<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 JULY 31, 1998
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)
DELAWARE 94-3200270
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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
August 31, 1998 was 99,524,658.
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<PAGE>
INDEX
NETSCAPE COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
(a) Condensed Consolidated Balance Sheets as of July 31, 1998 and December 31, 1997...... 3
(b) Condensed Consolidated Statements of Operations for the Three and Six Months Ended
July 31, 1998 and June 30, 1997...................................................... 4
(c) Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31,
1998 and June 30, 1997............................................................... 5
(d) Notes to Condensed Consolidated Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................................. 25
Item 6. Exhibits and Reports on Form 8-K................................................................ 25
Signatures................................................................................................. 26
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 103,998 $ 55,172
Short-term investments.............................................................. 101,773 129,426
Accounts receivable, net............................................................ 144,686 153,191
Deferred tax assets................................................................. 37,580 37,336
Other current assets................................................................ 16,643 19,961
----------- ------------
Total current assets.............................................................. 404,680 395,086
Property and equipment, net........................................................... 143,162 131,093
Long-term investments................................................................. 77,814 76,698
Other assets.......................................................................... 28,595 29,943
----------- ------------
Total assets........................................................................ $ 654,251 $ 632,820
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 39,063 $ 40,081
Accrued compensation and related liabilities........................................ 20,360 23,193
Other accrued liabilities........................................................... 33,347 31,397
Income taxes payable................................................................ 2,570 2,709
Deferred revenues................................................................... 164,541 106,170
----------- ------------
Total current liabilities......................................................... 259,881 203,550
Long-term obligations and installment notes payable................................... 620 215
Stockholders' equity:
Common stock and additional paid-in capital......................................... 570,014 549,196
Deferred compensation............................................................... (2,239) (3,671)
Accumulated deficit................................................................. (173,290) (119,201)
Accumulated other comprehensive income (loss)....................................... (735) 2,731
----------- ------------
Total stockholders' equity........................................................ 393,750 429,055
----------- ------------
Total liabilities and stockholders' equity.......................................... $ 654,251 $ 632,820
----------- ------------
----------- ------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JULY 31, JUNE 30, JULY 31, JUNE 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product revenues.......................... $ 92,293 $ 99,490 $ 168,589 $ 189,427
Service revenues.......................... 57,941 36,480 108,875 67,076
----------- ----------- ----------- -----------
Total revenues.......................... 150,234 135,970 277,464 256,503
Cost of revenues:
Cost of product revenues.................. 10,499 7,591 17,629 14,156
Cost of service revenues.................. 25,438 17,328 49,350 32,828
----------- ----------- ----------- -----------
Total cost of revenues.................. 35,937 24,919 66,979 46,984
----------- ----------- ----------- -----------
Gross profit................................ 114,297 111,051 210,485 209,519
Operating expenses:
Research and development.................. 37,794 33,167 73,259 63,377
Sales and marketing....................... 64,433 55,162 121,774 103,185
General and administrative................ 12,612 11,097 24,548 21,020
Purchased in-process research and
development............................. -- 52,587 -- 52,587
Goodwill amortization..................... 1,526 -- 3,052 --
----------- ----------- ----------- -----------
Total operating expenses................ 116,365 152,013 222,633 240,169
----------- ----------- ----------- -----------
Operating loss.............................. (2,068) (40,962) (12,148) (30,650)
Interest income, net........................ 2,140 2,445 3,903 4,856
Other income, net........................... 16 -- 8,341 --
Equity in net losses of joint ventures...... -- (1,938) -- (3,439)
----------- ----------- ----------- -----------
Income (loss) before income taxes........... 88 (40,455) 96 (29,233)
Provision for income taxes.................. -- 4,242 -- 8,156
----------- ----------- ----------- -----------
Net income (loss)........................... $ 88 $ (44,697) $ 96 $ (37,389)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic net income (loss) per share........... $ 0.00 $ (0.53) $ 0.00 $ (0.45)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted net income (loss) per share......... $ 0.00 $ (0.53) $ 0.00 $ (0.45)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in computing basic net income
(loss) per share.......................... 96,417 83,884 95,590 82,824
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in computing diluted net income
(loss) per share.......................... 104,644 83,884 103,240 82,824
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JULY 31, JUNE 30,
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................................... $ 96 $ (37,389)
Adjustments:
Depreciation and amortization....................................... 24,320 16,525
Amortization of deferred compensation............................... 1,228 1,228
In-process research and development................................. -- 52,587
Deferred income taxes............................................... (2,850) (2,580)
Gains on sales of equity investments................................ (8,471) --
Changes in assets and liabilities:
Accounts receivable................................................. (14,218) (53,955)
Other current assets................................................ 1,372 (3,211)
Accounts payable.................................................... 6,936 9,114
Accrued compensation and related liabilities........................ (3,776) 4,310
Other accrued liabilities........................................... (205) 7,415
Income taxes payable................................................ (192) 1,357
Deferred revenues................................................... 64,897 21,278
--------- ---------
Net cash provided by operating activities............................... 69,137 16,679
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................................... (33,877) (41,042)
Change in other assets.................................................. 4,750 (4,138)
Purchases of investments available-for-sale............................. (82,214) (121,156)
Maturities of investments available-for-sale............................ 81,868 56,616
Sales of investments available-for-sale................................. 7,521 51,249
--------- ---------
Net cash used in investing activities................................... (21,952) (58,471)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on installment notes payable................................... 863 1,284
Proceeds from issuance of common stock, net............................. 16,504 16,080
--------- ---------
Net cash provided by financing activities............................... 17,367 17,364
Effect of foreign exchange rate changes on cash and cash equivalents.... 18 304
--------- ---------
Net increase (decrease) in cash and cash equivalents.................... 64,570 (24,124)
Cash and cash equivalents at beginning of period........................ 39,428 88,233
--------- ---------
Cash and cash equivalents at end of period.............................. $ 103,998 $ 64,109
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid....................................................... $ 236 $ 8,235
--------- ---------
--------- ---------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for acquisitions.................................... $ -- $ 54,147
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements should be read together with the
audited consolidated financial statements and accompanying notes for Netscape
Communications Corporation ("Netscape") included in Netscape's Annual Report on
Form 10-K for the year ended December 31, 1997.
The accompanying unaudited, condensed and consolidated financial statements
include the accounts of Netscape and its wholly owned subsidiaries and reflect
all adjustments that Netscape believes are necessary to fairly present results
for the periods shown. All significant intercompany accounts and transactions
have been eliminated. The results of operations for all periods do not
necessarily indicate the results expected for the full fiscal year or for any
future period. The condensed and consolidated balance sheet as of December 31,
1997 was derived from audited consolidated financial statements at that date.
For the three months ended July 31, 1998, Netscape began to present
separately the results of operations for its two segments, Enterprise software
and Netcenter. Netscape's management evaluates the financial performance of
these two segments separately and believes that this more detailed information
will enable investors and analysts to evaluate the individual performance of
each segment. The Enterprise software segment of Netscape's business encompasses
Netscape's full line of Enterprise software solutions and professional services
for the intranet and extranet. The Netcenter segment encompasses Netscape's
Internet portal (Netcenter) and client business.
Statement of Financial Accounting Standards No. 131 ("SFAS 131") may require
additional disclosure of Netscape's Enterprise software and Netcenter segments.
Netscape will comply with the requirements of SFAS 131 for its fiscal year
ending October 31, 1998.
RECLASSIFICATION
Netscape has reclassified from sales and marketing expenses to cost of
service revenues all costs related to worldwide professional services, technical
support, and training for prior periods to conform with the current period
presentation. Previously, these costs were partly allocated to cost of service
revenues based in part upon the relative share of billable activity. This
reclassification of costs will closely align its financial presentation with
industry practices and allow for more comparable financial measurement. Netscape
has also reclassified to cost of service revenues certain manufacturing costs,
technical support expenses and royalty payments related to its non-revenue
earning client as these costs are attributed to the Netcenter segment. See
"Basis of Presentation" in "Notes to Condensed Consolidated Financial
Statements."
CHANGE IN YEAR END
In February 1998, the Board of Directors of Netscape approved a change in
Netscape's fiscal year to November 1 through October 31, effective for the
ten-month period ending October 31, 1998. Netscape previously reported results
on a calendar fiscal year model of January 1 through December 31. The Board's
action reflects Netscape's increased focus on enterprise software and services
and aligns Netscape's financial reporting practices with its business strategy
by taking into account the seasonal buying patterns of enterprise customers.
6
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
These condensed financial statements include the three and six months ended
June 30, 1997 as the prior year, previously reported periods most comparable to
the three and six months ended July 31, 1998. Netscape is not separately
recalculating its results for the three and six months ended July 31, 1997. Such
a separate calculation would be unreasonably costly and burdensome at a time
when Netscape is seeking to reduce operating expenses. Netscape also believes
that the results for the three and six months ended July 31, 1997 would not
materially differ from the results for the three and six months ended June 30,
1997 because each quarterly period contained one month that was treated as the
"first month" of a quarter and two months treated as the "second and third
months" of a quarter. Netscape does not believe that the seasonal buying
patterns of its enterprise customers materially affects the comparability of
these periods.
REVENUE RECOGNITION
Product revenues come from the Enterprise software segment and service
revenues come from both the Enterprise software and the Netcenter segments.
Enterprise software revenue comes from product licensing fees, technical
support, consulting, and, to a lesser extent, training services. Enterprise
product licensing fees are primarily from the sale of software licenses and
subscriptions. Netscape derives its Netcenter revenue from service fees from
Netcenter advertising, sponsorship, and other Netcenter services. Netcenter
sponsorship revenue primarily includes trademark fees, fees from revenue sharing
arrangements, and search and directory services.
Netscape generally recognizes license fees, net of allowances for future
returns, when a license agreement is in effect, the product has been shipped,
the license fee is fixed or determinable, and collectibility is reasonably
assured. Netscape generally recognizes license fees from original equipment
manufacturers ("OEMs") and certain other resellers upon delivery of product
masters, provided that the license fees are fixed and collectibility does not
depend upon resale to the end users; otherwise, Netscape recognizes these
license fees upon notification of delivery to the end users. Netscape recognizes
license and service fees from customer subscription and technical support
contracts ratably over the term of the contract period. Payments for
subscriptions are generally made in advance and are nonrefundable. Netscape
recognizes service fees from Netcenter advertising ratably over the term of the
contract beginning when the advertising is displayed on Netcenter. Netscape
recognizes service fees from sponsorships based on actual traffic incurred or
contracted minimums, and trademark fees when a license agreement is in effect,
the fees are fixed, and collectibility is reasonably assured. Netscape
recognizes service fees from training and consulting when the services are
performed.
RECENT PRONOUNCEMENTS
In 1997, SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued and is effective for years commencing after December
15, 1997. Netscape will comply with the requirements of SFAS 131 in its Annual
Report on Form 10-K for the fiscal year ending October 31, 1998.
2. PER SHARE AMOUNTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128 ("SFAS 128"), "Earnings Per Share". SFAS 128 replaces the
former calculations of primary and fully diluted earnings per share with basic
and diluted earnings per share. As required, Netscape adopted SFAS 128 in 1997
and restated earnings per share calculations for all prior periods. Netscape's
basic net income (loss) per share is computed using the weighted average number
of common shares outstanding during the period. Diluted net income (loss) per
share further includes dilutive (determined using the treasury stock
7
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
method) potential common shares outstanding during the period. Potential common
shares consist of shares issuable upon the exercise of stock options and
outstanding common shares subject to repurchase. The following table sets forth
the computation of basic and diluted net income (loss) per share for the three
and six months ended July 31, 1998 and June 30, 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JULY 31, JUNE 30, JULY 31, JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)............................................... $ 88 $ (44,697) $ 96 $ (37,389)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Denominator:
Weighted average common shares outstanding...................... 98,691 90,642 98,525 90,181
Weighted average outstanding common shares subject to
repurchase.................................................... (2,274) (6,758) (2,935) (7,357)
---------- ---------- ---------- ----------
Denominator for basic net income (loss) per share............... 96,417 83,884 95,590 82,824
Dilutive employee stock options and outstanding common shares
subject to repurchase......................................... 8,227 -- 7,650 --
---------- ---------- ---------- ----------
Denominator for diluted net income (loss) per share............. 104,644 83,884 103,240 82,824
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic net income (loss) per share............................... $ 0.00 $ (0.53) $ 0.00 $ (0.45)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted net income (loss) per share............................. $ 0.00 $ (0.53) $ 0.00 $ (0.45)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
3. OTHER INCOME, NET
Other income, net, for the three and six months ended July 31, 1998 was zero
and $8.3 million, respectively, primarily due to a one-time gain on the sales of
certain equity investments in the six months ended July 31, 1998.
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes changes in the balances of items that
are reported directly in a separate component of stockholders' equity on the
condensed consolidated balance sheets. Netscape had comprehensive income (loss)
comprised of net unrealized gain on available-for-sale securities and
accumulated foreign currency translation adjustments. The components of
comprehensive income (loss), net of related tax, for the three and six months
ended July 31, 1998 and June 30, 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ---------------------
JULY 31, JUNE 30, JULY 31, JUNE 30,
(IN THOUSANDS) 1998 1997 1998 1997
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net income (loss)..................................................... $ 88 $ (44,697) $ 96 $ (37,389)
Net unrealized gain on available-for-sale investments and
reclassification adjustment......................................... 30 2,192 (2,939) 2,167
Foreign currency translation adjustments.............................. 8 (131) 18 304
----- ---------- --------- ----------
Comprehensive income (loss)......................................... $ 126 $ (42,636) $ (2,825) $ (34,916)
----- ---------- --------- ----------
----- ---------- --------- ----------
</TABLE>
8
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of accumulated other comprehensive income (loss), net of
related tax, at July 31, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
(IN THOUSANDS) 1998 1997
--------- -------------
<S> <C> <C>
Net unrealized gain on available-for-sale investments........................... $ 89 $ 3,433
Foreign currency translation adjustments........................................ (824) (702)
--------- ------
Accumulated other comprehensive income (loss)................................. $ (735) $ 2,731
--------- ------
--------- ------
</TABLE>
5. HEDGING OF INTERCOMPANY BALANCES
In June 1998, Netscape initiated hedging activities to mitigate the impact
of changes in foreign exchange rates on intercompany balances. Netscape is using
foreign exchange forward contracts as a vehicle for hedging these intercompany
balances. A forward foreign exchange contract obligates Netscape to exchange
predetermined amounts of specified foreign currencies at specified exchange
rates on specified dates and to make or receive an equivalent U.S. dollar
payment equal to the value of such exchange. For these contracts that are
designated and effective as hedges, realized and unrealized gains and losses
resulting from changes in the spot exchange rate (including those from open,
matured, and terminated contracts) are included in other income, and net
discounts or premiums (the difference between the spot exchange rate and the
forward exchange rate at inception of the contract) are also accreted or
amortized to other income, net over the life of each contract, using the
straight-line method. These gains and losses offset gains and losses on
intercompany balances, which are also included in other income, net. The related
amounts due to or from counterparties are included in other assets or other
liabilities. In general, these foreign exchange forward contracts have three
months or less to maturity. At July 31, 1998, Netscape's hedged positions
totaled the equivalent of $3.8 million, and all hedge positions had maturity
dates within three months.
9
<PAGE>
THIS QUARTERLY REPORT ON FORM 10-Q ("FORM 10-Q") FOR NETSCAPE COMMUNICATIONS
CORPORATION ("NETSCAPE") CONTAINS FORWARD-LOOKING STATEMENTS MADE 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
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
"BUSINESS" AND "FACTORS AFFECTING NETSCAPE'S BUSINESS, OPERATING RESULTS, AND
FINANCIAL CONDITION" ON PAGES 20 THROUGH 35 IN THE ANNUAL REPORT ON FORM 10-K
("ANNUAL REPORT") FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
("COMMISSION") ON MARCH 27, 1998. READERS SHOULD NOT RELY UNDULY ON
FORWARD-LOOKING STATEMENTS, WHICH REFLECT ONLY THE OPINION OF 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 RISK
FACTORS SET FORTH IN OTHER REPORTS OR DOCUMENTS NETSCAPE FILES FROM TIME TO TIME
WITH THE COMMISSION, PARTICULARLY THE QUARTERLY REPORTS ON FORM 10-Q, AND ANY
CURRENT REPORTS ON FORM 8-K.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Netscape Communications Corporation ("Netscape") offers software, services,
and Website resources to businesses and consumers using the Internet.
Netscape is a leading provider of software and services for businesses that
want to transform the way they create and keep customers in the emerging Net
Economy. Netscape offers a full line of enterprise software solutions and
professional services designed to help companies build, buy or outsource
Internet applications that drive revenue growth, build customer loyalty, and
create new levels of business efficiency.
Complementing and building upon its software and services offerings,
Netscape first launched its Netcenter Website (Internet portal) in September
1997. In June 1998, Netscape redesigned Netcenter to use an industry-standard,
channel-based format, including Business, Entertainment, and other channels. The
new channel-based format offers consumers an improved interface and lets
advertisers more effectively target consumers.
SEGMENT PRESENTATION
For the three months ended July 31, 1998, Netscape began to present
separately the results of operations for its two segments individually,
Enterprise software and Netcenter. Netscape's management evaluates the financial
performance of these two segments separately and believes that this more
detailed information will enable investors and analysts to evaluate the
individual performance of each segment. The Enterprise software segment of
Netscape's business encompasses Netscape's full line of Enterprise software
solutions and professional services for the intranet and extranet. The Netcenter
segment encompasses Netscape's Internet portal (Netcenter) and client business.
Statement of Financial Accounting Standards No. 131 ("SFAS 131") may require
additional disclosure of Netscape's Enterprise software and Netcenter segments.
Netscape will comply with the requirements of SFAS 131 for its fiscal year
ending October 31, 1998.
RECLASSIFICATION
Netscape has reclassified from sales and marketing expenses to cost of
service revenues all costs related to worldwide professional services, technical
support, and training for prior periods to conform with the current period
presentation. Previously, these costs were partly allocated to cost of service
revenues based in part upon the relative share of billable activity. This
reclassification of costs will closely
10
<PAGE>
align its financial presentation with industry practices and allow for more
comparable financial measurement. Netscape has also reclassified to cost of
service revenues certain manufacturing costs, technical support expenses and
royalty payments related to its non-revenue earning client and attributed these
costs to the Netcenter segment. See "Basis of Presentation" in "Notes to
Condensed Consolidated Financial Statements."
CHANGE IN YEAR END
In February 1998, the Board of Directors of Netscape approved a change in
Netscape's fiscal year to November 1 through October 31, effective for the
ten-month period ending October 31, 1998. Netscape previously reported results
on a calendar fiscal year from January 1 through December 31. The Board's action
reflects Netscape's increased focus on enterprise software and services and
aligns Netscape's financial reporting practices with its business strategy by
taking into account the seasonal buying patterns of enterprise customers.
These condensed financial statements include the three and six months ended
June 30, 1997 as the prior year, previously reported periods most comparable to
the three and six months ended July 31, 1998. Netscape is not separately
recalculating its results for the three and six months ended July 31, 1997. Such
a separate calculation would be unreasonably costly and burdensome at a time
when Netscape is seeking to reduce operating expenses. Netscape also believes
that the results for the three and six months ended July 31, 1997 would not
materially differ from the results for the three and six months ended June 30,
1997 because each quarter contained one month that was treated as the "first
month" of a quarter and two months treated as the "second and third months" of a
quarter. Unless otherwise discussed herein, Netscape does not believe that the
seasonal buying patterns of its enterprise customers in those quarters
materially affects the comparability of these periods.
11
<PAGE>
RESULTS OF OPERATIONS--NETSCAPE CONSOLIDATED
The following tables and discussion compare the results of operations for
the three and six months ended July 31, 1998 and June 30, 1997 for Netscape.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) JULY 31, 1998 JUNE 30, 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues:
Product revenues..................................................... $ 92,293 61.4% $ 99,490 73.2%
Service revenues..................................................... 57,941 38.6 36,480 26.8
---------- --------- ---------- ---------
Total revenues..................................................... 150,234 100.0 135,970 100.0
Cost of revenues:
Cost of product revenues............................................. 10,499 7.0 7,591 5.6
Cost of service revenues............................................. 25,438 16.9 17,328 12.7
---------- --------- ---------- ---------
Total cost of revenues............................................. 35,937 23.9 24,919 18.3
---------- --------- ---------- ---------
Gross profit........................................................... 114,297 76.1 111,051 81.7
Operating expenses:
Research and development............................................. 37,794 25.2 33,167 24.4
Sales and marketing.................................................. 64,433 42.9 55,162 40.5
General and administrative........................................... 12,612 8.4 11,097 8.2
Purchased in-process research and development and merger related
charges............................................................ -- -- 52,587 38.7
Goodwill amortization................................................ 1,526 1.0 -- --
---------- --------- ---------- ---------
Total operating expenses........................................... 116,365 77.5 152,013 111.8
---------- --------- ---------- ---------
Operating loss......................................................... (2,068) (1.4) (40,962) (30.1)
Interest income, net................................................... 2,140 1.4 2,445 1.8
Other income, net...................................................... 16 -- -- --
Equity in net losses of joint ventures................................. -- -- (1,938) (1.5)
---------- --------- ---------- ---------
Income (loss) before income taxes...................................... 88 -- (40,455) (29.8)
Provision for income taxes............................................. -- -- 4,242 3.1
---------- --------- ---------- ---------
Net income (loss)...................................................... $ 88 --% $ (44,697) (32.9)%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Basic net income (loss) per share...................................... $ 0.00 $ (0.53)
---------- ----------
---------- ----------
Diluted net income (loss) per share.................................... $ 0.00 $ (0.53)
---------- ----------
---------- ----------
Shares used in computing basic net income (loss) per share............. 96,417 83,884
---------- ----------
---------- ----------
Shares used in computing diluted net income (loss) per share........... 104,644 83,884
---------- ----------
---------- ----------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) JULY 31, 1998 JUNE 30, 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues:
Product revenues..................................................... $ 168,589 60.8% $ 189,427 73.8%
Service revenues..................................................... 108,875 39.2 67,076 26.2
---------- --------- ---------- ---------
Total revenues..................................................... 277,464 100.0 256,503 100.0
Cost of revenues:
Cost of product revenues............................................. 17,629 6.4 14,156 5.5
Cost of service revenues............................................. 49,350 17.8 32,828 12.8
---------- --------- ---------- ---------
Total cost of revenues............................................. 66,979 24.2 46,984 18.3
---------- --------- ---------- ---------
Gross profit........................................................... 210,485 75.8 209,519 81.7
Operating expenses:
Research and development............................................. 73,259 26.4 63,377 24.7
Sales and marketing.................................................. 121,774 43.9 103,185 40.2
General and administrative........................................... 24,548 8.8 21,020 8.2
Purchased in-process research and development and merger related
charges............................................................ -- -- 52,587 20.5
Goodwill amortization................................................ 3,052 1.1 -- --
---------- --------- ---------- ---------
Total operating expenses........................................... 222,633 80.2 240,169 93.6
---------- --------- ---------- ---------
Operating loss......................................................... (12,148) (4.4) (30,650) (11.9)
Interest income, net................................................... 3,903 1.4 4,856 1.9
Other income, net...................................................... 8,341 3.0 -- --
Equity in net losses of joint ventures................................. -- -- (3,439) (1.4)
---------- --------- ---------- ---------
Income (loss) before income taxes...................................... 96 -- (29,233) (11.4)
Provision for income taxes............................................. -- -- 8,156 3.2
---------- --------- ---------- ---------
Net income (loss)...................................................... $ 96 --% $ (37,389) (14.6)%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Basic net income (loss) per share...................................... $ 0.00 $ (0.45)
---------- ----------
---------- ----------
Diluted net income (loss) per share.................................... $ 0.00 $ (0.45)
---------- ----------
---------- ----------
Shares used in computing basic net income (loss) per share............. 95,590 82,824
---------- ----------
---------- ----------
Shares used in computing diluted net income (loss) per share........... 103,240 82,824
---------- ----------
---------- ----------
</TABLE>
13
<PAGE>
REVENUES
Product revenues are derived from the Enterprise software segment and
service revenues are derived from both the Enterprise software and the Netcenter
segments. Netscape derives its Enterprise software revenue from product
licensing fees, technical support, consulting, and, to a lesser extent, training
services. Enterprise product licensing fees are primarily from the sale of
software licenses and subscriptions. Netscape derives its Netcenter revenue from
service fees from Netcenter advertising, sponsorships, and other Netcenter
services. Netcenter sponsorship revenue primarily includes trademark fees, fees
from revenue sharing arrangements, and search and directory services. As a
result of Netscape offering its client for free beginning in January 1998, there
were no revenues related to the sale of stand-alone client software and
client-related services in the three and six months ended July 31, 1998.
Netscape does not expect any future client stand-alone revenue.
TOTAL REVENUES. Total revenues grew 10.5% and 8.2% for the three and six
months ended July 31, 1998 from the three and six months ended June 30, 1997,
respectively. In general, where Netscape has experienced revenue growth in its
product lines, that growth has resulted from an increased number of software
licenses and recent product introductions, rather than increased prices. A
significant portion of revenue for the three and six months ended July 31, 1998
was attributable to several large product and Netcenter transactions. In
general, the number of these large transactions has continued to increase,
although the average dollar size has remained relatively consistent over the
past year. Netscape expects that such large transactions, including licenses to
Original Equipment Manufacturers ("OEMs"), other resellers, and enterprise
customers, will continue to account for a significant portion of revenue in
future periods. If Netscape lost, deferred, or failed to consummate one or more
such large product or Netcenter transactions, Netscape's results of operations
could be materially adversely affected in future periods.
PRODUCT REVENUES. Product revenues for the three months ended July 31, 1998
and June 30, 1997 were $92.3 million and $99.5 million, or 61.4% and 73.2% of
total revenues, respectively. Product revenues for the six months ended July 31,
1998 and June 30, 1997 were $168.6 million and $189.4 million, or 60.8% and
73.8% of total revenues, respectively. Product revenues decreased in both
absolute dollars and as a percentage of total revenues in all periods primarily
due to the significant reduction in client revenue in the three and six months
ended July 31, 1998 as a result of Netscape's decision to offer its client for
free beginning in January 1998. Product revenues further decreased as a
percentage of total revenues due to the increase in Netcenter service revenues.
Stand-alone client revenues were $32.0 million and $65.1 million for the three
and six months ended June 30, 1997, respectively. Excluding stand-alone client
revenues, product revenues increased 36.7% and 35.6% from the three and six
months ended June 30, 1997 to the three and six months ended July 31, 1998,
respectively. The increases in all periods were primarily due to increased
Enterprise Software transactions and recent product introductions. Netscape
expects that product revenues will fluctuate as a percentage of total revenues
in the future depending on the timing of new product introductions, customer
buying patterns, Netscape pricing actions, competition, and other factors.
SERVICE REVENUES. Service revenues for the three months ended July 31, 1998
and June 30, 1997 were $57.9 million and $36.5 million, or 38.6% and 26.8% of
total revenues, respectively. Service revenues for the six months ended July 31,
1998 and June 30, 1997 were $108.9 million and $67.1 million, or 39.2% and 26.2%
of total revenues, respectively. Service revenues increased in both absolute
dollars and as a percentage of total revenues in all periods primarily due to
increased Netcenter transactions, as well as to increased professional
consulting services. Netscape expects that service revenues as a percentage of
total revenues will fluctuate in future periods depending on the timing, size,
and number of Netcenter transactions, Netcenter viewership, expansion of
Netscape's professional services consulting organzlation, and the rate of growth
in the installed base of technical support contracts.
CHANNEL MIX. Netscape distributes its software products through a
combination of direct channels, including field sales, Internet-based sales and
telesales, and indirect channels, including OEMs, Internet Service Providers
("ISPs"), systems integrators, and other resellers. Indirect channel revenues
for the three
14
<PAGE>
months ended July 31, 1998 and June 30, 1997 were 43.3% and 49.2% of total
revenues, respectively. Indirect channel revenues for the six months ended July
31, 1998 and June 30, 1997 were 40.1% and 49.4% of total revenues, respectively.
Indirect channel revenues decreased as a percentage of total revenues in all
periods primarily due to increased Netcenter transactions through the direct
channel, a number of large Enterprise software sales by the direct sales force,
and the significant reduction in retail channel revenues due to Netscape
offering its client for free beginning in January 1998. In general, the
distribution of revenues among channels will fluctuate in future periods
depending on the timing of new product releases, Netscape's ability to expand
its use of OEMs, ISPs and other resellers, the mix of Netcenter service revenues
(which are largely direct sales) to total revenues, the timing of direct sales
to large Enterprise accounts and customer buying patterns.
GEOGRAPHIC MIX. International revenues (sales outside of North America) for
the three months ended July 31, 1998 and June 30, 1997 were 11.3% and 30.3% of
total revenues, respectively. International revenues for the six months ended
July 31, 1998 and June 30,1997 were 11.9% and 28.2% of total revenues,
respectively. International revenues decreased as a percentage of total revenues
in all periods due to Netscape offering its client for free beginning in January
1998, increased Netcenter revenues which were primarily domestic, the
restructuring of Netscape's European operations (which included a reduction in
workforce), and product transition and economic instability in the
Intercontinental Region ("ICON"), particularly Japan.
Netscape will continue to make investments in international markets by
deploying sales personnel with enterprise sales expertise in several countries
in Europe and ICON and by partnering with OEMs, ISPs, and other resellers
throughout the world. International revenues may fluctuate as a percentage of
total revenues in future periods as a result of localized product release
timing, competition, the general demand for Internet- and intranet-related
products in international markets, the timing of large product and service
transactions, and general economic conditions of the regions.
GROSS MARGIN
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
(IN THOUSANDS) JULY 31, 1998 JUNE 30, 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Product gross margin:
Product revenues....................................................... $ 92,293 100.0% $ 99,490 100.0%
Cost of product revenues............................................... 10,499 11.4 7,591 7.6
--------- --------- --------- ---------
Gross margin......................................................... $ 81,794 88.6% $ 91,899 92.4%
--------- --------- --------- ---------
Service gross margin:
Service revenues....................................................... $ 57,941 100.0% $ 36,480 100.0%
Cost of service revenues............................................... 25,438 43.9 17,328 47.5
--------- --------- --------- ---------
Gross margin......................................................... $ 32,503 56.1% $ 19,152 52.5%
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------------------
(IN THOUSANDS) JULY 31, 1998 JUNE 30, 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
Product gross margin:
Product revenues..................................................... $ 168,589 100.0% $ 189,427 100.0%
Cost of product revenues............................................. 17,629 10.5 14,156 7.5
---------- --------- ---------- ---------
Gross margin....................................................... $ 150,960 89.5% $ 175,271 92.5%
---------- --------- ---------- ---------
Service gross margin:
Service revenues..................................................... $ 108,875 100.0% $ 67,076 100.0%
Cost of service revenues............................................. 49,350 45.3 32,828 48.9
---------- --------- ---------- ---------
Gross margin....................................................... $ 59,525 54.7% $ 34,248 51.1%
---------- --------- ---------- ---------
</TABLE>
15
<PAGE>
Netscape's gross margin consists primarily of Enterprise software and
Netcenter revenues offset by the costs of these product and service revenues.
Costs associated with product revenues are product material costs, royalties
paid for licensed technology, and amounts paid to third-party vendors for sales
administration and order fulfillment. Costs associated with service revenues are
outside consulting services, personnel-related costs incurred in providing
customer support and professional services, costs associated with Netcenter
operations, certain costs associated with free client distribution, and fees
paid to third parties related to Netcenter advertising.
Product gross margins for the three months ended July 31, 1998 and June 30,
1997 were 88.6% and 92.4%, respectively. Product gross margins for the six
months ended July 31, 1998 and June 30, 1997 were 89.5% and 92.5%, respectively.
Product gross margins decreased primarily due to an increase in third-party
phone support associated with the free client, as well as fixed royalties paid
for licensed technology and relatively fixed amounts paid to third-party vendors
on decreased license fees for the same period.
Service gross margins for the three months ended July 31, 1998 and June 30,
1997 were 56.1% and 52.5%, respectively. Service gross margins for the six
months ended July 31, 1998 and June 30, 1997 were 54.7% and 51.1%, respectively.
Service gross margins increased primarily due to increased Netcenter transaction
revenues, which typically have lower associated costs than product and other
service revenues.
Netscape believes that the gross margin earned on product revenues will
fluctuate in future periods depending on the relative make-up of those products,
as different product lines have different levels of costs, such as costs
associated with licensed technology included in both client and server products,
and product warranty costs, which include telephone support for client products.
Netscape believes that the gross margin earned on services will fluctuate in
future periods depending on the composition of service revenues.
OPERATING EXPENSES
Netscape's total operating expenses for the three months ended July 31, 1998
and June 30, 1997 were $116.4 million and $152.0 million, or 77.5% and 111.8% of
total revenues, respectively. Total operating expenses for the six months ended
July 31, 1998 and June 30, 1997 were $222.6 million and $240.2 million, or 80.2%
and 93.6% of total revenues, respectively. Total operating expenses decreased in
both absolute dollars and as a percentage of total revenues in all periods due
to the purchased in-process research and development charges in the three months
ended June 30, 1997 relating to the acquisitions of Portola Communications, Inc.
("Portola") and Digital Style Corporation ("Digital Style").
Total operating expenses, excluding purchased in-process research and
development and merger related charges and goodwill amortization, for the three
months ended July 31, 1998 and June 30, 1997 were $114.8 million and $99.4
million, or 76.4% and 73.1% of total revenues, respectively. Total operating
expenses, excluding purchased in-process research and development and merger
related charges and goodwill amortization, for the six months ended July 31,
1998 and June 30, 1997 were $219.6 million and $187.6 million, or 79.1% and
73.1% of total revenues, respectively. The increases in both absolute dollars
and as a percentage of total revenues in all periods were generally due to
Netscape's growth and expansion in all operating areas.
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
deferred compensation for each of the three months ended July 31, 1998 and June
30, 1997, respectively, and $1.2 million in each of the six months ended July
31, 1998 and June 30, 1997, respectively. Netscape is amortizing the remaining
deferred compensation to operating expense over the 50-month vesting period of
the shares and it will therefore continue to adversely affect Netscape's
operating results. Specifically, Netscape will record additional operating
expenses of $614,000 for the quarter ending October 31, 1998 related to deferred
compensation.
16
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expenses for all periods
presented consisted primarily of compensation and consulting fees to support
research and development. Research and development expenses for the three months
ended July 31, 1998 and June 30, 1997 were $37.8 million and $33.2 million, or
25.2% and 24.4% of total revenues, respectively. Research and development
expenses for the six months ended July 31, 1998 and June 30, 1997 were $73.3
million and $63.4 million, or 26.4% and 24.7% of total revenues, respectively.
Research and development increased in both absolute dollars and as a percentage
of total revenues in all periods primarily due to increased staffing and
external consultant costs associated with the acquisitions of Actra Business
Systems, LLC ("Actra") and KIVA Software Corporation, which closed in the three
months ended December 31, 1997.
The capitalizable portion of software development costs has been immaterial
to date, and, as a result, such costs have been expensed as incurred. Netscape
believes that research and development activities are a critical area for
investment and intends to increase the level of research and development
expenses in future periods, which may increase such expenses as a percentage of
total revenues.
SALES AND MARKETING. Sales and marketing expenses for all periods presented
consisted of operating expenses associated with Netscape's Enterprise and
Netcenter sales and marketing organizations. Sales and marketing expenses for
the three months ended July 31, 1998 and June 30, 1997 were $64.4 million and
$55.2 million, or 42.9% and 40.5% of total revenues, respectively. Sales and
marketing expenses for the six months ended July 31, 1998 and June 30, 1997 were
$121.8 million and $103.2 million, or 43.9% and 40.2% of total revenues,
respectively. Sales and marketing expenses increased in both absolute dollars
and as a percentage of total revenues in all periods due to increased staffing,
particularly in direct sales and direct sales support functions, and marketing
staffing in the enterprise software segment, as well as increased staffing in
the marketing and operations groups, expanded online advertising initiatives and
the establishment of dedicated sales and engineering functions in the Netcenter
organization. Netscape plans to increase sales and marketing expenses in future
periods, particularly associated with Netcenter, which may increase such
expenses as a percentage of total revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for all
periods presented consisted primarily of compensation, fees for professional
services, and accounts receivable allowances. General and administrative
expenses for the three months ended July 31, 1998 and June 30, 1997 were $12.6
million and $11.1 million, or 8.4% and 8.2% of total revenues, respectively.
General and administrative expenses for the six months ended July 31, 1998 and
June 30, 1997 were $24.5 million and $21.0 million, or 8.8% and 8.2% of total
revenues, respectively. General and administrative expenses increased in both
absolute dollars and as a percentage of total revenues in all periods primarily
due to increased staffing, increased fees for professional services, and higher
reserves for accounts receivable balances primarily due to the client being
offered with no licensing fees beginning in January 1998. Netscape plans to
increase general and administrative expenses in future periods, which may cause
increases in such expenses as a percentage of total revenues.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT AND MERGER RELATED
CHARGES. In the three months ended June 30, 1997, Netscape incurred $52.6
million in purchased in-process research and development and merger related
charges associated with the acquisitions of Portola and DigitalStyle.
GOODWILL AMORTIZATION. In connection with the acquisition of Actra in
December 1997, Netscape allocated $18.3 million to goodwill, which is to be
amortized over three years on a straight-line basis from the date of
acquisition. Goodwill amortization for the three and six months ended July 31,
1998 was $1.5 million and $3.1 million, respectively. Netscape expects to
amortize $1.5 million each quarter through fiscal 2000.
17
<PAGE>
RESULTS OF OPERATIONS--ENTERPRISE SOFTWARE SEGMENT
The following tables and discussion set forth the results of operations for
the three months ended July 31, 1998 and April 30, 1998 for the Enterprise
software segment of Netscape.
ENTERPRISE SOFTWARE SEGMENT *
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
(IN THOUSANDS) JULY 31, 1998 APRIL 30, 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Revenues:
Product revenues....................... $ 92,293 82.7% $ 76,296 79.4%
Service revenues....................... 19,291 17.3 19,825 20.6
--------- --------- --------- ---------
Total revenues....................... 111,584 100.0 96,121 100.0
Cost of revenues:
Cost of product revenues............... 10,499 9.4 7,130 7.4
Cost of service revenues............... 19,316 17.3 17,358 18.1
--------- --------- --------- ---------
Total cost of revenues............... 29,815 26.7 24,488 25.5
--------- --------- --------- ---------
Gross profit............................. 81,769 73.3 71,633 74.5
Operating expenses:
Research and development............... 25,046 22.4 25,064 26.1
Sales and marketing.................... 48,270 43.3 44,662 46.4
General and administrative............. 8,796 7.9 8,750 9.1
--------- --------- --------- ---------
Total operating expenses............. 82,112 73.6 78,476 81.6
--------- --------- --------- ---------
Operating loss........................... $ (343) (0.3)% $ (6,843) (7.1)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
* The Enterprise software segment operating expenses do not include goodwill
amortization.
REVENUES--ENTERPRISE SOFTWARE SEGMENT
PRODUCT REVENUES. Enterprise product revenues for the three months ended
July 31, 1998 and April 30, 1998 were $92.3 million and $76.3 million, or 82.7%
and 79.4% of total revenues, respectively. Enterprise product revenues have
increased in both absolute dollars and as a percentage of total revenues between
periods due to increased Enterprise transactions over all product lines and
increased transaction sizes, as well as an increase in the number of large
transactions.
SERVICE REVENUES. Netscape derives Enterprise service revenues from
technical support services, consulting, and, to a lesser extent, training
related to software products. Enterprise service revenues for the three months
ended July 31, 1998 and April 30, 1998 were $19.3 million and $19.8 million, or
17.3% and 20.6% of total revenues, respectively. Enterprise service revenues
remained relatively flat in absolute dollars and decreased as a percentage of
total Enterprise revenues between periods due to growth in technical support
contracts offset by reduced hours billed in professional services.
CHANNEL MIX. Netscape distributes its Enterprise products through a
combination of direct channels, including field sales, Internet-based sales and
telesales, and indirect channels, including OEMs, ISPs, systems integrators, and
other resellers. Indirect channel revenues for the three months ended July 31,
1998 and April 30, 1998 were 58.2% and 48.1% of total revenues, respectively.
Indirect channel revenues increased as a percentage of total revenues primarily
due to an increase in OEM revenues.
GEOGRAPHIC MIX. Enterprise international revenues (sales outside of North
America) for the three months ended July 31, 1998 and April 30, 1998 were 13.2%
and 16.9% of total revenues, respectively.
18
<PAGE>
International revenues decreased as a percentage of total revenues between
periods due to a decline in Enterprise revenue in the ICON region, particularly
Japan, primarily attributable to product transition and economic instability in
that region.
GROSS MARGIN--ENTERPRISE SOFTWARE SEGMENT
Enterprise product margin consists of Enterprise product revenue offset by
the cost of product materials, royalties paid for licensed technology, and
amounts paid to third-party vendors for sales administration and order
fulfillment. Enterprise product margins for the three months ended July 31, 1998
and April 30, 1998 were 88.6% and 90.7% respectively. Enterprise product margins
declined between periods primarily due to increased fixed royalties paid for
licensed technology.
Enterprise service margin for all periods presented consisted primarily of
Enterprise service revenue offset by costs of outside consulting services and
personnel-related costs incurred in providing customer support and professional
services. Enterprise service margins for the three months ended July 31, 1998
and April 30, 1998 were approximately break-even and 12.4%, respectively.
Enterprise service margins declined between periods primarily due to the impact
of reduction in hours billed for professional services, an investment in
technical support to improve support levels and customer satisfaction, and the
development of training programs.
OPERATING MARGIN--ENTERPRISE SOFTWARE SEGMENT
Netscape's Enterprise segment operating margin consists of Enterprise gross
profit offset by Enterprise operating expenses. Enterprise operating margins for
the three months ended July 31, 1998 and April 30, 1998 were (0.3%) and (7.1%),
respectively. Although research and development and general and administrative
expenses remained relatively flat between periods and sales and marketing
expenses increased in absolute dollars between periods, each decreased as a
percentage of total Enterprise revenues resulting in the improved operating
margin from April 30, 1998 to July 31, 1998. Sales and marketing activities
increased in absolute dollars between periods primarily due to the increased
staffing, particularly in direct sales, direct sales support, and marketing.
RESULTS OF OPERATIONS--NETCENTER SEGMENT
The following tables and discussion set forth the results of operations for
the three months ended July 31, 1998 and April 30, 1998 for the Netcenter
segment of Netscape.
NETCENTER SEGMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
<S> <C> <C> <C> <C>
(IN THOUSANDS) JULY 31, 1998 APRIL 30, 1998
-------------------- --------------------
Total service revenues.............................. $ 38,650 100.0% $ 31,109 100.0%
Total cost of service revenues...................... 6,122 15.8 6,554 21.1
--------- --------- --------- ---------
Gross profit........................................ 32,528 84.2 24,555 78.9
Operating expenses:
Research and development.......................... 12,748 33.0 10,401 33.4
Sales and marketing............................... 16,163 41.8 12,679 40.8
General and administrative........................ 3,816 9.9 3,186 10.2
Total operating expenses........................ 32,727 84.7 26,266 84.4
--------- --------- --------- ---------
Operating loss...................................... $ (199) (0.5)% $ (1,711) (5.5)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
19
<PAGE>
REVENUES--NETCENTER SEGMENT
Netcenter revenues for the three months ended July 31, 1998 and April 30,
1998 were $38.7 million and $31.1 million, respectively. Netcenter revenues
increased in absolute dollars between periods due to increased Netcenter
transactions, particularly sponsorship fees, and general growth in consumer and
business use of the Internet.
GROSS MARGIN--NETCENTER SEGMENT
Netcenter's gross margin consisted primarily of Netcenter revenues offset by
the cost of Netcenter operations, certain costs associated with free client
distribution, and fees paid to third parties related to Netcenter advertising
revenues. Netcenter's gross margin for the three months ended July 31, 1998 and
April 30, 1998 were 84.2% and 78.9%, respectively. Netcenter's gross margin
increased primarily due to a reduction in support costs associated with the free
client product.
OPERATING MARGIN--NETCENTER SEGMENT
Netcenter's operating margins for the three months ended July 31, 1998 and
April 30, 1998 were (0.5%) and (5.5%), respectively. The operating margins
improved between periods due to increased Netcenter revenue and gross profit,
partially offset by growth in sales and marketing expenses. Sales and marketing
expenses increased in absolute dollars and as a percentage of total revenues
between periods due to costs associated with increased production of new channel
and content services, consumer advertising and promotions, increased staffing,
and expansion of the Netcenter sales organization.
INTEREST INCOME, NET
Interest income, net, for the three months ended July 31, 1998 and June 30,
1997 was $2.1 million and $2.4 million, respectively. Interest income, net, for
the six months ended July 31, 1998 and June 30, 1997 was $3.9 million and $4.9
million, respectively. Interest income, net, decreased in all periods primarily
due to lower average cash and investment balances. Pre-tax interest income may
fluctuate in future periods as a result of changes in Netscape's average cash
balances, the structure and duration of its portfolio, and changes in market
interest rates for investments.
OTHER INCOME, NET
Other income, net, for the three months ended July 31, 1998 and June 30,
1997 was $16,000 and zero, respectively. Other income, net, for the six months
ended July 31, 1998 and June 30, 1997 was $8.3 million and zero, respectively,
primarily due to a one-time gain on the sales of certain equity investments in
the six months ended July 31, 1998.
EQUITY IN NET LOSSES OF JOINT VENTURES
Equity in net losses of joint ventures reflects Netscape's share of the net
losses of Netscape's joint ventures under the equity method of accounting.
Equity in net losses of joint ventures for the three months ended July 31, 1998
and June 30, 1997 was zero and $1.9 million, respectively. Equity in net losses
of joint ventures for the six months ended July 31, 1998 and June 30, 1997 was
zero and $3.4 million, respectively. Equity in net losses of joint ventures in
the 1998 periods has been zero as Netscape no longer owns more than a 20%
interest in any joint venture and therefore states its joint ventures at the
lesser of cost and net realizable value.
INCOME TAXES
Netscape anticipates recording a zero income tax provision for the current
fiscal year and, accordingly, has recorded no tax provision for the three months
and six months ended July 31, 1998, compared to a
20
<PAGE>
35% effective tax rate, excluding the effect of one-time, non-deductible,
purchased in-process research and development charges, for the three months and
six months ended June 30, 1997. Netscape's assumptions could change based on a
change in the estimated amount or geographic mix of Netscape's earnings, the
amount of permanent reinvestment offshore of a portion of Netscape's 1998 fiscal
year earnings, changes in U.S. tax law, or the effect of future acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998, Netscape's principal source of liquidity was $205.8
million in cash, cash equivalents, and short-term investments, representing a
$21.2 million increase from the December 31, 1997 balance of $184.6 million.
During the same period, long-term investments increased by $1.1 million from
$76.7 million at December 31, 1997 to $77.8 million at July 31, 1998, resulting
in a net increase of $22.3 million in cash, cash equivalents, and short- and
long-term investments from December 31, 1997 to July 31, 1998. The increase was
primarily attributable to cash provided by operating activities in the six
months ended July 31, 1998. Netscape manages its cash and short- and long-term
investments so that they are available for working capital, strategic investment
opportunities, or other potential needs. Netscape has no material debt.
For the six months ended July 31, 1998, cash provided by operating
activities of $69.1 million related primarily to net income as adjusted for
depreciation and amortization, deferred income taxes, and gains on sales of
equity investments, in addition to increases in deferred revenues and accounts
payable, partially offset by the growth in accounts receivable and the decline
in accrued compensation and related liabilities. Cash used in investing
activities of $22.0 million for the six months ended July 31, 1998 related
primarily to capital expenditures of $33.9 million, partially offset by net
sales and maturities of available-for-sale investments of $7.2 million and a
decrease in other assets of $4.8 million. 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.
Cash provided by financing activities of $17.4 million for the six months ended
July 31, 1998 related primarily to proceeds from the issuance of common stock
under Netscape's stock option and employee stock purchase plans.
For the six months ended June 30, 1997, cash provided by operating
activities of $16.7 million related primarily to a net loss as adjusted for
depreciation and amortization, in-process research and development, and deferred
income taxes, in addition to increases in deferred revenues, accounts payable,
accrued compensation and related liabilities, and other accrued liabilities,
partially offset by the growth in accounts receivable and other current assets.
Cash used in investing activities of $58.5 million for the six months ended June
30, 1997 related primarily to capital expenditures of $41.0 million and net
purchases of available-for-sale investments of $13.3 million. 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. Cash provided by financing activities of $17.4
million for the six months ended June 30, 1997 related primarily to proceeds
from the issuance of common stock under Netscape's stock option and employee
stock purchase plans.
Deferred revenues primarily consist of the unrecognized portion of license
and service fees received pursuant to training, consulting, Netcenter
advertising, and subscription and support contracts, and the unrecognized
portion of nonrefundable, prepaid license royalties received pursuant to
sublicense agreements. Deferred revenues increased to $164.5 million at July 31,
1998 from $106.2 million at December 31, 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, Netcenter advertising, subscription, and support
contracts.
Netscape believes existing cash and investments together with any cash flows
generated from operations will suffice to meet its operating requirements for at
least the next 12 months.
21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IMPACT OF FOREIGN CURRENCY RATE CHANGES
Netscape invoices the customers of its international subsidiaries primarily
in U.S. dollars for license revenues, and, to a lesser extent, in the local
currencies of its subsidiaries for service revenues. The notable exception is in
Japan, where Netscape invoices its customers primarily in yen. Netscape is
exposed to foreign exchange rate fluctuations as the financial results of
foreign subsidiaries are translated into U.S. dollars in consolidation.
Netscape's exposure to foreign exchange rate fluctuations also arises from
intercompany accounts in which the cost of software (for Japan) and certain
other charges are allocated to Netscape's foreign sales subsidiaries. These
intercompany accounts are predominantly denominated in the functional currency
of the foreign subsidiary in order to centralize foreign exchange risk with the
parent company. Additionally, Netscape is exposed to foreign exchange rate
fluctuations arising out the of non-U.S. dollar receivables originated in the
U.S. These deals have historically been insignificant.
The effect of foreign exchange rate fluctuations on Netscape in 1997 and
through the three months ended July 31, 1998 was not material. However, for the
three months ended July 31, 1998, because foreign exchange exposure to these
fluctuations increases as sales and intercompany balances grow, Netscape
initiated a hedging program designed to mitigate the impact of changes in
foreign exchange rates on intercompany balances. Netscape is using foreign
exchange forward contracts as a vehicle for hedging these intercompany balances.
In general, these foreign exchange forward contracts have three months or less
to maturity. At July 31, 1998, Netscape's hedged positions totaled the
equivalent of $3.8 million and all hedge positions had maturity dates within
three months.
22
<PAGE>
FACTORS AFFECTING NETSCAPE'S BUSINESS, OPERATING RESULTS, AND FINANCIAL
CONDITION
IN ADDITION TO OTHER INFORMATION IN THIS FORM 10-Q AND THE RISK FACTORS
DISCUSSED IN NETSCAPE'S LATEST ANNUAL REPORT FILED WITH THE COMMISSION,
INVESTORS EVALUATING NETSCAPE AND ITS BUSINESS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS, WHICH MAY HAVE A SIGNIFICANT IMPACT ON NETSCAPE'S
BUSINESS, OPERATING RESULTS, AND FINANCIAL CONDITION. THE RISK FACTORS SET FORTH
BELOW AND ELSEWHERE IN THIS FORM 10-Q AND IN NETSCAPE'S ANNUAL REPORT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN ANY FORWARD-
LOOKING STATEMENTS.
YEAR 2000. The "Year 2000 Issue" refers generally to the problems that some
software may have in determining the correct century for the year. For example,
software with date-sensitive functions that is not Year 2000 compliant may not
be able to distinguish whether "00" means 1900 or 2000, which may result in
failures or the creation of erroneous results.
Netscape has developed a phased Year 2000 readiness plan for the current
versions of its products. The plan includes development of corporate awareness,
assessment, implementation (including remediation, upgrading and replacement of
certain product versions), validation testing, and contingency planning.
Netscape continues to respond to customer concerns about prior versions of its
products on a case-by-case basis.
Netscape has largely completed all phases of its plan, except for
contingency planning, with respect to the current versions of all of its
products. As a result, the current versions of each of its products except for
one electronic commerce product (which Netscape anticipates replacing by the end
of 1998 with a product that is Year 2000 Compliant) are "Year 2000 Compliant,"
as defined below, when configured and used in accordance with the related
documentation, and provided that the underlying operating system of the host
machine and any other software used with or in the host machine or Netscape
products are also Year 2000 Compliant. In some cases, Netscape's products
require a patch provided by Netscape with the product in order to be Year 2000
Compliant.
Netscape has defined "Year 2000 Compliant" as the ability to: (i) correctly
handle date information needed for the December 31, 1999 to January 1, 2000 date
change; (ii) function according to the product documentation provided for this
date change, without changes in operation resulting from the advent of a new
century, assuming correct configuration; (iii) where appropriate, respond to
two-digit date input in a way that resolves the ambiguity as to century in a
disclosed, defined, and predetermined manner; (iv) if the date elements in
interfaces and data storage specify the century, store and provide output of
date information in ways that are unambiguous as to century; and (v) recognize
year 2000 as a leap year. Netscape has not tested its products on all platforms
or all versions of operating systems that it currently supports and has advised
its customers to verify that their platforms and operating systems support the
transition to the year 2000.
Netscape has not specifically tested software obtained from third parties
(licensed software, shareware, and freeware) that is incorporated into its
products, but Netscape is seeking assurances from its vendors that licensed
software is Year 2000 Compliant. Despite testing by Netscape and current and
potential customers, and assurances from developers of products incorporated
into Netscape's products, Netscape's products may contain undetected errors or
defects associated with Year 2000 date functions. Also, certain prior versions
of Netscape's products are not fully Year 2000 Compliant, and Netscape is
working to address these issues. Known or unknown errors or defects in
Netscape's products could result in delay or loss of revenue, diversion of
development resources, damage to Netscape's reputation, or increased service and
warranty costs, any of which could materially adversely affect Netscape's
business, operating results, or financial condition. Some commentators have
predicted significant litigation regarding Year 2000 compliance issues, and
Netscape is aware of such lawsuits against other software vendors. Because of
the unprecedented nature of such litigation, it is uncertain whether or to what
extent Netscape may be affected by it.
23
<PAGE>
Netscape's internal systems include both its information technology ("IT")
and non-IT systems. Netscape has initiated an assessment of its material
internal IT systems (including both Netscape's own software products and
third-party software and hardware technology) and its non-IT systems (such as
its security system, building equipment, and embedded microcontrollers) and
retained an outside contractor to provide assistance. Netscape expects to
complete that testing in 1998. To the extent that Netscape is not able to test
the technology provided by third-party vendors, Netscape is seeking assurances
from such vendors that their systems are Year 2000 compliant. Although Netscape
is not currently aware of any material operational issues or costs associated
with preparing its internal IT and non-IT systems for the Year 2000, Netscape
may experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in its internal IT and non-IT systems.
Netscape does not currently have any information concerning the Year 2000
compliance status of its customers. As is the case with other similarly situated
software companies, if Netscape's current or future customers fail to achieve
Year 2000 compliance or if they divert technology expenditures (especially
technology expenditures that were reserved for enterprise software) to address
Year 2000 compliance problems, Netscape's business, results of operations, or
financial condition could be materially adversely affected.
Netscape has funded its Year 2000 plan from operating cash flows and has not
separately accounted for these costs in the past. Netscape will incur additional
amounts related to the Year 2000 plan for administrative personnel to manage the
project, outside contractor assistance, technical support for its products,
product engineering and customer satisfaction. Netscape may experience material
problems and costs with Year 2000 compliance that could adversely affect
Netscape's business, results of operations, and financial condition.
Netscape has not yet fully developed a comprehensive contingency plan to
address situations that may result if Netscape is unable to achieve Year 2000
readiness of its critical operations. The cost of developing and implementing
such a plan may itself be material. Finally, Netscape is also subject to
external forces that might generally affect industry and commerce, such as
utility or transportation company Year 2000 compliance failures and related
service interruptions.
EURO CURRENCY. The participating member countries of the European Union
have agreed to adopt the Euro as the common legal currency on January 1, 1999.
On that same date they will establish the fixed conversion rates between their
existing sovereign currencies and the Euro. Netscape has formed a task force and
has begun to assess the potential impact on Netscape that may result from the
Euro conversion. At this early stage of its assessment, Netscape cannot yet
predict the impact of the Euro conversion.
24
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to the stockholders at Netscape's
Annual Meeting of Stockholders held on May 29, 1998. Each of these matters were
approved by a majority of the shares present at the meeting.
1. The uncontested election of two Class III directors for a three-year
term expiring in 2001 and until their successors are duly elected and
qualified. The following is a summary of the nominees and voting results:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
------------ --------------
<S> <C> <C>
James L. Barksdale.............................................. 74,462,489 412,619
L. John Doerr................................................... 74,468,113 406,995
</TABLE>
Netscape's Board of Directors is currently comprised of six members that
are divided into three classes with overlapping three-year terms. The
term for Class I directors Marc L. Andreessen and Eric A. Benhamou will
expire at the annual meeting of stockholders to be held in 1999, and the
term for Class II directors James H. Clark and William V. Campbell will
expire at the annual meeting of stockholders to be held in 2000.
2. The adoption of an amendment to the 1995 Director Option Plan to
increase the number of shares reserved for issuance by an additional
150,000 shares of Common Stock, for an aggregate of 350,000 shares
reserved for issuance thereunder. Results of the voting included
71,742,466 shares for, 2,837,817 shares against, and 294,725 shares
abstained.
3. The adoption of an amendment to the 1995 Employee Stock Purchase Plan to
increase the number of shares reserved for issuance by an additional
1,500,000 shares of Common Stock, for an aggregate of 3,500,000 shares
reserved for issuance thereunder. Results of the voting included
73,385,024 shares for, 1,250,871 shares against, and 239,213 shares
abstained.
4. The ratification of the appointment of Ernst & Young LLP as the
independent auditors of Netscape for the year ending October 31, 1998.
Results of the voting included 73,803,647 shares for, 280,298 shares
against, and 791,163 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.
Exhibit 27.2 Financial Data Schedule.
(b) Reports on Form 8-K
None.
ITEMS 1, 2, 3, AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
25
<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.
NETSCAPE COMMUNICATIONS CORPORATION
<TABLE>
<S> <C> <C> <C>
Date: September 11, 1998 By: /s/ PETER L.S. CURRIE
------------------ ------------------------------------
Peter L.S. Currie,
Executive Vice President and Chief
Administrative Officer (PRINCIPAL
FINANCIAL OFFICER)
Date: September 11, 1998 By: /s/ NOREEN G. BERGIN
------------------ ------------------------------------
Noreen G. Bergin,
Senior Vice President, Finance and
Corporate Controller (PRINCIPAL
ACCOUNTING OFFICER)
</TABLE>
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NETSCAPE
COMMUNICATION CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE THREE AND
SIX MONTHS ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1998
<PERIOD-START> MAY-01-1998 FEB-01-1998
<PERIOD-END> JUL-31-1998 JUL-31-1998
<CASH> 103,998 103,998
<SECURITIES> 101,773 101,773
<RECEIVABLES> 144,686 144,686
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 404,680 404,680
<PP&E> 232,318 232,318
<DEPRECIATION> (89,156) (89,156)
<TOTAL-ASSETS> 654,251 654,251
<CURRENT-LIABILITIES> 259,881 259,881
<BONDS> 0 0
0 0
0 0
<COMMON> 10 10
<OTHER-SE> 393,740 393,740
<TOTAL-LIABILITY-AND-EQUITY> 654,251 654,251
<SALES> 92,293 168,589
<TOTAL-REVENUES> 150,234 277,464
<CGS> 10,499 17,629
<TOTAL-COSTS> 35,937 66,979
<OTHER-EXPENSES> 116,365 222,635
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 88 96
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 88 96
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 88 96
<EPS-PRIMARY> $0.00 $0.00
<EPS-DILUTED> $0.00 $0.00
</TABLE>
<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 THREE AND SIX
MONTHS ENDED JULY 31, 1998.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 64,109 64,109
<SECURITIES> 115,133 115,133
<RECEIVABLES> 164,776 164,776
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 388,665 388,665
<PP&E> 147,235 147,235
<DEPRECIATION> (35,906) (35,906)
<TOTAL-ASSETS> 622,620 622,620
<CURRENT-LIABILITIES> 190,209 190,209
<BONDS> 0 0
0 0
0 0
<COMMON> 9 9
<OTHER-SE> 430,750 430,750
<TOTAL-LIABILITY-AND-EQUITY> 622,620 622,620
<SALES> 99,490 189,427
<TOTAL-REVENUES> 135,970 256,503
<CGS> 7,591 14,156
<TOTAL-COSTS> 24,919 46,984
<OTHER-EXPENSES> 152,013 240,169
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (40,455) (29,233)
<INCOME-TAX> 4,242 8,156
<INCOME-CONTINUING> (44,697) (37,389)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (44,697) (37,389)
<EPS-PRIMARY> (0.53) (0.45)
<EPS-DILUTED> (0.53) (0.45)
</TABLE>
