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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 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
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NETOBJECTS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3233791
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 April 30, 2000, the Registrant had outstanding 30,791,638 shares of common
stock, $.01 par value.
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<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
<S> <C> <C>
Part I: Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at March 31, 2000 and September 30, 1999..............1
Condensed Consolidated Statements of Operations for the three-months
and six-months ended March 31, 2000 and March 31, 1999......................................2
Condensed Consolidated Statements of Cash Flows for the six-months
ended March 31, 2000 and March 31, 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.................................28
Part II: Other Information
Item 2. Changes in Securities and Use of Proceeds..................................................29
Item 4. Submission of Matters to a Vote of Security Holders........................................29
Item 6. Exhibits and Reports on Form 8-K...........................................................29
Signatures.................................................................................29
</TABLE>
ii
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
NETOBJECTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
<CAPTION>
March 31, September 30,
2000 1999
--------- ---------
Assets
<S> <C> <C>
Cash $ 16,383 $ 23,623
Short-term investments -- 9,331
Accounts receivable, net of allowance for doubtful accounts
of $644 and $908 at March 31, 2000 and September 30,
1999, respectively 11,653 6,065
Prepaid expenses 4,266 848
Other current assets 511 638
--------- ---------
Total current assets 32,813 40,505
Property and equipment, net 3,219 2,204
Intangible assets, net of amortization of $4,079 and $0 as
of March 31, 2000 and September 30, 1999, respectively 12,305 --
--------- ---------
Total Assets $ 48,337 $ 42,709
========= =========
Liabilities & Stockholders' Equity
Accounts payable $ 2,115 $ 2,489
Accrued compensation 1,266 1,068
Other accrued liabilities 3,655 1,657
Deferred revenue 2,214 988
Current portion of capital lease obligations 299 281
--------- ---------
Total current liabilities 9,549 6,483
Capital lease obligations, less current portion 107 54
Total liabilities 9,656 6,537
--------- ---------
Stockholders' Equity:
Common stock, $0.01 par value. 120,000,000 shares authorized
as of March 31, 2000 and September 30, 1999, respectively
30,784,464 and 24,755,960 shares issued and outstanding
at March 31, 2000 and September 30, 1999, respectively 308 248
Additional paid-in capital 126,955 110,810
Notes receivable from stockholders (22) (23)
Deferred stock-based compensation (746) (1,205)
Accumulated other comprehensive losses (50) (30)
Accumulated deficit (87,764) (73,628)
--------- ---------
Total stockholders' equity 38,681 36,172
Total liabilities and stockholders' equity $ 48,337 $ 42,709
========= =========
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
(unaudited)
<CAPTION>
Three months ended March 31, Six months ended March 31,
---------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees and online revenues $ 6,803 $ 2,923 $ 12,465 $ 5,545
Service revenues 1,170 440 2,129 630
Software license fees from IBM 2,251 1,017 3,539 2,335
Service revenues from IBM -- 1,246 -- 2,733
------------ ------------ ------------ ------------
Total revenues 10,224 5,626 18,133 11,243
------------ ------------ ------------ ------------
Cost of revenues:
Software license fees and online revenues (839) 453 1,383 948
Royalty adjustment (1,418) -- -- --
Service revenues 1,846 540 3,071 724
Service revenues from IBM -- 688 -- 2,092
------------ ------------ ------------ ------------
Total cost of revenues 1,267 1,681 4,454 3,764
------------ ------------ ------------ ------------
Gross profit 8,957 3,945 13,679 7,479
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 9,015 4,596 14,692 9,026
Research and development 3,160 1,781 6,389 3,985
General and administrative 1,323 1,072 2,707 1,966
Amortization of intangible assets 2,017 -- 4,033 --
Stock-based compensation 144 70 350 170
------------ ------------ ------------ ------------
Total operating expenses 15,659 7,519 28,441 15,147
------------ ------------ ------------ ------------
Operating loss (6,702) (3,574) (14,762) (7,668)
Interest income (expense) 276 (603) 650 (1,124)
Accretion of discount on debt -- (408) -- (599)
Interest on beneficial conversion feature of
convertible debt -- (3,665) -- (7,457)
------------ ------------ ------------ ------------
Loss before income taxes (6,426) (8,250) (14,112) (16,848)
------------ ------------ ------------ ------------
Income taxes 12 -- 24 2
------------ ------------ ------------ ------------
Net loss $ (6,438) $ (8,250) $ (14,136) $ (16,850)
Translation adjustment (9) -- (20) --
------------ ------------ ------------ ------------
Comprehensive loss $ (6,447) $ (8,250) $ (14,156) $ (16,850)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.23) $ (3.90) $ (0.52) $ (8.33)
============ ============ ============ ============
Shares used to calculate basic and diluted net
loss per share 27,769,924 2,114,000 27,299,084 2,023,214
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
NETOBJECTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
<CAPTION>
Six months ended March 31,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash used in operating activities:
Net loss $(14,136) $(16,850)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 814 522
Accretion of discount on borrowings -- 599
Nonrecurring interest charge on beneficial conversion feature of -- 7,457
convertible debt
Amortization of intangible assets 4,079 --
Amortization of deferred stock-based compensation 350 170
Changes in operating assets and liabilities:
Accounts receivable (5,526) (1,366)
Prepaid expenses (3,410) (683)
Other current assets (351) --
Accounts payable (592) (852)
Accrued compensation 197 (335)
Other accrued liabilities 1,455 260
Deferred revenue 1,173 (4,564)
Interest and income taxes payable -- 451
-------- --------
Net cash used in operating activities (15,947) (15,191)
-------- --------
Cash provided by (used in) investing activities:
Purchases of property and equipment (1,593) (1,129)
Cash paid for Sitematic Corporation, net of cash acquired (1,297) --
Maturities of short-term investments 9,331 --
-------- --------
Net cash provided by (used in) investing activities 6,441 (1,129)
-------- --------
Cash provided by financing activities:
Proceeds from short-term borrowings -- 3,421
Repayments of short-term borrowings -- (2,000)
Proceeds from convertible debt -- 10,910
Payment on capital lease obligations (159) (130)
Proceeds from issuance of preferred stock, net of issuance costs -- 5,262
Proceeds from issuance of common stock, net of issuance costs 2,447 133
Repurchases of common stock -- (6)
Issuance of stockholder notes receivable -- 90
-------- --------
Net cash provided by financing activities 2,286 17,680
-------- --------
Effect of exchange rate changes on cash (20) (3)
-------- --------
Net increase (decrease) in cash (7,240) 1,357
Cash and cash equivalents at beginning of period 23,623 459
-------- --------
$ 16,383 $ 1,816
======== ========
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Interest paid $ 14 $ 608
Noncash investing and financing activities:
Equipment recorded under capital leases $ 229 --
Discount on borrowings -- $ 8,776
Stock issued in exchange for services -- $ 316
Issuance of common stock for acquisitions $ 13,478 $ --
Deferred stock-based compensation $ 108 $ 1,467
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
NETOBJECTS, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of the Business
NetObjects, Inc. 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, NetObjects completed its initial public offering.
At that time, all series of convertible preferred shares outstanding were
converted to common stock.
On October 4, 1999 NetObjects acquired Sitematic Corporation and
issued common stock that brought IBM's ownership to less than 50%.
NetObjects provides software, solutions, and services that enable
small businesses to build, deploy, maintain websites online, and conduct
e-business; and enable large enterprises to effectively create and manage
corporate intranets.
2. Summary of Significant Accounting Policies
Basis of Presentation of Interim Financial Statements
The accompanying unaudited condensed consolidated financial
statements of NetObjects, Inc. and subsidiaries ("the Company" or "NetObjects")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three- and six- month
periods ended March 31, 2000 are not necessarily indicative of the results that
may be expected for the fiscal year ending September 30, 2000. For further
information, refer to the audited financial statements and footnotes thereto for
the fiscal year ended September 30, 1999 included in the Company's Annual Report
on Form 10-K/A.
Net Loss per Share
Basic net loss per share is computed using the weighted average
number of outstanding shares of common stock, excluding shares of common stock
subject to repurchase. Diluted net loss per share is computed using the
weighted-average number of shares of common stock outstanding and, when
dilutive, potential common shares from options and warrants to purchase common
stock using the treasury stock method and from convertible securities using the
if-converted basis. All potential common shares have been excluded from the
computation of diluted net loss per share for all periods presented because the
effect would have been anti-dilutive.
Diluted net loss per share for the three- and six-months ended
March 31, 2000, does not include the effect of warrants to purchase 336,528
shares of common stock with a weighted average exercise price of $7.70, options
to purchase 6,785,305 shares of common stock with a weighted-average exercise
price of $8.11 per share, or 34,607 shares of unvested common stock issued and
subject to repurchase by the Company at a weighted-average price of $0.16,
because their effects are anti-dilutive.
Diluted net loss per share for the three-and six-months ended
March 31, 1999, does not include
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the effect of 12,700,399 shares of convertible preferred stock outstanding,
warrants to purchase 6,229,499 shares of convertible preferred stock with a
weighted average exercise price of $6.04, options to purchase 2,900,087 shares
of unvested common stock with a weighted-average exercise price of $3.13 per
share, or 41,252 shares of unvested common stock issued and subject to
repurchase by the Company at a weighted-average price of $0.13, because their
effects are anti-dilutive.
At March 31, 2000, IBM held outstanding warrants to purchase
189,062 and 64,133 shares of common stock with an exercise price of $6.68 that
expire in October 2003 and February 2004, respectively, and 83,333 shares of
common stock with an exercise price of $10.80 and an expiration date in December
2000.
Recent accounting pronouncements
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) no. 101 regarding recognition, presentation and
disclosure of revenue. The Company has not determined the effect implementation
of SAB101 will have on its consolidated results of operations.
In March 2000, the Emerging Issues Task Force reached a consensus
on Issue 00-2, "Accounting for the Costs of Developing a Web Site" (EITF 00-2).
In general, EITF 00-2 states that the costs of developing a web site should be
accounted for under provisions of Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." We
are currently evaluating EITF 00-2 and do not believe that the pronouncement
will have a significant impact on our financial position, results of operations
or cash flows. EITF 00-2 is effective for costs incurred after June 30, 2000.
Also, in March 2000, the Emerging Issues Task Force reached a
consensus on Issue 00-3, "Application of AICPA Statement of Position 97-2,
`Software Revenue Recognition' to Arrangements That Include the Right to Use
Software Stored on Another Entity's Hardware" (EITF 00-3). EITF 00-3 addresses
the accounting issues related to software hosting arrangements. In general, EITF
00-3 states that if the customer does not have the option to physically take
possession of the software, the transaction is not within the scope of SOP 97-2
and revenue should be recognized ratably over the hosting period as a service
arrangement. However, if the customer has the option to take physical delivery
of the software and specific pricing information is available for both the
software and hosting components of the arrangement, then the software revenue
may be recognized when the customer first has access to the software and revenue
from the hosting component should be recognized ratable over the hosting period.
We are currently evaluating EITF 00-3 and do not believe that the pronouncement
will have a significant impact on our financial position, results of operations
or cash flows. We will be required to implement EITF 00-3 for the year ended
September 30, 2001.
3. Balance Sheet Components
Accounts receivable
The accounts receivables at March 31, 2000 increased by $5.6
million from September 30, 1999. The increase is primarily attributable to
increased sales to IBM and a customer in Europe. At March 31, 2000, the portion
of our accounts receivable balance over 90 days increased by approximately $1.1
million from September 30, 1999. The increase was due primarily to delays in
payment from a European OEM partner and the Company's major US channel
distributor as it made the transition to Fusion 5.0.
Prepaid Expenses
Prepaid expenses were approximately $4.3 million at March 31,
2000, an increase of $3.4 million from September 30, 1999. Most of this increase
was due to an arrangement with a European
5
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customer that increased prepaid expenses by $1.5 million and a $1.4 million
royalty payment due an Internet service provider ("ISP") that was expensed
during the first quarter then reclassified as a prepaid expense in the second
quarter. This prepaid will be amortized to cost of revenues on the basis of
end-user registrations with the hosting ISP.
Intangible Assets
On October 4, 1999, the Company acquired Sitematic Corporation for
total consideration of approximately $16.7 million. Approximately $16.1 million
was allocated to intangible assets, which included $14.5 million in goodwill and
$1.6 million of identifiable intangible assets. At March 31, 2000, intangible
assets related to the Sitematic acquisition were $12.1 million. Amortization
expense for the six months ended March 31, 2000 for Sitematic was approximately
$4.0 million.
Other Accrued Liabilities
Other accrued liabilities increased by approximately $2.0 million
from September 30, 1999. This increase was the result of increased co-op and
marketing fees due to our domestic and international customers.
4. Segment Information
The Company conducts its business in two distinct segments:
Enterprise and Small Business Online. The principal product of the Enterprise
segment is NetObjects Collage, which is targeted toward the large enterprise
market. The principal product of the Small Business Online segment is NetObjects
Fusion, which is targeted to small businesses that would like to establish a web
site or upgrade an existing site. The Company uses a direct sales force to
distribute NetObjects Collage domestically and through resellers in
international markets. The Company sells NetObjects Fusion through resellers,
distributors, and a dedicated web site.
<TABLE>
The Company's Chief Operating Decision Maker (CODM) is the Chief
Executive Officer. During the three and six months ended March 31, 2000, the
CODM received only revenue information on a disaggregated basis for the
Company's two segments. All other operating information was prepared on a basis
consistent with the consolidated statement of operations. Revenue information
for the Company's two segments follows:
<CAPTION>
For the three months For the six months
period ended March 31, 2000 period ended March 31, 2000
------------------------------------------ -----------------------------------------
Small Business Small Business
& Online Enterprise Total & Online Enterprise Total
Markets Markets NetObjects Markets Markets NetObjects
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Domestic license and Online $ 1,726 $ 1,275 $ 3,001 $ 4,291 $ 1,877 $ 6,168
International license 3,728 74 3,802 5,987 310 6,297
Domestic service -- 927 927 -- 1,614 1,614
International service -- 243 243 -- 515 515
IBM license 2,171 80 2,251 3,349 190 3,539
------- ------- ------- ------- ------- -------
Total Revenue $ 7,625 $ 2,599 $10,224 $13,627 $ 4,506 $18,133
======= ======= ======= ======= ======= =======
</TABLE>
In the Small Business & Online segment, two customers accounted
for approximately 43% of the outstanding accounts receivables at March 31, 2000.
There were no significant customer concentrations in the Enterprise segment.
For the six months ended March 31, 2000, revenues for the Small
Business & Online segment were concentrated in the United States and Europe,
representing approximately $7.6 million and
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$6.0 million, respectively. Sales for the Enterprise segment were concentrated
in the United States and Europe, representing approximately $3.7 million and
$0.8 million, respectively.
<TABLE>
<CAPTION>
For the three months For the six months
period ended March 31, 1999 period ended March 31, 1999
------------------------------------------ -----------------------------------------
Small Business Small Business
& Online Enterprise Total & Online Enterprise Total
Markets Markets NetObjects Markets Markets NetObjects
------- ------- ------- ------- ------- -------
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Domestic license and Online $ 1,641 $ 615 $ 2,256 $ 3,003 $ 1,028 $ 4,031
International license 666 1 667 1,513 2 1,515
Domestic service -- 247 247 -- 301 301
International service -- 193 193 -- 329 329
IBM license 1,017 -- 1,017 2,335 -- 2,335
IBM service 1,246 -- 1,246 2,732 -- 2,732
------- ------- ------- ------- ------- -------
Total Revenue 4,570 1,056 5,626 $ 9,582 $ 1,661 $11,243
======= ======= ======= ======= ======= =======
</TABLE>
In the Small Business & Online segment, one customer accounted for
approximately 42% of the outstanding accounts receivables at March 31, 1999.
There were no significant customer concentrations in the Enterprise segment.
For the six months ended March 31, 1999, revenues for the Small
Business & Online segment were concentrated in the United States and Europe,
representing approximately $8.1 million and $1.5 million, respectively. Sales
for the Enterprise segment were concentrated in the United States and Europe,
representing approximately $1.3 million and $0.3 million, respectively.
The Company does not measure performance of the segments based on any
asset-based metrics; therefore, segment information is not provided for assets.
5. Acquisition of Sitematic Corporation
On October 4, 1999, the Company acquired Sitematic Corporation, an
Application Services Provider (ASP) that offers e-business solutions for small
businesses. Under the terms of the acquisition, which was accounted for as a
purchase, the Company exchanged approximately two million shares of common stock
for all issued and outstanding Sitematic equity.
In addition to conversion of its preferred shares to the Company's
common stock, Sitematic preferred shareholders received approximately $1.6
million for their shares. All issued and outstanding Sitematic options were
converted to options to purchase the Company's common stock.
Total consideration, including transaction costs of approximately $0.6
million, was $15.5 million. Allocation of the purchase price that is in excess
of Sitematic Corporation's net book value resulted in the addition of
approximately $16.1 million in intangible assets to the Company's balance sheet,
of which about $14.1 million represents goodwill. The goodwill and intangible
assets are being amortized on a straight-line basis over 2 years.
The following unaudited pro forma information presents a summary of our
consolidated results of operations and the acquired ASP business of Sitematic
Corporation as if the acquisition had occurred on October 1, 1998.
(In thousands, except Six month period ended
for per share data) March 31,
------------------ 2000 1999
---- ----
Revenues 18,133 $11,296
Net Earnings (14,156) (17,872)
Net Earnings Per Share (0.52) (4.56)
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These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of operations which would have
actually resulted had the combinations been in effect on October 1, 1998 or of
future results of operations.
6. 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):
Six months ended March 31,
---------------------------
2000 1999
---- ----
Sales and marketing 78 55
Research and development 35 46
General and administrative 237 69
---- ----
Total 350 170
==== ====
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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 opportunity for web site building software and services, our strategy,
competition and expected expense levels, and the adequacy of our available cash
resources. Our actual results could differ materially from those expressed or
implied by these forward-looking statements as a result of various factors,
including the risk factors described 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 as
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 and maintain corporate
websites. For fiscal 2000, our revenues are derived principally from license
fees from our software products and, to a lesser extent, from fees on a range of
services complementing these products. For small business and other customers we
license NetObjects Fusion and offer online services. Our online business,
announced in the quarter ended December 31, 1999 and branded GoBizGo, was
established with the acquisition of Sitematic in October 1999. We derived
limited revenues from online services in the six months ended March 31, 2000.
For enterprise customers we license NetObjects Fusion and NetObjects Collage. In
fiscal year 1999, we began providing training, consulting and design services to
large enterprise customers for creating corporate websites.
We recognize revenues from software license fees upon delivery of our
software products to our customers, net of allowances for estimated returns and
price protection, as long as we have no significant obligations remaining, and
we believe that collection of the resulting receivable is probable. We provide
most distributors of our software products with rights of return and record an
allowance for estimated future returns based upon our historical experience with
product returns by those distributors. Software license fees earned from
products bundled with OEM resellers are recognized either upfront, if the OEM
vendor commits to a quantity and a fixed price with no right of return or, if
the volumes are not committed, when the OEM reseller ships the bundled products
to its customers. We recognize service revenues as services are rendered, or, if
applicable, using the percentage-of-completion method. We defer recognition of
maintenance revenues, paid primarily for support and upgrades, upon receipt of
payment and recognize the related revenues ratably over the term of the
contract, which typically is 12 months. These payments generally are made in
advance and are nonrefundable.
We earn revenues from software license fees through direct licenses to
enterprises and through important strategic relationships such as our
relationships with our indirect distribution channel. Professional services and
maintenance are typically sold through our direct sales organization. Most of
our software license fees to date have come from licenses to our indirect
distribution channel, expecially our OEM resellers. We expect our revenues from
license fees derived from our direct, or enterprise, sales channel to increase
as a percentage of our total revenues as our direct sales organization grows in
size. We derive our international revenues primarily through our indirect
distribution channel.
We acquired Sitematic in October 1999 in order to offer on-line website
building and hosting capabilities to small businesses. In December 1999, we
combined our existing online resources with the Sitematic offering and launched
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GoBizGo.com. These combined services include website building software, e-mail
list management for communicating with customers, domain name and search engine
registration, auction export, relevant content information for building and
maintaining an e-business online, and web hosting services. Currently, our
online business has two sources of revenue: Subscriptions for web-hosting
services provided directly to small businesses; and fees charged to our GoBizGo
business "partners" for establishing co-branded sites. The Sitematic acquisition
increased our operating expenses incrementally by slightly less than 10% above
pre-acquisition levels. We are incurring additional related expenses as we shift
some of our existing staff to support GoBizGo and to build infrastructure to
maintain and grow our online services. They will increase our cost of revenue
over time. Revenues from our online services business have represented
approximately 2% of total revenues since October, 1999.
In April 1997, IBM acquired approximately 80% of our outstanding stock
from existing investors. Under the terms of a 10-year license agreement with
IBM, we granted IBM rights to market and sell some of our products to its
customers for 10 years in exchange for nonrefundable cash prepayments totaling
$10.5 million between April 1997 and December 31, 1998. We requested and
received the full amount of these prepayments between April and December 1997.
These prepayments were reflected as deferred revenues from IBM on our balance
sheet. By June 1999, IBM had sold sufficient quantities of licenses, and
purchased services from NetObjects to fully utilize this $10.5 million
prepayment. In the three months ended December 31, 1997, IBM began reselling our
products, and in the three months ended March 31, 1998, we began providing
services to IBM to make our products compatible with and to integrate them with
IBM's WebSphere products. This services contract with IBM expired on February
28, 1999. Due, in part, to the expiration of this contract, our total revenues
from IBM were substantially lower during the second half of fiscal year 1999
compared to the first six months of the year when they represented 45.1% of
total revenues. During the first half of fiscal year 2000, our revenues from IBM
represented approximately 19.5% of our total revenues for the period. We believe
that our revenues from IBM may fluctuate significantly from quarter to quarter.
Please refer to "Risk Factors--Our Relationship with International Business
Machines Corporation, or IBM, has changed substantially over time. While IBM
controls us, it is under no obligation to continue any business relationships
with us, and IBM is allowed to compete with us or act in a manner that is
disadvantageous to us"
In March 2000, we commenced commercial shipments of NetObjects Collage,
an integrated platform for the management of enterprise web applications.
NetObjects Collage combines collaboration with content management, enterprise
integration, and dynamic application services.
We provide professional services to help our customers install
NetObjects Collage and to train their personnel in the use and maintenance of
corporate websites with this product.
We have incurred substantial net losses in each fiscal period since our
inception and, as of March 31, 2000, had an accumulated deficit of $87.8
million. Such net losses and accumulated deficit resulted primarily from the
significant costs incurred in the development of our products, establishing
brand identity, marketing organization, domestic and international sales
channels, and general and administrative infrastructure. We intend to increase
our expenditures in all of these areas, particularly for research and
development and sales and marketing.
Our future operating results must be considered in light of our limited
operating history and the risks, expenses and difficulties frequently
encountered by companies in early stages of development, particularly companies
in rapidly evolving markets such as the market for web site building software
and services.
To achieve our business objectives we need to do the following:
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o Increase substantially our revenues from our principal
software products, NetObjects Fusion and NetObjects Collage;
o Continue to develop successfully new versions of our products;
o Continue to be a leading provider of e-business software for
building websites and enterprise web applications;
o Respond quickly and effectively to competitive, market, and
technological developments;
o Expand our professional services business;
o Expand our online services business;
o Control expenses;
o Continue to attract, train, and retain qualified personnel in
the competitive software industry; and
o Maintain existing relationships and establish new
relationships with leading internet hardware and software
companies, such as our existing OEM resellers
There can be no assurance that we will achieve or sustain
profitability. Moreover, we may be unable to adjust spending in a timely manner
to compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall of revenues in relation to expectations would cause significant
declines in operating results.
Due to the foregoing factors, we believe that period to period
comparisons of historical operating results should not be relied upon as an
indication of future performance. Also, operating results may fall below our
expectations or the expectations of securities analysts or investors in some
future quarter and our stock price may decline substantially.
[Remainder of page intentionally left blank]
11
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<TABLE>
Results of Operations
The following table sets forth financial data for the periods indicated
as a percentage of total revenues:
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------- ---------------------
1999 2000 1999 2000
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Software license fees 52% 67% 49% 69%
Service revenues 8 11 6 12
Software license fees from IBM 18 22 21 20
Service revenues from IBM 22 -- 24 --
-------- -------- -------- --------
Total revenues 100 100 100 100
Cost of revenues:
Software license fees 8 8 8 8
Royalty adjustment -- (14) -- --
Service revenues 10 18 6 17
Service revenues from IBM 12 -- 19 --
-------- -------- -------- --------
Total cost of revenues 30 12 33 25
-------- -------- -------- --------
Gross profit 70 88 67 75
-------- -------- -------- --------
Operating expenses:
Sales and marketing 82 88 80 83
Research and development 32 31 35 35
General and administrative 19 13 17 15
Amortization of intangible assets -- 20 -- 22
Stock-based compensation 1 2 2 2
-------- -------- -------- --------
Total operating expenses 134 154 135 157
-------- -------- -------- --------
Operating loss (64) (66) (68) (81)
Interest income (expense) (11) 3 (10) 4
Accretion of discount on debt (7) -- (5) --
Interest on beneficial conversion feature
of convertible debt (65) -- (66) --
Loss before income taxes -- -- (150) (78)
-------- -------- -------- --------
Income taxes -- -- -- --
-------- -------- -------- --------
Net loss (147%) (63%) (150%) (78%)
======== ======== ======== ========
Translation Adjustment -- -- -- --
======== ======== ======== ========
Comprehensive Loss (147%) (63%) (150%) (78%)
======== ======== ======== ========
</TABLE>
Six Months Ended March 31, 2000 and 1999
Revenues. Total revenues were approximately $18.1 million and
approximately $11.2 million, respectively, for the six months ended March 31,
2000 and 1999. The 61% year-over-year increase resulted primarily from
additional OEM reseller agreements, in which our Fusion products and related
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intellectual property were bundled with products offered by our partners, such
as IBM, Lotus, Concentric, United Internet and Novell. In addition, we
experienced substantial growth in our enterprise business, which consists of
licenses of our enterprise products, NetObjects Authoring Server and NetObjects
Collage, from the same period in the previous fiscal year. This growth reflected
the expansion of our sales organization, increasing market acceptance of our
enterprise solutions and the introduction of NetObjects Collage in late March
2000.
For the six months ended March 31, 2000 and 1999, international
revenues were $6.8 million and $1.8 million or 38% and 16% of total revenues,
respectively. The substantial increase resulted primarily from new OEM
arrangements with internet service providers, or ISPs, in Germany, like United
Internet, and the generation of revenues from our professional services
business.
IBM software license fees for the six months ended March 31, 2000 and
1999 were $3.5 million and $2.3 million, respectively. New NetObjects Fusion
product bundling agreements accounted for $3.0 million of revenues during the
most recent six month period, and the remaining $0.5 million was attributable to
license fees from previous bundling arrangements.
We have not earned significant revenues from services to IBM since our
WebSphere development services contract expired in the quarter ended March 31,
1999. We do not anticipate additional service revenue from IBM in the forseeable
future.
Cost of Revenues. Our cost of software license fees includes the cost
of product media, duplication, manuals, packaging materials, shipping,
technology licensed to us and fees paid to third-party vendors for order
fulfillment, and was approximately $1.4 million and $0.9 million for the six
months ended March 31, 2000 and 1999, respectively.
During the first quarter of fiscal 2000, we began shipping NetObjects
Fusion 5.0 with an offer of 12 months of free web hosting services and entered
into an agreement with an Internet service provider to deliver those services.
Under the original terms of the agreement, we paid royalties to this Internet
service provider for web hosting services when Fusion 5.0 was shipped to the
customer. During the first quarter of fiscal 2000, the entire amount due for
hosting services under the contract, which expires in December 2001, was
accounted for as a cost of revenues. In the second quarter of fiscal 2000, the
contract was amended so that royalties for hosting services are due to the
service provider only when the end user registers for the hosting service, or,
up to the minimum committed amount as specified in the agreement. As a result,
in the quarter ended March 31, 2000, we reversed the cost of software licenses
that were expensed in the previous quarter, and recorded it as prepaid expense.
This prepaid expense is being amortized to cost of revenues on the basis of
end-user registration with the hosting ISP.
Our cost of service revenues increased to $3.1 million in the six
months ended March 31, 2000 from $0.7 million in the six months ended March 31,
1999. The increase corresponded to the revenue growth in services and our
continued investment in hiring and training professional services personnel.
Cost of service revenues for IBM was $2.1 million for the six months
ended March 31, 1999. We have not provided services to IBM since the expiration
of our WebSphere development services contract in February 1999.
Overall, gross margin for the six months ended March 31, 2000 was 75%
versus 67% for the six months ended March 31, 1999. The increase in gross margin
reflects our higher percentage of total revenue from software licenses as
compared to the previous period.
Sales and Marketing. Our sales and marketing expenses consist primarily
of salaries, commissions, consulting fees, tradeshow expenses, advertising,
marketing materials and the cost of customer service operations. We intend to
continue to increase staff in our enterprise sales organization and to expand
our aggressive brand building and marketing campaign. Therefore, we expect sales
and marketing expenses to continue to increase. Sales and marketing expenses,
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<PAGE>
were approximately $15.0 million and $9.0 million for the six months ended March
31, 2000 and 1999, respectively, representing 83% and 80%, respectively, of
total revenues for each period. The increased amount resulted primarily from
personnel growth in our enterprise division, increased co-op fees with our
European customers, increased sales commissions, and costs related to the
continued development and implementation of our branding and marketing
campaigns.
Research and Development. Our research and development expenses consist
primarily of salaries and consulting fees to support product development. To
date, we have expensed all research and development costs as we have incurred
them because we generally establish the technological feasibility of our
products upon completion of a working model. We have not yet incurred
significant costs between the date of completion of a working model and the date
of general release of a product. We believe that continued investment in
research and development is critical to attain our strategic objectives and, as
a result, we expect research and development expenses to continue to increase in
dollar amounts from current levels. Research and development expenses were
approximately $6.4 million and $4.0 million for the six months ended March 31,
2000 and 1999, respectively, representing approximately 35% of total revenues in
each period. The increase in research and development expenses was due to
additional costs associated with the development and release of Fusion 5.0 and
NetObjects Collage during the period, as well as expenses incurred for future
product development.
General and Administrative. Our general and administrative expenses
consist primarily of salaries and fees for professional services. We expect
general and administrative expenses to increase as we expand our staff and incur
additional costs related to growth of our business. General and administrative
expenses were approximately $2.7 and $2.0 for the six months ended March 31,
2000 and 1999, respectively, representing approximately 15% and 17%,
respectively, of total revenues for each period. The increased amount resulted
primarily from additional personnel and facility expenses related to our growth,
and the added cost associated with the financial reporting requirements of a
public company.
Goodwill and amortization. Amortization of goodwill and related
intangible assets was $4.1 million and $0 for the six months ended March 31,
2000 and 1999, respectively. Most of the amortization expense relates to the
Sitematic acquisition in October 1999.
Stock-Based Compensation. For the six months ended March 31, 2000 and
1999, we incurred stock-based compensation charges of $0.4 million and $0.2
million, respectively. These stock-based compensation charges are being
amortized on an accelerated basis over the vesting period of the options in a
manner consistent with Financial Accounting Standards Board (FASB)
Interpretation No. 28. Analyses of these charges by expense category have been
included in the notes to the financial statements for the respective periods.
Other Income (Expense). We earned interest income of $0.7 million for
the six months ended March 31, 2000. The interest income was the result of the
investment of funds obtained from our initial public offering.
Interest Expense. Interest expense for the six months ended March 31,
1999 consisted primarily of interest on our borrowings and amounted to
approximately $1.1 million. In addition, we recognized an interest charge of
approximately $7.5 million on convertible debt to IBM and a related party, and
recognized an accretion of discount on debt to IBM of approximately $0.6 million
for the six months ended March 31, 1999.
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<PAGE>
Income taxes. We have had a net operating loss for each period since
our inception through March 31, 2000. Our accumulated deficit through this
period is approximately $87.8 million. We recorded an income tax provision of
approximately $24,000 in the six months ended March 31, 2000 related to our
international operations.
Translation Adjustment. The functional currency our foreign subsidiary
is its local currency. Adjustments arising from the translation of the
subsidiary financial statements are reflected as a separate component of
stockholder's equity. Foreign currency transaction gains and losses are included
in the consolidated statements of operations.
Three Months Ended March 31, 2000 and 1999
Revenues. Total revenues increased to approximately $10.2 million for
the three months ended March 31, 2000 from approximately $5.6 million for the
three months ended March 31, 1999. The increase of 81% year-over-year resulted
primarily from new domestic and international partner agreements, in which our
Fusion products and related intellectual property were bundled with products
offered by our partners, as well as growth of license fees from IBM. In
addition, our enterprise business, which is comprised of license and service
offerings, grew substantially from the same period in the previous fiscal year,
due to continued expansion of our sales organization and new product
introductions.
For the three months ended March 31, 2000 and 1999, international
revenues were $4.0 million and $0.9 million or 40% and 15% of total revenues,
respectively. The increase in the amount of international revenues from the
comparable quarter in the last fiscal year resulted mainly from new OEM
arrangements with Internet service providers (ISPs) in Europe and the generation
of revenues from our professional services business.
IBM software license fees for the three months ended March 31, 2000 and
1999 were $2.3 million and $1.0 million, respectively. The increase resulted
from a new building agreement for Fusion 5.0.
Cost of Revenues. We recorded $0.8 million as cost of software license
fees for the three months ended March 31, 2000 compared to $0.5 million for the
three months ended March 31, 1999. In addition, we had a royalty adjustment of
negative $1.4 million, as discussed above.
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<PAGE>
Our cost of services were $1.8 million from $0.5 million in the three
months ended March 31, 2000 and 1999, respectively. The increase was driven by
the revenue growth in services and our continued investment in staffing to
handle future growth.
Gross margins for the three months ended March 31, 2000 were 88% versus
70% for the three months ended March 31, 1999. Most of the increase was a
consequence of the reversal of the first quarter's charge for royalties paid
with respect to free web hosting services offered with Fusion 5.0, which were
subtracted in calculating the cost of software license fees for the March 31,
2000 quarter.
Sales and Marketing. Sales and marketing expenses were approximately
$9.0 million and $4.6 million for the three months ended March 31, 2000 and
1999, respectively, representing 89% and 82%, respectively, of total revenues
for each period. The increase resulted primarily from personnel growth in our
enterprise division, increased co-op fees paid to our European customers,
increased sales commissions, and costs related to the continued development and
implementation of our branding and marketing campaigns.
Research and Development. Research and development expenses were
approximately $3.2 million and $1.8 million for the three months ended March 31,
2000 and 1999, respectively, representing approximately 31% and 32%,
respectively, of total revenues for each period. The increase in research and
development expenses was due to higher staffing levels than the previous period,
costs associated with the release of NetObjects Collage, and the costs of
ongoing product development.
Other Income (Expense). We earned interest income of $0.3 million for
the three months ended March 31, 2000. The interest income was the result of the
investment of funds obtained at our initial public offering.
Interest expense for the three months ended March 31, 1999 consisted
primarily of interest on our borrowings and amounted to approximately $0.6
million. In addition, we recognized an interest charge of approximately $3.7
million on convertible debt to IBM and a related party, and recognized an
accretion of discount on debt to IBM of approximately $0.4 million for the three
months ended March 31, 1999.
Income Taxes. We recorded an income tax provision of approximately
$12,000 in the three months ended March 31, 2000 related to international
operations.
The changes to or reasons for changes in our general and administrative
expenses, amortization of intangible assets, stock-based compensation and the
translation adjustment for the three months ended March 31, 2000 compared to the
same quarter one year ago are explained above in the discussion of the
comparison of our six-month periods for this fiscal year and last fiscal year.
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Liquidity and Capital Resources
At March 31, 2000, NetObjects had cash, cash equivalents and short-term
investments totaling $16.4 million, a decrease of $16.6 million from September
30, 1999. The decrease was attributable to expenses incurred and cash paid in
the Sitematic acquisition as well as to losses from continuing operations.
Total cash expense for the Sitematic acquisition was approximately $2.0
million, which includes approximately $1.6 million paid to Sitematic preferred
stockholders and transaction costs of $0.4 million.
Net cash used in operating activities was $16.0 million and $15.2
million for the six months ended March 31, 1999 and 1998, respectively. For the
period ended March 31, 2000, net cash used in operating activities included an
increase in accounts receivable of approximately $5.5 million, due to slower
than expected collections, and an increase of approximately $3.4 million in
other accrued liabilities due to accruals for future royalties. Adjustments to
reconcile net loss to net cash used in operating activities for the period ended
December 31, 1999 included amortization of goodwill of approximately $4.0
million related to the Sitematic acquisition. For the period ended March 31,
1999, net cash used in operating activities included a decrease in deferred
revenues of approximately $4.6 million, principally due to recognition of
prepayments from IBM. Adjustments to reconcile net loss to net cash used in
operating activities for the period ended December 31, 1998 included a
nonrecurring interest charge of approximately $7.5 million related to
convertible debt provided by IBM and Perseus. As of March 31, 2000, the portion
of our accounts receivable balance over 90 days increased by approximately $1.0
million from the quarter ended September 30, 1999. The increase resulted
primarily from delays in payment of receivables by one international OEM
reseller and our major US channel distributor that returned unsold inventory of
Fusion 4.0 and received new shipments of Fusion 5.0.
Net cash used in investing activities was $6.4 million for the six
months ended March 31, 2000 compared to $1.1 million net cash used in investing
activities for the six months ended March 31, 1999. The increase resulted in
part from the payment of cash in the Sitematic acquisition.
Net cash provided by financing activities was approximately $2.3
million for the six months ended March 31, 2000 compared to $17.7 million for
the six months ended March 31, 1999. Cash provided by financing activities for
the six months ended March 31, 2000 consisted primarily of proceeds from the
exercise of stock options by employees. Net cash provided by financing
activities for the six months ended March 31, 1999 reflected their receipt of
proceeds from the issuance of a short-term note to IBM and the issuance of
preferred stock and the use of proceeds to repay a short-term note to IBM.
We anticipate moderate growth in our operating expenses for the
foreseeable future to execute our business plan, particularly in sales and
marketing expenses and to a lesser extent research and development and general
and administrative expenses. As a result, we expect our operating expenses, as
well as planned capital expenditures, to continue to constitute a material use
of our cash resources. In addition, we may require cash resources to fund
acquisitions or investments in complementary businesses, technologies or product
lines. We believe that our current cash and cash equivalents are adequate to
finance our current level of operations only through September 30, 2000 and for
some period thereafter, depending upon several factors, including the impact of
a change in our rate of growth, the effect of any acquisitions that we may do
and the length of our accounts receivable collections cycle. During the next two
quarters we intend to raise additional capital to fund future operations through
the sale of additional equity securities, new borrowings, or some combination of
debt and equity. We have not decided upon the timing, form or amount of capital
that we will seek and have no assurances or commitments that we will succeed in
raising additional capital. If we fail to raise additional capital to fund
future operations our business, financial condition and results of operations
will be materially and adversely affected, and our stock price will decline
substantially.
Recently Issued Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) no. 101 regarding recognition, presentation and
disclosure of revenue. The Company has not determined the effect implementation
of SAB 101 will have on its consolidated results of operations.
In March 2000, the Emerging Issues Task Force reached a consensus on
Issue 00-2, "Accounting for the Costs of Developing a Web Site" (EITF 00-2). In
general, EITF 00-2 states that the costs of developing a web site should be
accounted for under provisions of Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." We
are currently evaluating EITF 00-2 and do not believe that the pronouncement
will have a significant impact on our financial position, results of operations
or cash flows. EITF 00-2 is effective for costs incurred after June 30, 2000.
Also, in March 2000, the Emerging Issues Task Force reached a consensus
on Issue 00-3, "Application of AICPA Statement of Position 97-2, `Software
Revenue Recognition' to Arrangements That Include the Right to Use Software
Stored on Another Entity's Hardware" (EITF 00-3). EITF 00-3 addresses the
accounting issues related to software hosting arrangements. In general, EITF
00-3 states that if the customer does not have the option to physically take
possession of the software, the transaction is not within the scope of SOP 97-2
and revenue should be recognized ratably over the hosting period as a service
arrangement. However, if the customer has the option to take physical delivery
of the software and specific pricing information is available for both the
software and hosting components of the arrangement, then the software revenue
may be recognized when the customer first has access to the software and revenue
from the hosting component should be recognized ratable over the hosting period.
We are currently evaluating EITF 00-3 and do not believe that the pronouncement
will have a significant impact on our financial position, results of operations
or cash flows. We will be required to implement EITF 00-3 for the year ended
September 30, 2001.
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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 March 31, 2000, we had an accumulated deficit of
approximately $87.8 million. We expect to sustain significant losses for the
foreseeable future, which could harm our business and decrease the market price
of our stock.
To achieve and sustain profitability, we must, among other things,
increase substantially our revenues from our principal products, NetObjects
Fusion and NetObjects Collage, and substantially increase our revenues from
professional and on-line services.
We expect to raise additional capital because our current cash position and cash
flow are unlikely to meet our operating requirements and anticipated growth
significantly beyond the end of the fiscal year ending September 30, 2000.
We believe that our current cash and cash equivalents are adequate to
finance our current level of operations only through the end of the current
fiscal year and for some period thereafter, depending upon several factors,
including the impact of a change in our rate of growth, the effect of any
acquisitions that we may do and the length of our accounts receivable
collections cycle. During the next two quarters, we may raise additional capital
to fund future operations through the sale of additional equity securities, new
borrowings, or some combination of debt and equity. We have not decided upon the
timing, form or amount of capital that we will seek and have no assurances or
commitments that we will succeed in raising additional capital. If we fail to
raise additional capital to fund future operations, our business, financial
condition and results of operations will be materially and adversely affected,
and our stock price probably will decline substantially.
Our relationship with International Business Machines Corporation, or IBM, has
changed substantially over time. While IBM controls us, it is under no
obligation to continue any business relationships with us, and IBM is allowed to
compete with us or act in a manner that is disadvantageous to us.
Although we have a number of license and reseller agreements or
arrangements with IBM, many of which are subject to the terms of our 10-year
license agreement that expires in April, 2007, we have no commitments for future
revenues from IBM. Revenues from IBM have represented a substantial portion of
our total revenues, representing approximately 29% and 36% of our total revenues
for the year ended September 30, 1999 and 1998, respectively, as well as
approximately 20% of our total revenues for the six months ended March 31, 2000.
We have no future revenue commitments from IBM and its subsidiary Lotus
Development Corporation, or Lotus. The amount of revenues we earn from IBM and
Lotus may fluctuate substantially from quarter-to-quarter. Although we expect to
continue licensing our products to IBM and Lotus as OEM resellers, we believe
that revenues from IBM will comprise a substantially lower percentage of our
total revenues in the future than they comprised in the fiscal year ended
September 30, 1999. During the quarter ended March 31, 2000, we recognized
revenue of $2.3 million from IBM including $2.0 million for licenses to
distribute NetObjects Fusion 5.0 with IBM PCs and committed to reimburse IBM for
up to $500,000 for promotional and advertising expenditures that IBM incurs in
marketing these bundles. During the quarter ended December 31, 1999, we
recognized revenues of $1.0 million from Lotus for licenses to bundle NetObjects
Fusion 3.01 with Lotus SmartSuite during calendar year 2000 and committed to
reimburse Lotus for up to $400,000 for promotional and advertising expenditures
incurred in marketing these bundles. In the past Lotus has created foreign
language, or "localized," versions of our software, for which IBM pays us
reduced royalties on products that it sells outside the United States under a
contract that expired on December 31, 1999. We may need to incur substantial
additional expense to obtain localized versions of new products or product
upgrades from Lotus or other vendors if necessary to satisfy the requirements of
key customers like IBM, Lotus and Novell.
We have business conflicts with IBM. IBM has chosen in the past and is
free in the future to promote and bundle competitors' products over our
products. Although we have been dependent on IBM, and IBM has provided
substantial support to us, IBM makes independent business and product decisions
that present conflicts with our business objectives.
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IBM controls us and is free to sell its interest in us. As of April 30,
2000, IBM owns approximately 49.4% of our common stock and holds warrants that
if exercised, would increase its ownership to approximately 50% of our
outstanding voting securities. As our largest stockholder, with three
representatives on our board of directors, IBM has substantial influence over
our direction and management, and may be able to prevent or cause a change in
control of us and could take other actions that might be favorable to IBM and
potentially harmful to us. IBM is eligible to sell its stock subject to
applicable securities laws and the terms of a registration rights agreement. IBM
may transfer some or all of its stock, including to our competitors. Such a
transfer could result in a transfer of IBM's interest in us, which could cause
our revenues to decrease and our stock price to fall.
IBM can act in ways that may be disadvantageous to us, such as
competing with us, investing in our competitors and taking advantage of
corporate opportunities. IBM is contractually or otherwise free to act in ways
that may harm our business. Our restated certificate of incorporation contains
provisions expressly acknowledging that:
o IBM retains "freedom of action" to conduct its business and
pursue other business opportunities, even in competition with
us;
o IBM has no obligation to refrain from investing in our
competitors, doing business with our customers or hiring away
our key personnel;
o No director appointed by IBM is prohibited from taking actions
or from voting on any action because of any actual or apparent
conflict of interest between that director and us, and these
provisions materially limit the liability of IBM and its
affiliates, including IBM's representatives on our board of
directors and Lotus, from conduct and actions taken by IBM or
its affiliates, even if the conduct or actions are beneficial
to IBM and harmful to us;
o IBM is under no obligation to inform us of any corporate
opportunity and is free to avail itself of any opportunity or
to transfer the opportunity to a third party.
Any of IBM's rights could give rise to conflicts of interests, and we
cannot be certain that any conflicts would be resolved in our favor. Any of the
risks arising from our relationship with IBM could harm our business and cause
our stock price to fall.
IBM could obtain and use our source code if we default on our
obligations under license agreements with IBM. Although our license agreements
with IBM contain restrictions on IBM's use and transfer of our software and
intellectual property, these restrictions are subject to exceptions. Under a
software license agreement with IBM, we have placed our key source code in
escrow for IBM's benefit. IBM may obtain access to the source code upon events
of default related to the Company's failure to provide required maintenance and
support or its bankruptcy or similar event of financial reorganization. IBM may
use the source code that it obtains to create derivative works, which it will
own subject to the Company's rights in the underlying software.
Our licensing arrangements with IBM are not exclusive and IBM is free
to enter into similar arrangements with our competitors. All of our licensing
arrangements with IBM are non-exclusive. IBM has the right to cease promoting
and distributing our software at any time.
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IBM may license its name, logo and technology to, or invest in, other web site
building companies, and it may more actively promote the services of our
competitors.
We have many established competitors, including Microsoft, and may be unable to
compete effectively against them.
The market for web site building software and services for the Internet
and corporate intranets is relatively new, constantly evolving and intensely
competitive. We expect competition to intensify in the future. Many of our
current and potential competitors have longer operating histories, greater name
recognition and significantly greater financial, technical and marketing
resources, and we may be unable to compete effectively against them. We compete
for small business customers with web content software makers like Adobe,
Macromedia, and Microsoft and in the on-line web hosting and services with
providers like Verio, Bigstep, Icat, and Yahoo Store. Microsoft's FrontPage, a
web site building software product, has a dominant market share. Microsoft
bundles FrontPage 2000 in several versions of the Office 2000 product suite that
dominates the market for desktop business application software. For our
enterprise customers, we compete in the Internet application development and
services market with companies such as Interwoven and Vignette. New technologies
and the expansion of existing technologies could also increase the competitive
pressures on us by enabling our competitors to offer lower-cost or superior
products or service. Increased competition could diminish the value of our
products and services and result in reduced operating margins and loss of market
share. We cannot assure you that we will be able to compete successfully against
current or future competitors.
We may not be able to accurately forecast revenue and adjust spending.
Because our business is evolving rapidly and we have a very limited
operating history, we have little experience in forecasting our revenues. Our
expense levels are based in part on our expectations of future revenues, and to
a large extent those expenses are fixed, particularly in the short-term. We
cannot be certain that our revenue expectations will be accurate or that we will
be able to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall.
Our quarterly operating results will probably fluctuate.
We believe that period-to-period comparisons of our financial results
are not necessarily meaningful, and you should not rely upon them as an
indication of our future performance. We generate a substantial percentage of
our revenues from software license fees from bundles of NetObjects Fusion with
products or services provided by our OEM resellers such as IBM, Lotus, Novell,
Inc., or Novell, 1&1 Telecommunications, or United Internet, and Concentric
Networks, Inc., or Concentric. Our revenues may vary substantially from quarter
to quarter depending on our ability to extend existing OEM bundling arrangements
with our OEM resellers or to enter into new OEM reselling arrangements. The
promptness with which sales data used for recognizing product royalties, are
reported to us from third parties, including IBM, also may cause our quarterly
results to be more volatile.
Most of our revenues have been derived from sales of a single product, and a
decline in demand or the sale price of that product would harm our business and
cause our stock price to fall.
About 60% of our revenues from software license fees in fiscal year
1999 and approximately 65% of our revenues from software license fees in the
first six months of fiscal year 2000 were derived from versions of one of our
products, NetObjects Fusion, and we expect that this single product will
continue to account for the majority of our total revenues in the near-term. To
remain competitive, software products typically require frequent updates that
add new features. There can be no assurance that we will succeed in creating and
selling updated or new
20
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versions of NetObjects Fusion. A decline in demand for, or in the average
selling price of, NetObjects Fusion, whether as a result of new product
introductions or price competition from competitors, technological change or
otherwise, would hurt our business or cause our stock price to fall.
Our future financial performance depends substantially on market acceptance and
growth of our enterprise products, professional services and online services. We
increasingly depend on our enterprise products to provide us with revenues.
Our enterprise products are relatively new and have not achieved
significant market penetration. During the quarter ended March 31, 2000, we
introduced NetObjects Collage as our primary enterprise product. We increasingly
depend on NetObjects Collage and other enterprise products to generate revenue,
and we may not receive these revenues for the following reasons:
o The success of NetObjects Collage will depend on its
acceptance as a solution for large enterprise web site and
intranet building products and services;
o Information services departments of large enterprises may
choose to create and maintain their web and intranet sites
internally or may use third-party professional developers or
our competitors' products to create and maintain their sites;
o Our enterprise products may not meet customer performance
needs or be free of significant software defects or bugs;
o Our enterprise products have a longer sales cycle than
NetObjects Fusion due to much higher pricing and different
marketing and distribution characteristics;
o There are no product bundles of our enterprise products with
any of our OEM resellers or other third party distributors;
and
o We may not be able to recruit and retain the additional sales
personnel needed to effectively market our enterprise
products.
Our professional services business, through which we provide training
and other support for our products, may not generate sufficient revenues.
We cannot be certain that our professional services business will
generate significant revenues or achieve profitability. We believe that software
license fees growth will depend on our ability to provide our customers with
these services and to educate third-party resellers about how to use our
products. We currently outsource much of our customers' services needs, but we
plan to increase the number of our services personnel to meet the needs of our
customers. Competition for qualified services personnel is intense, and we
cannot be certain that we can attract or retain a sufficient number of highly
qualified services personnel to meet our business needs.
21
<PAGE>
Our on-line services are new and have not yet received a broad customer
acceptance.
Since inception, we have invested resources to create and enhance our
on-line services, which we believe support and add to market acceptance of our
products. With the acquisition of Sitematic and our launch of GoBizGo.com,
providing on-line services to enable small businesses to conduct e-commerce has
become an integral part of our business growth strategy. Including the period
during which Sitematic operated these services they have been offered to
customers generally for less than 12 months. We depend on our distribution
partners to attract small business subscribers for these services for our
on-line business to succeed, and to date their efforts have met with limited
success. We may not be able to expand our distribution channels or sales force.
We expect to offer our on-line small business services through our distribution
partners under those partners' advertising and marketing logos in order to
expand our on-line small business services. We may fail to attract these new
customers and distributors, which would hurt our business and could cause our
stock price to fall.
We need to maintain our third-party distribution channel because our direct
sales to third parties would be insufficient to support our operating base.
While we derive some of our revenues from selling our products directly
to third parties, most of our revenues are derived from the sale of our products
through third-party distributors and OEM resellers. We need to develop third
party relationships for promoting our on-line offerings. A substantial portion
of our revenues from NetObjects Fusion 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 some of our
resellers. These programs also provide for price protection for our software for
some of our direct and indirect channel resellers that, under specified
conditions, entitle the reseller to a credit if we reduce our price to similar
channel resellers. There can be no assurance that actual returns or price
protection will not exceed our estimates, and our estimation policy may cause
significant quarterly fluctuations.
We need to maintain and establish new bundling arrangements because we may be
less successful at selling our products on a stand-alone basis.
We believe that products that are not sold in a "suite" containing
software products or components that perform different functions are less likely
to be commercially successful. For example, NetObjects Fusion 5.0 includes free
web site hosting services. IBM also bundles our products with some of its
software products, such as the bundling of NetObjects Fusion with WebSphere
Studio and NetObjects Fusion with Lotus Designer Studio and Lotus SmartSuite.
NetObjects Fusion is also bundled with Novell's NetWare for Small Business. We
cannot be assured of maintaining or obtaining suitable product or component
bundling arrangements with third parties. Failure to maintain or conclude
suitable software product bundling arrangements could hurt our business, cause
our revenues to decrease and our stock price to fall.
Our products may contain defects that could subject us to liability in excess of
insurance limitations.
Our software products are complex and may contain undetected errors or
result in system failures. Despite extensive testing, errors could occur in any
of our current or future
22
<PAGE>
product offerings after commencement of commercial shipments. Any errors could
result in loss of or delay in revenues, loss of market share, failure to achieve
market acceptance, diversion of development resources, and injury to our
reputation or damage to our efforts to build brand awareness. We cannot be
certain that the contractual limitations of liability will be enforceable, or
that our insurance coverage will continue to be available on reasonable terms or
will be available in amounts to cover one or more large claims, or that the
insurer will not disclaim coverage as to any future claim. The successful
assertion of one or more large claims that exceed available insurance coverage
or changes in our insurance policies, including premium increases or the
imposition of large deductible or co-insurance requirements, could cause our
revenues to decrease and our stock price to fall.
If we fail to respond adequately to rapid technological changes, our existing
products and services will become obsolete or unmarketable.
The market for our products is marked by rapid technological change,
which leads to frequent new product introductions and enhancements, uncertain
product life cycles, changes in customer demands and evolving industry
standards. New web site building products and services based on new technologies
or new industry standards could render our existing products obsolete and
unmarketable. We believe that to succeed, we must enhance our current products
and develop new products on a timely basis to keep pace with technological
developments and to satisfy the increasingly sophisticated requirements of our
customers.
Our product and software development efforts are inherently difficult to manage
and keep on schedule, so development delays may increase our costs.
On occasion, we have experienced software development delays and
related cost overruns, which to date have not materially affected our business,
and we cannot be certain that we will not encounter these problems in the
future. Any delays in developing and releasing enhanced or new products could
cause our revenues to decrease. In addition, we cannot be certain that we will
successfully develop and market new products or product enhancements that
respond to technological change, evolving industry standards or customer
requirements, or that any product innovations will achieve the market
penetration or price stability necessary for profitability.
The loss of our key personnel, or failure to hire additional personnel, could
harm our business because we would lose experienced personnel and new skilled
personnel are in short supply and command high salaries.
We depend on the continued service of our key personnel, and we expect
that we will need to hire additional personnel in all areas. The competition for
personnel throughout our industry is intense, particularly in the San Francisco
Bay Area, where our headquarters are located. We have experienced difficulties
in attracting new personnel, and all of our personnel, including our management,
may terminate their employment at any time for any reason. Currently, we are
dependent upon the services of Samir Arora, our President, Chief Executive
Officer, Chairman of the Board and one of our founders. The loss of Mr. Arora's
services would materially impede the operation and growth of our business at
this time. We do not maintain key person life insurance for any of our
personnel. Furthermore, our failure to attract new personnel or retain and
motivate our current personnel could hurt our business.
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<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 April 30, 2000, IBM owns approximately 49.4% of our outstanding
stock and holds warrants that if exercised, would increase its ownership to
approximately 50% of our outstanding voting securities. That ownership interest
and provisions of our restated certificate of incorporation, bylaws, a voting
agreement between us and IBM, and Delaware law could make it more difficult for
a third party to acquire us, even if a change in control would result in the
purchase of your shares of common stock at a premium to the market price.
If we fail to adequately protect our intellectual property rights or face a
claim of intellectual property infringement by a third party, we could lose our
intellectual property rights or be liable for significant damages.
Trademarks and other proprietary rights are important to our success
and our competitive position. We seek to protect our trademarks and other
proprietary rights, but our actions may be inadequate to prevent
misappropriation or infringement of our technology, trademarks and other
proprietary rights or to prevent others from claiming violations of their
trademarks and other proprietary rights. Although we have obtained federal
registration of the trademark NetObjects Fusion, we know that other businesses
use the word "Fusion" in their marks alone or in combination with other works.
We do not believe that we will be able to prevent others from using the word
"Fusion" for competing goods and services. For example, Allaire Corporation
markets its application development and server software for web development,
including applications for e-commerce, under the federally registered trademark
"ColdFusion." Under an agreement with Allaire Corporation, we have agreed that
neither company will identify its products and services with the single word
"Fusion," unless otherwise agreed as in the case of our co-bundled product
"Fusion2Fusion." Business customers may confuse our products and services with
similarly named brands, which could dilute our brand names or limit our ability
to build market share. To license many of our products, we rely in part on
"shrink-wrap" and "clickwrap" licenses that are not signed by the end user and,
therefore may be unenforceable under the laws of certain jurisdictions. In
addition, we may license content from third parties. We could become subject to
infringement actions based upon these third-party licenses, and we could be
required to obtain licenses from other third parties to continue offering our
products.
We cannot be certain that we will be able to avoid significant
expenditures to protect our intellectual property rights, to defend against
third-party infringement or other claims or to license content from third
parties alleging that our products infringe their intellectual property rights.
Incurring significant expenditures to protect our intellectual property rights
or to defend against claims or to license content could decrease our revenues
and cause our stock price to fall.
Because we are no longer a majority-owned subsidiary of IBM, we no
longer enjoy cross-licensing protection that we received as an IBM subsidiary.
We may face material litigation risk associated with patent infringement claims
that IBM's patent cross-licensees could not assert against us while we were an
IBM subsidiary.
Our international operations continue to expand and may not be successful.
International sales represented approximately 23% of our total revenues
in the year ended September 30, 1999, and approximately 40% of our total
revenues in the quarter ended March 31, 2000. We intend to expand the scope of
our international operations and
24
<PAGE>
currently have a subsidiary in the United Kingdom. Our continued growth and
profitability will require continued expansion of our international operations,
particularly in Europe.
Our international operations are, and any expanded international
operations will be, subject to a variety of risks associated with conducting
business internationally that could materially adversely affect our business,
including the following:
o difficulties in staffing and managing international
operations;
o lower gross margins than in the United States;
o slower adoption of the Internet;
o longer payment cycles;
o fluctuations in currency exchange rates;
o seasonal reductions in business activity during the summer
months in Europe and other parts of the world;
o recessionary environments in foreign economies; and
o increases in tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers imposed
by foreign countries.
Furthermore, the laws of foreign countries may provide little or no
protection of our intellectual property rights.
We may be unable to manage our rapid growth.
We have expanded our operations rapidly since inception, and we intend
to continue to expand them in the foreseeable future. This rapid growth places a
significant demand on our managerial and operational resources. To manage growth
effectively, we must:
o implement and improve our operational systems, procedures and
controls on a timely basis;
o expand, train and manage our workforce and, in particular, our
sales and marketing and support organizations in light of our
recent decision to offer on-line and professional services;
o implement and manage new distribution channels to penetrate
different and broader markets, including the market for
intranet software products;
o manage an increasing number of complex relationships with
customers, co-marketers and other third parties; and
o raise additional capital.
We cannot be certain that our systems, procedures or controls will be
adequate to support our current or future operations or that our management will
be able to manage the expansion, raise sufficient capital and
25
<PAGE>
still achieve the rapid execution necessary to exploit fully the market for our
products and services. Failure to manage our growth effectively could harm our
business.
Due to our small size, limited operations and the difficulty of hiring personnel
in our industry, any future acquisitions could strain our managerial,
operational and financial resources.
In the future we may make acquisitions of, or large investments in,
businesses that offer products, services and technologies that we believe would
help us better provide e-business web site and intranet site building software
and services to businesses, such as the acquisition of Sitematic in October
1999. Any future acquisitions or investments would present risks such as
difficulty in combining the technology, operations or workforce of the acquired
business with our own, disruption of our ongoing businesses and difficulty in
realizing the anticipated financial or strategic benefits of the transaction.
To make these acquisitions or large investments we might use cash,
common stock or a combination of cash and common stock. If we use common stock,
these acquisitions could further dilute existing stockholders. Amortization of
goodwill or other intangible assets resulting from acquisitions could materially
impair our operating results and financial condition. Furthermore, there can be
no assurance that we would be able to obtain acquisition financing, or that any
acquisition, if consummated, would be smoothly integrated into our business. If
we make acquisitions or large investments and are unable to surmount these
risks, our business could be harmed, our revenues could decrease and our stock
price could fall.
We may become subject to burdensome government regulation and legal
uncertainties in areas including network security, encryption and privacy, among
others, because we conduct electronic commerce and provide information and
services over the Internet.
We are not currently subject to direct regulation by any governmental
agency, other than laws and regulations generally applicable to businesses,
although specific U.S. export controls and import controls of other countries,
including controls on the use of encryption technologies, may apply to our
products. Due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted in the United
States and abroad with particular applicability to the Internet. It is possible
that governments will enact legislation that may apply to us in areas such as
network security, encryption, the use of key escrow, data and privacy
protection, electronic authentication or "digital" signatures, illegal and
harmful content, access charges and retransmission activities. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, content, taxation, defamation and personal privacy is uncertain. Any
new legislation or regulation or governmental enforcement of existing
regulations may limit the growth of the Internet, increase our cost of doing
business or increase our legal exposure, any of which could cause our revenues
to decrease and our stock price to fall.
A governmental body could impose sales and other taxes on the sale of our
products, license of our technology or provision of services, which would harm
our financial condition.
We currently do not collect sales or similar taxes with respect to the
sale of products, license of technology or provision of services in states and
countries other than states in which we have offices. In October 1998, the
Internet Tax Freedom Act, or ITFA, was signed into law. Among other things, the
ITFA imposes a three-year moratorium on discriminatory taxes on e-commerce.
Nonetheless, foreign countries, or, following the moratorium, one or more
states,
26
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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.
27
<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, limit the amount of the credit exposure to any one
issuer. We manage interest rate risk by limiting investments to debt securities
of relatively short maturities. In addition, we maintain sufficient cash and
cash equivalents so that we can hold investments to maturity.
At March 31, 2000, we had cash and cash equivalents of $16.4 million,
including approximately $13.7 million in money market funds and $1.0 million
invested in high-grade commercial paper issued by U.S. companies, with
maturities of less than 90 days. We have classified these debt securities as
available for sale.
Our general policy is to limit the risk of principal loss and ensure
the safety of invested funds by limiting market and credit risk. All highly
liquid investments with a maturity of three months or less at the date of
purchase are considered to be cash equivalents; investments with maturities
greater than three months are considered to be short-term investments. Our
investment policy limits purchases of debt securities to maturities of three
months or less.
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.
28
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PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On March 22, 2000, the Company filed an amendment to its current
Form S-8, to register 1,400,000 shares of common stock pursuant to seven 1999
Executive Stock Option Agreements, and to register an additional 3,100,000
shares of common stock issuable upon the exercise of options under the Company's
Amended and Restated 1997 Stock Option Plan.
(d) Since the IPO, we have invested approximately $1.6 million in the
Sitematic acquisition. We have used approximately $20.2 million to provide
working capital to maintain our business operations. The remainder of the
original net proceeds of $40.1 million, approximately $16.4 million, was
invested in cash and cash equivalents at March 31, 2000.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The annual meeting of stockholders of the Company was held on
March 15, 2000 in which proxies representing 22,445,603 shares of
common stock, or 82.63% of the total outstanding shares, voted.
b) At the annual meeting of stockholders, Mr. Samir Arora, Mr. Robert
G. Anderegg, Mr. Lee A. Dayton, Mr. Blake Modersitzki, Mr. John
Sculley and Mr. Michael D. Zisman were elected as directors for
the ensuing year, all of whom were currently serving on the board
of directors of the Company.
c) The following proposals were voted upon at the meeting:
Proposal One: Election of Directors
Total Vote for Total Vote Withheld
Director Each Director From Each Director
-------- ------------- ------------------
Samir Arora 22,381,924 63,679
Robert G. Anderegg 22,381,924 63,679
Lee A. Dayton 22,381,924 63,679
Blake Modersitzki 22,398,424 47,179
John Sculley 22,379,324 66,279
Michael D. Zisman 22,381,724 63,879
Proposal Two: The second matter voted upon was the amendment of the
Restated Certificate of Incorporation to increase the number of shares
of common stock that the Company is authorized to issue from 60,000,000
shares to 120,000,000 shares. There were 22,209,504 votes cast for the
proposal, 224,346 votes against the proposal and 11,753 abstentions.
Proposal Three: The third matter voted upon was the amendment of the
Amended and Restated Stock Option Plan to increase the maximum
aggregate number of shares of the Company's common stock that may be
optioned and sold under the plan from 4,500,000 to 7,600,000 shares.
There were 16,449,688 votes cast for the proposal, 9,373 votes against
the proposal and 5,248,013 broker non-votes.
Proposal Four: The fourth matter voted upon was the ratification of the
grant of options to senior executives of the Company allowing them to
purchase an aggregate of 1,400,000 shares of the Company's common
stock. There were 16,961,096 votes in favor of the proposal, 223,986
votes against the proposal, 12,508 abstentions and 5,248,013 broker
non-votes.
Proposal Five: The fifth matter voted upon was the ratification of the
selection of KPMG, LLP as independent auditors for the Company for the
fiscal year ending September 30, 2000. There were 22,434,253 votes in
favor of the proposal, 6,997 votes against the proposal and 4,353
abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
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: May 15, 2000
/s/ Russell F. Surmanek
----------------------------------------
Russell F. Surmanek
Executive Vice President, Finance and
Operations and Chief Financial Officer
29
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INDEX TO EXHIBITS
Exhibit Number Description
27.1 Financial Data Schedule
30
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 16,383
<SECURITIES> 0
<RECEIVABLES> 12,297
<ALLOWANCES> (644)
<INVENTORY> 241
<CURRENT-ASSETS> 32,813
<PP&E> 7,032
<DEPRECIATION> (3,813)
<TOTAL-ASSETS> 48,337
<CURRENT-LIABILITIES> 9,549
<BONDS> 0
0
0
<COMMON> 308
<OTHER-SE> 38,373
<TOTAL-LIABILITY-AND-EQUITY> 48,337
<SALES> 0
<TOTAL-REVENUES> 18,133
<CGS> 4,454
<TOTAL-COSTS> 28,441
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> (14,112)
<INCOME-TAX> 24
<INCOME-CONTINUING> (14,762)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,156)
<EPS-BASIC> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
