<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 APRIL 30, 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)
<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 May
29, 1998 was 98,354,190.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 April 30, 1998 and December 31, 1997....... 3
(b) Condensed Consolidated Statements of Operations for the Three Months Ended April 30,
1998 and March 31, 1997, and the One Month Ended January 31, 1998...................... 4
(c) Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30,
1998 and March 31, 1997, and the One Month Ended January 31, 1998...................... 5
(d) Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................................. 19
Signatures................................................................................................... 20
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 96,143 $ 55,172
Short-term investments.............................................................. 79,360 129,426
Accounts receivable, net............................................................ 139,695 153,191
Deferred tax assets................................................................. 37,610 37,336
Other current assets................................................................ 19,754 19,961
----------- ------------
Total current assets.............................................................. 372,562 395,086
Property and equipment, net........................................................... 138,910 131,093
Long-term investments................................................................. 61,367 76,698
Other assets.......................................................................... 33,016 29,943
----------- ------------
Total assets.................................................................. $ 605,855 $ 632,820
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 35,429 $ 40,081
Accrued compensation and related liabilities........................................ 25,137 23,193
Other accrued liabilities........................................................... 18,972 18,266
Income taxes payable................................................................ 2,395 2,709
Deferred revenues................................................................... 138,865 106,170
Accrued merger related charges...................................................... 3,388 8,911
Accrued restructuring charges....................................................... 3,174 3,685
Current portion of long-term obligations and installment notes payable.............. 109 535
----------- ------------
Total current liabilities......................................................... 227,469 203,550
Long-term obligations and installment notes payable................................... 215 215
Stockholders' equity:
Common stock and additional paid-in capital......................................... 555,175 549,196
Deferred compensation............................................................... (2,853) (3,671)
Accumulated deficit................................................................. (173,378) (119,201)
Accumulated other comprehensive income (loss)....................................... (773) 2,731
----------- ------------
Total stockholders' equity........................................................ 378,171 429,055
----------- ------------
Total liabilities and stockholders' equity.................................... $ 605,855 $ 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 ONE MONTH
---------------------- ENDED
APRIL 30, MARCH 31, JANUARY 31,
1998 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
License fees............................................................... $ 76,986 $ 89,937 $ 4,643
Services................................................................... 50,244 30,596 3,677
---------- ---------- -----------
Total revenues........................................................... 127,230 120,533 8,320
Cost of revenues:
Cost of license fees....................................................... 10,430 9,767 3,436
Cost of services........................................................... 9,957 6,221 3,309
---------- ---------- -----------
Total cost of revenues................................................... 20,387 15,988 6,745
---------- ---------- -----------
Gross profit................................................................. 106,843 104,545 1,575
Operating expenses:
Research and development................................................... 33,782 29,551 12,371
Sales and marketing........................................................ 69,679 54,760 25,223
General and administrative................................................. 11,936 9,922 6,450
Restructuring charges...................................................... -- -- 12,000
Goodwill amortization...................................................... 1,526 -- 509
---------- ---------- -----------
Total operating expenses................................................. 116,923 94,233 56,553
---------- ---------- -----------
Operating income (loss)...................................................... (10,080) 10,312 (54,978)
Interest income, net......................................................... 1,763 2,411 649
Other income, net............................................................ 8,325 -- 144
Equity in net losses of joint ventures....................................... -- (1,501) --
---------- ---------- -----------
Income (loss) before income taxes............................................ 8 11,222 (54,185)
Provision for income taxes................................................... -- 3,914 --
---------- ---------- -----------
Net income (loss)............................................................ $ 8 $ 7,308 $ (54,185)
---------- ---------- -----------
---------- ---------- -----------
Basic net income (loss) per share............................................ $ 0.00 $ 0.09 $ (0.58)
---------- ---------- -----------
---------- ---------- -----------
Diluted net income (loss) per share.......................................... $ 0.00 $ 0.08 $ (0.58)
---------- ---------- -----------
---------- ---------- -----------
Shares used in computing basic per share computation......................... 94,763 81,763 92,716
---------- ---------- -----------
---------- ---------- -----------
Shares used in computing diluted per share computation....................... 101,835 95,196 92,716
---------- ---------- -----------
---------- ---------- -----------
</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>
THREE MONTHS ENDED ONE MONTH
---------------------- ENDED
APRIL 30, MARCH 31, JANUARY 31,
1998 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................................ $ 8 $ 7,308 $ (54,185)
Adjustments:
Depreciation and amortization............................................ 10,916 7,612 2,404
Amortization of deferred compensation.................................... 614 614 204
Deferred income taxes.................................................... (2,223) (1,609) (300)
Gains on sales of equity investments..................................... (8,471) -- --
Changes in assets and liabilities:
Accounts receivable...................................................... (9,227) (7,162) 22,723
Other current assets..................................................... (1,739) 863 1,946
Accounts payable......................................................... 3,302 5,470 (7,954)
Accrued compensation and related liabilities............................. 1,000 (1,680) 943
Other accrued liabilities................................................ 266 1,568 440
Accrued taxes............................................................ (367) 2,098 53
Deferred revenues........................................................ 39,221 12,975 (6,526)
Accrued restructuring charges............................................ (5,143) -- 4,632
Accrued merger related charges........................................... (2,490) -- (3,033)
---------- ---------- -----------
Net cash provided by (used in) operating activities.......................... 25,667 28,057 (38,653)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures......................................................... (16,221) (24,209) (4,916)
Change in deposits and other assets.......................................... (328) (2,048) (496)
Purchases of investments available-for-sale.................................. (39,944) (39,871) (1,497)
Maturities of investments available-for-sale................................. 46,497 34,016 14,551
Sales of investments available-for-sale...................................... 39,452 14,993 11,435
---------- ---------- -----------
Net cash provided by (used in) investing activities.......................... 29,456 (17,119) 19,077
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on installment notes payable........................................ (83) (107) (342)
Proceeds from issuance of common stock, net.................................. 1,665 4,325 4,314
---------- ---------- -----------
Net cash provided by financing activities.................................... 1,582 4,218 3,972
Effect of foreign exchange rate changes on cash and cash equivalents......... 10 435 (140)
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents......................... 56,715 15,591 (15,744)
Cash and cash equivalents at beginning of period............................. 39,428 88,233 55,172
---------- ---------- -----------
Cash and cash equivalents at end of period................................... $ 96,143 $ 103,824 $ 39,428
---------- ---------- -----------
---------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid............................................................ $ 568 $ 4,176 $ --
---------- ---------- -----------
---------- ---------- -----------
</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
Please read the accompanying financial statements together with Netscape
Communication Corporation's ("Netscape") audited consolidated financial
statements and accompanying notes 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 such 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.
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.
These condensed financial statements include the three months ended March
31, 1997 as the prior year previously reported quarter most comparable to the
three months ended April 30, 1998. Netscape is not separately recalculating its
results for the three months ended April 30, 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 months ended April 30, 1997 would not materially differ from the results
for the three months ended March 31, 1997 because each 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. Unless otherwise discussed in
these notes, Netscape does not believe that the seasonal buying patterns of its
enterprise customers in those quarters materially affects the comparability of
these periods.
These condensed financial statements also include the results of operations
for the one month ended January 31, 1998. Those results include certain
restructuring charges and other expenses reflecting continuing expenses incurred
before Netscape's restructuring took effect. Those results also include
unusually low revenues during the month ended January 31, 1998, reflecting
Netscape's focus on restructuring and training activities during January 1998,
as well as the normally low level of revenues in the first month of each
quarter.
Total revenues for the months ended January 31, 1998 and 1997 were $8.3
million and $14.8 million, respectively, and gross margin was $1.6 million and
$10.4 million, respectively. For the months ended January 31, 1998 and 1997,
losses before income taxes were $54.2 million and $13.9 million, respectively,
and net losses were $54.2 million and $14.1 million, respectively. Diluted
losses per share were $0.58 and $0.18 for the months ended January 31, 1998 and
1997, respectively. The increase in the net loss was due to: (i) lower revenues
earned in January 1998, (ii) higher than average cost of revenues as a
percentage of
6
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
total revenues due to certain fixed costs which included royalties paid for
licensed technology and amounts paid to third-party vendors, (iii) increased
sales and marketing expenses associated with increased staffing year over year,
as well as investment in developing Netcenter, (iv) restructuring charges of
$12.0 million, and (v) goodwill amortization of $509,000. Netscape's
consolidated statement of cash flows for the one month ended January 31, 1997
reflected cash provided by operating activities of $5.7 million, cash used in
investing activities of $4.1 million, and cash provided by financing activities
of $4.1 million.
REVENUE RECOGNITION
Netscape derives revenue from product licensing fees and from service fees
for: (i) Netcenter transactions, which include Netcenter advertising, search and
directory services, trademark licensing, and other Netcenter services, and (ii)
maintenance and support services, training, and consulting. 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
internet service providers ("ISPs") 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 or upon receipt of cash. Netscape
recognizes license and service fees from customer subscription, maintenance and
technical support contracts ratably over the term of the contract period.
Payments for upgrades and support fees 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 search and
directory services based on actual traffic incurred. Netscape recognizes service
fees from trademark licensing when a license agreement is executed and the fees
are fixed. Netscape recognizes service fees from training and consulting when
the services are performed.
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was
issued in October 1997. SOP 97-2 supersedes SOP 91-1 and covers transactions
entered into for fiscal years beginning after December 15, 1997. SOP 98-4,
issued in March 1998, defers for one year certain provisions of SOP 97-2 related
to establishing value for software licenses and services. SOP 97-2 and SOP 98-4
address software revenue recognition matters primarily from a conceptual level
and do not include specific interpretive and implementation guidance.
Accordingly, the manner in which the concepts are implemented in practice could
vary depending on the interpretations of these concepts. The American Institute
of Certified Public Accountants ("AICPA") will address implementation issues and
the need for further guidance for SOP 97-2. Such detailed guidance, once issued,
could lead to changes in Netscape's current revenue accounting practices, which
could be material to Netscape's revenues and earnings. However, based on its
reading and interpretation of SOP 97-2 and SOP 98-4, Netscape believes that it
currently complies with the statements.
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
7
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
available-for-sale. Long-term investments also include available-for-sale equity
holdings in both public and private technology companies. 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.
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 per share
further includes dilutive (determined using the treasury stock 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 months ended April 30, 1998 and March 31,
1997, and for the one month ended January 31, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED ONE MONTH
---------------------- ENDED
APRIL 30, MARCH 31, JANUARY 31,
1998 1997 1998
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Numerator:
Net income (loss).......................................................... $ 8 $ 7,308 $ (54,185)
---------- ---------- -----------
---------- ---------- -----------
Denominator:
Weighted average common shares outstanding................................. 98,358 91,832 97,957
Weighted average outstanding common shares subject to repurchase........... (3,595) (10,069) (5,241)
---------- ---------- -----------
Denominator for basic net income (loss) per share.......................... 94,763 81,763 92,716
Dilutive employee stock options and outstanding common shares subject to
repurchase............................................................... 7,072 13,433 --
---------- ---------- -----------
Denominator for diluted net income (loss) per share--adjusted weighted
average shares and assumed conversions................................... 101,835 95,196 92,716
---------- ---------- -----------
---------- ---------- -----------
Basic net income (loss) per share........................................ $ 0.00 $ 0.09 $ (0.58)
---------- ---------- -----------
---------- ---------- -----------
Diluted net income (loss) per share...................................... $ 0.00 $ 0.08 $ (0.58)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
RECENT PRONOUNCEMENTS
In 1997, Statement of Financial Accounting Standards No. 131 ("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 Form 10-K for the fiscal
year ending October 31, 1998.
8
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RESTRUCTURING COSTS
In December 1997, Netscape began to implement certain restructuring actions
aimed at reducing its cost structure, improving its competitiveness, and
restoring sustainable profitability. The restructuring plan resulted from
decreased demand for certain Netscape products and Netscape's adoption of a new
strategic direction. The restructuring included reduction in workforce, closure
of certain facilities, write-off of non-performing operating assets, and
third-party royalty payments relating to canceled contracts. Netscape incurred
$23.0 million related to the restructuring in the fourth calendar quarter of
1997. At December 31, 1997, Netscape accrued approximately $3.7 million in
restructuring costs, primarily representing estimated third-party royalty
payments to be paid in fiscal 1998. The remaining restructuring costs primarily
came from write-offs of non-performing assets resulting from the restructuring.
Additionally, Netscape incurred remaining restructuring charges of approximately
$12.0 million in January 1998 for severance costs primarily related to the
termination of approximately 400 employees (approximately 13% of its workforce).
The following table depicts the movements in accrued restructuring charges
from December 31, 1997 to April 30, 1998:
<TABLE>
<CAPTION>
ACCRUED ACCRUED
RESTRUCTURING ONE MONTH ENDED THREE MONTHS ENDED APRIL RESTRUCTURING
CHARGES AS OF JANUARY 31, 1998 30, 1998 CHARGES AS OF
DECEMBER 31, ---------------------- ------------------------ APRIL 30,
1997 ACCRUALS PAYMENTS ACCRUALS PAYMENTS 1998
------------- --------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Cost to exit third-party royalty
arrangements related to canceled
contracts.............................. $ 3,685 $ -- $ -- $ -- $ (2,812) $ 873
Amounts for employees involuntarily
terminated............................. -- 12,000 (7,216) -- (2,483) 2,301
------ --------- ----------- ----- ----------- ------
Total................................ $ 3,685 $ 12,000 $ (7,216) $ -- $ (5,295) $ 3,174
------ --------- ----------- ----- ----------- ------
------ --------- ----------- ----- ----------- ------
</TABLE>
3. OTHER INCOME, NET
Other income, net, for the three months ended April 30, 1998 was $8.3
million primarily due to a one-time gain on the sales of certain equity
investments.
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
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
9
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. COMPREHENSIVE INCOME (LOSS) (CONTINUED)
tax, for the three months ended April 30, 1998 and March 31, 1997, and the one
month ended January 31, 1998 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED ONE MONTH
---------------------- ENDED
APRIL 30, MARCH 31, JANUARY 31,
1998 1997 1998
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss)............................................................. $ 8 $ 7,308 $ (54,185)
Unrealized gain on available-for-sale investments............................. (2,969) (25) (405)
Foreign currency translation adjustments...................................... 10 435 (140)
--------- ----------- -----------
Comprehensive income (loss)................................................. $ (2,951) $ 7,718 $ (54,730)
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
The components of accumulated other comprehensive income (loss), net of
related tax, at April 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1998 1997
----------- -------------
<S> <C> <C>
(IN THOUSANDS)
Unrealized gain on available-for-sale investments........................................ $ 59 $ 3,433
Foreign currency translation adjustments................................................. (832) (702)
----- ------
Accumulated other comprehensive income (loss).......................................... $ (773) $ 2,731
----- ------
----- ------
</TABLE>
10
<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 3 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's mission is to provide end-to-end solutions that enable Enterprise
Service Providers ("ESPs") to acquire and keep customers in the Net Economy.
Netscape develops, markets, and supports a broad software suite of enterprise
servers, clients, commercial applications, and development tools, targeted
primarily at corporate intranets and extranets. Netscape's software allows users
to share information, manage networks, and facilitate electronic commerce.
Netscape software is based on industry-standard protocols that can be deployed
across a variety of operating systems, platforms, and databases and that can be
interconnected with traditional client/server applications. Netscape Netcenter
("Netcenter"), one of the most highly trafficked websites on the World Wide Web,
offers a variety of products and services.
RECENT EVENTS
REPRICING OF STOCK OPTIONS. In January 1998, the Board of Directors
repriced employee stock options for the purchase of 8,581,294 shares of common
stock. The repricing was effective as of the close of business on January 28,
1998 and was at the then fair market value of $16.8125 per share. The vesting
schedules for the repriced options were extended by six months, and the repriced
options are not exercisable until after July 28, 1998. The repriced options
maintain the same expiration terms. Members of the Board of Directors, the Chief
Executive Officer and Executive Vice Presidents were excluded from the
repricing.
RECENT PRONOUNCEMENTS. Statement of Position ("SOP") 97-2, "Software
Revenue Recognition" was issued in October 1997. SOP 97-2 supersedes SOP 91-1
and covers transactions entered into for fiscal years beginning after December
15, 1997. SOP 98-4, issued in March 1998, defers for one year certain provisions
of SOP 97-2 related to establishing value for software licenses and services.
SOP 97-2 and SOP 98-4 address software revenue recognition matters primarily
from a conceptual level and do not include specific interpretive and
implementation guidance. Accordingly, the manner in which the concepts are
implemented in practice could vary depending on the interpretations of these
concepts. The American Institute of Certified Public Accountants ("AICPA") will
address implementation issues and the need for further guidance for SOP 97-2.
Such detailed guidance, once issued, could lead to changes in Netscape's current
revenue accounting practices, which could be material to Netscape's revenues and
earnings. However, based on its reading and interpretation of SOP 97-2 and SOP
98-4, Netscape believes that it currently complies with the statements.
In 1997, Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," was
issued and is effective for years commencing
11
<PAGE>
after December 15, 1997. Netscape will comply with the requirements of SFAS 131
in its Form 10-K for fiscal year ending October 31, 1998.
YEAR 2000
Netscape plans to complete Year 2000 testing on all of its products by the
end of Netscape's 1998 fiscal year. To the extent that Netscape is not able to
test the technology provided by third-party vendors, Netscape plans to obtain
assurances from such vendors that their systems are Year 2000 compliant.
Netscape is not aware of any material operational issues or costs associated
with preparing its internal systems for the Year 2000. See "Factors Affecting
Netscape's Business, Operating Results and Financial Condition--Year 2000" on
page 35 of Netscape's Annual Report.
RESULTS OF OPERATIONS
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.
The condensed financial statements include the three months ended March 31,
1997 as the prior year, previously reported quarter most comparable to the three
months ended April 30, 1998. Netscape is not separately recalculating its
results for the three months ended April 30, 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 months ended April 30, 1997 would not materially differ from the results
for the three months ended March 31, 1997 because each 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. Unless otherwise discussed in the
Notes to the Financial Statements, Netscape does not believe that the seasonal
buying patterns of its enterprise customers in those quarters materially affects
the comparability of these periods.
The condensed financial statements also include the results of operations
for the one month ended January 31, 1998. Those results include certain
restructuring charges and other expenses reflecting continuing expenses incurred
before Netscape's restructuring took effect. Those results also include
unusually low revenues during the month ended January 31, 1998, reflecting
Netscape's focus on restructuring and training activities during January 1998,
as well as the normally low level of revenues in the first month of each
quarter.
Total revenues for the months ended January 31, 1998 and 1997 were $8.3
million and $14.8 million, respectively, and gross margin was $1.6 million and
$10.4 million, respectively. For the months ended January 31, 1998 and 1997,
losses before income taxes were $54.2 million and $13.9 million, respectively,
and net losses were $54.2 million and $14.1 million, respectively. Diluted
losses per share were $0.58 and $0.18 for the months ended January 31, 1998 and
1997, respectively. The increase in the net loss was due to: (i) lower revenues
earned in January 1998, (ii) higher than average cost of revenues as a
percentage of total revenues due to certain fixed costs which included royalties
paid for licensed technology and amounts paid to third-party vendors, (iii)
increased sales and marketing expenses associated with increased staffing year
over year, as well as investment in developing Netcenter, (iv) restructuring
charges of $12.0 million, and (v) goodwill amortization of $509,000. Netscape's
consolidated statement of cash flows for the one month ended January 31, 1997
reflected cash provided by operating activities of $5.7 million, cash used in
investing activities of $4.1 million, and cash provided by financing activities
of $4.1 million.
The following discussion compares the results of operations for the three
months ended April 30, 1998 to those for the three months ended March 31, 1997.
The following table sets forth operating results, in
12
<PAGE>
absolute dollars and as a percentage of total revenues, for the three months
ended April 30, 1998 and March 31, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
APRIL 30, 1998 MARCH 31, 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
License fees.................................................... $ 76,986 60.5% $ 89,937 74.6%
Services........................................................ 50,244 39.5 30,596 25.4
---------- --------- ---------- ---------
Total revenues................................................ 127,230 100.0 120,533 100.0
Cost of revenues:
Cost of license fees............................................ 10,430 8.2 9,767 8.1
Cost of services................................................ 9,957 7.8 6,221 5.2
---------- --------- ---------- ---------
Total cost of revenues........................................ 20,387 16.0 15,988 13.3
---------- --------- ---------- ---------
Gross profit...................................................... 106,843 84.0 104,545 86.7
Operating expenses:
Research and development........................................ 33,782 26.5 29,551 24.5
Sales and marketing............................................. 69,679 54.8 54,760 45.4
General and administrative...................................... 11,936 9.4 9,922 8.2
Goodwill amortization........................................... 1,526 1.2 -- --
---------- --------- ---------- ---------
Total operating expenses...................................... 116,923 91.9 94,233 78.1
---------- --------- ---------- ---------
Operating income (loss)........................................... (10,080) (7.9) 10,312 8.6
Interest income, net.............................................. 1,763 1.4 2,411 2.0
Other income, net................................................. 8,325 6.5 -- --
Equity in net losses of joint ventures............................ -- -- (1,501) (1.3)
---------- --------- ---------- ---------
Income before income taxes........................................ 8 -- 11,222 9.3
Provision for income taxes........................................ -- -- 3,914 3.2
---------- --------- ---------- ---------
Net income........................................................ $ 8 --% $ 7,308 6.1%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Basic net income per share........................................ $ 0.00 $ 0.09
---------- ----------
---------- ----------
Diluted net income per share...................................... $ 0.00 $ 0.08
---------- ----------
---------- ----------
Shares used in computing basic net income per share............... 94,763 81,763
---------- ----------
---------- ----------
Shares used in computing diluted net income per share............. 101,835 95,196
---------- ----------
---------- ----------
</TABLE>
REVENUES
Netscape derives revenue from product licensing fees and from service fees
for: (i) Netcenter transactions, which include Netcenter advertising, search and
directory services, trademark licensing, and other Netcenter services, and (ii)
maintenance and support services, training, and consulting. In order to enhance
understanding of its business, Netscape recently decided to track and report its
revenue as follows: (i) revenues from software and services provided to
enterprise customers, (ii) revenues from client software and client-related
services on a stand-alone basis, and (iii) revenues from Netcenter. Client
stand-alone revenues are primarily from the sale of client software only and
client-related services. There were no client revenues in the three months ended
April 30, 1998 due to Netscape offering its client with no licensing fees
beginning in January 1998. Enterprise revenues are primarily from the sale of
client and server suites, subscription upgrades, and services such as consulting
and technical support. Netcenter revenues are primarily from Netcenter
advertising and combined sponsorship packages, which include search and
directory services, trademark licensing, and other Netcenter services.
13
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
APRIL 30, 1998 MARCH 31, 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Enterprise................................... $ 96,121 75.5% $ 67,769 56.2%
Netscape Netcenter........................... 31,109 24.5 19,642 16.3
Client stand-alone........................... -- -- 33,122 27.5
---------- --------- ---------- ---------
Total revenues........................... $ 127,230 100.0% $ 120,533 100.0%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
TOTAL REVENUES. Total revenues grew 5.6% for the three months ended April
30, 1998 from the three months ended March 31, 1997. In general, Netscape has
experienced revenue growth in its product lines as a result of an increased
number of software licenses and recent product introductions, as opposed to
higher prices. A significant portion of revenue for the three months ended April
30, 1998 was attributable to several large product and Netcenter licensing
transactions. In particular, one product licensing transaction accounted for
greater than 10% of total revenues for the three months ended April 30, 1998. In
general, Netscape's revenue stream is comprised of transactions that have
continued to increase significantly in average dollar size over the past year.
Netscape expects that such large licensing transactions, including licenses to
Original Equipment Manufacturers ("OEMs"), Internet Service Providers ("ISPs"),
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 licensing transactions, Netscape's
results of operations could be materially adversely affected in future periods.
LICENSE FEES. Revenues from license fees for the three months ended April
30, 1998 and March 31, 1997 were $77.0 million and $89.9 million, or 60.5% and
74.6.% of total revenues, respectively. Revenues from license fees decreased in
both absolute dollars and as a percentage of total revenues primarily due to the
absence of client revenue in the three months ended April 30, 1998 due to
Netscape offering its client with no licensing fees beginning in January 1998.
Netscape expects that revenue from license fees 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.
SERVICES. Revenues from services for the three months ended April 30, 1998
and March 31, 1997 were $50.2 million and $30.6 million, or 39.5% and 25.4% of
total revenues, respectively. The increase between periods was primarily due to
increased Netcenter transactions, as well as to increased professional
consulting services. Netscape expects that revenues from services as a
percentage of total revenues will fluctuate in future periods depending on the
timing, size, and number of Netcenter transactions, expansion of Netscape's
professional services consulting organization, and the rate of growth in the
installed base of technical support contracts. In particular, increased revenues
from services will depend in part upon Netscape's ability to attract and retain
qualified professional service consulting personnel, who are in short supply in
many key geographical areas.
CLIENT STAND-ALONE REVENUES. Client stand-alone revenues for the three
months ended April 30, 1998 and March 31, 1997 were none and $33.1 million, or
0.0% and 27.5% of total revenues, respectively. The decrease between periods,
both in absolute dollars and as a percentage of total revenues, was due to
Netscape offering its client with no licensing fees beginning in January 1998.
14
<PAGE>
ENTERPRISE REVENUES. Enterprise revenues for the three months ended April
30, 1998 and March 31, 1997 were $96.1 million and $67.8 million, or 75.5% and
56.2% of total revenues, respectively. Product licenses for the three months
ended April 30, 1998 and March 31, 1997 accounted for approximately $76.1
million and $56.9 million, respectively, of enterprise revenues. Enterprise
revenues have increased in both absolute dollars and as a percentage of total
revenues between periods due to an expanded product line, higher average
transaction sizes, expansion of Netscape's professional services consulting
organization, and general growth in the market for intranet-related software
products in the corporate environment.
NETCENTER REVENUES. Netcenter revenues for the three months ended April 30,
1998 and March 31, 1997 were $31.1 million and $19.6 million, or 24.5% and 16.3%
of total revenues, respectively. The increases in both absolute dollars and as a
percentage of total revenues between periods were due to increased Netcenter
transactions and general growth in consumer and business use of the Internet.
Netscape believes that Netcenter revenues may fluctuate in future periods as a
percentage of total revenues depending on the timing, size, and number of
Netcenter transactions.
CHANNEL MIX. Netscape distributes its products through a combination of
direct channels, including field sales, Internet-based sales and telesales, and
indirect channels, including OEMs, ISPs, systems integrators, Value Added
Resellers ("VARs"), and software retailers. Indirect channel revenues for the
three months ended April 30, 1998 and March 31, 1997 were 36.2% and 49.6% of
total revenues, respectively. The decrease as a percentage of total revenues was
primarily due to increased Netcenter transactions through the direct channel and
a number of large enterprise software sales by the direct sales force. Retail
channel revenues decreased due to Netscape offering its client with no licensing
fees 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 VARs, the
timing of direct sales to larger enterprise accounts, and customer buying
patterns.
GEOGRAPHIC MIX. International revenues (sales outside of North America) for
the three months ended April 30, 1998 and March 31, 1997 were 12.8% and 25.8% of
total revenues, respectively. International revenues decreased as a percentage
of total revenues due to Netscape offering its client with no licensing fees
beginning in January 1998, restructuring of Netscape's European operations
(which included reduction in workforce), and economic instability in the
Intercontinental Region ("ICON"), which includes the Pacific Rim and Latin
America.
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 VARs 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.
Netscape invoices the customers of its international subsidiaries
predominantly in U.S. dollars, and, to a lesser extent, in local currencies of
its subsidiaries (primarily for revenues from services). Netscape has not
engaged in foreign currency hedging activities. To the extent of its local
currency invoicing, Netscape's international revenues are subject to currency
exchange fluctuation risk. To the extent that its local currency invoicing
increases in the future, Netscape's exposure to fluctuations in currency
exchange rates will increase correspondingly. Currency fluctuations may also
effectively increase the cost of Netscape products and services in countries in
which customers are invoiced in U.S. dollars.
GROSS MARGIN
COST OF LICENSE FEES. Cost of license fees 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 license fees for the three months
ended April 30, 1998 and
15
<PAGE>
March 31, 1997 were $10.4 million and $9.8 million, or 13.5% and 10.9% of
related revenues from license fees, respectively. The increase in both absolute
dollars and as a percentage of related license fees between periods was
generally due to an increase in third-party phone support associated with the
free client. The increase as a percentage of related license fees was also due
to fixed royalties paid for licensed technology and relatively fixed amounts
paid to third-party vendors on decreased license fees for the same period.
Netscape believes that the gross margin earned on license fees will
fluctuate in future periods depending on the composition of related costs, which
includes the costs associated with licensed technology included in both client
and server products, and product warranty costs, which include telephone support
for client products.
COST OF SERVICES. Cost of services for all periods presented consisted
primarily of outside consulting services and personnel-related costs incurred in
providing customer support, consulting services, and fees paid to third parties
related to Netcenter advertising revenues. Cost of services for the three months
ended April 30, 1998 and March 31, 1997 were $10.0 million and $6.2 million, or
19.8% and 20.3% of related service revenues, respectively. The increase in
absolute dollars was primarily due to the increase in professional service
personnel. The decrease as a percentage of related revenues from services
between periods was due to an increase in Netcenter transaction revenues, which
typically have lower associated costs than other services.
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 April 30,
1998 and March 31, 1997 were $116.9 million and $94.2 million, or 91.9% and
78.1% of total revenues, respectively. The increase in both absolute dollars and
as a percentage of total revenues was primarily 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 April 30, 1998 and
March 31, 1997. Netscape is amortizing the remaining deferred compensation to
operating expense over the 50-month vesting period of the shares and it will
therefore therefore continue to adversely affect Netscape's operating results.
Specifically, Netscape will record additional operating expenses of $1.2 million
for the ten-month period ended October 31, 1998 related to deferred
compensation.
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 April 30, 1998 and March 31, 1997 were $33.8 million and $29.6 million, or
26.5% and 24.5% of total revenues, respectively. The increase in absolute
dollars and as a percentage of total revenues between periods was generally due
to increased staffing associated with the Actra Business Systems, LLC ("Actra")
and KIVA Software Corporation acquisitions that closed in the fourth quarter of
1997 and increased external consultant costs.
The capitalizable portion of the 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
consist of operating expenses associated with Netscape's Enterprise Sales and
Marketing organization and all operating expenses associated with Netcenter. As
non-sales and marketing Netcenter operating expenses (including
16
<PAGE>
hosting, operations, and research and development) are immaterial to the total
operating expenses, Netscape currently aggregates such Netcenter expenses within
sales and marketing expense.
Sales and marketing expenses for the three months ended April 30, 1998 and
March 31, 1997 were $69.7 million and $54.8 million, or 54.8% and 45.4% of total
revenues, respectively. Enterprise sales and marketing expense growth was
primarily attributable to increased staffing, particularly in direct sales and
direct sales support functions, and marketing staffing between periods. In
addition, Netcenter operating expenses increased significantly period to period,
reflecting Netscape's investment in developing Netcenter. Increased Netcenter
spending was primarily attributable to increased staffing in the marketing and
operations groups, expanded online advertising initiatives and the establishment
of dedicated sales and engineering functions over the last two fiscal quarters.
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 consist primarily of compensation, fees for professional
services, and accounts receivable allowances. General and administrative
expenses for the three months ended April 30, 1998 and March 31, 1997 were $11.9
million and $9.9 million, or 9.4% and 8.2% of total revenues, respectively. The
increase in both absolute dollars and as a percentage of total revenues was
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.
RESTRUCTURING COSTS. In December 1997, Netscape began to implement certain
restructuring actions aimed at reducing its cost structure, improving its
competitiveness, and restoring sustainable profitability. The restructuring plan
resulted from decreased demand for certain Netscape products and Netscape's
adoption of a new strategic direction. Netscape incurred $23.0 million related
to the restructuring in the fourth calendar quarter of 1997. Netscape incurred
the remaining restructuring charges of approximately $12.0 million in January
1998 for severance costs, primarily related to the termination of approximately
400 employees (approximately 13% of its workforce).
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 months ended April 30, 1998 was
$1.5 million, and Netscape expects to amortize $1.5 million each quarter through
fiscal 2000.
INTEREST INCOME, NET
Interest income, net, for the three months ended April 30, 1998 and March
31, 1997 was $1.8 million and $2.4 million, respectively. The decrease was 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 the portfolio, and changes in market
interest rates for investments.
OTHER INCOME, NET
Other income, net, for the three months ended April 30, 1998 was $8.3
million primarily due to a one-time gain on the sales of certain equity
investments.
EQUITY IN NET LOSSES OF JOINT VENTURES
Equity in net losses of joint ventures for the three months ended April 30,
1998 and March 31, 1997 was zero and $1.5 million, respectively, reflecting
Netscape's share of the net losses of Netscape's joint ventures under the equity
method of accounting. Netscape no longer owns more than 20% interest in any
joint venture and therefore states its joint ventures at the lesser of cost or
net realizable value.
17
<PAGE>
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
ended April 30, 1998, compared to a 35% effective tax rate for the three months
ended March 31, 1997. The zero income tax provision 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 such as the reinstatement of the research
tax credit, or the effect of future acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1998, Netscape's principal source of liquidity was $175.5
million in cash, cash equivalents, and short-term investments, representing a
$9.1 million decrease from the December 31, 1997 balance of $184.6 million.
During the same period, long-term investments decreased by $15.3 million from
$76.7 million at December 31, 1997 to $61.4 million at April 30, 1998, resulting
in a net decrease of $24.4 million in cash, cash equivalents, and short- and
long-term investments from December 31, 1997 to April 30, 1998. The decrease was
primarily attributable to cash used by operating activities in January 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 three months ended April 30, 1998, cash provided by operating
activities of $25.7 million related primarily to increases in 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,
accounts payable, accrued compensation and related liabilities, and the decline
in other accrued liabilities, partially offset by the growth in accounts
receivable, other current assets, and accrued restructuring and merger related
charges. Cash provided by investing activities of $29.5 million for the three
months ended April 30, 1998 related primarily to net sales and maturities of
available-for-sale investments of $46.0 million, partially offset by capital
expenditures of $16.2 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 $1.6 million for the three months ended
April 30, 1998 related primarily to proceeds from the issuances of Common Stock
under Netscape's stock option and employee stock purchase plans.
For the three months ended March 31, 1997, cash provided by operating
activities of $28.1 million, related primarily to increases in net income as
adjusted for depreciation and amortization and deferred income taxes, in
addition to increases in deferred revenues, accounts payable, and other accrued
liabilities partially offset by the growth in accounts receivable and the
decline in accrued compensation and related liabilities. Cash used in investing
activities of $17.1 million for the three months ended March 31, 1997 related
primarily to capital expenditures of $24.2 million, partially offset by net
sales and maturities of available-for-sale investments of $9.1 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 $4.2
million for the three months ended March 31, 1997 related primarily to proceeds
from the issuances 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 $138.9 million at April
30, 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, and Netcenter advertising, and subscription and support
contracts.
Netscape believes existing cash and investments together with any cash flows
generated from operations will suffice to meet Netscape's operating requirements
for at least the next 12 months.
18
<PAGE>
PART II--OTHER INFORMATION
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
1. A Current Report on Form 8-K was filed with the Commission by
Netscape on January 5, 1998 to report the announcement of preliminary
estimates of results of operations for the quarter ended December 31,
1997.
2. A Current Report on Form 8-K was filed with the Commission by
Netscape on January 22, 1998 to report the announcement of plans to
make the next-generation Netscape Communicator Source code available
without licensing fees on Netscape's Website.
3. A Current Report on Form 8-K was filed with the Commission by
Netscape on January 28, 1998 to report the announcement for the
quarter and full year ended December 31, 1997 results of operations.
4. A Current Report on Form 8-K was filed with the Commission by
Netscape on February 20, 1998 to report that Netscape gave certain
employees who held outstanding options to purchase Netscape common
stock at prices above the January 28, 1998 market closing price of
$16.8125 the opportunity to change the exercise price of such options
to the market closing price on January 28, 1998.
5. A Current Report on Form 8-K was filed with the Commission by
Netscape on February 25, 1998 to report that Netscape's Board of
Directors approved a resolution to change Netscape's fiscal year to
November 1 through October 31, effective immediately.
ITEMS 1, 2, 3, 4, AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
19
<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
Date: June 15, 1998 By: /s/ PETER L.S. CURRIE
--------------------------
Peter L.S. Currie,
EXECUTIVE VICE PRESIDENT
AND CHIEF ADMINISTRATIVE
OFFICER (PRINCIPAL
FINANCIAL OFFICER)
Date: June 15, 1998 By: /s/ NOREEN G. BERGIN,
--------------------------
Noreen G. Bergin,
SENIOR VICE PRESIDENT,
FINANCE AND CORPORATE
CONTROLLER (PRINCIPAL
ACCOUNTING OFFICER)
20
<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
APRIL 30, 1998 AND THE ONE MONTH ENDED JANUARY 13, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 1-MO
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> FEB-01-1998 JAN-01-1998
<PERIOD-END> APR-30-1998 JAN-31-1998
<CASH> 96,143 0
<SECURITIES> 79,360 0
<RECEIVABLES> 139,695 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 372,562 0
<PP&E> 217,674 0
<DEPRECIATION> (78,764) 0
<TOTAL-ASSETS> 605,855 0
<CURRENT-LIABILITIES> 227,469 0
<BONDS> 0 0
0 0
0 0
<COMMON> 10 0
<OTHER-SE> 378,161 0
<TOTAL-LIABILITY-AND-EQUITY> 605,855 0
<SALES> 76,986 4,643
<TOTAL-REVENUES> 127,230 8,320
<CGS> 10,430 3,436
<TOTAL-COSTS> 20,387 6,745
<OTHER-EXPENSES> 116,923 56,553
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 8 (54,185)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 8 (54,185)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8 (54,185)
<EPS-PRIMARY> 0.00 (0.58)
<EPS-DILUTED> 0.00 (0.58)
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<TABLE> <S> <C>
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0 0
0 0
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