<PAGE>
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UNITED STATES
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 THREE MONTHS ENDED SEPTEMBER 30, 1997
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: 0-26310
------------------------
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
of incorporation or organization) Identification No.)
</TABLE>
501 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (650) 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
October 31, 1997 was 90,652,050.
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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 September 30, 1997 and December 31,
1996............................................................................ 3
(b) Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1997 and 1996............................................... 4
(c) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 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 6. Exhibits and Reports on Form 8-K............................................................. 20
Signatures.............................................................................................. 21
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(In thousands) (Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 86,195 $ 87,530
Short-term investments.............................................. 103,962 113,034
Accounts receivable, net............................................ 160,819 110,627
Deferred tax assets................................................. 34,654 20,347
Other current assets................................................ 21,423 16,892
------------- ------------
Total current assets.............................................. 407,053 348,430
Property and equipment, net........................................... 131,524 86,567
Long-term investments................................................. 109,843 90,504
Other assets.......................................................... 11,072 11,949
------------- ------------
$659,492 $537,450
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 43,396 $ 27,634
Accrued compensation and related liabilities........................ 19,344 17,162
Other accrued liabilities........................................... 20,215 12,781
Income taxes payable................................................ 18,175 7,731
Deferred revenues................................................... 106,913 80,294
Current portion of long-term obligations and installment notes
payable........................................................... 673 714
------------- ------------
Total current liabilities......................................... 208,716 146,316
Deferred taxes and other long-term obligations........................ 3,919 484
Stockholders' equity:
Preferred stock, common stock and additional paid-in capital........ 472,085 399,022
Deferred compensation............................................... (4,285) (6,128)
Accumulated deficit................................................. (26,312) (2,227)
Other............................................................... 5,369 (17)
------------- ------------
Total stockholders' equity........................................ 446,857 390,650
------------- ------------
$659,492 $537,450
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
3
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
(In thousands, except per share data) 1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product revenues.................................. $ 107,327 $ 83,761 $ 296,152 $ 195,108
Service revenues.................................. 42,731 16,255 109,354 36,035
--------- --------- --------- ---------
Total revenues.................................. 150,058 100,016 405,506 231,143
Cost of revenues:
Cost of product revenues.......................... 14,023 10,900 34,893 27,414
Cost of service revenues.......................... 7,867 3,794 20,132 7,802
--------- --------- --------- ---------
Total cost of revenues.......................... 21,890 14,694 55,025 35,216
--------- --------- --------- ---------
Gross profit........................................ 128,168 85,322 350,481 195,927
Operating expenses:
Research and development.......................... 31,143 24,211 91,954 56,163
Sales and marketing............................... 70,057 43,865 185,835 102,176
General and administrative........................ 10,860 8,286 31,383 19,510
Purchased in-process research and development and
merger related charges.......................... -- -- 52,587 6,100
--------- --------- --------- ---------
Total operating expenses........................ 112,060 76,362 361,759 183,949
--------- --------- --------- ---------
Operating income (loss)............................. 16,108 8,960 (11,278) 11,978
Interest income, net.............................. 1,963 2,178 6,801 6,487
Equity in net losses of joint ventures............ (800) (586) (4,239) (1,002)
--------- --------- --------- ---------
Interest and other income, net.................. 1,163 1,592 2,562 5,485
--------- --------- --------- ---------
Income (loss) before income taxes................... 17,271 10,552 (8,716) 17,463
Provision for income taxes.......................... 5,527 2,895 15,369 5,311
--------- --------- --------- ---------
Net income (loss)................................... $ 11,744 $ 7,657 $ (24,085) $ 12,152
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share......................... $ 0.13 $ 0.09 $ (0.27) $ 0.14
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing net income (loss) per
share............................................. 93,225 87,883 89,084 86,941
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
4
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
(In thousands) 1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................................................... $ (24,085) $ 12,152
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Purchased in-process research and development..................... 52,587 --
Depreciation and amortization..................................... 26,352 10,604
Amortization of deferred compensation............................. 1,843 1,842
Deferred income taxes............................................. (9,312) --
Changes in assets and liabilities:
Accounts receivable............................................... (50,192) (65,979)
Other current assets.............................................. (4,531) (4,992)
Accounts payable.................................................. 15,762 17,279
Accrued compensation and related liabilities...................... 2,182 9,375
Other accrued liabilities......................................... 7,434 7,201
Income taxes payable.............................................. 10,444 --
Deferred revenues................................................. 26,619 45,094
--------- ---------
Net cash provided by operating activities............................. 55,103 32,576
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................................. (71,309) (63,201)
Other assets.......................................................... 877 (5,942)
Purchases of investments available-for-sale........................... (187,004) (306,301)
Maturities of investments available-for-sale.......................... 80,247 202,531
Sales of investments available-for-sale............................... 102,223 114,753
--------- ---------
Net cash used in investing activities................................. (74,966) (58,160)
CASH FLOWS FROM FINANCING ACTIVITIES
Tax benefit related to stock options.................................. 5,192 --
Payments on installment notes payable................................. (41) (457)
Proceeds from issuance of common stock, net........................... 13,725 8,553
--------- ---------
Net cash provided by financing activities............................. 18,876 8,096
Effect of foreign exchange rate changes on cash and cash
equivalents......................................................... (348) (174)
--------- ---------
Net decrease in cash and cash equivalents............................. (1,335) (17,662)
Cash and cash equivalents at beginning of period...................... 87,530 55,276
--------- ---------
Cash and cash equivalents at end of period............................ $ 86,195 $ 37,614
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid..................................................... $ 11,453 $ 1,029
--------- ---------
--------- ---------
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 Netscape Communications Corporation ("Netscape"), 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 Netscape's audited consolidated financial statements
and the notes thereto incorporated by reference into Netscape's Annual Report on
Form 10-K for the year ended December 31, 1996.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform with the
current period presentation.
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 nine months ended
September 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, Netscape 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
nine months ended September 30, 1997 and 1996 is not material.
REVENUE RECOGNITION
Netscape derives product revenues from product licensing fees and service
revenues from fees for Website transactions, which include Web advertising,
search and directory services, trademark licensing and other Web services, and
fees for maintenance and support services, training and consulting. 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") and internet service providers ("ISPs") 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 users. Product and service revenues from customer subscription and
technical support contracts are recognized ratably over the term of the contract
period. Payments for subscription and support fees are generally made in advance
and are nonrefundable. Service revenues from Web advertising are recognized
ratably over the term of the contract beginning when the advertising is
displayed on Netscape's Web page. Service revenues from search and directory
services are recognized based on actual traffic delivered. Service revenues from
trademark licensing are recognized when a license agreement is executed and the
6
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
fees are fixed. Service revenues from training and consulting are recognized
when the services are performed.
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 three 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. Debt securities and unrestricted public equity
securities with a readily determinable fair value, 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.
JOINT VENTURES
In June 1997, Netscape completed the formation of a joint venture, Novonyx,
Inc., ("Novonyx"), with Novell, Inc. ("Novell"). Novell and Netscape will
collaborate to integrate certain products and services for networked enterprise
customers building intranet and extranet applications. Netscape acquired for
cash a 9.9% ownership interest in the outstanding capital stock of Novonyx.
In August 1997, Netscape completed the merger of Navio Communications, Inc.,
a joint venture of Netscape, with and into Network Computer, Inc., ("NCI"), a
wholly-owned subsidiary of Oracle Corporation ("Oracle"). The surviving company,
NCI, creates software for open standards-based network computers and other
Internet appliances that will be used in homes, businesses and schools. Oracle
retains majority ownership in NCI and Netscape retains a minority equity
interest in NCI.
Netscape reports its share of earnings and losses of joint ventures in which
it owns a greater than 20% interest under the equity method of accounting. Other
joint ventures in which Netscape owns less than a 20% interest, including NCI
and Novonyx, are stated at the lesser of cost or 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 September 30, 1997
was immaterial.
BUSINESS COMBINATIONS
In June 1997, Netscape acquired Portola Communications, Inc. ("Portola"), a
company with expertise in high-performance messaging systems, and DigitalStyle
Corporation ("DigitalStyle"), a Web graphics tools vendor. Netscape 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 Netscape'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
7
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
had not yet reached technological feasibility. As of the date of each of the
acquisitions, Netscape 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
use. Netscape 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 it 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.
Netscape's results of operations include Portola's and DigitalStyle's
results of operations from the date of each acquisition. There can be no
assurance that Netscape will not incur additional charges in subsequent quarters
to reflect costs associated with these transactions or that Netscape will be
successful in its efforts to integrate the operations of these companies.
The pro forma results of operations of Netscape for the nine months ended
September 30, 1997 and 1996, assuming the Portola and DigitalStyle acquisitions
occurred at the beginning of each period presented, excluding the charge for
purchased in-process research and development related to the acquisitions and
eliminating all material intercompany transactions, are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
(In thousands, except per share data) 1997 1996
--------- ---------
<S> <C> <C>
Total revenues.................................................. $ 406,040 $ 231,612
Net income...................................................... 26,323 10,370
Net income per share............................................ $ 0.28 $ 0.12
</TABLE>
The pro forma information is presented as an illustration only and does not
necessarily indicate the operating results that would have occurred had the
transactions been completed at the beginning of the period indicated, nor does
it necessarily indicate future operating results.
SUBSEQUENT EVENTS
In November 1997, Netscape and GE Information Services, Inc. ("GEIS") signed
a definitive agreement for Netscape to acquire full ownership of Actra Business
Systems, LLC ("Actra"), a Netscape/ GEIS joint venture providing enterprise
software applications for Internet commerce, and reached a definitive agreement
to license certain technologies from GEIS, for an aggregate of approximately 2.3
million shares of Netscape common stock, subject to adjustment, which includes
approximately 600,000 shares for issuance upon exercise of options granted to
Actra employees. The acquisition will be accounted for as a purchase
transaction. Netscape anticipates that a substantial portion of the acquisition
will be written off as purchased in-process research and development in the
quarter in which the transaction closes. In addition, future periods will be
affected by acquisition-related amortization charges, which may be significant.
The transaction is currently anticipated to close in the fourth quarter of 1997
or the first quarter of 1998 and is subject to customary conditions to closing,
including certain regulatory approvals and other third party consents.
8
<PAGE>
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. WORDS SUCH AS
"ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES"
AND SIMILAR EXPRESSIONS IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE
SECTIONS ENTITLED "FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS
AND FINANCIAL CONDITION" IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1996 (THE "FORM 10-K"), "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" IN THE 1996 ANNUAL REPORT TO
STOCKHOLDERS (THE "ANNUAL REPORT") AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CERTAIN FACTORS AFFECTING
OPERATING RESULTS" IN THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 1997 (THE "FIRST QUARTER 10-Q REPORT. READERS SHOULD NOT UNDULY RELY
ON FORWARD-LOOKING STATEMENTS, WHICH REFLECT ONLY THE OPINION OF NETSCAPE
COMMUNICATIONS CORPORATION ("NETSCAPE") AS OF THE DATE HEREOF. UNLESS REQUIRED
BY LAW, NETSCAPE UNDERTAKES NO OBLIGATION TO REVISE FORWARD-LOOKING STATEMENTS.
READERS SHOULD ALSO CAREFULLY REVIEW THE FACTORS SET FORTH IN OTHER REPORTS AND
DOCUMENTS NETSCAPE 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
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 (the foregoing sections in
the Form 10-K, Annual Report and First Quarter 10-Q Report are collectively
referred to herein as the "Risk Factors").
OVERVIEW
Netscape is a leading provider of open software for linking people and
information over the Internet and private enterprise networks ("intranets")
based on transmission control protocol/Internet protocol ("TCP/IP").
RECENT EVENTS
In November 1997, Netscape and GE Information Services, Inc. ("GEIS") signed
a definitive agreement for Netscape to acquire full ownership of Actra Business
Systems, LLC ("Actra"), a Netscape/ GEIS joint venture providing enterprise
software applications for Internet commerce, and reached a definitive agreement
to license certain technologies from GEIS, for an aggregate of approximately 2.3
million shares of Netscape common stock, subject to adjustment, which includes
approximately 600,000 shares for issuance upon exercise of options granted to
Actra employees. The acquisition will be accounted for as a purchase
transaction. Netscape anticipates that a substantial portion of the acquisition
will be written off as purchased in-process research and development in the
quarter in which the transaction closes. In addition, future periods will be
affected by acquisition-related amortization charges, which may be significant.
The transaction is currently anticipated to close in the fourth quarter of 1997
or the first quarter of 1998 and is subject to customary conditions to closing,
including certain regulatory approvals and other third party consents.
There can be no assurance that Netscape will complete the proposed
acquisition of GEIS's interest in Actra or that Netscape will not incur
additional charges in subsequent quarters to reflect costs associated with the
acquisition or that Netscape will successfully integrate the operations of
Actra. Although Netscape believes the proposed acquisition of Actra is in the
best interests of Netscape and its stockholders, there are significant risks
associated with this acquisition, including but not limited to, difficulties in
integrating
9
<PAGE>
Actra and difficulties in maintaining revenue levels during product transition.
Further, the proposed acquisition of Actra involves a company that is in the
early stages of development. As a result, Netscape believes that the increases
in costs of revenue and in operating expenses (due in part to charges associated
with purchased in-process research and development) associated with the
development of these new technologies and the integration of the two companies
will, in the near term, greatly exceed any associated increases in revenue,
which will have an adverse impact on operating results.
Netscape expects to make further acquisitions, some of which may be
material, when it believes such acquisitions will complement its overall
business strategy. However, such acquisitions, and in particular the
acquisitions of high-technology companies, are inherently risky and there can be
no assurance that the proposed acquisitions will be successful and will not
adversely affect Netscape's business, operating results, or financial condition.
Netscape continues to face strong competition across all of its product
lines and markets. Netscape's competitors continue to develop and market new and
enhanced products. In particular, in August 1997 Microsoft Corporation
("Microsoft") began marketing Internet Explorer 4.0 and its "Active Desktop"
feature, which could reduce Netscape's share of the browser market. In addition,
Microsoft continues to engage in and expand the behaviors and practices
previously described in Netscape's Risk Factors, including entering into
preferential arrangements with providers of content for Internet software.
Microsoft's recently announced transaction with Apple Computer, Inc. ("Apple"),
which will make Internet Explorer 4.0 the default browser on Apple's systems,
could also reduce Netscape's share of the browser market. See "Risk Factors."
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 September 30, 1997,
June 30, 1997 and September 30, 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------
(In thousands, except per share data) SEPTEMBER 30,
(Unaudited) 1997 JUNE 30, 1997 SEPTEMBER 30, 1996
---------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues.................................... $150,058 100.0% $135,207 100.0% $100,016 100.0%
Cost of revenues.................................. 21,890 14.6 17,317 12.8 14,694 14.7
-------- ------ -------- ------ -------- ------
Gross profit...................................... 128,168 85.4 117,890 87.2 85,322 85.3
Operating expenses:
Research and development........................ 31,143 20.8 31,836 23.5 24,211 24.2
Sales and marketing............................. 70,057 46.7 61,736 45.7 43,865 43.9
General and administrative...................... 10,860 7.2 10,832 8.0 8,286 8.2
Purchased in-process research and development
and merger related charges.................... -- -- 52,587 38.9 -- --
-------- ------ -------- ------ -------- ------
Total operating expenses...................... 112,060 74.7 156,991 116.1 76,362 76.3
Operating income (loss)........................... 16,108 10.7 (39,101) (28.9) 8,960 9.0
Interest income, net............................ 1,963 1.3 2,443 1.8 2,178 2.2
Equity in net losses of joint ventures.......... (800) (0.5) (1,938) (1.4) (586) (0.6)
-------- ------ -------- ------ -------- ------
Interest and other income, net................ 1,163 0.8 505 0.4 1,592 1.6
-------- ------ -------- ------ -------- ------
Income (loss) before income taxes................. 17,271 11.5 (38,596) (28.5) 10,552 10.6
Provision for income taxes........................ 5,527 3.7 5,177 3.9 2,895 2.9
-------- ------ -------- ------ -------- ------
Net income (loss)................................. $ 11,744 7.8% $(43,773) (32.4)% $ 7,657 7.7%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
Net income (loss) per share....................... $ 0.13 $ (0.49) $ 0.09
-------- -------- --------
-------- -------- --------
Shares used in computing net income (loss) per
share........................................... 93,225 88,661 87,883
-------- -------- --------
-------- -------- --------
Excluding non-recurring purchased in-process
research and development and merger related
charges:
Net income........................................ $ 11,744 7.8% $ 8,814 6.5% $ 7,657 7.7%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
Net income per share.............................. $ 0.13 $ 0.10 $ 0.09
-------- -------- --------
-------- -------- --------
Shares used in computing net income per share..... 93,225 91,049 87,883
-------- -------- --------
-------- -------- --------
</TABLE>
11
<PAGE>
The following table sets forth operating results, in absolute dollars and as
a percentage of total revenues, for the nine months ended September 30, 1997 and
1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
(In thousands, except per share data) ---------------------------------------
(Unaudited) 1997 1996
---------------- ------------------
<S> <C> <C> <C> <C>
Total revenues.............................................. $405,506 100.0% $231,143 100.0%
Cost of revenues............................................ 55,025 13.6 35,216 15.2
-------- ------ -------- ------
Gross profit................................................ 350,481 86.4 195,927 84.8
Operating expenses:
Research and development.................................. 91,954 22.7 56,163 24.3
Sales and marketing....................................... 185,835 45.8 102,176 44.2
General and administrative................................ 31,383 7.7 19,510 8.5
Purchased in-process research and development and merger
related charges......................................... 52,587 13.0 6,100 2.6
-------- ------ -------- ------
Total operating expenses................................ 361,759 89.2 183,949 79.6
-------- ------ -------- ------
Operating income (loss)..................................... (11,278) (2.8) 11,978 5.2
Interest income, net...................................... 6,801 1.7 6,487 2.8
Equity in net losses of joint ventures.................... (4,239) (1.0) (1,002) (0.4)
-------- ------ -------- ------
Interest and other income, net.......................... 2,562 0.7 5,485 2.4
-------- ------ -------- ------
Income (loss) before income taxes........................... (8,716) (2.1) 17,463 7.6
Provision for income taxes.................................. 15,369 3.8 5,311 2.3
-------- ------ -------- ------
Net income (loss)........................................... $(24,085) (5.9)% $ 12,152 5.3%
-------- ------ -------- ------
-------- ------ -------- ------
Net income (loss) per share................................. $ (0.27) $ 0.14
-------- --------
-------- --------
Shares used in computing net income (loss) per share........ 89,084 86,941
-------- --------
-------- --------
Excluding non-recurring purchased in-process research and
development and merger related charges:
Net income.................................................. $ 28,502 7.0% $ 17,022 7.4%
-------- ------ -------- ------
-------- ------ -------- ------
Net income per share........................................ $ 0.31 $ 0.20
-------- --------
-------- --------
Shares used in computing net income per share............... 91,686 86,941
-------- --------
-------- --------
</TABLE>
12
<PAGE>
REVENUES
Netscape derives product revenues from product licensing fees and service
revenues from fees for Website transactions, which include Web advertising,
search and directory services, trademark licensing and other Web services, and
fees for maintenance and support services, training and consulting.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(In thousands) -------------------------------------------------------------------
(Unaudited) SEPTEMBER 30, 1997 JUNE 30, 1997 SEPTEMBER 30, 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Client.............................. $ 56,842 37.9% $ 53,145 39.3% $ 58,867 58.9%
Server, commercial applications and
other............................. 50,485 33.6 45,911 34.0 24,894 24.8
--------- ----- --------- ----- --------- -----
Total product revenues............ 107,327 71.5 99,056 73.3 83,761 83.7
Service............................. 42,731 28.5 36,151 26.7 16,255 16.3
--------- ----- --------- ----- --------- -----
Total revenues.................... $ 150,058 100.0% $ 135,207 100.0% $ 100,016 100.0%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
(In thousands) --------------------------------------------
(Unaudited) 1997 1996
--------------------- ---------------------
<S> <C> <C> <C> <C>
Client................................................ $ 155,296 38.3% $ 138,906 60.1%
Server, commercial applications and other............. 140,856 34.7 56,202 24.3
--------- ----- --------- -----
Total product revenues.............................. 296,152 73.0 195,108 84.4
Service............................................... 109,354 27.0 36,035 15.6
--------- ----- --------- -----
Total revenues...................................... $ 405,506 100.0% $ 231,143 100.0%
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
TOTAL REVENUES. Total revenues grew 50.0% in the three months ended
September 30, 1997 from the three months ended September 30, 1996. In the nine
months ended September 30, 1997 total revenues grew 75.4% from the nine months
ended September 30, 1996. Total revenues grew 11.0% in the three months ended
September 30, 1997 from the three months ended June 30, 1997. In general,
Netscape has experienced revenue growth in all of its product lines as a result
of increased numbers of software licenses and the introduction of new products,
as opposed to higher prices.
A significant portion of revenue in the three and nine months ended
September 30, 1997, as in prior periods, was attributable to several large
product and Website licensing transactions. In general, Netscape's revenue
stream is comprised of transactions that have increased significantly in average
dollar size over the past several quarters. Such large licensing transactions,
including licenses to original equipment manufacturers ("OEMs"), internet
service providers ("ISPs") 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 product or Website
licensing transactions in future quarters could have a material adverse impact
on results of operations in those future quarters.
13
<PAGE>
PRODUCT REVENUES. Product revenues for the three months ended September 30,
1997 and 1996 were $107.3 million and $83.8 million, or 71.5% and 83.7% of total
revenues, respectively. Product revenues for the nine months ended September 30,
1997 and 1996 were $296.2 million and $195.1 million, or 73.0% and 84.4% of
total revenues, respectively. For the three months ended September 30, 1997 and
June 30, 1997 product revenues were $107.3 million and $99.1 million, or 71.5%
and 73.3% of total revenues, respectively. Product revenues increased in
absolute dollars but decreased as a percentage of total revenues in all periods.
The increases in absolute dollars in all periods were due to an expanded product
line, increased unit shipments of existing products and general growth in the
market for intranet-related software products in the corporate environment. The
decreases as a percentage of total revenues were due to an increase in service
revenues attributable to the growth in Website and professional consulting
revenues. Netscape believes that the client and server products revenue mix will
become less meaningful as customers move toward purchasing enterprise solutions
as opposed to distinct client and server products. For the quarter ended
September 30, 1997, a significant portion of product revenues related to
contract sales that included client and server products, enterprise licenses and
client access licenses. Netscape expects that product revenues as a percentage
of total revenues will fluctuate in future periods depending on the timing of
new product introductions, consumer buying patterns, pricing actions taken by
Netscape, competition and other factors.
In July 1997, Netscape announced its Enterprise Purchase Program, which
modified Netscape's Enterprise License Program in that Netscape 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. Although the intent of
the Enterprise Purchase Program is to make Netscape's enterprise software
available to a greater number of customers and to generate greater revenue, any
change in pricing or the pricing model for Netscape's products could have an
adverse impact on product sales, which could have a material adverse effect on
Netscape's results of operations.
SERVICE REVENUES. Service revenues for the three months ended September 30,
1997 and 1996 were $42.7 million and $16.3 million, or 28.5% and 16.3% of total
revenues, respectively. Service revenues for the nine months ended September 30,
1997 and 1996 were $109.4 million and $36.0 million, or 27.0% and 15.6% of total
revenues, respectively. For the three months ended September 30, 1997 and June
30, 1997 service revenues were $42.7 million and $36.2 million, or 28.5% and
26.7% of total revenues, respectively. Website revenues comprised $27.0 million,
or 63.3% of total service revenues for the quarter ended September 30, 1997. The
increases in all periods were due to increased Website transactions, which
include Web advertising, search and directory services and trademark licensing,
as well as increased consulting services. Netscape believes that service
revenues may fluctuate as a percentage of total revenues in future periods
depending on the timing, size and number of Website transactions, expansion of
Netscape's professional services consulting organization and rate of growth in
the installed base of technical support contracts. In particular, Netscape's
ability to increase service revenues will depend in part upon its ability to
attract and retain qualified professional service consulting personnel, who are
in great demand.
CHANNEL MIX. Netscape 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 and ISPs, systems
integrators, value-added resellers ("VARs") and software retailers. Indirect
channel revenues for the three months ended September 30, 1997 and 1996 remained
constant at 55.3% and 55.6% of total revenues, respectively. Indirect channel
revenues for the nine months ended September 30, 1997 and 1996 were 51.7% and
49.0% of total revenues, respectively. This increase as a percentage of total
revenues was due to an increase in OEM, ISP and VAR channel revenues, partially
offset by a decrease in retail channel revenues. OEM, ISP and VAR channel
revenues as a whole increased in absolute dollars primarily due to an increase
in the number of OEMs, ISPs and VARs offering Netscape's products as well
14
<PAGE>
as increased sales through Netscape's preexisting OEMs, ISPs and VARs. Indirect
channel revenues for the three months ended September 30, 1997 and June 30, 1997
were 55.3% and 49.5% of total revenues, respectively. The increase was due to an
increase in VAR and retail channel revenues primarily attributable to the retail
release of the Netscape Communicator product in August 1997 and a number of
large transactions through the VAR channel.
In general, Netscape seeks to increase indirect channel revenues as a
percentage of total revenues in future periods, although there can be no
assurance that it will accomplish this goal. Specifically, Netscape believes
that indirect channels will account for a greater percentage of total revenues
as OEM, ISP and VAR channels become more established and are further leveraged
by Netscape, and as the absolute number of OEM, ISP 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, Netscape's ability to
expand its use of OEMs, ISPs and VARs, the timing of larger enterprise sales in
strategic accounts through Netscape's direct sales force, and, to a lesser
extent, customer buying patterns, including those impacting revenues in the
retail channel.
GEOGRAPHIC MIX. International revenues (sales outside of North America) for
the three months ended September 30, 1997 and 1996 were 15.9% and 29.9% of total
revenues, respectively. International revenues for the nine months ended
September 30, 1997 and 1996 were 23.7% and 29.1% of total revenues,
respectively. For the three months ended September 30, 1997 and June 30, 1997
international revenues were 15.9% and 30.4% of total revenues, respectively.
Netscape believes that international revenues decreased as a percentage of total
revenues in all periods due to seasonally lower demand in Europe as well as a
reduction in the number of large licensing transactions in Europe in the third
quarter of 1997.
Netscape is continuing to make significant investments in international
markets through the deployment of sales personnel in several countries in Europe
and the Intercontinental region ("ICON"), which includes the Pacific Rim and
Latin America, as well as through partnering with OEMs, ISPs and VARs throughout
the world. Netscape 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.
Netscape invoices the customers of its international subsidiaries in both
U.S. dollars and the local currencies of its subsidiaries. Netscape has not
engaged in foreign currency hedging activities and a part of its international
revenues is currently subject to currency exchange fluctuation risk. To the
extent that international revenues increase in the future, Netscape's exposure
to fluctuations in foreign currency exchange rates may correspondingly increase.
GROSS MARGIN
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 September 30, 1997 and 1996 were $14.0 million and $10.9 million,
or 13.1% and 13.0% of related product revenues, respectively. Cost of product
revenues for the nine months ended September 30, 1997 and 1996 were $34.9
million and $27.4 million, or 11.8% and 14.1% of related product revenues,
respectively. The increases in absolute dollars in all periods were due to an
increase in the amount of royalties paid for licensed technology and amounts
paid to third-party vendors. The decrease as a percentage of related product
revenues in the nine months ended September 30, 1997 compared to the nine months
ended September 30, 1996 was due to lower retail revenues as a percentage of
total revenues, which typically have higher material and fulfillment costs, and
larger average transaction sizes, which typically carry lower material and
fulfillment costs.
15
<PAGE>
Cost of product revenues for the three months ended September 30, 1997 and
June 30, 1997 were $14.0 million and $11.1 million, or 13.1% and 11.2% of
related product revenues, respectively. The increase was due to an increase in
retail revenues as a percentage of total revenues, the amount of royalties paid
for licensed technology and amounts paid to third-party vendors. Netscape
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 include telephone support for client products.
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 and consulting
services, and fees paid to third parties related to Website advertising. Cost of
service revenues for the three months ended September 30, 1997 and 1996 were
$7.9 million and $3.8 million, or 18.4% and 23.3% of related service revenues,
respectively. Cost of service revenues for the nine months ended September 30,
1997 and 1996 were $20.1 million and $7.8 million, or 18.4% and 21.7% of related
service revenues, respectively. The decreases as a percentage of related service
revenues in all periods were due to the increase in Website transaction revenue,
which typically has lower associated costs than other service revenues.
Cost of service revenues for the three months ended September 30, 1997 and
June 30, 1997 were $7.9 million and $6.2 million, or 18.4% and 17.1% of related
service revenues, respectively. The increase was due to the increase in
consulting revenues, which typically carry a higher associated cost. Netscape
believes that the gross margin earned on service revenues will fluctuate in
future periods depending on the composition of such revenues.
OPERATING EXPENSES
Netscape's total operating expenses for the three months ended September 30,
1997 and 1996 were $112.1 million and $76.4 million, or 74.7% and 76.3% of total
revenues, respectively. The increase in absolute dollars was due to Netscape's
growth and expansion in all operating areas. Total operating expenses for the
nine months ended September 30, 1997 and 1996 were $361.8 million and $183.9
million, or 89.2% and 79.6% of total revenues, respectively. Total operating
expenses for the three months ended September 30, 1997 and June 30, 1997 were
$112.1 million and $157.0 million, or 74.7% and 116.1% of total revenues,
respectively. The changes between each of these periods was primarily due to the
non-recurring purchased in-process research and development charge in the second
quarter of 1997, as well as Netscape's growth and expansion in all operating
areas.
Total operating expenses, excluding purchased in-process research and
development and merger related charges, for the nine months ended September 30,
1997 and 1996 were $309.2 million and $177.8 million, or 76.2% and 76.9% of
total revenues, respectively. Total operating expenses, excluding purchased
in-process research and development and merger related charges, for the three
months ended September 30, 1997 and June 30, 1997 were $112.1 million and $104.4
million, or 74.7% and 77.2% of total revenues, respectively. The increases in
absolute dollars were due to Netscape's growth and expansion in all operating
areas. Netscape believes that continued expansion of operations is essential to
achieving and maintaining a strong competitive position. In particular, Netscape
anticipates headcount growth in most functional areas in future quarters and
increased investment in sales and marketing programs. Additionally, Netscape
anticipates continued increases in its infrastructure-related expenses, such as
costs for facilities, telecommunications, management information systems and
acquisition integration. Netscape also continues to seek acquisitions to
complement its overall business strategy.
Netscape recorded deferred compensation of $11.1 million for the difference
between the grant price and the deemed fair value of Netscape'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
16
<PAGE>
deferred compensation for each of the three months ended September 30, 1997 and
1996 and $1.8 million for each of the nine months ended September 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 adversely affect Netscape's operating results. Specifically,
Netscape will record additional operating expenses of $614,000 for the three
months ended December 31, 1997 and in quarterly periods thereafter until the
deferred compensation is 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 months ended September 30, 1997
and 1996 were $31.1 million, and $24.2 million, or 20.8% and 24.2% of total
revenues, respectively. Research and development expenses for the nine months
ended September 30, 1997 and 1996 were $92.0 million and $56.2 million, or 22.7%
and 24.3% of total revenues, respectively. The increase in absolute dollars
between periods was due to increased staffing and external consultant costs
while the decrease as a percentage of total revenues between periods was due to
the increase in the total revenue base.
Research and development expenses for the three months ended September 30,
1997 and June 30, 1997 were $31.1 million and $31.8 million, or 20.8% and 23.5%
of total revenues, respectively. The decrease in research and development
expenses was due to the completion of contracted internationalization work for
Netscape's products. The capitalizable portion of the software development costs
has been immaterial and, to date, such costs have been expensed as incurred.
Netscape believes that research and development activities are a critical area
for investment in Netscape 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.
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 September 30, 1997 and 1996 were $70.1
million and $43.9 million, or 46.7% and 43.9% of total revenues, respectively.
Sales and marketing expenses for the nine months ended September 30, 1997 and
1996 were $185.8 million and $102.2 million, or 45.8% and 44.2% of total
revenues, respectively. For the three months ended September 30, 1997 and June
30, 1997 sales and marketing expenses were $70.1 million and $61.7 million, or
46.7% and 45.7% of total revenues, respectively. The increases in sales and
marketing expenses in all periods were due to increased staffing, additional
marketing programs, costs associated with opening new sales offices, sales
commissions on increased revenues and continued investment in sales and
marketing capabilities in Europe and ICON. In particular, such costs increased
in the third quarter of 1997 due to increased staffing, marketing programs and
sales commissions. During the third quarter of 1997 Netscape appointed a new
Executive Vice President to oversee both the sales and marketing organizations.
In conjunction with this appointment, Netscape initiated organizational changes
across sales and marketing with the intention of further leveraging Netscape's
indirect channel partners and maximizing the return achieved from the existing
cost base. These organizational changes may, in the short-term, cause increases
in sales and marketing expenses as a percentage of total revenues.
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 September 30, 1997 and 1996 were $10.9 million and $8.3 million, or 7.2%
and 8.2% of total revenues, respectively. General and administrative expenses
for the nine months ended September 30, 1997 and 1996 were $31.4 million and
$19.5 million, or 7.7% and 8.5% of total revenues, respectively. For the three
months ended September 30, 1997 and June 30, 1997 general and administrative
expenses remained constant at $10.9 million and $10.8 million, or 7.2% and 8.0%
of total revenues, respectively. Netscape believes that general and
administrative expenses are at an appropriate percentage of total revenues and
intends to keep them between 7.0% and 8.5% of expected total revenues, although
there can be no assurance that Netscape will be able to do so, especially in
periods of lower than expected earnings.
17
<PAGE>
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT AND MERGER RELATED
CHARGES. In the nine months ended September 30, 1997, Netscape expensed
approximately $52.6 million of purchased in-process research and development in
connection with the acquisitions of Portola Communications, Inc. ("Portola"), a
company with expertise in high-performance messaging systems, and DigitalStyle
Corporation ("DigitalStyle"), a Web graphics tools vendor. The value attributed
to the in-process research and development was determined by an independent
appraisal. There can be no assurance that Netscape will not incur additional
charges in subsequent quarters to reflect costs associated with these
transactions or that Netscape will be successful in its efforts to integrate the
operations and technology of these companies.
In the nine months ended September 30, 1996, Netscape 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. Netscape does not anticipate incurring
any additional charges associated with these mergers. However, Netscape may
incur additional charges in the event it undertakes additional acquisitions.
NET INTEREST INCOME
Net interest income for the three months ended September 30, 1997 and 1996
was $2.0 million and $2.2 million, respectively. Net interest income for the
nine months ended September 30, 1997 and 1996 was $6.8 million and $6.5 million,
respectively. For the three months ended September 30, 1997 and June 30, 1997,
net interest income was $2.0 and $2.4 million, respectively. The changes between
each of these periods primarily reflect fluctuations in cash, cash equivalents,
and investment balances, changes in market interest rates and Netscape's mix of
taxable and non-taxable instruments. Pre-tax interest income may fluctuate in
future quarters as a result of fluctuations in its average cash balances and
changes in market interest rates for investments.
EQUITY IN NET LOSSES OF JOINT VENTURES
Equity in net losses of joint ventures for the three months ended September
30, 1997, June 30, 1997 and September 30, 1996 were $800,000, $1.9 million and
$586,000, respectively. Equity in net losses of joint ventures for the nine
months ended September 30, 1997 and 1996 were $4.2 million and $1.0 million,
respectively, reflecting Netscape's share of the net losses of Netscape's joint
ventures under the equity method of accounting. Netscape may provide additional
contributions to these joint ventures in the future. Each of the joint ventures
is 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.
INCOME TAXES
Netscape's effective tax rate for the three and nine months ended September
30, 1997 was 32% and 35%, respectively, 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 nine months
ended September 30, 1996 was 27% and 30%, respectively. The lower effective tax
rate for 1996 was primarily attributable to the utilization of net operating
loss carryovers in that year.
Netscape revised its estimated 1997 effective tax rate during the third
quarter of 1997 from 37% to 35%, exclusive of the effect of one-time
non-deductible research and development charges. This revision resulted in a 32%
effective tax rate for the third quarter of 1997. The decrease in the estimated
1997 effective tax rate was primarily attributable to the reinstatement of the
U.S. federal research tax credit. Netscape anticipates the effective tax rate
for the fourth quarter of 1997 will be 35%. However, this rate could change due
to a change in the estimated amount or geographic mix of Netscape's earnings,
the amount of permanent reinvestment offshore of a part of Netscape's 1997
earnings, changes in the U.S. tax law or the effect of future acquisitions.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, Netscape's principal source of liquidity was $190.2
million in cash, cash equivalents and short-term investments, representing a
$10.4 million decrease from the December 31, 1996 balance of $200.6 million.
During the same period, long-term investments increased by $19.3 million from
$90.5 million at December 31, 1996 to $109.8 million at September 30, 1997,
resulting in a net increase of $8.9 million in cash, cash equivalents, and
short-and long-term investments from December 31, 1996 to September 30, 1997.
Netscape's cash, short-term and long-term investments are managed to be
available for working capital, strategic investment opportunities or other
potential cash needs in the future. Netscape has no material debt.
For the nine months ended September 30, 1997 and 1996, cash provided by
operating activities of $55.1 million and $32.6 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, taxes payable and other accrued liabilities as well
as depreciation and amortization, partially offset by the growth in accounts
receivable and deferred income taxes. Cash used in investing activities of $75.0
million and $58.2 million for the nine months ended September 30, 1997 and 1996,
respectively, related primarily to capital expenditures of $71.3 million and
$63.2 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. Netscape
anticipates that capital expenditures will increase in future quarters. Cash
flows from financing activities of $18.9 million and $8.1 million for the nine
months ended September 30, 1997 and 1996, respectively, were primarily
attributable to proceeds from the issuance of common stock under Netscape's
stock option and employee stock purchase plans and from the tax benefit from
disqualifying dispositions.
Deferred revenues primarily consist of the unrecognized portion of product
and service revenues received pursuant to training, consulting, Web advertising
and subscription and support contracts 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 $106.9 million at September 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, Web advertising and subscription and support contracts.
Netscape's principal commitments as of September 30, 1997 consisted of
obligations under operating leases for monthly rent and operating lease
agreements that include commitments by Netscape to complete the build-out of
certain tenant improvements.
Netscape believes existing cash and investments together with cash flows
expected to be generated from operations will suffice to meet Netscape's
operating requirements for at least the next 12 months.
19
<PAGE>
PART II - OTHER INFORMATION
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.
(b) Reports on Form 8-K
None.
ITEMS 1, 2, 3, 4, AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
20
<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>
<S> <C> <C>
NETSCAPE COMMUNICATIONS CORPORATION
Date: November 12, 1997 By: /s/ PETER L.S. CURRIE
-----------------------------------------
Peter L.S. Currie,
Executive Vice President and
Chief Administrative Officer
(PRINCIPAL FINANCIAL OFFICER)
Date: November 12, 1997 By: /s/ NOREEN G. BERGIN
-----------------------------------------
Noreen G. Bergin,
Vice President, Finance and
Corporate Controller
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
21
<PAGE>
EXHIBIT 11.1
NETSCAPE COMMUNICATIONS CORPORATION
STATEMENTS OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
(In thousands, except per share data) 1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Primary:
Weighted average common stock outstanding............. 90,454 84,440 89,084 83,141
Net effect of dilutive stock options based on the
treasury stock method............................... 2,771 3,443 -- 3,800
--------- --------- --------- ---------
Total weighted average common and common equivalent
shares outstanding................................ 93,225 87,883 89,084 86,941
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss)....................................... $ 11,744 $ 7,657 $ (24,085) $ 12,152
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share............................. $ 0.13 $ 0.09 $ (0.27) $ 0.14
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted:
Weighted average common stock outstanding............. 90,454 84,440 89,084 83,141
Net effect of dilutive stock options based on the
treasury stock method............................... 2,877 3,533 -- 3,871
--------- --------- --------- ---------
Total weighted average common and common equivalent
shares outstanding................................ 93,331 87,973 89,084 87,012
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss)....................................... $ 11,744 $ 7,657 $ (24,085) $ 12,152
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share............................. $ 0.13 $ 0.09 $ (0.27) $ 0.14
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
22
<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
SEPTEMBER 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> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 86,195
<SECURITIES> 103,962
<RECEIVABLES> 160,819
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 407,053
<PP&E> 177,208
<DEPRECIATION> 45,684
<TOTAL-ASSETS> 659,492
<CURRENT-LIABILITIES> 208,716
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 446,848
<TOTAL-LIABILITY-AND-EQUITY> 659,492
<SALES> 107,327
<TOTAL-REVENUES> 150,058
<CGS> 14,023
<TOTAL-COSTS> 21,890
<OTHER-EXPENSES> 112,060
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,271
<INCOME-TAX> 5,527
<INCOME-CONTINUING> 11,744
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,744
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
