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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 000-24271
NETGRAVITY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0410283
- -------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1900 S. NORFOLK STREET
SUITE 150
SAN MATEO, CALIFORNIA 94403-1151
(650) 425-6000
(Address, including ZIP code, and telephone number)
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 [ ]
17,779,474 shares of Common Stock, $0.001 par value, were outstanding as of
April 30, 1999.
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NETGRAVITY, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I - Financial Information
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations for the
three-months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk 23
PART II - Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and use of Proceeds 24
Item 3. Default upon Senior Securities 25
Item 4. Submission of Matters to a Vote of securities Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
</TABLE>
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NETGRAVITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,185 $ 10,236
Short-term investments $ 7,092 10,563
Accounts receivable, net 6,543 6,311
Proceeds receivable from secondary offering 95,813 -
Prepaid expenses and other current assets 1,222 778
-------------------------------------
Total current assets 121,855 27,888
Property and equipment, net 4,107 3,473
Other assets 1,857 2,059
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Total assets $ 127,819 $ 33,420
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-------------------------------------
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Current portion of notes payable 485 618
Accounts payable 1,535 898
Accrued liabilities 3,391 2,867
Deferred revenue 6,972 5,800
-------------------------------------
Total current liabilites 12,383 10,183
Notes payable, less current portion 1,121 1,109
Stockholders equity:
Convertible preferred stock - -
Common stock 17 14
Additional paid-in capital 142,942 46,817
Deferred compensation (1,898) (1,706)
Accumulated deficit (26,746) (22,997)
-------------------------------------
Total stockholders' equity 114,315 22,128
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Total liabilities and stockholders' equity 127,819 33,420
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</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
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NETGRAVITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31,
1999 1998
<S> <C> <C>
Revenues:
Software licenses $ 1,557 $ 775
Software upgrades 873 $ 402
Consulting and support 1,621 826
Transactional services 521 -
------------------------------------
Total revenues 4,572 2,003
Cost of revenues:
Cost of software licenses 3 15
Cost of consulting and support 1,223 1,158
Cost of transactional services 980 -
------------------------------------
Total cost of revenues 2,206 1,173
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Gross profit 2,366 830
------------------------------------
Operating costs and expenses:
Research and development 1,962 996
Sales and marketing 3,354 1,956
General and administrative 989 708
------------------------------------
Total operating costs and expenses 6,305 3,660
------------------------------------
Loss from operations (3,939) (2,830)
Other income (expense), net 190 30
------------------------------------
Net loss $ (3,749) $ (2,800)
------------------------------------
------------------------------------
Per share of common stock:
Basic and diluted net loss $ (0.28) $ (0.93)
------------------------------------
Weighted average shares used in per share
calculation of basic and diluted net loss 13,489 3,025
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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NETGRAVITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Cash Flows from operating activities:
Net loss $ (3,749) $ (2,800)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 385 231
Amortization of intangibles 167 -
Amortization of deferred stock compensation 295 246
Amortization of compensation from grant of non-employee stock options 163 -
Changes in operating assets and liabilities
Accounts receivable, net (232) (1,073)
Prepaid expenses and other assets (444) (64)
Accounts payable 637 (16)
Accrued liabilities 524 268
Deferred revenue 1,172 1,107
--------------------------------
Net cash used in operating activities (1,082) (2,101)
--------------------------------
--------------------------------
Cash flows from investing activities:
Capital expenditures (1,019) (358)
Proceeds from maturities of short-term investments, net 3,471 -
Other assets 35 -
--------------------------------
Net provided by (used in) in investing activities 2,487 (358)
--------------------------------
--------------------------------
Cash flows from financing activities:
Repayment of notes payable (121) (122)
Proceeds from issuance of preferred stock, net - 3,249
Proceeds from issuance of common stock, net 673 14
Issuance cost related to secondary offering (1,008) -
Repurchases of common stock - (1)
--------------------------------
Net cash provided by (used in) financing activities (456) 3,140
--------------------------------
--------------------------------
Net increase in cash and cash equivalents 949 681
Cash and cash equivalents at beginning of period 10,236 5,637
--------------------------------
Cash and cash equivalents at end of period 11,185 6,318
--------------------------------
--------------------------------
Supplemental disclosure of cash flow information:
Cash paid for interest 37 41
--------------------------------
--------------------------------
Non-cash financing activities:
Deferred compensation cost on employee stock option grants 650 390
--------------------------------
--------------------------------
Proceeds receivable from secondary offering 95,813 -
--------------------------------
--------------------------------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
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NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements of NetGravity, Inc. and
subsidiaries (the "Company") reflect all adjustments (consisting only of
normal recurring adjustments) that, in the opinion of management, are
necessary for a fair presentation of interim period results. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's annual
report on Form 10-K and other documents filed with the Securities and
Exchange Commission.
The results of operations for the current interim period are not necessarily
indicative of results to be expected for the entire current year or other
future interim periods.
Net Loss Per Share
Basic and diluted net loss per share are computed using the weighted average
number of outstanding shares of common stock.
Diluted Net loss per share for the three months ended March 31, 1998 does not
include the effect of approximately 12,601,000 (6,220,000 on an as-if
converted basis) shares of convertible preferred stock outstanding, 1,304,029
stock options with a weighted average exercise price of $0.27 per share,
27,650 common stock warrants with a weighted average exercise price of $0.22
per share, and 1,017,229 shares of common stock issued and subject to
repurchase by the Company at a weighted average price of $0.22 per share,
because their effects are anti-dilutive.
Net loss per share for the three months ended March 31, 1999 does not include
the effect of approximately 2,261,926 stock options outstanding with a
weighted average exercise price of $8.58 per share, and approximately 348,302
shares of common stock issued and subject to repurchase by the Company at a
weighted average price of $0.24 per share, because their effects are
anti-dilutive.
NOTE 2. EQUITY TRANSACTIONS
In March 1998, the Company issued and sold approximately 1,451,000 shares of
Series C Preferred Stock for aggregate net proceeds to the Company of
approximately $3,249,000.
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In June 1998, the Company raised $23.9 million of net proceeds from the sale
of 3 million shares of the Company's common stock in its IPO. All
outstanding shares of Series A, B and C Preferred Stock were converted into
2.5 million shares, 1.9 million shares and 1.8 million shares of common
stock, respectively, upon the closing of the IPO.
In July 1998, the Company raised an additional $2.1 million of net proceeds
from the sale of an additional 250,000 shares of the Company's common stock
upon the exercise of the underwriters' over-allotment option granted in
connection with the IPO.
Pursuant to an underwriting agreement dated March 29, 1999, in April 1999
the Company completed a secondary public offering of 4,692,000 shares of its
common stock (which includes shares issued upon exercise of the underwriters'
612,000 share over-allotment option) for net proceeds of approximately $138.6
million, after deducting underwriting discounts, commissions and estimated
offering expenses payable by the Company. In March, 1999 the Company sold
3,218,440 shares for net proceeds of approximately $94.8 million, and
certain NetGravity stockholders sold 861,560 shares for net proceeds of
approximately $25.6 million. In addition, the underwriters exercised the
612,000 shares from the over-allotment for net proceeds to the Company of
approximately $18.2 million.
In the three months ended March 31, 1998, the Company recorded deferred stock
compensation expense of $390,000 for the difference at the grant date between
the exercise price and the deemed fair value of the common stock underlying
the options granted during those periods. In the three months ended March 31,
1999 the Company recorded deferred stock compensation expense of $650,000
related to the grant of a stock option to an outside consultant. Amortization
of deferred compensation of approximately $246,000 and $458,000 was
recognized in the three months ended March 31, 1998 and 1999, respectively.
NOTE 3. SEGMENT INFORMATION
The Company has adopted the provisions of SFAS No. 131, DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
standards for the reporting by public business enterprises of information
about operating segments, products and services, geographic areas, and major
customers. The method for determining what information to report is based on
the way that management organizes the operating segments within the Company
for making operating decisions and assessing financial performance.
The Company's Chief Executive Officer ("CEO") is considered to be the "chief
operating decision maker" within the meaning of SFAS No. 131. The CEO reviews
financial information presented on a consolidated basis accompanied by
disaggregated information about revenues by geographic region for purposes of
making operating decisions and assessing financial performance. The
consolidated financial information reviewed by the CEO is identical to the
information presented in the accompanying consolidated
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statement of operations. Therefore, the Company has determined that it
operates in a single operating segment: interactive marketing software and
services.
Revenue and asset information regarding operations in the different
geographic regions is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
North America Europe Asia Consolidated
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<S> <C> <C> <C> <C>
Revenues:
Three months ended March 31, 1998 1,415 250 338 2,003
Three months ended March 31, 1999 2,964 1,019 589 4,572
Identifiable Assets:
March 31, 1998 10,753 1,079 -- 11,832
March 31, 1999 124,103 2,351 1,365 127,819
</TABLE>
No single customer accounted for greater than 10% of revenues in any period
reported.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the condensed
consolidated historical financial information and the notes thereto included
in Item 1 of this Quarterly Report on Form 10-Q (the "Form 10-Q" or the
"Report") and Management's Discussion and Analysis of Financial Condition and
Results of Operations and related financial information contained in
NetGravity's Form 10-K for the fiscal year ended December 31, 1998 (the "1998
Form 10-K"). In this Report, "NetGravity," the "Company," "we," "us" and
"our" refer to NetGravity, Inc. and its wholly-owned subsidiaries, NetGravity
Europe Limited, NetGravity Asia Pacific K.K. and NetGravity (Hong Kong)
Limited.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT
TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES
AND PROJECTIONS ABOUT THE COMPANY'S INDUSTRY, MANAGEMENT'S BELIEFS, AND
ASSUMPTIONS MADE BY MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS,"
"INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," VARIATIONS OF SUCH
WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT; THEREFORE, ACTUAL RESULTS AND OUTCOMES MAY DIFFER MATERIALLY FROM
WHAT IS EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH
RISKS AND UNCERTAINTIES INCLUDE THOSE SET FORTH HEREIN BELOW UNDER "FACTORS
AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION" AS WELL AS
THOSE NOTED IN THE COMPANY'S 1998 10-K, PARTICULARLY IN ITEM 1 OF PART I
THEREOF UNDER THE SECTION ENTITLED " FACTORS AFFECTING OUR BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION ." THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
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OVERVIEW
NetGravity, Inc. is a leading provider of online interactive marketing
solutions. The Company develops, markets and supports a broad range of
high-end, mission-critical software and transaction-based services designed
for e-commerce merchants (vendors of products and services), advertising
agencies and content publishers.
To date, the Company has generated its revenues primarily from the license
and related upgrade of, consulting for and support of its AdServer family of
software products. The Company believes that its current AdServer family of
software products and software products in development, together with the
related consulting and support services, will continue to account for a
substantial majority of its revenues for the foreseeable future.
In August 1998, the Company formally launched its transactional services
business with the introduction of AdCenter for Publishers ("AdCenter"), an
outsourced version of AdServer. In October 1998, the Company announced the
Global Profile Service ("GPS"), which is a database of anonymous consumer
profiles that the Company makes available to its customers for use in
enhanced targeting. To date revenues from GPS have not been material.
Revenues from AdCenter and GPS are included within the line-item
"transactional services."
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's condensed
consolidated statements of operations as a percentage of total revenues for
the periods indicated:
NETGRAVITY, INC.
% of Revenue Table
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
<S> <C> <C>
Revenues:
Software licenses 34.1% 38.7%
Software upgrades 19.0% 20.1%
Consulting and support 35.5% 41.2%
Transactional services 11.4% 0.0%
----------------------------
Total revenues 100.0% 100.0%
Cost of revenues: (1)
Cost of software licenses (2) 0.1% 0.7%
Cost of consulting and support (3) 26.8% 57.8%
Cost of transactional services (4) 21.4% 0.0%
----------------------------
Total cost of revenues 48.3% 58.5%
----------------------------
Gross profit 51.7% 41.5%
----------------------------
Operating costs and expenses:
Research and development 42.9% 49.7%
Sales and marketing 73.4% 97.7%
General and administrative 21.6% 35.3%
----------------------------
Total operating costs and expenses 137.9% 182.7%
----------------------------
Loss from operations (86.2%) (141.2%)
Other income (expense), net 4.20% 1.5%
----------------------------
Net loss (82.0%) (139.7%)
----------------------------
----------------------------
</TABLE>
- -------------------------------
(1) There are no material costs of revenue associated with software
upgrades
(2) As a percentage of software licenses revenues, cost of software
licenses was 1.9% and 0.2% in the three months ended March 31, 1998
and 1999, respectively.
(3) As a percentage of consulting and support revenues, cost of
consulting and support was 140.2% and 75.4% in the three months ended
March 31, 1998 and 1999, respectively.
(4) As a percentage of transactional services revenues, cost of
transactional services was 0.0% and 188.1% in the three months ended
March 31, 1998 and 1999, respectively.
REVENUES
The Company's total revenues increased from $2.0 million for the quarter
ended March 31, 1998 to $4.6 million for the quarter ended March 31, 1999.
International revenues, primarily comprised of export revenues, as a
percentage of total revenues were 29.4% and 35.2% for the quarters ended
March 31, 1998 and March 31, 1999, respectively. Recent growth in
international revenues was attributable to expanded consulting and support
and sales and marketing efforts overseas and the opening of an Asia-Pacific
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regional office in April 1998. No customer accounted for more than 10% of
total revenues for the quarter ended March 31, 1998 or the quarter ended
March 31, 1999.
SOFTWARE LICENSES. Software licenses revenues increased from $775,000 for the
quarter ended March 31, 1998 to $1.6 million for the quarter ended March 31,
1999. These increases were attributable to an increase in the number of
AdServer licenses sold, due in part to an expansion of the Company's direct
sales organization. Because software upgrades revenues and consulting and
support revenues are, to a large extent, a function of software licenses
revenues, the Company's future operating results will be substantially
dependent on growth of software licenses revenues, and the failure to
increase software licenses revenues would likely have a material adverse
effect on the Company's business, results of operations and financial
condition.
SOFTWARE UPGRADES. Software upgrades revenues increased from $402,000 for the
quarter ended March 31, 1998 to $873,000 for the quarter ended March 31,
1999. The increase was a result of software upgrades being provided to a
larger installed customer base. The number of NetGravity's customers
increased from approximately 230 at March 31, 1998 to approximately 360 at
March 31, 1999.
CONSULTING AND SUPPORT. Consulting and support revenues increased from
$826,000 for the quarter ended March 31, 1998 to $1.6 million for the quarter
ended March 31, 1999. The increase was primarily as a result of the increased
demand for consulting services, expansion into Europe and Asia, the larger
installed customer base, and customers electing to renew their support
programs.
TRANSACTIONAL SERVICES. The Company's transactional services were introduced
in 1998 with the formal release of AdCenter for Publishers during the third
quarter of 1998 and Global Profile Services in the fourth quarter of 1998.
Transactional services revenues were $521,000 for the quarter ended March 31,
1999, or 11.4% of total revenues.
COST OF REVENUES
Gross margins increased from 41.4% for the quarter ended March 31, 1998 to
51.7% for the quarter ended March 31, 1999. This increase was primarily
attributable to higher consulting and support revenues and margins in the
three months ended March 31, 1999 due to increased economies of scale in the
consulting and support organizations during that period. The increase in
consulting and support revenues and margins was partially offset by negative
transactional services margins.
COST OF SOFTWARE LICENSES. Cost of software licenses consists of royalties
paid to third parties for licensed technology. Cost of software licenses was
$15,000 and $3,000 for the quarters ended March 31, 1998 and 1999,
respectively. As a percentage of software licenses revenues, cost of software
licenses was 1.9% and 0.2% for the quarters ended March 31, 1998 and 1999,
respectively.
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COST OF CONSULTING AND SUPPORT. Cost of consulting and support consists
primarily of personnel-related costs (including overhead) incurred in
providing consulting, support and training to customers. The cost of
consulting and support was $1.2 million for each of the quarters ended March
31, 1998 and 1999. While absolute dollars spent on consulting and support
were constant between the two quarters, cost decreased as a percentage of
consulting and support revenues from 140.2% for the quarter ended March 31,
1998 to 75.4% for the quarter ended March 31, 1999. This decrease was
attributable to increased revenues and improved economies of scale associated
with a larger customer base.
COST OF TRANSACTIONAL SERVICES. The cost of transactional services consists
primarily of personnel and related expenses, hosting and bandwidth costs and
the amortization of intangibles associated with the AdCenter and Global
Profile Services offerings. The cost of transactional services for the three
months ended March 31, 1999 was $980,000, or 188.1% of transactional services
revenue for this period. There were no costs of transactional services during
the quarter ended March 31, 1998. The Company expects the cost of
transactional services to continue to increase in absolute dollars in future
periods as the Company continues to hire additional personnel to increase the
transactional capacity of its service bureau.
Overall gross margins may be impacted by the mix of products sold by the
Company, the mix of software licenses revenues, software upgrades revenues,
consulting and support revenues and transactional services revenues, the mix
of international and North American revenues, the mix of distribution
channels used by the Company, and the level of royalty payments, amortization
charges and other costs related to the acquisition of technology or other
intangible assets. The Company typically realizes higher gross margins on
software upgrades revenues than on software licenses revenues, substantially
higher gross margins on software licenses revenues than on consulting and
support revenues, and higher gross margins on direct sales than on indirect
sales. Shifts in the mix of revenues towards lower margin revenues or a
greater percentage of sales through indirect channels would adversely impact
the Company's overall gross margin and could materially adversely impact the
Company's operating results. There can be no assurance that such adverse
fluctuations in the mix of revenue or costs of revenues will not recur in the
future. Moreover, the Company expects that increases in costs of
transactional services will materially and adversely impact overall gross
margins for the foreseeable future.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of personnel-related
costs (including overhead), consulting expenses and related equipment. To
date, the Company has not capitalized any such development costs under
Statement of Financial Accounting Standards No. 86; all research and
development costs have been expensed as incurred. Research and development
expenses increased from $996,000 for the quarter ended March 31, 1998 to $2.0
million for the quarter ended March 31, 1999. The increase in absolute
dollars was primarily due to increased personnel costs and related overhead,
and a large increase in outside consulting expenses associated with
enhancements of existing products and development of new products. The
Company has recorded deferred stock compensation expense of $650,000 for a
stock option issued to a consultant. Amortization of deferred stock
compensation associated with this stock option totalled approximately
$163,000 under Statement of Financial Accounting Standards No. 123 in the
quarter ended March 31, 1999, which amount was included in research and
development expense for this period.
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The Company believes that continued investment in research and development is
critical to attaining its strategic objectives and, as a result, expects that
research and development expenses may increase in absolute dollars in future
periods.
SELLING AND MARKETING
Selling and marketing expenses consist primarily of personnel-related costs
(including overhead), travel expenses, advertising expenses, trade show
expenses, seminars and costs of marketing materials. Selling and marketing
expenses increased from $2.0 million for the quarter ended March 31, 1998 to
$3.4 million for the quarter ended March 31, 1999. The increase in absolute
dollars was due primarily to the increase in compensation paid to sales and
marketing personnel (including commissions) and related overhead, and
increased travel costs associated with the Company's direct selling efforts.
The Company expects selling and marketing expenses to increase significantly
in absolute dollars in future periods, as the Company hires additional
personnel, introduces new products and services, expands into new markets and
continues to promote the NetGravity brand.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of personnel-related
costs (including overhead) for the Company's executive, administrative,
finance and human resources personnel, support services and professional
services fees. General and administrative expenses increased from $708,000
for the quarter ended March 31, 1998 to $989,000 for the quarter ended March
31, 1999. The increase in absolute dollars was primarily a result of
increased personnel and related overhead necessary to support the Company's
increased scale of operations, including the additional costs associated with
being a publicly traded company. The Company expects general and
administrative expenses to increase in absolute dollars in future periods as
the Company expands its staff, incurs additional costs related to expansion
of its operations, and is subject to the requirements of being a publicly
traded company.
DEFERRED STOCK COMPENSATION EXPENSE
Amortization of deferred compensation associated with employee stock option
grants totaling approximately $295,000 was recognized in the three months
ended March 31, 1999. Including the $163,000 of amortized deferred
compensation associates with the stock options issued to a consultant, the
total amortization of deferred compensation expenses in the quarter ended
March 31, 1999 was $458,000. Amortization of deferred stock compensation
expense is allocated to costs of consulting and support, cost of
transactional services and to all operating expense lines identified on the
statement of operations over the life of the options, which is generally four
years. As a result, amortization of deferred compensation expense will
adversely impact the company's operating results through June, 2002.
OTHER INCOME (EXPENSES)
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Net interest income for the quarter ended March 31, 1998 was $30,000 compared
with net interest income for the quarter ended March 31, 1999 of $190,000.
The increase in net interest income was primarily due to the interest earned
on the net proceeds from the Company's initial public offering (IPO).
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had $11.2 million in cash and cash
equivalents and $7.1 million in short-term investments. In June 1998, the
Company sold 3,000,000 shares of its common stock in its IPO, generating net
proceeds of $23.9 million. In July 1998, the Company sold an additional
250,000 shares of its common stock and generated an additional $2.1 million
of net proceeds in connection with the exercise of the over-allotment-option
granted to the underwriters of the Company's IPO. In March of 1999 the
Company sold in a secondary public offering 3,218,440 shares for net proceeds
of approximately $94.8 million. The cash proceeds had not been received by
the Company as of March 31, 1999 and as such are classified on the Company's
March 31, 1999 balance sheet as proceeds receivable. In addition, in April of
1999, the underwriters of the Company's secondary public offering purchased
an additional 612,000 shares of the Company's common stock upon the exercise
of their over-allotment option, generating additional net proceeds of
approximately $18.2 million.
During the three months ended March 31, 1999, the Company used $1.1 million
in cash to fund its operating activities, primarily attributable to the
Company's operating loss, offset by certain non-cash charges and the
increases in certain liabilities. Net cash provided by investing activities
during the three months ended March 31, 1999 of $2.5 million was primarily
attributable the net proceeds from maturities of short-term investments of
$3.5 million, offset by the purchase of property and equipment of $1.0
million. Net cash used in financing activities during the three months ended
March 31, 1999 of $456,000 was primarily attributable to issuance costs
related to the Company's secondary offering, the repayment of certain debts,
offset by the proceeds from the issuance of common stock related to options
exercised.
The Company's deferred revenue balance includes deferred software licenses
revenues and revenues attributable to uncompleted consulting engagements, as
well as the unamortized portion of the revenues from software upgrades and
support contracts. The Company records an accounts receivable and deferred
revenue upon shipment and invoicing of a software license to a customer. The
Company's accounts receivable balance is relatively large in comparison to
quarterly and annual revenues because the Company generally recognizes
revenue from the licensing of software later than shipment and invoicing.
Further, the Company's deferred revenue balance or changes
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therein may not be indicative of changes in the ordering patterns of
customers or the Company's backlog.
The Company believes that it has sufficient resources to meet its anticipated
cash needs for working capital and capital expenditures for the next 12
months. However, there can be no assurance that additional funds will not be
required either during or after such 12-month period.
Year 2000 Compliance
The Company is aware that many currently installed information technology
("IT") systems, such as computer systems and software products, as well as
non-IT systems that include embedded technology, were not designed to
correctly process dates after December 31, 1999. NetGravity is currently
assessing the impact this issue, commonly referred to as the "Year 2000"
issue, may have on its business and operations. The Company has formed an
ad-hoc Year 2000 project team to identify and address Year 2000 issues,
including potential issues with the significant non-IT systems in its
buildings, plant, equipment and other infrastructure. The Year 2000 project
team has reviewed the Company's products, is continuing to review the
Company's IT systems and has recently begun reviewing the Company's non-IT
systems. NetGravity has not identified any significant non-compliance issues
with its products that have not already been corrected. The Company expects
that its review of its IT and non-IT systems will be completed by June 30,
1999. In addition to its internal reviews, the Company is discussing with its
significant suppliers and service providers their plans to investigate and
address their Year 2000 issues. The Company cannot assure you that it will be
able to identify and accurately evaluate all Year 2000 issues that it faces.
In September 1998, NetGravity released version 3.5 of its AdServer product
which included enhancements designed to correctly accept and process 21st
century dates and, as a result, the Company now believes that the current
versions of its AdServer family of software products are Year 2000 compliant.
However, given the complexity of software systems such as AdServer and the
need for them to interoperate with other systems, the Company cannot assure
you that its products will not experience Year 2000 problems in the future.
Any such Year 2000 issues could result in:
- a decrease in sales of the the Company's products;
- deferral of revenue recognition on contracts in which the Company
has warranted (or may in the future warrant) compliance with Year
2000 requirements;
- an increase in the allocation of resources to address Year 2000
problems of the Company's customers without additional revenue
commensurate with such dedicated resources; or
14
<PAGE>
- an increase in litigation costs relating to losses suffered by the
Company's customers due to Year 2000 problems.
In addition, NetGravity has determined that certain of its software IT
systems are not currently Year 2000 compliant. The Company believes that its
software IT systems will become compliant through updates and upgrades
purchased in the ordinary course of business for reasons unrelated to Year
2000. However, the Company cannot assure you that the incremental costs of
such IT software will not materially exceed its preliminary estimates. Higher
incremental costs of upgrading or replacing its IT software could have a
material and adverse effect on the Company's business, results of operations
and financial condition.
As the Company reviews its non-IT systems, it may identify situations that
present material Year 2000 risks or that will require substantial time and
material expense to address. In addition, if its customers or its potential
customers are required to expend significant resources to address their Year
2000 issues (or if they fail to appropriately address such Year 2000 issues),
the Company's business, results of operation and financial condition could be
adversely affected due to resulting changes in purchasing patterns.
Furthermore, if Year 2000 problems experienced by any of the Company's
significant suppliers or service providers cause or contribute to delays or
interruptions in the delivery of products or services, such delays or
interruptions could have a material and adverse effect on the Company's
business, results of operations and financial condition. Although the Year
2000 project team has not yet determined the most likely worst-case Year 2000
scenarios or quantified the likely impact of such scenarios, it is clear that
the occurrence of one or more of the risks described above could have a
material and adverse effect on the Company's business, financial condition or
results of operations.
The Company does not separately account for Year 2000 related expenses but
estimates that the expenses it has incurred to date to address Year 2000
issues have not been material and, although it has not completed its full
assessment of its Year 2000 readiness, it does not expect to incur material
expenses in connection with any required future remediation efforts. However,
the Company's Year 2000 compliance efforts related to AdServer consumed
significant software engineering resources that would otherwise have been
devoted to product development efforts. To the extent that significant
additional software engineering resources are required to address other Year
2000 issues that may be discovered, the Company's product development efforts
may be significantly hampered which, in turn, could have a material and
adverse effect on the Company's business, financial condition and results of
operations.
The Company's Year 2000 project team's activities will also include the
development of contingency plans in the event that the Company has not
completed all of its remediation programs in a timely manner. In addition,
the Year 2000 project team will develop contingency plans in the event that
any third parties that provide goods or services essential to the Company's
business fail to appropriately address their Year 2000 issues. The Year 2000
project team expects to conclude the development of these contingency
15
<PAGE>
plans by June 30, 1999. Even if these plans are completed on time and put in
place, it is possible that unresolved or undetected internal and external
Year 2000 issues will have a material and adverse effect on the Company's
business, financial condition and results of operations.
The information set forth above and elsewhere in this Report relating to Year
2000 issues constitute "Year 2000 Readiness Disclosures," as such term is
defined by the Year 2000 Information and Readiness Disclosure Act of 1998,
enacted October 19, 1998 (Public Law 105-271, 112 State. 2386).
FACTORS AFFECTING OUR OPERATING RESULTS AND FINANCIAL CONDITION
The following is a discussion of certain factors which currently impact or
may impact NetGravity's business, operating results and/or financial
condition. Anyone making an investment decision with respect to NetGravity's
capital stock or other securities is cautioned to carefully consider these
factors, along with the factors discussed in the Company's 1998 10-K,
particularly in Item 1 of Part I thereof under the section entitled "Factors
Affecting our Business, Operating Results and Financial Condition."
WE HAVE A LIMITED OPERATING HISTORY.
We were founded in September 1995 and commercially released version 1.0 of
AdServer in May 1996. Accordingly, we have a limited operating history, and
we face all of the risks and uncertainties encountered by early-stage
companies. The new and evolving nature of the online interactive marketing
solutions markets increases these risks and uncertainties. Also, because we
have a limited operating history, our past results may not be meaningful and
you should not rely on them as indicators of our future performance.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUED LOSSES.
Since our inception in September 1995, we have incurred substantial losses.
Our losses were $6.9 million for the year ended December 31, 1997,$11.3
million for the year ended December 31, 1998 and $3.7 for the quarter ended
March 31, 1999. As of March 31, 1999, we had an accumulated deficit of $26.7
million.
We anticipate that our expenses relating to developing, marketing and
supporting our current and future products and services will increase
substantially in the future. In particular, we expect to spend significantly
on the following activities:
- developing new market opportunities for our current and future
products and services;
16
<PAGE>
- funding more research and development to improve our current
solutions and to create new solutions, including the recently
announced AdServer 4.0;
- expanding and improving our sales and marketing operations;
- expanding and enhancing our outsourced interactive marketing solution
(AdCenter), our enhanced targeting service (Global Profile Service)
and possible future products and services designed for e-commerce
merchants and advertising agencies (including our recently announced
AdCenter for Agencies offering);
- developing new channels for distributing our products and providing
our services;
- expanding and improving our financial and operational infrastructure;
and
- broadening our customer support capabilities.
Accordingly, for the foreseeable future, we expect to experience additional
losses as our expenses for developing, marketing and supporting our current
solutions and developing new solutions exceed our total revenues. These
additional losses will increase our accumulated deficit.
OUR FUTURE OPERATING RESULTS ARE UNCERTAIN AND ARE LIKELY TO
FLUCTUATE SIGNIFICANTLY.
Our revenues, gross margins and other operating results may vary
significantly from quarter to quarter. The fluctuations may be due to a
number of factors, many of which are beyond our control. These factors
include:
- our or our competitors' introduction of new or enhanced online
interactive marketing solutions;
- market acceptance of existing or planned products and services,
including future versions of AdServer (such as the recently announced
version 4.0) and AdCenter, our enhanced targeting services (Global
Profile Service) and possible future products and services designed
for e-commerce merchants and advertising agencies (including AdCenter
for Agencies);
- the time it takes us to sell our services and license and implement
our products and the size of each transaction;
- the mix of software licenses, software upgrades, consulting and
support and transactional services revenues;
17
<PAGE>
- the amount of advertising spending budgeted by advertisers and direct
marketers for online interactive marketing;
- our or our competitors' price changes or changes in pricing models;
- our customers' failure to renew their AdServer upgrade and support
contracts;
- the shift from higher gross margins from software license and upgrade
revenues to lower gross margins from consulting and support and
transactional services revenues;
- the mix of distribution channels through which we sell our products
and services;
- our sales and licensing activities in international markets;
- costs relating to possible acquisitions of technology or businesses;
and
- the amounts of royalty payments, amortization charges and other costs
related to the licensing or acquisition of technology or other
intangible assets.
Due to all of the foregoing factors, we do not believe that period-to-period
comparisons of our historical results of operations are good predictors of
future performance. Furthermore, it is possible that in some future quarters
our results of operations may fall below the expectations of securities
analysts and investors. In such event, the trading price of our stock will
likely be materially and adversely affected.
WE RELY HEAVILY ON SALES OF ONE PRODUCT FAMILY.
To date, we have generated nearly all of our revenues from the license and
related upgrades, consulting and support of our AdServer family of software
products. We expect that our current AdServer family of software products and
software products in development, together with the related consulting and
support services, will continue to account for a substantial majority of our
revenues for the foreseeable future. Therefore, our future financial
performance is dependent, in significant part, upon the successful
development, introduction and customer acceptance of new and enhanced
versions of AdServer and of related new products and services that we may
develop. We cannot assure you that we will be successful in upgrading
AdServer or that we will successfully develop new products and services or
that any new product or service will achieve market acceptance. Consequently,
factors affecting the pricing of and demand for AdServer, such as
competition, technological changes, failure of the market for online
interactive marketing solutions to develop as we expect or lack of customer
acceptance of AdServer could have a material and adverse effect on our
business, results of operations or financial condition.
18
<PAGE>
OUR FUTURE SUCCESS DEPENDS ON THE TIMELY COMPLETION OF NEW SOLUTIONS
UNDER DEVELOPMENT.
We must successfully complete the development of AdServer 4.0, AdCenter for
Agencies and the next version of Global Profile Service (which is being
designed to provide much more detailed consumer profiles than the current
version). Our future revenues will likely fall below our expectations (and
the expectations of investors in our common stock) if we do not successfully
develop, market and support these services. Any actual or expected revenue
shortfall would likely reduce the trading price of our common stock.
WE HAVE AN UNPROVEN AND CHANGING BUSINESS MODEL.
Our core business model has been to license software designed to enable our
customers to directly manage their online interactive marketing activities.
We believe that it is too early to determine whether this business model will
be successful in the future. An alternate business model employed by some of
our competitors (including DoubleClick) is to provide outsourced,
service-based solutions to customers who choose not to directly manage their
online interactive marketing activities.
In 1998 we broadened our business by releasing AdCenter for Publishers, a
service-based service that transfers to us the responsibility for managing
our customers' online systems and the data generated from their online
interactive marketing activities, but preserves customers' control over their
advertising sales functions. We also recently introduced our Global Profile
Service which allows our customers to more narrowly target consumers through
the use of anonymous consumer profiles from our centralized database.
Although revenues from AdCenter and the Global Profile Service to date have
not been significant, we intend to place more emphasis on developing these
services in the future. Our increased emphasis on AdCenter and the Global
Profile Service may not be successful. In particular, AdCenter may not
compete effectively with current or future outsourced service providers based
on price, performance or other features. Similarly, our Global Profile
Service may not be competitive with current or future providers of consumer
profile data or related targeting services. In addition, we expect to devote
significant engineering, marketing, sales, consulting and customer support
resources to enhance AdCenter's and the Global Profile Service's
competitiveness, scalability and cost-effectiveness. These actions may divert
resources from our other products and services and may thus harm our core
AdServer business.
OUR MARKETS ARE HIGHLY COMPETITIVE.
The market for online interactive marketing solutions is new, intensely
competitive and rapidly evolving. We expect competition to continue to
increase both from existing competitors and new market entrants. We believe
that our ability to compete depends on many factors both within and beyond
our control, including:
- the ease of use, performance, features, price and reliability of our
solutions as compared to those of our competitors;
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<PAGE>
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us and our competitors;
- the quality of our customer service and support; and
- the effectiveness of our sales and marketing efforts.
In the online advertising market, we compete directly with DoubleClick Inc.,
CMGI, Inc. (through its Engage/Accipiter unit), Excite, Inc. (through its
MatchLogic unit), AdForce, Inc., Real Media, Inc. and a variety of other
online advertising service providers. To date, we have focused primarily on
developing software-based solutions, which we license to our customers,
although we have recently begun offering an outsourced solution (AdCenter).
Some of our competitors (including DoubleClick) have adopted a business model
focused on outsourcing of interactive marketing solutions. These competitors
have much more experience offering these outsourced solutions and may have
lower cost structures due, in part, to efficiencies created from the larger
scale of their operations. If the outsourced model gains popularity over the
software model in our target market, we cannot assure you that we will be
able to compete effectively with our current products and services.
In the online direct marketing market, we expect to face indirect competition
from the vendors of electronic commerce systems, including BroadVision, Inc.,
InterWorld Corporation and Open Market, Inc. among others. In addition, if
providers of electronic commerce systems begin including advanced online
direct marketing functionality in their products, this could reduce or
eliminate the need for separate direct marketing management solutions,
including our current and future products targeted at the direct marketing
market. We also encounter competition from Netscape and Microsoft, which
build or bundle advertising management products with their Internet commerce
solutions. Both Netscape and Microsoft have significantly greater resources
than we do, and, due to their control of the browser market, if either of
them were to offer online advertising and direct marketing management
solutions with features comparable to those offered by us, there can be no
assurance that we would be able to compete effectively.
Many of our current and potential competitors have longer operating histories
and significantly greater financial, technical, marketing and other resources
than we do and thus may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Also, many of our
current and potential competitors have greater name recognition, more
extensive customer bases and larger proprietary consumer databases. These
competitors may be able to undertake more extensive promotional activities,
adopt more aggressive pricing policies, or offer more attractive terms to
purchasers than we can. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
with third parties to enhance their products. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share.
20
<PAGE>
In addition to these current and potential commercial competitors, we also
face competition from the internal capabilities of some potential customers.
Some of the largest and most popular online content publishers use internally
developed interactive marketing solutions rather than the commercial
solutions offered by NetGravity and our competition. We cannot assure you
that we will be able to compete successfully with these internally-developed
solutions.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any one of which could impair our finances
and business prospects. We cannot assure you that we will be able to compete
successfully against existing or potential competitors or that competitive
pressures will not materially impair our finances or business prospects.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS AND PLANS
FOR EXPANSION.
WE HAVE A LIMITED OPERATING HISTORY IN OUR INTERNATIONAL MARKETS. We
have only limited experience in marketing, selling and distributing our
products and services internationally. Through our three subsidiaries,
NetGravity Europe Limited, NetGravity Asia Pacific K.K. and NetGravity (Hong
Kong) Limited, we recently began operations in a number of markets in Europe
and Asia Pacific. International revenues comprised approximately 28% of our
total revenues in 1998, 35% of our total revenues in the three months ended
March 31, 1999 and are expected to comprise a significant portion of our
total revenues in 1999.
THERE ARE CERTAIN RISKS AND CHALLENGES INHERENT IN DOING BUSINESS IN
INTERNATIONAL MARKETS. Such risks include:
- difficulties in collecting accounts receivable and longer collection
periods;
- changing and conflicting regulatory requirements;
- potentially adverse tax consequences;
- tariffs and general export restrictions, including export controls
relating to encryption technology;
- difficulties in staffing and managing foreign operations;
- political instability;
- fluctuations in currency exchange rates as evidenced by the ongoing
Asia Pacific financial crisis;
- the uncertain impact of the introduction of the Euro;
21
<PAGE>
- seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world; and
- the impact of local economic conditions and practices.
INTERNATIONAL MARKETS FOR ONLINE INTERACTIVE MARKETING ARE IN THEIR
VERY EARLY STAGES OF DEVELOPMENT. International markets for online
advertising and direct marketing are in earlier stages of development than in
the United States, and we cannot assure you that the market for, and use of
online advertising and direct marketing in international markets will be
significant in the future. Factors that may further account for slower growth
in the online advertising and direct marketing markets in Europe and Asia
include:
- slower growth in the number of individuals using the Internet
internationally;
- privacy concerns;
- a lower rate of advertising spending internationally than in the
United States; and
- a greater reluctance internationally to use the Internet for
advertising and direct marketing.
WE NEED TO DEVELOP LOCALIZED VERSIONS OF OUR PRODUCTS AND TO EXPAND
OUR INTERNATIONAL PRESENCE. We believe that having localized versions of our
products may become an important competitive factor for international sales
in the future. We also believe that our international sales may be limited in
the future if we do not increase our physical presence abroad, including
hiring additional personnel for local service and support. In addition,
before we can efficiently deliver transactional services to international
customers, we must establish local hosting centers from which to deliver
these services. The development of localized versions of our products and the
expansion of our international presence will likely require significant
resources.
Any of the above factors could have a material and adverse affect on our
international sales and operations, which, in turn, could adversely affect
our overall business, operating results and financial condition.
OUR SUCCESS DEPENDS ON CERTAIN KEY EMPLOYEES.
Our future performance will depend largely on the efforts and abilities of
our key technical, customer support, sales and managerial personnel and on
our ability to retain them. We have in the past experienced difficulty in
hiring qualified technical, customer support, sales and managerial personnel.
Our success will depend on our ability to attract and retain such personnel
in the future. In addition, the loss of any of our current
22
<PAGE>
executive officers could materially and adversely affect our business,
financial condition and operating results.
WE MAY ACQUIRE OTHER COMPANIES' PRODUCT LINES, TECHNOLOGIES OR
BUSINESSES.
As part of our growth strategy, we may in the future attempt to purchase
other companies' product lines, technologies or businesses. In connection
with any such acquisitions, we may pay cash, issue stock, incur debt or be
required to amortize expenses related to goodwill and other intangible
assets. For example, in September 1998 we paid $2 million to MatchLogic for
rights to use certain of MatchLogic's proprietary consumer profile databases
for limited purposes. We accounted for this transaction as a purchase of an
intangible asset, which is being amortized over its expected useful life of
three years. In addition to these issues, acquisitions of companies and
businesses involve numerous risks, including difficulties in the assimilation
of the operations, technologies, products and personnel of the acquired
company, the diversion of management's attention from other business
concerns, risks of entering markets in which we have no or limited direct
prior experience and the potential loss of key employees of the acquired
company. From time to time, we have engaged in discussions with third parties
concerning potential acquisitions of product lines, technologies and
businesses. In the event that such an acquisition were to occur, our
business, results of operations, financial condition and the trading price of
our common stock may be materially and adversely affected due to the factors
described above.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVES AND FINANCIAL INSTRUMENTS
FOREIGN CURRENCY HEDGING INSTRUMENTS
The Company transacts business in various foreign currencies. Accordingly,
the Company is subject to exposure from adverse movements in foreign currency
exchange rates. This exposure is primarily related to revenues and operating
expenses in the U.K. and Japan denominated in the respective local currency.
However, as of March 31, 1999, the Company had no hedging contracts
outstanding.
The Company currently does not use financial instruments to hedge operating
expenses in the U.K. or Japan denominated in the respective local currency.
Instead, the Company believes that a natural partial hedge exists, because
local currency revenues will substantially offset the operating expenses
denominated in the respective local currency. The Company assesses the need
to utilize financial instruments to hedge currency exposures on an ongoing
basis.
The Company does not use derivative financial instruments for speculative
trading purposes, nor does the Company hedge its foreign currency exposure in
a manner that entirely offsets the effects of changes in foreign exchange
rates. The Company regularly
23
<PAGE>
reviews its hedging program and may as part of this review determine at any
time to change its hedging program.
FIXED INCOME INVESTMENTS
The Company's 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. The Company places its investments
with high credit quality issuers and, by policy, limits the amount of the
credit exposure to any one issuer.
The Company's 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 between three and twelve months are considered to be short-term
investments; investments with maturities in excess of twelve months are
considered to be long-term investments. The weighted average pre-tax interest
rate on the investment portfolio as of March 31, 1999 is approximately 5.08%.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not involved in any legal proceedings that are material
to its business or financial condition.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Pursuant to a Registration Statement on Form S-1 (File No.
333-51007) filed with and declared effective by the Commission on June 11, 1998,
the Company offered an aggregate of 3,250,000 shares of its Common Stock for an
aggregate offering price of $29.3 million and certain selling stockholders
offered an aggregate of 200,000 shares of the Company's Common Stock for an
aggregate offering price of $1.8 million (such offering, the "IPO"). Net of
underwriters' discounts and commissions of 7% of the offering price, the Company
and the selling stockholders received proceeds of $27.2 million and $1.7
million, respectively, from the IPO. In addition to underwriters' discounts and
commissions, the Company reasonably estimates that it incurred approximately
$1.3 million in additional expenses related to the IPO, leaving it with
approximately $25.9 million in net proceeds.
From June 11, 1998 through March 31, 1999, the Company has used, from the net
proceeds of the IPO, approximately (i) $3.3 million to fund certain capital
expenditures,
24
<PAGE>
(ii) $13.8 million to fund operating expenses related to entering new
markets, increasing research and development spending, expanding sales and
marketing operations, developing new distribution channels, improving its
operational and financial systems and broadening its customer support
capabilities and (iii) $1.1 million to repay certain indebtedness. In
addition, the Company used net proceeds from the IPO to make a $2.0 million
payment to MatchLogic pursuant to an agreement between the Company and
MatchLogic related to the use of certain of MatchLogic's proprietary consumer
profile databases. The use of proceeds from IPO does not represent a material
change in the use of proceeds described in the final prospectus related to
the IPO. Pending other uses, the Company has invested most of the remaining
net proceeds in investment grade, short-term interest bearing securities.
None of the payments described in this Item 2(d) constituted direct or
indirect payments to directors, officers, general partners of the issuer or
their associates, or to persons owning ten percent or more of any class of
equity securities of the issuer or to affiliates of the issuer.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
(a) APPOINTMENT OF NEW CHIEF EXECUTIVE OFFICER. Effective as of
April 20, 1999, the Company's Board of Directors appointed Eric W. Spivey as
the Company's Chief Executive Officer and President. John W. Danner, a
co-founder of the Company and its former Chief Executive Officer, continues
to serve as the Company's Chairman of the Board.
(b) RESIGNATION OF VICE PRESIDENT OF NORTH AMERICAN SALES. Effective
April 23, 1999, John K. Donnelly resigned his position as the Company's Vice
President of North American Sales to pursue other opportunities. Susan
Atherton, the Company's Vice President of Worldwide Sales, has assumed the
duties of Mr. Donnelly.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibit is attached hereto.
27.1 Financial Data Schedule (First Quarter 1999).
25
<PAGE>
(b) Not Applicable.
SIGNATURE
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, on May 17, 1999.
NETGRAVITY, INC.
By: /s/ Stephen E. Recht
-----------------------------------------
Stephen E. Recht
CHIEF FINANCIAL OFFICER
AND SECRETARY
(Principal financial and accounting
officer and duly authorized officer)
26
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