================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____.
Commission File Number: 0-25427
--------------
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 (650) 482-3200
(Address of Principal Executive Offices) (Registrant's Telephone Number)
NOT APPLICABLE
(Former Name, Former Address, and Former Fiscal Year,
If Changed Since Last Report)
----------------
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
--- ---
As of July 31, 2000, the Registrant had outstanding 31,083,729 shares of common
stock, $.01 par value.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Part I: Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at June 30, 2000 and September 30, 1999..............1
Condensed Consolidated Statements of Operations and Comprehensive Loss for the
three-months and nine-months ended June 30, 2000 and June 30, 1999.........................2
Condensed Consolidated Statements of Cash Flows for the nine-months
ended June 30, 2000 and June 30, 1999......................................................3
Notes to Unaudited Condensed Consolidated Financial Statements.............................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................24
Part II: Other Information
Item 2. Changes in Securities and Use of Proceeds.................................................25
Item 4. Submission of Matters to a Vote of Security Holders.......................................25
Item 6. Exhibits and Reports on Form 8-K..........................................................25
Signatures................................................................................25
</TABLE>
ii
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETOBJECTS, INC.
AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
<CAPTION>
June 30, September 30,
2000 1999
-----------------------
<S> <C> <C>
Assets
Cash $ 11,464 $ 23,623
Short-term investments -- 9,331
Accounts receivable, net of allowance for doubtful accounts of
$625 and $908 at June 30, 2000 and September 30, 1999,
respectively 13,593 6,065
Prepaid expenses 4,001 848
Other current assets 436 638
--------- ---------
Total current assets 29,494 40,505
Property and equipment, net 3,055 2,204
Intangible assets, net of amortization of $6,130 and $0 as of
June 30, 2000 and September 30, 1999, respectively 10,352 --
Note receivable from related party 250 --
--------- ---------
Total Assets $ 43,151 $ 42,709
========= =========
Liabilities & Stockholders' Equity
Accounts payable $ 2,013 $ 2,489
Accrued compensation 1,477 1,068
Other accrued liabilities 3,631 1,657
Deferred revenue 3,150 988
Current portion of capital lease obligations 230 281
--------- ---------
Total current liabilities 10,501 6,483
Capital lease obligations, less current portion 79 54
--------- ---------
Total liabilities 10,580 6,537
Stockholders' Equity:
Common stock, $0.01 par value. 120,000,000 and 60,000,000 shares
authorized as of June 30, 2000 and September 30, 1999,
respectively; 31,070,927 and 24,755,960 shares issued and
outstanding at June 30, 2000 and September 30, 1999,
respectively 311 248
Additional paid-in capital 128,035 110,810
Note receivable from stockholder (23) (23)
Deferred stock-based compensation (583) (1,205)
Accumulated other comprehensive losses (72) (30)
Accumulated deficit (95,097) (73,628)
--------- ---------
Total stockholders' equity 32,571 36,172
Total liabilities and stockholders' equity $ 43,151 $ 42,709
========= =========
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
</TABLE>
1
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share data)
(unaudited)
<CAPTION>
Three months ended June 30, Nine months ended June 30,
--------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees and
online revenues $ 6,911 $ 3,452 $ 19,376 $ 8,998
Service revenues 1,098 685 3,227 1,315
Software license fees from IBM 2,650 980 6,189 3,315
Service revenues from IBM -- 50 -- 2,782
------------ ------------ ------------ ------------
Total revenues 10,659 5,167 28,792 16,410
------------ ------------ ------------ ------------
Cost of revenues:
Software license fees and online
revenues 1,708 487 3,091 1,435
Service revenues 1,572 820 4,643 1,544
Service revenues from IBM -- 21 -- 2,113
------------ ------------ ------------ ------------
Total cost of revenues 3,280 1,328 7,734 5,092
------------ ------------ ------------ ------------
Gross profit 7,379 3,839 21,058 11,318
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 7,701 4,968 22,663 13,994
Research and development 3,485 2,347 9,874 6,332
General and administrative 1,652 1,032 4,359 2,998
Amortization of goodwill 2,017 -- 6,050 --
Stock-based compensation 2 234 352 404
------------ ------------ ------------ ------------
Total operating expenses 14,857 8,581 43,298 23,728
------------ ------------ ------------ ------------
Operating loss (7,478) (4,742) (22,240) (12,410)
Interest income (expense), net 183 (93) 833 (1,217)
Accretion of discount on debt -- (1,054) -- (1,654)
Interest on beneficial conversion feature of
convertible debt -- -- -- (7,457)
------------ ------------ ------------ ------------
Loss before income taxes (7,295) (5,889) (21,407) (22,738)
------------ ------------ ------------ ------------
Income taxes 39 -- 63 2
------------ ------------ ------------ ------------
Net loss $ (7,334) $ (5,889) $ (21,470) $ (22,740)
Translation adjustment (22) -- (42) --
------------ ------------ ------------ ------------
Comprehensive loss $ (7,356) $ (5,889) $ (21,512) $ (22,740)
============ ============ ============ ============
Basic and diluted net loss per share $ 0.24) $ (0.36) $ (0.76) $ (3.31)
============ ============ ============ ============
Shares used to calculate basic and diluted
net loss per share 30,884,783 16,211,411 28,475,635 6,862,455
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
NETOBJECTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands, unaudited)
<CAPTION>
Nine months ended
June 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Cash used in operating activities:
Net loss $(21,470) $(22,740)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,200 812
Accretion of discount on borrowings -- 1,653
Nonrecurring interest charge on beneficial conversion feature of
convertible debt -- 7,457
Amortization of intangible assets 6,130 --
Amortization of deferred stock-based compensation 352 404
Changes in operating assets and liabilities:
Accounts receivable (7,467) (2,480)
Prepaid expenses (3,153) 69
Other current assets (268)
Accounts payable (694) (1,188)
Accrued compensation 409 (437)
Other accrued liabilities 1,431 216
Deferred revenue 2,109 (4,441)
Interest and income taxes payable -- 321
-------- --------
Net cash used in operating activities (21,421) (20,354)
-------- --------
Cash provided by (used in) investing activities:
Purchases of property and equipment (1,816) (1,406)
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 6,218 (1,406)
-------- --------
Cash provided by financing activities:
Proceeds from short-term borrowings -- 3,421
Repayments of short-term borrowings -- (24,421)
Proceeds from convertible debt -- 12,910
Repayment of convertible debt -- (2,000)
Payment on capital lease obligations (255) (202)
Proceeds from issuance of preferred stock, net of issuance costs -- 5,262
Proceeds from issuance of common stock, net of issuance costs 3,591 65,299
Repurchases of common stock -- (6)
Issuance of stockholder note receivable (250) 90
-------- --------
Net cash provided by financing activities 3,086 60,353
-------- --------
Effect of exchange rate changes on cash (42) (9)
Net increase (decrease) in cash (12,159) 38,584
Cash and cash equivalents at beginning of period 23,623 459
-------- --------
Cash and cash equivalents at end of period $ 11,464 $ 39,043
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 25 $ 1,445
Noncash investing and financing activities:
Discount on borrowings $ -- $ 1,653
Stock issued in exchange for services $ -- $ 316
Issuance of common stock for acquisition $ 13,478 $ --
Deferred stock-based compensation $ 269 $ 1,402
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
</TABLE>
3
<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
notes 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 nine-month periods
ending June 30, 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.
Diluted net loss per share for the three- and nine-months ended June
30, 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 7,375,534 shares of common stock with a weighted-average exercise price
of $9.20 per share, or 33,053 shares of 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- and nine-months ended June
30, 1999, does not include the effect of warrants to purchase 4,614,554 shares
of convertible preferred stock with a weighted average exercise price of $7.50,
options to purchase 2,765,749 shares of common stock with a weighted-average
exercise price of $3.78 per share, or 39,148 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.
4
<PAGE>
At June 30, 2000, the Company had 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
2002. All outstanding warrants as of June 30, 2000 were held by IBM.
Recent accounting pronouncements
In June 2000, the Financial Accounting Standards Board (FASB) issued
Statement No. 138 ("SFAS 138"), "Accounting for Certain Derivative Instruments
and Certain Hedging Activities - an amendment of FASB Statement No. 133". SFAS
138 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company will adopt SFAS 138 with the quarter beginning
October 1, 2000. The Company does not anticipate that adoption of SFAS 138 will
have a significant impact on its financial statements, cash flows or results of
operations.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC, was effective the first
fiscal quarter of fiscal years beginning after December 15, 1999 and requires
companies to report any changes in revenue recognition as a cumulative change in
accounting principle at the time of implementation in accordance with Accounting
Principles Board Opinion 20, "Accounting Changes." Subsequently, SAB 101A and
101B were issued to delay implementation of SAB No. 101. It will be effective in
NetObject's fourth quarter of fiscal 2001. The Company is currently evaluating
the affect that SAB 101 will have on its accounting policies and has not
definitively determined its impact on the Company's financial statements, cash
flows or results of operations.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), an
interpretation of APB 25, "Accounting for Stock Issued to Employees." FIN 44
addresses inconsistencies in accounting for stock-based compensation that arise
from implementation of APB 25. The Company is currently evaluating the affect
that FIN 44 will have on its accounting policies and does not anticipate that it
will have a significant impact on the Company's financial statements, cash flows
or results of operations. The Company will adopt FIN 44 effective July 1, 2000.
2. Balance Sheet Components
Accounts receivable
The accounts receivable at June 30, 2000, net of allowance for doubtful
accounts, increased by $7.5 million from September 30, 1999. The increase is
primarily attributable to greater domestic and international sales. At June 30,
2000, the portion of our accounts receivable balance over 90 days had increased
by approximately $2.0 million from September 30, 1999. The increase was due
primarily to delays in payment from our major US distributor and from extended
payment terms given to a European OEM partner under the terms of the original
contract.
Prepaid Expenses
Prepaid expenses were approximately $4.0 million at June 30, 2000, an
increase of approximately $3.1 million from September 30, 1999. This increase
was primarily due to two significant payments made during the first three
quarters of fiscal 2000: $1.5 million paid to a European customer that provides
hosting services to NetObjects in Europe; and $1.4 million prepaid royalty to a
leading internet service provider.
Intangible Assets
On October 4, 1999 the Company acquired the Sitematic Corporation for
total consideration of approximately $16.7 million. Approximately $16.1 million
of the purchase price was allocated to intangible assets, which included $14.5
million in goodwill and $1.6 million of identifiable intangible assets. At June
30, 2000, unamortized intangible assets related to the Sitematic acquisition
were $10.1 million. Amortization expense for the nine months ended June 30, 2000
was approximately $6.1 million, of which $6.0 million related to the Sitematic
acquisition.
Other Accrued Liabilities
Other accrued liabilities increased by approximately $2.0 million from
September 30, 1999, which primarily consisted of additional market development
funds accrued for payments to our domestic and international customers.
5
<PAGE>
Deferred Revenue
Deferred revenue increased by approximately $2.2 million from September
30, 1999, primarily due to the introduction of online sales in the first quarter
of the current fiscal year and the sale of Collage maintenance agreements
beginning in the second quarter of the current fiscal year. Revenue obtained
from online sales is deferred and recognized over the term of the service
agreement, which ranges from one to 48 months. Revenue obtained from Collage
maintenance agreements is deferred and recognized over the 12 month term of
these contracts.
3. Segment Information
The Company conducts its business in two distinct segments: Enterprise
and Small Business Online. The principal products of the Enterprise segment are
NetObjects Collage and NetObjects Authoring Server, which are targeted toward
the large business intranet 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 Authoring Server domestically and
through resellers in international markets. The Company distributes NetObjects
Fusion through resellers, channel distributors, and a dedicated web site.
The Company's Chief Operating Decision Maker (CODM) is the Chief
Executive Officer. During the three and nine months ended June 30, 2000 and
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 follows:
For the three month period ended June 30, 2000
Small Business & Enterprise Total
Online Markets Markets NetObjects
----------------------------------------------
Revenues:
Domestic license and Online $ 4,477 $ 1,183 $ 5,660
International license 719 532 1,251
Domestic service -- 720 720
International service -- 378 378
IBM license 2,650 -- 2,650
------- ------- -------
Total Revenue $ 7,846 $ 2,813 $10,659
======= ======= =======
In the Small Business & Online segment, three customers accounted for
approximately 58% of total revenue for the three months ended June 30, 2000.
There were no significant customer concentrations in the Enterprise segment.
For the three months ended June 30, 2000, revenues for the Small
Business & Online segment were concentrated in the United States and Europe,
representing approximately $7.1 million and $0.7 million, respectively. Sales
for the Enterprise segment also were concentrated in the United States and
Europe, representing approximately $1.9 million and $0.9 million, respectively.
6
<PAGE>
For the nine month period ended June 30, 2000
Small Business & Enterprise Total
Online Markets Markets NetObjects
-------------- ---------- ----------
Revenues:
Domestic license and Online $ 8,494 $ 3,333 $11,827
International license 6,793 756 7,549
Domestic service -- 2,336 2,336
International service -- 892 892
IBM license 5,942 246 6,188
------- ------- -------
Total Revenue $21,229 $ 7,563 $ 28,792
======= ======= =======
In the Small Business & Online segment, three customers accounted for
approximately 60% of total revenue for the nine months ended June 30, 2000.
There were no significant customer concentrations in the Enterprise segment.
For the nine months ended June 30, 2000, revenues for the Small
Business & Online segment were concentrated in the United States and Europe,
representing approximately $14.4 million and $6.8 million, respectively. Sales
for the Enterprise segment also were concentrated in the United States and
Europe, representing approximately $6.0 million and $1.6 million, respectively.
For the three month period ended June 30, 1999
Small Business & Enterprise Total
Online Markets Markets NetObjects
-------------- ---------- ----------
Revenues:
Domestic license and Online $1,400 $ 754 $2,154
International license 1,196 102 1,298
Domestic service -- 475 475
International service -- 210 210
IM license 989 41 1,030
------ ------ ------
Total Revenue $3,585 $1,582 $5,167
====== ====== ======
In the Small Business & Online segment, one customer accounted for
approximately 28% of the revenue for the three months ended June 30, 1999. There
were no significant customer concentrations in the Enterprise segment.
For the three months ended June 30, 1999, revenues for the Small
Business & Online segment were concentrated in the United States and Europe,
representing approximately $2.4 million and $1.2 million, respectively. Sales
for the Enterprise segment also were concentrated in the United States and
Europe, representing approximately $1.3 million and $0.3 million, respectively.
For the nine month period ended June 30, 1999
Small Business & Enterprise Total
Online Markets Markets NetObjects
-------------- ---------- ----------
Revenues:
Domestic license and Online $ 4,057 $ 2,127 $ 6,184
International license 2,603 210 2,813
Domestic service -- 777 777
International service -- 539 539
IBM license 5,853 244 6,097
------- ------- -------
Total Revenue $12,513 $ 3,897 $16,410
======= ======= =======
7
<PAGE>
In the Small Business & Online segment, one customer accounted for
approximately 47% of the revenue for the nine months ended June 30, 1999. There
were no significant customer concentrations in the Enterprise segment.
For the nine months ended June 30, 1999, revenues for the Small
Business & Online segment were concentrated in the United States and Europe,
representing approximately $9.9 million and $2.6 million, respectively. Sales
for the Enterprise segment also were concentrated in the United States and
Europe, representing approximately $3.1 million and $0.8 million, respectively.
4. 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):
Three months ended Nine months ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
----- ----- ----- -----
Sales & marketing $ (17) $ 54 $ 68 $ 109
Research & development (10) 27 18 73
General & administrative 29 153 266 222
----- ----- ----- -----
$ 2 $ 234 $ 352 $ 404
===== ===== ===== =====
The amortization expense for the three months ended June 30, 2000 was
much smaller than the comparable period in 1999 because a large number of
options that were subject to deferred compensation were canceled. When these
options were canceled, the related deferred compensation amortized in previous
periods was deducted from amortization expense in the current quarter under FIN
28, reducing deferred stock-based compensation expense.
5. Subsequent Events
On July 14, 2000, the Company completed the acquisition of
substantially all of the assets of Rocktide Inc., for $3.6 million in our common
stock and $0.4 million cash. Rocktide is a developer of an embedded ASP platform
and an embeddable online web builder. All of Rocktide's outstanding capital
stock was exchanged for approximately 458,000 shares of our common stock.
Unvested Rocktide options held by Rocktide employees who became our employees
were replaced with options to purchase approximately 29,000 shares of our common
stock.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the accompanying
condensed consolidated financial statements and notes included in this report.
This Form 10-Q 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 opportunities for web site building software and services and online
application 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 relevant events occur in the future.
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 corporate intranets.
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 Corporation in October 1999. 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 earn revenues from software license fees through direct licenses to
enterprises, through important strategic relationships such as our relationships
with IBM and through our indirect (OEM) 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 and OEM resellers. We derive our
international revenues primarily through our indirect distribution channel.
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
of our distributors of 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 upon delivery, if the OEM
vendor commits to a quantity and a fixed price with no right of return or, if
the volumes are not committed, then when the OEM resellers ship the bundled
products to their customers. We recognize service revenues as services are
rendered, or, if applicable, using the percentage-of-completion method. We defer
web-site hosting subscriptions, which typically are paid up-front, and recognize
these fees as revenue ratably over the terms of the respective contracts, which
range from 1 to 48 months. We defer recognition of maintenance fees, 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 acquired Sitematic Corporation in October 1999 in order to offer
on-line website building and hosting capabilities to small businesses. In
December 1999, we combined our online resources with the Sitematic offering and
launched 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.
In March 2000, we launched 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.
9
<PAGE>
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 nine months of fiscal year 2000, our revenues
from IBM represented approximately 22% 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 the first two quarters of fiscal 2000, the acquisition of Sitematic
incrementally increased our operating expenses, as we shifted some of our
existing staff to support online services and built infrastructure to maintain
and grow our online business. In the quarter ended June 30, 2000, we reduced our
workforce by 7%, primarily through a reduction in the number of personnel
assigned to online services, including some individuals who joined us through
the Sitematic acquisition, as we began to focus our online services on gaining
wide-scale distribution through embedding NetObjects Fusion and application
services with our distribution partners and obtaining more partner driven
revenue.
We have incurred substantial net losses in each fiscal period since our
inception and, as of June 30, 2000, had an accumulated deficit of $95.1 million.
Such net losses and accumulated deficit resulted primarily from the significant
costs incurred in the development of our products and establishing our 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. We anticipate that our expenses will decrease in the
fourth quarter of fiscal year 2000, but expect to continue incurring substantial
losses from operations for the forseeable future.
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:
o Increase substantially our revenues from our two 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 corporate intranet sites;
o Respond quickly and effectively to competitive, market, and
technological developments;
o Expand our professional services business;
o Expand our onlineservices 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.
10
<PAGE>
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.
<TABLE>
Results of Operations
The following table sets forth financial data for the periods indicated as a
percentage of total revenues:
<CAPTION>
Three months Nine months
ended June 30 ended June 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license fees and online revenues 65% 67% 67% 55%
Service revenues 10% 13% 11% 8%
Software license fees from IBM 25% 19% 22% 20%
Service revenues from IBM 0% 1% 0% 17%
----- ----- ----- -----
Total revenues 100% 100% 100% 100%
----- ----- ----- -----
Cost of revenues:
Software license fees and online revenues 16% 10% 11% 9%
Service revenues 15% 16% 16% 9%
Service revenues from IBM 0% 0% 0% 13%
----- ----- ----- -----
Total cost of revenues 31% 26% 27% 31%
----- ----- ----- -----
Gross profit 69% 74% 73% 69%
----- ----- ----- -----
Operating expenses:
Sales and marketing 72% 96% 79% 85%
Research and development 33% 45% 34% 39%
General and administrative 15% 20% 15% 18%
Amortization of goodwill 19% 0% 21% 0%
Stock-based compensation 0% 5% 1% 3%
----- ----- ----- -----
Total operating expenses 139% 166% 150% 145%
----- ----- ----- -----
Operating loss -70% -92% -77% -76%
Interest income (expense) 2% -2% 3% -7%
Accretion of discount on debt 0% -21% 0% -10%
Interest on beneficial conversion feature of
convertible debt 0% - 0% -46%
----- ----- ----- -----
Loss before income taxes -68% -115% -74% -139%
----- ----- ----- -----
Income taxes
Net loss -68% -115% -74% -139%
Translation adjustment - - - -
----- ----- ----- -----
Comprehensive loss -68% -115% -74% -139%
==== ===== ===== =====
</TABLE>
Nine Months Ended June 30, 2000 and 1999
Revenues. Total revenues were approximately $28.8 million and $16.4
million for the nine months ended June 30, 2000 and 1999, respectively. The
increase of 75% year-over-year was primarily due to growth in the number of
large volume domestic and international partner license agreements, in which our
NetObjects Fusion products and related intellectual property were bundled with
products offered by our partners. Our online business, which we started in the
first quarter of fiscal 2000, grew substantially during the nine month period
ended June 30, 2000. In
11
<PAGE>
addition, our enterprise business, which is comprised of license and service
offerings, grew from the same period in the previous fiscal year, primarily due
to increased market penetration of our products and the introduction of new
products, such as Collage.
For the nine months ended June 30, 2000 and 1999, international
revenues were $8.4 million and $3.4 million or 29% and 20% of total revenues,
respectively. The increase in the amount of international revenues from the
comparable period in the last fiscal year resulted mainly from new OEM
arrangements with Internet Service Providers (ISPs) in Europe, and the
generation of revenues from our professional services business.
IBM software license fees for the nine months ended June 30, 2000 and
1999 were $6.2 million and $3.3 million, respectively. In the third quarter of
fiscal 2000, we signed an agreement with IBM, in which they licensed NetObjects
Fusion 5.0 and NetObjects Authoring Server 2000 for $2.7 million in revenue. We
expect revenues from license fees attributable to IBM to fluctuate from
quarter-to-quarter.
We have not earned significant revenues from services to IBM during the
current fiscal year. In the nine months ended June 30, 1999, we earned $2.8
million in services revenue from IBM. We have no current professional services
agreements with IBM.
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. Since October 1999, our cost of software license fees also has
included the cost of providing online hosting services for Fusion 5.0 and
co-location services with some of our partners. The increase from $1.4 million
to $3.1million for the nine months ended June 30, 1999 and 2000, respectively,
was primarily attributable to increased shipments of products and the addition
of our online business, as well as increased royalty payments to third party
providers of software included in our products.
Our cost of service revenues increased to $4.6 million from $1.5
million in the nine months ended June 30, 2000 and 1999, respectively. The
increased cost was due to our investment in staffing and an increased use of
third party contractors to meet the increased growth and demand for enterprise
services in the nine months ended June 30, 2000 as compared to the same period
in the previous fiscal year. Our last service contract with IBM expired in the
quarter ended June 30, 1999.
Gross margins for the nine months ended June 30, 2000 were 73% versus
69% for the nine months ended June 30, 1999. The increase in gross margins was
due to the fact that higher margin software license fees represented a greater
percentage of total revenue in the nine months ended June 30, 2000 in comparison
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. Sales and
marketing expenses were approximately $22.7 million and $14.0 million for the
nine months ended June 30, 2000 and 1999, respectively, representing 79% and
85%, respectively, of total revenues for each period. The increase in total
expenses related primarily to personnel growth in our enterprise division,
increased market development fees due our European and domestic 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 attaining 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 $9.9 million and $6.3 million for the nine months ended June 30,
2000 and 1999, respectively, representing approximately 34% and 39%,
respectively, 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.
12
<PAGE>
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 $4.4 and $3.0 for the nine months ended June 30,
2000 and 1999, respectively, representing approximately 15% and 18%,
respectively, of total revenues for each period. The increased amount resulted
primarily from additional personnel, infrastructure expenses related to our
growth, and the legal and accounting expenses associated with the financial
reporting requirements of a public company.
Amortization of intangible assets. Amortization of goodwill and other
intangible assets increased to $6.1 million from $0 for the nine months ended
June 30, 2000 and 1999, respectively. The increase was predominantly
attributable to the amortization of goodwill recorded in connection with the
purchase of Sitematic Corporation in October 1999.
Stock-Based Compensation. For the nine months ended June 30, 2000 and
1999, we incurred stock-based compensation charges of approximately $0.4 million
for each period. 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 $800,000 for the
nine months ended June 30, 2000. The interest income was the result of the
investment of funds obtained at our initial public offering ("IPO"). Interest
expense for the nine period ended June 30, 2000 was $25,000.
Interest expense for the nine months ended June 30, 1999 consisted
primarily of interest on our borrowings and amounted to approximately $1.5
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 $1.7 million for the nine
months ended June 30, 1999.
Income taxes. We have had a net operating loss for each period since
our inception through June 30, 2000. Our accumulated deficit through this period
is approximately $95.1 million. We recorded an income tax provision of
approximately $63,000 in the nine months ended June 30, 2000 related to income
earned by our international operations.
Translation adjustment. The functional currency of 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 June 30, 2000 and 1999
Revenues. Total revenues increased to approximately $10.7 million from
approximately $5.2 million for the three months ended June 30, 2000 and 1999,
respectively. The increase of 106% 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 online revenues and 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, primarily
due to the fact that Collage was available for sale for a full fiscal quarter.
For the three months ended June 30, 2000 and 1999, international
revenues increased slightly $1.6 million from $1.5 million, representing 15% and
29% of total revenues, respectively.
IBM software license fees for the three months ended June 30, 2000 and
1999 were $2.7 million and $1.0 million, respectively. The increase was due to
increased license fees for bundling of NetObjects Fusion 5.0 and NetObjects
Authoring Server 2000 with several IBM product offerings.
Cost of Revenues. We recorded a $1.7 million cost of software license
fees for the three months ended June 30, 2000 compared to $0.5 million for the
three months ended June 30, 1999. The increase was attributable to higher
royalty amounts paid to third party software providers and the cost of online
hosting services in the quarter ended June 30, 2000.
13
<PAGE>
Our cost of services increased to $1.6 million from $0.8 million in the
three months ended June 30, 2000 and 1999, respectively. The increased cost was
due to our investment in staffing and an increased use of third party
contractors in the current quarter compared to the same quarter in the previous
fiscal year.
Gross margins for the three months ended June 30, 2000 were 69% versus
74% for the three months ended June 30, 1999. The decrease in gross margin was
due predominantly to the cost of online hosting services provided under some of
our partner agreements and a negative margin on enterprise professional services
that was larger in the quarter ended June 30, 2000 than in the quarter ended
June 30, 1999. The combined effect reduced total gross margins.
Sales and Marketing. Sales and marketing expenses were approximately
$7.7 million and $5.0 million for the three months ended June 30, 2000 and 1999,
respectively, representing 72% and 96%, respectively, of total revenues for each
period. The increased amount resulted primarily from personnel growth in our
enterprise division, increased market development funds and co-op fees paid to
our domestic and European customers, costs related to the continued development
and implementation of our branding and marketing campaigns, and increased sales
commissions.
Research and Development. Research and development expenses were
approximately $3.5 million and $2.3 million for the three months ended June 30,
2000 and 1999, respectively, representing approximately 33% and 45%,
respectively, of total revenues for each period. The increase in research and
development expenses was due mainly to higher staffing levels than the previous
period and the costs of ongoing product development.
General and Administrative. General and administrative expenses were
approximately $1.7 and $1.0 for the three months ended June 30, 2000 and 1999,
respectively, representing approximately 15% and 20%, respectively, of total
revenues for each period. The increase in general and administrative expenses
was due to higher staffing levels.
Amortization of intangible assets. Amortization of goodwill and other
intangible assets was $2.1 million compared to $0 for the three months ended
June 30, 2000 and 1999, respectively. The change was attributable to the
amortization of goodwill recorded in connection with the purchase of Sitematic
Corporation in October 1999.
Stock-Based Compensation. For three-month periods ended June 30, 2000
and 1999, we incurred stock-based compensation charges of approximately $2,000
and $200,000. 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. The
amortization expense for the three months ended June 30, 2000 was much smaller
than the comparable period in 1999 because a large number of unvested options
that were subject to deferred compensation were canceled.
Other Income (Expense). We earned interest income of $190,000 for the
three months ended June 30, 2000 from the investment of funds obtained at our
initial public offering ("IPO"). Our interest expense for the three months ended
June 30, 2000 was approximately $11,000.
Interest expense for the three months ended June 30, 1999 consisted
primarily of interest on our borrowings and amounted to approximately $0.4
million. In addition, we recognized an accretion of discount on debt to IBM of
approximately $1.1 million for the three months ended June 30, 1999.
Income taxes. We recorded an income tax provision of approximately
$39,000 in the three months ended June 30, 2000 for our international
operations.
Translation adjustment. The functional currency of 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.
Liquidity and Capital Resources
At June 30, 2000, NetObjects had cash, cash equivalents and short-term
investments totaling $11.5 million, a decrease of $21.5 million from September
30, 1999. The decrease was primarily due to losses from continuing operations
and the Sitematic acquisition which required the payment in cash of
approximately $2.0 million, which includes approximately $1.6 million paid to
Sitematic preferred stockholders and transaction costs of $0.4 million.
14
<PAGE>
Net cash used in operating activities was $21.4 million and $20.4
million for the nine months ended June 30, 2000 and 1999, respectively. For the
period ended June 30, 2000, net cash used in operating activities included an
increase in accounts receivable of approximately $7.5 million, due to slower
than expected collections, and an increase of $3.2 million in prepaid expenses
due to the reclassification of future royalties and an arrangement with a
European customer. Adjustments to reconcile net loss to net cash used in
operating activities for the period ended June 30, 1999 included noncash
interest of $7.5 million on the conversion feature of debt held by IBM and a
related party. Net cash used in operating activities included the recognition of
$4.6 million in deferred revenues from IBM.
Net cash provided by investing activities was $6.2 million for the nine
months ended June 30, 2000 as compared to $1.4 million net cash used in
investing activities for the nine months ended June 30, 1999. The change was
primarily attributable to the payment of cash to Sitematic stockholders for
their preferred stock, offset by the maturity of short-term investments.
Net cash provided by financing activities was approximately $3.1
million for the nine months ended June 30, 2000 as compared to $60.4 million for
the nine months ended June 30, 1999. Net cash provided by financing activities
for the nine months ended June 30, 2000 consisted primarily of proceeds from the
exercise of stock options by employees. Net cash provided by financing
activities for the nine months ended June 30, 1999 reflected the issuance of
common stock in our initial public offering, which yielded $65.3 million net of
offering costs and the repayment of short-term notes of $24.4 million under
short-term notes owed 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 December 31, 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, some combination of
debt and equity, or other available transactions. 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 by any means. 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 out stock price will decline substantially.
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.
Recent Developments
On July 14, 2000, the Company completed the acquisition of
substantially all of the assets of Rocktide Inc., for $3.6 million in our common
stock and $0.4 million cash. Rocktide is a developer of an embedded ASP platform
and an embeddable online web builder. All of Rocktide's outstanding capital
stock was exchanged for approximately 458,000 shares of our common stock.
Unvested Rocktide options were canceled and options to purchase approximately
29,000 shares of our common stock were issued to Rocktide option holders who
became our employees after the acquisition. We anticipate that a substantial
portion of the purchase price will be allocated to goodwill that we will
amortize over the period in which these assets retain value. We expect this
period to range from 12 to 36 months.
On July 28, 2000, we reduced our workforce by approximately 20% to a
level 24% below our fiscal first quarter staffing level, for which we will take
a charge in our fiscal fourth quarter. We expect these workforce reductions to
decrease operating expenses in our subsequent fiscal quarters and will allow us
to operate more efficiently.
15
<PAGE>
On July 31, 2000, we granted options to purchase an additional 1.2
million shares of our common stock from our Amended and Restated 1997 Stock
Option Plan to members of senior management. The exercise price of these options
is the closing price per share of our common stock as quoted on the Nasdaq
National Market on July 31, 2000.
RISK FACTORS
NetObjects believes that its results of operations in any quarterly
period may be impacted adversely by a number of factors, including those set
forth below. Readers of this report should consider these and other ordinary
business risk factors in evaluating the business, financial condition, results
of operations and prospects of NetObjects.
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 June 30, 2000, we had an accumulated deficit of
approximately $95.1 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 two principal products, NetObjects
Fusion and NetObjects Collage, and substantially increase our revenues from
professional and online 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 December 31, 2000 and,
perhaps, 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, or other available transactions. 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 by any means. 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 contracts with IBM to bundle our products with their
offerings, we have no commitments for future revenues from IBM. 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 years ended September
30, 1999 and 1998, respectively, as well as approximately 22% of our total
revenues for the nine months ended June 30, 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 comprised in the fiscal year ended September 30, 1999. During the
quarter ended June 30, 2000, we recognized revenue of $2.7 million from IBM and
committed to reimburse IBM for up to $500,000 for promotional and advertising
expenditures that IBM incurs in marketing our products bundled with their
product offerings. 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
16
<PAGE>
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.
IBM controls us and is free to sell its interest in us. As of June 30,
2000 IBM owns approximately 49.0% of our common stock and holds warrants that if
exercised, would increase its ownership to approximately 49.5% 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; and
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. 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.
17
<PAGE>
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 and the market for providing online embedded application
services are 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.
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 1999 and
approximately 61% of our revenues from software license fees in the first nine
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 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;
18
<PAGE>
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.
Our online 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 comes 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 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.
19
<PAGE>
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 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. Our ability to attract
and retain personnel may be adversely impacted by our recent layoffs of a
significant percentage of our workforce.
20
<PAGE>
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 June 30, 2000 IBM owns approximately 49.0% of our outstanding
stock and holds warrants that if exercised, would increase its ownership to
approximately 49.5% 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 and approximately 15% of our total revenues
in the quarter ended June 30, 2000. We intend to expand the scope of our
international operations and 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;
21
<PAGE>
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 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
and acquisition of Rocktide in July 2000. 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
22
<PAGE>
popularity and use of the Internet, it is possible that a number of laws and
regulations may be adopted in the United States and abroad with particular
applicability to the Internet. It is possible that governments will enact
legislation that may apply to us in areas such as network security, encryption,
the use of key escrow, data and privacy protection, electronic authentication or
"digital" signatures, illegal and harmful content, access charges and
retransmission activities. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, content, taxation,
defamation and personal privacy is uncertain. Any new legislation or regulation
or governmental enforcement of existing regulations may limit the growth of the
Internet, increase our cost of doing business or increase our legal exposure,
any of which could cause our revenues to decrease and our stock price to fall.
A governmental body could impose sales and other taxes on the sale of our
products, license of our technology or provision of services, which would harm
our financial condition.
We currently do not collect sales or similar taxes with respect to the
sale of products, license of technology or provision of services in states and
countries other than states in which we have offices. In October 1998, the
Internet Tax Freedom Act, or ITFA, was signed into law. Among other things, the
ITFA imposes a three-year moratorium on discriminatory taxes on e-commerce.
Nonetheless, foreign countries, or, following the moratorium, one or more
states, may seek to impose sales or other tax obligations on companies that
engage in 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.
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE 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, limits 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 June 30, 2000, we had cash and cash equivalents of $11.5 million,
including approximately $6.0 million in money market funds and approximately
$2.0 million invested in high-grade commercial paper issued by US companies,
with maturities of less than 90 days. We classify our 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.
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.
24
<PAGE>
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On June 6, 2000, we filed an amendment to Form S-1 on Form S-3 to
register 1,780,815 shares of common stock pursuant to a Plan and Agreement of
Reorganization dated October 4, 1999, in which we acquired the Sitematic
Corporation.
(d) Between the date of our initial public offering and June 30, 2000,
we have invested approximately $1.6 million in the Sitematic acquisition. We
have used approximately $25.1 million to provide working capital to maintain our
business operations. The remainder of the original net proceeds of $40.1
million, approximately $11.5 million, was invested in cash and cash equivalents
at June 30, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(c) We filed a definitive information statement on Schedule 14C on June
28, 2000 in connection with the increase from 7,600,000 to 11,000,000 shares of
NetObjects common stock reserved for issuance under our Amended and Restated
1997 Stock Option Plan. Three of our stockholders, who hold a majority of the
voting power of our common stock, approved amendment of the Plan by written
consent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
We filed no reports on Form 8-K during the quarter ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NETOBJECTS, INC.
Date: August 14, 2000
/s/ Samir Arora
---------------------------------------
Samir Arora
Chief Executive Officer
25
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
27.1 Financial Data Schedule
