<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
<TABLE>
<S> <C> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THREE MONTHS ENDED JUNE 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
For the transition period from to .
Commission File Number: 0-26310
NETSCAPE COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3200270
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
</TABLE>
501 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (415) 254-1900
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 / /
The number of shares outstanding of the registrant's Common Stock as of July
31, 1997 was 90,486,656.
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<PAGE>
INDEX
NETSCAPE COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
(a) Condensed Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996...... 3
(b) Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1997 and 1996............................................................... 4
(c) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1997 and 1996........................................................................ 5
(d) Notes to Condensed Consolidated Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........
9
PART II. OTHER INFORMATION
Item 2. Changes in Securities........................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders............................................. 20
Item 6. Exhibits and Reports on Form 8-K................................................................ 20
Signatures................................................................................................. 22
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1996
JUNE 30, ------------
1997
-----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 59,813 $ 87,530
Short-term investments.............................................................. 110,695 113,034
Accounts receivable, net............................................................ 164,311 110,627
Deferred tax assets................................................................. 24,508 20,347
Other current assets................................................................ 17,605 16,892
----------- ------------
Total current assets.............................................................. 376,932 348,430
Property and equipment, net........................................................... 110,895 86,567
Long-term investments................................................................. 105,844 90,504
Other assets.......................................................................... 16,663 11,949
----------- ------------
$ 610,334 $ 537,450
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 36,684 $ 27,634
Accrued compensation and related liabilities........................................ 21,395 17,162
Other accrued liabilities........................................................... 19,975 12,781
Income taxes payable................................................................ 9,088 7,731
Deferred revenues................................................................... 101,221 80,294
Current portion of long-term obligations and installment notes payable.............. 905 714
----------- ------------
Total current liabilities......................................................... 189,268 146,316
Deferred taxes and other long-term obligations........................................ 1,470 484
Stockholders' equity:
Preferred stock, common stock and additional paid-in capital........................ 460,098 399,022
Deferred compensation............................................................... (4,900) (6,128)
Accumulated deficit................................................................. (38,056) (2,227)
Other............................................................................... 2,454 (17)
----------- ------------
Total stockholders' equity........................................................ 419,596 390,650
----------- ------------
$ 610,334 $ 537,450
----------- ------------
----------- ------------
</TABLE>
See accompanying notes.
3
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED JUNE
JUNE 30, 30,
--------------------- ----------------------
1997 1996 1997 1996
(In thousands, except per share data) ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product revenues................................................ $ 99,056 $ 62,296 $ 188,825 $ 111,347
Service revenues................................................ 36,151 12,710 66,623 19,780
---------- --------- ---------- ----------
Total revenues................................................ 135,207 75,006 255,448 131,127
Cost of revenues:
Cost of product revenues........................................ 11,119 9,703 20,870 16,514
Cost of service revenues........................................ 6,198 2,325 12,265 4,008
---------- --------- ---------- ----------
Total cost of revenues........................................ 17,317 12,028 33,135 20,522
---------- --------- ---------- ----------
Gross profit...................................................... 117,890 62,978 222,313 110,605
Operating expenses:
Research and development........................................ 31,836 17,826 60,811 31,952
Sales and marketing............................................. 61,736 32,506 115,778 58,311
General and administrative...................................... 10,832 6,018 20,523 11,224
Purchased in-process research and development and merger related
charges....................................................... 52,587 6,100 52,587 6,100
---------- --------- ---------- ----------
Total operating expenses...................................... 156,991 62,450 249,699 107,587
---------- --------- ---------- ----------
Operating income (loss)........................................... (39,101) 528 (27,386) 3,018
Interest income, net............................................ 2,443 1,878 4,838 4,309
Equity in net losses of joint ventures.......................... (1,938) (416) (3,439) (416)
---------- --------- ---------- ----------
Interest and other income, net................................ 505 1,462 1,399 3,893
---------- --------- ---------- ----------
Income (loss) before income taxes................................. (38,596) 1,990 (25,987) 6,911
Provision for income taxes........................................ 5,177 1,084 9,842 2,416
---------- --------- ---------- ----------
Net income (loss)................................................. $ (43,773) $ 906 $ (35,829) $ 4,495
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Net income (loss) per share....................................... $ (0.49) $ 0.01 $ (0.41) $ 0.05
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Shares used in computing net income (loss) per share.............. 88,661 87,937 88,399 86,470
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
See accompanying notes.
4
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................................................... $ (35,829) $ 4,495
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Purchased in-process research and development........................................... 52,587 --
Depreciation and amortization........................................................... 16,448 5,152
Amortization of deferred compensation................................................... 1,228 1,228
Deferred income taxes................................................................... (1,424) --
Changes in assets and liabilities:
Accounts receivable..................................................................... (53,684) (30,943)
Other current assets.................................................................... (713) (4,951)
Accounts payable........................................................................ 9,050 20,244
Accrued compensation and related liabilities............................................ 4,233 4,487
Other accrued liabilities............................................................... 7,194 6,845
Income taxes payable.................................................................... 1,357 --
Deferred revenues....................................................................... 20,927 34,584
--------- ---------
Net cash provided by operating activities................................................... 21,374 41,141
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................................................ (40,776) (41,641)
Increase in other assets.................................................................... (4,714) (1,649)
Purchases of investments available-for-sale................................................. (118,699) (259,059)
Maturities of investments available-for-sale................................................ 56,616 174,921
Sales of investments available-for-sale..................................................... 51,249 81,879
--------- ---------
Net cash used in investing activities....................................................... (56,324) (45,549)
CASH FLOWS FROM FINANCING ACTIVITIES
Tax benefit related to stock options........................................................ 1,719 --
Payments on installment notes payable....................................................... -- (197)
Proceeds from issuance of common stock, net................................................. 5,210 4,326
--------- ---------
Net cash provided by financing activities................................................... 6,929 4,129
Effect of foreign exchange rate changes on cash and cash equivalents........................ 304 --
--------- ---------
Net decrease in cash and cash equivalents................................................... (27,717) (279)
Cash and cash equivalents at beginning of period............................................ 87,530 55,276
--------- ---------
Cash and cash equivalents at end of period.................................................. $ 59,813 $ 54,997
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid........................................................................... $ 8,235 $ 282
--------- ---------
--------- ---------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for acquisitions........................................................ $ 54,147 $ --
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
5
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments, consisting of normal recurring adjustments, which, in
the opinion of the Company, are necessary for a fair presentation of the results
for the periods shown. The results of operations for such periods do not
necessarily indicate the results expected for the full fiscal year or for any
future period. The condensed consolidated balance sheet as of December 31, 1996
has been derived from audited consolidated financial statements at that date.
The accompanying financial statements should be read in conjunction with the
audited consolidated financial statements of Netscape Communications Corporation
("Netscape" or the "Company") for the year ended December 31, 1996 and the notes
thereto incorporated by reference into the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
PER SHARE AMOUNTS
Net income (loss) per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares consist of the shares issuable upon the exercise of
stock options (using the treasury stock method). Common equivalent shares were
not included in the computation of loss per share for the three and six months
ended June 30, 1997 as their effect was antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of Statement No. 128 on the
calculation of primary and fully diluted earnings per share for the three and
six months ended June 30, 1997 and 1996 is not material.
REVENUE RECOGNITION
The Company's product revenues are derived from product licensing fees,
while service revenues are derived from fees for maintenance and support
services, training, consulting, Web advertising, content co-marketing activities
and trademark licensing. Product revenues, net of allowances for future returns,
are generally recognized when a license agreement is in effect, the product has
been shipped, the license fee is fixed or determinable, no significant vendor
obligations remain and collectibility is reasonably assured. Product revenues
from original equipment manufacturers ("OEMs") are generally recognized upon
delivery of product masters provided that the license fees are fixed and
collectibility is not dependent upon resale to the end users; otherwise, these
product revenues are recognized upon notification of delivery to the end user.
Product and service revenues from customer subscription and technical support
contracts, as well as payments of minimum commitments received from third
parties in association with co-marketing Web activities, are recognized ratably
over the term of the contract period, which is typically 12 months. Payments for
subscription and support fees are generally made in advance and are
nonrefundable. Service revenues from training and consulting are recognized when
the services are performed. Service revenues from Web advertising transactions
are recognized in the period in which the content is displayed on a Web page of
the Company. Service revenues from trademark licensing are recognized when a
license agreement is executed and the fees are fixed. Costs related to
insignificant obligations, primarily telephone support, are accrued upon
shipment and included in cost of revenues.
6
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
CASH, CASH EQUIVALENTS, SHORT- AND LONG-TERM INVESTMENTS
Cash and cash equivalents consist of cash on deposit with banks and money
market instruments with original maturities of 90 days or less. Short- and
long-term investments consist of debt securities with original maturities
primarily between 90 days and five years. The debt securities are all classified
as available-for-sale. Long-term investments additionally include equity
holdings in both public and private technology companies, which have been
classified as available-for-sale. Unrestricted public equity securities with a
readily determinable fair value, and debt securities, are stated at fair value,
which is determined based upon the quoted market prices of the securities. Other
equity securities are stated at the lesser of cost or the net realizable value.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform with the
current period presentation.
JOINT VENTURES
In June 1997, the Company completed the formation of a joint venture,
Novonyx, Inc., ("Novonyx"), with Novell, Inc. ("Novell"). Novell and the Company
will collaborate to integrate certain products and services for networked
enterprise customers building intranet and extranet applications. The Company
acquired for cash a 9.9% ownership interest in the outstanding capital stock of
Novonyx.
The Company reports its share of earnings and losses of the joint ventures
in which it owns a greater than 20% interest under the equity method of
accounting. Other joint ventures in which the Company owns less than a 20%
interest, including Network Computer, Inc., ("NCI"), and Novonyx, are stated at
the lesser of cost or the net realizable value. The joint ventures are in the
development stage and will incur escalating losses in the near term. The balance
of investments in joint ventures at June 30, 1997 was immaterial.
BUSINESS COMBINATIONS
In June 1997, the Company acquired Portola Communications, Inc. ("Portola"),
a company with expertise in high-performance messaging systems, and DigitalStyle
Corporation ("DigitalStyle"), a Web graphics tools vendor. The Company purchased
all of the outstanding capital stock of each of the corporations and assumed all
of their outstanding stock options in exchange for an aggregate of approximately
two million shares of the Company's common stock. The acquisitions were
accounted for as purchase transactions. Portola had an aggregate purchase price
of approximately $32.2 million, primarily consisting of $31.2 million of stock
issued and $934,000 of direct acquisition costs. DigitalStyle had an aggregate
purchase price of approximately $26.0 million, primarily consisting of $22.9
million of stock issued and $2.1 million of direct acquisition costs.
The aggregate purchase prices were allocated to the fair value of the assets
acquired, the majority of which was purchased in-process research and
development of $28.1 million for Portola and $24.5 million for DigitalStyle.
Purchased in-process research and development represents the present value of
the estimated cash flows expected to be generated by the purchased technology,
which at the acquisition dates had not yet reached technological feasibility. As
of the date of each of the acquisitions, the Company concluded that the
in-process technology had no alternative future use after taking into
consideration the potential for usage of the technology in different products,
resale of the software and internal usage. The Company intends to continue
devoting effort to developing commercially viable products from the
7
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
purchased in-process research and development, although there can be no
assurance that the Company will develop such commercially viable products. The
value of the purchased in-process research and development was expensed at the
time of each of the acquisitions. The total amount allocated to intangible
assets from both acquisitions of $731,000 will be amortized on a straight-line
basis over a period of three years from the date of each acquisition.
The Company's results of operations include Portola and DigitalStyle's
results of operations from the date of each acquisition. There can be no
assurance that the Company will not incur additional charges in subsequent
quarters to reflect costs associated with these transactions or that the Company
will be successful in their efforts to integrate the operations of these
companies.
The pro forma results of operations of the Company for the six months ended
June 30, 1997 and 1996, assuming the Portola and DigitalStyle acquisitions
occurred at the beginning of each period presented and excluding the charge for
purchased in-process research and development related to the acquisitions and
with all material intercompany transactions eliminated, are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
----------------------
(In thousands, except per share data) 1997 1996
---------- ----------
<S> <C> <C>
Total revenues................................................... $ 255,982 $ 131,177
Net income....................................................... 14,578 3,376
Net income per share............................................. $ 0.16 $ 0.04
</TABLE>
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results that would have occurred had
the transactions been completed at the beginning of the period indicated, nor is
it necessarily indicative of future operating results.
SUBSEQUENT EVENTS
In August 1997, the Company announced the completion of the merger of Navio
Communications, Inc., a joint venture of the Company, with and into Network
Computer, Inc., ("NCI"), a wholly-owned subsidiary of Oracle Corporation
("Oracle"). The surviving company, NCI, will create software for open
standards-based network computers and other Internet appliances that will be
used in homes, businesses and schools. Oracle will retain majority ownership in
NCI, and the Company will retain a minority equity interest in NCI.
8
<PAGE>
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT
TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS ABOUT NETSCAPE'S INDUSTRY, MANAGEMENT'S BELIEFS, AND CERTAIN
ASSUMPTIONS MADE BY NETSCAPE'S MANAGEMENT. WORDS SUCH AS "ANTICIPATES,"
"EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES" AND VARIATIONS
OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT
ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS
AND UNCERTAINTIES INCLUDE THOSE SET FORTH IN THE ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1996 (THE "FORM 10-K") UNDER "FACTORS AFFECTING THE
COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION" ON PAGES 27
THROUGH 42 THEREOF, AS WELL AS THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 1997 (THE "FIRST QUARTER 10-Q REPORT") UNDER "CERTAIN FACTORS
AFFECTING OPERATING RESULTS" ON PAGES 8 THROUGH 14 THEREOF. UNLESS REQUIRED BY
LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
HOWEVER, READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS SET FORTH IN THE
REPORTS AND OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the section
entitled "Factors Affecting the Company's Business, Operating Results and
Financial Condition" in the Form 10-K, the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1996 Annual Report to Stockholders (the "Annual Report") and the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Certain Factors Affecting Operating Results" in the First
Quarter 10-Q Report.
OVERVIEW
Netscape Communications Corporation ("Netscape" or the "Company") is a
leading provider of open software for linking people and information over
private enterprise networks ("intranets") based on transmission control
protocol/Internet protocol ("TCP/IP") and the Internet. As discussed in "Recent
Events", the Company completed acquisitions of Portola Communications, Inc.
("Portola"), a company with expertise in high-performance messaging systems, and
DigitalStyle Corporation ("DigitalStyle"), a Web graphics tools vendor, in June
1997, which were accounted for as purchase transactions.
RECENT EVENTS
In June 1997, the Company completed the formation of a joint venture,
Novonyx, Inc., ("Novonyx"), with Novell, Inc., ("Novell"). Novell and the
Company will collaborate to integrate certain products and services for
networked enterprise customers building intranet and extranet applications. The
Company acquired for cash a 9.9% ownership interest in the outstanding capital
stock of Novonyx.
In June 1997, the Company acquired Portola and DigitalStyle. The Company
purchased all of the outstanding capital stock of each of the companies and
assumed all of their outstanding stock options in exchange for an aggregate of
approximately two million shares of the Company's common stock. The acquisitions
were accounted for as purchase transactions. Portola had an aggregate purchase
price of approximately $32.2 million, primarily consisting of $31.2 million of
stock issued and $900,000 of direct acquisition costs. DigitalStyle had an
aggregate purchase price of approximately $26.0 million, primarily consisting of
$22.9 million of stock issued and $2.1 million of direct acquisition costs.
The aggregate purchase prices were allocated to the fair value of the assets
acquired, the majority of which was purchased in-process research and
development of $28.1 million for Portola and $24.5 million
9
<PAGE>
for DigitalStyle. Purchased in-process research and development represents the
present value of the estimated cash flows expected to be generated by the
purchased technology, which at the acquisition dates had not yet reached
technological feasibility. As of the date of each of the acquisitions, the
Company concluded that the in-process technology had no alternative future use
after taking into consideration the potential for usage of the technology in
different products, resale of the software and internal usage. The Company
intends to continue devoting effort to developing commercially viable products
from the purchased in-process research and development, although there can be no
assurance that the Company will develop such commercially viable products. The
value of the purchased in-process research and development was expensed at the
time of each of the acquisitions. The total amount allocated to intangible
assets from both acquisitions of $720,000 will be amortized on a straight-line
basis over a period of three years from the date of each acquisition.
The Company's results of operations include Portola and DigitalStyle's
results of operations from the date of each acquisition. There can be no
assurance that the Company will not incur additional charges in subsequent
quarters to reflect costs associated with these transactions or that the Company
will be successful in its efforts to integrate the operations of these
companies.
The Company expects to make further acquisitions and investments and to
enter into further joint ventures and strategic alliances, some of which may be
material, when it believes such transactions will complement its overall
business strategy. However, such transactions, and in particular the
acquisitions of technology companies, are inherently risky and there can be no
assurance that the recently completed acquisitions or any such future
transactions or joint ventures will be successful and will not adversely affect
the Company's business, operating results, or financial condition. See "Recent
Events" in the First Quarter 10-Q Report on pages 8 and 9 thereof.
SUBSEQUENT EVENTS
In August 1997, the Company announced the completion of the merger of Navio
Communications, Inc., a joint venture of the Company, with and into Network
Computer, Inc., ("NCI"), a wholly-owned subsidiary of Oracle Corporation
("Oracle"). The surviving company, NCI, will create software for open
standards-based network computers and other Internet appliances that will be
used in homes, businesses and schools. Oracle will retain majority ownership in
NCI, and the Company will retain a minority equity interest in NCI.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth operating results, in absolute dollars and as
a percentage of total revenues, for the three months ended June 30, 1997, March
31, 1997 and June 30, 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
JUNE 30, 1997 MARCH 31, 1997 JUNE 30, 1996
-------------------- -------------------- --------------------
(In thousands, except per share data)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total revenues............................ $ 135,207 100.0% $ 120,241 100.0% $ 75,006 100.0%
Cost of revenues.......................... 17,317 12.8 15,818 13.2 12,028 16.0
--------- --------- --------- --------- --------- ---------
Gross profit.............................. 117,890 87.2 104,423 86.8 62,978 84.0
Operating expenses:
Research and development................ 31,836 23.5 28,975 24.1 17,826 23.8
Sales and marketing..................... 61,736 45.7 54,042 44.9 32,506 43.3
General and administrative.............. 10,832 8.0 9,691 8.1 6,018 8.0
Purchased in-process research and
development and merger related
charges............................... 52,587 38.9 -- -- 6,100 8.1
--------- --------- --------- --------- --------- ---------
Total operating expenses.............. 156,991 116.1 92,708 77.1 62,450 83.3
--------- --------- --------- --------- --------- ---------
Operating income (loss)................... (39,101) (28.9) 11,715 9.7 528 0.7
Interest income, net...................... 2,443 1.8 2,395 2.0 1,878 2.5
Equity in net losses of joint ventures.... (1,938) (1.4) (1,501) (1.2) (416) (0.6)
--------- --------- --------- --------- --------- ---------
Interest and other income, net.......... 505 0.4 894 0.8 1,462 1.9
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes......... (38,596) (28.5) 12,609 10.5 1,990 2.7
Provision for income taxes................ 5,177 3.9 4,665 3.9 1,084 1.4
--------- --------- --------- --------- --------- ---------
Net income (loss)......................... $ (43,773) (32.4%) $ 7,944 6.6% $ 906 1.2%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net income (loss) per share............... $ (0.49) $ 0.09 $ 0.01
--------- --------- ---------
--------- --------- ---------
Shares used in computing net income (loss)
per share............................... 88,661 90,785 87,937
--------- --------- ---------
--------- --------- ---------
Excluding non-recurring purchased
in-process research and development and
merger related charges:
Net income................................ $ 8,814 6.5% $ 7,944 6.6% $ 5,776 7.7%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net income per share...................... $ 0.10 $ 0.09 $ 0.07
--------- --------- ---------
--------- --------- ---------
Shares used in computing net income per
share................................... 91,049 90,785 87,937
--------- --------- ---------
--------- --------- ---------
</TABLE>
11
<PAGE>
The following table sets forth operating results, in absolute dollars and as
a percentage of total revenues, for the six months ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------
1997 1996
-------------------- --------------------
(In thousands, except per share data)
(Unaudited)
<S> <C> <C> <C> <C>
Total revenues.......................................... $ 255,448 100.0% $ 131,127 100.0%
Cost of revenues........................................ 33,135 13.0 20,522 15.7
--------- --------- --------- ---------
Gross profit............................................ 222,313 87.0 110,605 84.3
Operating expenses:
Research and development.............................. 60,811 23.8 31,952 24.4
Sales and marketing................................... 115,778 45.3 58,311 44.5
General and administrative............................ 20,523 8.0 11,224 8.6
Purchased in-process research and development and
merger related charges.............................. 52,587 20.6 6,100 4.7
--------- --------- --------- ---------
Total operating expenses............................ 249,699 97.7 107,587 82.2
--------- --------- --------- ---------
Operating income (loss)................................. (27,386) (10.7) 3,018 2.1
Interest income, net.................................... 4,838 1.9 4,309 3.3
Equity in net losses of joint ventures.................. (3,439) (1.4) (416) (0.3)
--------- --------- --------- ---------
Interest and other income, net...................... 1,399 0.5 3,893 3.0
--------- --------- --------- ---------
Income (loss) before income taxes....................... (25,987) (10.2) 6,911 5.1
Provision for income taxes.............................. 9,842 3.8 2,416 1.7
--------- --------- --------- ---------
Net income (loss)....................................... $ (35,829) (14.0)% $ 4,495 3.4%
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share............................. $ (0.41) $ 0.05
--------- ---------
--------- ---------
Shares used in computing net income (loss) per share.... 88,399 86,470
--------- ---------
--------- ---------
Excluding non-recurring purchased in-process research
and development and merger related charges:
Net income.............................................. $ 16,758 6.6% $ 9,365 7.1%
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share.................................... $ 0.18 $ 0.11
--------- ---------
--------- ---------
Shares used in computing net income per share........... 90,917 86,470
--------- ---------
--------- ---------
</TABLE>
12
<PAGE>
REVENUES
The Company derives its revenues from license fees for its software products
and fees for services, which are generally charged separately from fees for
software licenses. Product revenues consist of product licensing fees, and
service revenues consist of fees for maintenance and support services, training,
consulting, Web advertising, content co-marketing activities and trademark
licensing.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
JUNE 30, 1997 MARCH 31, 1997 JUNE 30, 1996
-------------------- -------------------- --------------------
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Client.................................... $ 53,145 39.3% $ 45,309 37.7% $ 45,052 60.1%
Server, commercial applications and
other................................... 45,911 34.0 44,460 37.0 17,244 23.0
--------- --------- --------- --------- --------- ---------
Total product revenues.................. 99,056 73.3 89,769 74.7 62,296 83.1
--------- --------- --------- --------- --------- ---------
Service................................... 36,151 26.7 30,472 25.3 12,710 16.9
--------- --------- --------- --------- --------- ---------
Total revenues.......................... $ 135,207 100.0% $ 120,241 100.0% $ 75,006 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------
1997 1996
-------------------- --------------------
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Client.................................................... $ 98,454 38.5% $ 80,039 61.0%
Server, commercial applications and other................. 90,371 35.4 31,308 23.9
--------- --------- --------- ---------
Total product revenues.................................. 188,825 73.9 111,347 84.9
Service................................................... 66,623 26.1 19,780 15.1
--------- --------- --------- ---------
Total revenues.......................................... $ 255,448 100.0% $ 131,127 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
TOTAL REVENUES. Total revenues for the three months ended June 30, 1997 and
1996 were $135.2 million and $75.0 million, respectively, representing an 80.3%
increase. Total revenues for the six months ended June 30, 1997 and 1996 were
$255.4 million and $131.1 million, respectively, representing a 94.8% increase.
The Company experienced absolute dollar growth in both of its major product
groups and in services in the three and six months ended June 30, 1997 as
compared to the three and six months ended June 30, 1996. Total revenues for the
three months ended June 30, 1997 and March 31, 1997 were $135.2 million and
$120.2 million, respectively, representing a 12.4% increase. In general, the
Company has experienced revenue growth in all of its product lines as a result
of increased numbers of software licenses, as opposed to higher prices.
A significant portion of revenue in the three and six months ended June 30,
1997, as in prior quarters, was attributable to several large licensing
transactions. In general, the Company's revenue stream is comprised of
transactions which have increased significantly in average dollar size over the
past several quarters. Such large licensing transactions, including licenses to
original equipment manufacturers ("OEMs") and enterprise customers, are expected
to continue to account for a significant portion of revenue in future quarters.
The loss or deferral of, or failure to consummate, one or more such large
licensing transactions could have a material adverse impact on results of
operations in future quarters.
PRODUCT REVENUES. Client product revenues increased 18.0%, and server,
commercial applications and other revenues increased 166.2%, from the three
months ended June 30, 1996 to the three months ended June 30, 1997. Client
product revenues increased 23.0%, and server, commercial applications and other
revenues increased 188.7%, from the six months ended June 30, 1996 to the six
months ended June 30, 1997. These increases were primarily due to an expanded
client and server product line, increased unit shipments of existing products
and general growth in the market for intranet-related software products in the
corporate environment. Product revenues for the three months ended June 30, 1997
and March 31,
13
<PAGE>
1997 were $99.1 million, or 73.3% of total revenues, and $89.8 million, or 74.7%
of total revenues, respectively. Client product revenues increased in both
absolute dollars and as a percentage of total revenues in the three months ended
June 30, 1997 as compared to the three months ended March 31, 1997 primarily due
to unit volume increases in sales associated with the release of the Netscape
Communicator product in the latter half of the quarter. Revenues from the
Company's server, commercial applications and other products for the three
months ended March 31, 1997 reflected significant OEM sales, while revenues for
the three months ended June 30, 1997 reflected strong growth in end user sales.
The Company expects that the percentage of product revenues attributable to
its server, commercial applications and other software products as compared to
its client product line will fluctuate in future periods depending on the timing
of new product introductions, consumer buying patterns, pricing actions taken by
the Company, competition and other factors. During the quarter ended December
31, 1996, the Company introduced its Enterprise License Program which offered an
alternative to the Company's standard retail model, bundling clients and servers
to be sold on a per seat basis. As customers increase the number of users,
additional incremental license charges will apply but are subject to volume and
other discounts. Although the intent of the Enterprise License Program is to
make the Company's enterprise software available to a greater number of
customers and to generate greater revenue, any change in pricing or the pricing
model for the Company's products could have an adverse impact on product sales,
which could have a material adverse effect on the Company's results of
operations.
In July 1997, the Company announced its Enterprise Purchase Program, which
modified the Company's Enterprise License Program in that the Company will now
offer two editions of Netscape SuiteSpot: Netscape SuiteSpot Standard Edition
and Netscape SuiteSpot Professional Edition. Per seat pricing was increased to
reflect the added benefits of Netscape SuiteSpot Professional Edition but
remained the same for the standard edition. In addition, the per seat pricing
model was expanded to include as few as 100 users as opposed to 500 users
previously. Under this program, prospective sales to customers with 500 or fewer
users will be referred to the indirect channels.
SERVICE REVENUES. Service revenues increased 184.4% from the three months
ended June 30, 1996 to the three months ended June 30, 1997. Service revenues
increased 236.8% from the six months ended June 30, 1996 to the six months ended
June 30, 1997. Service revenues for the three months ended June 30, 1997 and
March 31, 1997 were $36.2 million, or 26.7% of total revenues, and $30.5
million, or 25.3% of total revenues, respectively. The increases in all periods
were due to increased Web advertising transactions, content co-marketing
activities and trademark licensing, and to a lesser extent, increased consulting
services and increased technical support services provided to a larger installed
base of customers. The Company believes that service revenues may fluctuate as a
percentage of total revenues in future periods depending on the timing of the
Web advertising transactions, content co-marketing activities and trademark
licensing, the rate of growth in the installed base of technical support
contracts, and the planned expansion of the Company's professional services
consulting organization.
CHANNEL MIX. The Company distributes substantially all of its products
through a combination of direct channels, including field sales, Internet-based
sales and telesales, and indirect channels (including OEMs, systems integrators,
value-added resellers ("VARs") and software retailers). Indirect sales for the
three months ended June 30, 1997 and 1996 were 49.5% and 42.0% of total
revenues, respectively. Indirect sales for the six months ended June 30, 1997
and 1996 were 49.6% and 44.1% of total revenues, respectively. These increases
were due to an increase in OEM and VAR channel revenues, partially offset by a
decrease in retail channel revenues. OEM and VAR channel revenues as a whole
increased in absolute dollars primarily due to an increase in the number of OEMs
and VARs as well as increased sales through the Company's preexisting OEMs and
VARs. Indirect sales for the three months ended June 30, 1997 and March 31, 1997
remained constant at 49.5% and 49.8% of total revenues, respectively.
In general, it is the Company's strategy to increase indirect channel
revenues as a percentage of total revenues in future periods, although there can
be no assurance that the Company will be successful at
14
<PAGE>
accomplishing this goal. Specifically, the Company believes that indirect
channels will account for a greater percentage of total revenues as OEM and VAR
channels become more established and are further leveraged by the Company, and
as the absolute number of OEM and VAR partners increases. In the near term,
however, the distribution of revenues among channels will fluctuate depending on
the timing of new product releases, the Company's ability to expand, leverage,
and educate OEMs and VARs, the timing of larger enterprise sales in strategic
accounts through the Company's direct sales force, and, to a lesser extent,
customer buying patterns, including that which can impact revenues in the retail
channel.
GEOGRAPHIC MIX. International revenues (sales outside of North America) for
the three months ended June 30, 1997 and 1996 were 30.4% and 29.8% of total
revenues, respectively. International revenues for the six months ended June 30,
1997 and 1996 were 28.3% and 28.6% of total revenues, respectively.
International revenues for the three months ended June 30, 1997 and March 31,
1997 were 30.4% and 25.9% of total revenues, respectively. The increase was
primarily due to increased international Website revenues, as well as sales and
marketing efforts in Europe and the Pacific Rim.
The Company is continuing to make significant investments in international
markets through the deployment of sales personnel in several countries in
Europe, Latin America and the Pacific Rim, as well as through partnering with
OEMs and VARs throughout the world. The Company believes that international
revenues may account for a greater percentage of total revenues in future
periods, although this percentage may fluctuate in the near term as a result of
localized product release timing, competition, the general demand for
Internet-and intranet-related products in international markets, and the timing
of large product and service transactions.
The Company invoices the customers of its international subsidiaries in both
U.S. dollars and the local currencies of its subsidiaries. The Company has not
engaged in foreign currency hedging activities, and a portion of its
international revenues is currently subject to currency exchange fluctuation
risk. To the extent that international revenues may increase in the future, the
Company's exposure to fluctuations in foreign currency exchange rates may
correspondingly increase.
GROSS MARGIN
Gross margins on total revenues may be affected by various factors,
including the mix of distribution channels used by the Company, the mix of
products and services sold, the mix of product revenues versus service revenues
and the prices and fees charged for products.
COST OF PRODUCT REVENUES. Cost of product revenues for all periods
presented consisted primarily of the cost of product materials, royalties paid
for licensed technology, and amounts paid to third-party vendors for sales
administration and order fulfillment. Cost of product revenues for the three
months ended June 30, 1997 and 1996 were 11.2% and 15.6% of related product
revenues, respectively. Cost of product revenues for the six months ended June
30, 1997 and 1996 were 11.1% and 14.8% of related product revenues,
respectively. These decreases were due primarily to lower retail revenues as a
percentage of total revenues in the first six months of 1997, as retail revenues
typically have higher material and fulfillment costs. Additionally, cost of
product revenues decreased due to larger average transaction sizes in the first
six months of 1997, which typically carry lower material and fulfillment costs.
Cost of product revenues for the three months ended June 30, 1997 and March 31,
1997 were 11.2% and 10.9% of related product revenues, respectively. The slight
increase was primarily due to an increase in the amount of royalties paid for
licensed technology and amounts paid to third-party vendors. The Company
believes that the gross margin earned on product revenues will fluctuate in
future periods depending on the composition of such revenues and costs incurred
in achieving such revenues, including the cost associated with licensed
technology included in both client and server products, and product warranty
costs, which includes telephone support for client products.
15
<PAGE>
COST OF SERVICE REVENUES. Cost of service revenues for all periods
presented consisted primarily of outside consulting services and
personnel-related costs incurred in providing customer support, consulting
services and fees paid to third parties related to Web advertising transactions
and content co-marketing activities. Cost of service revenues for the three
months ended June 30, 1997 and 1996 were 17.1% and 18.3% of related service
revenues, respectively. Cost of service revenues for the six months ended June
30, 1997 and 1996 were 18.4% and 20.3% of related service revenues,
respectively. Cost of service revenues for the three months ended June 30, 1997
and March 31, 1997 were 17.1% and 19.9% of related service revenues,
respectively. The decreases in all periods were primarily due to the increase in
Web advertising transactions, content co-marketing activities and trademark
licensing, which typically have lower associated costs than other service
revenues. The Company believes that the gross margin earned on service revenues
will fluctuate in future periods depending on the composition of such revenues
and costs incurred in achieving such revenues.
OPERATING EXPENSES
The Company's total operating expenses for the three months ended June 30,
1997 and 1996 were 116.1% and 83.3% of total revenues, respectively. Total
operating expenses for the six months ended June 30, 1997 and 1996 were 97.7%
and 82.2% of total revenues, respectively. Total operating expenses for the
three months ended June 30, 1997 and March 31, 1997 were 116.1% and 77.1% of
total revenues, respectively. In all periods, the increases reflect the
non-recurring purchased in-process research and development charge in the second
quarter of 1997, as well as the Company's growth and expansion in all operating
areas.
The Company's total operating expenses, excluding purchased in-process
research and development and merger related charges, for the three months ended
June 30, 1997 and 1996 were 77.2% and 75.1% of total revenues, respectively. The
increase reflects the Company's growth and expansion in all operating areas.
Total operating expenses, excluding purchased in-process research and
development and merger related charges, for the six months ended June 30, 1997
and 1996 were 77.2% and 77.4% of total revenues, respectively. Total operating
expenses, excluding purchased in-process research and development and merger
related charges, for the three months ended June 30, 1997 and March 31, 1997
were 77.2% and 77.1% of total revenues, respectively. The Company believes that
continued expansion of operations is essential to achieving and maintaining a
strong competitive position. In particular, the Company anticipates headcount
growth in most functional areas in future quarters and increased investment in
sales and marketing programs. Additionally, the Company anticipates continued
increases in its infrastructure-related expenses, such as costs for facilities,
telecommunications, management information systems and acquisition integration.
The Company also continues to seek acquisitions, strategic investments and joint
ventures to complement the Company's overall business strategy. As a result of
these factors, the Company directs a significant percentage of its revenues
towards operating expenses and towards nonoperating expenses associated with
equity interests in joint ventures and strategic investments.
The Company recorded deferred compensation of $11.1 million for the
difference between the grant price and the deemed fair value of the Company's
common stock for stock options granted in the first six months of 1995.
Operating expenses include $614,000 of non-cash charges associated with the
amortization of such deferred compensation for each of the three months ended
June 30, 1997 and 1996 and $1.2 million for each of the six months ended June
30, 1997 and 1996. The remaining deferred compensation will be amortized to
operating expense over the related 50-month vesting period of the shares and
will therefore continue to have an adverse impact on the Company's operating
results. Specifically, the Company will record additional operating expenses of
$614,000 for the three months ended September 30, 1997 and in quarterly periods
thereafter associated with deferred compensation amortization until fully
amortized.
RESEARCH AND DEVELOPMENT. Research and development expenses consisted
primarily of compensation and consulting fees to support product development.
Research and development expenses for the three
16
<PAGE>
months ended June 30, 1997, March 31, 1997 and June 30, 1996 were $31.8 million,
$29.0 million and $17.8 million, respectively, or 23.5%, 24.1% and 23.8% of
total revenues, respectively. Research and development expenses for the six
months ended June 30, 1997 and 1996 were $60.8 million and $32.0 million,
respectively, or 23.8% and 24.4% of total revenues, respectively. The absolute
dollar increases in each of the periods were primarily attributable to increased
staffing and external consultant costs. The capitalizable portion of the
software development costs have been immaterial and, to date, have been expensed
as incurred. The Company believes that research and development activities are a
critical area for investment in the Company and, as a result, intends to
increase the level of research and development expenses in future periods, which
may cause increases in such expenses as a percentage of total revenues in future
periods.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation, consulting fees, travel and advertising. Sales and marketing
expenses for the three months ended June 30, 1997, March 31, 1997 and June 30,
1996 were $61.7 million, $54.0 million and $32.5 million, respectively, or
45.7%, 44.9% and 43.3% of total revenues, respectively. Sales and marketing
expenses for the six months ended June 30, 1997 and 1996 were $115.8 million and
$58.3 million, respectively, or 45.3% and 44.5% of total revenues, respectively.
The absolute dollar and percentage increases in each of the periods were
generally due to increased staffing, additional marketing programs, costs
associated with opening new sales offices, sales commissions on increased
revenues and continued investment in Europe, Latin America and the Pacific Rim.
The Company intends to increase the level of sales and marketing expenses in
future periods, which may cause increases in such expenses as a percentage of
total revenues in future periods.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation, fees for professional services and accounts
receivable allowances. General and administrative expenses for the three months
ended June 30, 1997, March 31, 1997 and June 30, 1996 were $10.8 million, $9.7
million and $6.0 million, respectively, or 8.0%, 8.1% and 8.0% of total
revenues, respectively. General and administrative expenses for the six months
ended June 30, 1997 and 1996 were $20.5 million and $11.2 million, respectively,
or 8.0% and 8.6% of total revenues, respectively. The absolute dollar increases
in each of the periods were generally due to increased staffing, increased fees
for professional services, and higher accounts receivable allowances to support
higher revenue levels. The Company intends to increase the level of general and
administrative expenses in future periods, which may cause increases in such
expenses as a percentage of total revenues in future periods.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT AND MERGER RELATED
CHARGES. In the three and six months ended June 30, 1997, the Company expensed
approximately $52.6 million as purchased in-process research and development in
connection with the acquisitions of Portola and DigitalStyle. The value
attributed to the in-process research and development was determined by an
independent appraisal. There can be no assurance that the Company will not incur
additional charges in subsequent quarters to reflect costs associated with these
transactions or that the Company will be successful in its efforts to integrate
the operations and technology of these companies.
In the three and six months ended June 30, 1996, the Company incurred
certain merger related charges totaling $6.1 million. These expenses related to
the acquisitions of InSoft, Inc., Netcode Corporation and Paper Software, Inc.,
accounted for as poolings of interest, and were primarily associated with fees
for investment banking, legal, accounting, severance costs and other related
charges incurred with the acquisitions. The Company does not anticipate
incurring any additional charges associated with these mergers.
NET INTEREST INCOME
Net interest income for the three months ended June 30, 1997, March 31, 1997
and June 30, 1996 was $2.4 million, $2.4 million and $1.9 million, respectively.
Net interest income for the six months ended June 30, 1997 and 1996 was $4.8
million and $4.3 million, respectively. The increases in the three and six
17
<PAGE>
months ended June 30, 1997 compared to the same periods in 1996 were the result
of increased cash, cash equivalents and investment balances, partially offset by
lower market interest rates on average cash and investment balances. Net
interest income remained constant in the three months ended June 30, 1997
compared to the three months ended March 31, 1997 primarily due to the decrease
in the cash, cash equivalents and investment balances offset by lengthened
average maturities on securities, which generated higher yields. Pre-tax
interest income in future periods may fluctuate as a result of fluctuations in
average cash balances maintained by the Company and changes to market interest
rates for investments.
EQUITY IN NET LOSSES OF JOINT VENTURES
Equity in net losses of joint ventures for the three months ended June 30,
1997, March 31, 1997 and June 30, 1996 were $1.9 million, $1.5 million and
$416,000, respectively. Equity in net losses of joint ventures for the six
months ended June 30, 1997 and 1996 were $3.4 million and $416,000,
respectively, which reflects the Company's share of the net losses of the
Company's joint ventures under the equity method of accounting. The Company may
provide additional contributions to these joint ventures in the future. Each of
the joint ventures are in the development stage and will incur escalating losses
in the near term as the joint ventures grow and increase operating expenses to
fund their growth. See "Recent Events."
INCOME TAXES
The Company's effective tax rate for the three and six months ended June 30,
1997 was 37%, exclusive of the effect of one-time non-deductible purchased
in-process research and development charges incurred in the second quarter of
1997. The effective tax rate for the three and six months ended June 30, 1996
was 27%, exclusive of the effect of one-time non-deductible merger related
charges incurred in the second quarter of 1996. The lower effective tax rate for
1996 was primarily attributable to the utilization of net operating loss
carryovers in that year.
The Company anticipates its fiscal 1997 effective tax rate, exclusive of the
effect of one-time non-deductible research and development charges, to be
approximately 37%. This rate could change based on a change in the estimated
amount or geographic mix of the Company's earnings, the amount of permanent
reinvestment offshore of a portion of the Company's 1997 earnings, changes in
the U.S. tax law such as the reinstatement of the research tax credit, or the
effect of future acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company's principal source of liquidity was $170.5
million in cash, cash equivalents and short-term investments, representing a
$30.1 million decrease from the December 31, 1996 balance of $200.6 million.
During the same period, long-term investments increased by $15.3 million from
$90.5 million at December 31, 1996 to $105.8 million at June 30, 1997, resulting
in a net decrease of $14.8 million in cash, cash equivalents, short- and
long-term investments from December 31, 1996 to June 30, 1997. The Company's
cash and short-term investments are managed to be available for strategic
investment opportunities or other potential cash needs in the future. The
Company has no material debt.
For the six months ended June 30, 1997 and 1996, cash provided by operating
activities of $21.4 million and $41.1 million, respectively, was primarily
attributable to increases in net income excluding the purchased in-process
research and development charge which had no cash impact, deferred revenues,
accounts payable and other accrued liabilities, partially offset by the growth
in accounts receivable. Cash used in investing activities of $56.3 million and
$45.5 million for the six months ended June 30, 1997 and 1996, respectively,
related primarily to capital expenditures of $40.8 million and $41.6 million,
respectively. The capital expenditures primarily consisted of purchases of
computer hardware and software as well as leasehold improvements and furniture
and fixtures related to additional leased facilities. The Company estimates that
capital expenditures will increase in future quarters. Cash flows from financing
activities of
18
<PAGE>
$6.9 million and $4.1 million in the six months ended June 30, 1997 and 1996,
respectively, were primarily attributable to proceeds from the issuance of
common stock under the Company's stock option plans.
Deferred revenues primarily consist of the unrecognized portion of product
and service revenues received pursuant to training, consulting, and subscription
and support contracts, respectively, and the unrecognized portion of
nonrefundable, prepaid license royalties received pursuant to sublicense
agreements. Deferred revenues increased from $80.3 million at December 31, 1996
to $101.2 million at June 30, 1997 due to an increase in the number of
sublicense agreements, the amount of prepayments received pursuant to sublicense
agreements and, to a lesser extent, an increase in the number of training,
consulting, and subscription and support contracts.
The Company's principal commitments as of June 30, 1997 consisted of
obligations under operating leases for monthly rent and operating lease
agreements that include commitments by the Company to complete the build-out of
certain tenant improvements.
The Company believes existing cash and investments together with cash flows
expected to be generated from operations will be sufficient to meet the
Company's operating requirements for at least the next 12 months.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
In connection with the acquisitions of DigitalStyle and Portola, the Company
issued an aggregate of 1,794,563 shares of the Company's Common Stock (the
"Merger Shares") to the existing stockholders of DigitalStyle and Portola in
exchange for all of the outstanding shares of capital stock of DigitalStyle and
Portola. The Merger Shares were issued pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), afforded by Rule 506 under Regulation D of the Securities
Act. Both DigitalStyle and Portola retained a purchaser representative on behalf
of their stockholders who had knowledge and experience in financial and business
matters such that the purchaser representative was capable of evaluating the
merits and risks of the investment. The stockholders of DigitalStyle and Portola
had access to all relevant information regarding the Company necessary to
evaluate the investment and represented that the shares were being acquired for
investment intent. Additionally, the stockholders of DigitalStyle and Portola
were provided with information statements. There was no general solicitation or
advertising involved in the acquisitions, and the Company used reasonable care
to assure that the stockholders of DigitalStyle and Portola were not
underwriters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on May 30, 1997 (the
"Annual Meeting"). At the Annual Meeting, stockholders voted on two matters: (i)
the election of two Class II directors for a term of three years expiring in
2000 and (ii) the ratification of the appointment of Ernst & Young LLP as the
Company's independent auditors. The stockholders elected management's nominees
as the Class II directors in an uncontested election and ratified the
appointment of independent auditors by the following votes, respectively:
(i) Election of Class II directors for a term expiring in 2000:
<TABLE>
<CAPTION>
BROKER
VOTES FOR VOTES WITHHELD NON-VOTES
------------ -------------- ---------------
<S> <C> <C> <C>
James H. Clark...................................... 67,235,413 135,415 0
John E. Warnock..................................... 67,250,133 120,695 0
</TABLE>
The Company's Board of Directors is currently comprised of six members who
are divided into three classes with overlapping three-year terms. The term for
Class III directors (James L. Barksdale and L. John Doerr) will expire at the
meeting of stockholders to be held in 1998, and the term of Class I directors
(Marc L. Andreessen and Eric A. Benhamou) will expire at the annual meeting of
stockholders to be held in 1999.
(ii) Ratification of appointment of Ernst & Young LLP as independent
auditors:
<TABLE>
<CAPTION>
VOTES BROKER
VOTES FOR AGAINST ABSTENTIONS NON-VOTES
- ------------ ------------ ----------- ---------------
<S> <C> <C> <C>
67,124,090 118,554 128,184 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 11.1 Statements of Computation of Earnings (Loss) Per Share.
Exhibit 27.1 Financial Data Schedule.
20
<PAGE>
(b) Reports on Form 8-K:
A Current Report on Form 8-K was filed with the Securities and Exchange
Commission by the Company on July 23, 1997 to report certain financial results
for the three and six months ended June 30, 1997.
ITEMS 1, 3, AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
21
<PAGE>
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
following authorized representatives.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NETSCAPE COMMUNICATIONS CORPORATION
Date: August 13, 1997 By: /s/ PETER L.S. CURRIE
------------------- -------------------------------------------
Peter L.S. Currie,
Executive Vice President and
Chief Administrative Officer
(PRINCIPAL FINANCIAL OFFICER)
Date: August 13, 1997 By: /s/ NOREEN G. BERGIN
------------------- -------------------------------------------
Noreen G. Bergin,
Vice President, Finance and Corporate Controller
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
22
<PAGE>
EXHIBIT 11.1
NETSCAPE COMMUNICATIONS CORPORATION
STATEMENTS OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED JUNE
JUNE 30, 30,
--------------------- ---------------------
1997 1996 1997 1996
(In thousands, except per share data) ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Primary:
Weighted average common stock outstanding......................... 88,661 84,066 88,399 82,492
Net effect of dilutive stock options based on the treasury stock
method.......................................................... -- 3,871 -- 3,978
---------- --------- ---------- ---------
Total weighted average common and common equivalent shares
outstanding................................................... 88,661 87,937 88,399 86,470
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Net income (loss)................................................... $ (43,773) $ 906 $ (35,829) $ 4,495
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Net income (loss) per share......................................... $ (0.49) $ 0.01 $ (0.41) $ 0.05
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Fully diluted:
Weighted average common stock outstanding......................... 88,661 84,066 88,399 82,492
Net effect of dilutive stock options based on the treasury stock
method.......................................................... -- 3,923 -- 4,040
---------- --------- ---------- ---------
Total weighted average common and common equivalent shares
outstanding................................................... 88,661 87,989 88,399 86,532
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Net income (loss)................................................... $ (43,773) $ 906 $ (35,829) $ 4,495
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Net income (loss) per share......................................... $ (0.49) $ 0.01 $ (0.41) $ 0.05
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NETSCAPE
COMMUNICATIONS CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 59,813
<SECURITIES> 110,695
<RECEIVABLES> 164,311
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 376,932
<PP&E> 146,675
<DEPRECIATION> (35,780)
<TOTAL-ASSETS> 610,334
<CURRENT-LIABILITIES> 189,268
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 419,587
<TOTAL-LIABILITY-AND-EQUITY> 610,334
<SALES> 99,056
<TOTAL-REVENUES> 135,207
<CGS> 11,119
<TOTAL-COSTS> 17,317
<OTHER-EXPENSES> 156,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (38,596)
<INCOME-TAX> 5,177
<INCOME-CONTINUING> (43,773)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,773)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
