SEC Info - Netobjects Inc - ‘10-Q’ for 6/30/01

SEC Info℠

Home

Help

Please Sign In

Netobjects Inc – ‘10-Q’ for 6/30/01

On: Tuesday, 8/14/01, at 4:33pm ET · For: 6/30/01 · Accession #: 950005-1-500451 · File #: 0-25427

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/14/01  Netobjects Inc                    10-Q        6/30/01    1:89K                                    Dr EDGAR & Consulting/FA

Quarterly Report — Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                      23    147K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Exhibits and Reports on Form 8-K Financial Deterioration Financial Statements Financial Statements (unaudited) Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Signatures
1	1st Page - Filing Submission
2	Item 1. Financial Statements (unaudited)
3	Item 1. Financial Statements
10	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Financial Deterioration
22	Item 3. Quantitative and Qualitative Disclosures about Market Risk
23	Item 6. Exhibits and Reports on Form 8-K
"	Signatures

10-Q 1st Page of 23 TOC ↑Top Previous Next ↓Bottom Just 1st
 
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------

 FORM 10-Q

(Mark One)                                                                      

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934                                                           

For the Quarterly Period Ended June 30, 2001                          

or

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
EXCHANGE ACT OF 1934                                                  

For the Transition Period from      to     .                          
    ----    ----

 Commission File Number: 0-25427

----------

NETOBJECTS, INC.
(Exact name of Registrant as specified in its charter)

                                                                [Download Table]
                                                                                    
                    DELAWARE                                   94-3233791           
         (State or Other Jurisdiction of                    (I.R.S. Employer        
          Incorporation or Organization)                   Identification No.)      

301 GALVESTON DRIVE, REDWOOD CITY, CALIFORNIA 94063           (650) 482-3200        
     (Address of Principal Executive Offices)        (Registrant's Telephone Number)

NOT APPLICABLE
 (Former Name, Former Address, and Former Fiscal Year,
If Changed Since Last Report) 

----------

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days.                                              
YES [X] NO [ ]                                                                  

As of July 31, 2001, the Registrant had outstanding  31,777,601 shares of common
stock, $.01 par value.                                                          

================================================================================

10-Q 2nd Page of 23 TOC 1st Previous Next ↓Bottom Just 2nd
 TABLE OF CONTENTS

PART I:  FINANCIAL INFORMATION                                                  

Item 1.  Financial Statements (unaudited)                                       

Condensed Consolidated Balance Sheets at June 30, 2001        
         and September 30, 2000..............................................  1

Condensed Consolidated Statements of Operations and           
Comprehensive Loss for the three-months and nine-months       
         ended June 30, 2001 and June 30, 2000................................ 2

Condensed Consolidated Statements of Cash Flows for the       
         nine-months ended June 30, 2001 and June 30, 2000.................... 3

         Notes to Condensed Consolidated Financial Statements................. 4

Item 2.  Management's Discussion and Analysis of Financial                      
         Condition and Results of Operations.................................. 8

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.......... 20

PART II: OTHER INFORMATION                                                      

Item 6.  Exhibits and Reports on Form 8-K.................................... 21

     Signatures.............................................................  21

10-Q 3rd Page of 23 TOC 1st Previous Next ↓Bottom Just 3rd
 PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS                                                    

                NETOBJECTS, INC.
                AND SUBSIDIARIES
                 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT SHARE DATA)

                                                        [Enlarge/Download Table]

                                                                 JUNE 30, 2001    SEPTEMBER 30, 2000
                                                                 -------------    ------------------
                                        ASSETS                                                      
                                                                                                    
Cash and cash equivalents                                          $   4,441          $   8,323     
Accounts receivable, net of allowance for doubtful                                                  
  accounts of $790 and $1,315 at June 30, 2001 and                                                  
  September 30, 2000, respectively                                       883              5,647     
IBM trade receivable                                                     285                250     
Prepaid expenses                                                         508              2,845     
Other current assets                                                     503                636     
                                                                   ---------          ---------     
       Total current assets                                            6,620             17,701     

Property and equipment, net                                            1,535              2,700     
                                                                   ---------          ---------     
Intangible assets, net of amortization of $15,528                                                   
  and $8,297 as of June 30, 2001 and September 30, 2000,                                            
  respectively                                                         3,459             10,690     
Other long-term assets                                                   298              1,523     
                                                                   ---------          ---------     
Total Assets                                                       $  11,912          $  32,614     
                                                                   =========          =========     

                       LIABILITIES & STOCKHOLDERS' EQUITY                                           
Accounts payable                                                   $   1,579          $     944     
Accrued compensation                                                     640              1,337     
Other accrued liabilities                                              4,304              3,900     
Deferred revenue                                                       1,284              2,434     
Current portion of capital lease obligations                              --                168     
                                                                   ---------          ---------     
       Total current liabilities                                       7,807              8,783     

Capital lease obligations, less current portion                           --                 57     
                                                                   ---------          ---------     

Total liabilities                                                      7,807              8,840     
                                                                   ---------          ---------     
Stockholders' Equity:                                                                               
  Common stock, $0.01 par value. 60,000,000 shares                                                  
    authorized as of June 30, 2001 and September 30, 2000,                                          
    respectively. 31,799,616 and 31,632,125 shares                                                  
    issued and outstanding at June 30, 2001 and                                                     
    September 30, 2000, respectively                                     316                316     

Treasury stock, 46,361 shares outstanding at June 30, 2001               (37)                --     
Additional paid-in capital                                           131,985            132,007     
Notes receivable from stockholders                                      (523)              (598)    
Deferred stock-based compensation                                        (24)              (423)    
Accumulated other comprehensive losses                                  (116)               (89)    
Accumulated deficit                                                 (127,496)          (107,439)    
                                                                   ---------          ---------     
       Total stockholders' equity                                      4,105             23,774     
                                                                   ---------          ---------     

Total liabilities and stockholders' equity                         $  11,912          $  32,614     
                                                                   =========          =========     
<FN>                                                                                                
The accompanying notes are an integral part of these condensed consolidated financial statements.   
</FN>                                                                                               

1 

10-Q 4th Page of 23 TOC 1st Previous Next ↓Bottom Just 4th
                                                        [Enlarge/Download Table]
                                                  NETOBJECTS, INC.                                                              
                                                  AND SUBSIDIARIES                                                              
                              UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                         
                                               AND COMPREHENSIVE LOSS                                                           
                                   (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)                                              


                                                             THREE MONTHS ENDED JUNE 30,           NINE MONTHS ENDED JUNE 30,   
                                                          -------------------------------       ------------------------------- 
                                                              2001               2000               2001              2000      
                                                          ------------       ------------       ------------       ------------ 
                                                                                                                                
Revenues:                                                                                                                       
  Software license fees, training and online revenue      $      1,068       $      5,290       $      3,625       $     15,633 
  IBM software license and service revenue                          36              2,650       $        596              5,943 
                                                          ------------       ------------       ------------       ------------ 
       Total revenues                                            1,104              7,940              4,221             21,576 
                                                          ------------       ------------       ------------       ------------ 
Cost of revenues:                                                                                                               
  Software licenses, and online                                    893              1,637       $      5,314              2,702 
  Loss on prepaid service offering                                 923                 --       $        923                 -- 
  Services (professional and training)                             632                249       $      1,432                851 
                                                          ------------       ------------       ------------       ------------ 
       Total cost of revenues                                    2,448              1,886              7,669              3,553 
                                                          ------------       ------------       ------------       ------------ 
Gross profit                                                    (1,344)             6,054             (3,448)            18,023 
                                                          ------------       ------------       ------------       ------------ 
Operating expenses:                                                                                                             
  Sales and marketing                                            2,829              6,694              9,313             19,331 
  Research and development                                       1,632              2,694              6,159              7,792 
  General and administrative                                     1,071              1,652              3,585              4,357 
  Amortization of intangible assets                              2,365              2,017              7,128              6,051 
  Loss on impaired assets and terminated                                                                                        
    investment activities                                           13                 --              2,718                 -- 
  Stock-based compensation                                          68                  2                277                352 
                                                          ------------       ------------       ------------       ------------ 
       Total operating expenses                                  7,978             13,059             29,180             37,883 
                                                          ------------       ------------       ------------       ------------ 
Operating loss                                                  (9,322)            (7,005)           (32,628)           (19,860)
Interest income                                                    108                183                204                834 
                                                          ------------       ------------       ------------       ------------ 
  Loss before income taxes                                      (9,214)            (6,822)           (32,424)           (19,026)
                                                          ------------       ------------       ------------       ------------ 
Income taxes                                                        12                 39                 36                 63 
                                                          ------------       ------------       ------------       ------------ 

Net loss from continuing operations                       $     (9,226)      $     (6,861)      $    (32,460)      $    (19,089)
Gain (loss) from discontinued operations                                                                                        
  of Enterprise division                                  $         91       $       (473)      $     (2,706)      $     (2,379)
Gain from sale of the Enterprise division                 $         --       $         --       $     15,108       $         -- 
                                                          ------------       ------------       ------------       ------------ 

Net loss                                                        (9,135)            (7,334)           (20,058)           (21,468)
                                                          ------------       ------------       ------------       ------------ 

Translation adjustment                                             (15)               (22)               (27)               (42)
                                                          ------------       ------------       ------------       ------------ 

     Comprehensive loss                                   $     (9,150)      $     (7,356)      $    (20,085)      $    (21,510)
                                                          ============       ============       ============       ============ 
Basic and diluted net loss per share:                                                                                           
  From continuing operations                              $      (0.29)      $      (0.22)      $      (1.02)      $      (0.67)
                                                          ============       ============       ============       ============ 

  From discontinued operations and                                                                                              
    sale of the Enterprise division                       $         --       $      (0.02)      $       0.37       $      (0.08)
                                                          ============       ============       ============       ============ 

  Net loss                                                $      (0.29)      $      (0.24)      $      (0.65)      $      (0.75)
                                                          ============       ============       ============       ============ 

Shares used to compute basic and diluted net                                                                                    
  loss per share                                            31,758,932         30,884,783         31,694,492         28,475,635 
                                                          ============       ============       ============       ============ 
<FN>                                                                                                                            
              The accompanying notes are an integral part of these condensed consolidated financial statements.                 
</FN>                                                                                                                           

2 

10-Q 5th Page of 23 TOC 1st Previous Next ↓Bottom Just 5th
NETOBJECTS, INC.
AND SUBSIDIARIES
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                                NINE MONTHS ENDED JUNE 30,
                                                                                --------------------------
                                                                                    2001        2000      
                                                                                  --------    --------    
                                                                                                          
Cash flows from operating activities:                                                                     
Net loss from continuing operations                                               $(20,058)   $(21,468)   
Adjustments to reconcile net loss to netcash used in operating activities:                                
  Depreciation                                                                       1,027       1,200    
  Amortization of intangible assets                                                  7,231       6,130    
  Amortization of stock-based compensation                                             475         352    
  Gain on sale of Enterprise Division                                              (15,108)         --    
  Impairment of leasehold improvements                                                 138          --    
  Loss on prepaid service offering                                                     923          --    
  Changes in allowance for doubtful accounts and returns on accounts receivable       (525)       (284)   
  Changes in allowance for doubtful accounts on notes receivable                     1,500          --    
  Changes in operating assets and liabilities:                                                            
    Accounts receivable                                                              5,254      (7,183)   
    Prepaid expenses                                                                   952      (3,153)   
    Other current assets                                                              (269)       (266)   
    Other long term assets                                                             302          (2)   
    Accounts payable                                                                   635        (696)   
    Accrued compensation                                                              (697)        409    
    Other accrued liabilities                                                         (701)      1,431    
    Deferred revenue                                                                (1,150)      2,109    
                                                                                  --------    --------    
          NET CASH USED IN OPERATING ACTIVITIES                                    (20,071)    (21,419)   
                                                                                  --------    --------    
Cash flows from provided by investing activities:                                                         
  Purchases of property and equipment                                                   --      (1,816)   
  Notes receivable issued to Mycomputer.com                                         (1,500)         --    
  Proceeds from sale of Enterprise division                                         18,000          --    
  Cash paid for Sitematic Corporation, net of cash acquired                             --      (1,297)   
  Proceeds from sale of short-term investments                                          --       9,331    
  Issuance of stockholder note receivable                                               --        (250)   
                                                                                  --------    --------    
          NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES                       16,500       5,968    
                                                                                  --------    --------    
Cash flows from financing activities:                                                                     
  Proceeds from short-term borrowings                                                  750          --    
  Repayment of short-term borrowings                                                  (750)         --    
  Payment on capital lease obligations                                                (225)       (255)   
  Proceeds from issuance of common stock, net of issuance costs                        100       3,591    
  Repurchases of common stock                                                         (159)         --    
                                                                                  --------    --------    
          NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                         (284)      3,086    
                                                                                  --------    --------    
Effect of exchange rate changes on cash                                                (27)        (42)   
Net decrease in cash                                                                (3,882)    (12,159)   
Cash and cash equivalents at beginning of period                                     8,323      23,623    
                                                                                  --------    --------    
Cash and cash equivalents at end of period                                           4,441      11,464    
                                                                                  ========    ========    
Supplemental disclosures of cash flow information:                                                        
  Noncash investing and financing activities:                                                             
    Equipment recorded under capital leases                                       $     --    $    707    
    Issuance of common stock for acquisition                                      $     --    $ 13,478    
    Issuance and forgiveness of stockholders note receivable                      $     75    $    200    
    Deferred stock-based compensation on cancellation of stock options            $     62    $    269    

3 

10-Q 6th Page of 23 TOC 1st Previous Next ↓Bottom Just 6th
 NETOBJECTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. DESCRIPTION OF THE BUSINESS                                                  

     The Company was  incorporated in Delaware on November 21, 1995 and became a
majority-owned  subsidiary of IBM on April 11, 1997. In fiscal 1998, the Company
changed its fiscal year end from September 30 to the Saturday nearest  September
30. For presentation  purposes,  the consolidated financial statements and notes
refer to the calendar month end.                                                

     On May 7, 1999, the Company completed its initial public offering.  At that
time, all series of convertible  preferred shares  outstanding were converted to
common stock.                                                                   

     On October 4, 1999,  NetObjects  acquired Sitematic  Corporation and issued
common stock that reduced IBM's ownership to less than 50%.                     

     On July 14, 2000, NetObjects acquired Rocktide Inc. and issued common stock
that reduced IBM's ownership to 48%.                                            

     On September 29, 2000,  the Company  entered into an agreement  with IBIZU,
Inc., a privately held company (IBIZU), pursuant to which the Company acquired a
preferred  equity  interest  in IBIZU in  exchange  for the  transfer of certain
technology  rights  developed  by the  Company.  The Company  accounts  for this
investment using the equity method of accounting.                               

     NetObjects  provides  software,  solutions,  and services that enable small
businesses  to  build,   deploy  and  maintain  websites  online,   and  conduct
e-business.                                                                     

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                   

Basis of Presentation of Interim Financial Statements                 

     The accompanying  unaudited condensed  consolidated financial statements of
NetObjects,  Inc. and  subsidiaries  ("the Company" or  "NetObjects")  have been
prepared  in  accordance  with the  instructions  to Form 10-Q and Rule 10-01 of
Regulation  S-X  and in the  opinion  of  management,  include  all  adjustments
(consisting of normal recurring adjustments) considered necessary for their fair
presentation.  Accordingly, they do not include all of the information and notes
required by generally  accepted  accounting  principles  for complete  financial
statements.  Operating  results for the three-month  period ending June 30, 2001
are not  necessarily  indicative  of the results  that may be  expected  for the
fiscal year ending  September 30, 2001.  For further  information,  refer to the
audited  financial  statements  and footnotes  thereto for the fiscal year ended
September 30, 2000  included in the  Company's  Annual Report on Form 10-K filed
December 29, 2000.                                                              

Net Loss per Share                                                    

     Basic net loss per share is computed  using the weighted  average number of
outstanding shares of common stock,  excluding shares of common stock subject to
repurchase.  Diluted net loss per share is computed  using the  weighted-average
number of shares of common  stock  outstanding  and,  when  dilutive,  shares of
restricted  common  stock  subject to  repurchase  and options  and  warrants to
purchase  common stock using the treasury  stock  method,  and from  convertible
securities on an "if-converted" basis. In loss periods,  basic and dilutive loss
per  share  are  identical  since the  impact  of  common  equivalent  shares is
anti-dilutive  and all  potential  common  shares  have been  excluded  from the
computation of diluted net loss per share for all periods presented.            

     Diluted net loss per share for the three-months and nine-months  ended June
30, 2001, does not include the effect of warrants to purchase  336,528 shares of
common  stock  with a  weighted  average  exercise  price of $7.70,  options  to
purchase 7,375,534 shares of common stock with a weighted-average exercise price
of $9.20 per share,  or 33,262  shares of common  stock  issued  and  subject to
repurchase by the Company at a  weighted-average  price of $0.16,  because their
effects are anti-dilutive.                                                      

     Diluted net loss per share for the three-months and nine-months  ended June
30, 2000, does not include the effect of warrants to purchase  336,528 shares of
common  stock  with a  weighted  average  exercise  price of $7.70,  options  to
purchase 7,375,534 shares of common stock with a weighted-average exercise price
of $9.20 per share,  or 33,053  shares of common  stock  issued  and  subject to
repurchase by the Company at a  weighted-average  price of $0.16,  because their
effects are anti-dilutive.                                                      

4 

10-Q 7th Page of 23 TOC 1st Previous Next ↓Bottom Just 7th
 NETOBJECTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

     As of June 30,  2001,  the  Company  had  outstanding  warrants to purchase
253,195 shares of common stock with an exercise  price of $6.68,  that expire in
October 2003 and February 2004, respectively,  and 83,333 shares of common stock
with an exercise price of $10.80 that expire in December  2002. The  outstanding
warrants are held by IBM.                                                       

REVENUE RECOGNITION                                                   

     The Company  recognizes  revenue in accordance  with American  Institute of
Certified Public Accountants  (AICPA) Statement of Position (SOP) 97-2, Software
Revenue  Recognition,  as amended by SOP 98-9, Software Recognition with respect
to certain arrangements.                                                        

     Under SOP 97-2, software license revenue is recognized upon delivery of the
software,  when persuasive evidence of an agreement exists, and provided the fee
is fixed,  determinable,  and collectible,  and the arrangement does not involve
significant  customization of the software.  Maintenance and service revenue are
recognized on a straight-line basis over the term of the maintenance  agreement.
In addition, SOP 97-2 generally requires revenue earned on software arrangements
involving  multiple  elements  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  that is specific to
the vendor. If vendor does not have evidence of the fair value for all delivered
elements in a  multiple-element  arrangement,  revenue is  recognized  under the
"residual method" in accordance with SOP 98-9. Under the "residual method",  the
total fair value of the  undelivered  elements  is  deferred,  and the  residual
revenue is recorded upon delivery in accordance  with SOP 97-2. When evidence of
fair  value of the  undelivered  items  does not  exist,  all  revenue  from the
arrangement  is deferred  until such  evidence  exists or until all elements are
delivered.                                                                      

     Software   license  fees  are   generally   recognized   upon  delivery  to
distributors,  net of an allowance for estimated  returns,  price protection and
rebates,   provided  no  significant  obligations  of  the  Company  remain  and
collection  for the resulting  receivable is probable.  The Company  receives on
hand inventory and sales  information  from its  significant  distributors  on a
periodic  basis.  The allowance  for returns and price  protection is determined
based on a  comparison  of on hand  inventory  in the  distribution  channel  to
historical sales made by the distributors to their  respective  customers.  This
analysis  is  performed  on a product  line basis to estimate  potential  excess
inventory in the distribution  channel.  The allowance for rebates is based upon
contractual  rebate rates  certain  distributors  earn upon selling  products to
their respective  customers.  Software license fees earned from products bundled
with original  equipment  manufacturer's  (OEM) products are  recognized  either
upfront, if the OEM vendor commits to a quantity and a fixed price with no right
of return or, if the volumes are not  committed,  upon the OEM shipping  bundled
products to its customer. IBM and Lotus are considered OEMs for purposes of this
accounting policy.                                                              

     Service  revenue from  maintenance  agreements  for support and upgrades of
existing  products,  online  services and hosting are  deferred  and  recognized
ratably over the term of the  contract,  which  typically is 12 months.  Service
revenue for training and consulting  services are recognized as the services are
performed.                                                                      

RECENT ACCOUNTING PRONOUNCEMENTS                                      

     In July 2001, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  (SFAS) No. 141,  "Business  Combinations"  and
Statement of Financial  Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets".                                                             

     SFAS No.  141  addresses  the  accounting  for and  reporting  of  business
combinations.  SFAS No. 141 requires that all business combinations be accounted
for using the purchase method of accounting for  acquisitions and eliminates the
use of the pooling method.  This Statement applies to all business  combinations
initiated after June 30, 2001. The Company does not anticipate that the adoption
of SFAS No.  141 will  have a  material  effect  on its  consolidated  financial
statements.                                                                     

     SFAS No. 142  addresses  financial  accounting  and  reporting for acquired
goodwill and other  intangible  assets.  SFAS No. 142 changes the accounting for
goodwill  from  an  amortization  method  to  an  impairment-only   method.  The
amortization  of  goodwill,   including   goodwill  recorded  in  past  business
combinations will cease upon adoption of the statement, which will commence with
the  Company's  fiscal year  beginning  October 1, 2002.  However,  goodwill and
intangible  assets  acquired  after June 30,  2001 will be subject to  immediate
adoption of the  statement.  The Company will  continue to amortize its goodwill
during the remainder of fiscal 2001 after which it will have  approximately $1.2
million.  If in a future period, the Company determines that goodwill or another
intangible  asset is impaired,  such impairment  could have a material impact on
earnings for that period.                                                       

3. SEGMENT INFORMATION                                                          

In the first quarter of 2001, the Company  transitioned from licensing  software
to providing  online  solutions  for small  business  with a focus on NetObjects
Fusion and NetObjects Matrix. As part of this transition,  the Company sold its'
Enterprise  division to Merant  Incorporated  on February  18,  2001.  Operating
results and the gain on sale of the discontinued  Enterprise division operations
are reflected as discontinued operations in the Statement of Operations. For the
three-month and nine-month  periods ending June 30, 2001, the Company's  primary
operating segments were Fusion and Matrix Online and Services. Fusion revenue is
generated  from  shrinkwrap  sales of the FusionMX  software.  Matrix Online and
Services  revenue is generated from on-line fees related to the Matrix software,
the Company's latest website builder, and Gobizgo revenue.                      

                                 For the three month period ending June 30, 2001
                                 -----------------------------------------------
                  Fusion       Matrix Online
                               Revenue       And Services        Total
                               -------       ------------        -----
Revenues:                                                                       
Domestic license and Online        $  312          $  224          $  536   
International license                 475              --             475   
Software training                      --              57              57   
IBM license and service                36              --              36   
                                ------          ------          ------
Total Revenue                        $  823          $  281          $1,104     
                                ======          ======          ======

5 

10-Q 8th Page of 23 TOC 1st Previous Next ↓Bottom Just 8th
 NETOBJECTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

                                  For the nine month period ending June 30, 2001

                  Fusion       Matrix Online
                               Revenue       And Services        Total
                               -------       ------------        -----
Revenues:                                                                       
Domestic license and Online        $1,108          $  605          $1,713   
International license               1,692              --           1,692   
Software training                     163              57             220   
IBM license and service               562              34             596   
                                ------          ------          ------
Total Revenue                        $3,525          $  696          $4,221     
                                ======          ======          ======

                                 For the three month period ending June 30, 2000

                  Fusion       Matrix Online
                               Revenue       And Services        Total
                               -------       ------------        -----
Revenues:                                                                       
Domestic license and Online        $2,625          $1,946          $4,571   
International license                 719              --             719   
Software training                      --              --              --   
IBM license and service             2,650              --           2,650   
                                ------          ------          ------
Total Revenue                        $5,994          $1,946          $7,940     
                                ======          ======          ======

                                  For the nine month period ending June 30, 2000

                  Fusion       Matrix Online
                               Revenue       And Services        Total
                               -------       ------------        -----
Revenues:                                                                       
Domestic license and Online       $ 6,581         $ 2,259         $ 8,840   
International license               6,793              --           6,793   
Software training                      --              --              --   
IBM license and service             5,943              --           5,943   
                               -------         -------         -------
Total Revenue                       $19,317         $ 2,259         $21,576     
                               =======         =======         =======

4. DISCONTINUED OPERATIONS AND DIVESTITURES                                     

On  February  18,  2001,  the  Company  sold the  Enterprise  division to Merant
Incorporated for approximately $18 million in cash. As a result of the sale, the
Company  recorded a pre-tax gain of $15.1  million.  The  Enterprise  division's
activities consisted of licensing the Company's  NetObjects Collage,  NetObjects
Authoring Server products and providing  professional  services for training and
support  to  customers.  The cash  obtained  from  the  sale is  being  used for
operating capital.                                                              

5. DEFERRED STOCK-BASED COMPENSATION                                            

     The amortization of deferred  employee  stock-based  compensation  combined
with the expense associated with stock options granted to non-employees, relates
to the following items in the accompanying consolidated statements of operations
and comprehensive loss (in thousands):                                          

6 

10-Q 9th Page of 23 TOC 1st Previous Next ↓Bottom Just 9th
 NETOBJECTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

                                                     Three months ended June 30,
                                                     ---------------------------
                                                      2001            2000
                                                     -----           -----
Sales & marketing                                       $  28           $ (17)  
Research & development                                      5             (10)  
General & administrative                                   35              29   
                                                     -----           -----
                                                     $  68           $   2
                                                     -----           -----

                                                      Nine months ended June 30,
                                                      --------------------------
                                                      2001            2000
                                                     -----           -----
Sales & marketing                                       $ 101           $  68   
Research & development                                     23              18   
General & administrative                                  153             266   
                                                     -----           -----
                                                     $ 277           $ 352
                                                     -----           -----

7 

10-Q 10th Page of 23 TOC 1st Previous Next ↓Bottom Just 10th
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
OF OPERATIONS                                                   

     This  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results  of  Operations  should  be read in  conjunction  with the  accompanying
condensed  consolidated  financial statements and notes included in this report.
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Any statements  contained  herein that are not statements of historical
fact may be  deemed  to be  forward-looking  statements.  Without  limiting  the
foregoing, the words "believes,"  "anticipates," "plans," "expects," and similar
expressions  are  intended  to  identify   forward-looking   statements.   These
forward-looking  statements include,  without  limitation,  statements about the
market  opportunity for web site building  software and services,  our strategy,
competition and expected expense levels,  and the adequacy of our available cash
resources.  Our actual results could differ  materially  from those expressed or
implied by these  forward-looking  statements  as a result of  various  factors,
including  the risk  factors  described  in Risk  Factors and  elsewhere in this
report.  We  undertake no  obligation  to update  publicly  any  forward-looking
statements for any reason,  even if new information  becomes  available or other
events occur in the future.                                                     

RECENT DEVELOPMENTS                                                             

Financial Deterioration                                                         

     As of the  conclusion  of the third quarter of its 2001 fiscal year on June
30, 2001, the current liabilities of NetObjects, totaling $7.8 million, exceeded
its current assets, totaling $6.6 million. Its cash and cash equivalents totaled
$4.4 million. While management has taken steps to decrease expenses,  NetObjects
does not have  sufficient  cash to  continue  operation  through  the end of its
fiscal year on September 30, 2001.                                              

     As previously reported, NetObjects has retained Broadview International LLC
to  explore  strategic  alternatives,  including  the  sale of  NetObjects  or a
significant  investment by a third party. While that effort continues,  based on
the company's limited amount of cash, management and the Board of Directors have
determined that it is necessary to consider every other  extradordinary  measure
to preserve corporate assets.                                                   

Nasdaq Listing                                                                  

     As previously  announced,  NetObjects received a Nasdaq Staff Determination
on June 13, 2001,  indicating  that, the Company's bid price no longer  complied
with  Nasdaq's  $1.00 per share  minimum  bid price  requirement  for  continued
listing,  and that its  securities  were  subject to  delisting  from The Nasdaq
National  Market.  NetObjects  appealed the staff's  determination to the Nasdaq
Listings  Qualificataions  Panel and the Panel held a hearing on July 26,  2001.
Nasdaq is  currently  evaluating  the  merits of the  Company's  appeal  and its
decision is pending.                                                            

Other Corporate News                                                            

     NetObjects  announced  the  appointment  of  Ernie  Cicogna  as  the  Chief
Financial  Officer and Executive Vice  President,  Finance and  Operations.  Mr.
Cicogna was formerly Senior Vice President of Finance.                          

OVERVIEW                                                                        

     NetObjects has been helping small businesses transition successfully to the
online  world,  both  directly  and through  global  customers  since 1995.  Our
Web-site building  applications have garnered over 75 awards and eleven patents.
To date we have licensed the  distribution of more than 10 million copies of our
flagship product  NetObjects Fusion which has become the backbone of millions of
small business  websites.  With the release of both NetObjects  FusionMX and the
NetObjects Matrix Platform,  NetObjects intends to transition from predominantly
licensing software to generating revenue primarily through online subscriptions.

     We acquired Sitematic Corporation in October 1999 in order to offer on-line
website building and hosting capabilities to small businesses. In December 1999,
we combined  our online  resources  with the  Sitematic  offering  and  launched
GoBizGo.com.  These combined services include website building software,  e-mail
list management for communicating with customers,  domain name and search engine
registration,  auction  export,  relevant  content  information for building and
maintaining  an e-business  online,  and web hosting  services.  Currently,  our
online  business  has two  sources of  revenue:  subscriptions  for  web-hosting
services provided directly to small businesses;  and fees charged to our GoBizGo
business "partners" for establishing co-branded sites.                          

     In July, 2000, we acquired  privately-held  Rocktide, Inc. for $3.6 million
in NetObjects  common stock and $0.4 million in cash.  Rocktide is a provider of
next  generation  application  service  provider  (ASP)  technology and wireless
e-Services that help Web-enable  businesses  worldwide.  This product technology
was incorporated into our newly branded  NetObjects  Matrix Platform,  which was
initially released on October 30, 2000.                                         

     On March 12, 2001,  we launched  FusionMX,  which  provides both online and
software  solutions that enable small  businesses to build,  deploy and maintain
Internet web sites,  and  applications to conduct  e-business;  and enable large
enterprises to create corporate intranets.                                      

     We recognize  revenues  from  software  license  fees upon  delivery of our
software products to our customers,  net of allowances for estimated returns and
price protection, as long as we have no significant obligations remaining and we
believe that collection of the resulting receivable is probable. We provide most
of our  distributors  of software  products  with rights of return and record an
allowance for estimated future returns based upon our historical experience with
product  returns  by those  distributors.  Software  license  fees  earned  from
products  bundled with OEM resellers are recognized  upon  delivery,  if the OEM
vendor  commits to a quantity  and a fixed  price with no right of return or, if
the  volumes are not  committed,  then when the OEM  resellers  ship the bundled
products to their customers.                                                    

     We recognize service revenues as services are rendered,  or, if applicable,
using the percentage-of-completion  method. We defer web-site hosting and online
service  subscriptions,  which typically are paid up-front,  and recognize these
fees as revenue ratably over the term of the contract,  which ranges from one to
48 months.  We defer recognition of maintenance fees, paid primarily for support
and upgrades, upon receipt of payment and recognize the related revenues ratably
over the term of the  contract,  which  typically is 12 months.  These  payments
generally are made in advance and are nonrefundable.                            

     On February  18,  2001,  we sold our  Enterprise  division,  including  our
Collage platform,  to Merant Incorporated for approximately $18 million in cash.
A payment of $14 million was received in the quarter ended March 31, 2001 and $4
million was  received  as an advance in the quarter  ended  December  31,  2000.
NetObjects Collage provides an integrated  platform that combines  collaboration
with  content  management,   enterprise  integration,  and  dynamic  application
services. The sale of the Enterprise division substantially reduced our software
licensing business and revenue, as we have continued to shift our business focus
towards online solutions for small business.                                    

8 

10-Q 11th Page of 23 TOC 1st Previous Next ↓Bottom Just 11th
     Most of the  employees  of the  Enterprise  division  were  hired by Merant
Incorporated.  In addition,  during the quarter ended March 31, 2001, we reduced
further  the  number  of  personnel  and   part-time   employees  by  32  and  4
respectively.  Total  employment was 76 people at the end of the current quarter
compared to 218 people at June 30, 2000.                                        

     On January 10, 2001, the Company  granted an aggregate  amount of 3,025,600
stock options to all employees at an option  exercise price equal to the closing
price of one  share  of the  Company's  common  stock  on that  date of  $0.468.
Executive  officers  of the  Company  received  a total  of  1,400,000  of these
options.  The options vest on two separate schedules whereby an initial grant of
1,512,800 stock options vested with respect to one quarter of the shares on July
10,  2001  and the  remaining  shares  vest  in 18  equal  monthly  installments
thereafter,  subject to the optionee's continued employment with the issuer. The
remaining  1,512,800  stock  options  vested with  respect to one quarter of the
shares on September 1, 2001, and the remaining  shares vests in 18 equal monthly
installments thereafter, subject to the optionee's continued employment with the
issuer.                                                                         

     We have  incurred  substantial  net losses in each fiscal  period since our
inception and, as of June 30, 2001, had an accumulated  deficit of $127 million.
Such net losses and accumulated  deficit resulted primarily from the significant
costs  incurred in the  development of our products and  establishing  our brand
identity, marketing organization, domestic and international sales channels, and
general  and  administrative  infrastructure.   Our  operating  expenses  before
goodwill  amortization and other non-cash  charges  decreased in the first three
quarters  of fiscal year 2001,  but we expect to  continue to incur  substantial
losses from operations for the foreseeable future.                              

     Our future  operating  results must be  considered  in light of our limited
operating   history  and  the  risks,   expenses  and  difficulties   frequently
encountered by companies in early stages of development,  particularly companies
in rapidly  evolving  markets such as the market for web site building  software
and online services.                                                            

     There can be no assurance that we will achieve or sustain  profitability or
that we will be able to continue to do business at all.  Moreover,  particularly
as we transition to our new business  model, we may be unable to adjust spending
in a timely manner to compensate for both anticipated and unanticipated  revenue
shortfalls.  Accordingly,  any significant  shortfall of revenues in relation to
expectations would cause significant declines in our operating results.         

     Our total  revenues  fluctuate from quarter to quarter due to many factors,
including new product and product upgrade introductions. In addition, we attempt
to limit sales of existing  products during the months  preceding the release of
upgraded  products in order to reduce  returns of the older product from some of
our direct and indirect  channel  resellers.  The timing of our  recognition  of
revenues from strategic  arrangements  with other  companies has  contributed to
fluctuations in revenues from quarter to quarter.  During the three months ended
June 30, 2001, we had IBM revenue from software  license and service revenues of
$36,000 as compared to earned license fees and on-line  service fees of $287,000
from  IBM  for the  three  months  ended  March  31,  2001.  We have no  ongoing
commitments from IBM that will generate significant revenues for us.            

     In addition  to  fluctuations  in  revenues  from IBM and other third party
distributors,  our revenues have become more variable due to factors such as our
decision to focus our sales activities on the NetObjects  Matrix platform rather
than OEM software  licenses of  NetObjects  Fusion,  our sale of the  Enterprise
Division and the  uncertainty  of  generating  significant  revenues  from small
business subscriptions for online services.                                     

     Other factors contributing to uncertainty and fluctuations in our quarterly
operating  results include  seasonal  demand for our products and services,  for
example,  annual  reductions  in sales in  Europe in July and  August,  costs of
litigation and intellectual  property  protection,  technical  difficulties with
respect to the use of our products,  general  economic  conditions  and economic
conditions  specifically related to businesses dependent upon the Internet.  The
promptness  with which sales and licensing  data,  used in  recognizing  product
royalties,  is  delivered  to us from third  parties  also may affect  quarterly
operating  results.  It often is difficult to forecast the effect these  factors
will have on our results of operations for any given fiscal quarter.            

     Fluctuations in revenues from IBM, other third party distributors and other
general and  seasonal  factors are likely to be  continued  for the  foreseeable
future.  Further,  we believe that  period-to-period  comparisons  of historical

9 

10-Q 12th Page of 23 TOC 1st Previous Next ↓Bottom Just 12th
operating  results  should  not  be  relied  upon  as an  indication  of  future
performance.  Our  objective in  implementing  our new  business  model based on
recurring subscription revenue, was to reduce those severe fluctuations that our
company has  experienced  in the past.  This will  require  several  quarters to
achieve, and in the meantime, our revenue can and will be subject to significant
variations  from  quarter to quarter.  In addition,  operating  results may fall
below our expectations or the  expectations of securities  analysts or investors
in some future quarter and our stock price may decline substantially.           

RESULTS OF OPERATIONS                                                           

The following  table sets forth  financial  data for the periods  indicated as a
percentage of total revenues:                                                   

STATEMENT OF OPERATIONS AS A PERCENTAGE OF TOTAL REVENUE

                                                        [Enlarge/Download Table]

                                                      THREE MONTHS ENDED   NINE MONTHS ENDED  
                                                            JUNE 30,             JUNE 30,     
                                                       -----------------    ----------------- 
                                                       2001         2000    2001       2000   
                                                       ----         ----    ----         ---- 
                                                                                              
Revenues:                                                                                     
  Software license fees, training and online revenue     97%          67%     86%          72%
  IBM software license and service revenue                3%          33%     14%          28%
                                                       ----         ----    ----         ---- 
       Total revenues                                   100%         100%    100%         100%
                                                       ----         ----    ----         ---- 
Cost of revenues:                                                                             
  Software licenses, and online                          81%          21%    126%          13%
  Loss on prepaid service offering                       84%           0%     22%           0%
  Services (professional and training)                   57%           3%     34%           4%
                                                       ----         ----    ----         ---- 
       Total cost of revenues                           222%          24%    182%          16%
                                                       ----         ----    ----         ---- 
Gross profit                                           -122%          76%    -82%          84%
                                                       ----         ----    ----         ---- 
Operating expenses:                                                                           
  Sales and marketing                                   256%          84%    221%          90%
  Research and development                              148%          34%    146%          36%
  General and administrative                             97%          21%     85%          20%
  Amortization of intangible assets                     214%          25%    169%          28%
  Loss on impaired assets and termination of                                                  
    investment activities                                 1%           0%     64%           0%
  Stock-based compensation                                6%           0%      7%           2%
                                                       ----         ----    ----         ---- 
       Total operating expenses                         723%         164%    691%         176%
                                                       ----         ----    ----         ---- 
Operating loss                                         -844%         -88%   -773%         -92%
Interest income                                          10%           2%      5%           4%
                                                       ----         ----    ----         ---- 
  Loss before income taxes                             -835%         -86%   -768%         -88%
                                                       ----         ----    ----         ---- 
Income taxes                                              1%           0%      1%           0%
                                                       ----         ----    ----         ---- 
  Net loss from continuing operations                  -836%         -86%   -769%         -88%
  Gain (loss) from discontinued operations                8%          -6%    -64%         -11%
  Gain from sale of the Enterprise division               0%           0%    358%           0%
                                                       ----         ----    ----         ---- 
  Net loss                                             -827%         -92%   -475%         -99%
Translation adjustment                                   -1%           0%     -1%           0%
                                                       ----         ----    ----         ---- 
  Comprehensive loss                                   -829%         -93%   -476%        -100%
                                                       ====         ====    ====         ==== 

THREE MONTHS ENDED JUNE 30, 2001 AND 2000                                       

     Revenues.   Total  revenues  from   continuing   operations   decreased  to
approximately  $1.1 million from approximately $7.9 million for the three months
ended  June  30,  2001 and  2000,  respectively.  The  license  revenue  portion
(excluding IBM) decreased to $1.1 million from $5.8 million,  respectively.  The
80%  decrease   year-over-year  was  primarily  due  to  our  restructuring  and
substantially  reduced  NetObjects  Fusion  license  fees,  as we did  not  earn
revenues from fixed volume commitment OEM licensing deals during the quarter.   

     IBM software license fees for the three months ended June 30, 2001 and 2000
were  $36   thousand   and  $2.7   million,   respectively.   The  99%  decrease
year-over-year  reflects the absence of committed  volume licensing deals in the
current quarter.                                                                

     Cost of Revenues.  Our cost of software  license fees  includes the cost of
product media, duplication,  manuals, packaging materials,  shipping, technology
licensed to us and fees paid to third-party vendors for order fulfillment.      

10

10-Q 13th Page of 23 TOC 1st Previous Next ↓Bottom Just 13th
In  addition,  our  cost of  software  license  fees  also  include  the cost of
providing  online  hosting,  including  royalty  payments.  Our cost of software
license fees,  excluding  the $900  thousand  loss due to asset  impairment on a
prepaid international service offering,  was approximately $0.9 million and $1.6
million for the three-months ended June 30, 2001 and 2000, respectively. The 45%
decrease  year-over-year  reflects reductions in infrastructure  consistent with
our changing business model. The Company  anticipates no future benefit from the
prepaid service offering and therefore recognized the impairment.               

     Our cost of Service  revenues of $632  thousand  and $249  thousand for the
three-months  ended June 30, 2001 and 2000,  respectively is directly related to
the NetObjects Matrix Platform and Builder and online services. As we expand our
licenses and service  agreements for Matrix Platform and Builder,  we expect the
Services revenue and related cost of service revenues to increase directly as we
assign personnel to these activities.                                           

     Sales and Marketing.  Our sales and marketing expenses consist primarily of
salaries,   commissions,   consulting  fees,  tradeshow  expenses,  advertising,
marketing  materials  and the cost of  customer  service  operations.  Sales and
marketing  expenses  were  approximately  $2.8  million and $6.7 million for the
three  months  ended  June  30,  2001 and  2000,  respectively,  representing  a
reduction of 58%  year-over-year.  The decrease in sales and marketing  expenses
resulted  from the  reduction  in  personnel,  and  reduced  marketing  expenses
associated with NetObjects Fusion MX.                                           

     Research and  Development.  Our research and development  expenses  consist
primarily of salaries and consulting  fees to support  product  development.  To
date,  we have expensed all research and  development  costs as we have incurred
them  because  we  generally  establish  the  technological  feasibility  of our
products  upon  completion  of  a  working  model.  We  have  not  yet  incurred
significant costs between the date of completion of a working model and the date
of general  release  of a  product.  We believe  that  continued  investment  in
research and  development  is critical to attaining  our  strategic  objectives.
Research  and  development  expenses  were $1.6 million and $2.7 million for the
three  months  ended June 30, 2001 and 2000 a decrease of 39% due to a reduction
in  contractor  expenses   associated  with  the  restructuring.   Research  and
development  costs  will  continue  to be a  significant  part of our  operating
expenses  due to the  focus  on our new  NetObjects  Matrix  software;  however,
spending  levels  should  decrease  modestly  as a result  of the  reduction  in
personnel and the concentration on a few major projects.                        

     General and Administrative. Our general and administrative expenses consist
primarily  of  salaries  and  fees  for  professional   services.   General  and
administrative  expenses were $1.1 million and $1.7 million for the three months
ended June 30, 2001 and 2000,  a reduction of 35%  year-over-year  mainly due to
staff reductions.                                                               

     Amortization  of  intangible  assets.  Amortization  of goodwill  and other
intangible  assets  increased  to $2.4  million  from $2.0 million for the three
months   ended  June  30,  2001  and  2000,   respectively.   The  increase  was
predominantly   attributable  to  the  amortization  of  goodwill   recorded  in
connection with the purchase of Rocktide, Inc. in July, 2000.                   

     Stock-Based  Compensation.  For the three  months  ended June 30,  2001 and
2000, we incurred stock-based compensation charges of approximately $68 thousand
and $2 thousand for each period,  respectively.  These stock-based  compensation
charges are being  amortized on an accelerated  basis over the vesting period of
the options in a manner  consistent  with Financial  Accounting  Standards Board
(FASB) Interpretation No. 28.                                                   

     Other Income (Expense).  We earned net interest income of $108 thousand and
$183  thousand for the three months ended June 30, 2001 and 2000,  respectively.
The 41%  decrease  year over year is  related to the  decrease  in cash and cash
equivalents.                                                                    

     Income taxes.  We have had a net  operating  loss for each period since our
inception through June 30, 2001. Our accumulated  deficit through this period is
approximately $127 million. We recorded an income tax provision of approximately
$12 thousand in the three months ended June 30, 2001 related to income earned by
our international operations.                                                   

     Translation Adjustment.  For the three months ended June 30, 2001 and 2000,
we  incurred  a  translation  loss of $15k and  $22k,  respectively.  Due to the
restructuring  and sale of the Enterprise  division,  our level of international
operations  has also  decreased  causing  a  decrease  in the  level of  foreign
activity.                                                                       

NINE MONTHS ENDED JUNE 30, 2001 AND 2000                                        

     Revenues.   Total  revenues  from   continuing   operations   decreased  to
approximately $4.2 million from approximately  $21.6 million for the nine months
ended  June  30,  2001 and  2000,  respectively.  The  license  revenue  portion
(excluding IBM) decreased to $3.6 million from $15.6 million,  respectively. The
77%  decrease  year-over-year  was  primarily  due  to  our  restructuring,  and
substantially  reduced  NetObjects  Fusion  license  fees,  as we did  not  earn
revenues from fixed volume commitment OEM licensing deals during the quarter.   

     IBM software  license fees for the nine months ended June 30, 2001 and 2000
were $600  thousand and $5.9  million,  respectively,  reflecting a  significant
reduction in OEM contracts with IBM versus the earlier period.                  

11

10-Q 14th Page of 23 TOC 1st Previous Next ↓Bottom Just 14th
     International sales of software licenses for the nine months ended June 30,
2001 and 2000 were  $229  thousand  and $6.8  million,  respectively.  Decreased
international  sales resulted from the transition towards an online services and
subscription-based revenue focus.                                               

     Cost of  Revenues.  Our cost of  software  license  and online for the nine
months ending June 30, 2001 was approximately  $5.3 million,  excluding the $900
thousand cost for termination of a prepaid service offering,  compared with $2.7
million  for the  same  period  in 2000.  This  year-over-year  increase  of 97%
reflects the effect of two separate one time adjustments, a contract termination
charge of $.9  million  in March of 2001 and a credit of $(1.4)  million  in the
quarter ending March 2000.                                                      

     Our cost of service  revenues  of $1.4  million and $900  thousand  for the
nine-months  ended June 30, 2001 and 2000,  respectively are directly related to
the NetObjects  Matrix Platform and Builder and online services.  As the rollout
of the Matrix  Platform  and Builder  continues,  these costs of revenues  shall
increase directly related to the increase in services revenue.                  

     Sales and Marketing.  Our sales and marketing  expenses were  approximately
$9.3 million and $19.3 million for the nine months ended June 30, 2001 and 2000,
respectively, representing a 53% year-over-year reduction. The decrease in sales
and  marketing  expenses  resulted  from the effect of our staffing  reductions,
which occurred in the quarter ending March 31, 2001, and continued redcutions in
discretionary marketing spending.                                               

     Research and  Development.  Research  and  development  expenses  were $6.2
million  and $7.8  million  for the nine  months  ended  June 30, 2001 and 2000,
respectively,   representing  a  21%  reduction  year-over-year.   Research  and
development  costs  will  continue  to be a  significant  part of the  operating
expenses due to the focus on our new Matrix software.                           

     General and Administrative. Our general and administrative expenses consist
primarily  of  salaries  and  fees  for  professional   services.   General  and
administrative  expenses  were $3.6 million and $4.4 million for the nine months
ended June 30, 2001 and 2000,  respectively,  representing a 18%  year-over-year
reduction.                                                                      

     Amortization  of  intangible  assets.  Amortization  of goodwill  and other
intangible  assets increased to $7.1 million from $6.1 for the nine months ended
June  30,  2001  and  2000,   respectively.   The  increase  was   predominantly
attributable  to the  amortization  of goodwill  recorded in connection with the
purchase of Rocktide Inc. in July, 2000.                                        

     Loss on impaired  assets and  terminated  investments.  For the  nine-month
period ending June 30, 2001 includes the cost of writing-off  $1.5 million notes
receivable  due to the  uncertainty  of collection of these funds,  and expenses
associated with terminated  investments of $1.2 million;  the periods ended June
30, 2000, include no such charges.                                              

     Stock-Based Compensation. For the nine months ended June 30, 2001 and 2000,
we incurred stock-based  compensation charges of approximately $277 thousand and
$352  thousand for each period,  respectively.  These  stock-based  compensation
charges are being  amortized on an accelerated  basis over the vesting period of
the options in a manner consistent with FASB Interpretation No. 28.             

     Other Income (Expense).  We earned net interest income of $204 thousand and
$834 thousand for the nine months ended June 30, 2001 and 2000, respectively due
to a decrease in cash and cash equivalents.                                     

     Income taxes.  We have had a net  operating  loss for each period since our
inception through June 30, 2001. Our accumulated  deficit through this period is
approximately $127 million. We recorded an income tax provision of approximately
$36 thousand in the nine months ended June 30, 2001 related to income  earned by
our international operations.                                                   

     Gain (loss) from discontinued  operations.  On February 18, 2001 NetObjects
completed the sale of the Enterprise  division to Merant,  which resulted in our
discontinuing operations for this group.                                        

     Translation  Adjustment.  For the nine-months ended June 30, 2001 and 2000,
we  incurred  a  translation  loss of $27k and  $42k,  respectively.  Due to the
restructuring  and sale of the Enterprise  division,  our level of international
operations  has also  decreased  causing  a  decrease  in the  level of  foreign
activity.                                                                       

LIQUIDITY AND CAPITAL RESOURCES                                                 

     As  noted  above  under  "Recent  Devleopments--Financial   Deterioration,"
Financial  Deterioration,  as of the conclusion of the third quarter of its 2001
fiscal year on June 30, 2001, the current  liabilities  of NetObjects,  totaling
$7.8 million,  exceeded its current assets,  totaling $6.6 million. Its cash and
cash  equivalents  totaled $4.4  million.  While  management  has taken steps to
decreased  expenses,  NetObjects  does  not  have  sufficient  cash to  continue
operation through the end of its fiscal year on September 30, 2001.             

     As previously reported, NetObjects has retained Broadview International LLC
to  explore  strategic  alternatives,  including  the  sale of  NetObjects  or a
significant  investment by a third party.  While the effort continues,  based on
the company's limited amount of cash, management and the Board of Directors have
determined  that it is necessary  to consider  other  extraordinary  measures to
preserve corporate assets.                                                      

     As of June 30, 2001, NetObjects had cash and cash equivalents totaling $4.4
million,  a decrease of $3.9 million from  September  30, 2000.  Cash flows were
primarily affected by losses from continuing operations, and the net proceeds of
approximately  $18.0 million received from the sale of the Enterprise  division.
NetObjects cash and cash  equivalents  decreased by  approximately  $5.0 million
from the  previous  quarter  ending  March 31,  2001 (from  $9.4  million in the
previous quarter to $4.4 million).  Unless we are able to raise additional funds
through direct investment,  acquisition or prepayment of funds for future sales,
we would anticipated running out of cash and being forced to shutdown before the
end of the quarter.                                                             

     Net cash used in operating  activities was $ 20.0 million and $21.4 million
for the nine months ended June 30, 2001 and 2000,  respectively.  For the period
ended June 30, 2001, net cash used in operating  activities  included a decrease
in gross  accounts  receivable of  approximately  $5.3  million,  due to reduced
operating  revenues,  a gain on the  sale of the  Enterprise  division  of $15.1
million and amortization of intangible assets of $7.2 million.  Net cash used in
operating  activities for the period ended June 30, 2000 included an increase in
accounts  receivable  of  $7.2  million  due to  slower  than  expected  rate of
collections.                                                                    

     Net cash  provided by investing  activities  was $16.5 million for the nine
months  ended June 30,  2001 as compared  to $6.0  million net cash  provided by
investing  activities  for the nine  months  ended June 30,  2000.  The net cash
provided by investing  activities  consisted  primarily of the proceeds from the
sale of the Enterprise  division to Merant  Incorporated of approximately  $18.0
million,  net of expenses related to the sale in the amount of $1.4 million,  as
compared to the sale of  short-term  investments  of $9.3 million  offset by the
purchase of $1.8 million in capital assets and $1.3 million in acquisitions  for
the nine months ended June 30, 2000.                                            

12

10-Q 15th Page of 23 TOC 1st Previous Next ↓Bottom Just 15th
     Net cash used in financing  activities was approximately  $284 thousand for
the nine months  ended June 30,  2001 as  compared to $3.1  million for the nine
months ended June 30, 2000.  Net cash provided by financing  activities  for the
nine  months  ended  June 30,  2001  consisted  of  payments  on  capital  lease
obligations,  as  compared to $3.1  million  for the nine months  ended June 30,
2000.                                                                           

     If we are able to continue to do business under our present strucuture,  we
would anticipate a moderate decrease in our operating expenses over the next two
quarters as we  transition  to the new business  model.  However,  we expect our
operating  expenses  to  continue  to  constitute  a  material  use of our  cash
resources.  The sale of the Enterprise  division provided  additional capital to
fund our  operations in the short term,  however if we fail to continue to raise
additional capital to fund future operations our business,  financial  condition
and results of operations  will be materially  and adversely  affected,  and our
stock price will decline substantially.                                         

RISK FACTORS

     NetObjects  believes that its results of operations in any quarterly period
may be  impacted  adversely  by a number of factors,  including  those set forth
below.  Readers of this report should consider these and other ordinary business
risk  factors  in  evaluating  the  business,  financial  condition,  results of
operations and prospects of NetObjects.                                         

OUR FINANCIAL CONDITION HAS DETERIORATED AND MAY NOT RECOVER.                   

     As of the  conclusion  of the third quarter of its 2001 fiscal year on June
30, 2001, the current liabilities of NetObjects, totaling $7.8 million, exceeded
its current assets, totaling $6.6 million. Its cash and cash equivalents totaled
$4.4 million. While management has taken steps to decrease expenses,  NetObjects
does not have  sufficient  cash  to  continue  operation  through the end of its
fiscal year on September 30, 2001.                                              

     As previously reported, NetObjects has retained Broadview International LLC
to  explore  strategic  alternatives,  including  the  sale of  NetObjects  or a
significant  investment by a third party.  While the effort continues,  based on
the company's limited amount of cash, management and the Board of Directors have
determined  that it is  necessary  to consider  other  extraordinary  measure to
preserve corporate assets.                                                      

OUR  ABILITY  TO  CONTINUE  AS A  GOING  CONCERN  IS  DEPENDENT  ON OUR  RAISING
ADDITIONAL FUNDS.                                                               

     Without  raising  new  proceeds  from the sale of  assets,  debt or  equity
financing,  we will not have  enough  cash to remain in  business.  For the year
ended September 30, 2000, our auditors, KPMG LLP, in their independent auditors'
report,  have expressed  "substantial  doubt" as to our ability to continue as a
going concern.  This doubt is based on our significant operating losses since we
were formed,  and our insufficient funds as of September 30, 2000 to finance our
operations  through  fiscal year 2001.  As of  February  18,  2001,  we sold the
Enterprise  Division of the Company and  received  approximately  $18 million in
consideration.  The  proceeds  of this  divestiture  are being  utilized to fund
current operations.  We believe that our current cash and cash equivalents,  are
adequate to finance our current level of  operations  only through the middle of
the month of September  2001.  We may seek to raise  additional  capital to fund
future  operations  through  the  sale  of  additional  equity  securities,  new
borrowings,   some   combination  of  debt  and  equity,   or  other   available
transactions.  If we fail to quickly  raise  additional  capital to fund  future
operations our business,  financial  condition and results of operations will be
materially and adversely affected.                                              

WE HAVE A HISTORY OF  SUBSTANTIAL  LOSSES AND EXPECT  SUBSTANTIAL  LOSSES IN THE
FUTURE.                                                                         

     We were  incorporated  in November  1995 and first  recognized  revenues in
October  1996.  As  of  June  30,  2001,  we  had  an  accumulated   deficit  of
approximately  $127  million.  We expect to sustain  significant  losses for the
foreseeable future,  which could harm our business and decrease the market price
of our stock.                                                                   

     To achieve and sustain profitability, we must, among other things, increase
substantially  our revenues from our two principal  products,  NetObjects Fusion
and NetObjects Matrix, and substantially increase our revenues from professional
and online services, which have been insignificant to date.                     

WE HAVE  BEEN  ADVISED  BY  NASDAQ  THAT WE NO  LONGER  MEET  ITS  QUALIFICATION
REQIREMENTS  FOR  CONTINUED  LISTING OF OUR COMMON STOCK ON THE NASDAQ  NATIONAL
MARKET.  IF OUR STOCK IS DELISTED IT MAY NO LONGER HAVE AN ACTIVE PUBLIC TRADING
MARKET WHICH WOULD LIKELY MAKE THE COMMON STOCK AN ILLIQUID INVESTMENT.         

     We received a Nasdaq Staff Determination on June 13, 2001,  indicating that
our bid price no longer complied with Nasdaq's $1.00 per share minimum bid price
requirement  for  continued  listing,  and that our  securities  were subject to
delisting from The Nasdaq National Market. We appealed the staff's determination
to the Nasdaq Listings Qualifications Panel and the Panel held a hearing on July
26,  2001.  Nasdaq is  currently  evaluating  the  merits of our  appeal and its
decision is pending.  Even if our stock again trades  above $1.00 per share,  we
may not be able to satisfy any of Nasdaq's  other  listing  requirements  in the
future.  Nasdaq  also may delist our common  stock if it deems it  necessary  to
protect investors and the public interest. If our stock is delisted,  trading in
the common  stock would be  conducted  in the  over-the-counter  market,  in the
so-called "pink sheets" or, if available,  the "OTC Bulletin Board Services." As
a result,  an investor  would  likely find it  significantly  more  difficult to
dispose of, or to obtain accurate quotations as in the value of, our shares.    

IF OUR  COMMON  STOCK IS  DELISTED,  IT MAY BECOME  SUBJECT OT THE SEC'S  "PENNY
STOCK" RULES AND MORE DIFFICULT TO SELL.                                        

     SEC  rules  require  brokers  to  provide   information  to  purchasers  of
securities  traded at less than $5.00 and not  traded on a  national  securities
exchange or quoted on the Nasdaq Stock  Market.  If our common  stock  becomes a
"penny  stock"  that is not  exempt  from  these  SEC  rules,  these  disclosure
requirements  may have the effect of  reducing  trading  activity  in our common
stock and making it more  difficult for  investors to sell.  The rules require a
broker--dealer  to deliver a standardized  risk disclosure  document prepared by
the SEC that provies  information about penny stocks and the nature and level of
risks in the penny  market.  The broker must also give bid and offer  quotations
and broker and salesperson compensation information to the customer orally or in
writing before or with the confirmation.  The SEC rules also require a broker to
make a  special  written  determination  that  the  penny  stock  is a  suitable
investment for the purchaser and receive the  purchaser's  written  agreement to
the transaction before a transaction in a penny stock.                          

OUR REVENUES ARE DECLINING AND WILL BE  SUBSTANTIALLY  LOWER IN FISCAL YEAR 2001
AS WE CHANGE OUR BUSINESS MODEL.                                                

     We are changing our business model from one in which we have received large
up front  license  fees for the  distribution  of large  numbers  of  copies  of
NetObjects  Fusion to one in which we intend to earn most of our  revenues  from
distribution  arrangements  with  service  providers  that  will pay us  reduced
license fees and a percentage of their subscription revenues received from small
business subscribers.                                                           

     There can be no assurance that we will generate  substantial revenues under
our new business  model and we expect our revenues to decline  substantially  in
the current fiscal year in comparison to our revenues in preceding fiscal years.

OUR ONLINE SERVICES ARE NEW AND HAVE NOT RECEIVED A BROAD CUSTOMER ACCEPTANCE.  

     Since  inception,  we have  invested  resources  to create and  enhance our
online  services,  which we believe support and add to market  acceptance of our
products.  With the launch of our Matrix Platform and Builder,  providing online
services to enable small businesses to conduct e-commerce has become an integral
part of our business growth  strategy.  This strategy is predicated on using our
distribution  partners,  to  attract  a  substantial  number  of small  business
subscribers for these services for our online  business to succeed.  We may fail
to attract  these new  customers,  which would hurt our business and could cause
our stock price to fall.                                                        

13

10-Q 16th Page of 23 TOC 1st Previous Next ↓Bottom Just 16th
WE MAY NOT ADEQUATELY  ADJUST OUR OPERATING  EXPENSE TO REFLECT THE  ANTICIPATED
REDUCTION IN REVENUE.                                                           

     We must reduce our operating  expenses relative to the anticipated  revenue
reduction.  We  anticipate  that these  expenses will  substantially  exceed our
revenues for at least fiscal year 2001 and probably thereafter.  As a result, we
expect our  operating  expenses,  as well as planned  capital  expenditures,  to
continue to constitute a material use of our cash resources. In addition, we may
require cash resources to fund  acquisitions  or  investments  in  complementary
businesses, technologies or product lines and ongoing activities.               

OUR RELATIONSHIP WITH IBM HAS CHANGED SUBSTANTIALLY OVER TIME.                  

     While IBM owns a  substantial  percentage of our common stock and has three
representatives on our board of directors, it is under no obligation to continue
any business  relationships with us. IBM is allowed to compete with us or act in
a manner that is disadvantageous to us.                                         

ALTHOUGH WE HAVE CONTRACTS WITH IBM TO BUNDLE OUR PRODUCTS WITH THEIR OFFERINGS,
WE HAVE NO COMMITMENTS FOR FUTURE REVENUES FROM IBM.                            

     Revenues  from IBM have been a substantial  portion of our total  revenues,
representing  approximately 4% and 19% of our total revenues for the three month
period  ending  June 30, 2001 and the fiscal year  ending  September  30,  2000,
respectively.                                                                   

     We have a number of license and reseller  agreements or  arrangements  with
IBM many of which are subject to the terms of our 10-year license agreement that
expires in April 2007. We have no future revenue commitments from IBM or Lotus. 

     WE HAVE BUSINESS CONFLICTS WITH IBM. IBM HAS CHOSEN IN THE PAST AND IS FREE
IN THE FUTURE TO PROMOTE AND BUNDLE COMPETITORS' PRODUCTS OVER OUR PRODUCTS.    

     Although we have been  dependent on IBM,  and IBM has provided  substantial
support to us, IBM makes  independent  business and product  decisions  that may
present conflicts with our business objectives.                                 

IBM CONTROLS US AND IS FREE TO SELL ITS INTEREST IN US.               

     As of June 30, 2001 IBM owns  approximately  48.0% of our common  stock and
holds warrants that if exercised,  would increase its ownership to approximately
48.4% of our outstanding voting  securities.  As our largest  stockholder,  with
three  representatives on our board of directors,  IBM has substantial influence
over our direction and management,  and may be able to prevent or cause a change
in control of us and could take other actions that might be favorable to IBM and
potentially harmful to us.                                                      

     IBM CAN ACT IN WAYS THAT MAY BE  DISADVANTAGEOUS  TO US, SUCH AS  COMPETING
WITH  US,  INVESTING  IN OUR  COMPETITORS  AND  TAKING  ADVANTAGE  OF  CORPORATE
OPPORTUNITIES.                                                                  

     IBM is  contractually  or  otherwise  free to act in ways that may harm our
business.   Our  restated  certificate  of  incorporation   contains  provisions
expressly acknowledging that:                                                   

     *    IBM retains  "freedom of action" to conduct  its  business  and pursue
other business opportunities, even in competition with us;  

     *    IBM has no  obligation to refrain from  investing in our  competitors,
       doing business with our customers or hiring away our key personnel;

     *    No director appointed by IBM is prohibited from taking actions or from
          voting on any action  because of any actual or  apparent  conflict  of
          interest between that director and us, and these provisions materially
          limit  the  liability  of IBM  and  its  affiliates,  including  IBM's
          representatives  on our board of directors and Lotus, from conduct and
          actions taken by IBM or its affiliates, even if the conduct or actions
          are  beneficial  to IBM  and  harmful  to  us;  and  these  provisions
          materially  limit the liability of IBM and its  affiliates,  including
          IBM's  representatives  on our  board of  directors  and  Lotus,  from
          conduct  and  actions  taken  by IBM or its  affiliates,  even  if the
conduct or actions are beneficial to IBM and harmful to us. 

14

10-Q 17th Page of 23 TOC 1st Previous Next ↓Bottom Just 17th
Furthermore:                                                          

     *    IBM is eligible  to sell its stock  subject to  applicable  securities
          laws, contractual  arrangements with the underwriters and the terms of
          a registration  rights agreement.  IBM may transfer some or all of its
          stock, including to our competitors. Such a transfer could result in a
          transfer of IBM's  interest in us,  which could cause our  revenues to
decrease and our stock price to fall; and                   

     *    IBM is under no obligation  to inform us of any corporate  opportunity
          and is free to avail  itself of any  opportunity  or to  transfer  the
opportunity to a third party.                               

     Any of IBM's  rights  could give rise to  conflicts  of  interests,  and we
cannot be certain that any conflicts would be resolved in our favor.  Any of the
risks arising from our  relationship  with IBM could harm our business and cause
our stock price to fall.                                                        

     IBM could  obtain and use our source code if we default on our  obligations
under license  agreements  with IBM.  Although our license  agreements  with IBM
contain  restrictions on IBM's use and transfer of our software and intellectual
property, these restrictions are subject to exceptions. Under a software license
agreement  with IBM,  we have  placed  our key  source  code in escrow for IBM's
benefit. IBM may obtain access to the source code upon events of default related
to the  Company's  failure to provide  required  maintenance  and support or its
bankruptcy or similar event of financial reorganization.  IBM may use the source
code that it obtains to create  derivative  works,  which it will own subject to
the Company's rights in the underlying software.                                

     Our  licensing  arrangements  with IBM are not exclusive and IBM is free to
enter into  similar  arrangements  with our  competitors.  All of our  licensing
arrangements  with IBM are  non-exclusive.  IBM has the right to cease promoting
and  distributing  our software at any time. IBM may license its name,  logo and
technology to, or invest in, other Web site building companies,  and it may more
actively promote the services of our competitors.                               

WE HAVE MANY ESTABLISHED  COMPETITORS,  AND MAY BE UNABLE TO COMPETE EFFECTIVELY
AGAINST THEM.                                                                   

     The market for web site building software and services for the Internet and
corporate  intranets  is  relatively  new,  constantly  evolving  and  intensely
competitive.  We expect competition to intensify in the future,  particularly in
the market for  subscription  based online Web site services for small business.
Many of our current and potential  competitors have longer operating  histories,
greater name  recognition and  significantly  greater  financial,  technical and
marketing  resources,  and we may be unable to compete effectively against them.
We compete for small business  customers with web content  software  makers like
Adobe,  Macromedia,  and  Microsoft  and in the on-line web hosting and services
with  providers  like  Verio,  Bigstep,  Icat,  and  Yahoo  Store.   Microsoft's
FrontPage,  a web site building software  product,  has a dominant market share.
Microsoft  bundles FrontPage 2000 in several versions of the Office 2000 product
suite that dominates the market for desktop business application  software.  New
technologies and the expansion of existing  technologies could also increase the
competitive  pressures on us by enabling our competitors to offer  lower-cost or
superior products or service.  Increased competition could diminish the value of
our products and  services and result in reduced  operating  margins and loss of
market share. We cannot assure you that we will be able to compete  successfully
against current or future competitors.                                          

WE MAY NOT BE ABLE TO ACCURATELY FORECAST REVENUE AND ADJUST SPENDING.          

     As a  result  of our  transition  to a new  business  model  we have a very
limited operating history,  therefore,  we have little experience in forecasting
our revenues. Our expense levels are based in part on our expectations of future
revenues,  and to a large extent those expenses are fixed,  particularly  in the
short-term.  We cannot be certain that our revenue expectations will be accurate
or that we will be able to adjust  spending in a timely manner to compensate for
any unexpected revenue shortfall.                                               

OUR QUARTERLY OPERATING RESULTS WILL PROBABLY FLUCTUATE.                        

     We believe that  period-to-period  comparisons of our financial results are
not necessarily  meaningful,  and you should not rely upon them as an indication
of our future  performance.  Going  forward,  our revenues from IBM, if any, are
likely to become more variable.  The promptness  with which sales data, used for
recognizing product royalties, are reported to us from third parties,  including
IBM, may cause annual results to be more volatile.                              

WE ALLOW PRODUCT  RETURNS AND PROVIDE PRICE  PROTECTION TO SOME  PURCHASERS  AND
RESELLERS  OF OUR  PRODUCTS  AND  OUR  ALLOWANCES  FOR  PRODUCT  RETURNS  MAY BE
INADEQUATE.                                                                     

     We have  stock-balancing  programs  for our  software  products  that under
specified  circumstances  allow for the return of software by  resellers.  These
programs  also  provide for price  protection  for our  software for some of our
direct and indirect channel resellers that, under specified conditions,  entitle
the  reseller to a credit if we reduce our price to similar  channel  resellers.

15

10-Q 18th Page of 23 TOC 1st Previous Next ↓Bottom Just 18th
There can be no  assurance  that  actual  returns or price  protection  will not
exceed  our  estimates,   and  our  estimation   policy  may  cause  significant
fluctuations in revenue and earnings in future periods.                         

MOST OF OUR REVENUES  HAVE BEEN DERIVED  FROM SALES OF A SINGLE  PRODUCT,  AND A
DECLINE IN DEMAND OR THE SALE PRICE OF THAT PRODUCT  WOULD HARM OUR BUSINESS AND
CAUSE OUR STOCK PRICE TO FALL.                                                  

     In the quarter  ending June 30, 2001,  our revenues  were derived  entirely
from the sales of NetObjects  Fusion software.  On February 18, 2001 we sold the
Enterprise  Division to Merant  Incorporated  for  approximately  $18 million in
cash.  About 68% of our revenues from software  license fees in fiscal 2000 were
derived  from  versions  of  NetObjects  Fusion,  and we expect that this single
product will  continue to account for the majority of our total  revenues in the
near-term.  To remain competitive,  software products typically require frequent
updates that add new features. There can be no assurance that we will succeed in
creating and selling updated or new versions of NetObjects  Fusion. A decline in
demand for, or in the average selling price of, NetObjects Fusion,  whether as a
result of new  product  introductions  or price  competition  from  competitors,
technological  change or  otherwise,  would hurt our business or cause our stock
price to fall.                                                                  

WE MAY NOT BE ABLE TO EXPAND OUR DISTRIBUTION CHANNELS OR SALES FORCE.          

     We need to maintain our third-party distribution channel because our direct
sales to third parties  would be  insufficient  to support our  operating  base.
While we derive some of our revenues from selling our products directly to third
parties,  most of our revenues are derived from the sale of our products through
third-party  distributors  and OEM  resellers.  We need to develop  third  party
relationships for promoting our on-line offerings.  A substantial portion of our
revenues from NetObjects Fusion comes from arrangements with a limited number of
customers.  There can be no assurance that third parties will be willing or able
to carry our  products in the future.  If third  parties were to reduce or cease
carrying our products,  our direct sales to third parties would be  insufficient
to support our operating expense base.                                          

WE NEED TO MAINTAIN AND  ESTABLISH NEW BUNDLING  ARRANGEMENTS  BECAUSE WE MAY BE
LESS SUCCESSFUL AT SELLING OUR PRODUCTS ON A STAND-ALONE BASIS.                 

     We believe that products that are not sold in a "suite" containing software
products or components  that perform  different  functions are less likely to be
commercially  successful.  IBM bundles our  products  with some of its  software
products,  such as the bundling of NetObjects  Fusion with WebSphere  Studio and
NetObjects  Fusion with Lotus Designer Studio and Lotus  SmartSuite.  NetObjects
Fusion is also bundled with Novell's  NetWare for Small  Business.  We cannot be
assured of  maintaining  or obtaining  suitable  product or  component  bundling
arrangements  with third  parties.  Failure to  maintain  or  conclude  suitable
software  product  bundling  arrangements  could  hurt our  business,  cause our
revenues to decrease and our stock price to fall.                               

OUR PRODUCTS MAY CONTAIN DEFECTS THAT COULD SUBJECT US TO LIABILITY IN EXCESS OF
INSURANCE LIMITATIONS.                                                          

     Our  software  products  are complex and may contain  undetected  errors or
result in system failures.  Despite extensive testing, errors could occur in any
of our current or future  product  offerings  after  commencement  of commercial
shipments.  Any errors  could  result in loss of or delay in  revenues,  loss of
market share,  failure to achieve  market  acceptance,  diversion of development
resources,  and injury to our reputation or damage to our efforts to build brand
awareness.  We cannot be certain that the  contractual  limitations of liability
will  be  enforceable,  or that  our  insurance  coverage  will  continue  to be
available  on  reasonable  terms or will be available in amounts to cover one or
more large  claims,  or that the insurer  will not  disclaim  coverage as to any
future claim.  The successful  assertion of one or more large claims that exceed
available  insurance  coverage or changes in our insurance  policies,  including
premium  increases  or  the  imposition  of  large  deductible  or  co-insurance
requirements, could cause our revenues to decrease and our stock price to fall. 

IF WE FAIL TO RESPOND ADEQUATELY TO RAPID  TECHNOLOGICAL  CHANGES,  OUR EXISTING
PRODUCTS AND SERVICES WILL BECOME OBSOLETE OR UNMARKETABLE.                     

     The market for our products is marked by rapid technological  change, which
leads to frequent new product introductions and enhancements,  uncertain product
life cycles,  changes in customer demands and evolving industry  standards.  New
web  site  building  products  and  services  based on new  technologies  or new
industry standards could render our existing products obsolete and unmarketable.
We believe that to succeed, we must enhance our current products and develop new
products on a timely basis to keep pace with  technological  developments and to
satisfy the increasingly sophisticated requirements of our customers.           

OUR PRODUCT AND SOFTWARE  DEVELOPMENT EFFORTS ARE INHERENTLY DIFFICULT TO MANAGE
AND KEEP ON SCHEDULE, SO DEVELOPMENT DELAYS MAY INCREASE OUR COSTS.             

     On occasion,  we have experienced  software  development delays and related
cost overruns,  which to date have not materially affected our business,  and we
cannot be certain that we will not encounter  these problems in the future.  Any

16

10-Q 19th Page of 23 TOC 1st Previous Next ↓Bottom Just 19th
delays in  developing  and  releasing  enhanced or new products  could cause our
revenues  to  decrease.   In  addition,  we  cannot  be  certain  that  we  will
successfully  develop  and market new  products  or  product  enhancements  that
respond  to  technological  change,  evolving  industry  standards  or  customer
requirements,   or  that  any  product   innovations  will  achieve  the  market
penetration or price stability necessary for profitability.                     

THE LOSS OF OUR KEY PERSONNEL,  OR FAILURE TO HIRE ADDITIONAL  PERSONNEL,  COULD
HARM OUR BUSINESS  BECAUSE WE WOULD LOSE  EXPERIENCED  PERSONNEL AND NEW SKILLED
PERSONNEL ARE IN SHORT SUPPLY AND COMMAND HIGH SALARIES.                        

     We  depend  on  the  continued  service  of  our  key  personnel.  We  have
experienced  difficulties in attracting new personnel, and all of our personnel,
including our  management,  may terminate  their  employment at any time for any
reason.  Currently,  we are  dependent  upon the  services of Samir  Arora,  our
President,  Chief  Executive  Officer,  Chairman  of the  Board  and  one of our
founders. The loss of Mr. Arora's services would materially impede the operation
and growth of our  business  at this time.  We do not  maintain  key person life
insurance  for any of our  personnel.  Furthermore,  our  failure to attract new
personnel or retain and motivate our current personnel could hurt our business. 

A THIRD PARTY COULD BE PREVENTED FROM ACQUIRING OUR SHARES OF STOCK AT A PREMIUM
TO THE MARKET PRICE BECAUSE OF OUR ANTI-TAKEOVER PROVISIONS.                    

     As of June 30, 2001 IBM owns  approximately  48.0% of our outstanding stock
and  holds  warrants  that  if  exercised,   would  increase  its  ownership  to
approximately  48.4%  of  our  outstanding  voting  securities.  That  ownership
interest and provisions of our restated certificate of incorporation,  bylaws, a
voting  agreement  between  us and  IBM  and  Delaware  law  could  make it more
difficult  for a third party to acquire  us,  even if a change in control  would
result in the purchase of your shares of common stock at a premium to the market
price.                                                                          

IF WE FAIL TO  ADEQUATELY  PROTECT OUR  INTELLECTUAL  PROPERTY  RIGHTS OR FACE A
CLAIM OF INTELLECTUAL  PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE OUR
INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES.              

     Trademarks  and other  proprietary  rights are important to our success and
our  competitive   position.  We  seek  to  protect  our  trademarks  and  other
proprietary   rights,   but  our   actions   may  be   inadequate   to   prevent
misappropriation  or  infringement  of  our  technology,  trademarks  and  other
proprietary  rights or to  prevent  others  from  claiming  violations  of their
trademarks  and other  proprietary  rights.  Although we have  obtained  federal
registration of the trademark  NetObjects  Fusion, we know that other businesses
use the word "Fusion" in their marks alone or in  combination  with other works.
We do not  believe  that we will be able to prevent  others  from using the word
"Fusion" for competing  goods and  services.  For example,  Allaire  Corporation
markets its application  development  and server  software for web  development,
including applications for e-commerce,  under the federally registered trademark
"ColdFusion." Under an agreement with Allaire  Corporation,  we have agreed that
neither  company will  identify  its products and services  with the single word
"Fusion,"  unless  otherwise  agreed  as in the case of our  co-bundled  product
"Fusion2Fusion."  Business  customers may confuse our products and services with
similarly named brands,  which could dilute our brand names or limit our ability
to build  market  share.  To license  many of our  products,  we rely in part on
"shrink-wrap" and "clickwrap"  licenses that are not signed by the end user and,
therefore  may be  unenforceable  under the laws of  certain  jurisdictions.  In
addition,  we may license content from third parties. We could become subject to
infringement  actions  based upon these  third-party  licenses,  and we could be
required to obtain  licenses from other third  parties to continue  offering our
products.                                                                       

     We cannot be certain that we will be able to avoid significant expenditures
to protect our  intellectual  property  rights,  to defend  against  third-party
infringement or other claims or to license  content from third parties  alleging
that  our  products  infringe  their  intellectual  property  rights.  Incurring
significant  expenditures  to protect  our  intellectual  property  rights or to
defend  against  claims or to license  content  could  decrease our revenues and
cause our stock price to fall.                                                  

     Since we are no longer a  majority-owned  subsidiary  of IBM,  we no longer
enjoy cross-licensing  protection that we received as an IBM subsidiary.  We may
face material  litigation risk associated with patent  infringement  claims that
IBM's patent  cross-licensees  could not assert  against us while we were an IBM
subsidiary.                                                                     

OUR INTERNATIONAL OPERATIONS CONTINUE TO EXPAND AND MAY NOT BE SUCCESSFUL.      

     International sales represented  approximately 21% of our total revenues in
the quarter ended June 30, 2001 and  approximately  7% of our total  revenues in
the  quarter  ended   December  31,  2000.   International   sales   represented
approximately 40% and 31% of our total revenues for the nine-month periods ended
June 30, 2001 and 2000, respectively.  If we are able to continue to do business
as  currently  structured,   we  would  intend  to  continue  our  international
operations.  However, there can be no assurance that we will continue to operate
under our present form or that we will continue to operate at all.              

     Our international operations are, and any expanded international operations
will be,  subject  to a variety of risks  associated  with  conducting  business
internationally that could materially  adversely affect our business,  including
the following:                                                                  

17

10-Q 20th Page of 23 TOC 1st Previous Next ↓Bottom Just 20th
*    difficulties in staffing and managing international operations;  

*    lower gross margins than in the United States;                   

*    slower adoption of the Internet;                                 

*    longer payment cycles;                                           

*    fluctuations in currency exchange rates;                         

     *    seasonal  reductions in business  activity during the summer months in
Europe and other parts of the world;                        

*    recessionary environments in foreign economies; and              

     *    increases in tariffs,  duties, price controls or other restrictions on
      foreign currencies or trade barriers imposed by foreign countries.

     Furthermore,  the  laws of  foreign  countries  may  provide  little  or no
protection of our intellectual property rights.                                 

IF  INTERNET  AND  INTRANET  USAGE  DOES NOT  CONTINUE  TO GROW,  WE WILL NOT BE
SUCCESSFUL.                                                                     

     Sales of our products and services depend in large part on the emergence of
the  Internet  as a viable  commercial  marketplace  with a strong and  reliable
infrastructure  and  on the  growth  of  corporate  intranets.  Critical  issues
concerning use of the Internet and intranets,  including security,  reliability,
cost, ease of use and quality of service,  remain unresolved and may inhibit the
growth of, and the degree to which business is conducted  over, the Internet and
intranets.  Failure  of the  Internet  and  intranets  to  develop  into  viable
commercial  mediums  would harm our  business and cause our revenues to decrease
and our stock price to fall.                                                    

DUE TO OUR SMALL SIZE, LIMITED OPERATIONS AND THE DIFFICULTY OF HIRING PERSONNEL
IN  OUR  INDUSTRY,   ANY  FUTURE   ACQUISITIONS  COULD  STRAIN  OUR  MANAGERIAL,
OPERATIONAL AND FINANCIAL RESOURCES.                                            

     In the  future  we may  make  acquisitions  of,  or large  investments  in,
businesses that offer products,  services and technologies that we believe would
help us better provide  e-business web site and intranet site building  software
and services to businesses. Any future acquisitions or investments would present
risks such as difficulty in combining the technology, operations or workforce of
the acquired  business with our own,  disruption of our ongoing  businesses  and
difficulty in realizing the anticipated  financial or strategic  benefits of the
transaction.                                                                    

     To make these  acquisitions or large  investments we might use cash, common
stock or a combination of cash and common stock.  If we use common stock,  these
acquisitions  could  further  dilute  existing  stockholders.   Amortization  of
goodwill or other intangible assets resulting from acquisitions,  as in the case
of  our  Sitematic  and  Rocktide  acquisitions,  could  materially  impair  our
operating  results  and  financial  condition.  Furthermore,  there  can  be  no
assurance  that we would be able to obtain  acquisition  financing,  or that any
acquisition, if consummated,  would be smoothly integrated into our business. If
we make  acquisitions  or large  investments  and are unable to  surmount  these
risks,  our business could be harmed,  our revenues could decrease and our stock
price could fall.                                                               

WE  MAY  BECOME   SUBJECT  TO  BURDENSOME   GOVERNMENT   REGULATION   AND  LEGAL
UNCERTAINTIES IN AREAS INCLUDING NETWORK SECURITY, ENCRYPTION AND PRIVACY, AMONG
OTHERS,  BECAUSE WE CONDUCT  ELECTRONIC  COMMERCE  AND PROVIDE  INFORMATION  AND
SERVICES OVER THE INTERNET.                                                     

     We are not  currently  subject  to direct  regulation  by any  governmental
agency,  other than laws and  regulations  generally  applicable to  businesses,
although  specific U.S. export controls and import controls of other  countries,
including  controls  on the use of  encryption  technologies,  may  apply to our
products.  Due to the  increasing  popularity  and  use of the  Internet,  it is
possible  that a number of laws and  regulations  may be  adopted  in the United
States and abroad with particular  applicability to the Internet. It is possible
that  governments  will enact  legislation that may apply to us in areas such as
network  security,   encryption,  the  use  of  key  escrow,  data  and  privacy
protection,  electronic  authentication  or  "digital"  signatures,  illegal and
harmful content,  access charges and retransmission  activities.  Moreover,  the
applicability to the Internet of existing laws governing issues such as property
ownership,  content, taxation, defamation and personal privacy is uncertain. Any
new   legislation  or  regulation  or   governmental   enforcement  of  existing
regulations  may limit the growth of the  Internet,  increase  our cost of doing
business or increase our legal  exposure,  any of which could cause our revenues
to decrease and our stock price to fall.                                        

18

10-Q 21st Page of 23 TOC 1st Previous Next ↓Bottom Just 21st
A  GOVERNMENTAL  BODY  COULD  IMPOSE  SALES AND  OTHER  TAXES ON THE SALE OF OUR
PRODUCTS,  LICENSE OF OUR TECHNOLOGY OR PROVISION OF SERVICES,  WHICH WOULD HARM
OUR FINANCIAL CONDITION.                                                        

     We currently do not collect sales or similar taxes with respect to the sale
of  products,  license of  technology  or  provision  of  services in states and
countries  other than  states in which we have  offices.  In October  1998,  the
Internet Tax Freedom Act, or ITFA, was signed into law. Among other things,  the
ITFA imposes a three-year  moratorium  on  discriminatory  taxes on  e-commerce.
Nonetheless,  foreign  countries,  or,  following  the  moratorium,  one or more
states,  may seek to impose sales or other tax  obligations  on  companies  that
engage in on-line commerce within their jurisdictions. A successful assertion by
one or more states or any foreign  country that we should collect sales or other
taxes on the sale of products, license of technology or provision of services or
remit  payment  of  sales or other  taxes  for  prior  periods,  could  hurt our
business.                                                                       

OUR STOCK PRICE MIGHT HAVE WIDE FLUCTUATIONS,  AND INTERNET-RELATED  STOCKS HAVE
BEEN PARTICULARLY VOLATILE.                                                     

     The market price of our common stock is highly volatile and subject to wide
fluctuations.  Recently, the stock market has experienced  significant price and
volume fluctuations and the market prices of securities of technology companies,
particularly  Internet-related  companies,  have been  highly  volatile.  Market
fluctuations,  as well as general  political  and economic  conditions,  such as
recession or interest rate or currency rate fluctuations, could adversely affect
the market price of our common stock.                                           

19

10-Q 22nd Page of 23 TOC 1st Previous Next ↓Bottom Just 22nd
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK              

     Our  exposure  to market  risks  for  changes  in  interest  rates  relates
primarily to investments in debt securities issued by U.S.  government  agencies
and corporate debt securities. We place our investments with high quality credit
issuers  and,  by policy,  limit the amount of the  credit  exposure  to any one
issuer. We manage interest rate risk by limiting  investments to debt securities
of relatively short  maturities.  In addition,  we maintain  sufficient cash and
cash equivalents so that we can hold investments to maturity.                   

     As of June 30,  2001,  we had cash and cash  equivalents  of $4.4  million,
including  approximately  $3.6 million in money market funds with  maturities of
less than 90 days.  Based upon our balance of cash and cash  equivalents at June
30,  2001,  a  decrease  in  interest  rates of 0.5%  would not cause a material
decrease in our annual interest income.                                         

     Our general  policy is to limit the risk of  principal  loss and ensure the
safety of invested  funds by limiting  market and credit risk. All highly liquid
investments  with a maturity of three months or less at the date of purchase are
considered to be cash  equivalents;  investments  with  maturities  greater than
three months are considered to be short-term investments.  Our investment policy
limits purchases of debt securities to maturities of three months or less.      

     To date, we have not  purchased or sold forward  contracts to hedge foreign
currency exposure, since the relative amounts of international revenue generated
have not been large enough to make hedging cost-effective.                      

20

10-Q Last Page of 23 TOC 1st Previous Next ↓Bottom Just 23rd
PART II: OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                        

(a)  NONE                                                             

SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.                                         

                NETOBJECTS, INC.

Date: August 14, 2001                   /s/ Samir Arora                         
                                        ----------------------------------------
           Samir Arora
                            Chariman of the Board, Chief
                               Executive Officer and President
                         (Duly Authorized Officer)

                 /s/ Ernie Cicogna
                                        ----------------------------------------
             Ernie Cicogna
                                   Senior Vice President, Finance, and
                                      Operations and Chief Financial Officer
                              (Principal Accounting Officer)

21

10-Q	1st Page of 23	TOC	↑Top	Previous	Next	↓Bottom	Just 1st

10-Q	2nd Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 2nd

10-Q	3rd Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 3rd

10-Q	4th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 4th

10-Q	5th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 5th

10-Q	6th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 6th

10-Q	7th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 7th

10-Q	8th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 8th

10-Q	9th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 9th

10-Q	10th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 10th

10-Q	11th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 11th

10-Q	12th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 12th

10-Q	13th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 13th

10-Q	14th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 14th

10-Q	15th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 15th

10-Q	16th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 16th

10-Q	17th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 17th

10-Q	18th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 18th

10-Q	19th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 19th

10-Q	20th Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 20th

10-Q	21st Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 21st

10-Q	22nd Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 22nd

10-Q	Last Page of 23	TOC	1st	Previous	Next	↓Bottom	Just 23rd

Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘10-Q’ Filing	Date	First	Last	Other Filings

	10/1/02	7
	9/30/01	6	15	PRE 14C
	9/1/01	11
Filed on:	8/14/01	23
	7/31/01	1
	7/26/01	10	15
	7/10/01	11
For Period End:	6/30/01	1	22
	6/13/01	10	15
	3/31/01	10	14	10-Q
	3/12/01	10
	2/18/01	7	18
	1/10/01	11
	12/31/00	10	19	10-Q, 10-Q/A
	12/29/00	6		10-K
	10/30/00	10
	9/30/00	2	16	10-K, 10-K/A
	9/29/00	6
	7/14/00	6		8-K
	6/30/00	2	19	10-Q
	10/4/99	6		8-K
	5/7/99	6		S-1/A
	4/11/97	6
	11/21/95	6
				List all Filings

↑Top

Filing Submission 0000950005-01-500451 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Netobjects Inc – ‘10-Q’ for 6/30/01

On: Tuesday, 8/14/01, at 4:33pm ET · For: 6/30/01 · Accession #: 950005-1-500451 · File #: 0-25427

Previous ‘10-Q’: ‘10-Q’ on 5/15/01 for 3/31/01 · Latest ‘10-Q’: This Filing

Quarterly Report — Form 10-QFiling Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Quarterly Report — Form 10-Q
Filing Table of Contents