<PAGE>
As filed with the Securities and Exchange Commission on March 2, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------
NETGRAVITY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7372 77-0410283
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) No.)
</TABLE>
NetGravity, Inc.
1900 S. Norfolk Street, Suite 150
San Mateo, CA 94403
(650) 425-6000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
John W. Danner
Chairman and Chief Executive Officer
NetGravity, Inc.
1900 S. Norfolk Street, Suite 150
San Mateo, CA 94403
(650) 425-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
COPIES TO:
Larry W. Sonsini, Esq. Carla S. Newell, Esq.
James N. Strawbridge, Esq. William E. Growney, Jr., Esq.
Christopher G. Nicholson, Esq. Kiril M. Dobrovolsky, Esq.
Wilson Sonsini Goodrich & Rosati Gunderson Dettmer Stough Villeneuve
Professional Corporation Franklin & Hachigian, LLP
650 Page Mill Road 155 Constitution Drive
Palo Alto, CA 94304 Menlo Park, CA 94025
(650) 493-9300 (650) 321-2400
----------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Offering Amount of
Securities To Be Registered Price(1)(2) Registration Fee
<S> <C> <C>
Common Stock, $0.001 par value.................................. $87,198,751 $24,242
</TABLE>
(1) Includes 540,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) promulgated under the Securities Act of 1933, as
amended.
------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 2, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
<TABLE>
<CAPTION>
[LOGO]
<S> <C>
</TABLE>
3,600,000 SHARES
COMMON STOCK
NetGravity, Inc. is offering 2,738,440 shares of common stock and the
selling stockholders are selling an additional 861,560 shares. NetGravity's
common stock is listed on the Nasdaq National Market under the symbol "NETG."
The last reported sale price of the common stock on the Nasdaq National Market
on March 1, 1999 was $21 1/16 per share.
-------------------
Investing in the common stock involves risks.
See "Risk Factors" beginning on page 6.
-----------------
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price.............................................
Underwriting discounts and commissions............................
Proceeds to NetGravity............................................
Proceeds to the selling stockholders..............................
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
NetGravity has granted the underwriters a 30-day option to purchase up to an
additional 540,000 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on , 1999.
-------------------
BANCBOSTON ROBERTSON STEPHENS
NATIONSBANC MONGOMERY SECURITIES LLC
FAC/EQUITIES
The date of this prospectus is , 1999
<PAGE>
EDGAR Colorwork Descriptions:
INSIDE FRONT COVER OF PROSPECTUS:
Title: Solutions for online interactive and marketing
Intro Paragraph: NetGravity is a leading provider of online interactive
marketing solutions. At the core of NetGravity's solutions is its AdServer
product family, which is designed to enable customers to improve response
rates by targeting advertisements to individual users and to increase
efficiency by automating certain online interactive marketing business
processes. These features are designed to enhance customers' ability to
generate revenue from sales of advertising space and from direct marketing
campaigns.
Graphic Depicting Functions of AdServer
Caption 1:
1) Manage and schedule advertising and direct marketing offers. NetGravity
solutions analyze historical data, forecast advertising inventory
capacities and deliver up-to-date availability reports.
Caption 2:
2) Deliver the right message to the right person. Our solutions are
designed to enhance our customers' ability to generate revenue through
capabilities such as targeting advertisements to individual users and
groups of users.
Caption 3:
3) Test, track and fine-tune messages. Report-generating functions reveal
important information about how an online advertisement, group of
advertisements or direct marketing message is performing.
INSIDE GATEFOLD:
Title: NetGravity helps businesses build online relationships with
consumers.
Intro Paragraph:
The competitive nature of the global marketplace requires merchants to
continually seek out and obtain new customers while preserving their
relationships with current customers. To help build these relationships
online, NetGravity markets and supports three solutions, AdServer
Enterprise, AdServer Network and AdCenter for Publishers, designed to
support the needs of companies in the online interactive marketing industry.
NetGravity's products and services, together with its broad range of
consulting and support capabilities, are designed to enhance the
effectiveness and efficiency of the entire online interactive marketing
supply chain: e-commerce merchants (vendors of products and services),
advertising agencies and content publishers.
Upper Right-Hand Corner Captions:
- Manage and schedule advertising and direct marketing offers.
- Deliver the right message to the right person.
- Test, track and fine-tune messages.
Graphic Intro: How NetGravity solutions can be used to facilitate Internet
business.
Graphic Depicting AdServer's Role in online advertising and direct marketing
Captions 1-7:
1) An individual consumer surfs the Web.
2) The consumer encounters a site that piques interest.
3) A targeted advertisement is delivered to the consumer in real-time by
NetGravity AdServer.
4) The consumer clicks on the advertisement.
5) By means of a link, the consumer is sent to the merchant's site.
6) NetGravity AdServer delivers a targeted direct marketing offer to the
consumer.
7) NetGravity AdServer assists the merchant in collecting data for
future use.
INSIDE BACK COVER OF PROSPECTUS:
Intro Paragraph:
NetGravity provides mission-critical online interactive marketing solutions
for e-commerce merchants, advertising agencies and content publishers.
Content: 6 branded logos above a textual list of ~ 100 customer names.
Company logos for this sheet:
Agency.com
Netscape Communications
CNN Interactive
WhoWhere?
Real Cities (Knight-Ridder New Media)
ONSALE
NetGravity is a trademark of NetGravity, Inc. This prospectus also contains
additional trademarks
and tradenames of NetGravity and of other companies.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the common stock,
including stabilizing bids, syndicate covering transactions or the imposition of
penalty bids. For a description of these activities, see "Underwriting."
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell and seeking offers to buy
shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock. Please see "Risk Factors--You
should not rely on press releases, news articles or other information not
contained in the prospectus." In this prospectus, "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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................... 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 21
Dividend Policy........................................................... 21
Price Range of Common Stock............................................... 21
Capitalization............................................................ 22
Selected Consolidated Financial Data...................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 24
Business.................................................................. 38
Management................................................................ 57
Certain Transactions...................................................... 69
Principal and Selling Stockholders........................................ 72
Description of Capital Stock.............................................. 74
Shares Eligible for Future Sale........................................... 76
Underwriting.............................................................. 78
Legal Matters............................................................. 80
Experts................................................................... 80
Additional Information.................................................... 80
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------------------
3
<PAGE>
SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION IN THIS PROSPECTUS, INCLUDING RISK FACTORS, REGARDING OUR COMPANY
AND THE COMMON STOCK BEING SOLD IN THIS OFFERING.
Our Company
NetGravity, Inc. is a leading provider of solutions for online interactive
marketing, which includes online advertising and online direct marketing. We
were a pioneer in the online advertising software market and believe that we
were the first company to provide this software to major online content
publishers. We develop, market and support a broad range of high-end,
mission-critical software and transaction-based services. Our solutions are
designed to help our customers increase their revenues by automating online
interactive marketing and by improving response rates through better consumer
targeting. We sell our solutions to each of the three participants in the
interactive marketing supply chain: e-commerce merchants (vendors of products
and services); advertising agencies; and content publishers. Our core product,
AdServer, is a software solution targeted to large, sophisticated e-commerce
merchants and content publishers. AdServer manages the process of placing
advertisements, promotions and other offers on Web pages. We recently began
offering transaction-based services, including AdCenter for Publishers, an
outsourced version of AdServer. We have also announced AdCenter for Agencies,
which will extend AdCenter to include enhanced features designed for online
advertising agencies. We expect AdCenter for Agencies to be available in the
second quarter of 1999. In addition, we recently began offering our Global
Profile Service to our AdServer and AdCenter customers. Global Profile Service
is a transaction-based data service that gives our customers access to a
database of anonymous consumer profiles for use in targeting online
advertisements, promotions and other offers. The first release of Global Profile
Service allows for targeting based on geographic location. We are developing
future releases of Global Profile Service to allow targeting based on other
demographic and behavioral characteristics.
The unique capabilities of online advertising, the growth in use of
electronic media and the favorable demographics of Internet users have led to a
significant increase in online advertising. Jupiter Communications estimates
that online advertising expenditures in the United States will increase from
$1.9 billion in 1998 to $7.7 billion in 2002. Similarly, Jupiter estimates that
expenditures on online direct marketing were $190 million in 1998 and will
exceed $1.3 billion in 2002.
Our objective is to become the leading provider of online interactive
marketing solutions for e-commerce merchants, advertising agencies and content
publishers. To achieve this objective, our strategy includes the following key
elements:
- extend our leadership in online advertising software solutions by
continuing to enhance our technology;
- establish our leadership in interactive marketing solutions for e-commerce
by adding features to AdServer designed to meet the specific requirements
of e-commerce merchants;
- improve our customers' return on investment through enhanced targeting by
offering our Global Profile Service, which provides access to a database
of over 45 million anonymous consumer profiles;
- enable efficient advertising buying on the Internet by providing solutions
that link e-commerce merchants, advertising agencies and content
publishers; and
- enhance our long-term global competitive position by expanding our
international presence.
We market and sell our products and services primarily through our field
sales and telesales organizations. We maintain sales and support operations in
North America, Europe and Asia Pacific. To date, we have sold our software and
services to over 325 customers, including 32% of the top 50 revenue-generating
online content publishers listed in the March 31, 1998 CMR Interwatch report.
Our customers include agency.com, @Home Network, British Telecom, broadcast.com,
CNN Interactive, E*TRADE, IBM, Netscape Communications, Preview Travel, ONSALE,
Real Cities (Knight-Ridder New Media) and Time Inc. New Media.
Our Address
NetGravity's principal executive offices are located at 1900 South Norfolk
Street, Suite 150, San Mateo, California 94403 and our telephone number at that
address is (650) 425-6000. Our website is located at www.netgravity.com.
Information contained in our website is not part of this prospectus.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by NetGravity................ 2,738,440 shares
Common stock offered by the selling
stockholders.................................... 861,560 shares
Common stock to be outstanding after the
offering........................................ 16,617,898 shares(1)
Use of proceeds................................... For working capital and general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol..................... NETG
</TABLE>
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
September 5, 1995 Year Ended December 31,
(inception) to -------------------------------
December 31, 1995 1996 1997 1998
------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues............................................................ $ -- $ 1,939 $ 6,358 $ 11,557
Loss from operations...................................................... (191) (4,681) (6,872) (11,833)
Net loss.................................................................. (195) (4,627) (6,882) (11,293)
Basic and diluted net loss per share(2)................................... $ (0.19) $ (2.19) $ (2.46) $ (1.28)
Shares used in per share calculation(2)................................... 1,006 2,111 2,799 8,823
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-------------------------
<S> <C> <C>
Actual As Adjusted(3)
--------- --------------
Balance Sheet Data:
Cash, cash equivalents and short-term investments.................................................. $ 20,799 $ 74,305
Working capital.................................................................................... 17,705 71,211
Total assets....................................................................................... 33,420 86,926
Notes payable, less current portion................................................................ 1,109 1,109
Stockholders' equity............................................................................... 22,128 75,634
</TABLE>
- ------------
(1) Assumes no exercise of the underwriters' over-allotment option and exclude,
as of December 31, 1998, (i) 1,990,908 shares of common stock issuable upon
exercise of outstanding options at a weighted average exercise price of
$4.21 per share and (ii) an aggregate of 2,050,381 shares available for
future issuance under our 1998 Stock Plan, 1998 Employee Stock Purchase Plan
and 1998 Director Option Plan. New investors will be further diluted if any
shares of common stock are issued upon exercise of currently outstanding
options or other rights, are granted in the future or are reserved for
future issuance under our stock plans. See "Management--Employee Benefit
Plans" and Note 5 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for the
determination of shares used in computing basic and diluted net loss per
share.
(3) Adjusted to reflect our sale of 2,738,440 shares of common stock at an
assumed offering price of $21 1/16 per share (after deducting the
underwriting discounts and commissions and estimated offering expenses
payable by us) and the application of the estimated net proceeds therefrom.
------------------------------
EXCEPT AS OTHERWISE INDICATED HEREIN, ALL INFORMATION IN THIS PROSPECTUS
ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE
"PRINCIPAL AND SELLING STOCKHOLDERS" AND "UNDERWRITING."
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF OUR COMMON STOCK OFFERED BY THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY REVIEW THE FOLLOWING RISK
FACTORS AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE
MAKING AN INVESTMENT.
SOME OF THE INFORMATION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU CAN IDENTIFY
THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "BELIEVE," "ESTIMATE" AND "CONTINUE" OR SIMILAR WORDS. YOU SHOULD
READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY BECAUSE THEY: (1) DISCUSS OUR
EXPECTATIONS ABOUT OUR FUTURE PERFORMANCE; (2) CONTAIN PROJECTIONS OF OUR FUTURE
OPERATING RESULTS OR OF OUR FUTURE FINANCIAL CONDITION; OR (3) STATE OTHER
"FORWARD-LOOKING" INFORMATION. WE BELIEVE IT IS IMPORTANT TO COMMUNICATE OUR
EXPECTATIONS TO OUR INVESTORS. THERE MAY BE EVENTS IN THE FUTURE, HOWEVER, THAT
WE ARE NOT ACCURATELY ABLE TO PREDICT OR OVER WHICH WE HAVE NO CONTROL. THE RISK
FACTORS LISTED IN THIS SECTION, AS WELL AS ANY CAUTIONARY LANGUAGE IN THIS
PROSPECTUS, PROVIDE EXAMPLES OF RISKS, UNCERTAINTIES AND EVENTS THAT MAY CAUSE
OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE EXPECTATIONS WE DESCRIBE IN OUR
FORWARD-LOOKING STATEMENTS. BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE
AWARE THAT THE OCCURRENCE OF ANY OF THE EVENTS DESCRIBED IN THESE RISK FACTORS
AND ELSEWHERE IN THIS PROSPECTUS COULD HAVE A MATERIAL AND ADVERSE EFFECT ON OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION AND THAT UPON THE
OCCURRENCE OF ANY OF THESE EVENTS, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
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. For a detailed discussion
of our financial condition and results of operations, please see the section of
this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 and $11.3
million for the year ended December 31, 1998. As of December 31, 1998, we had an
accumulated deficit of $23.0 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;
- funding more research and development to improve our current solutions and
to create new solutions;
- 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 planned 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.
6
<PAGE>
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.
For more detailed information concerning our losses and other operating
results, please see the sections of this prospectus entitled "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 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;
- 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. Please also see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a more detailed
analysis of our period-to-period results.
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.
7
<PAGE>
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. For more information on the sources of our revenues,
please see the section of this prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Our future success depends on the timely completion of new solutions under
development.
We must successfully complete the development of 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 material, 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. 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. Please see the section of this prospectus entitled
"Business--Software Products and Transactional Services" for a description of
AdCenter and the Global Profile Service.
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;
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us and our competitors;
8
<PAGE>
- 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.,
CMG plc (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.
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.
Our sales and implementation cycles are long.
SALES CYCLE. To license our software products, we generally engage in a
lengthy sales effort. During the sales effort, we spend significant time
educating prospective customers on the use and benefit of our solutions. As a
result, the sales cycle for our products and services is long and currently
averages approximately four months. The sales cycle for our online direct
marketing solutions is likely to be longer than the sales cycle for online
advertising solutions, because we believe that online direct marketing is less
9
<PAGE>
established and will require more education of potential customers. In addition,
an increase in the average size of transactions would also likely result in an
even longer sales cycle as the license of our software products rises to the
level of an enterprise-wide decision for prospective customers, requiring a
significant commitment of resources. Delays due to lengthy sales cycles could
have a material and adverse effect on our business, results of operations or
financial condition. For a detailed description of our sales cycle, please see
the sections of this prospectus entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--Sales and
Marketing."
IMPLEMENTATION CYCLE. Because we do not recognize revenues from a sale until
the customer has implemented the solution purchased, the timing of our revenues
depends on our customers' implementation cycles. The implementation of our
products often involves a significant commitment of resources by customers
and/or our consultants over an extended period of time. Our sales and customer
implementation cycles may be delayed due to product defects or errors and
factors over which we have little or no control, including customers' budgetary
constraints, internal acceptance reviews and the complexity of customers' online
interactive marketing needs. Delays in customer deployment of a product could
have a material and adverse effect on our business, results of operations or
financial condition. For example, due to errors contained in early versions of
AdServer 3.0, deployment of this earlier version of AdServer required a
significant amount of our and our customers' time and resources. For more
information about our revenue recognition policies please see the section of
this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Online advertising and online direct marketing are new and evolving businesses.
Online interactive marketing is in its very early stages of development.
Like many new businesses, it is characterized by rapidly evolving technologies,
quickly changing marketing and sales strategies, multiple and aggressive market
participants, fluctuating demand and uncertain market acceptance for products
and services. Online advertising and online direct marketing (the two components
of online interactive marketing) are also characterized by their heavy
dependence on the success of the Internet, which itself is a new medium with an
unpredictable future. For a discussion of the risks associated with the
Internet, please see the Risk Factor entitled "Our success depends on the
widespread acceptance and use of the Internet."
ONLINE ADVERTISING
THE EFFECTIVENESS OF ONLINE ADVERTISING IS UNCERTAIN AND OUR FUTURE SUCCESS
DEPENDS HEAVILY ON THE CONTINUED AND INCREASED USE OF THE INTERNET AS AN
ADVERTISING MEDIUM. We believe that it is too early to accurately judge the
effectiveness of Internet advertising as compared to traditional advertising
media. If the market for Internet advertising fails to develop or develops more
slowly than we expect, our business, results of operations and financial
condition could be materially and adversely affected.
ADVERTISERS HAVE LIMITED EXPERIENCE WITH THE INTERNET. Our current and
potential advertising customers are generally not experienced in online
advertising and have allocated only a limited portion of their advertising
budgets to Internet advertising. There is no guarantee that our current and
potential customers will increase or even continue Internet advertising or that
advertisers that currently do not advertise on the Internet will begin to
advertise online.
WEB PUBLISHERS HAVE LIMITED ADVERTISING EXPERIENCE. Most of our current and
potential Web content publisher customers have little or no experience selling
advertising space on their Web sites. Consequently, such publishers may not
generate enough advertising revenues to be economically viable. If Web
publishers stop using our products and services, our business, results of
operations and financial condition would be materially and adversely affected.
THE CURRENT METHODS OF MEASURING ONLINE ADVERTISING'S EFFECTIVENESS PRODUCE
UNCERTAIN RESULTS. There are currently no standards for measuring the
effectiveness of Internet advertising. Without standardized measurements, online
advertisers may challenge or refuse to accept our or third-party measurements of
the
10
<PAGE>
effectiveness of online advertisements. Our business, results of operations and
financial condition could be materially and adversely affected if standards for
measuring the effectiveness of Internet advertising are not developed and widely
adopted.
OUR BUSINESS DEPENDS HEAVILY ON BANNER ADVERTISEMENTS. Almost all of our
revenues ultimately come from the delivery of banner advertisements on Web
pages. If advertisers determine that banner advertising is an ineffective or
unattractive advertising medium, our business, results of operations and
financial condition would be materially adversely affected.
INTERNET USERS MAY USE "FILTER" SOFTWARE TO BLOCK ADVERTISEMENTS. Some
Internet users use "filter" software programs that limit or prevent advertising
from being delivered to such users' computers. The commercial viability of
Internet advertising, and our business, results of operations and financial
condition, would be materially and adversely affected by Web users' widespread
adoption of such software.
ONLINE DIRECT MARKETING
DIRECT MARKETERS MAY NOT BE ACCUSTOMED TO CONDUCTING DIRECT MARKETING ON THE
INTERNET. Online direct marketing is a new and substantially different approach
to direct marketing that has not reached broad acceptance by direct marketing
companies. Consequently, direct marketing companies may be reluctant to conduct
their business online until they understand and are comfortable with the medium.
If direct marketing companies do not accept the Internet as a viable medium for
direct marketing, our business, results of operations and financial condition
could be materially and adversely affected.
ONLINE DIRECT MARKETING MAY COMPETE WITH TRADITIONAL DIRECT MARKETING MEDIA.
Companies that have already invested substantial resources in other methods of
conducting their direct marketing business may be reluctant or slow to adopt a
new approach that may replace, limit or compete with their existing systems. If
direct marketing companies do not accept the Internet as a viable medium for
direct marketing, our business, results of operations and financial condition
could be materially and adversely affected.
WE HAVE NOT YET, BUT EXPECT THAT WE MAY NEED TO, TAILOR OUR PRODUCTS TO
ONLINE MARKETERS' NEEDS. Because online direct marketing is emerging as a new
and distinct market apart from online advertising, we believe that potential
adopters of online direct marketing solutions will increasingly demand
functionality tailored to their specific requirements. Although AdServer's
largely advertising-oriented features can be deployed for online direct
marketing, we have not yet developed products with the custom features required
by online direct marketers. We cannot assure you that we will develop any such
products, or if such products are developed, that they will achieve a
satisfactory level of market acceptance.
We must successfully develop new products and keep up with rapid technological
change.
OUR BUSINESS WILL SUFFER IF WE FAIL TO KEEP UP WITH RAPIDLY CHANGING
TECHNOLOGY. Rapidly changing technology, evolving industry standards, frequent
announcements and introductions of new or enhanced products and services and
changing customer demands characterize the markets for our products and
services. The emerging nature of the Web in general and online interactive
marketing in particular underscore these characteristics. Accordingly, we are
dependent upon our ability to adapt to rapidly changing technologies, to adapt
our solutions to meet evolving industry standards and to continually improve the
performance, features and reliability of our solutions in response to both
changing customer demands and competitive product and service offerings. For
example, if the historical growth rate in the use of the Internet were to
continue, our current products may need to be redesigned in order to efficiently
process a significantly higher volume of transactions, particularly if each
transaction becomes more complex through the use of demographic targeting and
other advanced features. If we fail to successfully and quickly adapt to
changing technologies and customer requirements, our business, results of
operations or financial condition could be materially and adversely affected.
11
<PAGE>
OUR DEVELOPMENT EFFORTS FACE THE FURTHER CHALLENGE OF MAINTAINING
COMPATIBILITY WITH THIRD-PARTY HARDWARE AND SOFTWARE. Our products are designed
to operate on a variety of hardware and software platforms employed by our
customers in their individual networks. We must continually modify and enhance
our products to keep pace with changes in hardware and software platforms and
database technology. As a result, uncertainties related to the timing and nature
of new product announcements, introductions or modifications by operating
systems vendors, particularly Microsoft and Sun, by vendors of relational
database software, particularly Oracle and Microsoft, and browser vendors,
particularly Netscape and Microsoft, could materially and adversely affect our
business, results of operations and financial condition. Please also see the
section of this prospectus entitled "Business--Technology."
If our transactional services revenues grow, we may experience additional
revenue fluctuations.
To date, the vast majority of our revenues has been from software licenses
and related support and upgrades, and has not been directly linked to the volume
of advertisements delivered by our customers. However, as we increasingly focus
on offering transaction-based services, our revenues may become more dependent
on the volume of transactions executed by our customers. In contrast to revenues
from existing software licenses and upgrades and support arrangements which are
reasonably predictable over the term of the customer contract, transactional
services revenues are inherently less predictable and may contribute to the
variability of our overall revenues and other operating results. For example, we
believe that advertising sales in traditional media, such as television and
radio, are generally lower in the first calendar quarter of each year and are
subject to other cyclical variations. We believe that our transactional services
revenues will be affected by similar seasonal and cyclical fluctuations as the
online advertising market matures.
We have to effectively manage our growth.
We have recently experienced a period of rapid growth and expansion that has
placed and continues to place a significant strain upon our management, systems
and resources. We have grown from ten employees as of December 31, 1995 to 125
employees as of December 31, 1998 and currently plan to further expand our staff
both domestically and internationally. In particular, we plan to expand our
sales and marketing and customer support organizations both domestically and
internationally. Our ability to compete effectively and manage future growth, if
any, will require us to continue to implement and improve operational, financial
and management information systems on a timely basis and to attract, hire, train
efficiently and effectively and retain additional technical, managerial,
finance, sales and marketing and support personnel. Any failure to implement and
improve our operational, financial and management systems or to attract, hire,
train or retain employees could have a material and adverse effect on our
business, results of operations or financial condition. Please see the Risk
Factor entitled "Our success depends on certain key employees" for descriptions
of risks relating to our employees and the sections of this prospectus entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Employees" for a description of our growth.
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
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;
12
<PAGE>
- 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;
- 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 particular, we are currently seeking to hire a senior executive to
expand the operational expertise of our management team. Although we have
engaged an executive search firm to assist us, we cannot assure you that we will
be able to successfully hire and retain such an executive. In addition, the loss
of any of our current executive officers could materially and adversely affect
our business, financial condition and operating results. Please see the section
of this prospectus entitled "Management" for biographies and compensation of our
executive officers.
13
<PAGE>
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, 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.
We rely on third-party software and consumer profile data.
WE RELY ON SOFTWARE LICENSED FROM THIRD PARTIES, including database access
technology and other tools from Rogue Wave. We intend to increase our use of
licensed third-party software in future releases of our solutions. We cannot
assure you that we will be able to continue to license this technology on
commercially reasonable terms, if at all. The loss or inability to maintain any
of these technology licenses could result in delays in the sale of our products
and services until equivalent technology, if available, is identified, licensed
and integrated. These delays could have a material and adverse effect on our
business, results of operations or financial condition. For more information
concerning the way our products work with third-party technology, see the
section of this prospectus entitled "Business--Product and Service Development."
WE ARE DEPENDENT ON THIRD PARTY DATA SOURCES FOR OUR GLOBAL PROFILE SERVICE.
Our Global Profile Service is a service we offer our customers that allows them
to more narrowly target their online interactive marketing by using anonymous
geographic data. We plan to expand this service to cover other demographic and
behavioral data. We license the underlying databases of anonymous consumer
profiles from third party sources, including Excite/MatchLogic and HNC/Aptex.
The performance of our Global Profile Service, as measured by improved response
rates to advertisements, promotions or other offers is, in large part, dependent
on the scope, accuracy and timeliness of the profile data contained in these
third party databases. These factors are largely outside of our control.
Although our contracts with MatchLogic and Aptex provide for access to their
databases through September 2001, if, for whatever reason, we were no longer
able to purchase access to these databases or equivalent databases on
commercially reasonable terms, or if the quality and scope of the available data
was not sufficient for effective targeting, we may have to discontinue our
Global Profile Service. In addition to the resulting loss of direct revenue from
the Global Profile Service, existing or potential customers may view the
unavailability or impaired functionality of the Global Profile Service as a
competitive disadvantage and may choose not to use AdServer in favor of a
solution offering superior targeting capabilities. For these reasons, any
unavailability or degradation of our Global Profile Service could have a
material and adverse effect on our business, results of operations or financial
condition.
You should not rely on press releases, news articles or other information not
contained in the prospectus.
From time to time, we issue press releases concerning our products and
services or other information about NetGravity. In addition, traditional and
electronic publications or discussion forums may present information about us or
our products and services. The information contained in these press releases,
publications or forums may not be accompanied by other important information
necessary for investors to
14
<PAGE>
fairly understand our business and the risks associated with an investment in
our stock due, in part, to practical limitations on the form and length of these
channels of communication. Therefore, you should not rely on any information not
contained in this prospectus in making a decision to buy or sell our stock.
On February 25, 1999, we issued a press release that was published under the
following headline, "NetGravity Opens Four New Offices to Support Rapidly
Increasing Revenues, Projected to Reach More Than $9 Billion by 2002" and the
following sub-heading, "...Chicago Office Solidifies NetGravity's More than 30%
Marketshare Among Publishers...." These phrases were selected from the same
market background information as is provided elsewhere in this prospectus, but
may have lacked enough contextual information to allow a person unfamiliar with
us and our industry to accurately interpret them. In particular, the projection
was intended to refer to Jupiter Communications' projection that the overall
combined market for online direct marketing and online advertising would grow to
$9 billion by 2002 and the marketshare reference was intended to refer to the
fact that our solutions are used by 32% of the top 50 revenue-generating online
content publishers listed in the March 31, 1998 CMR Interwatch report. Any
inference from these statistics as to our future revenue or our overall market
share among content publishers was not intended and should not be relied upon by
investors. We do not claim that we have a 30% marketshare among the thousands of
online content publishers; we have approximately 325 customers. We do not claim
that our revenues will exceed $9 billion by 2002; our total revenues were $11.6
million in 1998 and we cannot assure you that our revenues will grow in the
future. In addition to the forgoing, the body of the press release contained
forward-looking statements, including statements regarding the emergence of
interactive marketing and our plans for our role in such market. These
forward-looking statements should be considered in the context of the
substantial risks that we face. Many of these risks are described in this
prospectus. We and each of the underwriters and selling stockholders disclaim
any information not contained in this prospectus (including the contents of the
press release described above) to the extent inconsistent with or in conflict
with the information contained in this prospectus.
We may need to expand our use of resellers.
We have historically sold our products and services primarily through our
field sales and telesales organization, but our future success may depend in
part upon our ability to increase sales of our solutions through Web hosting
organizations and Internet systems integrators (collectively, "Resellers"). We
cannot assure you that we will be able to attract and retain Resellers. If we
are able to attract Resellers, our gross margins may narrow due to discounts we
would give to our Resellers. In addition, if any of our Resellers were to
provide inadequate support and services to our customers, our revenues could
decrease and our reputation could be damaged. Our inability to attract or
adequately manage Resellers could materially and adversely affect our business,
results of operations and financial condition. Please see "Business--Marketing
Alliances" for a more detailed description of our Reseller and other third-party
relationships.
Our success depends on the widespread acceptance and use of the Internet.
Because we are in the business of providing online interactive marketing
solutions, our success is directly tied to the widespread acceptance and
continued use of the Internet. However, the Internet may not be accepted as a
viable commercial medium for a number of reasons, including the potentially
inadequate development of the Internet's infrastructure. Even if the Internet
gains widespread acceptance and continued use, such acceptance and use may
decrease rapidly if, in the future, the Internet's infrastructure cannot support
the demands that users place upon it, or if significant governmental regulation
is imposed on the Internet. If use of the Internet does not grow as expected,
our business, results of operations and financial condition would be materially
and adversely affected. Also, if the Internet's current infrastructure or the
technical standards and protocols that support such infrastructure change or are
replaced by new technical standards and protocols, we may need to incur
substantial costs to adapt our current solutions.
15
<PAGE>
We depend on cookie technology for ad targeting.
Our software, including our Global Profile Service software, uses "cookies"
to deliver targeted advertising, to help compile demographic information, and to
limit the frequency with which an advertisement is shown to a particular
Internet user. Cookies are small files of information about an Internet user's
movement through the Internet that are stored on the hard drive of the user's
computer. The cookie information is passed to the Web site through the Internet
user's browser software. Cookies are often placed on the user's hard drive
without the user's knowledge or consent, although users can often disable the
cookie functions of their Internet browser software.
Some Internet commentators and advocates and some governmental bodies
concerned with the privacy of Internet users have suggested limiting or
eliminating the use of cookies. These have led to legal and technical
limitations on the use of cookies. For example, the European Union has recently
adopted a directive addressing data privacy that may result in limitations on
the collection and use of certain information regarding Internet users. Also,
Germany has imposed its own laws limiting the use of cookies and other countries
may also place similar limitations.
If legal or technological restrictions impose any significant reduction or
limitation on the use or effectiveness of cookies, we would likely have to
switch to other technology that allows the gathering of information for ad
targeting. This could require significant reengineering time and resources,
might not be done in time to avoid negative consequences to our business,
results of operations or financial condition, and might not be possible at all.
Our business is subject to governmental regulations and to legal uncertainties.
CURRENT AND FUTURE LAWS MAY AFFECT ONLINE BUSINESSES. Due to concerns
arising from the increasing popularity and use of the Web, a number of laws and
regulations have been and may be adopted covering issues such as user privacy,
pricing, acceptable content, taxation and quality of products and services. Such
legislation could dampen the growth in use of the Internet generally and
decrease the acceptance of the Internet as a communications and commercial
medium. Further, due to the global nature of the Internet, it is possible that
multiple federal, state or foreign jurisdictions might attempt to concurrently
and inconsistently regulate the transmissions of our customers or levy sales or
other taxes relating to our activities. Moreover, the applicability to the
Internet of existing laws governing issues such as property ownership, libel and
personal privacy is uncertain. Any of the foregoing developments could have a
material and adverse effect on our business, results of operations or financial
condition.
CERTAIN ISP AND OSP ACCESS FEES HAVE BEEN PROPOSED AND MAY BE IMPOSED.
Because the growing popularity and use of the Web has burdened the existing
telecommunications infrastructure, many areas with high Web use have begun to
experience interruptions in phone service. Certain local telephone carriers have
petitioned governmental bodies to regulate Internet service providers ("ISPs")
and online service providers ("OSPs") in a manner similar to long distance
telephone carriers and to impose access fees on ISPs and OSPs. If any of these
petitions or the relief sought therein is granted, the costs of communicating on
the Web could increase substantially, potentially negatively affecting the
growth in use of the Web which could in turn decrease the demand for our
products and services.
We may be unable to adequately protect our customers' information.
We have included basic security features in certain of our products and
services that are intended to protect the privacy and integrity of data
collected from our customers. However, in our AdServer product, passwords for
certain operations are not encrypted and therefore are susceptible to hacker
interception, break-ins and disruption. Such computer break-ins and other
disruptions may jeopardize the security of information stored in and transmitted
through the computer systems of our customers. If such computer break-ins or
other disruptions were to happen to our current products or to any of our future
products, we might be subject to lawsuits by the affected customers, harm to our
reputation among our current and potential customers, and significant
expenditures of our capital and other resources.
16
<PAGE>
We face the risks of product defects and product liability claims.
OUR BUSINESS WILL BE HARMED IF OUR SOFTWARE CONTAINS SIGNIFICANT BUGS.
Software products as complex as ours frequently contain errors, defects or
performance problems (commonly called "bugs"), especially when they are first
introduced or when new versions or enhancements are released. Although we test
our products extensively prior to introduction, in the past our products have
contained software errors that were not discovered until after commercial
introduction. For example, AdServer 3.0, although functional when released, had
a number of software errors that affected the product's performance, reliability
and compatibility with certain operating environments. We had to devote
significant customer support resources to address these errors. We cannot assure
you that our testing (which includes customer beta testing) will detect all
serious defects, errors and performance problems prior to commercial release of
our future software products. Any future software defects, errors or performance
problems discovered after commercial release could result in the diversion of
scarce resources away from customer service and product development, lost
revenues or delays in customer acceptance of our products and damage to our
reputation, which, in each case, could have a material and adverse effect on our
business, results of operations or financial condition. Our customers and
potential customers may be particularly sensitive to any such defects, errors or
performance problems given that a failure of a Web site's advertising management
and delivery system often immediately and directly results in lost or reduced
advertising revenue during such failure.
IF OUR PRODUCTS MALFUNCTION OR SUFFER FROM DESIGN DEFECTS, WE MAY BE SUBJECT
TO PRODUCT LIABILITY CLAIMS. Although our license agreements with our customers
typically contain provisions designed to limit our exposure to liabilities
arising from product liability claims, we cannot assure you that these
provisions will be enforceable under existing or future international, federal,
state or local laws and judicial decisions. We have not experienced any product
liability claims to date, but we may be subject to such claims in the future. A
product liability claim brought against us could have a material and adverse
effect on our business, results of operations or financial condition.
We may be unable to protect our proprietary rights in our products.
IT IS DIFFICULT FOR US TO PREVENT THE MISAPPROPRIATION OF OUR INTELLECTUAL
PROPERTY. Policing unauthorized use of our products is difficult, particularly
because the global nature of the Internet makes it hard to control the ultimate
destination or security of software or other data transmitted. The laws of other
countries may afford little or no effective protection of our technology. We
cannot assure you that the steps taken by us will prevent misappropriation of
our technology or that agreements entered into for that purpose will be
enforceable. In addition, litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation, whether successful or
unsuccessful, could result in substantial costs and diversions of resources,
either of which could have a material and adverse effect on our business,
results of operations or financial condition.
WE PROTECT OUR INTELLECTUAL PROPERTY BY WAY OF SEVERAL LEGAL MEANS. The
success and competitiveness of our products depend in part upon our ability to
protect our current and future technology through a combination of trademark,
trade secret and copyright law. Because laws protecting certain ownership rights
in Internet-related industries are uncertain and still evolving, we cannot give
you any assurance about the future viability or value of any of our current
technology ownership rights.
OUR SOURCE CODE MAY BE RELEASED TO OUR CUSTOMERS UNDER CERTAIN
CIRCUMSTANCES. Under the general terms and conditions of our standard license
agreements with customers, we retain title to the trade secrets and copyrights
in the source code of our software products. However, some of our agreements
with our customers contain provisions requiring release of source code for
limited, non-exclusive use by the customer in the event that we cease to do
business or we fail to support our products. This release of source code may
increase the likelihood of misappropriation by third parties.
WE PROTECT OUR INTELLECTUAL PROPERTY BY ENTERING INTO INTELLECTUAL PROPERTY
AGREEMENTS WITH EMPLOYEES, CONSULTANTS AND VENDORS. We enter into
confidentiality and intellectual property assignment agreements with
17
<PAGE>
our employees, consultants, and vendors and generally control access to and
distribution of our software, documentation and other proprietary information.
Notwithstanding these precautions, it may be possible for a third party to copy
or otherwise obtain and use our software or other proprietary information
without authorization or to develop similar software independently.
Our products may infringe upon the intellectual property rights of others.
From time to time we have been, and expect to continue to be, subject to
claims of alleged infringement of the copyrights, trade secrets and other
intellectual property rights of third parties by us. In addition, other parties
may assert invalidity claims (or claims for indemnification resulting from
infringement claims) against us. Any such assertions or prosecutions might
materially and adversely affect our business, results of operations or financial
condition. Although such claims have not resulted in litigation or had a
material and adverse effect on our business, results of operations or financial
condition, such claims could subject us to significant liability for damages and
could result in invalidation of our proprietary rights and be time-consuming and
expensive to defend, and result in the diversion of management time and
attention. If any such claims or actions are asserted against us, we may seek to
obtain a license under a third party's intellectual property rights. We cannot
assure you, however, that under such circumstances, a license would be available
on reasonable terms or at all.
We face Year 2000 risks.
We are 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. We are currently assessing the impact of this
issue, commonly referred to as the "Year 2000" issue, on our business and
operations. We cannot assure you that we will be able to identify and accurately
evaluate all Year 2000 issues that we face.
In September 1998, we released version 3.5 of our AdServer product which
included enhancements designed to correctly accept and process 21st century
dates and, as a result, we now believe that the current versions of our 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, we cannot assure you that our products will not
experience Year 2000 problems in the future. Any such Year 2000 issues could
result in:
- a decrease in sales of our products;
- deferral of revenue recognition on contracts in which we have 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 our customers without additional revenue commensurate with such
dedicated resources; or
- an increase in litigation costs relating to losses suffered by our
customers due to Year 2000 problems.
In addition, we have determined that certain of our software IT systems are
not currently Year 2000 compliant. We believe that our software IT systems will
become compliant through updates and upgrades purchased in the ordinary course
of business for reasons unrelated to Year 2000.
As we review our non-IT systems, we may identify situations that present
material Year 2000 risks or that will require substantial time and material
expense to address. In addition, if our customers or our 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), our business,
results of operation and financial condition could be adversely affected due to
resulting changes in purchasing patterns.
Our 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, our product development efforts may be significantly hampered which,
in turn, could have a
18
<PAGE>
material and adverse effect on our business, financial condition and results of
operations. For more information, please see the section of this prospectus
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance."
Our corporate governance structure may delay or prevent our acquisition by
another company.
Our certificate of incorporation and by-laws and the Delaware General
Corporation Law include provisions that may be deemed to have anti-takeover
effects. These anti-takeover effects could delay or prevent a takeover attempt
that you or our other stockholders might consider in your or their best
interests.
In addition, our board of directors is authorized to issue, without
obtaining stockholder approval, up to 5,000,000 shares of preferred stock and to
determine the price, rights, preferences and privileges of such shares without
any further stockholder action. The existence of this "blank-check" preferred
stock could make more difficult or discourage an attempt to obtain control of us
by means of a tender offer, merger, proxy contest or otherwise.
In the future, we may adopt other measures that may have the effect of
delaying, deferring or preventing an unsolicited takeover, even if such a change
in control were at a premium price or favored by a majority of unaffiliated
stockholders. Certain of these measures may be adopted without any further vote
or action by the stockholders. For more information, please see the section of
this prospectus entitled "Description of Capital Stock."
We may require additional financing.
We believe that, following the offering, our cash reserves and cash flows
from operations will be adequate to fund our operations for at least the next 12
months. Nevertheless, we may need to raise more money within the next 12 months
or thereafter. Our capital requirements depend on many factors, including, but
not limited to:
- the rate at which we develop and introduce our products and services;
- the market acceptance and competitive position of our products and
services;
- the level of promotion and advertising required to market our products and
services and attain a competitive position in the marketplace; and
- the response of competitors to our products and services.
If we were to require additional funding, such additional funding might not
be available on terms favorable to our stockholders or us or in sufficient
amounts. If additional funds are raised through the issuance of common stock,
such stock might be offered at a price lower than the fair market value of our
common stock at the time of the sale and would therefore reduce the value of the
common stock of our then current stockholders. Even if the value of our common
stock does not decrease, the percentage ownership of the then current
stockholders of the company will be reduced by the issuance of the new stock.
Certain current stockholders own a large percentage of our voting stock.
Following the closing of this offering, our officers, directors and
affiliated entities together will beneficially own approximately 34.2% of our
outstanding common stock (28.3% if the underwriters' over-allotment option is
exercised in full). As a result, these stockholders may, as a practical matter,
be able to control all matters requiring stockholder approval and, thereby, our
management and affairs. Matters that typically require stockholder approval
include:
- election of directors;
- merger or consolidation; and
- sale of all or substantially all of our assets.
19
<PAGE>
This concentration of ownership may delay, deter or prevent acts that would
result in a change of control, which in turn could reduce the market price of
our common stock. Please see the section of this prospectus entitled "Principal
and Selling Stockholders" for a detailed description of the percentages of our
common stock owned by our officers, directors and affiliated entities.
This offering will benefit certain existing stockholders.
The selling stockholders will receive substantial proceeds from selling
their shares of common stock in this offering. We will pay the offering expenses
of the selling stockholders in this offering, other than underwriting discounts
and commissions. After deducting underwriting discounts and commissions, the net
proceeds (at an assumed offering price of $21 1/16 per share) to the selling
stockholders, most of whom are our affiliates, will be approximately $17,148,544
million after deducting underwriting fees of approximately $1.16 per share.
Our stock price is volatile.
The market price of our common stock is highly volatile and may be subject
to significant fluctuations in response to actual or anticipated variations in
quarterly operating results and other factors, such as:
- announcements of technological innovations;
- sales of common stock following the expiration of legal or contractual
transfer restrictions;
- new products or new contracts by us or our competitors;
- conditions and trends in the software and other technology industries;
- adoption of new accounting standards affecting the software industry;
- changes in earning estimates or recommendations by securities analysts;
and
- general market conditions.
From the time of our initial public offering through March 1, 1999, the
closing price of our common stock reported on the Nasdaq National Market has
ranged from $6 7/8 to $27. In addition, the stock market in general, and the
market for technology-related stocks in particular, have experienced extreme
volatility that often has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may adversely
affect the trading price of our common stock, regardless of our actual operating
performance. We cannot assure you that the market price for our common stock
will not decline below the price of the common stock we are offering in this
prospectus. Please see the section of this prospectus entitled "Price Range of
Common Stock" for additional information about our stock price.
In the past, following periods of volatility in the market price of a
particular company's stock, class action litigation has often been brought
against that company. We cannot assure you that we will not be the target of
such litigation in the future.
We do not expect to pay dividends.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future. For
more information, please see the section of this prospectus entitled "Dividend
Policy."
20
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 2,738,440 shares of common stock
offered by us will be approximately $53.5 million (approximately $64.3 million
if the Underwriters' over-allotment option is exercised in full) at an assumed
public offering price of $21 1/16 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the
Company. We will not receive any proceeds from the sale of shares of common
stock by the selling stockholders.
The primary purpose of this offering is to obtain additional working
capital. We expect to use the net proceeds of this offering for working capital
and other general corporate purposes and capital expenditures. In particular, we
intend to use a portion of the net proceeds to fund operating expenses related
to entering new markets for our products and services, increasing research and
development spending, increasing our sales and marketing operations, developing
new distribution channels, improving our operational and financial systems and
broadening our customer support capabilities. A portion of the net proceeds may
also be used for the acquisition of businesses, products and technologies that
complement ours. We have no present plans, agreements or commitments and are not
currently engaged in any negotiations with respect to any such transactions.
Pending such uses, we will invest the net proceeds of this offering in
investment-grade, interest-bearing securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
DIVIDEND POLICY
We have never paid cash dividends on our capital stock. We currently expect
to retain our future earnings, if any, for use in the operation and expansion of
our business and do not anticipate paying any cash dividends in the foreseeable
future. Our debt facilities contain restrictive covenants that limit our ability
to pay cash dividends or make stock repurchases without the prior written
consent of the lender. See Notes 3 and 5 of Notes to Consolidated Financial
Statements.
PRICE RANGE OF COMMON STOCK
NetGravity's common stock began trading publicly on the Nasdaq National
Market on June 12, 1998 and is traded under the symbol "NETG." The following
table shows the high and low per share closing prices of the common stock, as
reported by the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
1998
Second Quarter (Beginning June 12, 1998).................................. 14 1/8 9 7/8
Third Quarter............................................................. 27 7 3/4
Fourth Quarter............................................................ 26 6 7/8
1999
First Quarter (Through March 1, 1999)..................................... 26 13/16 15 7/16
</TABLE>
On March 1, 1999, the closing price of the common stock on the Nasdaq
National Market was $21 1/16 per share, and there were approximately 254 holders
of record of the common stock.
21
<PAGE>
CAPITALIZATION
The following table sets forth NetGravity's capitalization as of December
31, 1998, (i) on an actual basis and (ii) as adjusted to reflect our sale of
2,738,440 shares of common stock offered hereby at the offering price of
$21 1/16 per share and our application of the estimated net proceeds therefrom,
after deducting underwriting discounts and commissions and estimated offering
expenses. See "Use of Proceeds." The capitalization information set forth in the
table below is qualified by the more detailed Consolidated Financial Statements
and Notes thereto included elsewhere in this prospectus and should be read in
conjunction with such Consolidated Financial Statements and Notes.
<TABLE>
<CAPTION>
December 31, 1998
-------------------------
Actual As Adjusted(1)
--------- --------------
(in thousands)
<S> <C> <C>
Cash, cash equivalents and short term investments...................................... $ 20,799 $ 74,305
--------- --------------
--------- --------------
Notes payable, less current portion.................................................... 1,109 1,109
Stockholder's equity:
Convertible preferred stock; $0.001 par value; 5,000,000 shares authorized; none
issued and outstanding as of December 31, 1998, actual and as adjusted.............. -- --
Common stock, $0.001 par value; 50,000,000 shares authorized, 13,589,894 shares
issued and outstanding, actual; 50,000,000 shares authorized, 16,328,334 shares
issued and outstanding, as adjusted................................................. 14 16
Additional paid-in capital............................................................. 46,817 100,321
Deferred stock compensation............................................................ (1,706) (1,706)
Accumulated deficit.................................................................... (22,997) (22,997)
--------- --------------
Total stockholders' equity......................................................... 22,128 75,634
--------- --------------
Total capitalization............................................................. $ 23,237 $ 76,743
--------- --------------
--------- --------------
</TABLE>
- ------------
(1) Assumes no exercise of the underwriters' over-allotment option and excludes
as of December 31, 1998, (i) 1,990,908 shares of common stock issuable upon
exercise of outstanding options at a weighted average exercise price of
$4.21 per share and (ii) an aggregate of 2,050,381 shares available for
future issuance under our 1998 Stock Plan, 1998 Employee Stock Purchase Plan
and 1998 Director Option Plan. New investors will be further diluted if any
shares of common stock are issued upon exercise of currently outstanding
options or other rights, are granted in the future or are reserved for
future issuance under our stock plans. See "Management--Employee Benefit
Plans" and Note 5 of Notes to Consolidated Financial Statements.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for each of the
years in the three-year period ended December 31, 1998, and as of December 31,
1997 and 1998, are derived from the consolidated financial statements of
NetGravity, Inc. and its subsidiaries, which consolidated financial statements
have been audited by KPMG LLP, independent certified public accountants, and are
included elsewhere in this prospectus. The consolidated statement of operations
data for the period from September 5, 1995 (inception) through December 31,
1995, and the consolidated balance sheet data as of December 31, 1995 and 1996
are derived from audited consolidated financial statements of the Company that
are not included herein. The selected consolidated financial data set forth
below is qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from
September 5, 1995 Year Ended December 31,
(inception) to -------------------------------
December 31, 1995 1996 1997 1998
----------------- --------- --------- ---------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues:
Software licenses............................................. $ -- $ 1,262 $ 2,901 $ 4,115
Software upgrades............................................. -- 107 1,123 2,394
Consulting and support........................................ -- 570 2,334 4,637
Transactional services........................................ -- -- -- 411
------ --------- --------- ---------
Total revenues.............................................. -- 1,939 6,358 11,557
------ --------- --------- ---------
Cost of revenues:
Cost of software licenses..................................... -- -- 76 63
Cost of consulting and support................................ -- 702 2,496 4,521
Cost of transactional services................................ -- -- -- 644
------ --------- --------- ---------
Total cost of revenues...................................... -- 702 2,572 5,228
------ --------- --------- ---------
Gross profit................................................ -- 1,237 3,786 6,329
Operating costs and expenses:
Research and development...................................... 39 1,764 3,033 4,639
Selling and marketing......................................... 21 2,839 6,073 10,351
General and adminstrative..................................... 131 1,315 1,552 3,172
------ --------- --------- ---------
Total operating costs and expenses.......................... 191 5,918 10,658 18,162
------ --------- --------- ---------
Loss from operations........................................ (191) (4,681) (6,872) (11,833)
Other income (expense), net..................................... (4) 54 (10) 540
------ --------- --------- ---------
Net loss.................................................... $ (195) $ (4,627) $ (6,882) $ (11,293)
------ --------- --------- ---------
------ --------- --------- ---------
Basic and diluted net loss per share............................ $ (0.19) $ (2.19) $ (2.46) $ (1.28)
Shares used in per share calculation(1)......................... 1,006 2,111 2,799 8,823
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1995 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital (deficit)............................................ $ (69) $ (221) $ 2,222 $ 17,705
Total assets......................................................... 486 3,159 9,887 33,420
Notes payable, less current portion.................................. -- 682 727 1,109
Accumulated deficit.................................................. (195) (4,822) (11,704) (22,997)
Total stockholders' equity (deficit)................................. (12) (164) 2,851 22,128
</TABLE>
- ------------
(1) See Note 1 of Notes to Consolidated Financial Statements.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY CONTAINS FORWARD-LOOKING
STATEMENTS RELATING TO THE FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF
THE COMPANY, WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
SET FORTH UNDER "RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS.
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. Our solutions are
designed to help the Company's customers increase their revenues by automating
online interactive marketing and by improving response rates through better
consumer targeting. The Company sells its solutions to each of the three
constituents in the interactive marketing supply chain: e-commerce merchants
(vendors of products and services); advertising agencies; and content
publishers.
From inception (September 5, 1995) to December 31, 1995, the Company was in
the development stage, and its activities primarily related to raising capital,
recruiting personnel, conducting research and development activities, purchasing
operating assets and building the NetGravity brand. From January 1996 through
December 31, 1998, the Company began shipping products, built a consulting and
support organization, continued investing in research and development, built
domestic and international sales organizations, established its AdCenter service
bureau, expanded its marketing activities and developed its operational and
financial infrastructure.
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. In March 1996, the Company initially released and made
generally available AdServer 1.0. Subsequently, the Company has had two major
releases of its AdServer products: AdServer 2.0 in October 1996 and AdServer 3.0
in June 1997. Revenues from software licenses in any given period are generally
attributable to the sale of the most recent version of the Company's products,
and the Company generally discontinues marketing older versions upon new version
introductions. 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, an outsourced version
of AdServer. In October 1998, the Company announced the Global Profile Service,
which is a database of anonymous consumer profiles that the Company makes
available to its customers for use in enhanced targeting. Revenues from AdCenter
and Global Profile Service are included within the line-item "transactional
services." To date, transactional services revenues have not been material.
The Company records an account receivable and deferred revenue upon shipment
and invoicing of a software license to a customer. The Company recognizes
software license revenue upon completion of the product installation. The
Company's management has generally determined that installation occurs at the
point in time at which the customers begin "serving ads" by utilizing the
Company's products. This methodology has been applied consistently for all
software license revenue since the inception of the Company. A portion of the
initial software product license fee is attributed to the customer's right to
receive, at no additional charge, software upgrades released during the
subsequent twelve months. Revenues attributable to software upgrades are
deferred and recognized ratably over the period covered by the software license
agreement, which is generally one year. Revenue from consulting services are
recognized as the services are performed. Customer support revenue is deferred
and recognized ratably over the period covered by the customer support
24
<PAGE>
agreement, which is generally one year. Transactional services revenue is
recognized as the services are rendered. In October 1997, the American Institute
of Certified Public Accountants issued Statement of Position ("SOP") No. 97-2,
Software Revenue Recognition, which the Company adopted, effective January 1,
1998. Such adoption had no material effect on the Company's methods of
recognizing revenue from its software licenses, software upgrades, and
consulting and support activities. See Note 1 of Notes to Consolidated Financial
Statements.
Pricing for AdServer products is based on the number of copies licensed to
the customer, scaled to provide discounts based on the overall size of the
system being licensed. Initial license sales include a one-year subscription
entitling the licensee to free upgrades of major releases of the product. The
software upgrade revenue is broken out separately for every license in
accordance with SOP 97-2, based on vendor-specific objective evidence for the
upgrade element, and the revenue allocated to the upgrade element is recognized
over the agreement term. For subsequent years, customers may subscribe on an
annual basis for the right to receive major product upgrades. The cost to
subscribe to the upgrade program is based on a percentage of the list price of
software the customer has licensed. Annual support contracts, which are
generally purchased in conjunction with the licensing of a product, are sold
separately from the initial license for a fee, which is also based on a
percentage of the list price of the software. Support packages typically include
non-major product releases, online support and telephone support. Consulting
revenues consist of implementation services and training. Consulting is charged
at a per diem rate or on a fixed fee basis for a package of services.
AdCenter for Publishers pricing is based on the number of advertisements,
promotions or other offers delivered. Pricing for the sales of the initial
release of Global Profile Service (which currently includes only geographic
targeting) is based on the expected annual volume of profiles to be delivered to
the customer. The Company expects that pricing for future versions of Global
Profile Service will be based on the actual number of profiles delivered to
customers.
The Company licenses and sells its products and services primarily through
its direct sales force and telesales organizations and maintains sales and
support organizations in North America, Europe and Asia Pacific. See Note 7 of
Notes to Consolidated Financial Statements. The Company does not currently sell
its transactional services to international customers. Indirect sales channels,
including resellers and Web hosting providers, also sell the Company's products.
Indirect channels generally provide less revenue per license to the Company
since the channel partner usually receives discounts. Through December 31, 1998,
revenues through indirect channels were not material.
The Company currently invoices its European customers in local currencies
and its customers in Asia Pacific in U.S. currency. The Company expects to
eventually invoice all of its international customers in local currencies.
Although the Company pays certain of the expenses of its European and Asia
Pacific operations in local currencies, the Company has not engaged in foreign
currency hedging activities, and international revenues are currently subject to
fluctuations in currency exchange rates. Historically, fluctuations in foreign
currency exchange rates have not had a material effect on the Company's revenues
or expenses. However, to the extent that international revenues increase as a
percentage of total revenues in the future, exposure to foreign currency
fluctuations may also increase.
The Company's business has grown from inception through December 31, 1998,
with total revenues of $1.9 million, $6.4 million and $11.6 million for the
years ended December 31, 1996, 1997 and 1998, respectively. However, the Company
has experienced net losses over this entire period, and as of December 31, 1998
had an accumulated deficit of $23.0 million. The Company's loss from operations
and net loss were each $6.9 million for the year ended December 31, 1997 and
$11.8 million and $11.3 million, respectively, for the year ended December 31,
1998. Loss from operations exceeded total revenues in each of these periods.
These losses resulted from significant costs incurred in the development,
marketing and support of the Company's products and services. During this
period, the number of Company employees increased from 10 at December 31, 1995
to 125 at December 31, 1998. The Company currently expects to expand its
25
<PAGE>
sales and marketing operations, to continue international expansion, to increase
its investment in product development, to further expand its transactional
services infrastructure and offerings, to further expand its consulting and
support organizations and to improve its internal operating and financial
infrastructure in support of the Company's business plan, all of which will
increase operating expenses. As a result, the Company expects to incur
additional losses and continued negative cash flow from operations for the
foreseeable future. In particular, as a result of recent and pending significant
expenditures to expand the Company's transactional services, such losses are
anticipated to increase significantly during the first half of 1999.
The Company has recorded deferred stock compensation of $1.8 million for the
year ended December 31, 1997 and $1.4 million for the year ended December 31,
1998 as a result of stock options granted during 1997 and 1998. Amortization of
deferred stock compensation of approximately $115,000 was recognized in 1997,
$1.4 million was recognized in 1998 and approximately $965,000 is expected to be
recognized in 1999. Amortization of deferred stock compensation is allocated to
costs of consulting and support and to all operating expense lines identified on
the statement of operations. Deferred stock compensation is amortized over the
vesting period of the options, generally four years. As a result, amortization
of deferred stock compensation will adversely impact the Company's operating
results for the next four years.
The Company believes that period-to-period comparisons of its operating
results are not meaningful and should not be relied upon as predictive of future
performance. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in the early stage
of development, particularly companies in new and rapidly evolving markets.
There can be no assurance that the Company will be successful in addressing such
risks and difficulties. In addition, although NetGravity has experienced
significant revenue growth recently, there can be no assurance that the Company
will increase or even sustain its current level of revenues or that the Company
will achieve profitability in the future. See "Risk Factors--We have a limited
operating history," "--We have incurred substantial losses and anticipate
continued losses," "--Our future operating results are uncertain and are likely
to fluctuate significantly" and "--We have to effectively manage our growth."
26
<PAGE>
Results of Operations
The following table sets forth consolidated statement of operations data for
the periods indicated as a percentage of total revenue:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Software licenses........................................... 65.1% 45.6% 35.6%
Software upgrades........................................... 5.5 17.7 20.7
Consulting and support...................................... 29.4 36.7 40.1
Transactional services...................................... -- -- 3.6
--------- --------- ---------
Total revenues............................................ 100.0 100.0 100.0
--------- --------- ---------
Cost of revenues(1):
Cost of software licenses(2)................................ -- 1.2 0.5
Cost of consulting and support(3)........................... 36.2 39.3 39.1
Cost of transactional services(4)........................... -- -- 5.6
--------- --------- ---------
Total cost of revenues.................................... 36.2 40.5 45.2
--------- --------- ---------
Gross margin.............................................. 63.8 59.5 54.8
Operating costs and expenses:
Research and development.................................... 91.0 47.7 40.1
Selling and marketing....................................... 146.4 95.5 89.6
General and administrative.................................. 67.8 24.4 27.4
--------- --------- ---------
Total operating costs and expenses........................ 305.2 167.6 157.2
--------- --------- ---------
Loss from operations...................................... (241.4) (108.1) (102.4)
Other income (expense), net................................... 2.8 (0.2) 4.7
--------- --------- ---------
Net loss.................................................. (238.6)% (108.2)% (97.7)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------
(1) There are no material costs of revenues associated with software upgrades.
(2) As a percentage of software license revenues, cost of software licenses was
0.0%, 2.6% and 1.5% in the years ended December 31, 1996, 1997 and 1998,
respectively.
(3) As a percentage of consulting and support revenues, cost of consulting and
support was 123.2%, 106.9% and 97.5% in the years ended December 31, 1996,
1997 and 1998, respectively.
(4) As a percentage of transactional services revenues, cost of transactional
services was 0.0%, 0.0% and 156.7% in the years ended December 31, 1996,
1997 and 1998, respectively.
REVENUES
The Company's total revenues grew 228% from 1996 to 1997 and 82% from 1997
to 1998. Total revenues for 1996, 1997 and 1998 were $1.9 million, $6.4 million
and $11.6 million, respectively. In general, NetGravity has experienced revenue
growth in all of its revenue sources as a result of an increased number of
software licenses, increased average deal sizes and the introduction of new
services. International revenues, primarily comprised of exported AdServer
products and related services, as a percentage of total revenues were 0% in
1996, 8% in 1997 and 28% in 1998. Growth in international revenues in all
periods was attributable to expanded sales and marketing efforts overseas and
the opening of a European regional office in April 1997 and a regional office in
the Asia Pacific region in April 1998. The Company does not currently sell its
transactional services to international services. In North America, revenues
grew 215% from 1996 to 1997 and 35% from 1997 to 1998. No customer, domestic or
international, accounted for more than 10% of total revenues in the years ended
1996, 1997 or 1998. The approximate number of NetGravity's AdServer
27
<PAGE>
customers was 70, 190 and 295 at December 31, 1996, 1997 and 1998, respectively.
In addition, at December 31, 1998 the Company had 39 AdCenter for Publishers
customers and seven of its customers had purchased Global Profile Services.
SOFTWARE LICENSES. Software licenses revenues for 1996, 1997 and 1998 were
$1.3 million, $2.9 million and $4.1 million, or 65.1%, 45.6%, and 35.6% of total
revenues, respectively. Software licenses revenues increased in absolute dollars
but decreased as a percentage of total revenues in all periods. The increase in
absolute dollars was primarily attributable to an increased number of software
licenses sold, the introduction of new versions of AdServer and an increase in
average deal sizes. The decrease in each period as a percentage of total
revenues was primarily a result of increased demand for consulting services, the
increased number of customers participating in software upgrade and support
plans and the revenues associated with the introduction of transactional
services in North America in the second quarter of 1998. 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 for 1996, 1997 and 1998 were
$107,000, $1.1 million and $2.4 million, or 5.5%, 17.7% and 20.7% of total
revenues, respectively. The increase in each period was a result of software
upgrades being provided to a larger installed customer base, which more than
offset a reduction in the software upgrades pricing from 45% to 25% of the list
price of the related software license made in the last half of 1997, and a
further reduction to 20% of the list price of the related software license made
in the second quarter of 1998.
CONSULTING AND SUPPORT. Consulting and support revenues include revenues
related to the Company's consulting, support and training services. Consulting
and support revenues for 1996, 1997 and 1998 were $572,000, $2.3 million and
$4.6 million, or 29.4%, 36.7% and 40.1% of total revenues, respectively. The
increase in each period was primarily a result of the increased demand for
consulting services, increased offerings in consulting and education, expansion
into Europe and Asia, the larger installed customer base and the election of
customers to renew their support program. Consulting and training services
contributed $251,000, $1.2 million and $2.2 million in 1996, 1997 and 1998,
respectively.
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 $411,000 in 1998, or 3.6% of total
revenues.
COST OF REVENUES
Gross margins decreased from 63.8% in 1996 to 59.5% in 1997 and to 54.8% in
1998, primarily as a result of the increase in consulting and support revenues
as a percentage of total revenues and the increased staffing levels in
consulting and support and, in 1998, the transactional services organization.
The impact of these factors was offset in part by the increase in software
upgrades as a percentage of revenues, as the costs of software upgrade revenues
is not material.
COST OF SOFTWARE LICENSES. Cost of software licenses consists of royalties
paid to third parties for licensed technology. Cost of software licenses for
1996, 1997 and 1998 was $0, $76,000 and $63,000, respectively. As a percentage
of software licenses revenues, cost of software licenses was 0.0%, 2.6% and 1.5%
in 1996, 1997 and 1998, respectively. The Company expects cost of software
licenses to increase in future periods due to costs of additional technology
licensed for future products.
COST OF CONSULTING AND SUPPORT. Cost of consulting and support consists
primarily of personnel-related costs incurred in providing consulting, support
and training to customers. The cost of consulting and support for 1996, 1997 and
1998 was $702,000, $2.5 million and $4.5 million, respectively. The increase in
each
28
<PAGE>
period was primarily due to an increase in personnel and related overhead, as
the Company increased staff to meet customer demand, and increased outside
services and travel costs associated with the increased volume of service
provided by the consulting and support organizations. Personnel and related
overhead accounted for $511,000, $2.0 million and $3.6 million of cost of
consulting and support in 1996, 1997 and 1998, respectively. Outside services
accounted for $105,000, $226,000 and $455,000 of cost of consulting and support
in 1996, 1997 and 1998, respectively. Travel costs accounted for $86,000,
$300,000 and $291,000 of cost of consulting and support in 1996, 1997 and 1998,
respectively. The Company expects that the cost of consulting and support will
continue to increase in absolute dollar amounts in future periods as the Company
continues to hire additional consulting, training and customer support
personnel. Cost of consulting and support as a percentage of consulting and
support revenues decreased from 123.2% in 1996 to 106.9% in 1997 and to 97.5% in
1998, primarily due to better utilization of consulting and support personnel
associated with an increased customer base.
COST OF TRANSACTIONAL SERVICES. The cost of transactional services consists
primarily of the personnel and related expenses, the hosting and bandwidth costs
and the amortization of intangibles associated with the AdCenter and Global
Profile Services offerings. The cost of transactional services in 1998 was
$644,000. There were no costs of transactional services prior to 1998. In 1998,
personnel and related expenses represented $128,000, hosting and bandwidth costs
represented $251,000 and the amortization of intangible assets represented
$222,000. 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 and to serve increased volumes through its service bureau.
Cost of transactional services as a percentage of transactional services
revenues was 156.7% in 1998.
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.
For example, when consulting and support revenues increased as a percentage of
total revenues from 36.7% for 1997 to 40.1% for 1998, overall gross margins fell
from 59.5% to 54.8%, in part due to this shift in the mix of revenues. 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.
OPERATING COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation and consulting expenses and depreciation expense on
related equipment. To date, the Company has not capitalized any such development
costs under Statement of Financial Accounting Standards ("SFAS") No. 86 because
the Company believes its process for developing software is essentially
completed concurrent with the establishment of technological feasibility; all
research and development costs have been expensed as incurred. Research and
development expenses of $3.0 million in 1997 represented a 67% increase from the
$1.8 million in expenses in 1996. Research and development expenses of $4.6
million in 1998 represented a 53% increase from the $3.0 million in expenses in
1997. The increase in absolute dollars in all periods was primarily due to
increased personnel and related overhead and, to a lesser extent, outside
services associated with enhancements of existing products and development of
new products. Personnel and related overhead accounted for $1.6 million, $2.7
million and $3.9 million of research and development expenses in 1996,
29
<PAGE>
1997 and 1998, respectively. Outside services accounted for $62,000, $240,000
and $345,000 of research and development expenses in 1996, 1997 and 1998,
respectively. Research and development costs decreased as a percentage of total
revenues from 91.0% and 47.7% in 1996 and 1997, respectively, to 40.1% in 1998.
The Company believes that continued investment in research and development is
critical to attaining its strategic objectives and, as a result, expects
research and development expenses to increase in absolute dollars in future
periods.
SELLING AND MARKETING. Selling and marketing expenses consist primarily of
salaries, commissions, travel expenses, advertising expenses, trade show
expenses, seminars and costs of marketing materials. Selling and marketing
expenses of $6.1 million in 1997 represented a 114% increase from the $2.8
million in expenses in 1996. Selling and marketing expenses of $6.1 million in
1997 represented a 70% increase from $10.4 million in 1998. The increase in
absolute dollars in each period 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. Compensation paid to selling and marketing personnel and
related overhead accounted for $1.6 million, $4.1 million and $5.5 million of
selling and marketing expenses in 1996, 1997 and 1998, respectively. Travel
costs accounted for $189,000, $761,000 and $1.1 million of selling and marketing
expenses in 1996, 1997 and 1998, respectively. The balance of selling and
marketing expenses during all periods consisted primarily of costs of
development and implementation of the Company's marketing campaign (including
general brand promotion) and did not vary significantly between comparable
periods. Selling and marketing expenses as a percentage of total revenues were
146.4%, 95.5% and 89.6% in 1996, 1997 and 1998, respectively. The Company
expects selling and marketing expenses to increase in absolute dollars in future
periods as the Company hires additional personnel, promotes AdCenter for
Publishers, Global Profile Service and other new products, expands into new
markets and continues to promote the NetGravity brand.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and related costs for the Company's executive,
administrative, finance and human resources personnel, support services and
professional services fees. General and administrative expenses increased from
$1.3 million in 1996 to $1.6 million in 1997 and to $3.2 million in 1998. The
increase in absolute dollars in each period 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 the
requirements of becoming a publicly traded company in June 1998. Personnel and
related overhead accounted for $624,000, $1.1 million and $1.8 million of
general and administrative expenses in 1996, 1997 and 1998, respectively.
General and administrative expenses increased as a percentage of total revenues
from 24.4% in 1997 to 27.4% in 1998. The increase as a percentage of total
revenues was primarily a result of the increased staffing and costs related to
the Company's expanded operation, and the requirements of being a public
company. General and administrative expenses decreased as a percentage of total
revenues from 67.8% in 1996 to 24.4% in 1997. The Company expects general and
administrative expenses to increase in absolute dollars in future periods as the
Company expands its management and staff, incurs additional costs related to
expansion of its operation and continues to incur the additional costs
associated with being a publicly traded company.
OTHER INCOME (EXPENSE). The increase in other income (expense) from net
expense of $10,000 in 1997 to net income of $540,000 in 1998 was primarily due
to the interest earned on the net proceeds from the Company's initial public
offering in June 1998.
INCOME TAXES. Deferred taxes are recognized as a result of temporary
differences that arise between the tax basis of assets and liabilities and the
related financial statement carrying amounts, as measured using the tax rates
that are expected to be in effect when the temporary differences reverse. During
1996, 1997 and 1998, the Company generated pre-tax losses of $4.7 million, $6.9
million and $11.3 million, respectively. The Company has approximately $9.3
million in deferred tax assets; however, it has not recognized any associated
30
<PAGE>
income tax benefit because the deferred tax assets are fully reserved due to
uncertainties regarding the realization of the assets, given the lack of
earnings history for the Company. See Note 4 to Consolidated Financial
Statements.
At December 31, 1998, the Company had net operating loss carryforwards for
U.S. federal and state income tax purposes of approximately $15.9 million. In
addition, the Company had U.S. federal and state research and development credit
carryforwards of approximately $318,000 and $272,000, respectively, available to
offset future tax liabilities. The Company's U.S. federal net operating loss and
research and development credit carryforwards expire in the years 2010 through
2018, if not utilized. Federal and state tax laws impose substantial
restrictions on the utilization of net operating loss and tax credit
carryforwards in the event of an "ownership change" as defined in Section 382 of
the Internal Revenue Code of 1986, as amended. The Company had such an ownership
change, as defined, in March 1997. Accordingly, $6.0 million of each of the
Company's U.S. federal and state net operating loss carryforwards are each
limited in their annual usage to approximately $700,000 per year. The Company
has not yet determined whether any ownership change, as defined, has occurred
since 1997.
As of December 31, 1998, NetGravity Europe Limited and NetGravity Asia
Pacific K.K. had net operating loss carryforwards of approximately $2.7 million
and $900,000 in the United Kingdom and Japan, respectively. The United Kingdom
net operating loss carryforward can be carried forward indefinitely. The Japan
net operating loss will expire in the year 2003, if not utilized.
31
<PAGE>
Quarterly Results of Operations
The following table sets forth certain unaudited consolidated statement of
operations data for each of the eight quarters ended December 31, 1998, as well
as such data expressed as a percentage of the Company's total revenues for the
periods indicated. In the opinion of management, this information has been
prepared substantially on the same basis as the audited consolidated interim
financial statements appearing elsewhere in this prospectus, and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the unaudited consolidated
quarterly results of operations data. The unaudited consolidated quarterly data
should be read in conjunction with the audited Consolidated Financial Statements
of the Company and the Notes thereto appearing elsewhere in this prospectus. The
operating results for any quarter should not be considered indicative of results
of any future period.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------
Mar. 31 June 30 Sep. 30 Dec. 31 Mar. 31 June 30
1997 1997 1997 1997 1998 1998
---------- ----------- ----------- ----------- ----------- -----------
(in thousands, except as a percentage of total revenues)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses....................... $ 710 $ 665 $ 824 $ 702 $ 775 $ 877
Software upgrades....................... 185 266 303 369 402 527
Consulting and support.................. 458 470 614 792 826 916
Transactional services.................. -- -- -- -- -- 12
---------- ----------- ----------- ----------- ----------- -----------
Total revenues........................ 1,353 1,401 1,741 1,863 2,003 2,332
---------- ----------- ----------- ----------- ----------- -----------
Costs of revenues(1):
Cost of software licenses............... 7 21 7 41 15 20
Cost of consulting and support.......... 240 513 728 1,015 1,158 1,073
Cost of transactional services.......... -- -- -- -- -- 19
---------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues................ 247 534 735 1,056 1,173 1,112
---------- ----------- ----------- ----------- ----------- -----------
Gross margin.......................... 1,106 867 1,006 807 830 1,220
Operating costs and expenses:
Research and development................ 678 782 677 896 996 1,063
Selling and marketing................... 1,341 1,410 1,558 1,764 1,956 2,439
General and adminstrative............... 241 353 310 648 708 754
---------- ----------- ----------- ----------- ----------- -----------
Total operating costs and expenses.... 2,260 2,545 2,545 3,308 3,660 4,256
---------- ----------- ----------- ----------- ----------- -----------
Loss from operations.................. (1,154) (1,678) (1,539) (2,501) (2,830) (3,036)
Other income (expense), net............... (6) (8) (27) 31 30 26
---------- ----------- ----------- ----------- ----------- -----------
Net loss.............................. $ (1,160) $ (1,686) $ (1,566) $ (2,470) $ (2,800) $ (3,010)
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
Revenues:
Software licenses....................... 52.5% 47.5% 47.3% 37.7% 38.7% 37.6%
Software upgrades....................... 13.7 19.0 17.4 19.8 20.1 22.6
Consulting and support.................. 33.8 33.5 35.3 42.5 41.2 39.3
Transactional services.................. 0.0 0.0 0.0 0.0 0.0 0.5
---------- ----------- ----------- ----------- ----------- -----------
Total revenues........................ 100.0 100.0 100.0 100.0 100.0 100.0
---------- ----------- ----------- ----------- ----------- -----------
Cost of revenues(1):
Cost of software licenses(2)............ 0.5 1.5 0.4 2.2 0.7 0.9
Cost of consulting and support(3)....... 17.7 36.6 41.8 54.5 57.8 46.0
Cost of transactional services(4)....... 0.0 0.0 0.0 0.0 0.0 0.8
---------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues................ 18.2 38.1 42.2 56.7 58.5 47.7
---------- ----------- ----------- ----------- ----------- -----------
Gross profit.......................... 81.7 61.9 57.8 43.3 41.5 52.3
Operating costs and expenses:
Research and development................ 50.1 55.8 38.9 48.1 49.7 45.6
Selling and marketing................... 99.1 100.6 89.5 94.7 97.7 104.6
General and administrative.............. 17.8 25.2 17.8 34.8 35.3 32.3
---------- ----------- ----------- ----------- ----------- -----------
Total operating costs and expenses.... 167.0 181.6 146.2 177.6 182.7 182.5
---------- ----------- ----------- ----------- ----------- -----------
Loss from operations.................. (85.3) (119.7) (88.4) (134.3) (141.2) (130.2)
Other income (expense), net............... (0.4) (0.6) (1.6) 1.7 1.5 1.1
---------- ----------- ----------- ----------- ----------- -----------
Net loss.............................. (85.7)% (120.3 )% (90.0 )% (132.6 )% (139.7 )% (129.1)%
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
Sep. 30 Dec. 31
1998 1998
----------- -----------
<S> <C> <C>
Revenues:
Software licenses....................... $ 956 $ 1,507
Software upgrades....................... 697 768
Consulting and support.................. 1,347 1,548
Transactional services.................. 59 340
----------- -----------
Total revenues........................ 3,059 4,163
----------- -----------
Costs of revenues(1):
Cost of software licenses............... 7 21
Cost of consulting and support.......... 1,114 1,176
Cost of transactional services.......... 93 532
----------- -----------
Total cost of revenues................ 1,214 1,729
----------- -----------
Gross margin.......................... 1,845 2,434
Operating costs and expenses:
Research and development................ 1,298 1,282
Selling and marketing................... 2,859 3,097
General and adminstrative............... 794 916
----------- -----------
Total operating costs and expenses.... 4,951 5,295
----------- -----------
Loss from operations.................. (3,106) (2,861)
Other income (expense), net............... 283 201
----------- -----------
Net loss.............................. $ (2,823) $ (2,660)
----------- -----------
----------- -----------
Revenues:
Software licenses....................... 31.3% 36.2%
Software upgrades....................... 22.8 18.4
Consulting and support.................. 44.0 37.2
Transactional services.................. 1.9 8.2
----------- -----------
Total revenues........................ 100.0 100.0
----------- -----------
Cost of revenues(1):
Cost of software licenses(2)............ 0.2 0.5
Cost of consulting and support(3)....... 36.4 28.2
Cost of transactional services(4)....... 3.0 12.8
----------- -----------
Total cost of revenues................ 39.6 41.5
----------- -----------
Gross profit.......................... 60.4 58.5
Operating costs and expenses:
Research and development................ 42.4 30.8
Selling and marketing................... 93.5 74.4
General and administrative.............. 26.0 22.0
----------- -----------
Total operating costs and expenses.... 161.9 127.2
----------- -----------
Loss from operations.................. (101.5) (68.7)
Other income (expense), net............... 9.3 4.8
----------- -----------
Net loss.............................. (92.2 )% (63.9 )%
----------- -----------
----------- -----------
</TABLE>
- ------------
(1) There are no material costs of revenues associated with software upgrades.
(2) As a percentage of software license revenues, costs of software licenses was
1.0%, 3.2%, 0.8% and 5.8% chronologically as presented above in 1997, and
1.9%, 2.3%, 0.7% and 1.4% chronologically as presented above in 1998.
(3) As a percentage of consulting and support revenues, cost of consulting and
support was 52.4%, 109.1%, 118.6% and 128.2% chronologically as presented
above in 1997, and 140.2%, 117.1%, 82.7% and 76.0% chronologically as
presented above in 1998.
(4) As a percentage of transactional services revenues, cost of transactional
services was 158.3%, 157.6% and 156.5% chronologically as presented above in
the last three quarters of 1998.
32
<PAGE>
The Company's total revenues have increased in each quarter presented. The
increases have been generally due to increased acceptance of the Company's
AdServer family of products, expansion of the Company's direct sales force, the
introduction of AdServer Network in April 1997 and increased software upgrades
and customer services revenues as the installed customer base has grown. Total
costs of revenues have generally increased in absolute dollars over the quarters
presented due to the Company's increased staffing in customer support,
consulting, training and transactional services. Cost of revenues as a
percentage of total revenues increased in every quarter until the three months
ended March 31, 1998. Total cost of revenues as a percentage of total revenues
decreased in the second and third quarters of 1998 as a result of the consulting
and support organization's improved gross margin. However, as a result of the
investment in transactional services in the fourth quarter of 1998, the cost of
revenues as a percentage of total revenues increased over the third quarter. The
Company intends to increase its investment in the cost of transactional services
and, as a result, the Company expects the cost of revenues to increase as a
percent of total revenues during this investment period. Total operating
expenses have generally increased in absolute dollar amounts over the quarters
shown due to the Company's increased staffing in research and development, sales
and marketing and general and administrative functions.
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 and AdCenter, our enhanced targeting services
(Global Profile Service) and products and services designed for
advertising agencies (including AdCenter for Agencies) and electronic
commerce companies;
- the time it takes us to sell our services and license and implement our
products and the size of each sales or licensing transaction;
- the mix of software licenses, software upgrades, consulting and support
and transactional services revenues;
- the amount of advertising spending budgeted by advertisers for online
advertising and direct 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 achieved through software license and
upgrade revenues to lower gross margins achieved through 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.
33
<PAGE>
Liquidity and Capital Resources
The Company has funded its operations to date primarily through the private
placement of preferred stock and its initial public offering. Prior to the
Company's initial public offering, private placements provided net proceeds
totaling $17.4 million. In June 1998, the Company sold 3,000,000 shares of its
common stock in its initial public offering, generating net proceeds of $23.8
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 initial public offering. At December 31, 1998, the
Company had $20.8 million in cash and cash equivalents and short-term
investments, which represents an increase of $15.2 million as compared to $5.6
million at December 31, 1997. The Company currently has no significant capital
commitments other than obligations under operating leases.
At December 31, 1998, the Company had a revolving credit facility with a
bank in the amount of $4.0 million which bears interest at the prime rate (7.75%
as of December 31, 1998) and which matures in May 1999. Borrowings are limited
to the lesser of $4.0 million or 80% of the net amount of eligible accounts
receivable and are secured by the Company's assets. The credit facility has a
sub-facility for up to $1.5 million in non-revolving line of credit for
purchases of equipment all outstanding amounts are to be converted in May 1999
to a fully amortized 60 month term loan at prime, with principal and interest
payable monthly. As of December 31, 1998, borrowings under this credit facility
were $1.0 million, all of which were under the equipment sub-facility. See Note
3 of Notes to Consolidated Financial Statements.
As of December 31, 1997, the Company had a revolving credit facility with a
bank in the amount of $1.0 million which bore interest at the prime rate (8.50%
as of December 31, 1997) plus 0.75%, which matured in May 1998. Borrowings were
limited to the lesser of $1.0 million or 70% of the net amount of eligible
accounts receivable and were secured by the Company's accounts receivable. As of
December 31, 1997 and December 31, 1998, borrowings under this credit facility
were $655,000 and $0, respectively. As of December 31, 1997, the Company had an
equipment line of credit with the same bank that provided up to $1.0 million,
bears interest at the prime rate, and expires in June 2000. The line of credit
is secured by the Company's fixed assets. As of December 31, 1997 and 1998,
$584,000 and $350,000, respectively, had been advanced under this agreement with
the principal amount due in 30 monthly installments of $19,467 beginning
December 31, 1997. The Company also has a second equipment line of credit with
the same bank that provides up to $1.2 million, bears interest at the prime
rate, and expires in June 2000. The line of credit is secured by the Company's
fixed assets. As of December 31, 1997 and December 31, 1998, $628,000 and
$377,000, respectively, had been advanced under this agreement with the
principal amount due in 30 monthly installments of $20,933 beginning December
31, 1997. See Note 3 of Notes to Consolidated Financial Statements.
Net cash used in operating activities was $3.3 million, $5.1 million, and
$8.5 million in 1996, 1997 and 1998, respectively. In each period, cash used by
operating activities was primarily a result of a net loss and, in 1998, due to
increases in accounts receivable resulting from the significant increase in
revenue.
Net cash used in investing activities was $854,000, $1.2 million and $15.9
million in 1996, 1997 and 1998, respectively. In 1998, cash used in investing
activities was primarily for the acquisition of property and equipment, $2.3
million for the acquisition of other assets, and the purchase of $10.6 million
of short-term investments.
Cash provided by financing activities was $4.7 million, $10.9 million, and
$29.0 million in 1996, 1997 and 1998, respectively. The primary source of cash
provided by financing activities was proceeds from the issuance of stock and, to
a lesser extent, borrowings.
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 account receivable and deferred
revenue upon shipment and invoicing of a software license to a customer. The
Company's accounts receivable balance
34
<PAGE>
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 therein may not be indicative of the Company's backlog or changes in the
ordering patterns of customers.
Although the Company has no other material commitments other than its
facilities leases (see Note 6 of Notes to Consolidated Financial Statements),
management anticipates that it will experience an increase in its capital
expenditures and lease commitments consistent with its anticipated growth in
operations, infrastructure and personnel. The Company expects that capital
expenditures for 1999 will be at least $3.0 million. In particular, the Company
anticipates incurring capital expenditures in connection with its expansion of
its transactional services offerings. The Company currently anticipates that it
will continue to experience significant growth in its operating expenses for the
foreseeable future related to entering new markets for the Company's products
and services, increasing research and development spending, increasing its sales
and marketing operations, developing new distribution channels, improving its
operational and financial systems and broadening its customer support
capabilities. Such operating expenses will be a material use of the Company's
cash resources.
The Company believes that its available cash resources and amounts available
under its commercial credit facilities will be sufficient to meet its expected
working capital and capital expenditure requirements for at least the next 12
months. This estimate is a forward-looking statement that involves risks and
uncertainties, and actual results may vary as a result of a number of factors,
including those discussed under "Risk Factors" and elsewhere herein.
The Company may need to raise additional funds in order to support more
rapid expansion, develop new or enhanced services, respond to competitive
pressures, acquire complementary businesses or technologies, or respond to
unanticipated requirements. The Company may seek to raise additional funds
through private or public sales of securities, strategic relationships, bank
debt, financing under leasing arrangements, or otherwise. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of the stockholders of the Company will be reduced, stockholders may experience
additional dilution, or such equity securities may have rights, preferences, or
privileges senior to those of the holders of the Company's common stock. There
can be no assurance that additional financing will be available on acceptable
terms, if at all. If adequate funds are not available or are not available on
acceptable terms, the Company may be unable to develop or enhance its products,
take advantage of future opportunities, or respond to competitive pressures or
unanticipated requirements, which could have a material adverse effect on the
Company's business, financial condition and operating results.
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 December 31, 1998, 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 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 reviews its hedging program and may as part of this review
determine at any time to change its hedging program.
35
<PAGE>
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 is approximately 5.49%. The Company does not expect any
material loss with respect to its investment portfolio.
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, 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
- 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.
36
<PAGE>
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 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 prospectus relating to
Year 2000 issues constitutes a "Year 2000 Readiness Disclosure," 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).
37
<PAGE>
BUSINESS
THE FOLLOWING DISCUSSION OF OUR BUSINESS CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER RISK
FACTORS AND ELSEWHERE IN THIS PROSPECTUS.
Overview
NetGravity, Inc. is a leading provider of online interactive marketing
solutions. We were a pioneer in the online advertising management software
market and believe that we were the first company to provide this software to
major online content publishers. We develop, market and support a broad range of
high-end, mission-critical software and transaction-based services. Our
solutions are designed to help our customers increase their revenues by
automating online interactive marketing, including online advertising and
e-commerce direct marketing, and by improving response rates through better
consumer targeting. We sell our solutions to each of the three constituents in
the interactive marketing supply chain: e-commerce merchants (vendors of
products and services); advertising agencies; and content publishers. Our core
product, AdServer, is a software solution targeted to large, sophisticated
e-commerce merchants and content publishers. AdServer manages the process of
placing advertisements, promotions and other offers on Web pages. We recently
began offering transaction-based services, including AdCenter for Publishers, an
outsourced version of AdServer. We have also announced AdCenter for Agencies,
which will extend AdCenter to include enhanced features designed for online
advertising agencies. We expect AdCenter for Agencies to be available in the
second quarter of 1999. In addition, we recently began offering our Global
Profile Service to our AdServer and AdCenter customers. Global Profile Service
is a transaction-based data service that gives our customers access to a
database of anonymous consumer profiles for use in targeting online
advertisements, promotions and other offers. The first release of Global Profile
Service allows for targeting based on geographic location. We are developing
future releases of Global Profile Service to allow targeting based on other
demographic and behavioral characteristics.
NetGravity markets and sells its products and services primarily through its
field sales and telesales organizations. We maintain sales and support
operations in North America, Europe and Asia Pacific. To date, we have sold our
software and services to over 325 customers, including 32% of the top 50
revenue-generating online content publishers listed in the March 31, 1998 CMR
Interwatch report. Our customers include agency.com, @Home Network, British
Telecom, broadcast.com, CNN Interactive, E*TRADE, IBM, Netscape Communications,
Preview Travel, ONSALE, Real Cities (Knight-Ridder New Media) and Time Inc. New
Media.
Industry Background
The competitive nature of the global marketplace requires merchants to
continually seek out and obtain new customers while preserving their
relationships with existing customers. Historically, merchants have communicated
with consumers through advertising in traditional media (such as print,
television and radio) and through traditional direct marketing channels (such as
telemarketing and direct mail) to establish and maintain their brand identities,
introduce new products, announce improved product features and target offers to
potential and current customers. McCann-Erickson has estimated that $200 billion
would be spent on traditional media advertising in the United States during
1998. The Direct Marketing Association estimated that $163 billion would be
spent on direct marketing in the United States during 1998.
INTERACTIVE MARKETING SUPPLY CHAIN. The traditional advertising and direct
marketing industries together can be viewed as a supply chain with three primary
constituents: merchants (vendors of products and services), advertising agencies
and content publishers. As the driving force in the supply chain, merchants seek
to increase their sales and brand awareness by targeting advertisements and
offers to current and prospective consumers of their products and services. To
build relationships with new and existing customers,
38
<PAGE>
merchants work with advertising agencies to purchase advertising space targeted
at the types of consumers the merchants desire. Advertising agencies, in turn,
contact content publishers to identify and secure advertising space that meets
the merchants' criteria. Content publishers, such as magazines, newspapers,
radio stations and television programs, attract audiences of consumers by
offering compelling entertainment and information and deliver these audiences to
merchants. Established, larger content publishers generally work directly with
advertising agencies in order to retain greater control over their advertising
inventories, which, in turn, allows them to maintain and enhance the long-term
value of their advertising space to advertising agencies and merchants. Smaller,
less established content publishers generally work with advertising agencies
through advertising representatives or networks, which provide these content
publishers with an outsourced sales force for their advertising space. As
depicted below, advertising and direct marketing expenditures flow down the
supply chain from merchants to advertising agencies and then to content
publishers. In turn, audiences of consumers attracted by content publishers flow
up to merchants as prospective customers.
Interactive Marketing Supply Chain
[Graphic: Supply Chain]
39
<PAGE>
The dramatic growth of the Internet in recent years has led, and continues
to lead, merchants, advertising agencies and content publishers to devote
increasing resources toward developing and improving their utilization of the
Internet as a medium for customer acquisition and retention.
GROWTH OF THE WEB AND E-COMMERCE. IDC estimated that by the end of 1998
there were over 97 million users of the World Wide Web (the Web) worldwide. IDC
projects that, by the end of 2002, the number of Web users will increase to over
320 million worldwide. We believe that the number of Web users and the amount of
time users spend on the Web will continue to increase as Internet access becomes
more widely available, as Internet bandwidth and reliability are enhanced and as
Internet content improves and becomes more multimedia intensive.
Because online transactions can be faster, less expensive and more
convenient than transactions conducted via traditional means, a growing number
of consumers are transacting business over the Web. Examples of such
transactions include buying consumer goods, trading securities, purchasing
airline tickets and paying bills. Jupiter Communications has estimated that 27%
of adult Web users made online purchases in 1997 and that 50% of adult Web users
will make online purchases in 2000. IDC estimates that purchases of goods and
services over the Internet will increase from $32.4 billion in 1998 to $237.2
billion in 2001. We believe that, as electronic commerce expands, e-commerce
merchants will increasingly seek to use the Web to locate customers, advertise
their products and services and facilitate transactions.
ADVERTISERS AND MERCHANTS HAVE CONTINUED TO INCREASE THEIR ONLINE
INTERACTIVE MARKETING ACTIVITIES. The Web continues to emerge as a promising
new medium for advertisers due to the growth in the number of Web users, the
attractive demographic profiles of Web users, the ability to quickly gather
response data and other feedback, the interactive nature of the Web, the
potential for reduced costs-per-transaction, the Web's global reach and a
variety of other factors. The Web provides advertisers with the opportunity to
cost-effectively reach broad, global audiences and to target their advertising
based on consumers' demographic characteristics, specific interests and
geographic location. Online advertising also has the potential to allow
advertisers to measure, in real time, the number of times that a particular
advertisement has been viewed, the responses to the advertisement and certain
characteristics of the viewers of the advertisement. In addition, the
interactive nature of the Web gives advertisers the potential to establish
dialogues and one-on-one relationships with consumers, to receive direct
feedback on their advertising and to quickly refine their advertising based on
such feedback. Accordingly, we believe that the Web has the potential to become
a more effective and efficient means for advertisers to reach their target
audiences as compared to traditional media.
40
<PAGE>
The unique characteristics of online advertising, combined with the growth
in the number of Internet users and their attractive demographic profiles, have
led to an increase in online advertising. Jupiter estimates that online
advertising expenditures in the United States will increase from $1.9 billion in
1998 to $7.7 billion in 2002. Historically, the leading online advertisers have
generally been technology companies, Internet search engines and Web content
publishers. However, many of the largest advertisers on traditional media,
including mass marketers such as consumer products companies and automobile
manufacturers, have recently expanded their use of online advertising.
NetGravity believes that online advertising will become an increasing component
of such merchants' advertising budgets and that this trend will drive demand for
sophisticated online advertising and direct marketing solutions.
Because highly targeted product offers can be made to consumers at their
personal computers, we believe that the Internet represents an attractive new
medium for direct marketing, which has traditionally been conducted through
direct mail and telemarketing. The success of a direct marketing campaign is
generally measured by return on investment (ROI), which is favorably affected by
either an increase in response rate (for example, number of leads, sales or
other transactions as a percentage of impressions viewed) or a reduction in
cost-per-transaction. If merchants are able to generate higher ROIs from online
interactive marketing than from traditional media campaigns, we believe that
merchants will allocate a higher percentage of their marketing expenditures to
online interactive marketing. Jupiter Communications estimates that expenditures
on online direct marketing would be $190 million in 1998 and will exceed $1.3
billion in 2002 and that combined expenditures for online advertising and online
direct marketing will exceed $9 billion in 2002.
USE OF CONSUMER TARGETING DATA TO INCREASE RETURN ON
INVESTMENT. Interactive marketers seek to increase their ROI by targeting their
messages to the consumers most likely to respond favorably to them. In
traditional media, the goal of consumer-specific targeting can be indirectly
approached by delivering messages to broadly-defined audiences (such as viewers
of particular television programs). Although this target audience approach is
also used in online media (for example, by targeting advertisements to
particular Web sites), interactive marketing offers incremental opportunity for
direct consumer-specific targeting based on anonymous profile data such as
geographic or demographic information about individual consumers. We believe
that potentially higher response rates generated by more consumer-specific
targeting will justify higher prices being paid by online advertisers and
e-commerce merchants to content publishers that are able to reach more narrowly
defined audiences. However, the effectiveness and efficiency of direct
consumer-specific targeting is limited both by the capabilities of the targeting
technology and by the breadth and depth of consumer profile data available to
e-commerce merchants, advertising agencies and content publishers.
SUPPLY CHAIN CONSTITUENTS REQUIRE ENABLING TECHNOLOGY AND DATA. As the
constituents of the interactive marketing supply chain increase their online
presence, they seek technology and data solutions that allow them to exploit the
attractive demographics, consumer-specific targeting capability, real-time
feedback, business process efficiencies and other potential advantages of online
interactive marketing. E-commerce merchants, advertising agencies and content
publishers require comprehensive, reliable and scalable solutions to allow them
to effectively and efficiently leverage the power of the Internet for
interactive marketing. In particular, we believe that larger, more established
content publishers will generally require solutions that allow them to continue
to closely control their advertising inventory. Moreover, because the process of
directly managing the sale and delivery of online advertisements, promotions and
other offerings can generate valuable consumer profile and behavioral data, we
believe that the desirability of maintaining direct control over consumer data
may be even greater than with respect to traditional media. In addition, as
targeting capabilities become increasingly important, we believe that the
constituents of the interactive marketing supply chain will seek to augment
their own consumer data with broader and more detailed databases of anonymous
consumer profiles to enable them to further improve their targeting capabilities
and ROI.
41
<PAGE>
NetGravity Solution
NetGravity, Inc. is a leading provider of solutions for online interactive
marketing. We were a pioneer in the online advertising software market and
believe that we were the first company to provide this software to major online
content publishers. We develop, market and support a broad range of high-end,
mission-critical software and transaction-based services. Our solutions are
designed to help our customers increase their revenues by automating online
interactive marketing and by improving response rates through better consumer
targeting. We sell our solutions to each of the three constituents in the
interactive marketing supply chain: e-commerce merchants (vendors of products
and services); advertising agencies; and content publishers. Our core product,
AdServer, is a software solution targeted to large, sophisticated e-commerce
merchants and content publishers. AdServer manages the process of placing
advertisements, promotions and other offers on Web pages. We recently began
offering transaction-based services, including AdCenter for Publishers, an
outsourced version of AdServer. We have also announced AdCenter for Agencies,
which will extend AdCenter to include enhanced features designed for online
advertising agencies. We expect AdCenter for Agencies to be available in the
second quarter of 1999. In addition, we recently began offering our Global
Profile Service to our AdServer and AdCenter customers. Global Profile Service
is a transaction-based data service that gives our customers access to a
database of anonymous consumer profiles for use in targeting online
advertisements, promotions and other offers. The first release of Global Profile
Service allows for targeting based on geographic location. We are developing
future releases of Global Profile Service to allow targeting based on other
demographic and behavioral characteristics.
NetGravity's current and planned products and services are designed to
provide benefits to each of the three primary constituents in the online
interactive marketing supply chain:
E-COMMERCE MERCHANTS. E-commerce merchants are focused on attracting
consumers to their Web sites and on maximizing revenue per customer. Our
AdServer software is designed to allow e-commerce merchants to gather consumer
behavior data on their sites and correlate this information with other
information, such as purchase history, to build detailed customer-profile
databases using third party technology. Merchants can then use AdServer to
target advertisements, promotions or other offerings for new or complementary
products to particular consumers based on their profiles. Merchants can share
this targeting information with their advertising agency to allow for more
effective customer acquisition campaigns.
ADVERTISING AGENCIES. Advertising agencies seek to maximize the impact of
their clients' online campaigns to promote brand awareness or to solicit
transactions, while minimizing their own overhead in conducting the campaign.
AdServer is designed to enable advertising agencies to manage their clients'
online campaigns, to make changes to campaigns in real-time and to collect
information about consumer behavior that can be mined to create sophisticated
profiles. These profiles can be used to improve targeting for both current and
future campaigns.
We believe that many advertising agencies prefer outsourced solutions that
reduce their internal technical and administrative burdens. Several of our
advertising agency customers currently using our AdCenter service offering have
helped us identify ways to tailor AdCenter to their needs. As a result, we are
developing AdCenter for Agencies which will automate much of the campaign
management process for advertising agencies, including media planning, media
buying, trafficking, reporting and billing. In addition, AdCenter for Agencies
is being designed to track purchases made by consumers responding to particular
advertisements, making it easier to determine the cost-per-transaction for a
campaign. We expect AdCenter for Agencies to be released in the second quarter
of 1999.
CONTENT PUBLISHERS. Content publishers seek to attract consumers to their
Web sites to maximize the value of their advertising space and/or to solicit
e-commerce transactions. Using AdServer (or the outsourced version, AdCenter for
Publishers), content publishers can maintain control of their own advertising
inventory, consumer data, mission-critical advertising business processes, and
relationships with advertisers and advertising agencies. These solutions are
designed to allow content publishers to predict inventory available
42
<PAGE>
for sale, to deliver targeted advertisements to consumers and to provide reports
and analysis to advertisers. Additionally, our AdServer software solution can be
integrated with content management, billing and commerce systems.
Our software is designed to be fault tolerant, scalable, extensible and
platform-independent to meet the needs of even our largest customers. For
example, CNN Interactive, which operates one of the most visited Web sites on
the Internet, has served over 50 million impressions in a single day with our
AdServer software. NetGravity's software also supports industry standard
operating environments including popular Unix systems, Microsoft Windows NT,
standard relational databases, Web servers from Netscape and Microsoft and
Java-enabled Web browsers.
Strategy
NetGravity's objective is to become the leading provider of online
interactive marketing solutions for e-commerce merchants, advertising agencies
and content publishers. To achieve this objective, our strategy includes the
following key elements:
EXTEND LEADERSHIP IN ONLINE ADVERTISING SOFTWARE SOLUTIONS. NetGravity
intends to extend its leadership position in the market for online advertising
software solutions by continuing to enhance its technology through investment in
research and development activities and by incorporating industry-leading
components into its products. We believe that maintaining and enhancing our
products and services are critical to our ability to solidify our market
leadership, strengthen our relationships with current customers and acquire new
customers.
ESTABLISH LEADERSHIP IN INTERACTIVE MARKETING SOLUTIONS FOR
E-COMMERCE. NetGravity seeks to foster the growth of the emerging market for
interactive marketing solutions for e-commerce merchants and to establish
leadership in this market. Recognizing the potential of the Web as a direct
marketing channel, many of our e-commerce customers are already leveraging
AdServer's largely advertising-oriented features to deploy interactive marketing
systems for e-commerce. We believe that e-commerce interactive marketing is
emerging as a distinct market from online advertising and that customers
focusing on e-commerce will increasingly demand functionality tailored to their
specific requirements. Therefore, we intend to continue to add features to
AdServer designed to meet the specific requirements of e-commerce merchants as
well as to enhance our sales, marketing, professional services and support
capabilities to promote these new features. In addition, we plan to form
relationships with enterprise solutions vendors to accelerate the adoption of
our AdServer software by e-commerce merchants. In furtherance of this strategy,
we recently established a co-marketing and co-selling relationship with IBM
relating to our AdServer products.
IMPROVE OUR CUSTOMERS' ROI WITH GLOBAL PROFILE SERVICE. We are developing
solutions to allow e-commerce merchants to better target consumers, thereby
providing them the opportunity to increase their ROIs from investments in online
interactive marketing. The initial version of our Global Profile Service gives
our customers access to anonymous consumer profiles containing geographic data.
Through planned new releases of the Global Profile Service, we expect to provide
access to other demographic and behavioral data. We have already licensed access
to Matchlogic's database of approximately 45 million anonymous consumer profiles
and we plan to continue to form additional relationships with data providers to
improve the overall coverage of our profile database.
ENABLE EFFICIENT ADVERTISING BUYING ON THE INTERNET. NetGravity intends in
the future to develop products to link together its high-end interactive
marketing customers to allow them to automate the process of buying and selling
online advertising space. One of the key limitations of the Internet as compared
to other media is the difficulty merchants and advertising agencies experience
when trying to create and manage an online campaign across many selected content
publishers. Because we already work with several large and sophisticated content
publishers and advertising agencies, we believe we will have the opportunity to
leverage the compatability of our AdServer product and our planned AdCenter for
Agencies service to increase the
43
<PAGE>
efficiency of buying and selling ads for both sides of the transaction. We
believe that, if successful, this end-to-end solution could be critical to
establishing our solutions as the standard for online interactive marketing.
EXPAND INTERNATIONAL PRESENCE. NetGravity plans to expand its international
operations to address the global adoption of the Internet and the international
demand for online interactive marketing solutions. We believe that there are
many international opportunities for our products and services and have
established sales and support operations in Europe and Asia Pacific with
regional headquarters in London and Tokyo and field offices in France, Germany
and Hong Kong. As part of this expansion, we intend to create reselling and
systems integration relationships in Europe and Asia Pacific to leverage our
sales and consulting forces in these regions. We also intend to develop
localized versions of our products. We believe that an early presence in these
markets will enhance our long-term competitive position in these regions.
Software Products and Transactional Services
NetGravity develops, markets and supports its family of online interactive
marketing solutions and offers associated services. The following illustrates
the role of AdServer in a typical consumer interaction with a customer's Web
site.
[Graphic: Consumer Interaction with Web site that uses NetGravity AdServer]
CAPTIONS:
1) CONSUMER VISITS WEB SITE THAT USES NETGRAVITY ADSERVER SOLUTION.
2) BROWSER REQUESTS PAGE FROM WEB SITE.
3) NETGRAVITY ADSERVER LOOKS UP CONSUMER PROFILE, AND CHOOSES MOST
APPROPRIATE ADVERTISEMENTS.
4) CONTENT PAGE WITH TARGETED ADVERTISEMENTS DELIVERED TO CONSUMER'S
BROWSER.
5) NETGRAVITY ADSERVER LOGS DELIVERY AND RESULTS FOR FUTURE ANALYSIS AND
REPORTING.
- SITE ADMINISTRATORS USE NETGRAVITY ADSERVER TO MANAGE FORECASTING, AD
INVENTORY, SCHEDULING AND RESULTS ANALYSIS.
NetGravity markets three primary solutions to support the needs of companies in
the online interactive marketing industry: AdServer Enterprise, AdServer Network
and AdCenter for Publishers. NetGravity also offers its Global Profile Service
to extend the targeting capabilities of its primary solutions by providing
access to more extensive targeting data than may otherwise be available to our
customers. In addition, NetGravity is in the process of developing AdCenter for
Agencies, a version of AdCenter customized for advertising agencies.
NetGravity's solutions are designed to be scalable, extensible and robust
systems for deploying online interactive marketing solutions on the Internet.
The AdServer solutions utilize a common fault-tolerant, scalable architecture
for real-time delivery of targeted advertisements, a management system for
tracking advertising inventory and a customizable reporting and analysis system
allowing AdServer users to better understand their customers.
ADSERVER ENTERPRISE. AdServer Enterprise is designed to manage interactive
marketing on individual Web sites. AdServer Enterprise manages the process of
placing advertisements, promotions and other offers on Web pages. It also allows
tracking of consumer action and movement on a Web site and captures consumer
responses to advertisements. AdServer Enterprise is designed to be integrated
with other systems, such as customer databases, to create rich consumer profiles
for more effective targeting. AdServer Enterprise comes pre-configured to
address many common targeting requirements and can be extended to perform more
specific targeting. AdServer Enterprise's scalable architecture allows Web sites
to reliably serve high volumes of targeted advertisements. AdServer Enterprise
also collects and summarizes user interaction data to allow detailed analysis
and reporting to advertisers and direct marketers.
44
<PAGE>
ADSERVER NETWORK. AdServer Network is an enhanced version of AdServer
Enterprise designed to manage multi-site interactive marketing. AdServer Network
is designed to allow central management of advertising inventories of multiple
Web sites, delivery of targeted advertisements to multiple remote Web sites
based on centralized targeting data, centralized collection and analysis of user
information and targeting of advertisements to consumers on remote Web sites.
These features make AdServer Network an attractive solution for a variety of
applications. For example, AdServer Network can be used by content publishers to
deliver targeted advertisements to a set of affiliated Web sites or by
advertising agencies to manage campaigns for their clients across all of the Web
sites in the campaign.
ADCENTER FOR PUBLISHERS. AdCenter for Publishers is an outsourced service
solution based on our AdServer software and is designed to allow our customers
to outsource certain advertising management functions to NetGravity. NetGravity
works with Web hosting organizations to manage this centralized solution for
customers that do not wish to hire a technical staff or to maintain their own
systems. To date, revenues from AdCenter for Publishers have not been material.
GLOBAL PROFILE SERVICE. NetGravity's Global Profile Service is a central
database of anonymous user profiles which allows customers to augment their own
consumer information to improve their ability to analyze and target their
consumers. NetGravity has established relationships with two initial data
providers, Excite/MatchLogic and HNC/Aptex to provide demographic and purchase
affinity data on consumers for the Global Profile Service. The Global Profile
Service contains over 45 million consumer profiles with demographic and
geographic fields. This covers a substantial portion of all Internet users and
contains detailed information such as location, age, gender, household income,
education and presence of children. We are designing Global Profile Service to
work with multiple data providers and to aggregate fields supplied from several
sources in real-time. Currently, NetGravity is offering only geographic profiles
to our customers. NetGravity is in the process of extending the Global Profile
Service to enable it to deliver more comprehensive consumer profiles, but does
not expect such release to be available until late 1999, however we cannot
assure you that this release schedule will be met. See "Risk Factors--Our future
success depends on the timely completion of new solutions under development." To
date, revenues from the Global Profile Service have not been significant. See
"Risk Factors--We rely on third-party software and consumer profile data."
ADCENTER FOR AGENCIES. AdCenter for Agencies is a solution under
development that will be a version of AdCenter tailored to requirements of
advertising agencies. We are designing AdCenter for Agencies to automate much of
the campaign management process for advertising agencies including media
planning, media buying, trafficking, reporting and billing. AdCenter for
Agencies will also be used to track purchases made by consumers responding to
particular advertisements and thereby determine the cost-per-transaction for
each campaign. AdCenter for Agencies is expected to be released in the second
quarter of 1999, however we cannot assure you that this release schedule will be
met. See "Risk Factors--Our future success depends on the timely completion of
new solutions under development."
45
<PAGE>
The following table summarizes NetGravity's software products and
transactional services:
<TABLE>
<S> <C> <C> <C> <C>
Product or Market Benefits Introduction Dates Pricing Model
Service
AdServer SINGLE-SITE Provides single-site Version 1.0: March 1996 Software Model:
Enterprise merchants and management of user Version 2.0: September 1996 Perpetual software
content information, Version 2.1: March 1997 license fee plus ongoing
publishers targeting of Version 3.0: June 1997 fees for upgrades and
advertisements, and Version 3.5: September 1998 support
analysis and
reporting
capabilities
AdServer MULTI-SITE Provides the Version 2.1: March 1997 Software Model:
Network merchants, capability to target Version 3.0: June 1997 Perpetual software
advertising advertisements to Version 3.5: September 1998 license fee plus ongoing
agencies, consumers on remote fees for upgrades and
content Web sites, while support
publishers and aggregating all
advertising consumer information
networks and providing
centralized
management
capabilities
AdCenter for SINGLE AND Provides a service to April 1998 Transactional Model:
Publishers MULTI-SITE allow customers to Fees based on number of
merchants, outsource advertising advertisements,
advertising management to promotions or other
agencies, NetGravity offerings delivered
content
publishers and
advertising
networks
Global Profile ADSERVER AND Gives access to Geographic Profiles: Transactional Model:
Service ADCENTER database of anonymous October 1998 Geographic--Annual fee
CUSTOMERS consumer profiles Demographic and Behavioral based on expected number
used for enhanced Profiles: of profiles delivered
targeting Planned for second half of Demographic/Behavioral--
1999 Pricing expected to be
based on actual number
of profiles delivered
AdCenter for ADVERTISING Automates the Currently in development; Transactional Model:
Agencies AGENCIES campaign management expected to be available in Fees expected to be
seeking process for the second quarter of 1999 based on number of
outsourced advertising agencies advertisements,
online promotions or other
interactive offerings delivered
marketing
solutions
</TABLE>
Professional Services
NetGravity's professional services organization as of December 31, 1998
consisted of 29 individuals, including 14 consultants, who provide the following
range of services:
CONSULTING. NetGravity offers consulting services that address each of the
activities its customers require for the initial implementation and long-term
operation of their NetGravity products. NetGravity offers: implementation
services to assist its customers in deploying AdServer; system extension
services that enable customers to extend NetGravity's products to meet their
specific business needs or technical requirements; and migration services that
enable customers to migrate to NetGravity's current products from earlier
versions of our products, from their in-house systems or from competitors'
products. A typical AdServer implementation requires up to 10 days of
professional services. NetGravity also offers other consulting
46
<PAGE>
services, including project management, requirements definition, business
process re-engineering, system and solutions design, technical architecture
design, systems integration design, custom reporting and software development.
TECHNICAL SUPPORT. NetGravity provides product support services, including
telephone support and upgrade rights to new minor releases, under its standard
maintenance agreements. All of NetGravity's license customers have entered into
standard maintenance agreements. The annual maintenance fee for these services
is payable in advance and is based upon a percentage of the then-current list
price for the licensed software. A dedicated team of engineers trained to answer
questions on the installation and usage of AdServer products provides telephone
support from 6:30 a.m. to 4:30 p.m., Pacific time, Monday through Friday, from
NetGravity's corporate offices in San Mateo, California. NetGravity also offers
telephone support 24 hours a day, seven days a week through a call-back
procedure to certain customers who pay an additional fee for this service.
NetGravity believes that providing high quality customer service and technical
support is necessary to achieve rapid product implementation which, in turn, is
essential to customer satisfaction and revenue growth. Accordingly, NetGravity
is committed to continued recruiting and maintenance of a high-quality technical
support team.
EDUCATION. NetGravity provides training for both the users of AdServer and
the technical staffs who maintain AdServer. NetGravity also offers training in
advertising on the Internet, managing advertising sales with AdServer, and
administering AdServer. NetGravity is also offering training in developing
custom extensions to the AdServer product line. All training is made available
at either the customer's location or at NetGravity's facilities in San Mateo,
California, New York City, Tokyo or London.
47
<PAGE>
Technology
All of NetGravity's products and transactional services are built around the
core AdServer architecture. NetGravity's AdServer is designed to be a robust
architecture for customers to implement flexible, scalable and reliable online
advertising and direct marketing solutions, as well as to integrate these
solutions with external systems such as electronic commerce and dynamic content
generation systems. The AdServer architecture is also extensible through
documented application programming interfaces (APIs) and adheres to numerous
industry standards. In addition, we believe that the AdServer system
architecture is flexible enough to serve as the foundation for related future
products.
[Graphic: AdServer System Modules]
CAPTIONS:
- ADMANAGER PROVIDES FORECASTING, INVENTORY MANAGEMENT, AND SCHEDULING.
- ADINSIGHT PROVIDES AUTOMATIC REPORT GENERATION AND PUBLISHING.
- ADCONSOLE PROVIDES SYSTEM STATUS AND CONTROL.
- SITE AND CONSUMER DATA IS USED FOR REPORTING AND ANALYSIS.
PRIMARY ADSERVER SUBSYSTEMS
ADSERVER ADVERTISING DELIVERY ENGINE. NetGravity's AdServer advertising
delivery engine performs the actual content delivery function for the AdServer
System. The AdServer engine was designed to deliver highly targeted messages
with low latency to Web browsers, Web servers and proprietary content delivery
systems. The AdServer delivery engine architecture is designed to be highly
scalable, reliable and extensible. NetGravity has also incorporated several
performance and reliability enhancing technologies into the AdServer engine,
including built-in load balancing, automatic fail-over, automatic restart and
monitoring tools that notify technicians in the event of system failure.
ADMANAGER BUSINESS PROCESS MANAGEMENT APPLICATION. AdManager is a
three-tier application (comprised of user interface, application server and
database tiers) designed to allow customers to manage certain online advertising
and direct marketing business processes and associated data. In particular,
AdManager utilizes proprietary software to automate certain inventory
management, scheduling and availability functions that enable more efficient use
of available inventory.
48
<PAGE>
ADINSIGHT ADVERTISING PERFORMANCE AND REPORTING SYSTEM. NetGravity believes
that the information resulting from online interactive marketing placements and
consumer response is extremely valuable for understanding consumer behavior and
measuring return on investment. The AdInsight measurement and reporting system
has been designed to permit detailed reporting and analysis for Web sites and
networks. Because of the volume of data gathered from high-traffic sites and
networks, AdInsight offers customizable summarization and reporting functions to
reduce database size and storage requirements. AdInsight also implements a
scheduling system to generate reports for automatic delivery to advertisers and
others directly over the Internet.
ADCONSOLE SYSTEM MANAGEMENT APPLICATION. AdConsole is designed to simplify
the process of maintaining and administering the entire AdServer System by
providing system administrators with a user interface for common system
management tasks. For example, AdConsole permits centralized starting, stopping,
monitoring and administering of multiple AdServer engines. AdConsole allows
system administrators to schedule routine tasks and monitor and administer
AdServer engines across multiple CPUs which increases the reliability of the
entire system by reducing the likelihood for administration or configuration
errors.
OPEN ARCHITECTURE AND EXTENSIBILITY
NetGravity designed the AdServer System with numerous extensibility features
to allow integration into existing systems and creation of new functionality.
NetGravity's open targeting architecture allows customers to augment AdServer's
standard targeting functionality through the addition of external targeting
capabilities. NetGravity's advertising delivery API allows integration into
custom electronic commerce systems, dynamic content delivery systems and other
kinds of advertising delivery mechanisms. In addition, AdServer stores business
process data, including advertisements, targeting information, delivery
statistics and reporting data in a standard relational database management
system (RDBMS) in documented data structures, allowing industry standard
reporting and query tools to be used to view and manipulate this data. These
open extensibility features allow AdServer to be integrated with customers'
legacy systems and/or third-party systems, such as sophisticated targeting
engines, content delivery systems and customized data mining and analysis tools.
INDUSTRY STANDARDS
NetGravity uses many widely accepted standards in developing its products,
including SQL for accessing RDBMSs, HTTP for Internet access, NSAPI (Netscape
Application Programming Interface) for access to Netscape's Internet servers,
ISAPI (Internet Server Application Programming Interface) for access to
Microsoft's Internet servers and HTML for formatting advertisements. Most of the
Company's software is written in C++, a widely accepted standard programming
language for developing object-oriented applications. Adherence to industry
standards provides compatibility with existing applications, enables ease of
modification, and reduces the need for software to be rewritten, thus protecting
the customer's investment. In addition, NetGravity is active in formulating
standards for advertising measurement on the Internet. For example, John W.
Danner, NetGravity's Chairman and Chief Executive Officer, serves on the Board
of Directors of the Internet Advertising Bureau, a standards setting body for
Web publishers.
Customers and Markets
As of December 31, 1998, NetGravity had over 325 customers. NetGravity sells
its AdServer products and AdCenter services to merchants, advertising agencies,
advertising networks and content publishers. The following is a partial list of
NetGravity's customers:
Merchants
ArtNet
AutoWeb Interactive
Cendant Corporation
Commercial Dynamics
Didax Online L.C.
EGreetings, Inc.
E*TRADE Group
Garden.com
IBM
Ingram Micro
N(2)K
ONSALE
Planet Direct Corporation
Preview Travel
SRDS
TechWave
Ticketmaster Online CitySearch
49
<PAGE>
TUCOWS Interactive
Vitamin Shoppe
West Group
Agencies
Agency.com
Anderson and Lembke
Dentsu Inc. (CCI)
Giant Step
Ogilvy and Mather
Ogilvy Interactive GmbH
Ad Networks
Active Agent GMBH
@Home Network
Canadian Broadcasting
Canoe, Canadian Online Explorer
CDA Investment Technology
China Internet
Digital Skies
EMC(2)
Hong Kong Telecom IMS
MediaLinx
News Interactive Pty.
NTT Navispace Corporation
Overseas Connections, Taipei
Scandinavia Online
Singapore Telecommunications
StarMedia Network
TeleDanmark
Telstra Corporation
VLT Media
Yellow Pages
Publishers
Aftonbladet
America's Health Network
Asahi Shimbun
Associated New Media
Athena 2000
audioSENSE Corporation
British Telecom
broadcast.com
CADE
Cahners Business Information
Children's Television Workshop
China Telecom
China Times Interactive
Chung Hwa Telecom
Cinetic GmbH
Clear Channel Communications
CMP Media
College Club
CondeNet
CyBear
Cyber Communications
Dallas Morning News
DeTeMedien GmbH
Detroit Newspapers
Deutsche Telekom Online Service GmbH (T-Online)
El Nuevo Dia Interactive
Express Newspapers
Financial Times Group
Focus Online GmbH
Fujitsu
GoGlobal.net
Guardian Media Group
Hachette Filipacchi Interactions SA
Hearst New Media and Technology
HjemmeNett AS
Hollywood Online
INFOACCES, S.A. de C.V.
Interactive Investor International
Internet Technologies China (Sohoo)
John Fairfax Holding
Jubii A/S
Jumbo
Knight Ridder New Media
Korea Telecom
Le Groupe Videotron LTEE
Matrix
Merrill Lynch
Mirror Group Newspapers
Miller Freeman PLC
Minneapolis Star Tribune Interactive
Monster.com
Mpath Interactive
MTV Interactive
NEC Corporation
Netpool
NetRadio
Netscape
NetZero
Nihon Keizai Shimbun
Nikkei Busines Publications
Objectif Net
Ordenamiento de Links Especializados, S.L. (OLE)
PDN Xinren Information Technology
Posten Sverige
Prima S.A.
Reed Business Information
Reuters
Rodale Press
Rogers New Media
Salon
SocialNet
Spinner.com
SuperBusinessNet
Swisscom AG
Sysware Corporation
Telecom New Zealand
Telstra Corporation
The Economist
The Mainichi Newspapers
The Weather Channel
Third Age Media
Thomson Financial Services
Time Inc. New Media
Toronto Morning Star
Toshiba Corporation
Tribune Interactive
Turner Broadcasting (CNN Interactive)
USA.NET
Virgin Net
Videotex (Planet Internet)
Warner Bros. Online
Wired Digital
World Opponent Network
World Wrestling Federation
WSI
Zaz
Zip2 Corporation
SELECTED CUSTOMER CASE STUDIES
E-COMMERCE MERCHANT: GARDEN.COM (WWW.GARDEN.COM). Garden.com, the leading
Internet retailer of gardening products, information and services, uses AdServer
software to manage its internal direct marketing activities to promote sales to
consumers after they arrive at the site. NetGravity worked with Garden.com to
integrate AdServer with Garden.com's proprietary e-commerce system, allowing
AdServer to use consumer profile data (including purchase history) from
Garden.com's e-commerce system to target promotions to consumers and track
consumer responses. These promotions include cross-sell and up-sell campaigns,
discounts, credits and free shipping. For example, if a consumer adds tulip
bulbs to his shopping cart, AdServer might deliver an offer to purchase a
complementary product, such as gardening tools, at a discounted price. If the
customer accepts the promotion, AdServer notifies Garden.com's e-commerce
system, which reflects the addition to the consumer's shopping cart and applies
the discount upon checkout. By tracking customers from the initial click on an
advertisement, through purchase activity on the Garden.com web site in response
to targeted direct marketing offers delivered by AdServer, Garden.com uses our
solutions
50
<PAGE>
to generate detailed reports on overall campaign effectiveness that go beyond
simple impression and click through data. Garden.com believes that the tight
integration of AdServer and its e-commerce system has allowed it to improve the
effectiveness and efficiency of its customer acquisition and retention efforts.
51
<PAGE>
ADVERTISING AGENCY: AGENCY.COM. Agency.com, the largest online interactive
marketing agency, focuses on online marketing opportunities for its clients.
Prior to becoming a NetGravity customer and beginning to use AdCenter for
Publishers, Agency.com manually managed its interactive marketing campaigns.
This manual approach involved executing media buys via phone and fax, emailing
"creatives" (which are the advertisement graphics themselves) to individual
content publishers and logging transactions into a spreadsheet. Weekly reports
were generated manually from data reported from Agency.com's ISP and were not as
detailed as its clients were requesting. In December 1998, Agency.com began an
interactive marketing campaign for Sprint Long Distance using AdCenter. With
AdCenter, advertisements are automatically distributed to content publishers and
all reporting data are gathered centrally, enabling on-the-fly performance
reporting. Agency.com is even able to offer Sprint direct access to AdCenter's
reports which, in addition to summarizing impressions viewed and click-through
rates, also track the actions of consumers visiting Sprint's web site in
response to the campaign. This detailed reporting data is used to gauge the
effectiveness of the campaign and to adjust the campaign by selecting the
content publishers and creatives that generate the highest ROI for Sprint. Based
on its experience with the Sprint campaign and other projects, Agency.com
provided NetGravity with important suggestions for the feature set of AdCenter
for Agencies, and expects to begin using AdCenter for Agencies when it is
released.
CONTENT PUBLISHER: CNN INTERACTIVE. Since August 1995, Cable News Network,
Inc. has operated CNN Interactive, a family of Web sites which now includes
CNN.com, CNNfn, CNN-Time All Politics, CNN enEspanol, CNN emPortugues and
CNN-Sports Illustrated. CNN Interactive is consistently ranked as one of the
most visited families of sites on the Web, and currently averages over 110
million page views per week. CNN Interactive initially relied on an internally
developed system to manage its online advertising. Daily advertisement rotations
were done manually by CNN Interactive personnel using spreadsheets to track
advertising inventory. As user traffic and advertising inventory grew
dramatically, CNN Interactive concluded that it needed to automate and
streamline its online advertising management activities to keep pace with such
growth. CNN Interactive turned to NetGravity and, in December 1996, deployed
AdServer Enterprise to replace its internal advertising management system.
AdServer Enterprise now performs automatic, real-time impression-based
advertisement rotation on the CNN Interactive sites. In addition, CNN
Interactive uses AdServer's reporting features to generate individualized weekly
reports for each of its more than 150 advertisers.
Sales and Marketing
NetGravity markets and sells its products and services primarily through its
field sales and telesales organizations and maintains sales and support
operations in North America, Europe and Asia Pacific. On December 31, 1998,
NetGravity's sales organization consisted of 46 individuals. NetGravity has
sales and support offices in San Mateo, California, New York City, London,
Tokyo, Paris, Hong Kong and Frankfurt. NetGravity sells its products in Europe
and Asia Pacific through its subsidiaries in the United Kingdom, Japan and Hong
Kong. NetGravity intends to broaden its presence in international markets by
expanding its international sales force and by entering into distribution
agreements with foreign distributors. See "Risk Factors--We face risks
associated with our international operations and plans for expansion" and "--Our
success depends on certain key employees."
NetGravity's sales process begins with the generation of sales leads. Sales
leads are obtained primarily from telesales, customer referrals, our Web site,
responses to our public relations and marketing efforts and through trade shows.
Initial sales activity normally includes a product demonstration of AdServer
directly over the Internet to the prospective customer. This demonstration is
followed by one or more technical discussions where the customer's issues and
concerns are addressed. For interested accounts, a field sales representative
and a sales engineer make an on-site visit where the needs of such customer are
assessed. Soon thereafter, a proposal is generated containing a statement of
work for our consulting and training services and a quote for the package of
software license and services to be delivered. In addition, we have developed
pre-configured packages suitable for many common customer applications.
51
<PAGE>
NetGravity uses a variety of marketing programs (including general brand
promotion) to: stimulate demand for its products; build market awareness through
the press and industry analysts; produce and maintain marketing information and
sales tools; generate and develop customer leads; and establish and manage
marketing alliances. As of December 31, 1998, 10 employees were engaged in a
variety of marketing activities, including: preparing marketing research and
collateral marketing materials; product planning; managing press coverage and
other public relations; identifying potential customers; attending trade shows,
seminars and conferences; establishing and maintaining close relationships with
recognized industry analysts; and maintaining our Web site.
To license our software products, we generally engage in a lengthy sales
effort. During the sales effort, we spend significant time educating prospective
customers on the use and benefit of our solutions. As a result, the sales cycle
for our products and services is long and currently averages approximately four
months. The sales cycle for our online direct marketing solutions is likely to
be longer than the sales cycle for the online advertising solutions, because we
believe that online direct marketing is less established and will require more
education of our potential customers. In addition, an increase in the average
size of transactions would also likely result in an even longer sales cycle as
the license of our software products becomes rises to the level of an
enterprise-wide decision by prospective customers requiring a significant
commitment of resources. Delays due to lengthy sales cycles could have a
material and adverse effect on our business, results of operations or financial
condition.
Marketing Alliances
An important element of NetGravity's sales strategy is to form business
alliances to assist NetGravity in marketing and selling its products and
developing customer applications. This approach is intended to increase the
resources available to perform application design and development services for
NetGravity's customers and to enhance NetGravity's market credibility, potential
for lead generation and access to large accounts. Additionally, business
partners can provide online interactive marketing expertise in solving the
business problems of NetGravity's customers. Certain of NetGravity's business
partners have entered into reseller agreements with us, whereby they are
permitted to resell our products, and, in some cases, to customize the products.
NetGravity works with these partners to develop re-sale and co-marketing
programs and to generate business referrals that lead to sales. For example,
NetGravity and IBM recently entered a co-selling and co-marketing arrangement
under which IBM is authorized to promote our products and services to IBM's
net.commerce customers and, based on acheiving certain performance milestones,
IBM has agreed to fund certain joint marketing activities. We do not provide
exclusive sales territories and does not impose minimum purchase requirements in
connection with its reseller agreements. We have reseller agreements with the
following organizations:
WEB HOSTING ORGANIZATIONS. Web hosting organizations centrally house and
maintain Internet connectivity equipment, server hardware and software for their
customers. Many Web sites utilize the services of hosting organizations and rely
on their advice and recommendations in selecting Internet software solutions.
Because of their influence in the market, NetGravity strives to maintain good
business relationships with these organizations. The following Web hosting
organizations have provided hosting services to NetGravity customers: ANS
Communications, BBN Corporation, Digex Incorporated, EUnet International B.V.,
Exodus Communications, Inc., Frontier GlobalCenter, Inc. and Proxicom, Inc., the
data and Internet service business unit of Teleport Communications Group Inc.
INTERNET SYSTEMS INTEGRATORS. Internet systems integrators assist online
content publishers and merchants in the design, procurement and deployment of
their Web sites. These Internet systems integrators often recommend advertising
management and other Internet solutions to their clients. The following Internet
systems integrators have worked with NetGravity customers: CKS--Enterprise, a
systems integration and consulting organization within CKS Group, Inc., Fort
Point Partners, Horizon Technologies, Organic Inc. and Modem Media . Poppe
Tyson.
52
<PAGE>
We have historically sold our products and services primarily through our
field sales and telesales organization, but our future success may depend in
part upon our ability to increase sales of our solutions through Web hosting
organizations and Internet systems integrators (collectively, "Resellers"). We
cannot assure you that we will be able to attract and retain Resellers. If we
are able to attract Resellers, our gross margins may narrow due to discounts we
would give to our Resellers. In addition, if any of our Resellers were to
provide inadequate support and services to our customers, our revenues could
decrease and our reputation could be damaged. Our inability to attract or
adequately manage Resellers could materially and adversely affect our business,
results of operations and financial condition.
Product and Service Development
NetGravity believes that its future success will depend in large part on its
ability to enhance the AdServer System, develop new products, maintain
technological leadership, and satisfy an evolving range of customer requirements
for large scale online advertising and direct marketing applications.
NetGravity's product and services development organization is responsible for
product architecture, core technology, product testing and quality assurance,
writing user documentation, and expanding the ability of NetGravity products to
operate with the leading hardware platforms, operating systems, database
management systems, content management systems and electronic commerce systems.
Since inception, NetGravity has made substantial investments in product
development and related activities. In addition, certain technologies have been
acquired and integrated into NetGravity products through licensing arrangements.
As of December 31, 1998, there were 28 employees in NetGravity's product
development organization. NetGravity's research and development expenses were
$1.8 million, $3.0 million and $4.6 million for the years ended December 31,
1996, 1997 and 1998, respectively. To date, NetGravity has not capitalized any
software development costs. NetGravity expects to continue to devote substantial
resources to its product development activities. NetGravity plans to release its
next major version of AdServer in 1999. NetGravity also expects to release
AdCenter for Agencies in the second quarter of 1999. Finally, the Company is
developing an enhanced version of its Global Profile Service, adding the ability
to supply more detailed demographic targeting data, which is expected to be
available in the second half of 1999.
Although NetGravity sells products to each of the constituents in the online
advertising and direct marketing supply chain (merchants, advertising agencies
and content publishers), it does not currently offer products automating the
online advertising purchasing process among such constituents. If demand for a
comprehensive solution develops and NetGravity fails to develop such a solution
on a timely basis, or at all, it could have a material adverse effect on
NetGravity's business, results of operations or financial condition. In
addition, as more customers demand online advertising and direct marketing
solutions, NetGravity must tailor its products to the specific requirements of
both online advertisers and direct marketers and provide a solution for
supplying demographic and behavioral data. If NetGravity does not develop a
satisfactory product to address the online direct marketing market, future
growth of NetGravity could be impaired and NetGravity could lose customers to
competitors with more comprehensive solutions. The occurrence of any such event
could have a material adverse effect on NetGravity's business, results of
operations or financial condition.
NetGravity's products are designed to operate on a variety of hardware and
software platforms employed by its customers in their individual networks.
NetGravity must continually modify and enhance its products to keep pace with
changes in hardware and software platforms and database technology. As a result,
uncertainties related to the timing and nature of new product announcements,
introductions or modifications by operating systems vendors, particularly
Microsoft and Sun, by vendors of relational database software, particularly
Oracle and Microsoft, and browsers, particularly Netscape and Microsoft could
materially adversely impact NetGravity's business, results of operations or
financial condition.
53
<PAGE>
Competition
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;
- 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.
We believe that we presently compete favorably with respect to these
factors. However, we believe that our markets are still evolving, and we cannot
assure you that we will compete successfully in the future. Historically, our
competitive position with respect to prospective customers who favor outsourced
solutions has not been as strong as our position in the software market given
that we have not, until recently, offered outsourced solutions. Even with the
introduction of AdCenter we cannot assurance you that our competitive position
will improve among such customers. Our competitive position in our market (or
portions thereof) as compared to our competitors is otherwise difficult to
characterize, due principally to the variety of current and potential
competitors and the emerging nature of the market.
In the online advertising market, we compete directly with DoubleClick Inc.,
CMG plc (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. 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, Interworld and Open Market, 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.
54
<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.
Intellectual Property and Other Proprietary Rights
IT IS DIFFICULT FOR US TO PREVENT THE MISAPPROPRIATION OF OUR INTELLECTUAL
PROPERTY. Policing unauthorized use of our products is difficult, particularly
because the global nature of the Internet makes it hard to control the ultimate
destination or security of software or other data transmitted. The laws of other
countries may afford us little or no effective protection of our technology. We
cannot assure you that the steps taken by us will prevent misappropriation of
our technology or that agreements entered into for that purpose will be
enforceable. In addition, litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation, whether successful or
unsuccessful, could result in substantial costs and diversions of resources,
either of which could have a material and adverse effect on our business,
results of operations or financial condition.
WE PROTECT OUR INTELLECTUAL PROPERTY BY WAY OF SEVERAL LEGAL MEANS. The
success and competitiveness of our products depend in part upon our ability to
protect our current and future technology through a combination of trademark,
trade secret and copyright law. Because laws protecting certain ownership rights
in Internet-related industries are uncertain and still evolving, we cannot give
you any assurance about the future viability or value of any of our current
technology ownership rights.
OUR SOURCE CODE MAY BE RELEASED TO OUR CUSTOMERS UNDER CERTAIN
CIRCUMSTANCES. Under the general terms and conditions of our standard license
agreements with customers, we retain title to the trade secrets and copyrights
in the source code of our software products. However, some of our agreements
with our customers contain provisions requiring release of source code for
limited, non-exclusive use by the customer in the event that we cease to do
business or we fail to support our products. This release of source code may
increase the likelihood of misappropriation by third parties.
WE PROTECT OUR INTELLECTUAL PROPERTY BY ENTERING INTO INTELLECTUAL PROPERTY
AGREEMENTS WITH EMPLOYEES, CONSULTANTS AND VENDORS. We enter into
confidentiality and intellectual property assignment agreements with our
employees, consultants, and vendors and generally control access to and
distribution of our software, documentation, and other proprietary information.
Notwithstanding these precautions, it may be possible for a third party to copy
or otherwise obtain and use our software or other proprietary information
without authorization or to develop similar software independently.
From time to time we have been, and expect to continue to be, subject to
claims of alleged infringement of the copyrights, trade secrets and other
intellectual property rights of third parties by us. In addition, other parties
may assert invalidity claims (or claims for indemnification resulting from
infringement claims) against us. Any such assertions or prosecutions might
materially and adversely affect our business, results of operations or financial
condition. Although such claims have not resulted in litigation or had a
material and adverse effect on our business, results of operations or financial
condition, such claims could subject us to significant liability for damages and
could result in invalidation of our proprietary rights and be time-consuming and
expensive to defend, and result in the diversion of management time and
attention. If any
55
<PAGE>
such claims or actions are asserted against us, we may seek to obtain a license
under a third party's intellectual property rights. We cannot assure you,
however, that under such circumstances, a license would be available on
reasonable terms or at all.
WE PROTECT OUR INTELLECTUAL PROPERTY BY ENTERING INTO INTELLECTUAL PROPERTY
AGREEMENTS WITH EMPLOYEES, CONSULTANTS AND VENDORS. We enter into
confidentiality and intellectual property assignment agreements with our
employees, consultants, and vendors and generally control access to and
distribution of our software, documentation, and other proprietary information.
Notwithstanding these precautions, it may be possible for a third party to copy
or otherwise obtain and use our software or other proprietary information
without authorization or to develop similar software independently.
Employees
As of December 31, 1998, the Company had 125 employees, including 46 in
sales and marketing, 28 in research and development, 29 in professional
services, customer support and education, three in transactional services, and
19 in finance and administration. Of these, 11 are located in Asia, 15 are
located in Europe and the remainder are located in North America. None of the
Company's employees is represented by a labor union. The Company has experienced
no work stoppages and believes its relationship with its employees is good. See
"Risk Factors--Our Success Depends On Certain Key Employees."
Facilities
The Company is headquartered in San Mateo, California where it leases
approximately 26,500 square feet pursuant to a term lease that expires in
October 2005. In addition, the Company maintains a regional office in New York,
New York where it leases approximately 3,000 square feet of office space
pursuant to a lease that expires in 2003. The Company also leases space in
London, Tokyo and Hong Kong to support its international operations. See Note 6
of Notes to Consolidated Financial Statements.
Legal Proceedings
The Company is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the ordinary course of its business.
56
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company, and their ages as of
February 5, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ----------------------- --- --------------------------------------------------
<S> <C> <C>
John W. Danner(1)...... 31 Chairman of the Board and Chief Executive Officer
Stephen E. Recht....... 47 Chief Financial Officer and Secretary
Susan Atherton......... 42 Vice President of Worldwide Sales
Michael W. Davies...... 37 Vice President of Services and Support
John K. Donnelly....... 31 Vice President of North American Sales
Rick E. D. Jackson 38
IV................... Vice President of Marketing
Douglas S. Kaplan...... 32 Vice President and General Manager of Asia Pacific
Martin G. Lane-Smith... 51 Vice President of Engineering
Jitendra Valera........ 41 Vice President and General Manager of Europe
Larry C. Wear.......... 33 Vice President of Global Services
J. Scott Briggs........ 48 Director
John D. D. Kohler(2)... 44 Director
Amnon Landan........... 40 Director
Jonathan D. 47
Lazarus(3)........... Director
Alexander R. 31
Slusky(2)(3)......... Director
</TABLE>
- ----------
(1) Member of New-Hire Option Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
JOHN W. DANNER co-founded the Company in 1995, served as its President from
inception until April 1998 and has served as Chief Executive Officer and as a
Director since inception. In April 1998, Mr. Danner was elected Chairman of the
Board. From November 1993 to January 1995, Mr. Danner was a technical lead/
architect for Silicon Graphics, Inc. ("Silicon Graphics"), where he architected
the set-top and server side of a component of Silicon Graphics' interactive
television system. From June 1990 to November 1993, Mr. Danner was a development
manager at Oracle Corporation, where he oversaw product development for Oracle
Book, a multimedia browser. Since January 1998, Mr. Danner has served on the
Board of Directors of the Internet Advertising Bureau, an online advertising
advocacy group and standards-setting body for online content publishers. Mr.
Danner holds B.S.E.E. and M.S.E.E. degrees from Stanford University.
STEPHEN E. RECHT has served as the Chief Financial Officer and Secretary of
the Company since 1996. From 1995 to 1996, Mr. Recht was the Chief Financial
Officer of AuraVision Corporation, a fabless, multimedia semiconductor company,
where Mr. Recht was responsible for all financial operations, investor
relations, contract administration, human resources and facilities. From 1992 to
1995, Mr. Recht was the Vice President, Finance and Administration and the Chief
Financial Officer of ViewStar Corporation, a client/ server, business process
automation software company, where Mr. Recht directed all financial operations
and investor relations. Mr. Recht holds a B.A. degree in Economics from Stanford
University and an M.B.A. degree from the Wharton School at the University of
Pennsylvania.
SUSAN ATHERTON has served as the Company's Vice President of Worldwide Sales
since October 1998. From April 1998 to October 1998, Ms. Atherton served as the
Company's Vice President of Sales. From 1996 to 1998, Ms. Atherton was the Vice
President, Worldwide Sales, of DataMind Corporation, a developer of data mining
client/server and Web-enhanced products, where Ms. Atherton managed the
company's direct and indirect channels sales organization worldwide and helped
develop key strategic relationships with several technology companies. From 1995
to 1996, Ms. Atherton was the Vice President, Worldwide Sales, of Red
57
<PAGE>
Pepper Software, a supply chain management software developer, where Ms.
Atherton managed the company's direct and indirect channels sales organization
worldwide. From 1993 to 1995, Ms. Atherton was the Area Vice President of Ross
Systems, Inc., a provider of supply chain management solutions and client/server
business software for enterprise resource planning, where Ms. Atherton helped
manage the company's Western U.S. sales force. Ms. Atherton holds a B.S. degree
in Economics from the University of California, Riverside.
MICHAEL W. DAVIES has served as the Company's Vice President of Services and
Support since October 1998. From December 1997 to October 1998, Mr. Davies
served as the Company's Director of Professional Services. Before joining the
Company, Mr. Davies was the Director of Professional Services of Walker
Interactive Systems ("Walker"), a provider of enterprise-wide business and
accounting solutions, where he worked for eight years developing many areas
within Walker including consulting, education, sales, customer support and
marketing and managing Walker's Asia Pacific professional services practice. Mr.
Davies holds a B.S. degree in Computer Information Systems from the University
of Nevada.
JOHN K. DONNELLY has served as the Company's Vice President of North
American Sales since October 1998. From April 1997 until October 1998 Mr.
Donnelly was the Company's Director of Sales. From January 1997 to April 1997,
Mr. Donnelly was the Company's East Regional Sales Manager. From May 1996 to
January 1997, Mr. Donnelly served as a field sales manager for the Company's
Northeast North America region. From October 1991 to May 1996, Mr. Donnelly
handled major account sales for Parametric Technology Corporation, a company
that develops, markets and supports integrated product development and
information management software. Mr. Donnelly holds B.A. degrees in
Communication and History from Boston College.
RICK E. D. JACKSON IV has served as the Company's Vice President of
Marketing since 1997. From 1996 to 1997, Mr. Jackson was the Vice President,
Marketing for mFactory, Inc., an advanced multimedia authoring tool company,
where Mr. Jackson assembled and led a team of professionals responsible for all
aspects of product and corporate marketing. From 1994 to 1996, Mr. Jackson was
the Director of Product Marketing for Taligent, Inc. ("Taligent"), a software
company, where Mr. Jackson managed the marketing organization responsible for
various Taligent products. From 1990 to 1994, Mr. Jackson was the Director of
Product Marketing for NeXT Computer, Inc., a desktop computer and software
manufacturer, where Mr. Jackson assembled, managed and led the company's product
marketing team. Mr. Jackson holds a B.S. degree in Computer Science from
California State University, Northridge.
DOUGLAS S. KAPLAN has served as the Company's Vice President and General
Manager of Asia Pacific since 1997. From 1995 to 1997, Mr. Kaplan was the Vice
President of Nikkei BP BizTech Inc. ("Nikkei"), a Japanese business and
technology publisher, which Mr. Kaplan founded. At Nikkei, Mr. Kaplan defined
the company's business plan and developed Nikkei as a consulting and research
company. From 1990 to 1995, Mr. Kaplan was a Representative Director and a
co-founder of CMP Japan, the Japanese subsidiary of CMP Media, Inc., a
technology publisher. At CMP Japan, Mr. Kaplan developed the company's business
plan and implemented the business of consulting with U.S. technology companies
interested in conducting business in Japan. Mr. Kaplan holds a B.A. degree in
Asian Studies and Economics from the University of California, Berkeley.
MARTIN G. LANE-SMITH has served as the Company's Vice President of
Engineering since 1997. From 1991 to 1997, Mr. Lane-Smith was the Vice
President, Engineering of Edify Corporation, a provider of software solutions
for interactive online services, where Mr. Lane-Smith was responsible for all
aspects of product development, product support and the management of the
company's engineering team. Mr. Lane-Smith holds a B.A. degree and an M.A.
degree, each in Natural Sciences (Math and Physics), from the University of
Cambridge.
JITENDRA VALERA has served as the Company's Vice President and General
Manager of Europe since 1997 and has been an employee of the Company since May
1998. From 1996 to May 1998, Mr. Valera was an employee of Protege Software
(Holdings) Limited, a consulting firm providing management services to
58
<PAGE>
NetGravity Europe Limited. From 1994 to 1997, Mr. Valera was the Managing
Director of Applix (UK) Ltd., the United Kingdom subsidiary of Applix Inc., a
producer and marketer of enterprise software, where Mr. Valera was responsible
for management of the company. From 1989 to 1993, Mr. Valera held various
positions with Data Logic Ltd. ("Data Logic"), a computer services company,
including, most recently, Director of Sales, Professional Services Division
(International Territory) and Director, International Sales and Marketing,
Professional Services Division. Among Mr. Valera's responsibilities at Data
Logic was establishing sales groups and strategies. Mr. Valera holds a Business
Studies degree from Havering Technical College and an HND degree in Business
Studies from Hatfield Polytechnic.
LARRY C. WEAR has served as the Company's Vice President of Global Services
since October 1998. From the Company's inception until October 1998, Mr. Wear
served as the Company's Vice President of Support and Service. From 1994 to
1995, Mr. Wear was the Director of Customer Support for Mercury Interactive
Corporation, an automated client/server testing software company, where Mr. Wear
was responsible for all customer support, training, consulting and pre-sales
engineering in North America. From 1992 to 1993, Mr. Wear was the Vice President
of Software Development for XALT Software Corporation, a producer of personal
and group productivity tools, where he oversaw the design, development, testing,
porting and release of a suite of products. Mr. Wear holds a B.S.E.E. degree
from the University of California, Davis, and an M.S.E.E. degree from Stanford
University.
J. SCOTT BRIGGS has served as a Director of the Company since December 1998.
Mr. Briggs has also been a consultant to the Company since December 1998. From
June 1975 to July 1997, Mr. Briggs served in various positions, including
president, at Ziff-Davis Inc. ("Ziff-Davis"), an integrated media and marketing
company. Since July 1997, Mr. Briggs has served as a consultant to Ziff-Davis.
Mr. Briggs serves on the boards of directors of several Internet-related private
companies and is a senior advisor to Red Herring Communications. Mr. Briggs
holds a B.A. degree from Williams College.
JOHN D. D. KOHLER has served as a Director of the Company since inception.
In 1996, Mr. Kohler founded Redleaf Venture Management, L.L.C., a venture
management firm, of which he is currently a Managing Member. From 1994 to 1995,
Mr. Kohler was Vice President and General Manager, Customer Solutions, at
Netscape Communications Corporation. From 1991 to 1993, Mr. Kohler was a Vice
President and General Manager at Silicon Graphics. Over the previous 15 years,
Mr. Kohler held executive positions at Hewlett Packard Company, Convergent
Technologies and Unisys Corporation. Mr. Kohler holds a B.A. degree in
International Relations and Economics from the University of California, Los
Angeles.
AMNON LANDAN has served as a Director of the Company since October 1998. He
has served as President and Chief Executive Officer of Mercury Interactive
Corporation ("Mercury") since February 1997 and as a director of Mercury since
February 1996. Prior to his current positions, Mr. Landan held various
management positions at Mercury including President from October 1995 to January
1997, President of North American Operations from March 1995 to September 1995
and Chief Operating Officer from August 1993 to March 1995. Mr. Landan holds a
B.S. in Computer Science from the Technion Israel Institute of Technology.
JONATHAN D. LAZARUS has served as a Director of the Company since 1996. From
1985 to August 1996, Mr. Lazarus worked at Microsoft Corporation ("Microsoft"),
where he served most recently as Vice President, Strategic Relations. Mr.
Lazarus is an advisor to Microsoft, the Universal Studios New Media Group and
ZDTV. Mr. Lazarus currently serves on the boards of directors of Ziff-Davis Inc.
and the following private companies: HomeGrocer.com, Inc. and Vision Solutions,
Inc. Mr. Lazarus holds a B.S. degree in Communications from Temple University.
ALEXANDER R. SLUSKY has served as a Director of the Company since 1997.
Since January 1998, Mr. Slusky has been the Managing Member of Vector Capital
Partners, L.L.C., the General Partner of Vector Capital, L.P. ("Vector
Capital"), a technology equity fund affiliated with Ziff Brothers Investments
("ZBI"). From August 1995 to December 1997, Mr. Slusky was a Principal of ZBI
and from 1996 to April 1998 he was a General Partner of Vector Capital. From
August 1992 to August 1995, Mr. Slusky was an Associate at New Enterprise
Associates ("NEA"), a venture capital fund, and from 1993 until 1995 a Special
Limited
59
<PAGE>
Partner of NEA VI, an entity affiliated with NEA. Mr. Slusky serves on the
boards of directors of several private companies. Mr. Slusky holds an A.B.
degree in Economics from Harvard University and an M.B.A. from the Harvard
Business School.
Board Committees
The Board of Directors has a Compensation Committee, an Audit Committee and
a New-Hire Option Committee.
COMPENSATION COMMITTEE. The Compensation Committee of the Board of
Directors reviews and makes recommendations to the Board regarding all forms of
compensation provided to the executive officers and directors of the Company and
its subsidiaries, including stock compensation and loans. In addition, the
Compensation Committee reviews and makes recommendations on bonus and stock
compensation arrangements for all employees of the Company. As part of the
foregoing, the Compensation Committee also administers the Company's 1995 Stock
Option Plan, 1998 Stock Plan and 1998 Employee Stock Purchase Plan. The current
members of the Compensation Committee are Messrs. Lazarus and Slusky.
AUDIT COMMITTEE. The Audit Committee of the Board of Directors reviews and
monitors the corporate financial reporting and the internal and external audits
of the Company and its subsidiaries, including, among other things, the
Company's internal audit and control functions, the results and scope of the
annual audit and other services provided by the Company's independent auditors
and the Company's compliance with legal matters that have a significant impact
on the Company's financial reports. The Audit Committee also consults with the
Company's management and the Company's independent auditors prior to the
presentation of financial statements to stockholders and, as appropriate,
initiates inquiries into aspects of the Company's financial affairs. In
addition, the Audit Committee has the responsibility to consider and recommend
the appointment of, and to review fee arrangements with, the Company's
independent auditors. The current members of the Audit Committee are Messrs.
Kohler and Slusky.
NEW-HIRE OPTION COMMITTEE. The New-Hire Option Committee of the Board of
Directors has the authority to grant options under the Company's 1998 Stock Plan
to newly-hired employees (other than executive officers), in each case in an
amount determined by the New-Hire Option Committee at an exercise price per
share equal to the fair market value of the Company's common stock determined on
the date of grant of such options, and otherwise on the terms and conditions
specified in the 1998 Stock Plan. The current sole member of the New-Hire Option
Committee is Mr. Danner.
Director Compensation and Other Arrangements
Directors of the Company do not receive cash compensation for their service
as directors. Each non-employee director automatically receives an option to
purchase 25,000 shares of common stock upon joining the Board of Directors. Each
incumbent director is automatically granted an option to purchase an additional
5,000 shares of common stock annually. See "Management--Employee Benefit Plans."
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors currently consists of
Messrs. Lazarus and Slusky. No interlocking relationship exists between any
member of the Company's Board of Directors or the Company's Compensation
Committee and any member of the board of directors or compensation committee of
any other company, and no such interlocking relationship has existed in the
past.
60
<PAGE>
Employment Contracts and Change of Control Arrangements
Pursuant to the Founder's Stock Purchase Agreement entered into in September
1995 by and between the Company and John W. Danner, the Company's Chairman of
the Board and Chief Executive Officer, the vesting of the stock purchased under
such agreement will accelerate upon certain changes of control of the Company.
See "Certain Transactions."
Pursuant to various agreements entered into by and between the Company and
each of Stephen E. Recht, the Company's Chief Financial Officer and Secretary,
Susan Atherton, the Company's Vice President of Worldwide Sales, and Jitendra
Valera, the Company's Vice President and General Manager of Europe, upon certain
changes of control, certain benefits will be provided to each of such
individuals under certain circumstances in accordance with their respective
agreements. See "Certain Transactions--Employment and Severance Agreements."
Executive Compensation
The following table sets forth information concerning the compensation
during fiscal 1997 and fiscal 1998 of (i) the Company's Chief Executive Officer
and (ii) the Company's five other most highly compensated executive officers
whose salary and bonus for fiscal 1998 exceeded $100,000 (collectively, the
"Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
-------------
Awards
-------------
Annual Compensation Securities
---------------------- Underlying All Other
Name and Principal Positions Year Salary($) Bonus($) Options(#) Compensation($)
- ---------------------------------------------- --------- ---------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
John W. Danner, Chairman of the Board and
Chief Executive Officer..................... 1998 $ 129,327 $ -- 226 $ --
1997 124,280 -- -- --
Stephen E. Recht, Chief Financial Officer and
Secretary................................... 1998 $ 176,183 $ -- 5,907 $ 17,907(1)
1997 154,517 -- 78,408 --
Rick E. D. Jackson IV, Vice President of
Marketing (2)............................... 1998 $ 167,069 $ 22,627 22,952 $ --
1997 78,462 -- 150,000 --
Martin G. Lane-Smith, Vice President of
Engineering (3)............................. 1998 $ 194,506 $ -- 78,134 $ --
1997 21,346 25,000 214,603 --
John K. Donnelly, Vice President of North
American Sales.............................. 1998 $ 89,719 $ 129,004 16,134 $ --
1997 77,915 143,642 81,817 --
Jitendra Valera, Vice President and General
Manager of Europe........................... 1998(4) $ 143,056 $ 99,768 79,769 $ 18,711(5)
</TABLE>
- ----------
(1) Represents forgiveness by the Company of a previously outstanding loan
pursuant to a debt forgiveness agreement by and between Mr. Recht and the
Company dated November 20, 1998.
(2) Mr. Jackson joined the Company in June 1997; his annualized base salary for
fiscal 1997 was $150,000.
(3) Mr. Lane-Smith joined the Company in November 1997; his annualized base
salary for fiscal 1997 was $185,000.
(4) Mr. Valera became an employee of the Company in May 1998. His compensation
is paid in pounds sterling. The U.S. dollar amounts in this table for Mr.
Valera reflect the exchange ratio of pounds sterling to U.S. dollars on
December 31, 1998.
(5) Consists of automobile lease payments made by the Company.
61
<PAGE>
Option Grants in Fiscal 1998
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the fiscal year ended December
31, 1998. All such options were awarded under the Company's 1995 Stock Option
Plan and 1998 Stock Plan. No stock appreciation rights were granted to these
individuals during such year.
<TABLE>
<CAPTION>
Potential Realized
Individual Grants Value at Assumed
----------------------------------------------------------- Annual Rates of
Number of Percent of Stock Price
Securities Total Options Appreciation
Underlying Granted to Exercise for Option Term(1)
Options Employees in Price Per Expiration ------------------------------
Name and Principal Positions Granted(#) Fiscal 1998(%) Share($)(2)(3) Date(4) ($)5% ($)10%
- --------------------------------- ----------- ----------------- ------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John W. Danner, Chairman of the
Board and Chief Executive
Officer........................ 113(5) 0.01% $ 23.69 7/8/98 $ 1,683.35 $ 4,265.95
113(5) 0.01 0.61 5/26/98 43.35 109.86
Stephen E. Recht, Chief Financial
Officer and Secretary.......... 113(5) 0.01 23.69 7/8/2008 1,683.35 4,265.95
5,681 0.69 6.60 4/6/2008 23,580.15 59,756.74
113(5) 0.01 0.50 1/28/2008 35.53 90.05
Rick E. D. Jackson IV, Vice
President of Marketing......... 113(5) 0.01 23.69 7/8/2008 1,683.35 4,265.95
22,726 2.74 6.60 4/6/2008 94,328.91 239,047.98
113(5) 0.01 0.55 1/28/2008 39.09 99.05
Martin G. Lane-Smith, Vice
President of Engineering....... 113(5) 0.01 23.69 7/8/2008 1,683.53 4,266.40
78,021 9.41 11.94 11/3/2008 585,859.83 1,484,683.84
4,545 0.55 6.60 4/6/2008 18,864.95 47,807.49
John K. Donnelly, Vice President
of North American Sales........ 113(5) 0.01 23.69 7/8/2008 1,683.35 4,265.95
15,908 1.84 6.60 4/6/2008 66,029.41 167,331.48
113(5) 0.01 0.55 1/28/2008 39.09 79.05
Jitendra Valera, Vice President
and General Manager of
Europe......................... 113 0.01 23.69 7/8/2008 1,683.35 4,265.95
38,635 4.66 7.15 5/12/2008 173,726.01 440,255.82
40,908 4.93 6.60 4/21/2008 169,797.02 430,298.99
113 0.01 0.55 1/28/2008 39.09 99.05
</TABLE>
- ---------
(1) The 5% and 10% assumed annual rates of compound stock price appreciation are
prescribed by the rules and regulations of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future trading prices of its common stock. There can be no assurance that
the actual stock price appreciation over the ten-year option term will be at
the assumed 5% and 10% levels or at any other defined level. Actual gains,
if any, on stock option exercises are dependent on numerous factors,
including the future performance of the Company, overall market conditions
and the option holder's continued employment with the Company throughout the
entire vesting period and option term, which factors are not reflected in
this table. The potential realizable value is calculated by multiplying the
exercise price per share by the stated annual appreciation rate compounded
annually for the option term, subtracting the exercise price per share from
the product, and multiplying the remainder by the number of shares
underlying the option granted.
(2) Options were granted at an exercise price equal to the fair market value of
the Company's common stock.
62
<PAGE>
(3) Exercise price may be paid (i) in cash, (ii) by check, (iii) by promissory
note, (iv) by delivery of already-owned shares of the Company's common stock
subject to certain conditions, (v) by delivery of a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds required
to pay the exercise price or (vi) by any combination of the foregoing
methods of payment under applicable law. In addition, the consideration for
shares acquired upon exercise of options granted under the 1998 Stock Plan
may consist of a reduction in the amount of any Company liability to the
optionee.
(4) Twenty-five percent (25%) of the shares issuable upon exercise of options
granted under the Company's 1995 Stock Option Plan or 1998 Stock Plan
generally become vested on the first anniversary of the vesting commencement
date and the balance generally vests at the rate of 1/48th of such shares
for each month thereafter.
(5) This option was fully vested on date of grant.
Aggregate Option Exercises in Fiscal 1998 and December 31, 1998 Option Values
The following table sets forth, as to the Named Executive Officers,
information concerning stock options exercised during fiscal 1998 and the number
of shares subject to both exercisable and unexercisable stock options as of
December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Number of December 31, 1998(#) December 31, 1998($)(1)
Shares Acquired Value ---------------------------- --------------------------
Name on Exercise(#) Realized($)(2) Exercisable(3) Unexercisable Exercisable Unexercisable
- -------------------------------------- --------------- ------------ ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John W. Danner, Chairman of the Board
and Chief Executive Officer......... 113 $ 808 113 -- $ -- --
Stephen E. Recht, Chief Financial
Officer and Secretary............... 10,000 183,126 173,692 -- 2,702,832 --
9,600 162,000 -- --
Rick E. D. Jackson IV, Vice President
of Marketing........................ 8,700 146,813 164,252 -- 2,445,084 --
Martin G. Lane-Smith, Vice President
of Engineering...................... 10,000 168,750 209,374 78,021 3,273,104 316,960
John K. Donnelly, Vice President of
North American Sales................ 1,900 32,063 28,097 -- 872,367 --
Jitendra Valera, Vice President and
General Manager of Europe........... 4,500 82,406 88,905 -- 872,367 --
</TABLE>
- ------------
(1) Represents the difference between the fair market value of the shares of
common stock underlying the options at December 30, 1998, $16 per share (the
closing price of the common stock on the last trading day of fiscal 1998 as
reported by the Nasdaq National Market) less the corresponding exercise
price of such options.
(2) The amount set forth represents the difference between the fair market value
of the shares on the date of exercise and the exercise price of the option.
(3) The option shares are immediately exercisable, subject to the Company's
repurchase option at the original exercise price upon the optionee's
cessation of service prior to vesting in such option shares. The repurchase
option generally lapses or the option shares generally vest as follows: 25%
of the option shares vest upon the completion of one year of service from
the vesting commencement date and an additional 1/48th of such shares become
exercisable each month thereafter.
Employee Benefit Plans
1995 STOCK OPTION PLAN. The Company's 1995 Stock Option Plan (the "1995
Plan") was adopted by the Board of Directors in September 1995 and was approved
by the Company's stockholders in October 1995. The 1995 Plan provides for grants
of incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), to employees (including officers
and employee directors) and nonstatutory stock options to employees (including
officers and employee directors) and consultants of the Company. Directors who
are not also employees are not eligible to receive grants under the 1995 Plan
once the Company registers any class of any equity security pursuant to the
Exchange Act. The
63
<PAGE>
purposes of the 1995 Plan are to attract and retain the best available personnel
for positions of substantial responsibility, to provide additional incentive to
employees and consultants of the Company and its subsidiaries and to promote the
success of the Company's business. The 1995 Plan is administered by the Board of
Directors or by a committee appointed by the Board which identifies optionees
and determines the terms of options granted, including the exercise price,
number of shares subject to the option and the exercisability thereof.
The terms of options granted under the 1995 Plan may not exceed ten years.
The term of all incentive stock options granted to an optionee who, at the time
of grant, owns stock representing more than 10% of the voting power of all
classes of stock of the Company or a parent or subsidiary of the Company (a "Ten
Percent Stockholder"), may not exceed five years, however. Generally, options
granted under the 1995 Plan vest and become exercisable starting one year after
the date of grant, with 25% of the shares subject to the option becoming
exercisable at that time and an additional 1/48th of such shares becoming
exercisable each month thereafter. Holders of options granted under the 1995
Plan may exercise their options prior to complete vesting of shares, provided
that such holders enter into a restricted stock purchase agreement granting the
Company an option to repurchase any unvested shares at a price per share equal
to the original exercise price per share for the option in the event of a
termination of the optionee's employment or consulting relationship. The
exercise price of incentive stock options granted to an employee under the 1995
Plan must be at least equal to the fair market value of the shares on the date
of grant. The exercise price of any incentive stock option granted to a Ten
Percent Stockholder must equal at least 110% of the fair market value of the
common stock on the date of grant. The exercise price of nonstatutory stock
options granted to a Ten Percent Stockholder under the 1995 Plan must be no less
than 110% of the fair market value of the common stock on the date of grant. The
exercise price of nonstatutory stock options granted to a non-Ten Percent
Stockholder may be no less than 85% of the fair market value of the common stock
on the date of grant for non-Ten Percent Stockholder employees and consultants.
The consideration for exercising any incentive stock option or any nonstatutory
stock option is determined by the Board of Directors and may consist of (i)
cash, (ii) check, (iii) promissory note, (iv) delivery of already-owned shares
of the Company's common stock subject to certain conditions, (v) delivery of a
properly executed exercise notice together with irrevocable instructions to a
broker to promptly deliver to the Company the amount of sale or loan proceeds
required to pay the exercise price or (vi) any combination of the foregoing
methods of payment under applicable law.
No option granted under the 1995 Plan may be transferred by the optionee
other than by will or the laws of descent or distribution, and each option may
be exercised, during the lifetime of the optionee, only by such optionee. An
optionee whose relationship with the Company or any related corporation ceases
for any reason (other than death or permanent and total disability) may exercise
options in the three-month period following such cessation (unless such options
terminate or expire sooner by their terms). In the event of a proposed sale of
all or substantially all of the Company's assets or merger of the Company with
or into another corporation, all outstanding options may either be assumed or an
equivalent option may be substituted by the surviving entity. If such options
are not assumed or substituted, each optionee may exercise options as to all of
the shares subject to the option agreement, including shares as to which such
options would not otherwise be exercisable and the options become fully vested,
or to the extent such options have been exercised and unvested shares remain
subject to a restricted stock purchase agreement, the Company's repurchase
option will lapse entirely. In the event that the options become fully vested in
connection with a sale of assets or merger of the Company, the optionees will be
notified that the options are fully vested for a period of fifteen (15) days
from the date of such notice, and that the options will terminate upon the
expiration of such period.
As of February 5, 1999, 1,527,797 shares of common stock had been issued
upon exercise of options outstanding under the 1995 Plan. Options to purchase
1,473,291 shares of common stock at a weighted average exercise price of $2.67
were also outstanding. The Company has not granted options to purchase common
stock pursuant to the 1995 Plan since the closing of the Company's initial
public offering.
1998 STOCK PLAN. The Company's 1998 Stock Plan (the "1998 Plan") was
adopted by the Board of Directors on April 23, 1998 and was approved by the
Company's stockholders effective as of May 8, 1998.
64
<PAGE>
The 1998 Plan provides for the grant of incentive stock options, within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), to employees (including officers and employee directors) and for the
grant of nonstatutory stock options and stock purchase rights ("SPRs") to
employees, directors and consultants. As of February 5, 1999, a total of
1,946,575 shares of common stock was available for issuance under the 1998 Plan.
At the beginning of each of the Company's fiscal years during the term of the
1998 Plan, the number of shares available for issuance under the 1998 Plan will
be increased by the least of (i) 1,000,000, (ii) 5% of the outstanding shares of
common stock at that time or (iii) a number determined by the Board. Unless
terminated sooner, the 1998 Plan will terminate automatically in April 2008.
The 1998 Plan may be administered by the Board of Directors or a committee
of the Board (as applicable, the "Administrator"). The Administrator has the
power to determine the terms of the options or SPRs granted, including the
exercise price of the option or SPR, the number of shares subject to each option
or SPR, the exercisability thereof, and the form of consideration payable upon
such exercise. In addition, the Administrator has the authority to amend,
suspend or terminate the 1998 Plan, provided that no such action may affect any
share of common stock previously issued and sold or any option previously
granted under the 1998 Plan.
Options and SPRs granted under the 1998 Plan are generally not transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1998 Plan must
generally be exercised within three months after the end of optionee's status as
an employee, director or consultant of the Company, or within twelve months
after such optionee's termination by death or disability, but in no event later
than the expiration of the option's term.
In the case of SPRs, unless the Administrator determines otherwise, the
Restricted Stock Purchase Agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment or consulting relationship with the Company for any reason (including
death or disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
The exercise price of all incentive stock options granted under the 1998
Plan must be at least equal to the fair market value of the common stock on the
date of grant. The exercise price of nonstatutory stock options and SPRs granted
under the 1998 Plan is determined by the Administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must be at least equal to the fair market value of the common stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of the Company's outstanding capital
stock, the exercise price of any incentive stock option granted must equal at
least 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other options
granted under the 1998 Plan may not exceed ten years.
The 1998 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option and SPR shall be assumed or an equivalent option substituted
for by the successor corporation. If the outstanding options and SPRs are not
assumed or substituted for by the successor corporation, the Administrator shall
provide for the optionee to have the right to exercise the option or SPR as to
all of the optioned stock, including shares as to which it would not otherwise
be exercisable. If an option or SPR becomes exercisable in full in connection
with a merger or sale of assets, the Administrator shall notify the optionee
that the option or SPR shall be fully exercisable for a period of fifteen (15)
days from the date of such notice, and the option or SPR will terminate upon the
expiration of such period.
As of February 5, 1999, 226 shares of common stock had been issued upon
exercise of options outstanding under the 1998 Plan. As of that date, options to
purchase 732,693 shares of common stock at a weighted average exercise price of
$18.31 were outstanding.
65
<PAGE>
1998 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1998 Employee Stock
Purchase Plan (the "1998 Purchase Plan") was adopted by the Board of Directors
on April 23, 1998 and was approved by the Company's stockholders effective as of
May 8, 1998. As of February 5, 1999, a total of 665,524 shares of common stock
was available for issuance under the 1998 Purchase Plan. At the beginning of
each of the Company's fiscal years during the term of the 1998 Plan, the number
of shares available for issuance under the 1998 Purchase Plan will be increased
by the least of (i) 750,000; (ii) 4% of the outstanding shares of common stock
at that time or (iii) a number determined by the Board.
The 1998 Purchase Plan, which is intended to qualify under Section 423 of
the Code, contains consecutive, overlapping, twenty-four month offering periods.
Each offering period includes four six-month purchase periods. The offering
periods generally start on the first trading day on or after February 1 and
August 1 of each year. However, the first such offering period commenced on June
12, 1998 (the first trading day after the effective date of the Company's
initial public offering) and ends on the last trading day on or before July 31,
2000.
Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, any employee who (i)
immediately after grant owns stock possessing 5% or more of the total combined
voting power or value of all classes of the capital stock of the Company, or
(ii) whose rights to purchase stock under all employee stock purchase plans of
the Company accrues at a rate which exceeds $25,000 worth of stock for each
calendar year may not be granted an option to purchase stock under the 1998
Purchase Plan. The 1998 Purchase Plan permits participants to purchase common
stock through payroll deductions of up to 10% of the participant's
"compensation." Compensation is defined as the participant's base straight time
gross earnings and commissions but excludes payments for overtime, shift
premium, incentive compensation, incentive payments, bonuses and other
compensation. The maximum number of shares a participant may purchase during a
single purchase period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 1998 Purchase Plan is 85% of the lower of the fair market
value of the common stock (i) at the beginning of the offering period or (ii) at
the end of the purchase period; provided, however, that under certain
circumstances, the purchase price may be adjusted to a price not less than 85%
of the lower of the fair market value on the common stock on (i) the date the
Company's stockholders approve an increase in shares reserved for issuance under
the 1998 Purchase Plan or (ii) at the end of the purchase period. In the event
the fair market value at the end of a purchase period is less than the fair
market value at the beginning of the offering period, the participants will be
withdrawn from the current offering period following exercise and automatically
re-enrolled in a new offering period. The new offering period will use the lower
fair market value as of the first date of the new offering period to determine
the purchase price for future purchase periods. Participants may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with the Company.
Rights granted under the 1998 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1998 Purchase Plan. The 1998 Purchase Plan provides
that, in the event of a merger of the Company with or into another corporation
or a sale of substantially all of the Company's assets, each outstanding option
may be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date will
be set that is before the date of the Company's proposed sale or merger. The
1998 Purchase Plan will terminate in April 2008. The Board of Directors has the
authority to amend or terminate the 1998 Purchase Plan, except that no such
action may adversely affect any outstanding options under the 1998 Purchase
Plan.
As of February 5, 1999, 78,071 shares of common stock had been purchased
under the 1998 Purchase Plan at a purchase price per share of $7.65.
66
<PAGE>
1998 DIRECTOR OPTION PLAN. The 1998 Director Option Plan (the "Director
Plan") was adopted by the Board of Directors on April 23, 1998 and was approved
by the Company's stockholders effective as of May 8, 1998. The Director Plan
provides for the grant of nonstatutory stock options to non-employee directors.
The Director Plan has a term of ten years, unless terminated sooner by the
Board. As of February 5, 1999, a total of 200,000 shares of common stock was
available for issuance under the Director Plan. At the beginning of each of the
Company's fiscal years during the term of the Director Plan, the number of
shares available for issuance under the Director Plan will be the lesser of (i)
200,000 or (ii) a number determined by the Board.
The Director Plan provides that each non-employee director shall
automatically be granted an option to purchase 25,000 shares of common stock
(the "First Option") on the later of (i) the effective date of the Director Plan
or (ii) the date which such person first becomes a non-employee director. In
addition to the First Option, each non-employee director shall automatically be
granted an option to purchase 5,000 shares (a "Subsequent Option") on the date
of each of the Company's annual meeting of stockholders, if on such date he or
she shall have served on the Board for at least six months. Each First Option
and Subsequent Option shall have a term of 10 years. The shares subject to the
First Option and Subsequent Option shall vest as to 25% of the optioned stock
one year from the date of grant, and 1/48 of the optioned stock shall vest each
month thereafter, provided the person continues to serve as a director on such
dates. Holders of options granted under the Director Plan may exercise their
options prior to complete vesting of shares, subject to such holders entering
into restricted stock purchase agreements granting the Company an option to
repurchase, any unvested shares at a price per share equal to the original
exercise price per share for the option in the event of a termination of the
optionee's directorship. The exercise price of each First Option and each
Subsequent Option shall be 100% of the fair market value per share of the common
stock on the date of grant.
In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each option may be assumed or an equivalent option
substituted for by the successor corporation. If an option is assumed or
substituted for by the successor corporation, it shall continue to vest as
provided in the Director Plan. However, if a non-employee director's status as a
director of the Company or the successor corporation, as applicable, is
terminated other than upon a voluntary resignation by the non-employee director,
each option granted to such non-employee director shall become fully vested and
exercisable upon such termination date. If the successor corporation does not
agree to assume or substitute for the option, each option shall become fully
vested and exercisable for a period of fifteen days from the date the Board
notifies the optionee of the option's full exercisability, after which period
the option shall terminate. Options granted under the Director Plan must be
exercised within three months of the end of the optionee's tenure as a director
of the Company, or within twelve months after such director's termination by
death or disability, but in no event later than the expiration of the option's
ten-year term. Options granted under the Director Plan are generally not
transferable by the optionee other than by will or the laws of descent and
distribution, and each option is exercisable, during the lifetime of the
optionee, only by such optionee.
As of February 5, 1995, no shares of common stock have been issued upon
exercise of options outstanding under the Director Plan. As of that date,
options to purchase 125,000 shares of common stock at a weighted average
exercise price of $11.08 were outstanding.
401(K) PLAN. The Company participates in a tax-qualified employee savings
and retirement plan (the "401(k) Plan") which covers all of the Company's
full-time employees who are at least 21 years of age. Pursuant to the 401(k)
Plan, eligible employees may defer up to 20% of their pre-tax earnings, subject
to the Internal Revenue Service's annual contribution limit. The 401(k) Plan
permits additional discretionary matching contributions by the Company on behalf
of all participants in the 401(k) Plan in such a percentage amount as may be
determined annually by the Board of Directors. To date, the Company has made no
such matching contributions. The 401(k) Plan is intended to qualify under
Section 401 of the Internal Revenue Code of 1986, as amended, so that
contributions by employees or by the Company to the 401(k) Plan, and income
earned on plan contributions, are not taxable to employees until withdrawn from
the 401(k) Plan, and so that contributions by the Company, if any, will be
deductible by the Company when made. The trustee under the 401(k) Plan, at the
direction of each participant, invests the assets of the 401(k) Plan in any of a
number of investment options.
67
<PAGE>
Limitation of Liability and Indemnification Matters
The Company's Amended and Restated Certificate of Incorporation, as amended,
limits the liability of directors to the maximum extent not prohibited by
Delaware law. Delaware law provides that a corporation's certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director for monetary damages for breach of their fiduciary
duties as directors, except for liability (i) for any breach of their duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
or (iv) for any transaction from which the director derived an improper personal
benefit.
The Company's Amended and Restated Bylaws provide that the Company shall
indemnify its directors, officers and employee benefit plan fiduciaries, and may
indemnify its employees and agents to the fullest extent permitted by law. The
Company believes that indemnification under its Amended and Restated Bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. The Company's Amended and Restated Bylaws also permit the Company to
advance expenses incurred by an indemnified director or officer in connection
with the defense of any action or proceeding arising out of such director's or
officer's status or service as a director or officer of the Company upon an
undertaking by such director or officer to repay such advances if it is
ultimately determined that such director or officer is not entitled to such
indemnification.
The Company has entered into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in the Company's
Amended and Restated Bylaws. These agreements, among other things, indemnify the
Company's directors and officers for certain expenses (including attorneys' fees
and associated legal expenses), judgments, fines and amounts paid in settlement
amounts if such settlement is approved in advance by the Company, which approval
shall not be unreasonably withheld, actually and reasonably incurred by any such
person in any action, suit, proceeding or alternative dispute resolution
mechanism arising out of such person's services as a director or officer of the
Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee benefit plan fiduciary, employee or agent of the
Company where indemnification will be required or permitted. The Company is not
aware of any threatened litigation or proceeding that might result in a claim
for such indemnification.
68
<PAGE>
CERTAIN TRANSACTIONS
Since the Company's inception in September 1995, there were no transaction
or series of similar transactions to which the Company was or is a party in
which the amount involved exceeded or exceeds $60,000 and in which any Director,
executive officer, holder of more than 5% of any class of the Company's voting
securities or any member of the immediate family of any of the foregoing persons
had or will have a direct or indirect material interest, other than the
transactions described below.
Equity and Convertible Debt Financings
INITIAL SALES OF COMMON STOCK TO FOUNDERS. In September 1995, the Company
issued and sold 1,636,363 shares of common stock to John W. Danner, the
Company's Chairman of the Board and Chief Executive Officer, and 818,181 shares
of common stock to Thomas A. Shields, the Company's former Vice President, Chief
Technology Officer, for an aggregate purchase price of $150,000 or approximately
$0.06 per share. In March 1997, the Company repurchased 89,212 and 356,850
shares of such common stock from Messrs. Danner and Shields, respectively, for
an aggregate purchase price of $98,134 or $0.22 per share. Mr. Shields resigned
from the Company in November 1998. See "--Employment and Severance Agreements."
COMMON STOCK AND BRIDGE NOTE FINANCING. From September through November
1995, the Company issued and sold an aggregate of 818,181 shares of common stock
for an aggregate purchase price of $49,999.98, or approximately $0.06 per share,
and issued bridge notes in the aggregate amount of $450,000, the principal and
interest of which were convertible into Preferred Stock (the "Common Stock and
Bridge Note Financing"). The investors in the common stock and Bridge Note
Financing included, among others, (1) a trust controlled by Alden E. and Ann
Danner, parents of John W. Danner, which trust purchased 163,636 shares of
common stock and lent the Company $90,000 at an annual simple interest rate of
5.91%, which principal and interest converted into Series A Preferred Stock in
the Company's Series A Preferred Stock financing (the "Series A Preferred Stock
Financing"); (2) Thomas A. Shields, Sr., the father of the Company's former Vice
President, Chief Technology Officer, who purchased 81,818 shares of common stock
and lent to the Company $45,000 at an annual simple interest rate of 5.91%,
which principal and interest converted into Series A Preferred Stock in the
Series A Preferred Stock Financing; and (3) a trust controlled by John D. D.
Kohler, a Director of the Company, which trust purchased 163,636 shares of
common stock and lent the Company $90,000 at an annual simple interest rate of
5.91%, which principal and interest converted into Series A Preferred Stock in
the Series A Preferred Stock Financing.
SERIES A PREFERRED STOCK FINANCING. In January and April 1996, the Company
issued and sold an aggregate of 4,404,578 shares of Series A Preferred Stock for
an aggregate purchase price of $4,448,623.78, or $1.01 per share. The investors
in such shares included, among others, (1) Vector Capital, L.P. ("Vector
Capital"), a general partner of which is Vector Capital Partners, L.L.C., of
which Alexander R. Slusky, a Director of the Company, is the Managing Member,
which limited partnership purchased 500,000 shares of Series A Preferred Stock;
(2) a trust controlled by Alden E. and Ann Danner, parents of John W. Danner,
which trust purchased 90,623 shares of Series A Preferred Stock; (3) a trust
controlled by Thomas A. Shields, Sr., which trust purchased 45,117 shares of
Series A Preferred Stock; (4) a trust controlled by John D. D. Kohler, which
trust purchased 90,609 shares of Series A Preferred Stock; (5) Larry C. Wear,
Vice President of Global Services, who purchased 49,504 shares of Series A
Preferred Stock; and (6) certain entities affiliated with an institutional
investor that was a holder of more than 5% of the Company's securities and that
held a seat on the Board of Directors of the Company until March 1998, which
entities purchased 3,073,738 shares of Series A Preferred Stock, all of which
stock was sold by such investor and its affiliated entities in March 1998 to
other institutional investors in the Company for an aggregate selling price of
approximately $3,688,485. Upon consummation of the Company's initial public
offering in June 1998, the outstanding shares of Series A Preferred Stock
automatically converted into an aggregate of 2,494,147 shares of common stock.
69
<PAGE>
SERIES B PREFERRED STOCK FINANCING. In March 1997, the Company issued and
sold an aggregate of 4,307,969 shares of Series B Preferred Stock at an
aggregate purchase price of $4,299,999.24, or approximately $1.00 per share. The
investors in such shares included, among others, (1) Vector Capital which
purchased 3,506,487 shares of Series B Preferred Stock; (2) Redleaf Venture I,
L.P. and Redleaf Associates I, L.P. (together, "Redleaf"), the general partner
of which is Redleaf Venture Management, L.L.C. of which John D. D. Kohler, a
Director of the Company, is a Managing Member, which limited partnerships
purchased an aggregate of 300,556 shares of Series B Preferred Stock; (3)
Jonathan D. Lazarus, a Director of the Company, who purchased 75,139 shares of
Series B Preferred Stock; and (4) certain entities affiliated with an
institutional investor that was a holder of more than 5% of the Company's
securities and that held a seat on the Board of Directors of the Company until
March 1998, which entities purchased 400,741 shares of Series B Preferred Stock,
all of which stock was sold by such investor and its affiliated entities in
March 1998 to other institutional investors in the Company for an aggregate
selling price of approximately $480,889. Upon consummation of the Company's
initial public offering, the outstanding shares of Series B Preferred Stock
automatically converted into an aggregate of 1,958,158 shares of common stock.
SERIES C PREFERRED STOCK FINANCING. In November 1997 and March 1998, the
Company issued and sold an aggregate of 3,887,978 shares of Series C Preferred
Stock for aggregate net proceeds to the Company of $8,683,000, or approximately
$2.24 per share. The investors in such shares included, among others, (1) London
Pacific Life & Annuity Company, an owner of more than 5% of the Company's common
stock, which purchased 2,437,241 shares of Series C Preferred Stock and (2)
Vector Capital, which purchased 669,571 shares of Series C Preferred Stock. Upon
consummation of the Company's initial public offering, the outstanding shares of
Series C Preferred Stock automatically converted into an aggregate of 1,767,261
shares of common stock.
Registration Rights Agreement
Certain holders of common stock have certain registration rights with
respect to their shares of common stock pursuant to a Second Amended and
Restated Registration Rights Agreement by and among the Company and certain of
its stockholders dated as of November 25, 1997. See "Description of Capital
Stock--Registration Rights of Certain Holders."
Employment and Severance Agreements
JITENDRA VALERA EMPLOYMENT AGREEMENT. In May 1998, the Company and Mr.
Valera, the Company's Vice President and General Manager of Europe, entered into
an employment agreement under which Mr. Valera is entitled to receive severance
benefits under certain circumstances. In the event Mr. Valera is involuntarily
terminated from the Company or a successor Company without cause within 12
months of a Change of Control, defined to include (i) the acquisition of the
Company, (ii) the merger or consolidation of the Company with any other
corporation, (iii) a sale of all or substantially all of the Company's assets or
(iv) the acquisition by any person of beneficial ownership of 50% or more of the
total voting power of the Company's then outstanding securities, Mr. Valera
would be entitled to a lump sum payment equal to 18 months of Mr. Valera's base
salary as in effect immediately prior to the Change of Control, which lump sum
payment would equal approximately $253,127, based on Mr. Valera's current base
salary. In the event of any other involuntary termination of Mr. Valera's
employment with less than six months notice, Mr. Valera would be entitled to
continued monthly payment of his base salary for six months following such
notice.
SUSAN ATHERTON EMPLOYMENT AGREEMENT. In April 1998, the Company and Ms.
Atherton, the Company's Vice President of Worldwide Sales, entered into an
employment agreement under which Ms. Atherton is entitled to receive severance
benefits under certain circumstances. Pursuant to her employment agreement, Ms.
Atherton was granted an option to purchase up to 176,802 shares of the Company's
common stock, subject to the Company's standard vesting provisions. In the event
Ms. Atherton is involuntarily terminated by the Company or a successor company
without cause within 12 months of a Change of Control, defined to include (i)
the acquisition of the Company, (ii) the merger or consolidation of the Company
with any other
70
<PAGE>
corporation or (iii) a sale of all or substantially all of the Company's assets,
Ms. Atherton would be entitled to a lump sum payment equal to 18 months of Ms.
Atherton's base salary as in effect immediately prior to the Change of Control,
which lump sum payment would equal approximately $159,386, based on Ms.
Atherton's current base salary.
STEPHEN E. RECHT EMPLOYMENT AND SEVERANCE AGREEMENT. In March 1998, the
Company and Mr. Recht, Chief Financial Officer and Secretary of the Company,
entered into an employment and severance agreement under which Mr. Recht is
entitled to receive certain benefits generally in the event Mr. Recht is
involuntarily terminated by the Company or a successor company without cause (i)
upon the acquisition of the Company, (ii) upon the merger or consolidation of
the Company with any other corporation, (iii) upon a sale of all or
substantially all of the Company's assets (each a "Change of Control") or (iv)
within 12 months of a Change of Control. Upon such a termination, Mr. Recht
would be entitled to (i) a total of 18 monthly payments equal to Mr. Recht's
monthly base salary as in effect immediately prior to the Change of Control,
currently $14,681, and (ii) reimbursements for a period of 18 months for the
cost of Mr. Recht's group health and dental plan coverage.
The Company also has granted options to certain of its executive officers
which are described further in the Management section under "Executive
Compensation" and "Option Grants in Fiscal 1998."
PROTEGE SOFTWARE PROFESSIONAL SERVICES AGREEMENT. In March 1997, the
Company and Protege Software (Holdings) Limited ("Protege") entered into a
professional services agreement (the "Professional Services Agreement") under
which Protege agreed to act as general manager for the Company in Europe. In
addition, Protege agreed to perform certain professional services for the
Company. In connection with the Professional Services Agreement, Jitendra Valera
the Company's Vice President and General Manager of Europe, served in such
capacity via the Professional Services Agreement as an employee of Protege from
March 1997 through May 1998. In May 1998, the Company and Protege amended the
Professional Services Agreement to, among other things, allow the Company to
hire Mr. Valera directly. Effective May 1998, Mr. Valera became an employee of
NetGravity Europe Limited and continued to serve as the Company's Vice President
and General Manager of Europe. See "Management--Executive Officers and
Directors." The Professional Services Agreement was terminated by the Company in
December 1998.
ASIA PACIFIC VENTURES CO. CONSULTANT AND REPRESENTATIVE AGREEMENT. In June
1998, the Company and Asia Pacific Ventures Co. ("Asia Pacific Ventures")
entered into a consultant and representative agreement (the "Consultant and
Representative Agreement") under which Asia Pacific Ventures agreed to advise
and represent the Company in Asia. In connection with the Consultant and
Representative Agreement, Douglas Kaplan, then an employee of Asia Pacific
Ventures, served as the Company's Vice President and General Manager of Asia
Pacific. See "Management--Executive Officers and Directors." The Consultant and
Representative Agreement was terminated by the Company in September 1998. Mr.
Kaplan is now an employee of the Company and continues to serve as its Vice
President and General Manager of Asia Pacific.
THOMAS A. SHIELDS SEPARATION AGREEMENT AND RELEASE OF ALL CLAIMS. In
December 1998, the Company and Mr. Shields, the Company's former Vice President,
Chief Technology Officer, entered into a separation agreement and release of all
claims pursuant to which Mr. Shields terminated his employment with the Company
(the "Termination Agreement"). Pursuant to the Termination Agreement, Mr.
Shields received a severance payment of $110,000 and will continue to be a
consultant to the Company until May 1999. In addition, pursuant to the
Termination Agreement, Mr. Shields generally agreed to release the Company from
any claims arising out of or relating to his employment with or his resignation
from the Company, and the Company agreed to release Mr. Shields from any claims
arising out of or relating to his employment with the Company.
71
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of February 5, 1999 and as adjusted
to reflect the sale of the 3,600,000 shares of common stock offered hereby for
(i) each person or entity who is known by the Company to own beneficially 5% or
more of the Company's outstanding common stock, (ii) each director of the
Company, (iii) each of the Named Executive Officers, (iv) each of the selling
stockholders and (v) all directors and executive officers of the Company as a
group. Each individual or entity named below has agreed with the Company and/or
the underwriters to not sell any common stock of the Company during the period
ending 90 days after the date of this prospectus.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially Owned
Prior to the Offering Number of After the Offering
------------------------- Shares Being -------------------------
Name and Address Number Percent(1) Offered Number Percent(1)
- --------------------------------------------------- ---------- ------------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Vector Capital, L.P.(2) ........................... 2,072,029 15.0% 25,000 2,047,029 12.4%
3000 Sand Hill Road
Building 4, Suite 235
Menlo Park, CA 94025
London Pacific Life & Annuity Company(3) .......... 1,107,836 8.0 -- 1,107,836 6.7
3109 Poplarwood Court, Suite 300
Raleigh, NC 24604
Thompson U.S. Inc. ................................ 470,360 3.3 470,360 -- *
Two Mill Road
P.O. Box 4679
Wilmington, DE 19807
John W. Danner(4).................................. 1,294,632 9.4 200,000 1,094,632 6.6
J. Scott Briggs(5)................................. 25,000 * -- 25,000 *
John D. D. Kohler(6)............................... 482,013 3.5 75,000 407,013 2.5
Amnon Landan(7).................................... 25,000 * -- 25,000 *
Jonathan D. Lazarus(8)............................. 77,335 * -- 77,335 *
Alexander R. Slusky(2)............................. 2,072,029 15.0 25,000 2,047,029 12.4
Stephen E. Recht(9)................................ 171,805 1.2 25,000 146,805 *
Rick E. D. Jackson IV(10).......................... 154,252 1.1 10,000 144,252 *
Martin G. Lane-Smith(11)........................... 212,023 1.5 20,000 192,023 1.2
John K. Donnelly(12)............................... 26,113 * 1,200 24,913 *
Jitendra Valera(13)................................ 90,755 * -- 90,755 *
Michael W. Davies(14).............................. 90,112 * 10,000 80,112 *
Larry C. Wear(15).................................. 168,374 1.2 25,000 143,374 *
All directors and executive officers as a group
(15 people)(16).................................. 5,066,470 34.2 391,200 4,675,270 28.3
</TABLE>
- ----------
* Represents beneficial ownership of less than 1% of the outstanding shares of
common stock.
(1) Applicable percentage ownership is based on 13,770,325 shares of common
stock outstanding as of February 5, 1999 and 16,554,325 shares outstanding
immediately following the completion of this offering (assuming no exercise
of the underwriters' over-allotment option and no exercise of options after
February 5, 1999). Beneficial ownership of shares is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes shares as to which a person holds sole or shared voting
or investment power. Shares of common stock subject to options that are
presently exercisable or exercisable within 60 days of February 5, 1999 are
deemed to be beneficially owned by the person holding such options for the
purpose of computing the percentage ownership of such person but are not
treated as outstanding for the purpose of computing the percentage ownership
of any other person. Unless otherwise noted, the address for the
stockholders named in this table is NetGravity, Inc., 1900 S. Norfolk
Street, Suite 150, San Mateo, California 94403.
72
<PAGE>
(2) Includes 2,072,029 shares beneficially owned by Vector Capital, L.P.
("Vector Capital"), Vector Capital Partners, L.L.C. ("VCP"), PBK Holdings,
Inc. ("PBK"), Alexander R. Slusky and Philip B. Korsant. Mr. Slusky is the
Managing Member of VPC, which is a general partner of Vector Capital. Mr.
Korsant is the president and sole shareholder of PBK, a general partner of
Vector Capital. Messrs. Slusky and Korsant disclaim beneficial ownership of
such shares except to the extent of their pecuniary interests in such shares
via VCP and PBK, respectively. Also includes 25,000 shares of common stock
issuable to Mr. Slusky upon exercise of a stock option exercisable within 60
days of February 5, 1999. The offered shares are being sold by Vector
Capital.
(3) This information was obtained from a Schedule 13G filed pursuant to the
Exchange Act.
(4) Includes 113 shares of common stock issuable upon exercise of a stock option
exercisable within 60 days of February 5, 1999.
(5) Consists of 25,000 shares of common stock issuable upon exercise of a stock
option exercisable within 60 days of February 5, 1999.
(6) Includes 187,389 shares held by the Kohler Family Trust, of which Mr. Kohler
is a trustee (the "Kohler Trust"). Also includes 3,303 shares held by
Redleaf Associates I, L.P. and 266,321 shares held by Redleaf Venture I,
L.P. (collectively, the "Redleaf Limited Partnerships") and 25,000 shares
issuable upon exercise of a stock option held by Mr. Kohler exercisable
within 60 days of February 5, 1999. Mr. Kohler, a Director of the Company,
is the Managing Member of Redleaf Venture Management, L.L.C., the General
Partner of the Redleaf Limited Partnerships. Mr. Kohler disclaims beneficial
ownership of the shares held by the Redleaf Limited Partnerships except to
the extent of his pecuniary interest therein. The offered shares are being
sold by the Kohler Trust.
(7) Consists of 25,000 shares of common stock issuable upon exercise of a stock
option exercisable within 60 days of February 5, 1999.
(8) Consists of 52,335 shares of common stock held by Lazarus Family Investments
LLC, of which Mr. Lazarus is a Managing Member, and 25,000 shares of common
stock issuable upon exercise of a stock option exercisable within 60 days of
February 5, 1999.
(9) Includes 161,692 shares issuable upon exercise of stock options exercisable
within 60 days of February 5, 1999.
(10) Consists of 154,252 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of February 5, 1999.
(11) Includes 106,699 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of February 5, 1999.
(12) Includes 23,745 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of February 5, 1999.
(13) Includes 88,905 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of February 5, 1999.
(14) Consists of 90,112 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of February 5, 1999.
(15) Includes 104,769 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of February 5, 1999.
(16) Includes 1,032,171 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of February 5, 1999.
73
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 50,000,000 shares of common stock, $0.001
par value, and 5,000,000 shares of undesignated Preferred Stock, $0.001 par
value. Immediately after the completion of this offering and assuming no
exercise of the underwriters' over-allotment option, based on the capitalization
of the Company as of February 5, 1999, there will be an aggregate of 16,508,765
shares of common stock outstanding, 2,330,984 shares of common stock will be
issuable upon exercise of outstanding options and no shares of Preferred Stock
will be issued and outstanding.
The following description of the Company's capital stock and certain
provisions of the Company's Amended and Restated Certificate of Incorporation,
as amended, and Amended and Restated Bylaws does not purport to be complete and
is subject to and qualified in its entirety by the Company's Amended and
Restated Certificate of Incorporation and Bylaws, which are included as exhibits
to the Registration Statement of which this prospectus forms a part, and by
applicable provisions of Delaware law.
Common Stock
As of February 5, 1999, there were 13,770,325 shares of common stock
outstanding that were held of record by approximately 316 stockholders. There
will be 16,508,765 shares of common stock outstanding (assuming no exercise of
the underwriters' over-allotment option and no exercise of options then
outstanding) after giving effect to the sale of common stock offered to the
public hereby. The holders of common stock are entitled to one vote per share
held of record on all matters submitted to a vote of stockholders. Holders of
common stock do not have cumulative voting rights, and, therefore, holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
Holders of the common stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. The Company has never declared or paid
cash dividends on its capital stock, expects to retain future earnings, if any,
for use in the operation and expansion of its business, and does not anticipate
paying any cash dividends in the foreseeable future. In addition, the Company's
bank line of credit agreement contains a restrictive covenant that limits the
Company's ability to pay cash dividends or make stock repurchases without the
prior written consent of the lender. See "Dividend Policy." In the event of the
liquidation, dissolution or winding up of the Company, the holders of common
stock are entitled to share ratably in all assets legally available for
distribution after payment of all debts and other liabilities and subject to the
prior rights of holders of Preferred Stock then outstanding, if any.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the Preferred
Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a series or the
designation of such series, without any further vote or action by the Company's
stockholders. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or preventing a change in
control of the Company without further action by the stockholders and may
adversely affect the market price of, and the voting and other rights of, the
holders of common stock. The issuance of Preferred Stock with voting and
conversion rights may adversely affect the voting power of the holders of common
stock, including the loss of voting control to others. The Company has no
current plans to issue any shares of Preferred Stock.
74
<PAGE>
Antitakeover Effects of Provisions of Certificate of Incorporation, Bylaws and
Delaware Law
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") provides that all stockholder actions must be effected at a duly
called annual or special meeting and may not be effected by written consent. The
Company's Amended and Restated Bylaws provide that, except as otherwise required
by law, special meetings of the stockholders can only be called pursuant to a
resolution adopted by a majority of the Board of Directors or by the chief
executive officer of the Company. In addition, the Amended and Restated Bylaws
establish an advance notice procedure for stockholder proposals to be brought
before an annual meeting of stockholders, including proposed nominations of
persons for election to the Board. Stockholders at an annual meeting may only
consider proposals or nominations specified in the notice of meeting or brought
before the meeting by or at the direction of the Board of Directors or by a
stockholder who was a stockholder of record on the record date for the meeting,
who is entitled to vote at the meeting and who has delivered timely written
notice in proper form to the Company's Secretary of the stockholder's intention
to bring such business before the meeting. The Certificate and the Amended and
Restated Bylaws provide that the affirmative vote of holders of at least a
majority of the total votes eligible to be cast in the election of directors is
required to amend, alter, change or repeal certain of their provisions.
The foregoing provisions of the Company's Certificate and Amended and
Restated Bylaws are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions which may involve an actual or threatened change of control of the
Company. Such provisions are designed to reduce the vulnerability of the Company
to an unsolicited acquisition proposal and, accordingly, could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions are also intended to discourage certain tactics
that may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for the Company's shares and,
consequently, may also inhibit fluctuations in the market price of the Company's
shares that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
the Company. See "Risk Factors--Our corporate governance structure may delay or
prevent our acquisition by another company."
Effect of Delaware Antitakeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by the employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or (iii) on or
subsequent to such date, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition involving the interested stockholder
of 10% or more of the assets of the corporation; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested
75
<PAGE>
stockholder; or (v) the receipt by the interested stockholder of the benefit of
any loans, advances, guarantees, pledges or other financial benefits provided by
or through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with or controlling or controlled by such entity or person. See "Risk
Factors--Our corporate governance structure may delay or prevent our acquisition
by another company."
Registration Rights of Certain Holders
After this offering, the holders of 4,656,510 shares of common stock may be
entitled upon expiration of lock-up agreements with the Underwriters to certain
rights with respect to the registration of such shares under the Securities Act.
Under the terms of the agreement between the Company and the holders of such
registrable securities, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other securities holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include shares
of such common stock therein. Holders of registration rights may also require
the Company to file a registration statement under the Securities Act at the
Company's expense with respect to their shares of common stock, and the Company
is required to use its best efforts to effect such registration. Further,
holders may require the Company to file registration statements on Form S-3 at
the Company's expense when such form becomes available for use to the Company.
All such registration rights are subject to certain conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares to be included in such registration.
Transfer Agent
The Transfer Agent and Registrar for the common stock is ChaseMellon
Shareholder Services. Its address is 235 Montgomery Street, 23rd Floor, San
Francisco, California 94109, and its telephone number at this location is (415)
743-1444.
Listing
The Company's common stock is traded on the Nasdaq National Market under the
trading symbol "NETG."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, based on shares outstanding as of February
5, 1999, the Company will have outstanding an aggregate of 16,508,765 shares of
common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options. Of these shares, the 3,600,000 shares
sold in this offering (assuming no exercise of the underwriters' over-allotment
option) will be freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), unless such
shares are purchased by "affiliates" of the Company as that term is defined in
Rule 144 under the Securities Act (the "Affiliates"). In addition, the 3,450,000
shares sold in the Company's initial public offering in June 1998 are currently
eligible to be resold immediately in the public market without restriction. Of
the remaining shares, all are freely tradeable, except for 5,810,231 shares of
common stock held by existing stockholders, which shares are either shares
subject to contractual lock-up restrictions and/or "restricted securities" as
that term is defined in Rule 144 under the Securities Act ("Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144 or 144(k) promulgated
under the Securities Act, which rules are summarized below.
Giving effect to the contractual restrictions described below and the
provisions of Rules 144 and 144(k), shares will be available for sale in the
public market as follows: (i) 10,698,534 shares will be eligible for immediate
sale on the date of this prospectus, (ii) 27,125 Restricted Shares will be
eligible for sale on
76
<PAGE>
March 20, 1999 (the one-year anniversary of their purchase from the Company or
an Affiliate) and (iii) 5,783,106 shares will be eligible for sale upon
expiration of the lock-up agreements 90 days after the date of this prospectus,
subject to the volume limitations described below.
All officers and directors of the Company, and the holders of five percent
or more of the Company's common stock have agreed not to sell, make any short
sale of, grant any option for the purchase of, or otherwise transfer or dispose
of, any shares of common stock or any securities convertible into or exercisable
or exchangeable for common stock for a period of 90 days after the date of this
prospectus, without the prior written consent of BancBoston Robertson Stephens.
BancBoston Robertson Stephens currently has no plans to release any portion of
the securities subject to lock-up agreements. When determining whether or not to
release shares from the lock-up agreements, BancBoston Robertson Stephens will
consider, among other factors, the stockholder's reasons for requesting the
release, the number of shares for which the release is being requested and
market conditions at the time.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year (including the holding period of any prior owner except an
Affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of common stock then outstanding (which will equal approximately 165,087
shares immediately after this offering); or (ii) the average weekly trading
volume of the common stock on the Nasdaq National Market during the four
calendar weeks preceding the filing of a notice on Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been an
Affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144; therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
Upon completion of this offering, the holders of 4,656,510 shares of common
stock, or their transferees, may be entitled to certain rights with respect to
the registration of such shares under the Securities Act. See "Description of
Capital Stock--Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by Affiliates)
immediately upon the effectiveness of such resignation.
The Company files registration statements on Form S-8 under the Securities
Act covering shares of common stock reserved for issuance under the Company's
1995 Plan, 1998 Plan, 1998 Director Plan and 1998 Purchase Plan. Accordingly,
shares registered under such registration statements are available, subject to
Rule 144 volume limitations applicable to Affiliates, for sale in the open
market upon exercise, unless such shares are subject to vesting restrictions
with the Company or the lock-up agreements described above. As of February 5,
1999, options to purchase 1,473,291 shares of common stock were outstanding
under the 1995 Plan, options to purchase 732,693 shares of common stock were
outstanding under the Company's 1998 Plan and options to purchase 125,000 shares
of common stock were outstanding under the 1998 Director Plan. See
"Management--Employee Benefit Plans."
77
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., NationsBanc Montgomery Securities LLC and
FAC/Equities, a division of First Albany Corporation, have severally agreed with
us and the selling stockholders, subject to the terms and conditions of the
underwriting agreement, to purchase the number of shares of common stock set
forth opposite their respective names below. The underwriters are committed to
purchase and pay for all shares if any are purchased.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
- --------------------------------------------------------------------------------- ----------
<S> <C>
BancBoston Robertson Stephens Inc................................................
NationsBanc Montgomery Securities LLC............................................
First Albany Corporation.........................................................
----------
Total........................................................................ 3,600,000
----------
----------
</TABLE>
The underwriters' representatives have advised us that the underwriters
propose to offer the shares of common stock to the public at the public offering
price set forth on the cover page of this prospectus and to certain dealers at
such price less a concession of not in excess of $ per share, of which $
may be reallowed to other dealers. After the public offering, the public
offering price, concession, and reallowance to dealers may be reduced by the
underwriters' representatives. No such reduction shall change the amount of
proceeds to be received by us as set forth on the cover page of this prospectus.
We have granted to the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to 540,000 additional
shares of common stock at the same price per share as will be paid for the
3,600,000 shares that the underwriters have agreed to purchase. To the extent
that the underwriters exercise such option, each of the underwriters will have a
firm commitment to purchase approximately the same percentage of such additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the 3,600,000 shares offered
hereby. If purchased, such additional shares will be sold by the underwriters on
the same terms as those on which the 3,600,000 shares are being sold.
The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act of 1933 and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
The Company, our directors, officers and certain of our other stockholders
have each agreed that, without the prior written consent of BancBoston Robertson
Stephens Inc. on behalf of the underwriters, during the period ending 90 days
after the date of this prospectus, we will not, directly or indirectly;
- Offer to sell, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock (whether
such shares or any such securities are then owned by such person or are
thereafter acquired directly from us); or
- Engage in any hedging or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
78
<PAGE>
The restrictions described in the previous paragraph do not apply to
- the sale to the underwriters of the shares of common stock under the
underwriting agreement;
- the issuance by the Company of shares of common stock upon the exercise of
an option or a warrant or the conversion of a security outstanding on the
date of this prospectus which is described in the prospectus;
- transactions by any person other than the Company relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares of common stock; or
- issuances of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans in existence on the
date of the prospectus and consistent with past practices.
The underwriters have informed us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
Stabilization Disclosure
The underwriters' representatives have advised us that, pursuant to
Regulation M under the Securities Act of 1933, certain persons participating in
the offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids which may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common stock on behalf of
the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for or the purchase
of the common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with the offering. A "penalty bid" is
an arrangement permitting the underwriters' representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with the offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the underwriters'
representatives in a syndicate covering transaction and has therefore not been
effectively placed by such underwriter or syndicate member. The underwriters'
representatives have advised us that such transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
Regulation M/Passive Market Disclosure
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the business day prior to
the pricing of the offering before the commencement of offers or sales of the
common stock. Passive market makers must comply with applicable volume and price
limitations and must be identified as such. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.
79
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters in connection with the offering will be
passed upon by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California.
EXPERTS
The consolidated financial statements and related schedule of NetGravity,
Inc. and subsidiaries as of December 31, 1997 and 1998 and for each of the years
in the three-year period ended December 31, 1998, have been included herein and
in the Registration Statement in reliance upon the reports of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
Effective March 1997, the Company's Board of Directors engaged KPMG LLP
("KPMG") as the Company's principal accountants to audit the Company's financial
statements. Prior to such engagement, KPMG and the Company discussed matters
including the application of accounting principles and auditing standards. Such
discussions occurred in the normal course of business, and KPMG's responses were
not a condition to its engagement by the Company. Ernst & Young LLP ("Ernst &
Young") served as the Company's independent auditors from the Company's
inception until the Company's dismissal of Ernst & Young effective March 1997,
which dismissal was approved by the Company's Board of Directors. Ernst & Young
performed the first full fiscal year audit of the Company's financial statements
for the then fiscal year ended March 31, 1996 (the "March 31, 1996 Audit"),
which was the only audit of the Company performed by Ernst & Young. The report
of Ernst & Young on the financial statements of the Company prepared in
connection with the March 31, 1996 Audit did not contain an adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. Furthermore, in connection with the March 31,
1996 Audit and during the subsequent interim period prior to the dismissal of
Ernst & Young, there were no disagreements between Ernst & Young and the Company
on any matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, if not resolved to the
satisfaction of Ernst & Young, would have caused Ernst & Young to make reference
to the subject matter of such disagreements in connection with its report.
ADDITIONAL INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act, as amended (the "Exchange Act"), and in accordance therewith is
obligated to file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Company has filed
with the Commission a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended, with respect to the
securities offered hereby. This prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
common stock, reference is made to the Registration Statement and the exhibits
and schedules filed as a part thereof. Statements contained in this prospectus
as to the contents of any contract or any other document referred to are not
necessarily complete. In each instance, reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement, and each
such statement is qualified in all respects by such reference. The Registration
Statement, including exhibits and schedules thereto, as well as all reports,
proxy statements and other information filed by the Company with the Commission
pursuant to the Exchange Act may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
Seven World Trade Center, Suite 1300, New York, New York 10048 and Northwestern
Atrium Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such materials may be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Information concerning the Company is also
80
<PAGE>
available for inspection at the offices of the Nasdaq National Market, Reports
Section, 1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's Web site is http://www.sec.gov. The Company
intends to furnish its stockholders with annual reports containing audited
consolidated financial statements and to make available quarterly unaudited
summary financial information for the first three fiscal quarters of each fiscal
year.
81
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.............. F-3
Consolidated Statements of Operations for the Years ended December 31,
1996, 1997 and 1998..................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
ended December 31, 1996, 1997 and 1998.................................. F-5
Consolidated Statements of Cash Flows for the Years ended December 31,
1996, 1997 and 1998..................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
NetGravity, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of NetGravity,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NetGravity, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
<TABLE>
<S> <C>
KPMG LLP
San Francisco, California
January 27, 1999
</TABLE>
F-2
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................................................. $ 5,637 $ 10,236
Short-term investments..................................................................... -- 10,563
Accounts receivable, net of allowances of $223 and $202 at December 31, 1997 and 1998,
respectively.............................................................................. 2,739 6,311
Prepaid expenses and other current assets.................................................. 155 778
--------- ---------
Total current assets..................................................................... 8,531 27,888
Property and equipment, net.................................................................. 1,356 3,473
Other assets, net............................................................................ -- 2,059
--------- ---------
$ 9,887 $ 33,420
--------- ---------
--------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of notes payable........................................................... $ 1,140 $ 618
Accounts payable........................................................................... 305 898
Accrued liabilities........................................................................ 1,344 2,867
Deferred revenue........................................................................... 3,520 5,800
--------- ---------
Total current liabilities................................................................ 6,309 10,183
Notes payable, less current portion.......................................................... 727 1,109
Commitments
Stockholders' equity:
Convertible preferred stock; $0.001 par value; 26,540,194 shares authorized; 11,149,788
shares issued and outstanding at December 31, 1997; 5,000,000 shares authorized; none
issued and outstanding at December 31, 1998............................................... 11 --
Common stock, $0.001 par value; 35,000,000 shares authorized; 3,979,125 shares issued and
outstanding at December 31, 1997; 50,000,000 shares authorized; 13,589,894 shares issued
and outstanding at December 31, 1998...................................................... 4 14
Additional paid-in capital................................................................. 16,209 46,817
Deferred stock compensation................................................................ (1,669) (1,706)
Accumulated deficit........................................................................ (11,704) (22,997)
--------- ---------
Total stockholders' equity............................................................... 2,851 22,128
--------- ---------
$ 9,887 $ 33,420
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Software licenses.............................................................. $ 1,262 $ 2,901 $ 4,115
Software upgrades.............................................................. 107 1,123 2,394
Consulting and support......................................................... 570 2,334 4,637
Transactional services......................................................... -- -- 411
--------- --------- ---------
Total revenues............................................................... 1,939 6,358 11,557
--------- --------- ---------
Cost of revenues:
Cost of software licenses...................................................... -- 76 63
Cost of consulting and support................................................. 702 2,496 4,521
Cost of transactional services................................................. -- -- 644
--------- --------- ---------
Total cost of revenues....................................................... 702 2,572 5,228
--------- --------- ---------
Gross profit................................................................. 1,237 3,786 6,329
--------- --------- ---------
Operating costs and expenses:
Research and development....................................................... 1,764 3,033 4,639
Selling and marketing.......................................................... 2,839 6,073 10,351
General and administrative..................................................... 1,315 1,552 3,172
--------- --------- ---------
Total operating costs and expenses........................................... 5,918 10,658 18,162
--------- --------- ---------
Loss from operations......................................................... (4,681) (6,872) (11,833)
Other income (expense), net...................................................... 54 (10) 540
--------- --------- ---------
Net loss..................................................................... $ (4,627) $ (6,882) $ (11,293)
--------- --------- ---------
--------- --------- ---------
Basic and diluted net loss per share............................................. $ (2.19) $ (2.46) $ (1.28)
--------- --------- ---------
--------- --------- ---------
Shares used in per share calculation............................................. 2,111 2,799 8,823
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
(In Thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------------- ---------------------- Paid-In
Shares Amount Shares Amount Capital
--------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1995.................................... -- -- 4,364 5 178
Issuance of common stock upon exercise of stock options............. -- -- 310 -- 62
Repurchases of common stock......................................... -- -- (439) (1) (27)
Compensation expense related to non-employee option grants.......... -- -- -- -- 8
Issuance of Series A preferred stock, net of issuance costs of
$15............................................................... 4,405 4 -- -- 4,429
Net loss............................................................ -- -- -- -- --
--------- --- --------- --- -----------
Balances as of December 31, 1996.................................... 4,405 4 4,235 4 4,650
Issuance of common stock for cash................................... -- -- 17 -- 4
Issuance of common stock upon exercise of stock options............. -- -- 301 -- 67
Compensation expense related to non-employee option grants.......... -- -- -- -- 120
Deferred compensation related to grants of stock options............ -- -- -- -- 1,784
Amortization of deferred compensation............................... -- -- -- -- --
Repurchases of common stock in connection with revaluation.......... -- -- (446) -- (98)
Repurchases of common stock......................................... -- -- (126) -- (26)
Issuance of Series B preferred stock, net of issuance costs of
$18............................................................... 4,308 4 -- -- 4,277
Issuance of Series C preferred stock, net of issuance costs of
$566.............................................................. 2,437 3 -- -- 5,431
Net loss............................................................ -- -- -- -- --
--------- --- --------- --- -----------
Balances as of December 31, 1997.................................... 11,150 $ 11 3,979 $ 4 $ 16,209
Issuance of common stock upon exercise of stock options............. -- -- 204 -- 73
Repurchases of common stock......................................... -- -- (102) -- (23)
Issuance of Series C preferred stock, net of issuance costs of $1... 1,451 2 -- -- 3,247
Issuance of common stock upon exercise of warrants.................. -- -- 28 -- 7
Issuance of restricted common stock for cash........................ -- -- 11 -- 2
Conversion of Preferred Stock to Common............................. (12,601) (13) 6,220 7 6
Issuance of common stock in initial public offering................. -- -- 3,250 3 25,869
Deferred compensation related to grants of stock options............ -- -- -- -- 1,427
Amortization of deferred stock compensation......................... -- -- -- -- --
Net loss............................................................ -- -- -- -- --
--------- --- --------- --- -----------
Balances as of December 31, 1998.................................... -- -- 13,590 $ 14 $ 46,817
--------- --- --------- --- -----------
--------- --- --------- --- -----------
<CAPTION>
Total
Deferred Stockholders'
Stock Accumulated Equity
Compensation Deficit (Deficit)
------------- ------------ ------------
<S> <C> <C> <C>
Balances as of December 31, 1995.................................... -- (195) (12)
Issuance of common stock upon exercise of stock options............. -- -- 62
Repurchases of common stock......................................... -- -- (28)
Compensation expense related to non-employee option grants.......... -- -- 8
Issuance of Series A preferred stock, net of issuance costs of
$15............................................................... -- -- 4,433
Net loss............................................................ -- (4,627) (4,627)
------------- ------------ ------------
Balances as of December 31, 1996.................................... -- (4,822) (164)
Issuance of common stock for cash................................... -- -- 4
Issuance of common stock upon exercise of stock options............. -- -- 67
Compensation expense related to non-employee option grants.......... -- -- 120
Deferred compensation related to grants of stock options............ (1,784) -- --
Amortization of deferred compensation............................... 115 -- 115
Repurchases of common stock in connection with revaluation.......... -- -- (98)
Repurchases of common stock......................................... -- -- (26)
Issuance of Series B preferred stock, net of issuance costs of
$18............................................................... -- -- 4,281
Issuance of Series C preferred stock, net of issuance costs of
$566.............................................................. -- -- 5,434
Net loss............................................................ -- (6,882) (6,882)
------------- ------------ ------------
Balances as of December 31, 1997.................................... $ (1,669) $ (11,704) $ 2,851
Issuance of common stock upon exercise of stock options............. -- -- 73
Repurchases of common stock......................................... -- -- (23)
Issuance of Series C preferred stock, net of issuance costs of $1... -- -- 3,249
Issuance of common stock upon exercise of warrants.................. -- -- 7
Issuance of restricted common stock for cash........................ -- -- 2
Conversion of Preferred Stock to Common............................. -- -- --
Issuance of common stock in initial public offering................. -- -- 25,872
Deferred compensation related to grants of stock options............ (1,427) -- --
Amortization of deferred stock compensation......................... 1,390 -- 1,390
Net loss............................................................ -- (11,293) (11,293)
------------- ------------ ------------
Balances as of December 31, 1998.................................... $ (1,706) $ (22,997) $ 22,128
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................................... $ (4,627) $ (6,882) $ (11,293)
Adjustments to reconcile net loss to net cash used in operating activities:................
Depreciation............................................................................. 172 540 965
Amortization of intangibles.............................................................. -- -- 222
Amortization of deferred stock compensation.............................................. -- 115 1,390
Compensation from grant of non-employee stock options.................................... 8 120 --
Changes in operating assets and liabilities:
Accounts receivable, net............................................................... (1,218) (1,521) (3,572)
Prepaid expenses and other assets...................................................... (178) 27 (623)
Accounts payable....................................................................... 239 48 593
Accrued liabilities.................................................................... 635 678 1,523
Deferred revenue....................................................................... 1,718 1,802 2,280
--------- --------- ---------
Net cash used in operating activities................................................ (3,251) (5,073) (8,515)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures....................................................................... (810) (1,201) (3,082)
Purchases of short-term investments........................................................ (2,705) (2,466) (10,563)
Proceeds from maturities of short-term investments......................................... 2,705 2,466 --
Acquisition of intangibles................................................................. -- -- (2,000)
Other assets............................................................................... (44) 44 (281)
--------- --------- ---------
Net cash used in investing activities................................................ (854) (1,157) (15,926)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from notes payable................................................................ 683 1,185 1,000
Repayment of notes payable................................................................. (450) -- (1,140)
Proceeds from issuance of preferred stock, net............................................. 4,433 9,715 3,249
Proceeds from issuance of common stock..................................................... 62 71 25,954
Repurchases of common stock................................................................ (28) (124) (23)
--------- --------- ---------
Net cash provided by financing activities............................................ 4,700 10,847 29,040
--------- --------- ---------
Net increase in cash and cash equivalents.................................................... 595 4,617 4,599
Cash and cash equivalents at beginning of year............................................... 425 1,020 5,637
--------- --------- ---------
Cash and cash equivalents at end of year..................................................... $ 1,020 $ 5,637 $ 10,236
--------- --------- ---------
--------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid for interest................................................................... $ 18 $ 91 $ 118
--------- --------- ---------
--------- --------- ---------
Non-cash financing activities:
Deferred compensation cost on employee stock option grants............................... $ -- $ 1,784 $ 1,427
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
(1) Description of Business and Summary of Significant Accounting Policies
DESCRIPTION OF BUSINESS
NetGravity, Inc. (the Company), a Delaware corporation, was incorporated in
September 1995. The Company is a leading provider of interactive marketing
solutions. The Company maintains its US headquarters in California. The Company
incorporated a subsidiary in the UK in April 1997 for its European operations
and incorporated subsidiaries in Japan in April 1998 and in Hong Kong in October
1998 for its Asia Pacific operations.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated on consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments with remaining maturities of
three months or less at the date of purchase.
INVESTMENTS
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. SFAS
No. 115 requires entities to classify investments in debt and equity securities
with readily determined fair values as "held-to-maturity," "available-for-sale"
or "trading" and establishes accounting and reporting requirements for each
classification. Management determines the appropriate classification of
investment securities at the time of purchase and reevaluates such designation
as of each balance sheet date. As of December 31, 1998, all investment
securities were designated as "available-for-sale." Available-for-sale
securities are carried at fair value based on quoted market prices, with
unrealized gains and losses, if material, reported as a component of accumulated
other comprehensive income (loss) in stockholders' equity.
Realized gains and losses and declines in value judged to be
other-than-temporary for available-for-sale securities are included in the
consolidated statements of operations. There have been no such gains, losses or
declines through December 31, 1998. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities classified
as available-for-sale are included in interest income.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation of property and equipment is provided over the estimated useful
lives of the respective assets, estimated to be three years on a straight-line
method.
SOFTWARE DEVELOPMENT COSTS
In accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED, development costs related to
the software products are expensed as incurred until the technological
feasibility of the product has been established. Technological feasibility in
the Company's
F-7
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 1996, 1997 and 1998
(1) Description of Business and Summary of Significant Accounting Policies
(Continued)
circumstances occurs when a working model is completed. The Company believes its
process for developing software is essentially completed concurrent with the
establishment of technological feasibility and, accordingly, no research and
development costs have been capitalized to date.
REVENUE RECOGNITION
The Company records an account receivable and deferred revenue upon shipment
and invoicing of a software license to a customer. The Company recognizes
software license revenue upon completion of the product installation which the
Company's management has generally determined to occur at the point in time at
which customers begin "serving ads" utilizing the Company's software. A portion
of the initial software license fee is attributed to the customer's right to
receive, at no additional charge, software upgrades released during the
subsequent twelve months. Revenues attributable to software upgrades are
deferred and recognized ratably over the period covered by the software license
agreement, generally one year. Revenue from consulting services are recognized
as the services are performed. Customer-support revenue is deferred and
recognized ratably over the period covered by the customer support agreement,
generally one year.
Revenue from transactional services is primarily comprised of fees from
AdCenter advertising management outsourcing services, as well as fees from the
Company's Global Profile Service, which licenses the use of data to customers.
Fees derived from transactional services are recognized as the services are
rendered.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, SOFTWARE REVENUE RECOGNITION (SOP 97-2).
Effective January 1, 1998, the Company adopted SOP 97-2. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements
such as software products, upgrades, enhancements, post-contract customer
support, installation and training to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence which is specific to the vendor. The revenue allocated to software
products, including specified upgrades or enhancements, generally is recognized
upon delivery of the products. The revenue allocated to unspecified upgrades and
updates and post contract customer support generally is recognized as the
services are performed. If evidence of the fair value for all elements of the
arrangement do not exist, all revenue from the arrangement is deferred until
such evidence exists or until all elements are delivered. There was no material
change to the Company's accounting for revenues as a result of the adoption of
SOP 97-2.
In February 1998, the Accounting Standards Executive Committee (AcSEC) of
the AICPA issued SOP 98-4, "DEFERRAL OF THE EFFECTIVE DATE OF SOP 97-2". The SOP
defers the effective date for applying the provisions regarding vendor-specific
objective evidence ("VSOE") of fair value until the AcSEC can reconsider what
constitutes such VSOE. There was no material change to the Company's accounting
for revenues as a result of the adoption of SOP 98-4.
In December 1998, AcSEC issued SOP 98-9 "SOFTWARE REVENUE RECOGNITION, WITH
RESPECT TO CERTAIN ARRANGEMENTS", which requires recognition of revenue using
the "residual method" in a multiple element arrangement when fair value does not
exist for one or more of the delivered elements in the arrangement. Under the
"residual method", the total fair value of the undelivered elements is deferred
and subsequently recognized in accordance with SOP 97-2. The Company does not
expect a material change to its accounting for revenues as a result of the
provisions of SOP 98-9.
F-8
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 1996, 1997 and 1998
(1) Description of Business and Summary of Significant Accounting Policies
(Continued)
Advances on commissions are paid upon receipt of a firm sales order for an
initial software license. These advances totaled $0 and $259,000 at December 31,
1997 and 1998, respectively, and are included in other current assets in the
accompanying consolidated balance sheets. Advances on commissions are expensed
as selling and marketing expenses when the related deferred revenue is
recognized.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
CONCENTRATION OF CREDIT RISK
Accounts receivable potentially subject the Company to concentrations of
credit risk. The Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral for accounts
receivable. When required, the Company maintains allowances for credit losses,
and to date such losses have been within management's expectations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's cash, cash equivalents, accounts
receivable, accounts payable and notes payable approximate their carrying values
due to the short maturity or variable-rate structure of those instruments.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of their carrying amount or fair value less cost to
sell.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation arrangements using the
intrinsic-value method pursuant to APB Opinion No. 25. As such, compensation
expense is recorded on the date of grant when the
F-9
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 1996, 1997 and 1998
(1) Description of Business and Summary of Significant Accounting Policies
(Continued)
fair value of the underlying common stock exceeds the exercise price for stock
options or the purchase price for issuance or sales of common stock. Pursuant to
SFAS No. 123, the Company discloses the pro forma effects of using the fair
value method of accounting for stock-based compensation arrangements.
COMPREHENSIVE LOSS
NetGravity has no significant components of other comprehensive loss and,
accordingly, the comprehensive loss is the same as net loss for all periods.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. Such costs are included in
selling and marketing expense and totalled approximately $783,000, $831,000 and
$1,033,000 during the years ended December 31, 1996, 1997, and 1998,
respectively.
FOREIGN CURRENCY TRANSACTIONS
The functional currency of the Company's UK, Japan and Hong Kong
subsidiaries is the US dollar. Resulting foreign currency gains and losses are
included in operating results and have not been significant in any period
presented.
PER SHARE INFORMATION
Basic and diluted net loss per share are computed using the weighted average
number of outstanding shares of common stock.
Net loss per share for the year ended December 31, 1998 does not include the
effect of approximately 1,989,545 stock options with a weighted average exercise
price of $4.21 per share, or 463,468 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 year ended December 31, 1997 does not include the
effect of approximately 11,150,000 (5,563,000 on an as-if converted basis)
shares of convertible preferred stock outstanding, 1,312,399 stock options with
a weighted average exercise price of $0.22 per share, 15,908 common stock
warrants with a weighted average exercise price of $0.22 per share, or 1,171,546
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.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The Company must adopt SFAS No. 133 by July 1,
1999. Management does not believe the adoption of SFAS No. 133 will have a
material effect on the financial position or results of operations of the
Company.
F-10
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 1996, 1997 and 1998
(2) Balance Sheet Components
SHORT-TERM INVESTMENTS
The following is a summary of short-term investments (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Cash equivalents:
Money market funds................................................... $ 5,637 $ 10,236
--------- ---------
Short-term investments:
Corporate Bonds...................................................... -- 10,563
--------- ---------
$ 5,637 $ 20,799
--------- ---------
--------- ---------
</TABLE>
Through December 31, 1998, the difference between the fair value and the
amortized cost of available-for-sale securities was not significant; therefore,
no unrealized gains or losses have been recorded in stockholders' equity. As of
December 31, 1998, the average portfolio duration and contractual maturity was
less than three months.
PURCHASE OF INTANGIBLE ASSETS
In September 1998, the Company entered into an agreement with MatchLogic,
Inc., a subsidiary of Excite, Inc. As part of this agreement, the Company paid
MatchLogic $2 million for the limited, non-exclusive right to use certain of
MatchLogic's proprietary consumer profile databases for certain purposes. This
transaction has been accounted for as a purchase of an intangible asset. The
cost of this intangible asset has been capitalized, is included in other assets
on the Company's consolidated balance sheet, and is being amortized over a
three-year period.
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 1997
and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Computer equipment and software........................................... $ 1,837 $ 3,228
Furniture and fixtures.................................................... 236 423
Leasehold improvements.................................................... -- 1,343
--------- ---------
2,073 4,994
Accumulated depreciation.................................................. (717) (1,521)
--------- ---------
Property and equipment, net............................................. $ 1,356 $ 3,473
--------- ---------
--------- ---------
</TABLE>
(3) Notes Payable
The Company had a revolving credit facility with a bank in the amount of
$1.0 million which bore interest at the prime rate (8.50% as of December 31,
1997) plus 0.75%, and expired in May 1998.
F-11
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 1996, 1997 and 1998
(3) Notes Payable (Continued)
Borrowings were limited to the lesser of $1.0 million or 70% of the net amount
of eligible accounts receivable and were secured by the Company's accounts
receivable. As of December 31, 1997 and December 31, 1998, borrowings under this
credit facility were $655,000 and $0, respectively.
The Company has an equipment line of credit with a bank that provides up to
$1.0 million, bears interest at the prime rate (7.75% as of December 31, 1998),
and expires in June 2000. The line of credit is secured by the Company's fixed
assets. As of December 31, 1997 and 1998, $584,000 and $350,000, respectively,
were outstanding under this agreement with the principal amount due in 30
monthly installments of $19,467 beginning December 31, 1997.
The Company also has a second equipment line of credit with the same bank
that provides up to $1.2 million, bears interest at the prime rate, and expires
in June 2000. The line of credit is secured by the Company's fixed assets. As of
December 31, 1997 and 1998, $628,000 and $377,000, respectively, were
outstanding under this agreement with the principal amount due in 30 monthly
installments of $20,933 beginning December 31, 1997.
In September 1998, the Company secured a revolving credit facility with a
bank in the amount of $4.0 million, which bears interest at the prime rate and
expires in May 1999. Borrowings are limited to the lesser of $4.0 million or 80%
of the net amount of eligible accounts receivable, and are secured by the
Company's assets. The credit facility has a non-revolving sub-facility for up to
$1.5 million for purchases of equipment, bears interest at the prime rate, and
expires in December 2004. The line of credit is secured by the Company's
accounts receivable. As of December 31, 1998, $1.0 million was outstanding under
this agreement with the principal and interest due in 60 monthly installments
beginning in May 1999.
As of December 31, 1998, the Company was in compliance with the financial
covenants on all of the aforementioned credit facilities. The terms of the
aforementioned credit facilities include financial covenants related to certain
financial ratios and tangible asset requirements.
The aggregate principal payments on long-term debt for each of the years in
the five-year period subsequent to December 31, 1998 are as follows: 1999,
$618,000; 2000, $442,000; 2001, $200,000; 2002, $200,000; 2003, $200,000;
Thereafter $67,000.
(4) Income Taxes
The domestic and foreign components of loss before income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Domestic..................................................... $ (4,627) $ (6,244) $ (8,586)
Foreign...................................................... -- (638) (2,707)
--------- --------- ---------
Loss before income taxes................................. $ (4,627) $ (6,882) $ (11,293)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate of
34% is due to net operating losses not being benefited.
F-12
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 1996, 1997 and 1998
(4) Income Taxes (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets as of December 31, 1997 and 1998 are
presented below (in thousands):
<TABLE>
<CAPTION>
Year Ended December
31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Various accruals and reserves not deductible for tax purposes............ $ 229 $ 340
Property and equipment................................................... 134 264
Capitalized start-up expenditures........................................ 89 51
Net operating loss carryforward.......................................... 4,446 8,079
Research and development credit carryforward............................. 265 590
--------- ---------
Total deferred tax assets............................................ 5,163 9,324
Valuation allowance...................................................... (5,163) (9,324)
--------- ---------
Net deferred tax assets.............................................. $ -- $ --
--------- ---------
--------- ---------
</TABLE>
As of December 31, 1998, NetGravity Europe Limited and NetGravity Asia
Pacific K.K. had net operating loss carryforwards of approximately $2,700,000
and $900,000 in the UK and Japan, respectively. The UK net operating loss can be
carried forward indefinitely. The Japan net operating loss will expire in the
year 2003, if not utilized.
As of December 31, 1998, the Company has a net operating loss carryforward
for U.S. federal and state income tax purposes of approximately $15.9 million.
In addition, the Company had U.S. federal and state research and development
credit carryforwards of approximately $318,000 and $272,000, respectively. The
Company's U.S. federal net operating loss and research and development credit
carryforwards will expire in the years 2010 through 2018, if not utilized. The
Company's state net operating loss carryforwards will expire in the year 2003.
The state research and development credit can be carried forward indefinitely.
U.S. federal and state tax laws impose substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in the event of
an "ownership change" as defined in Section 382 of the Internal Revenue Code.
The Company had such an ownership change, as defined, in March 1997.
Accordingly, $6.0 million of each of the Company's U.S. federal and state net
operating loss carryforwards are each limited in their annual usage to
approximately $700,000 per year. The Company has not yet determined whether any
ownership change, as defined, has occurred since 1997.
(5) Stockholders' Equity
INITIAL PUBLIC OFFERING
In July 1998, the Company completed its initial public offering (IPO) in
which it sold 3,250,000 shares and raised approximately $25.9 million in
proceeds, net of offering costs of approximately $1.3 million. In connection
with the IPO, all outstanding shares of preferred stock automatically converted
into approximately 6,220,000 shares of common stock.
F-13
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 1996, 1997 and 1998
(5) Stockholders' Equity (Continued)
STOCK SPLIT
The Company's Board of Directors approved a 1-for-2.2 reverse split of the
Company's common stock (approved by the stockholders effective as of May 8,
1998) which was effected at the effectiveness of the IPO. All common share
amounts in the accompanying consolidated financial statements have been adjusted
retroactively.
COMMON STOCK
In connection with the Board of Directors' revaluation of the Company's fair
value in March 1997, the Company repurchased and retired approximately 446,000
shares of common stock previously held by two of the Company's founders, at an
average purchase price of $0.22 per share. Additionally, the Company adjusted
the conversion price of Series A convertible preferred stock to $1.78 per share
of common stock; previously the conversion price was $2.22 per share of common
stock. Approximately 494,340 additional shares of common stock (after giving
effect to the 1-for-2.2 reverse stock split) were in-substance issuable to the
holders of Series A convertible preferred stock due to the reduction in the
conversion price. The fair value of the assumed in-substance dividend on
reported basic and diluted net loss per share for fiscal 1997 was not
significant.
Common stock issued to certain individuals is subject to repurchase at the
option of the Company, at the original issuance price, in the event an
individual ceases to be employed by the Company. Such shares are subject to
repurchase on a pro rata basis over a four-year period from the date of
issuance. As of December 31, 1996, 1997 and 1998, there were approximately
1,688,000, 628,000 and 218,000 shares, respectively, subject to repurchase, at a
weighted average price of $0.07 per share. During 1996, 1997 and 1998,
approximately 439,000, 126,000 and 102,000 shares, respectively, were
repurchased.
The Company's Board of Directors adopted the 1998 Stock Plan (the "1998
Plan") on April 23, 1998 (approved by the stockholders effective as of May 8,
1998). The 1998 Plan provides for the grant of incentive and nonstatutory stock
options and stock purchase rights to employees, directors and consultants. A
total of 2,000,000 shares of common stock, plus annual increases equal to the
lesser of (i) 1,000,000 shares, (ii) 5% of the outstanding shares, or (iii) a
lesser amount determined by the Board of Directors, were reserved for issuance
pursuant to the 1998 Plan.
The Company's Board of Directors adopted the 1998 Employee Stock Purchase
Plan (the "1998 Purchase Plan") on April 23, 1998 (approved by the stockholders
effective as of May 8, 1998). A total of 200,000 shares of common stock were
reserved for issuance under the 1998 Purchase Plan, plus annual increases equal
to the lesser of (i) 750,000 shares, (ii) 4% of the outstanding shares on such
date, or (iii) a lesser amount determined by the Board of Directors.
The Company's Board of Directors also adopted the 1998 Director Option Plan
(the "Director Plan") on April 23, 1998 (approved by the stockholders effective
as of May 8, 1998). The Director Plan provides for the grant of nonstatutory
stock options to non-employee directors of the Company or affiliates thereof. A
total of 200,000 shares of common stock were reserved for issuance under the
Director Plan plus annual increases to maintain 200,000 shares of common stock
reserved for additional option grants.
As of December 31, 1998, a total of 2,727,570 shares of common stock were
authorized for issuance under the 1995 Stock Option Plan (the Plan). Options may
be granted at an exercise price not less than 100%
F-14
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 1996, 1997 and 1998
(5) Stockholders' Equity (Continued)
of the fair market value, as determined by the Board of Directors, for incentive
stock options and 85% of fair market value for nonqualified stock options at the
grant date. All options are granted at the discretion of the Company's Board of
Directors and have a term not greater than 10 years from the date of grant.
Options issued are generally immediately exercisable and generally vest 25% on
the first anniversary date and 1/48th of the shares each month thereafter, so
that all the shares are vested 48 months after the vesting commencement date.
A summary of the status of the Company's options under the Plan is as
follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, 1996 December 31, 1997 December 31, 1998
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
average average average
Number of exercise Number of exercise Number of exercise
options price options price options price
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year................... 5,000 $ 0.07 456,509 $ 0.22 1,312,399 $ 0.22
Granted at market value............................ 833,418 0.22 475,193 0.22 368,388 $ 12.13
Granted at less than market value.................. -- -- 845,092 0.22 643,468 $ 5.85
Exercised.......................................... (309,418) 0.22 (301,009) 0.22 (204,036) $ 0.36
Canceled........................................... (72,491) 0.22 (163,386) 0.22 (129,311) $ 1.84
----------- ----------- -----------
Options at end of year............................. 456,509 0.22 1,312,399 0.22 1,990,908 $ 4.21
----------- ----------- -----------
----------- ----------- -----------
Weighted-average fair value of options granted
during the year with exercise prices equal to
market value at date of grant.................... $ 0.07 $ 0.07 $ 12.13
----------- ----------- -----------
----------- ----------- -----------
Weighted-average fair value of options granted
during the year with exercise prices less than
market value at date of grant.................... -- $ 2.05 $ 8.07
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding
- -----------------------------------------------------------------
Weighted-average
remaining
contractual life Options
Exercise Price Number (years) vested
- ----------------- ---------- ------------------- -------------
<S> <C> <C> <C>
$0.22 1,037,993 8.50 332,675
$0.55 73,374 9.09 5,368
$6.60 409,866 9.28 4,734
$7.15-11.94 374,427 9.57 --
$13.31-$23.69 95,135 9.12 10,735
$26.06 113 4.52 113
---------- -------------
1,990,908 353,625
---------- -------------
---------- -------------
</TABLE>
The Company uses the intrinsic value-based method to account for all its
employee stock-based compensation arrangements. Accordingly, no compensation
cost has been recognized for its stock options in the accompanying consolidated
financial statements because the fair value of the underlying common stock
equals or exceeds the exercise price of the stock options at the date of grant,
except with respect to certain
F-15
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 1996, 1997 and 1998
(5) Stockholders' Equity (Continued)
options granted in 1997 and 1998. The Company has recorded deferred stock
compensation expense of $1,784,000 and $1,427,000 for the difference at the
grant date between the exercise price and the fair value of the common stock
underlying the options granted in 1997 and 1998, respectively. Amortization of
deferred compensation of approximately $115,000 and $1,390,000 was recognized in
1997 and 1998, respectively.
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with the fair value approach set forth in SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's net losses for the years
ended December 31, 1996, 1997 and 1998, would have been as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net loss--as reported.................................................. $ (4,627) $ (6,882) $ (11,293)
Net loss--pro forma.................................................... $ (4,635) $ (6,883) $ (11,085)
Basic and diluted net loss per share--as reported...................... $ (2.19) $ (2.46) $ (1.28)
Basic and diluted net loss per share--pro forma........................ $ (2.20) $ (2.46) $ (1.26)
</TABLE>
The fair value of options granted during the years ended December 31, 1996
and 1997 is estimated on the date of grant using the minimum value method with
the following weighted-average assumptions: no dividend yield, risk-free
interest rates of 6.0% and 6.1% for 1996 and 1997, respectively, and expected
lives of 5 years.
The fair value of options granted during the year ended December 31, 1998 is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions: no dividend yield, risk free
interest rate of 5.2%, expected lives of 5 years, and an expected volatility of
80%.
WARRANTS
In March 1997, in connection with a lease termination agreement, the Company
issued the building landlord a warrant to purchase 6,818 shares of common stock
at a purchase price of $0.22 per share. There warrants were exercised in June
1998. The value of the warrant was not significant at the date of grant.
In October 1997, in connection with certain consulting activities, the
Company committed to deliver a warrant to purchase 9,090 shares of common stock
at a purchase price of $0.22 per share. These warrants were exercised in May
1998. The value of the warrant was not significant at the date of grant.
In January 1998, in connection with a non-employee compensation matter, the
Company committed to deliver a warrant to purchase 11,742 shares of common stock
at a purchase price of $0.22 per share. These warrants were exercised in May
1998. The value of the warrant was not significant at the date of grant.
F-16
<PAGE>
NETGRAVITY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 1996, 1997 and 1998
(6) Commitments
The Company leases its facilities under various noncancellable operating
lease agreements that expire on various dates through 2005. As of December 31,
1998, the remaining future minimum payments for these facilities are as follows
(in thousands):
<TABLE>
<CAPTION>
Operating
Years Ending December 31, Leases
- --------------------------------------------------------------------------------------- ---------------
<S> <C>
1999................................................................................... $ 1,396
2000................................................................................... 1,367
2001................................................................................... 1,363
2002................................................................................... 1,398
Thereafter,............................................................................ 3,558
------
$ 9,082
------
------
</TABLE>
Total rent expense, including month to month arrangements, was approximately
$149,000, $313,000 and $800,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
(7) 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 operating decision maker is considered to be the
Company's Chief Executive Officer ("CEO"). 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 statement of operations. Therefore, the Company 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):
<TABLE>
<CAPTION>
North
America Europe Asia Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
1996.................................................... 1,939 -- -- $ 1,939
1997.................................................... 6,358 -- -- 6,358
1998.................................................... 8,263 1,980 1,314 11,577
Identifiable assets:
1997.................................................... 9,139 748 -- $ 9,887
1998.................................................... 30,587 1,513 1,320 33,420
</TABLE>
No single customer accounted for greater than 10% of revenues in any period
reported.
F-17
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts, commissions and certain accountable expenses, payable by
the Company in connection with the sale of common stock being registered. All
amounts are estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 24,242
NASD Filing Fee................................................. 9,220
Nasdaq National Market Listing Fee.............................. 17,500
Printing Fees and Expenses...................................... 300,000
Legal Fees and Expenses......................................... 300,000
Accounting Fees and Expenses.................................... 150,000
Blue Sky Fees and Expenses...................................... 5,000
Transfer Agent and Registrar Fees............................... 10,000
Miscellaneous................................................... 184,038
---------
Total....................................................... $1,000,000
---------
---------
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article Nine of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors, officers or
employee benefit plan fiduciaries, to the fullest extent not prohibited by
Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
directors and officers if such person acted in good faith and in a manner
reasonably believed to be in and not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, the
indemnified party had no reasonable cause to believe his conduct was unlawful.
Article VI also permits the Company to advance expenses incurred by indemnified
directors or officers in connection with the defense of any action or proceeding
arising out of such directors' or officers' status or service as directors or
officers of the Company upon an undertaking by such directors or officers to
repay such advances if it is ultimately determined that such directors or
officers are not entitled to such indemnification.
The Registrant has entered into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in the Registrant's
Amended and Restated Bylaws. These agreements, among other things, indemnify the
Registrant's directors and officers for certain expenses (including attorneys'
fees and associated legal expenses), judgments, fines and amounts paid in
settlement amounts if such settlement is approved in advance by the Registrant,
which approval shall not be unreasonably withheld, actually and reasonably
incurred by any such person in any action, suit, proceeding or alternative
dispute resolution mechanism arising out of such person's services as a director
or officer of the Registrant, any subsidiary of the Registrant or any other
company or enterprise to which the person provides services at the request of
the Registrant.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
1. Between January 1996 and April 1996 the Registrant issued and sold an
aggregate of 4,404,578 shares of Series A Preferred Stock convertible into
2,494,147 shares of common stock to venture capitalists and other Sophisticated
Investors for total consideration of $4,448,623.78 consisting of cash and the
cancellation of the principal and interest due on the promissory notes referred
to above.
2. In March 1997 the Registrant issued and sold an aggregate of 4,307,969
shares of Series B Preferred Stock convertible into 1,958,158 shares of common
stock to venture capitalists and other Sophisticated Investors at a purchase
price of $0.9982 per share for an aggregate purchase price of $4,299,999.24.
3. In October 1997 the Registrant issued and sold 11,362 shares of common
stock to consultants in consideration for services rendered.
4. In November 1997 and March 1998 the Registrant issued and sold an
aggregate of 3,887,978 shares of Series C Preferred Stock convertible into
1,767,261 shares of common stock to venture capitalists and other Sophisticated
Investors for aggregate net proceeds to the Registrant of $8,683,000, or
approximately $2.24 per share.
5. In November 1997 the Registrant issued and sold 15,909 shares of common
stock to a former employee in connection with the termination of such employee's
employment with the Registrant.
6. From September 1995 through April 30, 1998 the Registrant granted
options under the 1995 Stock Option Plan to purchase an aggregate of 3,219,772
shares of the Registrant's common stock at exercise prices ranging from $0.06 to
$6.60 to 145 employees, directors and consultants.
7. From September 1995 through April 30, 1998 the Registrant issued an
aggregate of 1,205,861 shares of common stock pursuant to option exercises at
exercise prices ranging from $0.0277 to $0.22 to 62 employees, directors and
consultants. From May 1, 1998 to July 27, 1998, the Registrant issued an
aggregate of 23,012 shares of common stock pursuant to option exercises under
the 1995 Stock Option Plan at exercise prices ranging from $0.22 to $6.60 to 11
employees, former employees whose options had not yet expired and consultants.
8. From September 1995 through April 30, 1998, the Registrant issued
warrants to consultants and other Sophisticated Investors exercisable for an
aggregate of 27,650 shares of common stock at an exercise price of $0.22 per
share. Such warrants were exercised in June 1998.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.
Item 16. Exhibits and Financial Statement Schedules
(a) The following exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
3.2 Amended and Restated Bylaws of the Registrant.
*4.1 Specimen certificate representing shares of common stock of the
Registrant.
*4.2 Second Amended and Restated Registration and Information Rights Agreement.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
*10.1 Form of Indemnification Agreement for Directors and Officers of the
Registrant.
*10.2 1995 Stock Option Plan.
*10.3 1998 Stock Option Plan, together with form of Stock Option Agreement and
form of Stock Issuance Agreement.
*10.4 1998 Employee Stock Purchase Plan.
*10.5 1998 Director Option Plan.
**10.6 Lease dated August 5, 1998 for the Registrant's headquarters in San Mateo,
CA.
*10.7 Lease dated March 2, 1998 for the Registrant's offices in New York, NY.
*10.8 Employment and Severance Agreement dated March 31, 1998 by and between the
Registrant and Stephen E. Recht.
*10.9 Professional Services Agreement dated March 27, 1997 by and between the
Registrant and Protege Software (Holdings) Limited as amended by
Amendment dated May 13, 1998.
*10.10 common stock Repurchase Agreement and Clarification of Founder's Stock
Purchase Agreement dated March 12, 1997 by and between the Registrant
and John W. Danner.
*10.12 Employment Agreement dated April 22, 1998 by and between the Registrant
and Susan Atherton.
*10.13 401(k) Plan.
*10.14 Employment Agreement dated May 12, 1998 by and between the Registrant and
Jitendra Valera.
*10.15 Consultant and Representative Agreement dated June 1, 1998 by and between
the Registrant and Asia Pacific Ventures Co.
*10.16 Single User License Agreement by and between the Registrant and Rogue Wave
Software, Inc.
*11.1 Statement Regarding Computation of Earnings Per Share (contained in Note 1
of the Notes to Financial Statements).
*16.1 Letter from Ernst & Young LLP regarding change in certified accountants.
21.1 List of Subsidiaries of the Registrant.
23.1 Report on Schedule and Consent of Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (contained in signature page on page II-5).
27.1 Financial Data Schedule (Fiscal 1998).
</TABLE>
- ---------
* Incorporated herein by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (Commission File No. 333-51007).
** Incorporated herein by reference to the exhibit 10.17 filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1998.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-3
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereto which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement; and (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(2) That, for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(4) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of this offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Mateo,
State of California, on the 2nd day of March, 1999.
NETGRAVITY, INC.
By: /s/ STEPHEN E. RECHT
-----------------------------------------
Stephen E. Recht
CHIEF FINANCIAL OFFICER
AND SECRETARY
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints each of John W. Danner and Stephen E.
Recht, and each of the acting alone, his true and lawful attorney-in-fact and
agent, each with full power of substitution and resubstitution, for such person
and in his name, place and stead, in any and all capacities, in connection with
this Registration Statement, including to sign and file in the name and on
behalf of the undersigned as director or officer of the Registrant (i) any and
all amendments or supplements (including any and all stickers and post-effective
amendments) to this Registration Statement, with all exhibits thereto, and other
documents in connection therewith, and (ii) any and all additional registration
statements, and any and all amendments thereto, relating to the same offering of
securities as those that are covered by this Registration Statement that are
filed pursuant to Rule 462(b) under the Securities Act of 1933, with the
Securities and Exchange Commission and any applicable securities exchange or
securities self-regulatory body, granting unto said attorneys-in-fact and
agents, and each of them acting alone, full power and authority to do and
perform each and every act and thing requisite or necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board and
/s/ JOHN W. DANNER Chief Executive Officer
- ------------------------------ (principal executive March 2, 1999
John W. Danner officer)
Chief Financial Officer
/s/ STEPHEN E. RECHT and Secretary (principal
- ------------------------------ financial and accounting March 2, 1999
Stephen E. Recht officer)
/s/ J. SCOTT BRIGGS
- ------------------------------ Director March 2, 1999
J. Scott Briggs
/s/ JOHN D. D. KOHLER
- ------------------------------ Director March 2, 1999
John D. D. Kohler
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ AMNON LANDAN
- ------------------------------ Director March 2, 1999
Amnon Landan
/s/ JONATHAN D. LAZARUS
- ------------------------------ Director March 2, 1999
Jonathan D. Lazarus
/s/ ALEXANDER R. SLUSKY
- ------------------------------ Director March 2, 1999
Alexander R. Slusky
</TABLE>
II-6
<PAGE>
SCHEDULE II
NETGRAVITY, INC.
VALUATION AND QUALIFYING ACCOUNTS--
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance At Beginning Charged to Balance At End
of Period Expense Deductions of Period
--------------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996 -- 197 28 169
Year ended December 31, 1997 169 67 13 223
Year ended December 31, 1998 223 204 235 202
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
*4.1 Specimen certificate representing shares of common stock of the
Registrant.
*4.2 Second Amended and Restated Registration and Information Rights Agreement.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
*10.1 Form of Indemnification Agreement for Directors and Officers of the
Registrant.
*10.2 1995 Stock Option Plan.
*10.3 1998 Stock Option Plan, together with form of Stock Option Agreement and
form of Stock Issuance Agreement.
*10.4 1998 Employee Stock Purchase Plan.
*10.5 1998 Director Option Plan.
**10.6 Lease dated August 5, 1998 for the Registrant's headquarters in San Mateo,
CA.
*10.7 Lease dated March 2, 1998 for the Registrant's offices in New York, NY.
*10.8 Employment and Severance Agreement dated March 31, 1998 by and between the
Registrant and Stephen E. Recht.
*10.9 Professional Services Agreement dated March 27, 1997 by and between the
Registrant and Protege Software (Holdings) Limited as amended by
Amendment dated May 13, 1998.
*10.10 common stock Repurchase Agreement and Clarification of Founder's Stock
Purchase Agreement dated March 12, 1997 by and between the Registrant
and John W. Danner.
*10.12 Employment Agreement dated April 22, 1998 by and between the Registrant
and Susan Atherton.
*10.13 401(k) Plan.
*10.14 Employment Agreement dated May 12, 1998 by and between the Registrant and
Jitendra Valera.
*10.15 Consultant and Representative Agreement dated June 1, 1998 by and between
the Registrant and Asia Pacific Ventures Co.
*10.16 Single User License Agreement by and between the Registrant and Rogue Wave
Software, Inc.
*11.1 Statement Regarding Computation of Earnings Per Share (contained in Note 1
of the Notes to Financial Statements).
*16.1 Letter from Ernst & Young LLP regarding change in certified accountants.
21.1 List of Subsidiaries of the Registrant.
23.1 Report on Schedule and Consent of Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (contained in signature page on page II-5).
27.1 Financial Data Schedule (Fiscal 1998).
</TABLE>
- ---------
* Incorporated herein by reference to the exhibit 10.17 filed with the
Registrant's Registration Statement on Form S-1 (Commission File No.
333-51007).
** Incorporated herein by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
1998.
<PAGE>
Draft of March 2, 1999
3,600,000 SHARES(1)
NETGRAVITY, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
__________ , 1999
BANCBOSTON ROBERTSON STEPHENS INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
FIRST ALBANY CORPORATION
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
NetGravity, Inc., a Delaware corporation (the "Company"), and certain
stockholders of the Company named in Schedule B hereto (hereafter called the
"Selling Stockholders") address you as the Representatives of each of the
persons, firms and corporations listed in Schedule A hereto (herein collectively
called the "Underwriters") and hereby confirm their respective agreements with
the several Underwriters (if you are the only Underwriters, then all references
to "Representatives" shall be deemed to refer to the Underwriters) as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
2,738,440 shares of its authorized and unissued Common Stock, par value $0.001
per share, to the several Underwriters. The Selling Stockholders, acting
severally and not jointly, propose to sell an aggregate of 861,560 shares of
the Company's authorized and outstanding Common Stock, par value $0.001 per
share to the several Underwriters. The 2,738,440 shares of Common Stock, par
value $0.001 per share of the Company to be sold by the Company are hereinafter
called the "Company Shares" and the 861,560 shares of Common Stock, par value
$0.001 per share to be sold by the Selling Stockholders are hereinafter called
the "Selling Stockholder Shares." The Company Shares and the Selling
Stockholder Shares are hereinafter collectively referred to as the "Firm
Shares." The Company also proposes to grant to the Underwriters an option to
purchase up to 540,000 additional shares of the Company's Common Stock, par
value $0.001 per share (the "Option Shares"), as provided in Section 7 hereof.
As used in this Agreement, the term "Shares" shall
- --------------------
(1) Plus an option to purchase up to 540,000 additional shares from the
Company to cover over-allotments.
<PAGE>
include the Firm Shares and the Option Shares. All shares of Common Stock,
par value $0.001 per share of the Company to be outstanding after giving
effect to the sales contemplated hereby, including the Shares, are
hereinafter referred to as "Common Stock."
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE
SELLING STOCKHOLDERS.
I. The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form S-1 (File No. 333-_____)
with respect to the Shares, including a prospectus subject to completion, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration
statements pursuant to Rule 462(b) of the Rules and Regulations as may have
been required prior to the date hereof have been similarly prepared and filed
with the Commission; and the Company will file such additional amendments to
such registration statement, such amended prospectuses subject to completion
and such abbreviated registration statements as may hereafter be required.
Copies of such registration statement and amendments, of each related
prospectus subject to completion (the "Preliminary Prospectuses") and of any
abbreviated registration statement pursuant to Rule 462(b) of the Rules and
Regulations have been delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if BancBoston Robertson Stephens Inc., on
behalf of the several Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if BancBoston
Robertson Stephens Inc., on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); PROVIDED,
HOWEVER, that if in reliance on Rule 434 of the Rules and Regulations and with
the consent of BancBoston Robertson Stephens Inc., on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the
2
<PAGE>
Underwriters by the Company and circulated by the Underwriters to all
prospective purchasers of the Shares (including the information deemed to be
a part of the Registration Statement at the time it became effective pursuant
to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing,
if any revised prospectus shall be provided to the Underwriters by the
Company for use in connection with the offering of the Shares that differs
from the prospectus referred to in the immediately preceding sentence
(whether or not such revised prospectus is required to be filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time
it is first provided to the Underwriters for such use. If in reliance on Rule
434 of the Rules and Regulations and with the consent of BancBoston Robertson
Stephens Inc., on behalf of the several Underwriters, the Company shall have
provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as
applicable, prior to the time that a confirmation is sent or given for
purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet,
together, will not be materially different from the prospectus in the
Registration Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased,
(i) the Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained and will contain all material information
required to be included therein by the Act and the Rules and Regulations and
will in all material respects conform to the requirements of the Act and the
Rules and Regulations, (ii) the Registration Statement, and any amendments or
supplements thereto, did not and will not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (iii) the
Prospectus, and any amendments or supplements thereto, did not and will not
include any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; PROVIDED, HOWEVER, that none of the
representations and warranties contained in this subparagraph (b) shall apply to
information contained in or omitted from the Registration Statement or
Prospectus, or any amendment or supplement thereto, in reliance upon, and in
conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter specifically for use in the preparation thereof.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation with full power and authority
(corporate and other) to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company owns all of the outstanding
capital stock of its subsidiaries free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; each of the Company and its
subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations or business of the Company and its subsidiaries considered as one
enterprise; no proceeding has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification; each of the Company and its subsidiaries
is in possession of and operating in compliance with all authorizations,
licenses, certificates, consents, orders and permits from state, federal and
other regulatory authorities, all of which are valid and in full force and
effect, except to the extent that the failure to possess or comply with, or the
lack of validity or enforceability of, such authorizations, licenses,
certificates, consents, order or permits would not have a material adverse
effect on the Company and its subsidiaries considered as one enterprise; neither
the Company nor any of its subsidiaries is in violation of its respective
charter or bylaws or in default in the performance or observance of any
obligation,
3
<PAGE>
agreement, covenant or condition contained in any bond, debenture, note or
other evidence of indebtedness, or in any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of its subsidiaries or their respective properties may be
bound, except any such violation or default which would not have a material
adverse effect on the Company and its subsidiaries considered as one
enterprise; and neither the Company nor any of its subsidiaries is in
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its subsidiaries or
over their respective properties of which it has knowledge, except any such
violation which would not have a material adverse effect on the Company and
its subsidiaries considered as one enterprise. The Company does not own or
control, directly or indirectly, any corporation, association or other entity
other than NetGravity Europe Limited, NetGravity Asia Pacific K.K. and
NetGravity (Hong Kong) Limited
(d) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the Company
and is a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a breach or violation of
any of the terms and provisions of, or constitute a default under, (i) any bond,
debenture, note or other evidence of indebtedness, or under any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which it or any of its subsidiaries or their respective properties
may be bound, (ii) the charter or bylaws of the Company or any of its
subsidiaries, or (iii) any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties, except any such breach or
violation of such items (i) through (iii) which would not have a material
adverse effect on the Company and its subsidiaries considered as one enterprise.
No consent, approval, authorization or order of or qualification with any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or over their
respective properties is required for the execution and delivery of this
Agreement and the consummation by the Company or any of its subsidiaries of the
transactions herein contemplated, except such as may be required under the Act,
or under state or other securities or Blue Sky laws, all of which requirements
have been satisfied in all material respects.
(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company, any
of its subsidiaries or any of their respective officers or any of their
respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective officers or
properties or otherwise which, if determined adversely to the Company, (i) could
reasonably be expected to result in any material adverse change in the condition
(financial or otherwise), earnings, operations or business of the Company and
its subsidiaries considered as one enterprise or might materially and adversely
affect their properties, assets or rights, (ii) could reasonably be expected to
prevent consummation of the transactions contemplated hereby or (iii) is
required to be disclosed in the Registration Statement or Prospectus and is not
so disclosed; and there are no agreements, contracts, leases or documents of the
Company or any of its subsidiaries of a character required to be described or
referred to in the Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement by the Act or the Rules and Regulations
which have not been accurately described in all material respects in the
Registration Statement or Prospectus or filed as exhibits to the Registration
Statement.
4
<PAGE>
(f) All outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid and nonassessable,
have been issued in compliance with applicable federal and state securities
laws, were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities, which rights were not
otherwise waived, and the authorized and outstanding capital stock of the
Company is as set forth in the Prospectus, as of the dates set forth in the
Prospectus, under the caption "Capitalization" and conforms in all material
respects to the statements relating thereto contained in the Registration
Statement and the Prospectus (and such statements correctly state the substance
of the instruments defining the capitalization of the Company); the Firm Shares
and the Option Shares to be purchased from the Company hereunder have been duly
authorized for issuance and sale to the Underwriters pursuant to this Agreement
and, when issued and delivered by the Company against payment therefor in
accordance with the terms of this Agreement, will be duly and validly issued and
fully paid and nonassessable, and will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first refusal or
other similar right of stockholders exists with respect to any of the Firm
Shares or Option Shares to be purchased from the Company hereunder or the
issuance and sale thereof other than those that have been expressly waived prior
to the date hereof and those that will automatically expire upon and will not
apply to the consummation of the transactions contemplated on the Closing Date.
No further approval or authorization of any stockholder, the Board of Directors
of the Company or others is required for the issuance and sale or transfer of
the Shares except as may be required under the Act or under state or other
securities or Blue Sky laws. All issued and outstanding shares of capital stock
of each subsidiary of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, and were not issued in violation of or
subject to any preemptive right, or other rights to subscribe for or purchase
shares and are owned by the Company free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest. Except as disclosed in or
contemplated by the Prospectus and the financial statements of the Company, and
the related notes thereto, included in the Prospectus, neither the Company nor
any subsidiary has outstanding any options to purchase, or any preemptive rights
or other rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown, pursuant to the Act and the Rules and
Regulations with respect to such plans, arrangements, options and rights.
(g) KPMG LLP, which has examined the consolidated financial
statements of the Company, together with the related schedules and notes, as
of December 31, 1997 and 1998, and for each of the years ended December 31,
1996, 1997 and 1998, filed with the Commission as a part of the Registration
Statement, which are included in the Prospectus, are independent accountants
within the meaning of the Act and the Rules and Regulations; the audited
consolidated financial statements of the Company, together with the related
schedules and notes, and the unaudited consolidated financial information,
forming part of the Registration Statement and Prospectus, fairly present the
financial position and the results of operations of the Company and its
subsidiaries at the respective dates and for the respective periods to which
they apply; and all audited consolidated financial statements of the Company,
together with the related schedules and notes, and the unaudited consolidated
financial information, filed with the Commission as part of the Registration
Statement, have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved
except as may be otherwise stated therein. The selected and summary
financial and statistical data included in the Registration Statement present
fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements or schedules are required to be included in the
Registration Statement.
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not been
(i) any material adverse change in the condition (financial or otherwise),
earnings, operations or business of the Company and its subsidiaries considered
as one
5
<PAGE>
enterprise, (ii) any transaction that is material to the Company and its
subsidiaries considered as one enterprise, except transactions entered into
in the ordinary course of business, (iii) any obligation, direct or
contingent, that is material to the Company and its subsidiaries considered
as one enterprise, incurred by the Company or its subsidiaries, except
obligations incurred in the ordinary course of business, (iv) any change in
the capital stock or outstanding indebtedness of the Company or any of its
subsidiaries that is material to the Company and its subsidiaries considered
as one enterprise, (v) any dividend or distribution of any kind declared,
paid or made on the capital stock of the Company or any of its subsidiaries,
or (vi) any loss or damage (whether or not insured) to the property of the
Company or any of its subsidiaries which has been sustained or will have been
sustained which has a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company and its
subsidiaries considered as one enterprise.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its subsidiaries has good and marketable
title to all properties and assets described in the Registration Statement and
Prospectus as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as would not
have a material adverse effect on the condition (financial or otherwise),
earnings, operations or business of the Company and its subsidiaries considered
as one enterprise, (ii) the agreements to which the Company or any of its
subsidiaries is a party described in the Registration Statement and Prospectus
are valid agreements, enforceable by the Company and its subsidiaries (as
applicable), except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles and, to the best of the Company's knowledge, the other contracting
party or parties thereto are not in material breach or material default under
any of such agreements, and (iii) each of the Company and its subsidiaries has
valid and enforceable leases for all properties described in the Registration
Statement and Prospectus as leased by it, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles. Except as set forth in the Registration Statement
and Prospectus, the Company owns or leases all such properties as are necessary
to conduct its operations in the manner described in the Prospectus.
(j) The Company and its subsidiaries have timely filed all
necessary federal, state and foreign income and franchise tax returns, or have
requested extensions thereof, and have paid all taxes shown thereon as due, and
there is no tax deficiency that has been or, to the best of the Company's
knowledge, might be asserted against the Company or any of its subsidiaries that
is likely to have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company and its subsidiaries
considered as one enterprise; and all tax liabilities are adequately provided
for on the books of the Company and its subsidiaries.
(k) The Company and its subsidiaries maintain insurance with
insurers of recognized financial responsibility of the types and in the amounts
generally deemed adequate for their respective businesses and consistent with
insurance coverage maintained by similar companies in similar businesses,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company or its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect; neither the Company nor any
such subsidiary has been refused any insurance coverage sought or applied for;
and neither the Company nor any such subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations or
business of the Company and its subsidiaries considered as one enterprise.
(l) To the best of Company's knowledge, no labor disturbance by
the employees of the Company or any of its subsidiaries exists or is imminent;
and the Company is not aware of any existing or
6
<PAGE>
imminent labor disturbance by the employees of any of its principal
suppliers, value added resellers, subcontractors, authorized dealers or
international distributors that might be expected to result in a material
adverse change in the condition (financial or otherwise), earnings,
operations or business of the Company and its subsidiaries considered as one
enterprise. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
(m) Each of the Company and its subsidiaries owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations
or business of the Company and its subsidiaries considered as one enterprise;
the Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could reasonably be expected to have a material
adverse effect on the condition (financial or otherwise), earnings, operations
or business of the Company and its subsidiaries considered as one enterprise.
(n) The Common Stock is registered pursuant to Section 12(g) of
the Exchange Act and is listed on The Nasdaq National Market, and the Company
has taken no action designed to, or likely to have the effect of, terminating
the registration of the Common Stock under the Exchange Act or delisting the
Common Stock from The Nasdaq National Market, nor has the Company received any
notification that the Commission or the National Association of Securities
Dealers, Inc. ("NASD") is contemplating terminating such registration or
listing.
(o) There are no material issues related to the Company's, or
any of its subsidiaries', preparedness for the Year 2000 that (i) are of a
character required to be described or referred to in the Registration
Statement or Prospectus by the Act or the Rules and Regulations which have
not been accurately described in the Registration Statement or Prospectus or
(ii) might reasonably be expected to result in any material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise or that might materially affect their properties, assets or rights.
7
<PAGE>
(p) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(q) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(r) Neither the Company nor any of its subsidiaries has at any
time during the last four (4) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(s) The Company has not taken and will not take, directly or
indirectly, any action designed to or that could reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(t) Each officer and director of the Company, each Selling
Stockholder and each beneficial owner of 5% or more shares of Common Stock has
agreed in writing that such person will not, for a period of 90 days from the
date that the Registration Statement is declared effective by the Commission
(the "Lock-up Period"), offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exchangeable
for shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners, stockholders or
affiliates of such person, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, (iii) in transactions
relating to shares of Common Stock or other securities acquired in open market
transactions after the date that the Registration Statement is declared
effective, or (iv) with the prior written consent of BancBoston Robertson
Stephens Inc. The foregoing restriction has been expressly agreed to preclude
the holder of the Securities from engaging in any hedging or other transaction
which is designed to or reasonably expected to lead to or result in a
Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than such holder. Such prohibited hedging
or other transactions would include, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person has also agreed and consented to the entry
of stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction. The Company has provided to counsel for the Underwriters a
complete and accurate list of all securityholders of the Company and the number
and type of securities held by each securityholder. The Company has provided to
counsel for the Underwriters true, accurate and complete copies of all of the
agreements pursuant to which its officers, directors and stockholders have
agreed to such or similar restrictions (the "Lock-up Agreements") presently in
effect or effected hereby.
8
<PAGE>
The Company hereby represents and warrants that it will not release any of
its officers, directors or other stockholders from any Lock-up Agreements
currently existing or hereafter effected without the prior written consent of
BancBoston Robertson Stephens Inc.
(u) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) to the Company's knowledge, the Company will
not be required to make future material capital expenditures to comply with
Environmental Laws and (iv) to the Company's knowledge, no property which is
owned, leased or occupied by the Company has been designated as a Superfund site
pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. Section 9601, ET SEQ.), or otherwise designated as a
contaminated site under applicable state or local law.
(v) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(x) The Company has complied with all provisions of
Section 517.075, Florida Statutes relating to doing business with the Government
of Cuba or with any person or affiliate located in Cuba.
II. Each Selling Stockholder, severally and not jointly, represents
and warrants to and agrees with each Underwriter and the Company that:
(a) Such Selling Stockholder now has and on the Closing Date
will have valid title to the Shares to be sold by such Selling Stockholder, free
and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest other than pursuant to this Agreement; and upon delivery of
such Shares hereunder and payment of the purchase price as herein contemplated,
each of the Underwriters will obtain valid title to the Shares purchased by it
from such Selling Stockholder, free and clear of any pledge, lien, security
interest pertaining to such Selling Stockholder or such Selling Stockholder's
property, encumbrance, claim or equitable interest, including any liability for
estate or inheritance taxes, or any liability to or claims of any creditor,
devisee, legatee or beneficiary of such Selling Stockholder.
(b) Such Selling Stockholder has duly authorized (if
applicable), executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of Attorney")
appointing John W. Danner and Stephen E. Recht as attorneys-in-fact
(collectively, the "Attorneys" and individually, an "Attorney") and a Letter of
Transmittal and Custody Agreement (the "Custody Agreement") with Chase Manhattan
Bank & Trust Company, N.A., as custodian (the "Custodian"); each of the Power of
Attorney and the Custody Agreement constitutes a valid and binding agreement on
the part of such Selling Stockholder, enforceable in accordance with its terms,
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting
9
<PAGE>
creditors' rights generally or by general equitable principles; and each of
such Selling Stockholder's Attorneys, acting alone, is authorized to execute
and deliver this Agreement and the certificate referred to in Section 6(h)
hereof on behalf of such Selling Stockholder, to determine the purchase price
to be paid by the several Underwriters to such Selling Stockholder as
provided in Section 3 hereof, to authorize the delivery of the Shares to be
sold by such Selling Stockholder under this Agreement and to duly endorse (in
blank or otherwise) the certificate or certificates representing such Shares
or a stock power or powers with respect thereto, to accept payment therefor,
and otherwise to act on behalf of such Selling Stockholder in connection with
this Agreement.
(c) All consents, approvals, authorizations and orders required
for the execution and delivery by such Selling Stockholder of the Power of
Attorney and the Custody Agreement, the execution and delivery by or on behalf
of such Selling Stockholder of this Agreement and the sale and delivery of the
Shares to be sold by such Selling Stockholder under this Agreement (other than,
at the time of the execution hereof (if the Registration Statement has not yet
been declared effective by the Commission), the issuance of the order of the
Commission declaring the Registration Statement effective and such consents,
approvals, authorizations or orders as may be necessary under state or other
securities or Blue Sky laws) have been obtained and are in full force and
effect; such Selling Stockholder, if other than a natural person, has been duly
organized and is validly existing in good standing under the laws of the
jurisdiction of its organization as the type of entity that it purports to be;
and such Selling Stockholder has full legal right, power and authority to enter
into and perform its obligations under this Agreement and such Power of Attorney
and Custody Agreement, and to sell, assign, transfer and deliver the Selling
Stockholder Shares to be sold by such Selling Stockholder under this Agreement.
(d) Such Selling Stockholder will not, during the Lock-up
Period, effect the Disposition of any Securities now owned or hereafter acquired
directly by such Selling Stockholder or with respect to which such Selling
Stockholder has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners,
stockholders or affiliates of such Selling Stockholder, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, (iii) in transactions relating to shares of Common Stock or other
securities acquired in open market transactions after the date that the
Registration Statement is declared effective, or (iv) with the prior written
consent of BancBoston Robertson Stephens Inc. The foregoing restriction is
expressly agreed to preclude the holder of the Securities from engaging in any
hedging or other transaction which is designed to or reasonably expected to lead
to or result in a Disposition of Securities during the Lock-up Period, even if
such Securities would be disposed of by someone other than the Selling
Stockholder. Such prohibited hedging or other transactions would including,
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Such Selling
Stockholder also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent against the transfer of the securities held by
such Selling Stockholder except in compliance with this restriction.
(e) Certificates in negotiable form for all Shares to be sold by
such Selling Stockholder under this Agreement, together with a stock power or
powers duly endorsed in blank by such Selling Stockholder, have been placed in
custody with the Custodian for the purpose of effecting delivery hereunder.
(f) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not (i) result in a material breach or material violation
10
<PAGE>
of any of the terms and provisions of or constitute a material default under
any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which such Selling Stockholder is
a party or by which such Selling Stockholder, or any Selling Stockholder
Shares to be sold by such Selling Stockholder hereunder, may be bound, (ii)
to the best of such Selling Stockholders' knowledge, result in any violation
of any law, order, rule, regulation, writ, injunction, judgment or decree of
any court, government or governmental agency or body, domestic or foreign,
having jurisdiction over such Selling Stockholder or over the properties of
such Selling Stockholder, or, (iii) if such Selling Stockholder is other than
a natural person, result in any material violation of any provisions of the
charter, bylaws or other organizational documents of such Selling Stockholder.
(g) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that could reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished in writing by or on behalf of such
Selling Stockholder relating to such Selling Stockholder and the Selling
Stockholder Shares that is contained in the representations and warranties of
such Selling Stockholder in such Selling Stockholder's Power of Attorney or set
forth in the Registration Statement or the Prospectus is, and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date, was or will be,
true, correct and complete in all material respects, and does not, and at the
time the Registration Statement became or becomes, as the case may be, effective
and at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) will not, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make such
information, as it relates to such selling stockholder or such stockholder's
shares, not misleading.
(j) Such Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date and
will advise one of its Attorneys and BancBoston Robertson Stephens Inc. prior to
the Closing Date if any statement to be made on behalf of such Selling
Stockholder in the certificate contemplated by Section 6(h) would be inaccurate
if made as of the Closing Date.
(k) Such Selling Stockholder does not have, or has waived prior
to the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Shares that are to be sold
by the Company or any of the other Selling Stockholders to the Underwriters
pursuant to this Agreement; such Selling Stockholder does not have, or has
waived prior to the date hereof, any registration right or other similar right
to participate in the offering made by the Prospectus, other than such rights of
participation as have been satisfied by the participation of such Selling
Stockholder in the transactions to which this Agreement relates in accordance
with the terms of this Agreement; and such Selling Stockholder does not own any
warrants, options or similar rights to acquire, and does not have any right or
arrangement to acquire, any capital stock, rights, warrants, options or other
securities from the Company, other than those described in the Registration
Statement and the Prospectus.
(l) Such Selling Stockholder is not aware (without having
conducted any investigation or inquiry) that any of the representations and
warranties of the Company set forth in Section 2.I. above is untrue or
inaccurate in any material respect.
11
<PAGE>
(m) Such Selling Stockholder, if an executive officer or a
director of the Company, represents and warrants and agrees with each
Underwriter that to such Selling Stockholder's knowledge, each of the
representations and warranties of the Company set forth Section 2.I.b. above is
true and accurate.
3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company and the Selling
Stockholders agree, severally and not jointly, to sell to the Underwriters,
and each Underwriter agrees, severally and not jointly, to purchase from the
Company and the Selling Stockholders, respectively, at a purchase price of
$_____ per share, the respective number of Company Shares as hereinafter set
forth and Selling Stockholder Shares set forth opposite the names of the
Company and the Selling Stockholders in Schedule B hereto. The obligation of
each Underwriter to the Company and to each Selling Stockholder shall be to
purchase from the Company or such Selling Stockholder that number of Company
Shares or Selling Stockholder Shares, as the case may be, which (as nearly as
practicable, as determined by you) is in the same proportion to the number of
Company Shares or Selling Stockholder Shares, as the case may be, set forth
opposite the name of such Underwriter in Schedule A hereto (subject to
adjustment as provided in Section 10) is to the total number of Firm Shares
to be purchased by all the Underwriters under this Agreement.
The certificates in negotiable form for the Selling Stockholder Shares
have been placed in custody (for delivery under this Agreement) under the
Custody Agreement. Each Selling Stockholder agrees that the certificates for
the Selling Stockholder Shares of such Selling Stockholder so held in custody
are subject to the interests of the Underwriters hereunder, that the
arrangements made by such Selling Stockholder for such custody, including the
Power of Attorney is to that extent irrevocable and that the obligations of such
Selling Stockholder hereunder shall not be terminated by the act of such Selling
Stockholder or by operation of law, whether by the death or incapacity of such
Selling Stockholder or the occurrence of any other event, except as specifically
provided herein or in the Custody Agreement. If any Selling Stockholder should
die or be incapacitated, or if any other such event should occur, before the
delivery of the certificates for the Selling Stockholder Shares hereunder, the
Selling Stockholder Shares to be sold by such Selling Stockholder shall, except
as specifically provided herein or in the Custody Agreement, be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether
the Custodian shall have received notice of such death or other event.
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made
against payment of the purchase price therefor by the several Underwriters by
wire transfer of immediately available funds, to an account specified in
writing by the Company with regard to the Shares being purchased from the
Company at the offices of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, 650 Page Mill Road, Palo Alto, California 94304 (or at such
other place as may be agreed upon among the Representatives and the Company
and the Attorneys), at 7:00 A.M., San Francisco time (a) on the third (3rd)
full business day following the first day that Shares are traded, (b) if this
Agreement is executed and delivered after 1:30 P.M., San Francisco time, the
fourth (4th) full business day following the day that this Agreement is
executed and delivered or (c) at such other time and date not later than
seven (7) full business days following the first day that Shares are traded
as the Representatives and the Company and the Attorneys may determine (or at
such time and date to which payment and delivery shall have been postponed
pursuant to Section 10 hereof), such time and date of payment and delivery
being herein called the "Closing
12
<PAGE>
Date;" PROVIDED, HOWEVER, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later than two (2) full business days following
delivery of copies of the Prospectus to the Representatives. The
certificates for the Firm Shares to be so delivered will be made available to
you at such office or such other location including, without limitation, in
New York City, as you may reasonably request for checking at least one (1)
full business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2)
full business days prior to the Closing Date. If the Representatives so
elect, delivery of the Firm Shares may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by the
Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose payment shall not have been received by you prior to the Closing Date for
the Firm Shares to be purchased by such Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of any of
its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make a public offering (as such term is described in
Section 11 hereof) of the Firm Shares at an initial public offering price of
$_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), on the inside
front cover concerning stabilization and over-allotment by the Underwriters,
and under the first (including the table below such paragraph), second,
sixth, seventh, and eighth paragraphs under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitutes the only information
furnished by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement, and you, on behalf
of the respective Underwriters, represent and warrant to the Company and the
Selling Stockholders that the statements made therein do not include any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best efforts
to cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of
Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission; if the Company files a term sheet
pursuant to Rule 434 of the Rules and Regulations, the Company will provide
evidence satisfactory to you that the Prospectus and term sheet meeting the
requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations,
have been filed, within the time period prescribed, with the Commission pursuant
to subparagraph (7) of Rule 424(b) of the Rules and Regulations; if for any
reason
13
<PAGE>
the filing of the final form of Prospectus is required under Rule 424(b)(3)
of the Rules and Regulations, it will provide evidence satisfactory to you
that the Prospectus contains such information and has been filed with the
Commission within the time period prescribed; it will notify you promptly of
any request by the Commission for the amending or supplementing of the
Registration Statement or the Prospectus or for additional information; as
promptly as practicable upon your request, it will prepare and file with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel for the Company and counsel for
the several Underwriters ("Underwriters' Counsel"), may be necessary or
advisable in connection with the distribution of the Shares by the
Underwriters; it will promptly prepare and file with the Commission, and
promptly notify you of the filing of, any amendments or supplements to the
Registration Statement or Prospectus which may be necessary to correct any
statements or omissions, if, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event shall have
occurred as a result of which the Prospectus or any other prospectus relating
to the Shares as then in effect would include any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements
of Section 10(a)(3) of the Act; and it will file no amendment or supplement
to the Registration Statement or Prospectus which shall not previously have
been submitted to you a reasonable time prior to the proposed filing thereof
or to which you shall reasonably object in writing, subject, however, to
compliance with the Act and the Rules and Regulations and the provisions of
this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its commercially reasonable efforts to
qualify the Shares for offering and sale under the securities laws of such
jurisdictions as you may designate and to continue such qualifications in effect
for so long as may be required for purposes of the distribution of the Shares,
except that the Company shall not be required in connection therewith or as a
condition thereof to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction in which it is not otherwise
required to be so qualified or to so execute a general consent to service of
process. In each jurisdiction in which the Shares shall have been qualified as
above provided, the Company will make and file such statements and reports in
each year as are or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and,
in the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (four of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if BancBoston Robertson Stephens Inc., on behalf
of the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you in such
quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first
14
<PAGE>
occurring after the first anniversary of the effective date of the
Registration Statement, an earnings statement (which will be in reasonable
detail but need not be audited) complying with the provisions of Section
11(a) of the Act and Rule 158 thereunder.
(f) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request
(i) concurrently with furnishing such reports to its stockholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's stockholders, (ii) concurrently with furnishing to
its stockholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of stockholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants,
(iii) as soon as they are available, copies of all reports (financial or other)
mailed to stockholders, (iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission, any
securities exchange or the National Association of Securities Dealers, Inc.
("NASD"), (v) every material press release and every material news item or
article in respect of the Company or its affairs which was generally released to
stockholders or prepared by the Company or any of its subsidiaries, and (vi) any
additional information of a public nature concerning the Company or its
subsidiaries, or its business which you may reasonably request. During such
five (5) year period, if the Company shall have active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated
by reason of any failure, refusal or inability on the part of the Company or any
Selling Stockholder to perform any agreement on its their respective parts to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant to
Section 11(a) hereof, or if the Underwriters shall terminate this Agreement
pursuant to Section 11(b)(i) (other than for noncompliance with paragraph (e) of
Section 6 hereof), the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including fees and disbursements of Underwriters'
Counsel) incurred by the Underwriters in investigating or preparing to market or
marketing the Shares.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, if, in the opinion of
counsel to the Company such statement is required, responding to or commenting
on such rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without the
prior written consent of BancBoston Robertson Stephens Inc., effect the
Disposition of, directly or indirectly, any Securities other than
15
<PAGE>
the sale of the Company Shares and the Option Shares to be sold by the
Company hereunder and the Company's issuance of options or Common Stock under
the Company's presently authorized 1995 Stock Option Plan, 1998 Stock Plan,
1998 Employee Stock Purchase Plan and 1998 Director Option Plan
(collectively, the "Plans") or the issuance of Common Stock under stock
options presently outstanding.
5. EXPENSES.
(a) The Company and the Selling Stockholders agree with each
Underwriter that:
(i) The Company will pay and bear all costs and expenses
in connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto; the
printing of this Agreement, the Agreement Among Underwriters, the Selected
Dealer Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky
Survey, the Underwriters' Questionnaire and Power of Attorney, and any
instruments related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes, if any,
the cost of all certificates representing the Shares and transfer agents' and
registrars' fees; the fees and disbursements of counsel for the Company; all
fees and other charges of the Company's independent certified public
accountants; the cost of furnishing to the several Underwriters copies of the
Registration Statement (including appropriate exhibits), Preliminary Prospectus
and the Prospectus, and any amendments or supplements to any of the foregoing;
NASD filing fees and the cost of qualifying the Shares under the laws of such
jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company and the Selling Stockholders in connection with the performance of their
obligations hereunder. Any additional expenses incurred as a result of the sale
of the Shares by the Selling Stockholders will be borne collectively by the
Company and the Selling Stockholders. The provisions of this
Section 5(a)(i) are intended to relieve the Underwriters from the payment of the
expenses and costs which the Selling Stockholders and the Company hereby agree
to pay, but shall not affect any agreement which the Selling Stockholders and
the Company may make, or may have made, for the sharing of any of such expenses
and costs. Such agreements shall not impair the obligations of the Company and
the Selling Stockholders hereunder to the several Underwriters.
(ii) In addition to its other obligations under
Section 8(a) hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(a) hereof, it will reimburse the Underwriters on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse the Underwriters for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, the Underwriters shall promptly return
such payment to the Company together with interest, compounded daily, determined
on the basis of the prime rate (or other commercial lending rate for borrowers
of the highest credit standing) listed from time to time in The Wall Street
Journal which represents the base rate on corporate loans posted by a
substantial majority of the nation's thirty (30) largest banks (the "Prime
Rate"). Any such interim reimbursement payments which are not made to the
Underwriters within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request; provided that such
request for reimbursement is made no more frequently than quarterly.
(b) In addition to their other obligations under Section 8(c)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(c) hereof, they will reimburse the
Company and each Selling Stockholder on a monthly basis for all reasonable legal
or other expenses incurred in connection
16
<PAGE>
with investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Underwriters'
obligation to reimburse the Company and each such Selling Stockholder for
such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. To the extent that
any such interim reimbursement payment is so held to have been improper, the
Company and each such Selling Stockholder shall promptly return such payment
to the Underwriters together with interest, compounded daily, determined on
the basis of the Prime Rate. Any such interim reimbursement payments which
are not made to the Company and each such Selling Stockholder within thirty
(30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in
Sections 5(a)(ii) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the reimbursing parties, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant
to the Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. In the event
the party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Any such arbitration will be limited to the
operation of the interim reimbursement provisions contained in Sections 5(a)(ii)
and 5(b) hereof and will not resolve the ultimate propriety or enforceability of
the obligation to indemnify for expenses which is created by the provisions of
Sections 8(a), 8(b) and 8(c) hereof or the obligation to contribute to expenses
which is created by the provisions of Section 8(e) hereof.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Stockholders
herein, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, any Selling Stockholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this Section.
(c) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date, or any later date on which Option Shares are to
be purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations or business of the
Company and its subsidiaries considered as one enterprise from that set forth in
the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus.
17
<PAGE>
(d) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Company and the Selling Stockholders, except with respect to
subparagraphs (i), (ii), (iii), (v), (xv) and (xvi) below to the extent that
they relate to NetGravity Europe Limited or NetGravity Asia Pacific K.K., which
opinions shall be given by Rowe & Maw (Europe) and Baker & McKenzie (Japan),
respectively, each dated the Closing Date or such later date on which Option
Shares are to be purchased addressed to the Underwriters and with reproduced
copies or signed counterparts thereof for each of the Underwriters, to the
effect that:
(i) The Company and each of NetGravity Europe Limited,
NetGravity Asia Pacific K.K., and NetGravity (Hong Kong) Ltd. has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation;
(ii) The Company and each of NetGravity Europe Limited
and NetGravity Asia Pacific K.K. has the corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus;
(iii) To such counsel's knowledge, the Company and each
of NetGravity Europe Limited and NetGravity Asia Pacific K.K. is duly
qualified to do business as a foreign corporation and is in good standing
in each jurisdiction, if any, in which the ownership or leasing of its
properties or the conduct of its business requires such qualification,
except where the failure to be so qualified or be in good standing would
not have a material adverse effect on the financial condition, earnings,
operations or business of the Company and its subsidiaries considered as
one enterprise. To such counsel's knowledge, the Company does not own or
control, directly or indirectly, any corporation, association or other
entity other than NetGravity Europe Limited and NetGravity Asia Pacific
K.K.;
(iv) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and outstanding
shares of capital stock of the Company have been duly and validly issued
and are fully paid and nonassessable, and, to such counsel's knowledge,
will have not been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or other
similar right;
(v) All issued and outstanding shares of capital stock
of each of NetGravity Europe Limited and NetGravity Asia Pacific K.K. have
been duly authorized and validly issued and, to such counsel's knowledge,
are fully paid and nonassessable, and, to such counsel's knowledge, have
not been issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar right
and, to such counsel's knowledge, are owned by the Company free and clear
of any pledge, lien, security interest, encumbrance, claim or equitable
interest;
(vi) The Firm Shares or the Option Shares, as the case
may be, to be issued by the Company pursuant to the terms of this Agreement
have been duly authorized and, upon issuance and delivery against payment
therefor in accordance with the terms hereof, will be duly and validly
issued and fully paid and nonassessable, and will not have been issued in
violation of or subject to any statutory preemptive right or, to such
counsel's knowledge, contractual preemptive right, co-sale right,
registration right, right of first refusal or other similar right.
18
<PAGE>
(vii) The Company has the corporate power and authority
to enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it hereunder;
(viii) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been duly
executed and delivered by the Company and, assuming due authorization,
execution and delivery by you, is a valid and binding agreement of the
Company, enforceable in accordance with its terms, except insofar as
indemnification provisions may be limited by applicable law and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights
generally or by general equitable principles;
(ix) The Registration Statement has become effective
under the Act and, to such counsel's knowledge, (i) no stop order
suspending the effectiveness of the Registration Statement has been issued
and (ii) no proceedings for that purpose have been instituted or are
pending or threatened under the Act;
(x) The Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial data derived therefrom as to
which such counsel need express no opinion), as of the effective date of
the Registration Statement, complied as to form in all material respects
with the requirements of the Act and the applicable Rules and Regulations;
(xi) The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes matters
of law or legal conclusions, has been reviewed by such counsel and is a
fair summary of such matters and conclusions; and the form of certificate
evidencing the Common Stock and filed as an exhibit to the Registration
Statement complies with Delaware law;
(xii) The descriptions in the Registration Statement and
the Prospectus of the charter and bylaws of the Company under the caption
"Description of Capital Stock" and of statutes are accurate and fairly
present the information required to be presented by the Act and the
applicable Rules and Regulations;
(xiii) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company is a party
of a character required under the Act and the applicable Rules and
Regulations to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which
are not described or referred to therein or filed as required;
(xiv) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than
performance of the Company's indemnification obligations hereunder,
concerning which no opinion need be expressed) does not (a) result in any
violation of the Company's charter or bylaws or (b) to such counsel's
knowledge, result in a material breach or material violation of any of the
terms and provisions of, or constitute a material default under, any bond,
debenture, note or other evidence of indebtedness, or any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument filed as an exhibit to the Registration Statement,
or any applicable statute, rule or regulation known to such counsel or, to
such counsel's knowledge, any order, writ or decree of any court,
government or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries, or over any of their properties or
operations;
19
<PAGE>
(xv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries, or over
any of their properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated, except
such as have been obtained under the Act or such as may be required under
state or other securities or Blue Sky laws in connection with the purchase
and the distribution of the Shares by the Underwriters;
(xvi) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company or any
of its subsidiaries of a character required to be disclosed in the
Registration Statement or the Prospectus by the Act or the Rules and
Regulations, other than those described therein;
(xvii) To such counsel's knowledge, except as set forth in
the Registration Statement and Prospectus, no holders of Common Stock or
other securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the Company having
rights known to such counsel to registration of such shares of Common Stock
or other securities, because of the filing of the Registration Statement by
the Company have, with respect to the offering contemplated thereby, waived
such rights or such rights have expired by reason of lapse of time
following notification of the Company's intent to file the Registration
Statement or have included securities in the Registration Statement
pursuant to the exercise of and in full satisfaction of such rights;
(xviii) Each Selling Stockholder which is not a natural
person has full power and authority under its charter documents to enter
into and to perform its obligations under the Power of Attorney and Custody
Agreement to be executed and delivered by it in connection with the
transactions contemplated herein; the Power of Attorney and Custody
Agreement of each Selling Stockholder that is not a natural person has been
duly authorized by such Selling Stockholder; the Power of Attorney and
Custody Agreement of each Selling Stockholder has been duly executed and
delivered by or on behalf of such Selling Stockholder; and the Power of
Attorney and Custody Agreement of each Selling Stockholder constitutes the
valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general
equitable principles;
(xix) Each of the Selling Stockholders has full right,
power and authority to enter into and to perform its obligations under this
Agreement and to sell, transfer, assign and deliver the Option Shares to be
sold by such Selling Stockholder hereunder;
(xx) This Agreement has been duly authorized by each
Selling Stockholder that is not a natural person and has been duly executed
and delivered by or on behalf of each Selling Stockholder; and
(xxi) Upon the delivery of and payment for the Option
Shares as contemplated in this Agreement, each of the Underwriters will
receive valid title to the Option Shares purchased by it from such Selling
Stockholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest. In rendering such opinion, such
counsel may assume that the Underwriters are without notice of any adverse
claim or other defect in the title of the Option Shares being purchased
from the Selling Stockholders.
20
<PAGE>
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions
of law not involving the laws of the United States or the States of California
and Delaware upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company, the Selling
Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person), and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, an opinion
of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, in form and
substance satisfactory to you, with respect to the sufficiency of all such
corporate proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as they may have requested
for the purpose of enabling them to pass upon such matters.
(f) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a letter
from KPMG Peat Marwick LLP, addressed to the Company and the Underwriters, dated
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations and based upon the procedures
described in such letter delivered to you concurrently with the execution of
this Agreement (herein called the "Original Letter"), but carried out to a date
not more than five (5) business days prior to the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be,
(i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be, and
(ii) setting forth any revisions and additions to the statements and conclusions
set forth in the Original Letter which are necessary to reflect any changes in
the facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change in the condition
(financial or otherwise), earnings, operations or business of the Company and
its subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. The Original Letter from KPMG Peat Marwick LLP, shall be
addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent
21
<PAGE>
certified public accountants with respect to the Company within the meaning
of the Act and the applicable published Rules and Regulations, (ii) set forth
their opinion with respect to their examination of the consolidated balance
sheet of the Company as of December 31, 1997 and December 31, 1998 and
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1996, 1997 and 1998, (iii) state that
KPMG Peat Marwick LLP, has performed the procedures set out in Statement on
Auditing Standards No. 71 ("SAS 71") for a review of interim financial
information and providing the report of KPMG LLP, as described in SAS 71 on
the financial statements for the eight-quarter period ended March 31, 1998
(the "Quarterly Financial Statements"), (iv) state that in the course of such
review, nothing came to their attention that leads them to believe that any
material modifications need to be made to the Quarterly Financial Statements
in order for them to be in compliance with generally accepted accounting
principles consistently applied across the period presented, and (v) address
other matters agreed upon by KPMG Peat Marwick LLP and you. In addition, you
shall have received from KPMG Peat Marwick LLP a letter addressed to the
Company and made available to you for the use of the Underwriters stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their
examination of the Company's consolidated financial statements as of March
31, 1998, did not disclose any weaknesses in internal controls that they
considered to be material weaknesses.
(g) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company
in this Agreement are true and correct in all material respects,
provided that, to the extent that such representations and warranties
are qualified as to materiality therein, such representations are
true and correct in all respects, as if made on and as of the Closing
Date or any later date on which Option Shares are to be purchased, as
the case may be, and the Company has complied with all the agreements
and satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date or any later date on which
Option Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or to such officer's knowledge, are
pending or threatened under the Act;
(iii) When the Registration Statement became effective
and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus, and any
amendments or supplements thereto, contained all material information
required to be included therein by the Act and the Rules and
Regulations and in all material respects conformed to the requirements
of the Act and the Rules and Regulations, the Registration Statement,
and any amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, the Prospectus, and any amendment or
supplement thereto, did not and does not include any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading, and, since the effective date of the
Registration Statement, there has occurred no event required to be set
forth in an amended or supplemented Prospectus which has not been so
set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been (a) any material adverse change in the condition
(financial or otherwise), earnings, operations or business of the
Company and its
22
<PAGE>
subsidiaries considered as one enterprise, (b) any transaction that
is material to the Company and its subsidiaries considered as one
enterprise, except transactions entered into in the ordinary course
of business, (c) any obligation, direct or contingent, that is
material to the Company and its subsidiaries considered as one
enterprise, incurred by the Company or its subsidiaries, except
obligations incurred in the ordinary course of business, (d) any
change in the capital stock or outstanding indebtedness of the
Company or any of its subsidiaries that is material to the Company
and its subsidiaries considered as one enterprise, (e) any dividend
or distribution of any kind declared, paid or made on the capital
stock of the Company or any of its subsidiaries, or (f) any loss or
damage (whether or not insured) to the property of the Company or
any of its subsidiaries which has been sustained which has a
material adverse effect on the condition (financial or otherwise),
earnings, operations or business of the Company and its
subsidiaries considered as one enterprise.
(h) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date from the Attorneys for each Selling
Stockholder to the effect that, as of the Closing Date they have not been
informed that:
(i) The representations and warranties made by such
Selling Stockholder herein are not true or correct in any material
respect on the Closing Date; or
(ii) Such Selling Stockholder has not complied
with any obligation or satisfied any condition which is required to be
performed or satisfied on the part of such Selling Stockholder at or
prior to the Closing Date.
(i) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, each Selling
Stockholder and each beneficial owner of 5% or more shares of Common Stock in
writing prior to the date hereof that such person will not, during the Lock-up
Period, effect the Disposition of any Securities now owned or hereafter acquired
directly by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) as a bona fide gift or
gifts, provided the donee or donees thereof agree in writing to be bound by this
restriction, (ii) as a distribution to partners, stockholders or affiliates of
such person, provided that the distributees thereof agree in writing to be bound
by the terms of this restriction, (iii) in transactions relating to shares of
Common Stock or other securities acquired in open market transactions after the
date that the Registration Statement is declared effective, or (iv) with the
prior written consent of BancBoston Robertson Stephens Inc. The foregoing
restriction shall have been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a Disposition of Securities
during the Lock-up Period, even if such Securities would be disposed of by
someone other than the such holder. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will have also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance with
this restriction.
(j) The Company and the Selling Stockholders shall have
furnished to you such further certificates and documents as you shall reasonably
request (including certificates of officers of the Company, the Selling
Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person) as to the accuracy of the representations
and warranties of the Company and the Selling Stockholders herein, as to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder and as to the other conditions concurrent and precedent to
the obligations of the Underwriters hereunder.
23
<PAGE>
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Underwriters'
Counsel. The Company and the Selling Stockholders will furnish you with such
number of conformed copies of such opinions, certificates, letters and documents
as you shall reasonably request.
7. OPTION SHARES.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters, for the purpose of
covering over-allotments in connection with the distribution and sale of the
Firm Shares only, a nontransferable option to purchase up to an aggregate of
540,000 Option Shares at the purchase price per share for the Firm Shares set
forth in Section 3 hereof. Such option may be exercised by the Representatives
on behalf of the several Underwriters on one (1) or more occasions in whole or
in part during the period of thirty (30) days after the date on which the Firm
Shares are initially offered to the public, by giving written notice to the
Company. The number of Option Shares to be purchased by each Underwriter upon
the exercise of such option shall be the same proportion of the total number of
Option Shares to be purchased by the several Underwriters pursuant to the
exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representatives in such manner as to avoid fractional shares.
If the Underwriters elect to purchase less than the total
number of Option Shares, the number of Option Shares to be purchased by the
several Underwriters pursuant to the exercise of the option granted by this
Section 7 shall be made against payment of the purchase price therefor by the
several Underwriters by wire transfer of immediately available funds to an
account specified in writing by the Company with regard to the Option Shares
being purchased from the Company. Such delivery and payment shall take place
at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
650 Page Mill Road, Palo Alto, California 94304 or at such other place as may
be agreed upon among the Representatives and the Company (i) on the Closing
Date, if written notice of the exercise of such option is received by the
Company at least two (2) full business days prior to the Closing Date, or
(ii) on a date which shall not be later than the third (3rd) full business
day following the date the Company receives written notice of the exercise of
such option, if such notice is received by the Company less than two (2) full
business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose payment shall not have been received by you prior to the date of payment
and delivery for the Option Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter or
Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date
24
<PAGE>
of payment and delivery for such Option Shares) to the accuracy of and
compliance with the representations, warranties and agreements of the Company
herein, to the accuracy of the statements of the Company and officers of the
Company made pursuant to the provisions hereof, to the performance by the
Company of their obligations hereunder, to the conditions set forth in
Section 6 hereof, and to the condition that all proceedings taken at or prior
to the payment date in connection with the sale and transfer of such Option
Shares shall be reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, and you shall have been furnished with all such
documents, certificates and opinions as you may reasonably request in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants or
agreements of the Company or the satisfaction of any of the conditions herein
contained.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Rule 2720 of the Conduct Rules of the NASD)
under the Act or otherwise, specifically including, but not limited to, losses,
claims, damages or liabilities (or actions in respect thereof) arising out of or
are based upon (i) any breach of any representation, warranty, agreement or
covenant of the Company herein contained, (ii) any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement or
any amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and agrees to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, such Preliminary Prospectus or the
Prospectus, or any such amendment or supplement thereto, in reliance upon, and
in conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter, directly or through you, specifically for use
in the preparation thereof and, PROVIDED FURTHER, that the indemnity agreement
provided in this Section 8(a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Selling Stockholder, severally and not jointly, agrees
to indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject (including, without limitation, in its capacity as an Underwriter or as
a "qualified independent underwriter" within the meaning of Rule 2720 of the
Conduct Rules of the NASD) under the Act or otherwise, specifically including,
but not limited to, losses, claims, damages or liabilities (or actions in
respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or
25
<PAGE>
covenant of such Selling Stockholder herein contained, (ii) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company or such Underwriter by such
Selling Stockholder, directly or through such Selling Stockholder's
representatives, specifically for use in the preparation thereof, and agrees
to reimburse each Underwriter for any legal or other expenses reasonably
incurred by it in connection with investigating or defending any such loss,
claim, damage, liability or action; PROVIDED, FURTHER, that the indemnity
agreement provided in this Section 8(b) with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any losses, claims, damages, liabilities or actions based
upon any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission to state therein a material fact purchased
Shares, if a copy of the Prospectus in which such untrue statement or alleged
untrue statement or omission or alleged omission was corrected had not been
sent or given to such person within the time required by the Act and the
Rules and Regulations, unless such failure is the result of noncompliance by
the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which such Selling Stockholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Stockholder against any
losses, claims, damages or liabilities, joint or several, to which the Company
or such Selling Stockholder may become subject under the Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities (or actions in respect thereof) arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of such
Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(c) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company and each such Selling Stockholder
for any legal or other expenses reasonably incurred by the Company and each such
Selling Stockholder in connection with investigating or defending any such loss,
claim, damage, liability or action.
The indemnity agreement in this Section 8(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, each Selling Stockholder and each person, if any, who controls the
Company or any Selling Stockholder within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which
each Underwriter may otherwise have.
26
<PAGE>
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; PROVIDED, HOWEVER, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 8(a), 8(b) or 8(c) hereof who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; PROVIDED that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on all claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this
Section 8 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that, except as set forth
in Section 8(f) hereof, the Underwriters severally and not jointly are
responsible pro rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and the
Company and the Selling Stockholders are responsible for the remaining portion,
PROVIDED, HOWEVER, that (i) no Underwriter shall be required to contribute any
amount in excess of the amount by which the underwriting discount applicable to
the Shares purchased by such Underwriter exceeds the amount of damages which
such Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(e)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company or
any Selling Stockholder within the meaning of the Act or the Exchange Act and
each officer of the Company who signed the Registration Statement and each
director of the Company.
27
<PAGE>
(f) The liability of each Selling Stockholder under the
representations, warranties and agreements contained herein and under the
indemnity agreements contained in the provisions of this Section 8 shall be
applicable only if such Selling Stockholder sells Selling Stockholder Shares and
shall be limited to an amount equal to the initial public offering price of the
Selling Stockholder Shares sold by such Selling Stockholder to the Underwriters
minus the amount of the underwriting discount paid thereon to the Underwriters
by such Selling Stockholder. The Company and such Selling Stockholders may
agree, as among themselves and without limiting the rights of the Underwriters
under this Agreement, as to the respective amounts of such liability for which
they each shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company, the Selling Stockholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or any Selling Stockholder, or
any of their officers, directors or controlling persons within the meaning of
the Act or the Exchange Act, and shall survive the delivery of the Shares to the
several Underwriters hereunder or termination of this Agreement.
10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters
agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the
remaining Underwriters shall have the right, but shall not be obligated, to
take up and pay for (in such proportions as may be agreed upon among them)
the Firm Shares which the defaulting Underwriter or Underwriters so agreed
but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing
Date shall be postponed for twenty-four (24) hours to allow the several
Underwriters the privilege of substituting within twenty-four (24) hours
(including non-business hours) another underwriter or underwriters (which may
include any nondefaulting Underwriter) satisfactory to the Company. If no
such underwriter or underwriters shall have been substituted as aforesaid by
such postponed Closing Date, the Closing Date may, at the option of the
Company, be postponed for a further twenty-four (24) hours, if necessary, to
allow the Company the privilege of finding another underwriter or
underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If
it shall be arranged for the remaining Underwriters or substituted
underwriter or underwriters to take up the Firm Shares of the defaulting
Underwriter or Underwriters as provided in this Section 10, (i) the Company
shall have the right to postpone the time of delivery for a period of not
more than seven (7) full business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
promptly to file any amendments to the Registration Statement or supplements
to the Prospectus which may thereby be made necessary, and (ii) the
respective
28
<PAGE>
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and
pay for all such Firm Shares so agreed to be purchased by the defaulting
Underwriter or Underwriters or substitute another underwriter or underwriters
as aforesaid and the Company shall not find or shall not elect to seek
another underwriter or underwriters for such Firm Shares as aforesaid, then
this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company nor any Selling
Stockholder shall be liable to any Underwriter (except as provided in Sections 5
and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Stockholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Stockholder (except to the
extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., San Francisco time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set
forth in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be,
(i) if the Company or any Selling Stockholder shall have failed, refused or been
unable to perform any agreement on its part to be performed, or because any
other condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including, without limitation, any change in the
condition (financial or otherwise), earnings, operations or business of the
Company and its subsidiaries considered as one enterprise from that set forth in
the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse, or (ii) if additional material governmental restrictions,
not in force and effect on the date hereof, shall have been imposed upon trading
in securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a material loss by strike, fire, flood, earthquake, accident or other
calamity of such character as to interfere materially with the conduct of the
business and operations of the Company regardless of whether or not such loss
shall have been insured, or (iv) if there shall have been a material adverse
change in the general political or economic conditions or financial markets as
in your reasonable judgment makes it inadvisable or impracticable to proceed
with the offering, sale and delivery of the Shares, or (v) if there shall have
been an outbreak or escalation of hostilities or of any other insurrection or
armed conflict or the declaration by the United States of a national emergency
which, in the reasonable opinion of the Representatives, makes it impracticable
or inadvisable to proceed with the public offering of the Shares as
29
<PAGE>
contemplated by the Prospectus. In the event of termination pursuant to
subparagraph (i) above, the Company shall remain obligated to pay costs and
expenses pursuant to Sections 4(j), 5 and 8 hereof. Any termination pursuant
to any of subparagraphs (ii) through (v) above shall be without liability of
any party to any other party except as provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
11. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancBoston Robertson Stephens Inc., 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to 1900 S. Norfolk St., Suite 150, San
Mateo, CA 94403, telecopier number (650) 655-4777, Attention: John W. Danner,
Chief Executive Officer; if sent to one or more of the Selling Stockholders,
such notice shall be sent mailed, delivered, telegraphed (and confirmed by
letter) or telecopied (and confirmed by letter) to John W. Danner and Stephen E.
Recht, as Attorneys-in-Fact for the Selling Stockholders, at 1900 S. Norfolk
St., Suite 150, San Mateo, CA 94403, telecopier number (650) 655-4777.
12. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and the Selling Stockholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 8 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling Stockholders under
this Agreement, you shall act on behalf of each of the several Underwriters, and
the Company and the Selling Stockholders shall be entitled to act and rely upon
any statement, request, notice or agreement made or given by you jointly or by
BancBoston Robertson Stephens on behalf of you.
13. APPLICABLE LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California.
14. COUNTERPARTS. This Agreement may be signed in several counterparts,
each of which will constitute an original.
30
<PAGE>
If the foregoing correctly sets forth the understanding among the Company, the
Selling Stockholders and the several Underwriters, please so indicate in the
space provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Company, the Selling Stockholders and the several
Underwriters.
Very truly yours,
NETGRAVITY, INC.
By
---------------------------------------------
SELLING STOCKHOLDERS
By
---------------------------------------------
Attorney-in-Fact for the Selling Stockholders
named in Schedule B hereto
Accepted as of the date first above written:
BANCBOSTON ROBERTSON STEPHENS INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
FIRST ALBANY CORPORATION
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By BANCBOSTON ROBERTSON STEPHENS INC.
By
--------------------------------------------
Authorized Signatory
<PAGE>
SCHEDULE A
Underwriters Number of
Firm Shares
- ------------------------------------ To Be
Purchased
-----------
BancBoston Robertson Stephens Inc.
NationsBanc Montgomery Securities LLC
First Albany Corporation
--------
Total.......................................................
<PAGE>
SCHEDULE B
NetGravity, Inc. Number of
Company
- -------------------------------- Shares To
Be Sold
-----------
-------
Total.....................................................
-------
-------
Name of Selling Stockholder Number of
Selling
- --------------------------------- Stockholder
Shares
To Be Sold
-----------
-------
Total.....................................................
-------
-------
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
NETGRAVITY, INC.
(Pursuant to Sections 228, 242 and 245 of
the Delaware General Corporation Law)
NetGravity, Inc., a corporation organized and existing under the Delaware
General Corporation Law (the "CORPORATION"), does hereby certify:
FIRST: That the Corporation was originally incorporated on September 5,
1995 under the name of Netvertiser, Inc., pursuant to the Delaware General
Corporation Law.
SECOND: That the Board of Directors of the Corporation duly adopted
resolutions proposing to restate and integrate, without further amending the
provisions of, the Certificate of Incorporation of the Corporation as heretofore
amended and supplemented, without discrepancy between such provisions and the
provision of this Restated Certificate of Incorporation, declaring said
restatement and integration to be advisable and in the best interests of the
Corporation and its stockholders, which resolution setting forth the proposed
restatement and integration is as follows:
"RESOLVED, that the Restated Certificate of Incorporation of this
corporation be restated and integrated to read in its entirety as follows:
ONE. The name of this corporation is:
NetGravity, Inc.
TWO. The address of this corporation's registered office in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THREE. The purpose of this corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOUR. This corporation is authorized to issue two classes of stock,
to be designated, respectively, "COMMON STOCK" and "PREFERRED STOCK." The total
number of shares of Common Stock that this corporation is authorized to issue is
50,000,000, with a par value of $0.001 per share. The total number of shares of
Preferred Stock that this corporation is authorized to issue is 5,000,000, with
a par value of $0.001 per share, all of which are undesignated.
The Board of Directors of this corporation is authorized to determine or
alter the powers, preferences and rights and the qualifications, limitations or
restrictions granted to or imposed upon
<PAGE>
any wholly unissued series of Preferred Stock, and within the limitations or
restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series, to
increase or decrease (but not below the number of shares of any such series
then outstanding) the number of shares of any such series, to determine the
designation of any series, and to fix the number of shares of any series.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to
the adoption of the resolution originally fixing the number of shares of such
series.
FIVE. The corporation is to have perpetual existence.
SIX. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors of the corporation is expressly authorized to
make, alter, amend or repeal the Bylaws of the corporation.
SEVEN. Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the corporation shall so provide.
EIGHT. Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws of the corporation may provide. The books of the
corporation may be kept outside of the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors of the
corporation or in the Bylaws of the corporation.
NINE.
(a) LIMITATION OF DIRECTOR'S LIABILITY. To the fullest extent not
prohibited by the General Corporation Law of Delaware as the same exists or as
it may hereafter be amended, a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for conduct as a director.
(b) INDEMNIFICATION OF CORPORATE AGENTS. The corporation shall
indemnify to the fullest extent not prohibited by law any person made or
threatened to be made a party to an action or proceeding, whether criminal,
civil, administrative or investigative, by reason of the fact that such
person, such person's testator or intestate is or was a director, officer or
employee benefit plan fiduciary of the corporation or any predecessor of the
corporation or serves or served at the request of the corporation or any
predecessor of the corporation as a director, officer or employee benefit
plan fiduciary of another corporation, partnership, limited liability
company, joint venture, trust or other entity or enterprise. The Board of
Directors of the corporation may, in its discretion, extend such
indemnification to former, current or future employees and other agents of
the corporation or any predecessor corporate.
(c) REPEAL OR MODIFICATION. Neither any amendment or repeal of this
Article Nine, nor the adoption of any provision of the corporation's Certificate
of Incorporation inconsistent with
2
<PAGE>
this Article Nine, shall eliminate or reduce the effect of this Article Nine in
respect of any matter occurring, or any action or proceeding accruing or arising
or that, but for this Article Nine, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
TEN. The stockholders of the corporation may not take action by
written consent without a meeting but must take any such actions at a duly
called annual or special meeting of stockholders."
3
<PAGE>
THIRD: The foregoing Restated Certificate of Incorporation was duly
adopted by the Board of Directors of the Corporation in accordance with Section
245 of the Delaware General Corporation Law.
We hereby further declare and certify under penalty of perjury under the
laws of the State of Delaware that the facts set forth in the foregoing
certificate are true and correct of our own knowledge and that this Restated
Certificate of Incorporation is our act and deed.
Executed at San Mateo, California, on February 25, 1999.
/s/ John W. Danner
--------------------------------------------------
John W. Danner,
Chairman of the Board and Chief Executive Officer
/s/ Stephen E. Recht
--------------------------------------------------
Stephen E. Recht,
Secretary
4
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
NETGRAVITY, INC.
(A DELAWARE CORPORATION)
<PAGE>
BYLAWS OF
NETGRAVITY, INC.
(A DELAWARE CORPORATION)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 REGISTERED OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 OTHER OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II - MEETINGS OF STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . .1
2.1 PLACE OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . .1
2.2 ANNUAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2.3 SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS. . . . . . . . . . . . . . . . . . .2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS . . .2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. . . . . . . . . . . . .2
2.7 QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.8 ADJOURNED MEETING; NOTICE . . . . . . . . . . . . . . . . . . . . . .3
2.9 VOTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . .3
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING. . . . . . . . . . . . . .4
2.12 PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.13 ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE . . . . . . . . . . . . . . . .4
ARTICLE III - DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
3.1 POWERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
3.2 NUMBER OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . .5
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS. . . . . . . . . . . . . . .5
3.4 RESIGNATION AND VACANCIES . . . . . . . . . . . . . . . . . . . . . .6
3.5 REMOVAL OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . .7
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. . . . . . . . . . . . . . .7
3.7 FIRST MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.8 REGULAR MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.9 SPECIAL MEETINGS; NOTICE. . . . . . . . . . . . . . . . . . . . . . .7
3.10 QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.11 WAIVER OF NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.12 ADJOURNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.13 NOTICE OF ADJOURNMENT . . . . . . . . . . . . . . . . . . . . . . . .8
-i-
<PAGE>
TABLE OF CONTENTS
(Continued)
Page
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . . . . .8
3.15 FEES AND COMPENSATION OF DIRECTORS. . . . . . . . . . . . . . . . . .9
3.16 APPROVAL OF LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . . .9
3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION. . . . . . . .9
3.18 NOMINATION OF DIRECTORS; STOCKHOLDER BUSINESS AT ANNUAL
MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
ARTICLE IV - COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.1 COMMITTEES OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . 11
4.2 MEETINGS AND ACTION OF COMMITTEES . . . . . . . . . . . . . . . . . 11
4.3 COMMITTEE MINUTES . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE V - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.1 OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.2 ELECTION OF OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . 12
5.3 SUBORDINATE OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . 12
5.4 REMOVAL AND RESIGNATION OF OFFICERS . . . . . . . . . . . . . . . . 12
5.5 VACANCIES IN OFFICES. . . . . . . . . . . . . . . . . . . . . . . . 13
5.6 CHAIRMAN OF THE BOARD . . . . . . . . . . . . . . . . . . . . . . . 13
5.7 PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.8 VICE PRESIDENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.9 SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.10 CHIEF FINANCIAL OFFICER . . . . . . . . . . . . . . . . . . . . . . 14
5.11 ASSISTANT SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . 14
5.12 ADMINISTRATIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . 14
5.13 AUTHORITY AND DUTIES OF OFFICERS. . . . . . . . . . . . . . . . . . 15
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS . . 15
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . . . . . . . 15
6.2 INDEMNIFICATION OF OTHERS . . . . . . . . . . . . . . . . . . . . . 16
6.3 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VII - RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . 16
7.1 MAINTENANCE AND INSPECTION OF RECORDS . . . . . . . . . . . . . . . 16
7.2 INSPECTION BY DIRECTORS . . . . . . . . . . . . . . . . . . . . . . 17
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. . . . . . . . . . . 17
-ii-
<PAGE>
TABLE OF CONTENTS
(Continued)
Page
7.4 CERTIFICATION AND INSPECTION OF BYLAWS. . . . . . . . . . . . . . . 17
ARTICLE VIII - GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING . . . . . . . 17
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS . . . . . . . . . . . . . 18
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED. . . . . . . . . 18
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES. . . . . . . . . . 18
8.5 SPECIAL DESIGNATION ON CERTIFICATES . . . . . . . . . . . . . . . . 19
8.6 LOST CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.7 TRANSFER AGENTS AND REGISTRARS. . . . . . . . . . . . . . . . . . . 19
8.8 CONSTRUCTION; DEFINITIONS . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE IX - AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
-iii-
<PAGE>
BYLAWS
OF
NETGRAVITY, INC.
(A DELAWARE CORPORATION)
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be fixed in the certificate
of incorporation of the corporation.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Friday in June in each year at 3:00 p.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected, and
any other proper business may be transacted.
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president.
<PAGE>
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.5 of these bylaws not less than ten (10) nor more than
sixty (60) days before the date of the meeting. The notice shall specify the
place, date and hour of the meeting and (i) in the case of a special meeting,
the purpose or purposes for which the meeting is called (no business other than
that specified in the notice may be transacted) or (ii) in the case of the
annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
To be properly brought before an annual meeting or special meeting,
nominations for the election of directors or other business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the board of directors, (b) otherwise properly brought before
the meeting by or at the direction of the board of directors or (c) otherwise
properly brought before the meeting by a stockholder. For such nominations or
other business to be considered properly brought before the meeting by a
stockholder, such stockholder must have given timely notice and in proper form
of his or her intent to bring such business before such meeting in accordance
with Section 3.18 of these bylaws.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting in accordance
with Section 2.8 of these bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the
-2-
<PAGE>
certificate of incorporation or these bylaws, a different vote is required, in
which case such express provision shall govern and control the decision of the
question.
If a quorum be initially present, the stockholders may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time and place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation or
these bylaws, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
The stockholders of the corporation may not take action by written
consent without a meeting but must take any such actions at a duly called
annual or special meeting.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
-3-
<PAGE>
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
The record date for any other purpose shall be as provided in Section 8.1
of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware (relating to the irrevocability of proxies).
2.13 ORGANIZATION
The president, or in the absence of the president, the chairman of the
board, shall call the meeting of the stockholders to order, and shall act as
chairman of the meeting. In the absence of the president, the chairman of the
board, and all of the vice presidents, the stockholders shall appoint a chairman
for such meeting. The chairman of any meeting of stockholders shall determine
the order of business and the procedures at the meeting, including such matters
as the regulation of the manner of voting and the conduct of business. The
secretary of the corporation shall act as secretary of all meetings of the
stockholders, but in the absence of the secretary at any meeting of the
stockholders, the chairman of the meeting may appoint any person to act as
secretary of the meeting.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior
-4-
<PAGE>
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and to
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The number of directors of the corporation shall be not less than three
(3) nor more than nine (9). The exact number of directors shall be six (6)
until changed, within the limits specified above, by a bylaw amending this
Section 3.2, duly adopted by the board of directors or by the stockholders.
The indefinite number of directors may be changed, or a definite number may
be fixed without provision for an indefinite number, by a duly adopted
amendment to the Certificate of Incorporation or by an amendment to this
bylaw duly adopted by the board of directors or by the stockholders.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall hold
office until the expiration of the term for which elected and until a successor
has been elected and qualified; except that if any such election shall not be so
held, such election shall take place at a stockholders' meeting called and held
in accordance with the Delaware General Corporation Law.
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
Each director so elected shall hold office until the expiration of the term of
office of the director whom he has replaced and until a successor has been
elected and qualified.
Vacancies occurring on the Board of Directors for any reason and newly
created directorships resulting from an increase in the authorized number of
directors may be filled only by vote of a majority of the remaining members
of the Board of Directors, although less than a quorum, at any meeting of the
Board of
-5-
<PAGE>
Directors. A person so elected by the Board of Directors to fill a vacancy or
newly created directorship shall hold office until the next election of the
Class for which such director shall have been chosen and until his or her
successor shall have been duly elected and qualified.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware (relating to meetings
of shareholders).
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware (relating to meetings of shareholders) as far as
applicable.
3.5 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors; provided, however, that, if and so
long as stockholders of the corporation are entitled to cumulative voting, if
less than the entire board is to be removed, no director may be removed without
cause if the votes cast against his removal would be sufficient to elect him if
then cumulatively voted at an election of the entire board of directors.
Whenever the holders of any class or series are entitled to elect one or more
directors by the certificate of incorporation, this Section 3.5 shall apply, in
respect to the removal without cause of a director or directors so elected, to
the vote of the holders of the outstanding shares of that class or series and
not to the vote of the outstanding shares as a whole.
-6-
<PAGE>
Any director may be removed from office by the stockholders of the
corporation only for cause.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting of the board, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such participating
directors shall be deemed to be present in person at the meeting.
3.7 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting. In the event of the failure of the stockholders to fix the time
or place of such first meeting of the newly elected board of directors, or in
the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.8 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time as shall from time to time be determined by the board of directors.
If any regular meeting day shall fall on a legal holiday, then the meeting shall
be held at the same time and place on the next succeeding full business day.
3.9 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telecopy or telegram, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone, telecopy or telegram, it shall be
delivered personally or by telephone or to the telegraph company at least
forty-eight (48) hours before the time of the holding of the meeting. Any oral
notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director. The
notice need not specify the purpose or the place of the meeting, if the meeting
is to be held at the principal executive office of the corporation.
-7-
<PAGE>
3.10 QUORUM
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.12
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
certificate of incorporation and applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the quorum for that meeting.
3.11 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice, whether before or after the meeting, or (ii) who attends the
meeting other than for the express purposed of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. All such waivers shall be filed with the corporate records
or made part of the minutes of the meeting. A waiver of notice need not specify
the purpose of any regular or special meeting of the board of directors.
3.12 ADJOURNMENT
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting of the board to another time and place.
3.13 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting of the board
need not be given unless the meeting is adjourned for more than twenty-four (24)
hours. If the meeting is adjourned for more than twenty-four (24) hours, then
notice of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 3.9 of these
bylaws, to the directors who were not present at the time of the adjournment.
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board of directors.
3.15 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.15 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
-8-
<PAGE>
3.16 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION
In the event only one director is required by these bylaws or the
certificate of incorporation, then any reference herein to notices, waivers,
consents, meetings or other actions by a majority or quorum of the directors
shall be deemed to refer to such notice, waiver, etc., by such sole director,
who shall have all the rights and duties and shall be entitled to exercise all
of the powers and shall assume all the responsibilities otherwise herein
described as given to the board of directors.
3.18 NOMINATION OF DIRECTORS; STOCKHOLDER BUSINESS AT ANNUAL MEETINGS
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
nominations for the election of directors may be made by the board of directors
or any nominating committee appointed by the board of directors or by any
stockholder entitled to vote in the election of directors generally. However, a
stockholder generally entitled to vote in the election of directors may nominate
one or more persons for election as directors at a meeting only if written
notice of such stockholder's intent to make such nomination or nominations has
been given, either by personal delivery or by U.S. mail, postage prepaid, to the
secretary of the corporation not later than (i) with respect to an election to
be held at an annual meeting of stockholders, 60 days in advance of such meeting
and (ii) with respect to an election to be held at a special meeting of
stockholders for the election of directors, the close of business on the seventh
day following the date on which notice of such meeting is first given to
stockholders. Each such notice shall set forth the following information:
(a) the name and address of the stockholder who intends to make the nomination
and of the person or persons to be nominated; (b) a representation that the
stockholder is a holder of record of stock of the corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the stockholder, each nominee or any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder; (d) such other
information regarding each nominee proposed by such stockholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission, had the nominee been nominated, or
intended to be nominated, by the board of directors of the corporation; and (e)
the consent of each nominee to serve as a director of the corporation if so
elected. At the request of the board of directors, any person properly
nominated by the board of directors for election as a director shall furnish to
the secretary of the corporation that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the corporation unless nominated
in accordance with the procedures set forth herein. A majority of the board of
directors may reject any nomination by a stockholder not timely made or
otherwise not in
-9-
<PAGE>
accordance with the terms of this Section 3.18. If a majority of the board of
directors reasonably determines that the information provided in a stockholder's
notice does not satisfy the informational requirements of this Section 3.18 in
any material respect, the secretary of the corporation shall promptly notify
such stockholder of the deficiency in writing. The stockholder shall have an
opportunity to cure the deficiency by providing additional information to the
secretary within such period of time, not to exceed ten days from the date such
deficiency notice is given to the stockholder, as a majority of the board of
directors shall reasonably determine. If the deficiency is not cured within
such period, or if a majority of the board of directors reasonably determines
that the additional information provided by the stockholder, together with the
information previously provided, does not satisfy the requirements of this
Section 3.18 in any material respect, then a majority of the board of directors
may reject such stockholder's nomination. The secretary of the corporation
shall notify a stockholder in writing whether the stockholder's nomination has
been made in accordance with the time and information requirements of this
Section 3.18.
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the chairman of the meeting or (ii) by any stockholder of the
corporation who complies with the notice procedures set forth in this Section
3.18. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than 60 days prior to the meeting; provided, however, that
in the event that less than 70 days notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be received not later than the close of business on the tenth
day following the earlier of the day on which such notice of the date of the
annual meeting was mailed or such public disclosure was made. A stockholder's
notice to the secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting the following information: (a) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the corporation's books, of the
stockholder proposing such business, (c) the class and number of shares of the
corporation which are beneficially owned by the stockholder and (d) any material
direct or indirect interest, financial or otherwise of the stockholder or its
affiliates or associates in such business. The board of directors may reject
any stockholder proposal not timely made in accordance with this Section 3.18.
If the board of directors determines that the information provided in a
stockholder's notice does not satisfy the informational requirements hereof, the
secretary of the corporation shall promptly notify such stockholder of the
deficiency in the notice. The stockholder shall then have an opportunity to
cure the deficiency by providing additional information to the secretary within
such period of time, not to exceed ten days from the date such deficiency notice
is given to the stockholder, as the board of directors shall determine. If the
deficiency is not cured within such period, or if the board of directors
determines that the additional information provided by the stockholder, together
with the information previously provided, does not satisfy the requirements of
this Section 3.18, then the board of directors may reject such stockholder's
proposal. The secretary of the corporation shall notify a stockholder in
writing whether the stockholder's proposal has been made in accordance with the
time and information requirements hereof.
This provision shall not prevent the consideration and approval or
disapproval at an annual meeting of reports of officers, directors and
committees of the board of directors, but in connection therewith no new
business shall be acted upon at any such meeting unless stated, filed and
received as herein provided. Notwithstanding anything in these bylaws to the
contrary, no business brought before a meeting by a stockholder shall be
conducted at an annual meeting except in accordance with procedures set forth in
this Section 3.18.
-10-
<PAGE>
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of one or more directors, to serve at the pleasure of the board. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have and
may exercise all the powers and authority of the board, but no such committee
shall have the power or authority to (i) amend the certificate of incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the board
of directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware (relating to mergers and consolidations of domestic and foreign
corporations), (iii) recommend to the stockholders the sale, lease or exchange
of all or substantially all of the corporation's property and assets,
(iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution or (v) amend the bylaws of the corporation; and,
unless the board resolution establishing the committee, the bylaws or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware (relating to mergers of parent and
subsidiary corporations).
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the following provisions of Article III of these bylaws:
Section 3.6 (place of meetings; meetings by telephone), Section 3.8 (regular
meetings), Section 3.9 (special meetings; notice), Section 3.10 (quorum),
Section 3.11 (waiver of notice), Section 3.12 (adjournment), Section 3.13
(notice of adjournment) and Section 3.14 (board action by written consent
without meeting), with such changes in the context of those bylaws as are
necessary to substitute the committee and its members for the board of directors
and its members; provided, however, that the time of regular meetings of
committees may be determined either by resolution of the board of directors or
by resolution of the committee, that special meetings of committees may also be
called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
4.3 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
-11-
<PAGE>
ARTICLE V
OFFICERS
5.1 OFFICERS
The Corporate Officers of the corporation shall be a president, a secretary
and a chief financial officer. The corporation may also have, at the discretion
of the board of directors, a chairman of the board, one or more vice presidents
(however denominated), one or more assistant secretaries, one or more assistant
treasurers, and such other officers as may be appointed in accordance with the
provisions of Section 5.3 of these bylaws. Any number of offices may be held by
the same person.
In addition to the Corporate Officers of the Company described above, there
may also be such Administrative Officers of the corporation as may be designated
and appointed from time to time by the president of the corporation in
accordance with the provisions of Section 5.12 of these bylaws.
5.2 ELECTION OF OFFICERS
The Corporate Officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board of directors, subject to the rights,
if any, of an officer under any contract of employment, and shall hold their
respective offices for such terms as the board of directors may from time to
time determine.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to
appoint, such other Corporate Officers as the business of the corporation may
require, each of whom shall hold office for such period, have such power and
authority, and perform such duties as are provided in these bylaws or as the
board of directors may from time to time determine.
The president may from time to time designate and appoint Administrative
Officers of the corporation in accordance with the provisions of Section 5.12 of
these bylaws.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of a Corporate Officer under any contract of
employment, any Corporate Officer may be removed, either with or without cause,
by the board of directors at any regular or special meeting of the board or,
except in case of a Corporate Officer chosen by the board of directors, by any
Corporate Officer upon whom such power of removal may be conferred by the board
of directors.
Any Corporate Officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the receipt
of that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall not
be necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Corporate
Officer is a party.
-12-
<PAGE>
Any Administrative Officer designated and appointed by the president may be
removed, either with or without cause, at any time by the president. Any
Administrative Officer may resign at any time by giving written notice to the
president or to the secretary of the corporation.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise such other
powers and perform such other duties as may from time to time be assigned to him
by the board of directors or as may be prescribed by these bylaws. If there is
no president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction and control of the business and the officers of the corporation. He
or she shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He or she shall have the general powers and duties of management
usually vested in the office of president of a corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, and if there is no chairman
of the board, the vice presidents, if any, in order of their rank as fixed by
the board of directors or, if not ranked, a vice president designated by the
board of directors, shall perform all the duties of the president and when so
acting shall have all the powers of, and be subject to all the restrictions
upon, the president. The vice presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the board of directors, these bylaws, the president or the
chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of the board of directors,
committees of directors and stockholders. The minutes shall show the time and
place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a
-13-
<PAGE>
share register or a duplicate share register, showing the names of all
stockholders and their addresses, the number and classes of shares held by each,
the number and date of certificates evidencing such shares and the number and
date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable
times be open to inspection by any director for a purpose reasonably related to
his position as a director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He or she shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.
5.11 ASSISTANT SECRETARY
The assistant secretary, if any, or, if there is more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his or her inability or refusal
to act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
5.12 ADMINISTRATIVE OFFICERS
In addition to the Corporate Officers of the corporation as provided in
Section 5.1 of these bylaws and such subordinate Corporate Officers as may be
appointed in accordance with Section 5.3 of these bylaws, there may also be such
Administrative Officers of the corporation as may be designated and appointed
from time to time by the president of the corporation. Administrative Officers
shall perform such duties and have such powers as from time to time may be
determined by the president or the board of directors in order to assist the
Corporate Officers in the furtherance of their duties. In the performance of
such duties and the exercise of such powers, however, such Administrative
Officers shall have limited authority to act on behalf of the corporation as the
board of directors shall establish, including but not limited to limitations on
the dollar amount and on the scope of agreements or commitments that may be made
by such Administrative Officers on behalf of the corporation, which limitations
may not be exceeded by such individuals or altered by the president without
further approval by the board of directors.
-14-
<PAGE>
5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing powers, authority and duties, all officers of
the corporation shall respectively have such authority and powers and perform
such duties in the management of the business of the corporation as may be
designated from time to time by the board of directors.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware as the same now exists or may hereafter
be amended, indemnify any person against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit,
or proceeding in which such person was or is a party or is threatened to be made
a party by reason of the fact that such person is or was a director or officer
of the corporation. For purposes of this Section 6.1, a "director" or "officer"
of the corporation shall mean any person (i) who is or was a director or officer
of the corporation, (ii) who is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees) incurred
by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should ultimately be determined that the director or officer is
not entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the corporation's Certificate of Incorporation, these
bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
-15-
<PAGE>
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
-16-
<PAGE>
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his or her position as a director.
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
7.4 CERTIFICATION AND INSPECTION OF BYLAWS
The original or a copy of these bylaws, as amended or otherwise altered to
date, certified by the secretary, shall be kept at the corporation's principal
executive office and shall be open to inspection by the stockholders of the
corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not
precede the date upon which the resolution fixing the record date is adopted and
which shall not be more than sixty (60) days before any such action. In that
case, only stockholders of record at the close of business on the date so fixed
are entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided by law.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board of directors adopts the applicable
resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness
-17-
<PAGE>
that are issued in the name of or payable to the corporation, and only the
persons so authorized shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws, may
authorize and empower any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such power and authority may be general or confined to specific
instances. Unless so authorized or ratified by the board of directors or within
the agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and, upon
request, every holder of uncertificated shares, shall be entitled to have a
certificate signed by, or in the name of the corporation by, the chairman or
vice-chairman of the board of directors, or the president or vice-president, and
by the chief financial officer or an assistant treasurer, or the secretary or an
assistant secretary of such corporation representing the number of shares
registered in certificate form. Any or all of the signatures on the certificate
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate has
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the corporation with the same effect as if he or
she were such officer, transfer agent or registrar at the date of issue.
Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; and, if the shares be assessable, or,
if assessments are collectible by personal action, a plain statement of such
facts.
Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
-18-
<PAGE>
8.5 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware (relating to transfers of stock, stock certificates and uncertificated
stock), in lieu of the foregoing requirements there may be set forth on the face
or back of the certificate that the corporation shall issue to represent such
class or series of stock a statement that the corporation will furnish without
charge to each stockholder who so requests the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
The board of directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, each of which shall be an incorporated bank
or trust company -- either domestic or foreign, who shall be appointed at such
times and places as the requirements of the corporation may necessitate and the
board of directors may designate.
8.8 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, as used in these bylaws, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both an entity and a natural person.
-19-
<PAGE>
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
-20-
<PAGE>
Exhibit 5.1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
March 2, 1999
NetGravity, Inc.
1900 S. Norfolk Street
Suite 150
San Mateo, CA 94403
RE: Registration Statement on Form S-1
Ladies and Gentlemen:
We are acting as counsel to NetGravity, Inc., a Delaware corporation (the
"Company"), in connection with the registration of 3,600,000 shares of the
Company's common stock, par value $0.001 per share, including 540,000 shares
subject to an over-allotment option (collectively, the "Shares"), pursuant to a
Registration Statement on Form S-1 (the "Registration Statement"), filed as of
the date hereof with the Securities and Exchange Commission under the Securities
Act of 1933, as amended. The Shares are being sold by the Company and the
selling stockholders identified as such in the Registration Statement.
As counsel for the Company, we have examined originals or copies, certified
or otherwise identified to our satisfaction, of such documents, corporate
records, certificates of public officials and other instruments as we have
deemed necessary for the purposes of rendering this opinion. In our examination,
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity with the originals of
all documents submitted to us as copies.
Based upon the foregoing, we are of the opinion that the Shares to be
registered for sale by the Company and the selling stockholders have been duly
authorized by the Company, and the Shares to be registered for sale by the
selling stockholders are, and the Shares to be registered for sale by the
Company, when issued, delivered and paid for in accordance with the terms of the
underwriting agreement referred to in the Registration Statement and in
accordance with the resolutions adopted by the Board of Directors of the
Company, will be, validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and we consent to the reference of our name under the caption "Legal
Matters" in the prospectus forming a part of the Registration Statement.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE>
Exhibit 21.1
List of Subsidiaries.
NetGravity Europe Ltd.
NetGravity Asia Pacific K.K.
NetGravity (Hong Kong) Limited
<PAGE>
EXHIBIT 23.1
REPORT ON SCHEDULE AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NetGravity, Inc. and Subsidiaries:
The audits referred to in our report dated January 27, 1999, included the
related financial statement schedule as of December 31, 1998, and for each of
the years in the three-year period ended December 31, 1998, as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
KPMG LLP
San Francisco, California
March 2, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,236
<SECURITIES> 10,563
<RECEIVABLES> 6,513
<ALLOWANCES> (202)
<INVENTORY> 0
<CURRENT-ASSETS> 27,888
<PP&E> 4,994
<DEPRECIATION> (1,521)
<TOTAL-ASSETS> 33,420
<CURRENT-LIABILITIES> 10,183
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 22,114
<TOTAL-LIABILITY-AND-EQUITY> 33,420
<SALES> 0
<TOTAL-REVENUES> 11,557
<CGS> 0
<TOTAL-COSTS> (5,228)
<OTHER-EXPENSES> 18,162
<LOSS-PROVISION> 140
<INTEREST-EXPENSE> 114
<INCOME-PRETAX> (11,293)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,293)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,293)
<EPS-PRIMARY> (1.28)
<EPS-DILUTED> (1.28)
</TABLE>
