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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(MARK ONE)
/ / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
/X/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JANUARY 1, 1998 TO OCTOBER 31, 1998
COMMISSION FILE NUMBER: 0-26310
NETSCAPE COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 94-3200270
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
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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
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.0001 PER SHARE
(Title of Class)
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. / /
As of January 12, 1999, there were 103,799,644 shares of the Registrant's
common stock outstanding. The aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on January 12, 1999) was approximately
$5,289,922,802. Shares of the Registrant's common stock held by each executive
officer and director and by each entity that owns 5% or more of the Registrant's
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
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NETSCAPE COMMUNICATIONS CORPORATION
TRANSITION REPORT ON FORM 10-K/A FOR THE TRANSITION PERIOD FROM
JANUARY 1, 1998 TO OCTOBER 31, 1998
TABLE OF CONTENTS
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PART I.
Item 1. Business...................................................................................... 3
Factors Affecting Netscape's Finances and Business Prospects.................................. 18
Enterprise Segment............................................................................ 26
Netcenter Segment............................................................................. 30
Item 2. Properties.................................................................................... 35
Item 3. Legal Proceedings............................................................................. 35
Item 4. Submission of Matters to a Vote of Security Holders........................................... 35
PART II.
Item 5. Market for Netscape's Common Equity and Related Stockholder Matters........................... 36
Item 6. Selected Financial Data....................................................................... 37
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 63
Item 8. Financial Statements and Supplementary Data................................................... 65
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 65
PART III.
Item 10. Netscape's Directors and Executive Officers................................................... 66
Compliance with 16(a) of the Exchange Act..................................................... 68
Item 11. Executive Compensation........................................................................ 69
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 73
Item 13. Certain Relationships and Related Transactions................................................ 75
Transactions with Management.................................................................. 76
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 77
Signatures.................................................................................... 113
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PART I
OUR TRANSITION REPORT ON FORM 10-K/A ("10-K/A") CONTAINS FORWARD-LOOKING
STATEMENTS MADE WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED (THE "EXCHANGE ACT"). 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-- SUCH AS
THOSE DISCUSSED IN THE SECTION ENTITLED "FACTORS AFFECTING NETSCAPE'S FINANCES
AND BUSINESS PROSPECTS" BELOW--THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR FORECASTED. YOU SHOULD NOT RELY ON THESE
FORWARD-LOOKING STATEMENTS, WHICH REFLECT ONLY OUR OPINION AS OF THE DATE OF
THIS 10-K/A. WE DO NOT ASSUME ANY OBLIGATION TO REVISE FORWARD-LOOKING
STATEMENTS. YOU SHOULD ALSO CAREFULLY REVIEW THE RISK FACTORS SET FORTH IN OTHER
REPORTS OR DOCUMENTS WE FILE FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE
COMMISSION, PARTICULARLY THE QUARTERLY REPORTS ON FORM 10-Q AND ANY CURRENT
REPORTS ON FORM 8-K.
ITEM 1. BUSINESS.
OVERVIEW
We offer software, services, and Website resources to businesses and
consumers using the Internet.
ENTERPRISE SOFTWARE AND SERVICES. We are a leading provider of enterprise
software and services for businesses that want to transform the way they create
and keep customers in the emerging Net Economy. We provide our customers with
end-to-end electronic commerce ("e-commerce") solutions.
We develop, market, sell, and support a broad suite of enterprise software,
which consists of e-commerce infrastructure and e-commerce applications targeted
primarily at corporate intranets and extranets, as well as the Internet. Our
software allows users to share information, manage networks, and facilitate
electronic commerce. Our software is based on industry-standard protocols that
can be deployed across a variety of operating systems, platforms, and databases
and interconnected with traditional client/ server applications.
NETCENTER. We operate Netcenter-TM-, one of the most highly trafficked
sites on the Internet, a key Web portal where users can quickly and easily find
useful information, products, and services. Netcenter also showcases our
software, our partners' software, and our customer solutions. The Netcenter
business segment also includes our popular browser product.
We were incorporated in Delaware in April 1994. In early 1998, we changed
our fiscal year from a calendar year to a year that begins on November 1 and
ends on October 31, effective for the ten-month period ended October 31, 1998.
Our principal executive office is located at 501 East Middlefield Road, Mountain
View, California 94043, with a telephone number of (650) 254-1900. Our common
stock is listed on the Nasdaq National Market under the symbol "NSCP." Our home
page is located on the Web at http://home.netscape.com, where you can find
additional information about us and our products; however, that information is
generally not targeted at investors and is not a part of this report. All
references to "we", "us", "our", and "Netscape" refer to Netscape Communications
Corporation and its consolidated subsidiaries.
We separately manage and evaluate the performance of our two business
segments, Enterprise software and services and Netcenter. After discussing
Recent Developments, we describe the business of each segment in separate
sections below.
RECENT DEVELOPMENTS
BUSINESS COMBINATIONS
AMERICA ONLINE. In November 1998, we entered into an agreement with America
Online, Inc. ("AOL") under which AOL plans to acquire us. The stock-for-stock
pooling-of-interests transaction, in
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which our stockholders will receive 0.45 shares of AOL common stock for each
share of Netscape common stock, is expected to close in the spring of 1999,
subject to various conditions, including customary regulatory approvals and
approval by our stockholders. AOL has announced that our operations will remain
in Mountain View, California. See "Factors Affecting Netscape's Finances and
Business Prospects--Netscape--Risks Relating to the AOL Merger."
ATWEB. In December 1998, we acquired AtWeb, Inc. ("AtWeb"), a leading
online web site service company. AtWeb offers services to businesses to manage
web site promotion, maintenance, and membership services. We exchanged 2,685,970
shares of our common stock and 677,801 options for all of the outstanding
capital stock, options, and warrants of AtWeb in a transaction accounted for as
a pooling of interests. The historical operations and financial condition of
AtWeb were not significant for us.
We may continue to consider further acquisitions and investments and to
enter into further joint ventures and strategic alliances, some of which may be
material, when we believe such transactions will complement our overall business
strategy. However, such transactions, and in particular the acquisitions of
technology companies, are inherently risky. Our recently completed acquisitions
or any such future transactions or joint ventures may not be successful and
could impair our finances and business prospects. See "Factors Affecting
Netscape's Finances and Business Prospects--Netscape--Risks of Acquisitions and
Investments."
PRODUCT RELEASES
COMMUNICATOR 4.5. In October 1998, we shipped
Netscape-Registered Trademark-Communicator 4.5, which integrates easily with
Netcenter services. This software includes our Smart Browsing-TM- technology to
make the Internet easier to navigate for consumers, as well as high-performance
Internet email.
GECKO-TM-. In December 1998, we delivered the first version of
Netscape-Registered Trademark- Gecko, our next-generation browsing engine, to
hundreds of Internet developers. Our new browsing engine sets new browser
technology milestones in speed, smaller size, and full standards support.
Netscape Gecko is our first software product based on contributions from
mozilla.org, a dedicated team within our company (with an associated Website)
that promotes and guides open dialog and development relating to our client
source code.
CUSTOM NETCENTER-TM-. More than twenty companies and institutions are
previewing Custom Netcenter, our new custom portal service that extends the
power of Internet portals to the enterprise. Rather than directing people to
static web sites, Custom Netcenter enables businesses to create their own
portals with up-to-the-minute news, free email, and stock quotes, combined with
company-specific content and services such as personal billing or human
resources information. Built on the powerful Netscape personalization engine,
Custom Netcenter can be customized for any given vertical market or specific
employee, customer, or business partner.
E-COMMERCE APPLICATIONS. In December 1998, we began shipping our next
generation of packaged applications for Commerce Exchange, which is designed to
manage trading communities and business processes and to help customers connect
with partners' business systems over the Internet and existing private networks.
The new Commerce Exchange solution includes the new release of
Netscape-Registered Trademark- ECXpert 2.0, Netscape-Registered Trademark-
ECXpert Enterprise 2.0, and a new packaged application called
Netscape-Registered Trademark- TradingXpert 2.0. Also in December 1998, we
released Netscape-Registered Trademark- BuyerXpert 2.0, a packaged enterprise
application for automating external supplier interactions, streamlining internal
processes, and integrating existing legacy systems. In October 1998, we released
a limited production version of Netscape-Registered Trademark-BillerXpert 1.0, a
new Internet bill presentment and payment application designed to enable
enterprise service providers to enhance the billing process, strengthen customer
relationships, and create new revenue streams.
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ENTERPRISE SOFTWARE AND SERVICES
We develop, market, and support a broad suite of enterprise software, which
consists of e-commerce infrastructure and e-commerce applications targeted
primarily at corporate intranets and extranets as well as the Internet. Our
software allows users to share information, manage networks, and facilitate
electronic commerce. Our 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.
E-COMMERCE INFRASTRUCTURE
Our E-Commerce Infrastructure is a group of solutions for enterprise
customers and Internet Service Providers ("ISPs") wanting a flexible, scalable
foundation on which to build and manage their own extranet or Internet
applications or use our E-Commerce Applications. Our E-Commerce Infrastructure
provides a services-ready platform through such solutions as a directory and
security service for managing users and applications, an application server for
building and deploying applications, and a messaging solution for hosting and
delivering communications services such as email and unified messaging. Specific
products comprising our E-Commerce Infrastructure are:
NETSCAPE-REGISTERED TRADEMARK- DIRECTORY SERVER. This server allows
organizations to securely manage users and intranet and extranet applications,
including authenticating users and establishing groups and preferences. Advanced
features such as selective replication, strong authentication, and support for
international character-sets help organizations build effective and protected
extranets. This product's support for Lightweight Directory Access Protocol
(LDAP) enables organizations to collaborate effectively both within intranets
and on extranets.
NETSCAPE CERTIFICATE SERVER-REGISTERED TRADEMARK-. This server allows
security services such as single sign-on, message privacy, and access control
designed to safeguard intellectual property and ensure confidential
communications. Netscape Certificate Server integrates with some of our other
products to let information technology professionals create and manage a
public-key infrastructure that authenticates both clients and servers using open
standards-based digital certificates. We have announced that
Netscape-Registered Trademark- Certificate Management System will be the next
major upgrade of Netscape Certificate Server. Netscape Certificate Management
System will be tightly integrated with Netscape Directory Server and designed
for scalability and to integrate easily with existing security systems such as
Kerberos and SecurID authentication modules from DASCOM, Inc. and Security
Dynamics Technologies, Inc., respectively.
NETSCAPE-REGISTERED TRADEMARK- APPLICATION SERVER. With the acquisition of
KIVA Software Corporation in December 1997, we became a provider of application
server software for enterprise-class intranet, extranet, and Internet
applications. Netscape Application Server is designed to provide the
performance, availability, rapid development, legacy integration, and
manageability enterprises need to build and deploy scalable intranet, extranet,
and Internet business-critical solutions. We offer Netscape Application Server
to our customers who are developing and deploying business-critical applications
that reach beyond the company to include partners, customers, and suppliers. The
Netscape Application Server product line includes Netscape-Registered Trademark-
Application Builder, a development environment for building Java and C++
business-critical applications, and Netscape-Registered Trademark- Extension
Builder, a tool-kit for building server extensions to access legacy systems,
client-server applications, enterprise resource planning systems, and
third-party Internet services.
NETSCAPE ENTERPRISE SERVER-REGISTERED TRADEMARK-. This web server allows
organizations to manage business-critical web sites by incorporating features
designed to provide high performance, reliability, availability, and
scalability. Netscape Enterprise Server management tools help administrators to
manage users and monitor server activity without delay. By supporting multiple
platforms, databases, and document types, Netscape Enterprise Server leverages
existing investments in hardware, applications, and information. Services such
as Internet-based access controls, automatic link management, and revision
control are built
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into Netscape Enterprise Server to allow workgroups to publish and share
documents. Netscape Enterprise Server allows a comprehensive platform for
building and deploying database applications by providing native database
connectivity to information stored in Oracle, Informix, IBM DB2, or Sybase
databases.
NETSCAPE-REGISTERED TRADEMARK- MESSAGING SERVER. This server allows users
to host and deliver encrypted email messages with embedded sound, graphics,
video files, Hyper Text Markup Language ("HTML") forms, Java applets, and
desktop applications. Netscape Messaging Server is compatible with Netscape
Communicator software and other open-standards-based messaging clients, creating
a messaging system for corporate intranets and communications across the
enterprise. The Netscape messaging solution also allows group collaboration and
knowledge-sharing among teams both inside and outside an organization. We have
also developed Messaging Server Hosting Edition, a scalable hosting server that
facilitates sending, receiving, and managing email messages and that provides
centralized administration, scalability, performance, security, and remote
connectivity.
NETSCAPE-REGISTERED TRADEMARK- COMPASS SERVER. This server provides a
comprehensive set of tools that helps administrators gather and organize the
resources scattered across enterprise intranets so that users can more easily
find and retrieve information, whenever it is needed. Netscape Compass Server
also allows users to identify topics of interest and receive a newsletter
summary of relevant information from an intranet and the Internet on a daily
basis.
NETSCAPE-REGISTERED TRADEMARK- CALENDAR SERVER. This server allows a user
to schedule meetings, appointments, and resources for a large number of users.
Updating information in real time enables users to view a current calendar.
Support for Internet mail enables users to receive meeting notifications through
email. Netscape Calendar Server provides organizations with a scalable
architecture enabling organizations to support a large number of users per
server and multiple networked servers for even greater scalability.
NETSCAPE FASTTRACK SERVER-REGISTERED TRADEMARK-. Netscape FastTrack Server
is designed to allow users to create, publish, and serve Web documents without
the complexity of a large Website. Netscape FastTrack Server allows developers
to access ODBC-enabled databases using powerful relational database access
capabilities. Netscape FastTrack Server enables deployment of Web applications
that combine static and dynamic content, database access, and messaging.
Netscape FastTrack Server includes Netscape Communicator client software,
letting users create, edit, and publish Web documents. Netscape FastTrack Server
also lets users restrict access to server resources (such as applications,
documents, and administrative tools) and encrypt the information that flows
between the server and client. Flexible access control allows users to select
which resources to protect.
E-COMMERCE APPLICATIONS
The Netscape-Registered Trademark- CommerceXpert product family of
e-commerce applications allow businesses to link and manage online trading
communities of suppliers, distributors, and customers of all sizes and degrees
of technical sophistication. The Netscape CommerceXpert solutions are based on
the same open protocols and scalable security architecture used for
communications on the Internet. These solutions enable organizations to create
more secure Internet commerce sites and efficiently exchange information with
trading partners. The Netscape CommerceXpert product family includes the
following e-commerce application products:
NETSCAPE-REGISTERED TRADEMARK- ECXPERT. With Netscape ECXpert Internet
commerce software, companies are able to communicate and exchange information
within and beyond the networked enterprise. Netscape ECXpert is designed to
safeguard data communications over private and public networks, as well as to
provide flexible integration with internal business applications. By combining
the widespread availability, speed, and low cost of the Internet with its
capability to transmit data securely, Netscape ECXpert delivers the trading
reach of a large, global company to many small-to-medium-sized companies, while
lowering the overall cost of transactions across the company's entire supply
chain.
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NETSCAPE-REGISTERED TRADEMARK- TRADINGXPERT. With Netscape TradingXpert,
companies can host trading communities that are accessible to their trading
partners with only a web browser. Netscape TradingXpert provides a customizable
interface for a company's trading partners and common forms, such as purchase
orders and invoices, in electronic format designed for easy customizing. With
access to the dynamic message center provided with Netscape TradingXpert, a
company's trading partners can view both inbound and outbound purchase documents
to track the status of the transaction. Netscape TradingXpert has been designed
for scalability and performance and is suitable for ISPs as a service bureau
offering.
NETSCAPE-REGISTERED TRADEMARK- SELLERXPERT. Netscape SellerXpert enables
companies to create a complete system for business-to-business online commerce,
while preserving investments in existing back-end systems and processes.
Netscape SellerXpert includes the following key components of an electronic
storefront: electronic catalogs, membership management, order submission and
management, and payment services. With Netscape SellerXpert, companies have the
flexibility to customize the presentation of their electronic storefronts and
may customize further to meet the needs of specific trading partners. Netscape
SellerXpert includes reporting functions that permit companies to analyze the
purchasing patterns of their customers.
NETSCAPE-REGISTERED TRADEMARK- MERCHANTXPERT. Netscape MerchantXpert (due
to be released in the first calendar quarter of 1999) enables large companies
and ISPs to create a complete system for business-to-consumer online commerce,
while preserving investments in existing back-end systems and processes.
Netscape MerchantXpert includes the following key components of an electronic
storefront: electronic catalogs, customer profiling, order submission and
management, and payment services. With Netscape MerchantXpert, companies have
the flexibility to customize the presentation of their electronic storefronts.
Netscape MerchantXpert also has reporting capabilities.
NETSCAPE-REGISTERED TRADEMARK- BUYERXPERT. Netscape BuyerXpert enables
purchasing professionals to set up an electronic collection of approved vendor
catalogs so that employees have one central resource for products and services.
While preserving corporate controls, Netscape BuyerXpert makes employee
self-service ordering a reality by giving employees the means to create, get
approvals for, and track orders from their Web browser. It enables purchasing
professionals to improve productivity, reduce order processing costs, minimize
order cycle time, and take full advantage of volume discounts.
NETSCAPE-REGISTERED TRADEMARK- PUBLISHINGXPERT. Netscape PublishingXpert is
an integrated commerce-based solution that enables companies to quickly deploy
large-scale publishing, extranet, and multi-hosting applications. With Netscape
PublishingXpert, organizations are able to expand their presence on the Web to
deliver, sell, and manage premium content through an advanced set of
personalized content-management services. In addition, an integrated,
open-standards-based architecture provides the flexibility to adapt and grow
with business needs.
NETSCAPE-REGISTERED TRADEMARK- BILLERXPERT. Netscape BillerXpert is a
comprehensive Internet bill presentment and payment (IBPP) solution that allows
companies to provide customer convenience, manage customer relationships, and
generate new revenue opportunities. Flexible payment options allow the customer
to pay with an electronic check, credit card, or even schedule bill payments for
a future date. Robust e-mail capabilities allow organizations to inform their
customers about new bills, past due payments, regulatory information, and
special offers or promotions. Targeted marketing capabilities can help companies
sell new services to customers based on profile information and spending habits.
Netscape BillerXpert has been designed to provide the high performance, high
availability, fault tolerance, and scalability required to support the critical
billing and accounts receivable function.
ENTERPRISE SOFTWARE SERVICES
TECHNICAL SUPPORT. We seek to provide timely, high-quality technical
support to meet the diverse needs of our customers and partners and to
facilitate the adoption and use of our products.
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Netscape SupportEdge is designed to provide customers worldwide with a suite
of technical support offerings. Customers can choose the Netscape SupportEdge
offering that best meets their needs, based on the size of their support staff
and the expertise of their in-house team. Payment options range from
pay-as-you-go, incident-based support to unlimited annual support. Additionally,
if an organization needs support for in-house applications being developed on
our technology or for integrating our products into existing technology, the
developer support option (available as part of certain service programs)
provides advice on coding approaches and detailed help with Netscape
ONE-Registered Trademark- (Open Network Environment) technologies. A technical
support engineer gives customers sample code and reviews a test case to help
identify problems.
Netscape DevEdge-Registered Trademark- is designed to provide the technical
information and marketing support that developers need to stay competitive.
Netscape DevEdge offers memberships for developers creating software products,
building intranets, extranets, Websites, or simply trying to keep up with the
latest Web-based technologies. The Netscape DevEdge program is a developer's
link to Netscape and the community of developers building on the Netscape ONE
platform.
PROFESSIONAL SERVICES. Netscape Professional Services provides technology
consulting and application development expertise to our customers. Established
to deliver business solutions to organizations seeking an innovative approach to
the use of new technologies, Netscape Professional Services offers architecture
and design, infrastructure system implementation, systems integration, and
application development services. These solutions are designed to address a
client's technology and business requirements while providing the training and
knowledge required to create self-sufficiency. With core competencies in
information architecture and design, Internet commerce, electronic messaging,
and security services, Netscape Professional Services works with our
engineering, product marketing, technical support, and business partners to
offer customers comprehensive Web-based solutions.
TRAINING. We offer hands-on training courses and materials to resellers and
end-users covering software installation, configuration, and troubleshooting. We
also offer multi-media courses and materials that cover Network and Systems
Administration, discussing the implementation and administration of Web servers,
the implementation of security for Websites, and networking fundamentals. Other
courses and materials cover Content and Site Development, discussing fundamental
and advanced HTML Website development techniques and fundamental and advanced
Java programming training designed to help developers create interactive
applications.
MARKETING
We use a variety of marketing programs designed to stimulate demand for our
products and services to support our direct and indirect sales channels. The key
elements of our marketing strategy include:
TARGET MARKETING. We focus direct marketing efforts on decision makers in
large organizations. Our goal is to identify potential buyers of our enterprise
software and services and create awareness of our company, brand, and product
offerings (including clients, servers, applications, and services).
CUSTOMER RETENTION. We maintain an ongoing dialogue with our existing
customers to ensure customer satisfaction, request references, and make
follow-on sales.
MARKETING ON THE INTERNET. We make many of our products available for
evaluation and purchase through the Netscape channel on Netcenter. Certain
customer information is collected electronically through an automated
registration process, creating the basis for ongoing marketing of upgrades, new
products, add-on products, and merchandise.
DISTRIBUTION
We have designed our distribution strategy to address the particular
requirements of our diverse enterprise and individual target customers. We
distribute our products directly through a direct sales
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force, a netsales force, and Netcenter. We distribute our products indirectly
through Original Equipment Manufacturers ("OEMs"), Value Added Resellers
("VARs"), systems integrators, and software retailers.
DIRECT SALES. Our direct sales force targets primarily large organizations
already or likely to become electronic merchants and information publishers for
commerce on the Internet, including telecommunications companies, manufacturers,
retailers, publishers, and financial service companies. In addition, these
organizations have a substantial installed base of intranets and have been
widely deploying Web servers for internal enterprise applications. In certain
instances, our direct sales force works with complementary hardware OEMs, VARs,
and systems integrators to deliver complete solutions for major customers.
NETSALES. Our Netsales organization, based in Mountain View, California,
prospects for, qualifies, and closes license transactions valued at less than
$100,000. The group also works with our direct sales force in North America on
larger opportunities.
INTERNET SALES. We offer our products and services electronically via
Netcenter.
OEMS. We have established OEM relationships to leverage our sales efforts.
For example, we have OEM reseller agreements with several leading systems
vendors to bundle our server software with certain of their product offerings.
VARS AND SYSTEMS INTEGRATORS. VARs and systems integrators customize,
configure, and install our software products with complementary hardware,
software, and services. In combining these products and services, these
resellers are able to deliver more complete Netscape-based solutions to address
specific customer needs. We may also help these VARs and systems integrators
design customized applications to meet the unique requirements of these
customers.
RETAIL DISTRIBUTION. We currently distribute our retail products through a
network of retail distributors in North America.
REVENUES
Licenses of our Enterprise Software and related professional services
revenues accounted for 66.4%, 41.5%, and 30.4% of our total revenues in the
ten-month period ended October 31, 1998, and the years ended December 31, 1997,
and December 31, 1996, respectively.
COMPETITION
The market for software and services for intranets, extranets, and the
Internet is relatively new, intensely competitive, and subject to rapid
technological change. We expect competition to continue and increase in the
future. Such competition could impair our finances or business prospects.
We develop, market, and sell e-commerce infrastructure and e-commerce
application software. For both types of software and related services, we
believe the principal competitive factors are core technology, breadth of
product features, product quality, marketing and distribution resources,
pricing, and customer service and support. We believe we compete well with
respect to many of these factors. Selling products like our e-commerce
infrastructure and application products requires a significant amount of
customer service and support. See "Factors Affecting Netscape's Finances and
Business Prospects-- Enterprise Segment--Need to Execute Difficult Type of
Sale." Many of our current and potential competitors, including especially
Microsoft Corporation ("Microsoft"), have longer operating histories, larger
overall installed customer bases, related products that inter-operate with
e-commerce infrastructure and application software products, more employees,
greater brand recognition, and greater financial, technical, marketing, public
relations, and distribution resources than we do. Competition could result in
price reductions for our products, loss of market share, or other material
adverse effects on our finances or business prospects.
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The competition in the server market is broad across all classes of server
software. In addition to Microsoft, companies offering competing Web and
application server products include International Business Machines Corporation
("IBM"), Oracle Corporation ("Oracle"), Sun Microsystems, Inc. ("Sun"), BEA
Systems, Inc. ("BEA"), and various other software providers. Additionally, the
Apache web server, a widely used, open-source product, is available for download
from the Internet for free. Other companies offering competing messaging server
products include Microsoft, Lotus (a subsidiary of IBM), which sells a Web
server based on its popular Notes group software program, Novell, Inc.
("Novell"), which sells Groupwise based on its popular server operating system,
and Software.com, Inc. Other companies that offer or will offer competing
directory server products include Microsoft, Sun, Novell, IBM, and Oracle.
Companies offering server and client products that are or can be bundled
with operating systems or other software or hardware are particularly formidable
competition in the market for server software. For example, Microsoft's server
products operate on its Windows NT server operating system ("Windows NT" or
"NT"), Oracle's server products operate with its large installed base of
database software, Sun's server products operate on its Solaris server operating
system, and BEA's server products operate with its installed base of software
that monitors transaction processing. IBM has a large customer base using legacy
systems and is, in many cases, willing to provide server software to large
customers at nearly no charge as a way to win hardware and services business.
We compete with Microsoft with respect to every type of server we offer.
Microsoft has taken the following actions to promote its server products.
- Microsoft actively promotes its proprietary technologies and standards
(such as Active Directory, Component Object Model (COM), and Distributed
Component Object Model (DCOM)), which are incompatible with our products
and other open-standards-based products. If Microsoft's proprietary
standards become widely accepted, demand for our products would decrease.
- Microsoft provides many of its competing server products at a low fee or
for free to its customers purchasing Windows NT. For example, Microsoft
bundles its Internet Information Server ("IIS") with Windows NT at no
separately stated additional cost to the purchaser and has made IIS
available for download from the Internet for free. Microsoft provides
other server products and tools (a directory server, a proxy server, an
application server, management tools, and development tools) at a low fee
or for free to customers purchasing Windows NT. Microsoft has also stated
that it intends to take "non-economic returns" on its Microsoft Exchange
("Exchange") product (an email and groupware server that operates in
conjunction with Microsoft's Back Office and Internet Explorer products),
which has a substantial retail list price, to build market share for
Windows NT. Microsoft has provided Exchange at little or no separately
stated cost to its corporate consumers and may include Exchange as a free
bundle in new versions of NT. While we believe that our products have
certain technical advantages, these practices of Microsoft may cause
pricing pressure on our server products and may reduce our market share
for these products.
- We believe that Microsoft has used, and will continue to use, its dominant
position to secure preferential distribution and bundling contracts with
third parties such as ISPs, online service providers, VARs, and OEMs,
including third parties with whom we have relationships. Such preferential
arrangements could reduce our market share for server software.
- Microsoft may integrate its server products more tightly with its
operating systems, in which case we would have a difficult time switching
users to our server products. If we are unable in a timely and effective
fashion to obtain access to the application programming interfaces or
other technical information necessary to access Windows NT, we will not be
able to deliver in a timely way server products compatible with Windows
NT. Even if we can obtain timely access to this technical information, the
performance of our products may be impaired relative to Microsoft's more
tightly integrated product. If Microsoft is successful in more tightly
integrating its server products with its operating systems or restricting
access to its operating systems, our product sales, finances, or business
prospects could be impaired.
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- Microsoft has released server products for ISPs and content providers to
set up Web servers and related services. The availability of such server
products targeted for sale to the ISP market is causing pricing pressure
on our messaging and hosting products and may reduce our ISP market share.
- Microsoft is investing significantly in localizing its enterprise software
in non-English languages, which may be a competitive threat as we attempt
to expand our international business.
Such actions, together with Microsoft's aggressive marketing of Windows NT,
may reduce our share of the server market, which could materially adversely
affect our finances or business prospects.
Competition in the e-commerce application market is also intense. The
Netscape CommerceXpert family of products facilitates the creation and
maintenance of Websites for online commerce. Companies currently offering
products that compete with the Netscape CommerceXpert family of products include
IBM, Oracle, General Electric Information Systems, Microsoft, enterprise
resource planning vendors (such as PeopleSoft, Inc. and SAP AG), Open Market,
Inc., Ariba Technologies, CommerceOne, Sterling Commerce, Inc., BroadVision,
Inc., and a wide variety of smaller competitors. Companies offering e-commerce
application software that can be bundled with operating systems or other
software or hardware are particularly formidable in this market. In particular,
IBM is investing heavily in marketing, research, and development for e-commerce
applications. IBM has a large customer base using legacy systems and will likely
be willing to provide e-commerce application software to large customers at
nearly no charge as a way to win hardware and services business. Competition in
this market could impair our finances and business prospects.
INTERNATIONAL
We believe it is important to have an international presence and intend to
continue to conduct business in markets outside the United States through a
combination of subsidiaries and distributors. We conduct business
internationally through a variety of distribution and service partners.
NETCENTER
The Netcenter segment of our business includes both our Internet portal,
Netcenter, and our client software.
Netcenter is one of the most highly trafficked sites on the Internet, a key
Web portal where users can quickly and easily find useful information, products,
and services. Designed to provide information, showcase products and services,
and form the basis of an electronic marketplace, Netcenter consists of multiple
pages of information, each identified by a Uniform Resource Locator, or URL.
Netcenter offers a variety of products and services, including news and
information, opportunities to purchase goods and services, Internet site
directories, software, software downloads, product and technical support
information, and news about us and our products.
We significantly expanded our content and services offerings on Netcenter in
June 1998, after we entered into a multi-faceted, strategic collaboration with
Excite, Inc. ("Excite") in April 1998. Netcenter originated as our corporate
website, from which our customers could download our software products, to which
we later added search capability. In addition to continuing to provide its
search services on Netcenter, Excite now programs Netscape branded search and
the channels we co-brand with Excite.
Since June 1998, we have been changing our business model from delivering
user traffic to other companies, which then deliver content and services to the
users and sell advertising for the pages users view, to keeping the user traffic
within Netcenter, where we provide content and services to users and sell
advertising. To complete this transition, we will need to continue to deliver
content and services that attract users with characteristics that advertisers
want, aggressively promote Netcenter, and increase our advertising sales force.
All of these initiatives will increase our expenses, which, if we are
unsuccessful in making the transition, will impair our finances and business
prospects.
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NETCENTER SERVICES
Netcenter's services consist of search and navigation services, such as the
aggregated NetSearch area, which helps consumers and businesses more easily find
relevant information, and Smart Browsing described below in "Netcenter--Client
Software"; programming channels, such as Contact-TM-, Personal Financial, or
Small Business, which organize content and services for directed broadcast;
communications and community services, such as email, bulletin board and instant
messaging services, which help consumers and businesses connect and communicate;
personalization services, such as MyNetscape Channel, a personalized topical
channel, which users can customize simply and easily to satisfy their personal
interests, and Custom Netcenter, which enables businesses to create their own
portals; and opportunities for e-commerce.
NET SEARCH. Netcenter's Net Search Page is one of the most heavily
trafficked on the Web. We maintain relationships with several search providers
including Excite, Lycos, Inc. ("Lycos"), Infoseek Corporation ("Infoseek"),
LookSmart Ltd., Goto.com, and others who in turn offer links to their own
services from the NetSearch main page. These relationships are renewed annually.
Excite programs our co-branded search service, which also appears on the
NetSearch page.
NETCENTER CHANNELS. Netcenter has launched a channels-based format for its
services and content to provide consumers with a more intuitive interface that
reflects the way they navigate through other forms of media, such as television,
and enables advertisers and retailers to more effectively target consumers. The
entire suite of Netcenter services can be accessed from each channel. By
combining existing services with specialized information and services from
leading content providers, Netcenter provides channel-specific content
(including topical news), directories, bulletin boards, email, search
capabilities, and links to related Web sites, products, services.
We provide our branded channels on Netcenter: Business, Computing &
Internet, Kids & Family, News, Personal Finance, Small Business, and Sports.
Excite also programs a number of Netcenter channels including: Autos, Education,
Games, Health, Lifestyles, Real Estate, and Shopping. The Local and Travel
channels on Netcenter are programmed by AOL (Digital City) and The SABRE Group
Holdings, Inc. (Travelocity), respectively. Entertainment Tonight Online and
other companies provide content for the Entertainment channel on Netcenter.
NETCENTER COMMUNICATIONS AND COMMUNITIES. We offer a number of services
that allow users to connect and communicate with each other. We believe that
users who habitually check their email on Netcenter Mail or their instant
messages on Netscape AIM (AOL Instant Messenger) are more likely to visit
Netcenter more frequently and spend more time on Netcenter, and use other
Netcenter services as well. Community-building services, such as bulletin boards
and the Small Business channel, allow users to join communities of other users
with similar interests or needs, thereby enhancing the user experience within
Netcenter with the goal of improving customer retention.
PERSONALIZATION SERVICES. MyNetscape Channel enables consumers to
personalize their home page Web interface and choose what information they want
delivered to their personal page, thereby creating a personalized Web experience
for each consumer. After registering with Netcenter, users create a personal
profile that selects and automatically updates information of interest such as
personalized stock quotes, news stories, local and national sports scores,
horoscopes, local and national weather, and special reminders. See "Recent
Developments--Product Releases--Custom Netcenter" for a description of Custom
Netcenter.
E-COMMERCE. Netcenter provides many opportunities for its users to shop
conveniently from their desktops with many leading online merchants.
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CLIENT SOFTWARE
NETSCAPE COMMUNICATOR. Netscape Communicator is a suite of open HTML-based
client software that integrates browsing, email, web-based word processing, and
group scheduling, letting users easily communicate, share, and access
information. We currently market two versions of our Netscape Communicator
client software: Netscape Communicator and Netscape Communicator with Calendar.
NETSCAPE NAVIGATOR-REGISTERED TRADEMARK-. Netscape Navigator, the browser
that serves as the core component of Netscape Communicator, allows access to
information and network applications on intranets, extranets, and the Internet.
Netscape Navigator offers a point-and-click graphical user interface that allows
users to browse the Internet's vast array of network resources and participate
in commerce across extranets and the Internet.
We will continue to add new features, such as Smart Browsing, to our client
product to make it more useful to Netcenter members and direct traffic to
Netcenter. With Smart Browsing, users can type plain English in the location
field when conducting a search, rather than having to remember and type long,
complicated Internet addresses (URLs). Once users get where they're going, they
can use the "What's Related" feature of Smart Browsing to view a list of sites
related to the one they are viewing.
MARKETING
We use a variety of marketing programs designed to increase user traffic on
Netcenter. The key elements of our marketing strategy include:
NETCENTER BRAND-BUILDING. We are supplementing our ongoing online promotion
of Netcenter with a major promotional campaign on television, radio, national
print, and billboards aimed at extending the Netscape brand to include services
within Netcenter. We plan to continue investing to strengthen and position our
brands.
NETCENTER MEMBERSHIP ACQUISITION PROGRAMS. To increase Netcenter membership
and user traffic, we have offered quarterly promotions, such as sweepstakes, on
Netcenter.
CLIENT MARKET-SHARE PROGRAMS. We have used a number of distribution
programs to maintain market share for our client products, which direct user
traffic to Netcenter in a variety of ways. See "--Distribution--Client
Software."
DISTRIBUTION
NETCENTER. Netcenter advertising inventory, consisting of page views
(defined as the display of an electronic page for one user until the user
changes pages), is sold by our direct sales force.
CLIENT SOFTWARE. In January 1998, we launched Unlimited Distribution, a
program designed to distribute our market-leading Internet client software to
users for free. Unlimited Distribution allows participants, including OEMs,
ISPs, telecommunications companies, Web content providers, publishers, and
software developers, to distribute Netscape Communicator to their customers and
prospects for free. We also encourage users to download Netscape Communicator
from Netcenter and the websites of other companies for free. From time to time,
we have distributed and will distribute compact discs with our client products
for free.
REVENUES
Revenues from the Netcenter segment of our business comes 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. We allow advertisers to display
their logos or messages on a hyperlinked button with access to their Websites.
We charge fees for the
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advertising spots on our Website, which vary depending on the specific page
location and the number of visits to the page.
Revenues from Netcenter accounted for 26.9%, 17.9%, and 6.7% of our total
revenues in the ten-month period ended October 31, 1998, and the years ended
December 31, 1997, and December 31, 1996, respectively.
COMPETITION
The Internet portal market is relatively new, intensely competitive, rapidly
evolving, and subject to rapid technological change. We expect competition to
continue and increase in the future, which could impair our finances and
business prospects.
We compete with other companies operating "portals," websites that serve as
a consumer's gateway to the Internet. Portals aggregate high, recurring amounts
of Internet traffic by offering a broad array of products and services, such as
online search and navigation, information, and community and personalization
services. See "--Netcenter Services." Companies currently offering competitive
portal sites include Yahoo! Inc., Excite, Microsoft, AOL, Lycos, Infoseek, and
CNET, Inc. ("CNET"), among others. As we expand the scope of our Internet
services, we will compete directly with a greater number of Internet sites and
other media companies across a wide range of different online services.
We believe that the principal competitive factors in the portal market are,
with respect to consumers, brand recognition and identity, ease of accessibility
and use, comprehensiveness, independence, quality of search results,
dependability, and quality and variety of content targeted toward specific
users. With respect to advertisers and sponsors, the principal competitive
factors are the number of users, duration and frequency of visits, user
demographics, and increasingly, e-commerce services. We believe we compete well
with respect to many of the competitive factors we have identified. We launched
our Netcenter portal in June 1998 and since then have been adding information
and services to Netcenter to provide greater breadth and depth of content. See
"--Netcenter Services." We have also increased the number of users visiting and
registering as members of Netcenter since its launch. In the future, we may face
competition in various special interest, demographic, and geographic markets.
Our competitors may develop Web-based services that are superior to ours or they
may achieve greater market acceptance than ours. Moreover, many of our current
and potential competitors in this market have greater financial, technical,
marketing, distribution, and managerial resources than we do. For all of these
reasons, this competition may impair our finances and business prospects.
A considerable amount of Netcenter traffic comes from our browser product,
which has Netcenter as its default home page. Our client market share has
decreased significantly in recent years, although net Netcenter traffic has
increased overall due to new adopters and additional and enhanced content. To
the extent our client market share continues to decline, however, net Netcenter
traffic may remain constant, even as we expand and improve Netcenter, or even
decline. We have faced and continue to face severe competition for browser
market share from Microsoft, which has a longer operating history, a much larger
overall installed customer base, many more employees, greater brand recognition,
and much greater financial, technical, marketing, public relations, and
distribution resources than we do. Microsoft has taken the following actions to
promote its Internet Explorer browser. Some of these actions are being
challenged by the U.S. Department of Justice in UNITED STATES OF AMERICA V.
MICROSOFT CORPORATION, Civil Action No. 98-1232, currently pending before Judge
Thomas Penfield Jackson in the U.S. District Court for the District of Columbia.
- Microsoft has integrated Internet Explorer into its Windows 98 operating
system, which is shipped with approximately 95% of new personal computers.
As a result of this practice, we face difficulties in addition to the
challenge of switching users to our browser from the browser integrated
into their operating system. If we are unable in a timely and effective
fashion to obtain effective access to the application programming
interfaces or other technical information necessary to access Microsoft's
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operating systems, we will not be able to deliver in a timely way a
browser product compatible with the operating system used by an
overwhelming majority of personal computer users. Even if we can obtain
timely access to this technical information, the performance of our
product may be impaired relative to Microsoft's integrated product.
- Microsoft has also entered into certain product licenses that have
contained restrictions on the licensees' rights to contract with us and
offered monetary and other valuable incentives, such as presence on the
Windows desktop, to licensees of its browser.
- Microsoft is promoting its proprietary ActiveX technology as a method of
writing Windows-specific Websites viewable only in Internet Explorer. In
addition, we believe that Microsoft may be using co-marketing funds and
other inducements to have Websites developed exclusively for Internet
Explorer or using technology that may only be accessed by Internet
Explorer.
- We believe that Microsoft has used, and will continue to use, its dominant
position to secure preferential distribution and bundling contracts for
Internet Explorer with third parties such as ISPs, online service
providers, VARs, and OEMs including third parties with whom we have
relationships.
Such actions, together with Microsoft's aggressive marketing of Internet
Explorer, have reduced and may continue to reduce our share of the browser
market, which could materially adversely affect our finances or business
prospects. Specifically, a significant decline in our share of the browser
market could reduce the traffic to Netcenter.
Netcenter competes directly with various Microsoft-owned Websites that
Microsoft has united into a single site called "MSN.com". MSN.com may become the
opening screen for Windows or Internet Explorer's users or operate in some other
fashion that promotes Microsoft's products and Websites. These practices could
make it more difficult for Internet users to access and use our products and
services.
We will increasingly face competition in the portal market from providers of
other Internet products and services who already aggregate large amounts of
traffic or provide an initial point of entry for Internet users. Successful
e-commerce merchants (such as Amazon.com, Inc., Travelocity, E*Trade Group,
Inc., eBay Inc., and Onsale, Inc.), ISPs (such as @Home Corporation and
Earthlink Network, Inc.), long-distance providers, the Regional Bell Operating
Companies, and cable companies currently offer and could further develop,
acquire, or license Internet search and navigation functions and community and
communications services that compete with those we offer. Additionally, if the
mix of portal market revenues were to shift from advertising to e-commerce, we
would have to develop the capability to compete with the successful e-commerce
sites, which have brand recognition for e-commerce, expertise with respect to
the products they offer and in conducting e-commerce, and large customer bases.
We will also increasingly face competition from media companies such as the
National Broadcasting Company, which has made an investment in CNET's Snap
service, and The Walt Disney Company, which made an investment in Infoseek and
recently launched a new portal site at www.go.com. Time-Warner Companies, Inc.
and CBS Corporation have announced that they may create portal sites. These
media companies have ready audiences and significantly greater financial and
marketing resources than we do. In response to their promotion of their online
properties, we may need to increase our sales and marketing expenditures, which
would impair our finances.
We compete with portals, other high-traffic websites, and ISPs, as well as
traditional forms of offline media such as television, radio, and print, for a
share of advertisers' total advertising and marketing budgets. We believe that
the number of companies selling Web-based advertising and the available
inventory of advertising space has recently increased substantially and will
continue to increase. With this competition for advertising placements, we may
face increased pressure to reduce our prices for ads, which may reduce our
advertising revenues. In addition, our sales of advertising may be adversely
affected to the
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extent that our competitors offer superior advertising services that better
target users or provide better reporting of advertising results.
We have expanded and plan to continue expanding Netcenter by acquiring
strategic businesses and technologies and licensing content and services. We
will face increasing competition for these assets from competitors with much
greater financial resources than we have. As always, we will assume certain
risks when acquiring businesses. See "Factors Affecting Netscape's Finances and
Business Prospects--Netscape--Risks of Acquisitions and Investments."
INTERNATIONAL
We provide content and commerce in the local language on 17 sites now in
operation outside the United States. We expect to continue to work with local
companies to provide content and commerce services customized for local
audiences in different countries.
PROPRIETARY RIGHTS
Our success and ability to compete partly depend on our technology,
including both our internally developed technology and the technology that we
license from third parties. Others may develop technologies that are similar or
superior to ours, which could impair our ability to compete.
For the technology we develop internally, we rely on the technological and
creative skills of our employees. To establish and maintain a technology
leadership position, new product developments, frequent product enhancements,
name recognition, and reliable product maintenance are essential. If we were
unable to develop new technology and deliver new products and enhancements, our
finances and business prospects would be impaired.
We also rely on technology that we license from third parties, including
software integrated with internally developed software and used in our products
to perform key functions. These third-party technology licenses may not continue
to be available to us on commercially reasonable terms. The loss of any of these
technology licenses could delay or reduce product shipments until equivalent
technology could be identified, licensed, and integrated. Any such delays or
reductions in product shipments could impair our finances and business
prospects.
To protect our technology, we rely on patent, trademark, trade secret, and
copyright law and generally enter into confidentiality or license agreements
with our employees, consultants, and vendors. We generally control access to and
distribution of our software, documentation, and other proprietary information.
Despite these precautions, it may be possible for unauthorized third parties to
copy or otherwise obtain and use our products, technology, or proprietary
information. In addition, effective patent, trademark, trade secret, and
copyright protection may be unavailable or limited in certain foreign countries.
To license our products, we rely in part on "shrink wrap" licenses that are not
signed by the end-user and, therefore, may be unenforceable under the laws of
certain jurisdictions. Policing unauthorized use of our products is difficult
and the steps we take may not prevent the misappropriation of our technology. In
addition, litigation may be necessary in the future to enforce our intellectual
property rights, to defend the validity of our patents, to protect our trade
secrets, or to determine the validity and scope of the proprietary rights of
others. Such misappropriation or litigation could result in substantial costs
and diversion of resources and the potential loss of intellectual property
rights, which could impair our finances or business prospects.
We have received, and may continue to receive, notice of claims of
infringement of other parties' proprietary rights. Such claims may involve our
internally developed technology or technology and enhancements that we license
from third parties, including enhancements incorporated into Netscape
Communicator in connection with the Royalty-Free Source Code program. See
"Factors Affecting Netscape's Finances and Business Prospects--Netcenter
Segment--Royalty-Free Source Code." Although
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we are sometimes indemnified by third parties against claims that licensed
third-party technology infringes the proprietary rights of others, indemnity may
be limited, unavailable, or, where the third party lacks sufficient assets or
insurance, ineffectual. Any such claims could require us to spend time and money
defending against them, and, if they were decided adversely to us, could cause
us to pay damages, to be subject to injunctions, or to halt distribution of our
products while we re-engineer them or seek licenses to necessary technology
(which might not be available on reasonable terms). Moreover, we could also be
subject to claims for indemnification resulting from infringement claims made
against our customers, which could increase our defense costs and potential
damages. We do not currently have liability insurance to protect against the
risk that our technology or licensed third-party technology infringes the
proprietary rights of others. Any of these factors could impair our finances or
business prospects.
RESEARCH AND DEVELOPMENT
Our current research and development efforts are focused on new products,
new services, product enhancements, and adaptations of existing products to new
operating systems. We have addressed the need to develop new products,
enhancements, and adaptations through our internal development efforts, as well
as through acquisitions of other companies and the licensing of third-party
technology. However, such new products, product enhancements, or product
adaptations may not be made commercially available as planned or otherwise on a
timely and cost-effective basis, and if introduced, may not achieve market
acceptance. See "Factors Affecting Netscape's Finances and Business
Prospects--Enterprise Segment--Product Development and Technological Change" and
"--Developing Market; Uncertain Acceptance of Netscape's Products; Uncertain
Rate of Adoption of Intranets, Extranets, and the Internet as a Medium of
Communication, Collaboration, and Commerce." We believe that significant
investments in research and development are required to remain competitive.
While we intend to continue to invest a significant percentage of our total
revenues in research and development, a number of our competitors are in a
position to expend substantially more absolute dollars on research and
development than we are. Our research and development expenditures were $123.2
million, $132.8 million, $86.0 million in the ten-month period ended October 31,
1998, and the years ended December 31, 1997, and December 31, 1996,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation--Operating Expenses--Research and Development" and
"--Purchased In-Process Research and Development."
EMPLOYEES
As of December 31, 1998, we had approximately 2,510 regular employees, and
approximately 426 temporary or part-time employees and contractors. None of our
employees is represented by a labor union or collective bargaining agreement. We
have not experienced any work stoppages and consider our relations with our
employees to be good.
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FACTORS AFFECTING NETSCAPE'S
FINANCES AND BUSINESS PROSPECTS
IN ADDITION TO OTHER INFORMATION IN THIS 10-K/A, INVESTORS EVALUATING US AND
OUR BUSINESS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS FOR OUR
COMPANY AS A WHOLE AND FOR THE ENTERPRISE SOFTWARE AND NETCENTER BUSINESS
SEGMENTS. THESE RISKS MAY IMPAIR OUR FINANCES AND BUSINESS PROSPECTS. THE RISKS
SET FORTH BELOW AND ELSEWHERE IN THIS FORM 10-K/A COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED.
NETSCAPE
Our company as a whole faces the following risks, which have the potential
to impair our finances and business prospects. In separate sections below, you
will see risks associated more particularly with the Enterprise and Netcenter
business segments.
RISKS RELATING TO THE AOL MERGER
In November 1998, we signed an agreement to be acquired by AOL if certain
events occur, including approvals by the government of the merger and
satisfaction of certain other closing conditions by AOL and us. See "Recent
Developments--Business Combinations--America Online." There are numerous risks
associated with the AOL transaction:
NETSCAPE STOCKHOLDERS WILL RECEIVE 0.45 OF A SHARE OF AOL COMMON STOCK
DESPITE CHANGES IN MARKET VALUE OF NETSCAPE COMMON STOCK OR AOL COMMON STOCK.
Upon completion of the merger, each share of Netscape common stock will be
exchanged for 0.45 of a share of AOL common stock. The terms of the deal do not
provide for any adjustment for changes in the market price of either Netscape
common stock or AOL common stock, and we are not permitted to "walk away" from
the merger or resolicit the vote of our stockholders solely because of changes
in the market price of AOL common stock. Accordingly, the specific dollar value
of AOL common stock to be received by Netscape stockholders upon completion of
the merger will depend on the market value of AOL common stock at the time of
completion of the merger.
BENEFITS OF THE MERGER MAY NOT BE REALIZED. We entered into the merger
agreement with AOL with the expectation that the merger will result in certain
benefits, including advancing a multiple brand strategy, strengthening our
positions in interactive medium and enterprise software, and potential cost
savings. Achieving the benefits of the merger will depend in part on the
integration of our technology, operations, and personnel in a timely and
efficient manner so as to minimize the risk that the merger will result in the
loss of customers or key employees or the continued diversion of the attention
of management. Among the challenges involved in this integration is
demonstrating to our customers that the merger will not result in adverse
changes in client service standards or business focus, as has been suggested in
some public commentary on the merger, and persuading our personnel that our
business cultures are compatible. We may not be able to integrate successfully
with AOL and may not be able to realize any of the anticipated benefits of the
merger. Failure to do so could impair AOL's finances and business prospects.
OUR OFFICERS AND DIRECTORS HAVE CONFLICTS OF INTEREST RELATING TO THE
MERGER. Our directors and officers participate in certain arrangements and have
continuing indemnification against certain liabilities that provide them with
interests in the merger that are different from, or in addition to, those of
Netscape stockholders. In particular, James L. Barksdale and certain other of
our officers have agreements with us entitling them to continued vesting of
their stock options and restricted stock after the merger. The number of shares
of Netscape common stock subject to unvested options or Netscape repurchase
rights that are held by these officers totaled an aggregate of 826,514, as of
January 12, 1999. In addition, unvested stock options granted under our 1995
Director Option Plan to L. John Doerr, William V. Campbell, and Eric A.
Benhamou, each one of our outside directors, will vest upon the completion of
the merger. The number of shares of Netscape common stock subject to unvested
options held by these
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outside directors that will vest upon completion of the merger totaled an
aggregate of 98,800, on January 12, 1999. As a result, these directors and
officers could be more likely to vote to approve the merger agreement than if
they did not hold these interests.
FAILURE TO OBTAIN CONSENTS AND WAIVERS. We have contracts with many of our
suppliers, customers, licensors, licensees, and other business partners relating
to, among other things, certain intellectual property rights. Some of these
contracts require us to obtain the consent, waiver, or approval of these other
parties in connection with the merger agreement. If we cannot do so, we and AOL
may be required to refund various prepaid amounts under certain material
contracts. In addition, we and AOL may lose the right to use intellectual
property that is necessary for smooth operation of our Netcenter website or
related to some of our software. We have agreed to use reasonable efforts to
secure the necessary consents, waivers, and approvals. However, there can be no
assurance that we will be able to obtain all of the necessary consents, waivers,
and approvals and failure to do so could impair AOL's finances and business
prospects. In addition, certain consents of third parties required by the merger
agreement must be obtained or AOL may terminate the merger agreement.
FAILURE TO COMPLETE THE MERGER. If the merger is not completed for certain
reasons, we may be subject to a number of material risks, including the
following:
- we may be required to pay AOL a termination fee of $100 million
- the option for 19,887,317 shares of Netscape common stock with an exercise
price of $33.94 per share we granted to AOL may become exercisable
- the price of Netscape common stock may decline to the extent that the
current market price for Netscape common stock reflects a market
assumption that the merger will be completed
- the public announcement of the merger may have an adverse effect on:
- our sales and operating results,
- our ability to attract and retain key management, marketing, and
technical personnel, and
- progress of certain development projects
- costs related to the merger, such as legal, accounting, and financial
advisor fees must be paid even if the merger is not completed
If the merger is terminated and our board of directors determines to seek
another merger or business combination, there can be no assurance that it will
be able to find a partner willing to pay an equivalent or more attractive price
than that which would be paid in the merger. In addition, while the merger
agreement is in effect and subject to certain limited exceptions, we are
prohibited from soliciting, initiating, knowingly encouraging, or entering into
certain extraordinary transactions such as a merger, sale of assets, or other
business combination with any party other than AOL. Furthermore, if the merger
agreement is terminated and AOL exercises its option to purchase Netscape common
stock, we may not be able to account for future transactions as a "pooling of
interests."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
As a result of our relatively limited operating history and recent
acquisitions, we do not have relevant historical financial data for a
significant number of periods on which to base planned operating expenses.
Accordingly, our expense levels, which are to a large extent fixed, are based in
part on our expectations as to future revenues. In addition, we typically
operate with a minimal backlog of product orders. Therefore, our quarterly sales
and operating results generally depend on the volume, timing, and fulfillment of
orders received within the quarter, which are difficult to forecast. For the
Enterprise business segment, we typically recognize the majority of our revenues
toward the end of each quarter. Accordingly, we may not be able to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
Any
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significant shortfall of demand for our products and services in relation to our
expectations would immediately impair our finances and business prospects.
Moreover, we may: (1) increase our operating expenses to exploit a market
opportunity for our products and services, fund greater levels of research and
development, increase our sales and marketing operations, develop new
distribution channels, improve our operational and financial systems, and
broaden our customer support capabilities, and (2) continue to incur significant
merger-related charges and other increases in operating expenses associated with
recently completed and future acquisitions. To the extent that such expenses
precede or are not subsequently followed by increased revenues, our finances and
business prospects will be impaired.
We expect to experience significant fluctuations in operating results that
may be caused by a variety of factors, including:
- varying demand for our products and services;
- increasing complexity of products with higher prices and longer sales
cycles;
- the timing of the introduction or enhancement of our products and services
or those of our competitors;
- market acceptance of new products and services;
- the timing and size of individual license transactions (particularly to
enterprise customers who may attempt to delay closing transactions until
the end of a fiscal quarter as a negotiating tactic);
- our price changes (such as the free client initiative we announced in
January 1998) or those of our competitors;
- the timing, size, and number of Website transactions;
- seasonal trends in Internet usage and advertising placements;
- the addition or loss of Website advertisers;
- the level of user traffic on Netcenter;
- the amount and timing of capital expenditures and other costs relating to
the expansion of our operations;
- the mix of distribution channels through which products are sold;
- the mix of products and services sold;
- the mix of international and North American revenues;
- litigation-related costs; and
- general economic conditions.
Quarterly operating results may fluctuate due to the timing of revenue from
large sales of enterprise software products, including Netscape Application
Server, Netscape Directory Server, and the Netscape CommerceXpert family of
products. See "--Enterprise Segment--Fluctuations in Operating Results from
Enterprise Software Sales." While we intend to pursue multiple sales
opportunities with respect to these enterprise products, the loss or deferral of
one or more significant sales could impair our finances or business prospects.
In addition, as a strategic response to changes in the competitive
environment, we may from time to time make certain pricing or marketing
decisions (such as the free client initiative announced in January 1998) or
enter into business combinations (such as the AtWeb or AOL business
combinations) that could impair our finances or business prospects. See
"--Netcenter Segment--Free Client Software" and "--Netscape--Risks of
Acquisitions and Investments." As a result, we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful and may
not predict future
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performance. Our revenues are also likely to fluctuate due to factors that
affect the organizations that are prospective customers of our enterprise
products. Expenditures by these organizations tend to vary in cycles that
reflect overall economic conditions and budgeting and buying patterns. See
"--Netscape--Year 2000." Our business would be adversely affected by a decline
in the economic prospects of our customers or the economy generally, which could
alter current or prospective customers' capital spending priorities or budget
cycles or extend our sales cycle with respect to certain customers. In addition,
many large organizations defer capital expenditures beyond the first calendar
quarter, meaning that we may realize lower revenue from sales in our second and
third fiscal quarters than in other quarters of our fiscal year. For these
reasons, among others, we may not be able to attain profitability on a
quarter-to-quarter basis. Because of all of the foregoing factors, it is likely
that in some future quarters our operating results will be below the
expectations of public market analysts and investors, likely reducing the price
of our common stock.
Our proposed merger with AOL has diverted significant management,
engineering, and sales resources away from running our business, which could
impair our revenues and operating results. The pending AOL merger may also
create uncertainties for our customers regarding product overlap and new product
development following the merger. These uncertainties may cause our customers to
delay purchasing our products and services, which would impair our revenues and
operating results.
MANAGEMENT OF OPERATIONS
We have a history of rapid growth through new hires and through the
acquisition of companies. Our rapid growth has placed a significant strain on
our managerial, operational, and financial resources. In December 1997 and
January 1998, we implemented certain restructuring actions aimed at reducing our
cost structure, improving our competitiveness, and restoring sustainable
profitability. The restructuring plan resulted from decreased revenue associated
with certain of our products and our adoption of a new strategic direction. The
restructuring included reduction in workforce of approximately 400 employees,
closure of certain facilities, write-down of operating assets to be disposed of,
and payments on canceled third-party royalty contracts. As our business
operations evolve, we will continue to restructure as necessary. There are
several risks inherent in any efforts to recognize significant cost savings by
restructuring, including the risk that cost-cutting initiatives will impair our
ability to innovate and remain competitive in the software industry. Any future
restructuring actions may not achieve the desired results, additional
restructuring actions may be necessary in the future, and our systems,
procedures, or controls may not be adequate to support our current or future
operations. Failure to effectively manage restructurings in a timely and
cost-effective manner would impair our finances and business prospects.
Our future operating results will depend on management's ability to forecast
revenues and control expenses, improve our operational and financial systems,
retain qualified employees, and manage multiple relationships among various
customers, suppliers, resellers, licensors, strategic partners, and other third
parties. Our systems, procedures, and controls may not be adequate to support
our current or future operations. Although we do not currently contemplate
significantly expanding our headcount in the foreseeable future, we may initiate
growth, through acquisitions or otherwise, to respond to market conditions and
exploit the market opportunity for our products and services. Such renewed
growth could place a significant strain on our managerial, operational, and
financial resources. Further, our future operating results will also depend on
our ability to manage our expanding product line, restructure our sales and
marketing organizations, implement and manage new distribution channels to
penetrate different and broader markets, including the market for enterprise
software, and expand our support organization commensurate with the increasing
base of our installed products. Our failure to manage current operations and any
future growth effectively or to rapidly and effectively take advantage of a
market opportunity for our products and services would impair our finances and
business prospects.
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RISKS OF ACQUISITIONS AND INVESTMENTS
In December 1998, we completed a business combination with AtWeb and in
October 1998, we purchased the technology assets of Newhoo. As part of our
overall strategy, we may enter into further business combinations, make
significant investments in complementary companies, products, and technologies,
and enter into joint ventures and strategic alliances with other companies. Any
such transactions would be accompanied by the risks commonly encountered in such
transactions. In particular, business combinations with high-technology
companies include such risks as the difficulty of assimilating the operations
and personnel of the combined companies, the potential disruption of our ongoing
business, the inability to retain key technical and managerial personnel, the
inability of management to maximize our financial and strategic position through
the successful integration of acquired businesses, the incurring of additional
expenses associated with amortization of acquired intangible assets, the
difficulty of maintaining uniform standards, controls, procedures, and policies,
and harm to relationships with employees and customers as a result of any
integration of new personnel. We may not overcome these risks or any other
problems encountered in connection with such business combinations, investments,
and joint ventures, and such transactions may therefore impair our finances and
business prospects.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
Except as noted below, we are not currently subject to direct government
regulation other than the laws and the regulations that generally apply to
publicly owned companies and to businesses generally. Few laws or regulations
specifically apply to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is likely that a number of
laws and regulations may be adopted with respect to the Internet, covering
certain content (such as pornography and gaming) and issues such as user privacy
and expression, pricing of products and services, e-commerce liability,
taxation, advertising, intellectual property rights, information security, and
the convergence of traditional communication services with Internet
communications. Other countries and various political organizations are likely
to favor more and different regulation than what has been proposed in the U.S.,
thus further increasing the complexity of regulation. The adoption of such laws
or regulations, possibly including the taxation of Internet services and
transactions, may decrease the growth of intranets, extranets, and the Internet,
which could in turn decrease the demand for our products, increase our cost of
doing business, or otherwise impair our finances and business prospects. See
"--Enterprise Segment--Developing Market; Uncertain Rate of Acceptance of
Netscape's Products; Uncertain Adoption of Intranets, Extranets, and the
Internet as a Medium of Communication, Collaboration, and Commerce." In
addition, it is not clear how existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, taxation, libel,
and personal privacy apply to the Internet. The vast majority of such laws were
adopted prior to the advent of the Internet and related technologies and, as a
result, do not contemplate or address the unique issues of the Internet and
related technologies. Changes to such laws intended to address these issues,
including some recently proposed changes, could create uncertainty in the
marketplace that could reduce demand for our products, increase our cost of
doing business, including as a result of costs of litigation or increased
product development costs, or otherwise impair our finances or business
prospects.
The encryption technology contained in our products is subject to U.S.
export controls. Such export controls, either in their current form or as may be
subsequently revised, may limit our ability to distribute certain encrypted
products outside of the United States. While we take precautions against
unlawful exportation, such exportation may inadvertently occur from time to
time, subjecting us to potential liability and adverse consequences. In
addition, future legislation or regulation may further limit levels of
encryption or authentication technology that can be included in our products.
For example, recent proposals at the federal level call for domestic controls on
encryption products and related services. Such new regulation would alter the
design, production, distribution, and use of our products, and could reduce
demand for our products as well as general demand for Internet software and for
electronic commerce
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products and services. See "--Enterprise Segment--Developing Market; Uncertain
Acceptance of Netscape's Products; Uncertain Rate of Adoption of Intranets,
Extranets, and the Internet as a Medium of Communication, Collaboration, and
Commerce." In addition, foreign governments have import and domestic use laws
and regulations already in place that may restrict the type of encryption
software that is permitted for distribution in their countries. As a consequence
of such export, import, and use controls, we must develop and market both
domestic and international versions of our products that contain encryption
software, with the version for the U.S. market having a stronger level of
encryption than the version for export to international markets. Along with the
additional costs associated with the duplication of effort and expense in
research, development, manufacturing, and distribution of different versions of
products, we may lose sales from customers who wish to have the same level of
encryption security throughout their organization. We may also encounter
difficulties competing with non-U.S. producers of strong encryption products,
who may both import their products into the United States and sell products
overseas.
Additionally, some countries have enacted import laws requiring the
alteration of our products in order for the government of such countries to
maintain a level of control over the content of products entering such
countries. In addition to the costs we incur in complying with varying
international regulations, alteration of our products may cause such products to
perform at a level below their intended level and thereby subject us to
potential liability and other adverse consequences. Any such export
restrictions, import restrictions, legislation, regulation, or unlawful
exportation or importation could impair our finances or business prospects.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY; RISKS ASSOCIATED WITH LICENSED
THIRD PARTY TECHNOLOGY
See "Proprietary Rights."
DEPENDENCE ON KEY PERSONNEL
Our performance depends substantially on the performance of our executive
officers and key employees. Given our relatively early stage of development, we
also depend on our ability to retain and motivate highly qualified personnel,
especially our management and highly skilled development teams. We do not have
"key person" life insurance policies on any of our employees. The loss of the
services of any of our executive officers or other key employees could impair
our finances or business prospects.
Our future success also depends on our continuing ability to identify, hire,
train, and retain other highly qualified technical and managerial personnel,
especially software developers. Competition for such personnel is intense, and
we may not be able to attract, assimilate, or retain other highly qualified
technical and managerial personnel in the future. The inability to attract and
retain the necessary technical and managerial personnel could impair our
finances or business prospects.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Within our Enterprise software operating segment, we are currently
incurring, and expect to continue to incur, costs in developing, marketing, and
distributing a variety of localized versions of our products. If international
revenues are not adequate to offset the expense of maintaining foreign
operations and the costs of localizing our products, our finances and business
prospects could be impaired. For example, in the ten months ended October 31,
1998, we experienced a decline in international revenue growth rates in part due
to the economic crisis in the Asia/Pacific region. We may not be able to
successfully market, sell, and deliver our products in foreign markets. In
addition to the uncertainty as to our ability to maintain and generate new
revenues from our foreign operations and expand our international presence,
there are certain risks inherent in doing business on an international level,
such as unexpected changes in regulatory requirements, export and import
restrictions, export and import controls relating to encryption technology,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, longer payment
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cycles, problems in collecting accounts receivable, political instability,
fluctuations in currency exchange rates, software piracy, seasonal reductions in
business activity during the summer months in Europe and elsewhere, and
potentially adverse tax consequences, which could adversely impact the success
of our international operations. One or more of such factors may impair our
future international operations and our overall finances and business prospects.
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 are 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.
We have developed a phased Year 2000 readiness plan for the current versions
of our products. The plan includes development of corporate awareness,
assessment, implementation (including remediation, upgrading, and replacement of
certain product versions), validation testing, and contingency planning. We
continue to respond to customer concerns about prior versions of our products on
a case-by-case basis.
We have largely completed all phases of our plan, except for contingency
planning, with respect to the current versions of all of our products. We have
made Year 2000 readiness disclosures stating that the current versions of all of
the products that we currently ship 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 our products are also Year 2000
Compliant. These disclosures note that, in some cases, our products require a
patch we provide with the product in order to be Year 2000 Compliant. We, our
customers, and vendors continue to test our software for compliance and may find
additional errors or defects associated with Year 2000 date functions.
We have defined "Year 2000 Compliant" to mean that the product will
accurately receive, process, and provide date data from, into, and between the
twentieth and twenty-first centuries, including the years 1999 and 2000, and
make leap year calculations, provided that all other products (whether hardware,
software, or firmware) used in or in combination with the product properly
exchange data with it. We have not tested our products on all platforms or all
versions of operating systems that we currently support and have advised our
customers to verify that their platforms and operating systems support the
transition to the year 2000.
We have not specifically tested software obtained from third parties
(licensed software, shareware, and freeware) that is incorporated into our
products, but we are seeking assurances from our vendors that licensed software
is Year 2000 Compliant. Despite our testing, testing by our current and
potential customers, and whatever assurances we may receive from developers of
products incorporated into our products, our products may contain undetected
errors or defects associated with Year 2000 date functions. Current versions of
Netscape ECXpert, Netscape BuyerXpert, Netscape SellerXpert, and Netscape
MerchantXpert include third-party Java components that may not be Year 2000
Compliant in all respects. Netscape provides no warranty to our customers with
respect to the Year 2000 compliance of third-party components embedded in our
software. Also, certain prior versions of our products are not fully Year 2000
Compliant, and we are working to address these issues. Known or unknown errors
or defects in our products could result in delay or loss of revenue, diversion
of development resources, damage to our reputation, or increased service and
warranty costs, any of which could impair our finances or business prospects.
Some commentators have predicted significant litigation regarding Year 2000
compliance issues, and we are aware of such lawsuits against other software
vendors. Because of the unprecedented nature of such litigation, it is uncertain
whether or to what extent we may be affected by it.
Our internal systems include both our information technology ("IT") and
non-IT systems. We have completed a baseline assessment of our material internal
IT systems (including both our own software
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products and third-party software and hardware technology) and our non-IT
systems (such as our security system, building equipment, and embedded
microcontrollers) and are beginning implementation (including remediation,
upgrading, and replacement). We have retained an outside contractor to provide
assistance with validation testing and contingency planning. We expect to
complete all project phases by August 31, 1999. To the extent that we are not
able to test the technology provided by third-party vendors, we are seeking
assurances from such vendors that their systems are Year 2000 compliant. Our
worst case scenario would involve the unavailability of our major internal
systems to our employees and the unavailability of Netcenter to its users. In
the event of this worst case scenario, we may incur expenses to repair our
systems, face interruptions in the work of our employees, lose advertising
revenue, not be able to deliver minimum guaranteed levels of traffic, not be
able to deliver downloads of our browser product, and suffer damage to our
reputation. We estimate total costs for all internal systems project phases to
be approximately $8 million, with approximately $5 million of this representing
our internal cost of the work our own employees have done on this project. Costs
to be capitalized in connection with purchased computer hardware are expected to
approximate $1.5 million, with the remaining costs to be expensed when incurred.
In addition to the specific problems and costs we've described, we may
experience material unanticipated problems and costs caused by undetected errors
or defects in the technology used in our internal IT and non-IT systems.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. As is the case with other similarly situated software
companies, if our 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, our finances or business prospects could be impaired.
We have funded our Year 2000 plan from operating cash flows. We estimate
that costs incurred through October 31, 1998 in connection with Year 2000
compliance projects have not been material. We will incur additional amounts
related to the Year 2000 plan for administrative personnel to manage the
project, outside contractor assistance, technical support for our products,
product engineering and customer satisfaction. We may experience material
problems and costs with Year 2000 compliance that could impair our finances and
business prospects.
We have not yet fully developed a comprehensive contingency plan to address
situations that may result if we are unable to achieve Year 2000 readiness of
our critical operations. The cost of developing and implementing such a plan may
itself be material. Finally, we are 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 agreed to adopt the
European Currency Unit (the "Euro") as the common legal currency beginning
January 1, 1999. On that same date they established fixed conversion rates
between their existing sovereign currencies and the Euro. Our e-commerce
application products are not currently "Euro Compliant." We plan to release Euro
Compliant versions of our e-commerce application products in the first calendar
quarter of 1999 (MerchantXpert and SellerXpert) and the second calendar quarter
of 1999 (BuyerXpert). Delays in developing these new Euro Compliant versions
could result in delay or loss of revenue, damage to our reputation, or increased
service and warranty costs, any of which could impair our finances or business
prospects. We have defined "Euro Compliant" to mean that our product is capable
of processing and reporting any data denominated in the Euro in the same manner
as processing and reporting data denominated in the national currency units that
comprise the currencies of those member states that adopt the Euro (the "NCUs")
without any loss of
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functionality or interoperability or degradation in performance of volume
capacity and, without prejudice to the generality of the foregoing, has the
ability to provide all the following functions:
(1) Conversion of NCUs to Euro (and vice versa) at the Fixed Conversion Rates
and conversion of NCUs to NCUs using the Fixed Conversion Rates between the
relevant NCUs and the Euro and, in each case, rounding of such amounts in
accordance with applicable laws and regulations from time to time. "Fixed
Conversion Rates" means the fixed Euro/NCU conversion rates established by
the Council of the European Union pursuant to Article 109(L) of the Treaty
of Rome of 25th March 1957, as amended by the Single European Act 1986 and
the Maastricht Treaty, establishing the European Community, as amended from
time to time.
(2) Rounding of amounts denominated in Euro to the nearest "Euro cent" and of
amounts denominated in NCUs to the nearest sub-unit applicable to the
relevant NCUs and use in data of the Euro symbol;
(3) Making and receiving payment of amounts denominated in Euro and in different
denominations of the Euro and/or in NCUs (including Euro cents and NCUs);
and
(4) All functions and reporting, including regulatory reporting, in both Euro
and NCUs.
ANTI-TAKEOVER DEFENSE PROVISIONS
In November 1998, we entered into a Preferred Shares Rights Plan. See Item
5(c) of this 10-K/A. The Plan has the anti-takeover effect of causing
substantial dilution to a person or group (other than AOL) that attempts to
acquire us on terms not approved by our board of directors. These anti-takeover
provisions could limit the price that certain investors might be willing to pay
in the future for shares of Netscape common stock.
ENTERPRISE SEGMENT
The Enterprise segment of our business faces the following risks, which have
the potential to impair our finances and business prospects. Our Enterprise
segment includes server software, e-commerce application software, technical
support, professional services, and training.
COMPETITION
See "Enterprise Software and Services--Competition."
NEED TO EXECUTE DIFFICULT TYPE OF SALE
We sell enterprise software products and services primarily to large
companies, institutions, and government entities. These types of customers
generally commit significant resources to an evaluation of enterprise software
and require the vendor to expend substantial time, effort, and money educating
them about the value of the vendor's solution. As a result, sales to these types
of customers generally require an extensive sales effort throughout the
organization, and often require final approval by an executive officer or senior
level employee. We have experienced and will likely continue to experience
delays following initial contact with a prospective customer and expend
substantial funds and management effort in connection with these sales. In order
to accomplish these difficult and lengthy sales, we have restructured our direct
sales force, and must extensively train and effectively manage our sales
personnel, invest greater resources in the sales effort, and educate the
indirect channels. Additionally, we will need to add trained technical personnel
to help us implement and support solutions for our enterprise software
customers. Sales and technical personnel with the sufficient level of expertise
and experience for these positions are in great demand, and we may not be able
to hire and retain a sufficient number of qualified personnel for these
purposes. Failure to do so or failure to complete these difficult sales could
impair our finances or business prospects.
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FLUCTUATIONS IN OPERATING RESULTS FROM ENTERPRISE SOFTWARE SALES
Revenues from sales of Netscape Application Server, the Netscape
CommerceXpert product family, and our other enterprise software products are
expected to continue to fluctuate substantially from quarter to quarter as a
result of the timing of significant orders and sales. Moreover, because the
procurement process of our customers generally takes a significant amount of
time from initial contact to order placement and may involve competing capital
budget considerations, sales of our enterprise software products will continue
to be difficult to predict. The loss or deferral of one or more significant
sales could have a material adverse effect on quarterly results of operations,
particularly if there are significant sales and marketing expenses associated
with the deferred sale. While we intend to pursue multiple sales opportunities
with respect to these enterprise software products, we may experience
fluctuations in revenue. See "--Netscape--Potential Fluctuations in Quarterly
Results."
POSSIBLE PRODUCT DEFECTS
Enterprise software products as complex as Netscape Application Server, the
Netscape CommerceXpert product family, and our other enterprise software
products frequently contain errors or bugs. Although we conduct extensive
product testing, we have in the past released products that contain such
defects. Despite our testing and testing by current and potential customers,
errors or bugs may be discovered after Netscape Application Server, the Netscape
CommerceXpert product family, and Netscape's other enterprise software products
are installed and used by customers, which could result in delay or loss of
revenue, delay in market acceptance, diversion of development resources, damage
to our reputation, or increased service and warranty costs, any of which could
impair our finances or business prospects.
PRODUCTS USED IN CRITICAL BUSINESS FUNCTIONS OF OUR CUSTOMERS
We market and sell our enterprise software for use in critical business
functions of our customers where nearly constant availability is required. These
deployments of our products may expose us to heightened liability for problems
caused by any unavailability of our products. We seek to disclaim such
liability.
PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
We have historically derived the majority of our total revenues from
licensing our software and selling associated services. Accordingly, broad
acceptance of our software products and services by customers is critical to our
future success. Our future success will depend on our ability to design,
develop, test, and support new software products and enhancements that meet
changing customer needs and respond to technological developments and emerging
industry standards on a timely and cost-effective basis. Enterprise software
products as complex as Netscape Application Server and the Netscape
CommerceXpert product family require longer product development cycles. We may
not successfully identify new product opportunities and develop and bring new
products to market in a timely and cost-effective manner. Further, products or
technologies developed by others may render our products or technologies
obsolete or noncompetitive. We have addressed the need to develop new products
and enhancements through our internal development efforts and through
acquisitions of other companies and the licensing of third-party technology. See
"Recent Developments--Business Combinations--AtWeb." Enterprise software
products as complex as Netscape Application Server and the Netscape
CommerceXpert product family typically involve higher aggregate royalty payments
for embedded technology. Acquiring other companies and licensing third-party
technology involve numerous risks. See "--Netscape--Risks of Acquisitions and
Investments" and "Proprietary Rights." The failure of our new product
development efforts could impair our finances or business prospects.
Our current products are designed around certain standards and current and
future sales of our products will partly depend on widespread adoption of such
standards by enterprises, consumers, developers, and other software providers.
Widespread adoption of a standard not supported by us could impair our finances
or business prospects.
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DEVELOPING MARKET; UNCERTAIN ACCEPTANCE OF NETSCAPE'S PRODUCTS; UNCERTAIN RATE
OF ADOPTION OF INTRANETS, EXTRANETS, AND THE INTERNET AS A MEDIUM OF
COMMUNICATION, COLLABORATION, AND COMMERCE
The market for our enterprise software products and services is relatively
new, is rapidly evolving and is characterized by an increasing number of market
entrants who have introduced or developed products and services for
communication, collaboration, and commerce over intranets, extranets, and the
Internet. It is difficult to predict the future growth rate and size of this
market. The intranet, extranet, and Internet software industry is relatively
young and has a limited number of proven products. While we believe that our
enterprise software products offer significant advantages for communication,
collaboration, and commerce over intranets, extranets, and the Internet,
customers might not buy our enterprise software products, which could impair our
finances and business prospects.
Moreover, continued market acceptance of our enterprise software products
substantially depends on the rate of adoption of intranets, extranets, and the
Internet for commerce, collaboration, and communications. This adoption
generally requires the acceptance of a new way of conducting business and
exchanging information. Enterprises that have already invested substantial
resources in other means of conducting commerce, collaboration, and
communication may be particularly reluctant or slow to adopt a new strategy that
may make some or all of their existing information systems technology, software,
and systems obsolete. In addition, individual PC users in businesses or at home
may be slow to adopt intranets, extranets, or the Internet for online commerce,
collaboration, or communication. Moreover, critical issues concerning the use of
intranets, extranets, and the Internet (including security, reliability, cost,
ease of deployment and administration, and quality of service) remain unresolved
and may impact the growth of intranet, extranet, and Internet use. Delays in the
rate of adoption of intranets, extranets, and the Internet for commerce,
collaboration, and communications could impair our finances and business
prospects.
EVOLVING DISTRIBUTION CHANNELS
We sell our enterprise products directly to end-users and certain of our
enterprise products via the Internet. In addition, we offer certain of our
products indirectly through OEMs, VARs, and software retailers. We expect that
any material increase in sales through resellers as a percentage of total
revenues, especially any increase in the percentage of sales through OEMs, VARs,
and systems integrators, will adversely affect our average selling prices and
gross margins due to the lower unit prices that are typically charged when
selling through indirect channels. Other potential adverse consequences of our
focus on developing sales through resellers are the diversion of management
resources and attention from direct sales, which could adversely affect direct
sales revenue and sales of Netscape Application Server, the Netscape
CommerceXpert product family, and our other enterprise software products, and
continued revenue fluctuation of retail revenue, which tends to fluctuate with
product releases and may be subject to seasonality. Moreover, we may not be able
to continue to attract and retain resellers able to effectively market our
products, particularly resellers of enterprise software products, such as
Netscape Application Server, the Netscape CommerceXpert product family, and our
other enterprise software products, and such resellers may not be qualified to
provide timely and cost-effective customer support and service. We also may not
be able to manage conflicts among our resellers. In addition, our agreements
with resellers typically do not restrict resellers from distributing competing
products, and in many cases may be terminated by either party without cause.
Further, in some cases we have granted exclusive distribution rights that are
limited by territory and in duration. Consequently, we may be adversely affected
should any reseller fail to adequately penetrate its market segment. Our
inability to recruit, manage, educate, or retain important resellers,
particularly resellers of enterprise software products, such as Netscape
Application Server, the Netscape CommerceXpert product family, and our other
enterprise software products, or their inability to penetrate their respective
market segments, could impair our finances or business prospects.
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We will continue to distribute certain of our enterprise software products
electronically through the Internet. Distributing our enterprise software
products through the Internet makes our enterprise software more susceptible
than other software to unauthorized copying and use. We have historically
allowed and currently intend to continue to allow potential customers to
electronically download certain of our enterprise software products for a free
evaluation period. Upon expiration of the evaluation period, we may not be able
to collect payment from users that retain a copy of our software. In addition,
by distributing certain of our products for free evaluation over the Internet,
we may have reduced the future demand for our products. If, as a result of
changing legal interpretations of liability for unauthorized use of our software
or otherwise, users were to become less sensitive to avoiding copyright
infringement, our finances and business prospects would be impaired.
SECURITY RISKS AND SYSTEM DISRUPTIONS; LACK OF PRODUCT LIABILITY INSURANCE FOR
PRODUCTS INCORPORATING SECURITY FEATURES
We have included in our products security protocols that operate in
conjunction with encryption and authentication technology licensed from RSA Data
Security Inc. Despite the existence of these technologies, our products and the
technology from other software companies incorporated into our products, like
most software, are vulnerable to break-ins and similar disruptive problems
caused by Internet users. In the last three years, there have been several
instances in which weaknesses or vulnerabilities in our security implementation
were discovered. In each instance in which a vulnerability or weakness was
discovered and verified in our security implementation, we attempted to address
the vulnerability or weakness by making the various design changes in our
security and reviewing those changes internally and with a broad set of outside
industry experts. The design changes appear to have resolved most known security
vulnerabilities and weaknesses in our products. Moreover, our products may be
susceptible to other security flaws, whether in our products or technologies, or
in other technology incorporated into our products.
Despite our attempts to address the vulnerabilities and weaknesses in our
security implementation, our products and licensed technology incorporated in
such products may continue to have security flaws that make them vulnerable to
break-ins and similar disruptive problems. Further, as is generally known,
weaknesses in the environment in which our products are used may compromise the
security of confidential electronic information exchanges across intranets,
extranets, and the Internet. This includes, but is not limited to, the security
of the physical network, the machines used for the information transfer, and the
operating system on which our products are running. Any such flaws in intranets,
extranets, the Internet, or the end-user environment or weaknesses or
vulnerabilities in our products or incorporated technology would jeopardize the
security of confidential information sent over intranets, extranets, and the
Internet using our software, such as credit card numbers and email, and might
enable others to dismantle the special security techniques meant to protect such
transactions.
Moreover, the security and privacy concerns of existing and potential
customers, as well as concerns related to computer viruses or other security
problems, may inhibit the growth and commercial development of intranets,
extranets, and the Internet, and our customer base and revenues. We attempt to
limit our liability to our customers, including liability arising from failure
of the security implementation contained in our products, through contractual
provisions. However, such limitations may not be available in some cases or
effective. We currently do not have product liability insurance to protect
against risks associated with break-ins or disruptions. Any security-related
problems in our products or incorporated technology could require us to expend
significant capital and resources to alleviate or correct such problems, result
in lawsuits against us, result in loss of customers, or interrupt, delay, or
stop product shipments to our customers, any of which could impair our finances
or business prospects.
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NETCENTER SEGMENT
The Netcenter segment of our business faces the following risks, which have
the potential to impair our finances and business prospects. Our Netcenter
segment includes both our Internet portal, Netcenter, and our client software.
FREE CLIENT SOFTWARE
In January 1998, we launched a program to distribute Netscape Communicator
Standard Edition and Netscape Navigator Stand-Alone Edition for free. Although
we believe that the free client distribution program will increase the number of
new users of our client software, there are risks associated with providing our
client software for free. For one, these actions virtually eliminated revenue
from stand-alone client software in the ten months ended October 31, 1998, which
has increased the importance of growth in other areas of our business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Revenues." Additionally, as part of our software distribution
program, qualified partners are able to customize certain aspects of Netscape
Communicator, including removing or changing default URLs in Netscape
Communicator, which currently drive user traffic to Netcenter. If such qualified
partners remove or change the defaults to non-Netscape URLs, Netcenter may
experience a reduced amount of user traffic and such reduction in traffic could
impair our finances or business prospects. See "--Reliance on Website Revenues;
Uncertain Adoption of Web as an Advertising Medium."
ROYALTY-FREE SOURCE CODE
In 1998, we made our client source code publicly available over the Internet
for licensing on a royalty-free basis and will make subsequently developed
source code available on the same terms. Through this action, we sought to
accelerate development and free distribution of future versions of Netscape
Communicator to individuals and business customers. Programmers not employed by
us contribute to the development of the public source code base, which we expect
will continue to be the basis of our branded client products. We incur various
expenses administering the public source code base and reviewing and performing
quality-assurance tests on proposed enhancements. Our decision to make our
source code available for royalty-free licensing is, however, unparalleled in
the revenue-producing software community, and thus involves risks that cannot be
fully known at this time. For example, only a limited number of developers may
design enhancements to the source code, developers may not contribute such
enhancements to the public source code base, proposed enhancements may not meet
our quality specifications, proposed enhancements may not address our design
goals for Netscape Communicator, the free source code may lead to a
proliferation of incompatible or competitive products (potentially creating
brand and market confusion), or our competitors may attempt to incorporate
certain competitive design advantages of Netscape Communicator into their own
products. If any of the foregoing were to occur, the demand for Netscape
Communicator may decrease, which could decrease traffic to Netcenter, thereby
impairing our finances or business prospects.
We have initiated source code distribution under a license agreement that
allows source code modification and redistribution and provides for free
availability of source code versions. As we accept code enhancements from the
development community and ultimately incorporate such enhancements into Netscape
Communicator, there is a risk that such enhancements will infringe the
proprietary rights of third parties. Although our license requires contributing
developers to disclose known third-party claims, intellectual property claims
may still be made against us, for which we may not be indemnified. See
"Proprietary Rights." Additionally, while we do not believe that our products
infringe the proprietary rights of any third parties, disclosure of the source
code may provide a useful discovery tool for individuals or organizations
interested in initiating an intellectual property claim against us. Irrespective
of the merits of such claims, we could spend significant time and money
defending such claims, which could impair our finances or business prospects.
See "Proprietary Rights."
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INTEGRATION OF CLIENT PRODUCT WITH NETCENTER
We will continue to add new features, such as Smart Browsing, to our client
product to make it more useful to Netcenter members and direct traffic to
Netcenter. See "Netcenter--Client Software." Because we receive no revenue from
our client product, our finances and business prospects will be impaired if we
expend resources on developing and promoting these types of features, but
receive no increase in traffic to Netcenter.
COMPETITION
See "Netcenter--Competition."
RELIANCE ON WEBSITE REVENUES; UNCERTAIN ADOPTION OF WEB AS AN ADVERTISING MEDIUM
Netcenter offers a variety of products and services, including access to
news and information, search and navigation services, opportunities for
e-commerce, directories of interesting sites on the Internet, our software,
third-party software, a variety of product and technical support information,
and current news about us and our products. See "Netcenter--Netcenter Services."
Our ability to continue to generate Web-based revenues through Netcenter will
depend upon, among other things:
- companies' acceptance of the Web as an effective medium to market their
products and services;
- advertisers' acceptance of the Web as an effective and sustainable
advertising medium;
- the development of a large base of users of Netcenter services possessing
demographic characteristics attractive to companies and advertisers;
- our ability to continually offer compelling content and new services
(which achieve market acceptance);
- our ability to attract the average Web consumer and draw high amounts of
traffic;
- our ability to develop and sustain relationships with leading content and
service providers; and
- our ability to develop and deliver an effective Web-based service delivery
system.
Certain advertising filter software programs are available that limit or
remove advertising from an Internet user's desktop. Such software, if generally
adopted by users, may have a material adverse effect upon the viability of
Web-based services on the Internet. As a result of these factors, we may not
sustain or increase our current Web-based service revenues. Any of these factors
could impair our finances or business prospects. In addition, there is intense
competition in the sale of Web-based services on the Internet, including
competition from Internet online services as well as other high-traffic
Websites. See "Netcenter--Competition."
RISKS RELATED TO CO-BRANDED SERVICES AND CONTENT AND SPONSORSHIPS
We enter into, and derive a significant portion of revenues from,
sponsorship arrangements with third parties to provide sponsored services and
placements on Netcenter in addition to traditional banner advertising. In
connection with these arrangements, we generally receive sponsorship fees, and
we may receive a portion of the transaction revenues received by sponsors from
users originated through Netcenter. These arrangements expose us to potentially
significant financial risks, including the risk that we fail to deliver required
minimum levels of user impressions (in which case these agreements are typically
subject to termination), the risk that users do not generate expected levels of
revenue subject to revenue sharing, and the risk that sponsors do not renew the
agreements at the end of their term. These arrangements may also require us to
integrate our sponsors' content with our services, which can require the
dedication of resources and significant programming and design efforts. We may
not be able to attract additional sponsors or renew existing sponsorship
arrangements when they expire. In addition, we have
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granted exclusivity provisions to certain of our sponsors, and may in the future
grant additional exclusivity provisions. Such exclusivity provisions may have
the effect of preventing us, for the duration of such exclusivity arrangements,
from accepting advertising or sponsorship arrangements within a particular
subject matter with respect to portions of a channel or service, an entire
channel, an entire service, or over all of Netcenter. Our inability to enter
into further sponsorship or advertising arrangements as a result of our
exclusivity arrangements could impair our finances and business prospects.
RISKS ASSOCIATED WITH BANNER ADVERTISING
We derive revenues from the sale of banner advertisements on Netcenter. A
majority of our customers purchasing banner advertisements do so on a short-term
basis, and many of these customers may terminate their advertising commitments
at any time without penalty. These customers may not continue or increase their
level of advertising on Netcenter and these customers may move their advertising
to competing Web sites or to other traditional media. Consequently, we may not
be successful in maintaining or increasing the amount of banner advertising
revenue from Netcenter, and our failure to do so may impair our finances and
business prospects.
DEPENDENCE ON THIRD-PARTY RELATIONSHIPS
We depend and expect to continue to depend on a number of third parties for
user traffic and to provide content on Netcenter, making it more attractive to
advertisers and consumers. These relationships include agreements with ISPs and
online service providers ("OSPs") and arrangements for providing content for
Netcenter such as stock quotes and news stories. The termination of, or our
failure to renew on reasonable terms, our relationship with an ISP, OSP or key
content provider (such as Excite) could significantly reduce traffic on
Netcenter or otherwise adversely affect our sponsorship and advertising
revenues, which would also impair our finances and business prospects. We could
also incur expenses relating to the development of new content as a result of a
new agreement with a third party. These expenses could impair our finances and
business prospects.
We also generally depend on other Web site operators who provide links to
Netcenter. Most of these arrangements do not require future minimum commitments
to provide access or links to Netcenter or to provide content to us, are often
not exclusive, and are often short-term or may be terminated at the convenience
of the other party. There can be no assurance that these third parties regard
their relationships with us as important to their own respective businesses and
operations, that they will not reassess their commitments to Netcenter at any
time in the future, or that they will not develop their own competitive services
or products. Further, there can be no assurance that the services of those
companies that provide access to Netcenter will achieve market acceptance or
commercial success, and therefore there can be no assurance that any significant
amount of traffic will be directed to Netcenter as a result of these third-party
relationships. Accordingly, our existing relationships with other Web site
operators may not result in sustained business relationships, successful service
offerings, generation of significant traffic on Netcenter, or significant
revenues for us.
PRIVACY CONCERNS
A number of countries, including the United States, are considering
potential legislation limiting the collection, use, and transfer of personally
identifiable information. A European Union Directive regarding such privacy
issues carried a deadline of January 1, 1999 for member countries to enact
implementing legislation. It is uncertain what regulations will be implemented
in various countries and what effects they will have. We are currently changing
Netcenter data management practices in ways that will bring them closer to
conforming to the practices described in the European Union Directive. We
currently maintain data management practices that are consistent with those of
exclusively internet companies. Depending on what regulations are implemented in
various countries, we could face potential sanctions in certain countries for
noncompliance, incur expenses in complying with the new rules, be subject to
government or
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private enforcement actions, or have less marketing data to sell or share with
our customers, any of which could impair our finances or business prospects.
For example, our services use "cookies" to deliver targeted advertising,
help compile demographic information about users, and limit the frequency with
which an ad is shown to the user. Cookies are bits of information keyed to a
specific drive and passed to a Web site server through the user's browser
software. Cookies are placed on the user's hard drive, but can be removed by the
user at any time. In addition, our browser allows a user to prevent cookies from
being stored on the user's hard drive. Any reduction or limitation by users in
the use of cookies due to privacy or other concerns could limit the
effectiveness of our ad targeting, which could result in our experiencing lower
cost per thousand ("CPM") rates for our advertisements, which could impair our
finances and business prospects.
UNCERTAIN MAINTENANCE AND STRENGTHENING OF NETSCAPE'S BRANDS
We believe that maintaining and strengthening our brands is critical to
achieving widespread acceptance of Netcenter, particularly in light of the
competitive nature of the portal market. Promoting and positioning our brands
will depend largely on the success of our marketing efforts and our ability to
provide high quality content and services. In order to promote our brands, we
anticipate increasing our marketing budget or otherwise increasing our financial
commitment to creating and maintaining brand loyalty among our customers. If we
fail to promote and maintain our brands or incur excessive expenses in an
attempt to promote and maintain our brands or if our existing or future
strategic relationships fail to promote our brands or increase brand awareness,
our finances and business prospects could be impaired.
DEPENDENCE ON NEW AND ENHANCED SERVICES
Because the attractiveness of Netcenter to sponsors and advertisers is based
substantially upon the amount of traffic on Netcenter, broad acceptance of
Netcenter by consumers is critical to our future success. We currently offer a
variety of services on Netcenter. See "Netcenter--Netcenter Services." We intend
to introduce additional services in the future. Any new service we launch that
is not favorably received by consumers could adversely affect our reputation or
brand name and could also adversely affect our user traffic. We may experience
difficulties that could delay or prevent the successful design, development,
testing, introduction, or marketing of these services, and our new services and
enhancements may not achieve significant market acceptance. Furthermore, our
existing services and new releases, whether improved versions of existing
services or introductions of entirely new services, may contain undetected
errors that require significant design modifications. Delays in the commencement
of services or errors contained in services and enhancements may result in
customer dissatisfaction and delay or loss of advertising revenues. If we are
unable, for technological or other reasons, to develop and introduce new
services or enhancements in a timely manner, or if our services or enhancements
contain errors or do not achieve a significant degree of market acceptance, our
finances and business prospects could be impaired.
LIABILITY FOR INFORMATION PROVIDED VIA THE WEB
Because materials contained on the Web may be accessed through the services
we offer and be subsequently distributed to others, there is a potential that
some person may make claims against us for defamation, copyright, or trademark
infringement, or other injuries based on the nature and content of such
materials. While U.S. law currently limits liability for aggregation of third
party content, such claims have been brought, and sometimes successfully
pressed, against OSPs and ISPs in the past. In addition, we could be exposed to
liability with respect to the selection of listings that may be accessible
through our services and through content and materials that may be posted by
users in classifieds, bulletin board and chat room services we offer. Such
claims might include, among others, that by providing hypertext links to Web
sites operated by third parties, we are liable for copyright, trademark
infringement, fraud, violation of privacy rights, violation of consumer
protection laws or regulations, violations of other laws, or other wrongful
actions by such third parties through such Web sites. It is possible that if any
information provided through our services (such as stock quotes, analyst
estimates or other trading information)
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contains errors, third parties could make claims against us for losses incurred
in reliance on such information. We offer Web-based email services, which expose
us to potential risks, such as liabilities or claims resulting from unsolicited
email (spamming), lost or misdirected messages, illegal or fraudulent use of
email or interruptions, or delays in email service.
CONSUMER PRODUCT LIABILITY
Certain of our sponsorship relationships may contain provisions under which
we are entitled to receive a share of revenue from the purchase of goods and
services by users of our services. In certain sponsorship relationships, the
third-party vendor of goods and services may use our trademarks in connection
with the transaction. Such arrangements may expose us to additional legal risks
and uncertainties, including, without limitation, potential liabilities to
consumers of such products and services. Although we carry general liability
insurance, our insurance may not cover potential claims of this type, or may not
be adequate to indemnify us for all liability that may be imposed. Any
imposition of liability that is not covered by insurance or is in excess of
insurance coverage could impair our finances and business prospects.
CAPACITY CONSTRAINTS AND SYSTEM FAILURE; ADVERTISING MANAGEMENT SYSTEM
A key element of our strategy is to generate a high volume of traffic to our
products and services. Accordingly, the performance of our products and services
is critical to our reputation, our ability to attract advertisers to Netcenter,
and market acceptance of these products and services. Any system failure that
causes interruptions or that increases response time of our products and
services would result in less traffic to Netcenter and, if sustained or
repeated, would reduce the attractiveness of our products and services to
advertisers, content providers, and users. In addition, an increase in the
volume of page views, member sign-ons, registrations, downloads, and searches
conducted through our products and services could strain the capacity of the
software, hardware, or telecommunications lines we deploy, which could lead to
slower response time or system failures. If traffic to Netcenter continues to
increase, there can be no assurance that our products, services and systems will
be able to scale appropriately. We also depend on ISPs and OSPs to generate a
certain amount of traffic to our products and services, and viewers have
experienced and may in the future experience difficulties due to system or
software failures or incompatibilities not within our control. We also depend on
hardware suppliers for prompt delivery, installation, and service of servers and
other equipment and services used to provide our products and services. Any
disruption in the Internet access and service we or our service providers
provide could impair our finances and business prospects.
The process of managing advertising within large, high-traffic Web sites
such as Netcenter is an increasingly important and complex task. Any extended
failure of, or material difficulties encountered in connection with, our
advertising management system may expose us to "make good" obligations with our
advertising customers, which, by displacing advertising inventory, would reduce
revenue and would impair our finances and business prospects.
In addition, our operation depends upon our ability to maintain and protect
our computer systems, which are mainly located at our principal offices in
Mountain View, California. This system is subject to potential damage from fire,
floods, earthquakes, power loss, telecommunications failures, break-ins, and
similar events. While we have located some redundant systems for our service at
an alternate site, we do not currently have a complete disaster recovery plan in
effect. If our systems in Mountain View failed completely, we could display our
home page, static content, and most channels and permit downloads at
approximately 35% of our normal capacity. Despite our implementation of network
security measures, our servers are also vulnerable to computer viruses,
break-ins, and similar disruptive problems. Computer viruses, break-ins, or
other problems caused by third parties could lead to interruptions, delays in,
or temporary cessation of service to users of our products and services. The
occurrence of any of these events would impair our finances and business
prospects.
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USE OF NETSCAPE OPEN DIRECTORY
In October 1998, we purchased for approximately $1 million all of the
technology assets of Newhoo, Inc., which included relationships with individuals
who volunteer their time to create directories of Web-based content. Directories
create the structure for the channel-based presentation of information and
services to visitors of a website. We intend to continue Newhoo's work with
these volunteer content aggregators to build a content directory, which we have
named Netscape Open Directory. We plan to integrate these directory listings
throughout Netcenter, including in the Smart Browsing results of our browser and
the personalization services of MyNetscape. We cannot influence the behavior of
the volunteers in aggregating and producing content as we would that of our own
employees, and we may face increased liability for aggregation of third-party
content as a result of this project. See "--Liability for Information Provided
Via the Web."
ITEM 2. PROPERTIES.
We lease and occupy various facilities in Mountain View and Sunnyvale,
California, which provide approximately 1.3 million square feet of office space
and contain our principal executive, administrative, engineering, sales,
marketing, customer support, and research and development functions. Such leases
expire at various dates ranging from 1999 through 2013. As a result of the
restructuring in late 1997 and early 1998, we subleased approximately 290,000
square feet of this space to other parties. We believe that existing facilities
and facilities subject to lease will be adequate until 2000 and that sufficient
additional space will be available as needed thereafter. We also have short-term
operating leases for sales offices in North America, Europe, Asia, and
Australia.
In addition, we maintain secure computers that contain our confidential
information and that of our customers. Our operations depend in part upon our
ability to protect our internal network infrastructure against damage from
physical break-ins, natural disasters, operational disruptions, and other
events. Physical break-ins could result in the theft or loss of our confidential
or critical business information and that of our customers. Any such break-in or
damage or failure that causes interruptions in our operations could impair our
finances or business prospects.
ITEM 3. LEGAL PROCEEDINGS.
We are subject to various legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. We have also learned
of several suits related to our proposed merger with America Online. We believe
that these suits lack merit and we intend to defend against them vigorously.
While the outcome of these claims cannot be predicted with certainty, we do not
believe that the outcome of any of these legal matters will impair our finances
or business prospects.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We submitted no matters to a vote of security holders during the fourth
quarter of 1998.
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PART II
ITEM 5. MARKET FOR NETSCAPE'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Netscape common stock is listed on the Nasdaq National Market under the
symbol NSCP. The following table sets forth the high and low sale prices
per share of Netscape common stock for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1997
First Quarter.............................................................. $ 59.25 $ 25.50
Second Quarter............................................................. $ 37.88 $ 25.00
Third Quarter.............................................................. $ 49.50 $ 32.19
Fourth Quarter............................................................. $ 41.50 $ 23.69
FISCAL 1998(1)
January 1998............................................................... $ 24.88 $ 14.88
Second Quarter............................................................. $ 29.19 $ 16.00
Third Quarter.............................................................. $ 44.50 $ 22.13
Fourth Quarter............................................................. $ 34.94 $ 15.50
FISCAL 1999
First Quarter (through January 12, 1999)................................... $ 71.50 $ 22.00
</TABLE>
- ------------------------
(1) The first quarter of 1998 is represented by January 1998 because we did not
have a full fiscal first quarter in 1998 due to our change in fiscal year
end (see ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-- Change in Year End).
As of January 12, 1999, there were 3,630 holders of record of Netscape
common stock. Because many shares of Netscape common stock are held by brokers
and other institutions on behalf of stockholders, we are unable to estimate the
total number of stockholders represented by these record holders. We have never
declared or paid any cash dividends on Netscape common stock. Since we currently
intend to retain all future earnings to finance future growth, we do not
anticipate paying any cash dividends in the foreseeable future.
(b) In connection with the 1998 acquisition of AtWeb, Inc. ("AtWeb"), we
issued 2,685,970 shares of Netscape common stock (the "Acquisition
Shares") to the existing shareholders of AtWeb on December 31, 1998, in
exchange for all of the outstanding shares of capital stock of AtWeb.
The Acquisition Shares were issued pursuant to an exemption from the
registration requirements of the Securities Act, afforded by Section 4(2) of the
Securities Act. The shareholders of AtWeb had access to all relevant information
regarding Netscape necessary to evaluate the investment and each shareholder
represented that the Acquisition Shares were being acquired for investment
intent. All AtWeb shareholders were represented by a sophisticated purchasers'
representative. There was no general solicitation or advertising involved in the
acquisition, and Netscape used reasonable care to assure that the shareholders
of AtWeb were not underwriters.
(c) In November 1998, we adopted a Preferred Shares Purchase Rights Plan.
The Plan provides for the distribution of a preferred stock purchase
Right as a dividend for each share of our common stock held of record at
the close of business on December 11, 1998. The Rights are not currently
exercisable. Under certain conditions involving an acquisition or
proposed acquisition by any person or group other than AOL of 15% or more
of our common stock, the Rights permit the holders (other than the 15%
holder) to purchase our common stock at a 50% discount from the
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market price at that time, upon payment of an exercise price of $225.00
per Right. Before the acquiror acquires 50% of our stock, a majority of
our Board of Directors may exchange the Rights (other than the acquiror's
Rights), in whole or in part, for shares of our common stock at an
exchange ratio of one Right per share of common stock. In addition, in
the event of certain business combinations other than the AOL merger, the
Rights permit the purchase of the common stock of the acquirer at a 50%
discount from the market price at that time. Under certain conditions,
the Rights may be redeemed by our Board of Directors in whole, but not in
part, at a price of $0.001 per Right. The Rights have no voting
privileges and are attached to and automatically trade with our common
stock. The Rights expire on the earlier of November 23, 2008, the
exchange or redemption of the Rights, or the effectiveness of the AOL
merger.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
--------- --------- ---------
TEN MONTHS
ENDED OCT
31, 1998 1997
----------- ---------
(RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total revenues........................... $ 447,809 $ 533,851 $ 346,294 $ 85,387 $ 4,138
Operating income (loss).................. (74,936) (55,730) 20,488 (10,709) (14,067)
Net income (loss)........................ (60,087) (38,959) 19,517 (6,613) (13,830)
Basic net income (loss) per share........ (0.63) (0.45) 0.27 (0.16) (2.84)
Diluted net income (loss) per share...... (0.63) (0.45) 0.21 (0.16) (2.84)
Total assets............................. 737,615 712,271 541,325 231,154 16,996
Short-term debt.......................... 690 535 733 1,326 725
Long-term debt........................... 420 215 616 1,198 725
Stockholders' equity..................... 475,442 508,506 394,222 177,387 8,161
</TABLE>
- ------------------------
(1) No dividends have been declared or paid on the common stock of Netscape.
(2) The 1997 operating loss, net loss, and basic and diluted net loss per share
include $29.1 million of purchased in-process research and development and
merger related charges, $23.0 million of restructuring charges and $3.3
million of goodwill amortization. Excluding these charges, net of tax
effect, Netscape would have reported net income of $3.9 million, and basic
and diluted net income per share of $0.05 and $0.04, respectively.
(3) The 1998 operating loss, net loss, and basic and diluted net loss per share
include $12.0 million of restructuring charges and $11.2 million of goodwill
amortization. Excluding these charges, Netscape would have a reported net
loss of $(36.9) million and basic and diluted net loss per share of $(0.38).
(4) Subsequent to the Securities and Exchange Commission's letter to the
American Institute of Certified Public Accountants ("AICPA") dated September
9, 1998, regarding its views on in-process research and development,
("IPR&D"), the Company re-evaluated the amounts of its IPR&D charges arising
from the acquisitions of DigitalStyle Corporation ("DigitalStyle"), Portola
Communications, Inc. ("Portola"), and Actra Business Systems, LLC ("Actra"),
revised the related purchase price allocations and restated its financial
statements. Amounts for the ten months ended October 31, 1998 and the year
ended December 31, 1997, have been restated to adjust the allocations of the
purchase prices of these business combinations. The adjustment had the
effect of increasing the net loss and diluted net loss per share by $8.7
million and $0.09, respectively, for the ten months ended October 31, 1998,
and decreasing the net loss and diluted net loss per share by $76.5 million
and $0.89, respectively, for the year ended December 31, 1997.
37
<PAGE>
ITEM 7. 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 attract and keep customers in the emerging Internet
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 (its Internet portal) in September
1997. In June 1998, Netscape redesigned Netcenter to use an industry-standard,
channel-based format, including Business, Computing and Internet, and other
channels. The new channel-based format offers consumers an improved interface
and lets advertisers more effectively target consumers.
RESTATEMENT OF FINANCIAL STATEMENTS
In June 1997, Netscape acquired DigitalStyle Corporation ("DigitalStyle"), a
web graphics tools vendor, and Portola Communications, Inc. ("Portola"), a
developer of high performance messaging systems. In December 1997, Netscape
acquired the remaining equity interests of Actra Business Systems, LLC
("Actra"), a developer of commerce applications for conducting
business-to-business and business-to-consumer commerce on the internet. The
acquisitions were accounted for as business combinations using the purchase
method of accounting. In accordance with Accounting Principles Board Opinion No.
16, "Accounting for Business Combinations", the cost of the acquisitions were
allocated to the assets acquired and the liabilities assumed (including
in-process research and development) based on their estimated fair values using
valuation methods believed to be appropriate at the time. The estimated fair
value of the in-process research and development ("IPR&D"), of $24.5 million and
$28.1 million for DigitalStyle and Portola, respectively, was expensed in the
quarter ended June 30, 1997 and the estimated fair value of the IPR&D of $50.5
million for Actra was expensed in the quarter ended December 31, 1997 (the
periods in which the acquisitions were consummated) in accordance with FASB
Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method". Subsequent to the Securities
and Exchange Commission's letter to the AICPA dated September 9, 1998, regarding
its views on IPR&D, the Company has re-evaluated its IPR&D charges on these
acquisitions, revised the purchase price allocations, principally to reflect the
stage of completion of IPR&D projects and restated its financial statements. As
a result, Netscape has made an adjustment to decrease the amounts previously
expensed as IPR&D in fiscal 1997 by $79.8 million and increased goodwill and
intangible assets by the same amount.
38
<PAGE>
The effect of these adjustments on the previously reported consolidated
financial statements as of and for the ten months ended October 31, 1998 and the
year ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
TEN MONTHS YEAR ENDED
ENDED OCTOBER 31, 1998 DECEMBER 31, 1997
------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Purchased IPR&D................................... $ 0 $ 0 $ 103,087 $ 23,250
Goodwill amortization............................. 5,088 11,175 0 3,300
Total operating expenses.......................... 396,045 402,132 552,421 475,884
Operating loss.................................... (66,266) (74,936) (132,267) (55,730)
Loss before income taxes.......................... (51,417) (60,087) (127,284) (50,747)
Net loss.......................................... (51,417) (60,087) (115,496) (38,959)
Basic net loss per share.......................... (0.54) (0.63) (1.34) (0.45)
Diluted net loss per share........................ (0.54) (0.63) (1.34) (0.45)
Goodwill, net..................................... 9,992 76,149 13,835 86,886
Other assets...................................... 16,107 20,731 16,108 22,508
Total assets...................................... 666,834 737,615 632,820 712,271
Accumulated deficit............................... (170,618) (102,751) (119,201) (42,664)
Total stockholders' equity........................ 404,661 475,442 429,055 508,506
</TABLE>
RECENT EVENTS
In November 1998, America Online, Inc. ("AOL") entered into an agreement to
acquire Netscape in a transaction designed to extend AOL's leadership in
interactive services. The stock-for-stock pooling of interests transaction, in
which stockholders of Netscape will receive 0.45 shares of AOL common stock for
each share of Netscape common stock, is expected to close in the spring of 1999,
subject to various conditions including customary regulatory approvals and
approval by Netscape's stockholders.
Netscape has contracts with some of its suppliers, customers, licensors,
licensees and other business partners which require Netscape to obtain the
consent, waiver, or approval of these other parties in connection with the
merger agreement with AOL. If consent, waiver, or approval cannot be obtained,
Netscape may be required to refund various prepaid amounts under certain
material contracts and may lose the right to use intellectual property that is
necessary for the smooth operation of our portal or related to certain of it's
software. Netscape has agreed to use reasonable efforts to secure the necessary
consents, waivers and approvals. However, there can be no assurance that
Netscape will be able to obtain all of the necessary consents, waivers and
approvals and failure to do so could impair AOL's finances and business
prospects in the event the merger is completed. In addition, certain consents of
third parties required by the merger agreement must be obtained or AOL may
terminate the merger agreement.
In November 1998, Netscape announced its plans to acquire AtWeb, Inc.
("AtWeb"), a leading online web site service company. In December 1998, the
transaction closed and Netscape purchased all of the outstanding capital stock
of AtWeb and assumed all of AtWeb's outstanding stock options in exchange for
3,336,771 shares and options of Netscape common stock. The AtWeb acquisition
will be accounted for as a pooling of interests. Netscape's financial results
will not be restated for the business combination as the effect of the AtWeb
acquisition is not considered to be material to Netscape's financial condition
and results of operations.
SEGMENT PRESENTATION
During 1998, Netscape began to individually present its results of
operations for its two operating segments: Enterprise software and Netcenter.
The Enterprise software segment of Netscape's business encompasses Netscape's
full line of Enterprise software solutions and professional services for the
intranet
39
<PAGE>
and extranet. The Netcenter segment encompasses Netscape's Internet portal and
Client software business where users can quickly and easily find the
information, products, and services they need. Netcenter also showcases its
software, its partners' software, and its customer solutions.
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 more closely align Netscape's financial
presentation with industry practices and allow for more comparable financial
measurement. Netcenter costs, which were previously classified as sales and
marketing expenses, have been reclassified to research and development and to
cost of service revenues. Netscape has also reclassified to cost of service
revenues all manufacturing costs, technical support expenses, and royalty
payments related to its non-revenue earning Client software and attributed these
costs to the Netcenter segment.
CHANGE IN YEAR END
In February 1998, the Board of Directors approved a change in Netscape's
fiscal year to November 1 through October 31, effective for the ten-month period
ended 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.
The following discussion includes the year ended December 31, 1997 as the
prior year, the previously reported period most comparable to the ten months
ended October 31, 1998. See Note 1 of Notes to Consolidated Financial
Statements.
40
<PAGE>
RESULTS OF OPERATIONS
The following table and discussion compares the results of operations in
absolute dollars and as a percentage of total revenues, for the ten months ended
October 31, 1998 and the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996
TEN MONTHS ENDED ---------------------
OCTOBER 31, 1998
-------------------- 1997
-----------------------
(RESTATED)
(RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues............................... $ 261,457 58.4% $ 383,950 71.9% $ 291,183 84.1%
Service revenues............................... 186,352 41.6 149,901 28.1 55,111 15.9
--------- --------- ---------- ----- ---------- ---------
Total revenues............................... 447,809 100.0 533,851 100.0 346,294 100.0
Cost of revenues:
Cost of product revenues....................... 29,896 6.6 36,579 6.9 25,552 7.4
Cost of service revenues....................... 90,717 20.3 77,118 14.4 43,776 12.6
--------- --------- ---------- ----- ---------- ---------
Total cost of revenues....................... 120,613 26.9 113,697 21.3 69,328 20.0
--------- --------- ---------- ----- ---------- ---------
Gross profit..................................... 327,196 73.1 420,154 78.7 276,966 80.0
Operating expenses:
Research and development....................... 123,238 27.5 132,808 24.9 86,023 24.8
Sales and marketing............................ 213,004 47.6 237,321 44.5 133,124 38.4
General and administrative..................... 42,715 9.5 50,357 9.4 31,231 9.0
Purchased in-process research and
development.................................. -- -- 23,250 4.3 -- --
Merger related charges......................... -- -- 5,848 1.1 6,100 1.8
Restructuring charges.......................... 12,000 2.7 23,000 4.3 -- --
Goodwill amortization.......................... 11,175 2.5 3,300 0.6 -- --
--------- --------- ---------- ----- ---------- ---------
Total operating expenses..................... 402,132 89.8 475,884 89.1 256,478 74.1
--------- --------- ---------- ----- ---------- ---------
Operating income (loss).......................... (74,936) (16.7) (55,730) (10.4) 20,488 5.9
Interest income, net............................. 6,873 1.5 9,062 1.7 8,720 2.5
Other income, net................................ 7,976 1.8 1,860 0.3 -- --
Equity in net losses of joint ventures........... -- -- (5,939) (1.1) (1,928) (0.5)
--------- --------- ---------- ----- ---------- ---------
Income (loss) before income taxes................ (60,087) (13.4) (50,747) (9.5) 27,280 7.9
Provision (benefit) for income taxes............. -- -- (11,788) (2.2) 7,763 2.3
--------- --------- ---------- ----- ---------- ---------
Net income (loss)................................ $ (60,087) (13.4)% $ (38,959) (7.3)% $ 19,517 5.6%
--------- --------- ---------- ----- ---------- ---------
--------- --------- ---------- ----- ---------- ---------
Basic net income (loss) per share................ $ (0.63) $ (0.45) $ 0.27
--------- ---------- ----------
--------- ---------- ----------
Diluted net income (loss) per share.............. $ (0.63) $ (0.45) $ 0.21
--------- ---------- ----------
--------- ---------- ----------
Shares used in computing basic net income (loss)
per share...................................... 95,993 86,058 72,942
--------- ---------- ----------
--------- ---------- ----------
Shares used in computing diluted net income
(loss) per share............................... 95,993 86,058 90,841
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
REVENUES
Product revenues are derived from the Enterprise software segment (which,
prior to January 1998, included product revenue from stand-alone Client software
as Netscape at that time charged product licensing fees for the stand-alone
Client software) and service revenues are derived from both the Enterprise
software and the Netcenter segments. Netscape derives its Enterprise software
and services revenues from product licensing fees, technical support,
consulting, and, to a lesser extent, training
41
<PAGE>
services. Enterprise product licensing fees are primarily from the sale of
software licenses. 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. In response to a competitor
offering free browser software, Netscape began offering its stand-alone Client
software for free beginning in January 1998. These actions resulted in a 42%
reduction in revenues related to the sale of stand-alone Client software and
Client-related services in 1997 compared to 1996, and virtually eliminated
revenue from stand-alone Client software in the ten months ended October 31,
1998. Netscape expects future stand-alone Client software and service revenues
to be immaterial. See Note 14 of Notes to Consolidated Financial Statements for
segment information.
TOTAL REVENUES. Total revenues decreased 16.1% for the ten months ended
October 31, 1998 compared to the year ended December 31, 1997. Total revenues
grew 54.2% for the year ended December 31, 1997 from the year ended December 31,
1996. Excluding the decline attributable to comparison of a ten month 1998
fiscal year to a twelve month 1997 fiscal year, the decline in 1998 revenues was
primarily the result of the free stand-alone Client software. A significant
portion of 1998 revenues was attributable to several large product and Netcenter
licensing transactions; although none were individually greater than 10% of
total revenues. The increase in revenues from 1996 to 1997 was primarily
attributable to several large product and Website licensing transactions during
1997. In general, Netscape's revenue stream is comprised of software licensing,
Netcenter services, and consulting that have increased significantly in average
dollar size over the past two years. Large licensing transactions, including
licenses to OEMs, ISPs, and Enterprise customers, are expected to continue to
account for a significant portion of revenue in future periods. The loss of,
deferral of, or failure to complete one or more of such transactions could
materially adversely affect results of operations in future periods as it did in
the fourth quarter of 1997.
PRODUCT REVENUES. Product revenues for the ten months ended October 31,
1998 and the years ended December 31, 1997 and 1996 were $261.5 million, $384.0
million, and $291.2 million, or 58.4%, 71.9%, and 84.1% of total revenues,
respectively. Excluding the decline attributable to comparison of a ten month
1998 fiscal year to a twelve month 1997 fiscal year, product revenues decreased
in absolute dollars and as a percentage of product revenues in the ten months
ended October 31, 1998 compared to the year ended December 31, 1997 primarily
due to offering the stand-alone Client for free starting in January 1998.
Product revenues increased in absolute dollars, but decreased as a percentage of
total revenues in 1997 compared to 1996. The increase in absolute dollars from
1996 to 1997 was due to an expanded product line, increased unit shipments of
existing products, and general growth in the market for intranet-related
software products in the corporate environment. The decrease as a percentage of
total revenues was due to an increase in service revenues attributable to
increased Netcenter and professional consulting revenues. Netscape expects that
product revenues as a percentage of total revenues will fluctuate in future
periods depending on the timing of new product introductions, consumer buying
patterns, pricing actions taken by Netscape, competition, and other factors. See
"Factors Affecting Netscape's Finances and Business Prospects--Potential
Fluctuations in Quarterly Results."
SERVICE REVENUES. Service revenues for the ten months ended October 31,
1998 and the years ended December 31, 1997 and 1996 were $186.4 million, $149.9
million, and $55.1 million, or 41.6%, 28.1%, and 15.9% of total revenues,
respectively. Excluding the decline attributable to comparison of a ten month
1998 fiscal year to twelve month 1997 fiscal year, service revenues increased in
both absolute dollars and as a percentage of total revenues in all periods
primarily due to increased Netcenter transactions and 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 organization, and the rate of growth
in the installed base of technical support contracts. See "Factors Affecting
Finances and Business Prospects--Potential Fluctuations in Quarterly Results."
42
<PAGE>
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 ten months ended October 31, 1998 and the years ended December 31, 1997
and 1996 were 33.6%, 53.5%, and 50.2% of total revenues, respectively. Indirect
channel revenues decreased as a percentage of total revenues for the ten months
ended October 31, 1998 compared to the year ended December 31, 1997 primarily
due to increased Netcenter transactions through the direct channel, a number of
large Enterprise software sales by the direct sales force, and a significant
reduction in retail channel revenues due to Netscape offering its stand-alone
Client software for free beginning in January 1998. The increase as a percentage
of total revenues in 1997 compared to 1996 was due to increases in OEM, ISP,
system integrator, and VAR channel revenues, partially offset by a decrease in
retail channel revenues. OEM, ISP, system integrator, and VAR channel revenues
as a whole increased in absolute dollars in 1997 primarily due to an increase in
the number of OEMs, ISPs, systems integrators, and VARs offering Netscape's
products as well as increased sales through Netscape's pre-existing OEMs, ISPs,
systems integrators, and VARs. 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 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. See "Factors Affecting Finances and Business
Prospects--Evolving Channel Distribution."
GEOGRAPHIC MIX. International revenues (sales outside of the Americas) for
the ten months ended October 31, 1998 and the years ended December 31, 1997 and
1996 were 12.1%, 22.1%, and 29.3% of total revenues, respectively. Beginning in
January 1998, Netscape began offering its stand-alone Client software for free
which resulted in a significant reduction in international revenues as a
percentage of total revenues from 1997 to 1998 because the mix of revenue
generated by Client software was greater internationally than in the Americas.
Increased U.S. Netcenter revenues, the restructuring of Netscape's European
operations (which included a reduction in workforce--see Note 3 of Notes to
Consolidated Financial Statements), and product transition and economic
instability in the Asia Pacific region, particularly Japan, also contributed to
reductions in international revenues during 1998. International revenues
decreased as a percentage of total revenues from 1996 to 1997 due to increased
competition which resulted in declining prices and a reduction in the number of
large licensing transactions, late acceptance of infrastructure and application
products in Europe and Asia Pacific, and, in the fourth quarter of 1997, the
economic instability in the Asia Pacific region. See Note 14 of Notes to
Consolidated Financial Statements for further geographic information.
Netscape will continue to make investments in international markets by
deploying sales personnel with Enterprise sales expertise in several countries
in Europe and Asia Pacific, and by partnering with OEMs, ISPs, VARs, and other
resellers throughout the world. International revenues may fluctuate 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.
43
<PAGE>
GROSS MARGIN
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------------
1997 1996
TEN MONTHS ENDED -------------------- --------------------
OCTOBER 31,
1998
--------------------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Product gross margin:
Product revenues...................... $ 261,457 100.0% $ 383,950 100.0% $ 291,183 100.0%
Cost of product revenues.............. 29,896 11.4 36,579 9.5 25,552 8.8
--------- --------- --------- --------- --------- ---------
Gross margin........................ $ 231,561 88.6% $ 347,371 90.5% $ 265,631 91.2%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Service gross margin:
Service revenues...................... $ 186,352 100.0% $ 149,901 100.0% $ 55,111 100.0%
Cost of service revenues.............. 90,717 48.7 77,118 51.4 43,776 79.4
--------- --------- --------- --------- --------- ---------
Gross margin........................ $ 95,635 51.3% $ 72,783 48.6% $ 11,335 20.6%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
Netscape's gross margin consists of Enterprise software and Netcenter
revenues offset by the costs of these products and services. Costs of product
revenues include product material costs, royalties paid for licensed
technologies, and amounts paid to third-party vendors for sales administration,
telephone support and order fulfillment. Costs of service revenues include
outside consulting services, personnel-related and telephone costs incurred in
providing customer support and professional services, costs associated with
Netcenter operations (primarily compensation, telephone charges and third party
royalties), certain costs associated with free stand-alone Client software
distribution, and fees paid to third parties related to Netcenter advertising.
Product gross margins for the ten months ended October 31, 1998 and the
years ended December 31, 1997 and 1996 were 88.6%, 90.5%, and 91.2% of product
revenues, respectively. Product gross margins decreased among the periods
primarily due to an increase in third-party telephone support, and, in 1998
relatively fixed licensing royalties and fees paid to third-party vendors for
sales administration, and order fulfillment on decreased license fees.
Service gross margins for the ten months ended October 31, 1998 and the
years ended December 31, 1997 and 1996 were 51.3%, 48.6%, and 20.6% of service
revenues, respectively. Service gross margins increased in all periods primarily
due to increased Netcenter transaction revenues, which typically have lower
associated costs than other service revenues.
Netscape believes that the gross margin earned on product revenues will
fluctuate in future periods depending on the relative mix of those products, as
different product lines have different levels of costs, such as costs associated
with licensed technology included in server products, and product warranty
costs, which include telephone support for server products. Netscape believes
that the gross margin earned on services will fluctuate in future periods
depending on the relative mix of service revenues.
OPERATING EXPENSES
Netscape's total operating expenses for the ten months ended October 31,
1998 and the years ended December 31, 1997 and 1996 were $402.1 million, $475.9
million, and $256.5 million, or 89.8%, 89.1%, and 74.1% of total revenues,
respectively. Excluding the change attributable to comparison of a ten month
1998 fiscal year to a twelve month 1997 fiscal year, operating expenses remained
comparable in 1998 and 1997, as decreases of $23.3 million, $5.8 million and $11
million in purchased IPR&D, merger related charges and restructuring charges,
respectively, were offset by the increase of $7.9 million in goodwill
amortization and increased investments in research and development, sales
personnel, and marketing programs. Operating expenses increased in 1997 compared
to 1996 due to purchased in-process research
44
<PAGE>
and development of $23.3 million in 1997 relating to the acquisitions of
Portola, DigitalStyle and Actra, compared to zero in 1996, restructuring charges
of $23.0 million in 1997 compared to zero in 1996 (see Note 3 of Notes to
Consolidated Financial Statements), and increased investments in research and
development, sales personnel, and marketing programs.
Total operating expenses, excluding purchased in-process research and
development, merger-related costs, restructuring charges and goodwill
amortization, for the ten months ended October 31, 1998 and the years ended
December 31, 1997, and 1996 were $379.0 million, $420.5 million, and $250.4
million, or 84.6%, 78.8%, and 72.3% of total revenues, respectively. Excluding
the decline attributable to comparison of a ten month 1998 fiscal year to twelve
month 1997 fiscal year, operating expenses increased in both absolute dollars
and as a percentage of total revenue from 1997 to 1998 and 1996 to 1997 due to
increased investments in research and development, sales personnel, and
marketing programs. Operating expenses also increased in 1997 compared to 1996
due to an increase in general and administrative expenses.
RESEARCH AND DEVELOPMENT. Research and development expenses consisted
primarily of compensation and consulting fees to support research and
development ("R&D") activities. Research and development expenses for the ten
months ended October 31, 1998 and the years ended December 31, 1997 and 1996
were $123.2 million, $132.8 million, and $86.0 million, or 27.5%, 24.9%, and
24.8% of total revenues, respectively. Excluding the decline attributable to
comparison of a ten month 1998 fiscal year to twelve month 1997 fiscal year, R&D
expenses increased in both absolute dollars and as a percentage of total
revenues from 1997 to 1998 primarily due to increased staffing and external
consultant costs associated with the 1997 acquisitions of Actra and KIVA
Software Corporation ("KIVA"). See Note 2 of the Notes to Consolidated Financial
Statements. Research and development expenses increased from 1996 to 1997 in
absolute dollars due primarily to increased staffing and external consultant
costs. The capitalizable portion of the software development costs has been
immaterial and, to date, such costs have been expensed as incurred.
SALES AND MARKETING. Sales and marketing expenses for all periods consist
of operating expenses associated with Netscape's Enterprise and Netcenter sales
and marketing organizations. Sales and marketing expenses for the ten months
ended October 31, 1998 and the years ended December 31, 1997 and 1996 were
$213.0 million, $237.3 million, and $133.1 million, or 47.6%, 44.5%, and 38.4%
of total revenues, respectively. Excluding the decline attributable to
comparison of a ten month 1998 fiscal year to twelve month 1997 fiscal year, the
increase in both absolute dollars and as a percentage of total revenue from 1997
to 1998 was due to increased Netcenter staffing, sales commissions, and
advertising programs. Sales and marketing expenses increased in both absolute
dollars and as a percentage of revenues from 1996 to 1997 due to increased
staffing, additional marketing programs, costs associated with opening new sales
offices, sales commissions on increased revenues, and continued investment in
sales and marketing capabilities in Europe and Asia Pacific.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for all
periods presented consist primarily of compensation, fees for professional
services, and bad debt expense. General and administrative expenses for the ten
months ended October 31, 1998 and the years ended December 31, 1997 and 1996
were $42.7 million, $50.4 million, and $31.0 million, or 9.5%, 9.4%, and 9.0% of
total revenues, respectively. Excluding the decline attributable to comparison
of a ten month 1998 fiscal year to twelve month 1997 fiscal year, general and
administrative expenses remained fairly flat both in absolute dollars and as a
percentage of total revenue in 1998 and 1997. General and administrative
expenses increased in both absolute dollars and as a percentage of total
revenues from 1996 to 1997 primarily due to increased staffing, increased fees
for professional services, and higher reserves for accounts receivable balances.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the
purchases of Portola, DigitalStyle, and Actra (collectively, the "Acquired
Companies"), the Company allocated a portion of the purchase price to purchased
in-process research and development ("IPR&D"). These amounts were expensed as
non-recurring charges on the respective acquisition dates of the Acquired
Companies because
45
<PAGE>
the IPR&D projects had not yet reached technological feasibility and had no
future alternative uses. Subsequent to the Securities and Exchange Commission's
letter to the American Institute of Certified Public Accountants dated September
9, 1998 regarding its views on in-process research and development, Netscape
re-evaluated the amounts of its IPR&D charges arising from the acquisitions of
the Acquired Companies. The Company has reallocated the previously reported
purchase prices based on its understanding and interpretations of the issues set
forth in the aforementioned letter. The reallocation reduced the amounts
previously written-off as IPR&D, principally to reflect the stage of completion
of the IPR&D projects and increased goodwill and other intangible assets by the
same amount. The following table depicts the adjustments made to the values
ascribed to IPR&D:
<TABLE>
<CAPTION>
IPR&D WRITE-OFFS
------------------------------
ACQUISITION AS REPORTED AS RESTATED
- ----------------------------------- -------------- --------------
<S> <C> <C>
Portola............................ $28,061,000 $5,300,000
DigitalStyle....................... 24,526,000 4,000,000
Actra.............................. 50,500,000 13,950,000
-------------- --------------
$103,087,000 $23,250,000
-------------- --------------
-------------- --------------
</TABLE>
The nature of the efforts required to develop the acquired IPR&D into
commercially viable products principally related to the completion of all
planning, designing, and testing activities that are necessary to establish that
the product can be produced to meet its design requirements, including
functions, features, and technical performance requirements. As of the Portola
acquisition date the identified IPR&D project needed to be completed, tested,
ported to all supported Netscape platforms and successfully integrated with
other Netscape products. As of the DigitalStyle acquisition date, the IPR&D
projects needed to be completely rewritten in a different programming language
and integrated with the next version of Netscape's client product. As of the
Actra acquisition date, each IPR&D project needed to add significant new
features and functionality to meet the specifications of the changing e-commerce
market and customer demands. Because the Actra IPR&D projects are more complex
than any of Netscape's other projects, this process typically required more
time, complexity and cost than that of the existing Netscape product family.
With respect to the acquired in-process technologies the calculations of
value were adjusted to reflect the stage of completion of the value creation
efforts of each Acquired Company prior to the closing of the acquisition.
Following are the estimated completion percentages as of the acquisition dates
and actual/ estimated introduction dates:
<TABLE>
<CAPTION>
PERCENT COMPLETE
AT ACQUISITION
DATE INTRODUCTION DATE
------------------ ------------------
<S> <C> <C>
Portola in-process technologies:
Messaging Server.................................... 30% December 1998
DigitalStyle in-process technologies:
Client Layout Engine................................ 40% Mid 1999
Actra in-process technologies:
ECXpert............................................. 15% Mid 1998
SellerXpert......................................... 45% Late 1998
BuyerXpert.......................................... 55% Late 1998
PublishingXpert..................................... 80% Late 1998
</TABLE>
The Company currently expects that those acquired IPR&D projects not yet
completed will be successfully developed, but there can be no assurance that
commercial viability of these products will be achieved. Failure to complete the
development of these projects in their entirety, or in a timely manner, could
have an adverse impact on the Company's operating results, financial condition
and results of operations.
46
<PAGE>
A description of the acquired in-process technologies of Portola,
DigitalStyle, and Actra, including the estimates made by the Company in revised
valuation analyses are set forth below.
PORTOLA
OVERVIEW
Portola was founded in March 1996 to design electronic-mail and messaging
servers. At the time of the acquisition, Portola had no existing products on the
market nor any services generating revenues. Since its founding, Portola's
efforts have been directed exclusively towards the development of messaging
server technology. The following is a brief description of the Messaging Server
project.
MESSAGING SERVER. In 1996, Portola began developing a messaging server
technology significantly advanced in terms of speed, scalability, efficiency,
and capabilities relative to existing products on the market. Portola's
messaging server utilizes Internet Message Access Protocol ("IMAP") standards
and allows for messages to be held on a server that can be accessed by any
compatible client in more than one location. IMAP technology will effectively
permit the user to access their e-mail from their home desktop computer, office
workstation, or computer notebook without the need to transfer files back and
forth between any of these computers. IMAP technology permits the user to access
electronic mail or bulletin board messages from remote locations. The existing
standard, Post Office Protocol ("POP") restricts the user to a single computer
for message manipulation and storage. POP was designed to work effectively with
a single computer, wherein messages could be downloaded from a server and
deleted from the messaging server. Although possible, it would not be feasible
for a user to have multiple connections with a POP server, due to the server
distributing messages across all of the accessible computers. The Portola
messaging technology had not been fully developed as of the acquisition date;
however, the computer code written as of the acquisition date by the Portola
software engineers was expected to be integrated with Netscape's messaging
technology then under development. It was estimated that the code for Portola's
messaging technology will account for approximately 70% of the technology
underlying Netscape's Messaging Server product (Messaging 4.0).
VALUATION ANALYSIS
REVENUE. The revised value of the acquired in-process technology was
computed using a discounted cash flow analysis on the anticipated income stream
of the related product sales. The discounted cash flow analysis was based on
management's forecast of future revenues, cost of revenues and operating
expenses related to the products and technologies purchased from Portola which
are intended to be utilized in the Company's future Messaging products. Revenue
attributable to the Portola technology was estimated to be $67.5 million in
1999. Thereafter, revenue was estimated to increase 6% in 2000, 5% in 2001, then
stabilize at 20% growth per year through the remainder of the estimation period.
The fluctuations in the expected revenue growth rates for the Portola technology
reflect changes in the estimated contribution levels of the acquired Portola
technologies through subsequent Messaging products.
Management's analysis also considered anticipated product development and
product introduction schedules for future Messaging products, product sales
cycles, and the estimated life of a product's underlying technology. The overall
technology life was estimated to be approximately four years.
OPERATING EXPENSES. Operating expenses used in the valuation analysis of
Portola included (i) cost of goods sold, (ii) general and administrative
expense, (iii) sales and marketing expense, and (iv) research and development
expense. In developing future expense estimates, it was estimated that the
Portola operations would be merged into Netscape's operating structure. Selected
operating expense assumptions were based on an evaluation of Netscape's overall
business model, including both historical and expected direct expense levels (as
appropriate), and an assessment of general industry metrics.
COST OF GOODS SOLD. Cost of goods sold, expressed as a percentage of
revenue, for the in-process technologies was estimated to be 4% throughout the
estimation period. This amount of cost of goods sold
47
<PAGE>
is primarily due to the fact that Portola contained minimal third party costs
associated with licensed technology given the fact that the majority of its code
base was developed in house at Portola.
GENERAL AND ADMINISTRATIVE ("G&A") EXPENSE. G&A expense, expressed as a
percentage of revenue, for the in-process technologies was estimated to be 8%
throughout the estimation period based on Company-wide G&A levels.
SALES AND MARKETING EXPENSE. Sales and marketing expense, expressed as a
percentage of revenue, for the in-process technologies was estimated to range
from approximately 40% to 42% throughout the estimation period based on the
Company's historical experience with similar products.
MAINTENANCE RESEARCH AND DEVELOPMENT ("R&D") EXPENSE. Maintenance R&D
expense consists of the costs associated with activities undertaken to correct
errors or keep products updated with current information. Maintenance R&D
includes all activities undertaken after a product is available for general
release to customers to correct errors or keep the product updated with current
information. These activities include routine changes and additions. The
maintenance R&D expense was estimated to be $1.8 million per year throughout the
estimation period.
EFFECTIVE TAX RATE. The effective tax rate utilized in the analysis of the
in- process technologies reflected Netscape's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
DISCOUNT RATE. The discount rate selected for the in-process technology was
30%. In the selection of the appropriate discount rate, primary consideration
was given to Netscape's Weighted Average Cost of Capital ("WACC"), as well as
venture capital rates of return. The discount rate utilized for the in-process
technology was determined to be higher than Netscape's WACC due to the fact that
the technology had not yet reached technological feasibility as of the date of
valuation. In utilizing a discount rate greater than Netscape's WACC, management
has reflected the risk premium associated with achieving the forecasted cash
flows associated with these projects.
COMPARISON TO ACTUAL RESULTS
To date, revenues and operating expenses attributable to the technologies
associated with the Portola acquisition are consistent with management's
projections. Based upon factors currently known, management believes the
revenues and operating expenses associated with these in-process technologies
will favorably impact Netscape's consolidated results of operations and
financial position. If the in-process projects contemplated in management's
forecast are not successfully developed, future revenue and profitability of the
Company may be adversely affected.
DIGITALSTYLE
OVERVIEW
DigitalStyle was a Web graphics tools vendor. The company is known for the
development of Web graphics tools and animation. At the time of the acquisition,
DigitalStyle's existing WebSuite technology was being phased out through an
end-of-life plan and was not expected to be used in the company's other projects
under development. As such, no developed or core technology was identified in
this acquisition. At the time of the acquisition, DigitalStyle was engaged in
the architecting and development of a core Client Layout Engine envisioned to be
incorporated into future Netscape client products.
CLIENT LAYOUT ENGINE. Beginning in August 1996, DigitalStyle began the
foundation for an embeddable HTML layout engine to be incorporated in future
versions of Netscape client products. The design specifications of the developed
product include a document model, style management model, a component model, as
well as rendering and printing abstractions. The project was ultimately written
in C++ language and was intended to be a cross-platform application. Key
features and specifications included:
- high performance
- advanced, embeddable HTML engine for viewing and navigating the World-Wide
Web
48
<PAGE>
- style sheet support
- international support; and
- advanced graphics and rendering capabilities
The technology under development at DigitalStyle was expected to be
incorporated into future modules of Netscape's Communicator product beginning
with version 5.0. The Communicator product is a suite of software components for
sharing, accessing, and communicating information via intranets and the
Internet.
The future Communicator products, and their reliance on DigitalStyle
in-process technology, are as follows:
- Communicator Version 5.0 will rely on certain fundamental elements of
DigitalStyle technology.
- Communicator Versions 6.0 and beyond will be expected to continue to build
on the core layout engine features and functionality.
VALUATION ANALYSIS
REVENUE. The revised value of the acquired in-process technology was
computed using a discounted cash flow analysis on the anticipated income stream
of the related product sales. The discounted cash flow analysis was based on
management's forecast of future revenues, cost of revenues and operating
expenses related to the products and technologies purchased from DigitalStyle
which are intended to be utilized in Netcenter. Revenue attributable to the
DigitalStyle technology was estimated to be $14.7 million in 1999. Thereafter,
revenue was estimated to increase approximately 30% per year through the
remainder of the estimation period. Year-to-year revenue growth estimates were
developed based on an assumed increasing market for Netcenter and the ability of
Netscape to maintain its position in the market.
Management's analysis also considered anticipated future enhancements to
Netcenter, as well as release dates for other Netscape Communicator products
which are expected to utilize the acquired DigitalStyle technologies. The
overall technology life was estimated to be approximately three to four years.
OPERATING EXPENSES. Operating expenses used in the valuation analysis of
DigitalStyle included (i) cost of goods sold, (ii) G&A expense, (iii) sales and
marketing expense, and (iv) R&D expense. In developing future expense estimates,
it was estimated that the DigitalStyle operations would be merged into
Netscape's operating structure. Selected operating expense assumptions were
based on an evaluation of Netscape's overall business model, including both
historical and expected direct expense levels (as appropriate), and an
assessment of general industry metrics.
COST OF GOODS SOLD. Cost of goods sold, expressed as a percentage of
revenue, for the in-process technologies was estimated to be 12% throughout the
estimation period, based on Company-wide cost of goods sold data.
G&A EXPENSE. G&A expense, expressed as a percentage of revenue, for the
in-process technologies was estimated to be 8% throughout the estimation period
based on Company-wide G&A levels.
SALES AND MARKETING EXPENSE. Sales and marketing expense, expressed as a
percentage of revenue, for the in-process technologies was estimated at 40%
based on the Company's historical experience with similar products.
MAINTENANCE R&D EXPENSE. Maintenance R&D expense was estimated to be 1% of
revenue throughout the estimation period.
EFFECTIVE TAX RATE. The effective tax rate utilized in the analysis of the
in-process technologies reflected Netscape's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
49
<PAGE>
DISCOUNT RATE. The discount rate selected for the in-process technology was
30%. In the selection of the appropriate discount rate, primary consideration
was given to Netscape's WACC, as well as venture capital rates of return. The
discount rate utilized for the in-process technology was determined to be higher
than Netscape's WACC due to the fact that the technology had not yet reached
technological feasibility as of the date of valuation. In utilizing a discount
rate greater than Netscape's WACC, management has reflected the risk premium
associated with achieving the forecasted cash flows associated with these
projects.
COMPARISON TO ACTUAL RESULTS
To date, revenues and operating expenses attributable to the technologies
associated with the DigitalStyle acquisition are consistent with management's
projections. Based upon factors currently known, management believes the
revenues and operating expenses associated with these in-process technologies
will favorably impact Netscape's consolidated results of operations and
financial position. If the in-process projects contemplated in management's
forecast are not successfully developed, future revenue and profitability of the
Company may be adversely affected.
ACTRA
OVERVIEW
Actra was formed as a joint venture between Netscape and GE Information
Services ("GEIS") in April 1996, with each company owning 50% of the membership
units of the joint venture. Actra is a developer of Internet-based e-commerce
software. Actra's CommerceXpert product family was a suite of application
solutions for linking consumers over Extranets and the Internet. The application
modules include: (i) ECXpert, (ii) SellerXpert, (iii) BuyerXpert, and (iv)
PublishingXpert. Following are brief descriptions of the Actra products.
50
<PAGE>
ECXPERT is the foundation application for the CommerceXpert suite, that will
deliver secure electronic data interchange ("EDI") for the Internet. ECXpert is
a powerful, effective tool for business-to-business e-commerce that safeguards
data communications over private and public networks. With ECXpert, companies
can communicate and exchange information both internally and externally using
connections over the Internet. Technological enhancements will include:
- compatibility with existing legacy EDI systems
- extreme versatility, providing communication through virtually any
protocol including EDI, FTP, SMTP, and HTTP; and
- flexible integration with internal business applications, therefore
allowing for an inexpensive alternative to a company's proprietary
e-commerce software.
SELLERXPERT is a tool to be used by e-commerce vendors for establishing
Internet relationships with customers. SellerXpert forms a complete system for
business-to-business commerce by integrating catalog, inventory, ordering, and
payment technologies. Along with ECXpert, SellerXpert connects vendors to
employees and internal purchasing systems. Vendors will be able to provide
electronic copies of catalog information via the Internet to customers'
networks. The program will also provide the vendors with the means to execute
and receive electronic payment for transactions. In addition, SellerXpert can
increase sales, improve customer satisfaction, and reduce operating expenses by
increasing productivity and decreasing delays and overhead costs. Features of
SellerXpert will include:
- an intelligent sales order-processing engine that creates a personalized
buying experience for the customer
- customizable client information lists according to contracts and
conditions
- flexible organization and presentation designs
- customizable storefronts and product displays
- on-line order tracking for customers; and
- enhanced security.
With BUYERXPERT, companies receive information from vendors over the
Internet and provide an electronic collection of selected catalogs over an
Extranet or network to serve as a resource for employees. Although BuyerXpert
does not require SellerXpert, the product does complement SellerXpert as an
internal procurement system. With BuyerXpert any employee with Internet/Extranet
access can order materials from the selected catalogs. Orders are grouped and
delivered to the vendor, recognized by the customers internal accounting,
approved, and recorded in inventory applications. Two primary cost saving
benefits of BuyerXpert's functionality include: (i) increased efficiency of
allowing employees to order for themselves and (ii) added efficiency provided by
the state-of-the-art search engines which allow employees and purchasing agents
to locate and purchase products quickly. Features include:
- ability for purchasing managers to establish criteria for approval of
orders
- automation of circulating orders for approval, or subjected to approval
criteria
- acceptance of requisitions
- consolidation of orders; and
- management of complex contracts.
PUBLISHINGXPERT is a next-generation Internet solution for content
management and customized content delivery on the Web. Originally designed to
serve the consumer online and media markets, PublishingXpert now also provides
commerce-based publishing services for Extranets and multi-hosting
51
<PAGE>
applications. With PublishingXpert, companies can change the way they market
their products over the Internet. Due to its efficiency, PublishingXpert can
potentially help increase sales, improve customer return on investment, and
lower operating costs. Features of PublishingXpert include the following:
- multi-tiered distributed application architecture
- personalized content delivery
- advanced text-search services
- flexible billing and payment services
- granular membership, subscription, and access controls
- distributed content-management capabilities; and
- multi-hosting features to support multiple content providers.
The technology under development at Actra at the time of the acquisition was
expected to be incorporated into future modules of Netscape's ONE platform. The
Netscape ONE platform unifies the standards of the Internet into a single
platform for creating powerful applications. It embraces open standards
including: Dynamic HTML, Java, JavaScript, Lightweight Directory Access Protocol
("LDAP"), and Common Objective Request Broker Architecture ("CORBA").
VALUATION ANALYSIS
REVENUE. The revised values of the acquired developed and in-process
technologies were computed using a discounted cash flow analysis on the
anticipated income stream of the related product sales. The discounted cash flow
analysis was based on management's forecast of future revenues, cost of revenues
and operating expenses related to the products and technologies purchased from
Actra. Revenue attributable to the Actra technology (excluding revenue derived
from technology support and consulting services) was estimated to be $96 million
in 1998. Thereafter, revenue was estimated to increase 56% in 1999, 100% in
2000, 80% in 2001, then stabilize at 20% growth per year through the remainder
of the estimation period. The rates of revenue growth primarily reflect the
growth dynamics of the e-commerce market and volume increases in the number of
business-to-business e-commerce transactions.
Management's analysis also considered anticipated product development and
product introduction schedules, product sales cycles, and the estimated life of
a product's underlying technology. The overall technology life was estimated to
be approximately four to five years.
OPERATING EXPENSES. Operating expenses used in the valuation analysis of
Actra included (i) cost of goods sold, (ii) G&A expense, (iii) sales and
marketing expense, and (iv) R&D expense. In developing future expense estimates,
it was estimated that the Actra operations would be merged into Netscape's
operating structure. Selected operating expense assumptions were based on an
evaluation of Netscape's overall business model, including both historical and
expected direct expense levels (as appropriate), and an assessment of general
industry metrics.
COST OF GOODS SOLD. Cost of goods sold, expressed as a percentage of
revenue, for the in-process technologies was estimated to be 13% throughout the
estimation period, based on Company-wide cost of goods sold data.
G&A EXPENSE. G&A expense, expressed as a percentage of revenue, for the
in-process technologies was estimated to be 8% throughout the estimation period
based on Company-wide G&A levels.
SALES AND MARKETING EXPENSE. Sales and marketing expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 35% throughout the estimation period.
52
<PAGE>
This is primarily due to the fact that the existing Netscape sales and marketing
resources were used to support the Actra product line.
MAINTENANCE R&D EXPENSE. Maintenance R&D expense was estimated to be 3% of
revenue throughout the estimation period.
EFFECTIVE TAX RATE. The effective tax rate utilized in the analysis of the
developed and in-process technologies reflected Netscape's combined federal and
state statutory income tax rates, exclusive of non-recurring charges at the time
of the acquisition and estimated for future years.
DISCOUNT RATES. The discount rates selected for the developed and
in-process technologies were 25% and 40%, respectively. The relatively high
discount rates utilized in the valuation reflect the risk inherent in the
e-commerce industry. Moreover, the higher discount rate selected for the
in-process technology reflects the fact that the technology had not yet reached
technological feasibility as of the date of valuation.
COMPARISON TO ACTUAL RESULTS
To date, revenues and operating expenses attributable to the technologies
associated with the Actra acquisition are consistent with management's
projections. Based upon factors currently known, management believes the
revenues and operating expenses associated with these in-process technologies
will favorably impact Netscape's consolidated results of operations and
financial position. If the in-process projects contemplated in management's
forecast are not successfully developed, future revenue and profitability of the
Company may be adversely affected.
As mentioned previously, as of the date of each of the acquisitions,
Netscape concluded that the IPR&D had no alternative future use after taking
into consideration the potential use of the technology in different products,
the stage of development and life cycle of each project, resale of the software,
and internal use. The value of the IPR&D projects was expensed at the time of
each of the acquisitions. Netscape has completed development of a majority of
the acquired IPR&D and released products related to two of the acquisitions.
Remaining anticipated project development costs are estimated at $3 million and
completion dates are expected to occur within the next calendar year, at which
time Netscape expects to begin selling those developed products. Netscape
intends to continue devoting effort to developing commercially viable products
from the acquired IPR&D projects, although it may not develop such commercially
viable products.
MERGER-RELATED CHARGES. In 1997, Netscape expensed $5.8 million of
Enterprise software merger-related charges in connection with the acquisitions
of Portola, DigitalStyle, and Actra, accounted for as purchase transactions, and
KIVA, accounted for as a pooling of interests. In 1996, Netscape incurred
certain Enterprise software merger-related charges totaling $6.1 million related
to the acquisitions of InSoft, Netcode and Paper, accounted for as poolings of
interests. These expenses were primarily associated with fees for investment
banking, legal and accounting services, severance costs and other related
charges in connection with the acquisitions. Netscape does not anticipate
incurring any future charges associated with these mergers. However, Netscape
may incur additional charges in the event it undertakes additional combinations.
See Note 2 of Notes to Consolidated Financial Statements.
RESTRUCTURING CHARGES. In December 1997 and January 1998, Netscape
implemented certain restructuring actions aimed at reducing its Enterprise
software 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 a reduction in the workforce
(approximately 400 employees, or 13% of Netscape's workforce), the closure of
certain facilities, the write-off of non-performing operating assets, and
third-party royalty payment obligations relating to canceled contracts.
53
<PAGE>
The following table depicts the movements in accrued restructuring charges
and restructuring related asset reserves from December 31, 1996 to October 31,
1998:
<TABLE>
<CAPTION>
BALANCE BALANCE
DEC. 31, DEC. 31, NON CASH
1996 CHARGES 1997 CHARGES WRITE-OFFS PAYMENTS TRANSFERS
----------- --------- --------- --------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cost to exit third-party royalty
arrangements related to discontinued
projects.............................. $ -- $ 5,173 $ 5,173 $ -- $ (1,630) $ (3,543) $ --
Remaining rent payments and leasehold
improvements on abandoned facilities,
net of anticipated sublease income.... -- 9,000 9,000 -- (6,767) -- (1,263)
Write-down of abandoned computer
equipment and other operating assets.. -- 8,827 8,827 -- (10,918) -- 2,091
Severance for involuntary employee
terminations.......................... -- -- -- 12,000 -- (11,172) (828)
----- --------- --------- --------- ----------- ----------- -----------
Total................................. $ -- $ 23,000 $ 23,000 $ 12,000 $ (19,315) $ (14,715) $ --
----- --------- --------- --------- ----------- ----------- -----------
----- --------- --------- --------- ----------- ----------- -----------
<CAPTION>
BALANCE
OCT. 31,
1998
---------
<S> <C>
Cost to exit third-party royalty
arrangements related to discontinued
projects.............................. $ --
Remaining rent payments and leasehold
improvements on abandoned facilities,
net of anticipated sublease income.... 970
Write-down of abandoned computer
equipment and other operating assets.. --
Severance for involuntary employee
terminations.......................... --
---------
Total................................. $ 970
---------
---------
</TABLE>
At October 31, 1998, the remaining reserves pertain to one vacant facility
that has not been subleased. Netscape anticipates utilizing the remaining
reserve balance over the next six to twelve months.
GOODWILL AMORTIZATION. In connection with the acquisitions of DigitalStyle
and Portola in June 1997, and Actra in December 1997, Netscape allocated $90.2
million of the purchase prices to goodwill and $2.3 million to other intangible
assets, which are to be amortized over seven and three years, respectively, on a
straight-line basis from the date of acquisition. Goodwill amortization for the
ten months ended October 31, 1998 was $11.2 million. Netscape expects to record
goodwill amortization of $3.2 million each quarter through June 2004 and $1.6
million in each of the following two quarters. See Note 2 of Notes to
Consolidated Financial Statements.
OPERATING INCOME (LOSS). For the ten months ended October 31, 1998 and the
years ended December 31, 1997 and 1996, operating income (loss) was $(74.9)
million, $(55.7) million, and $20.5 million, or (16.7)%, (10.4)%, and 5.9% of
revenues, respectively.
54
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RESULTS OF OPERATIONS--ENTERPRISE SOFTWARE SEGMENT
The following tables and discussion set forth the results of operations for
the ten months ended October 31, 1998 and the years ended December 31, 1997 and
1996 for the Enterprise software segment of Netscape:
<TABLE>
<CAPTION>
ENTERPRISE SEGMENT*
----------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------------
1997 1996
-------------------- --------------------
TEN MONTHS ENDED
OCTOBER 31, 1998
--------------------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues...................... $ 261,457 79.9% $ 383,951 87.6% $ 291,183 90.1%
Service revenues...................... 65,947 20.1 54,552 12.4 31,831 9.9
--------- --------- --------- --------- --------- ---------
Total revenues...................... 327,404 100.0 438,503 100.0 323,014 100.0
Cost of revenues:
Cost of product revenues.............. 29,896 9.2 36,579 8.3 25,552 7.9
Cost of service revenues.............. 67,194 20.5 55,961 12.8 27,901 8.6
--------- --------- --------- --------- --------- ---------
Total cost of revenues.............. 97,090 29.7 92,540 21.1 53,453 16.5
--------- --------- --------- --------- --------- ---------
Gross profit............................ 230,314 70.3 345,963 78.9 269,561 83.5
Operating expenses:
Research and development.............. 84,118 25.7 100,465 22.9 59,523 18.4
Sales and marketing................... 157,233 48.0 193,843 44.2 119,623 37.0
General and administrative............ 29,975 9.2 40,604 9.3 28,686 8.9
--------- --------- --------- --------- --------- ---------
Total operating expenses............ 271,326 82.9 334,912 76.4 207,832 64.3
--------- --------- --------- --------- --------- ---------
Operating income (loss)................. $ (41,012) (12.6)% $ 11,051 2.5% $ 61,729 19.1%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
* The Enterprise software segment operating expenses exclude purchased
in-process research and development, merger related costs, restructuring
charges and goodwill amortization.
PRODUCT REVENUES. Enterprise product revenues for the ten months ended
October 31, 1998 and the years ended December 31, 1997 and 1996 were $261.5
million, $384.0 million, and $291.2 million, or 79.9%, 87.6%, and 90.1% of total
revenues, respectively. Excluding the decline attributable to comparison of a
ten month 1998 fiscal year to twelve month 1997 fiscal year, Enterprise product
revenues decreased in absolute dollars from 1997 to 1998 primarily due to the
discontinued stand-alone Client software revenue source (see prior discussion
under REVENUES). This decline was partially offset by an increase in other
Enterprise products. Enterprise product revenues increased in absolute dollars
in 1997 compared to 1996 due to an expanded product line, increased unit
shipments of existing products, and general growth in the market for
intranet-related software products in the corporate environment. Enterprise
product revenues decreased as a percentage of total revenues in all periods
primarily due to the growth of the Netcenter business.
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 ten months
ended October 31, 1998 and the years ended December 31, 1997 and 1996 were $65.9
million, $54.6 million, and $31.8 million, or 20.1%, 12.4%, and 9.9% of total
revenues, respectively. Enterprise service revenues increased in both absolute
dollars and as a percentage of total revenues in all periods primarily due to an
increase in professional consulting services partially offset by the effect of
comparing a ten month 1998 period to the prior twelve month years.
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,
55
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VARs, systems integrators, and other resellers. Indirect channel revenues for
the ten months ended October 31, 1998 and the years ended December 31, 1997 and
1996 were 45.9%, 65.2%, and 53.8% of total revenues, respectively. Indirect
channel revenues decreased as a percentage of total revenues for the ten months
ended October 31, 1998 compared to the year ended December 31, 1997 primarily
due to an increased number of large dollar Enterprise software sales by the
direct sales force, and a significant reduction in retail channel revenues due
to Netscape offering its stand-alone Client software for free beginning in
January 1998. The increase as a percentage of total revenues in 1997 compared to
1996 was due to growth in OEM, ISP, system integrator, and VAR channel revenues,
partially offset by a decrease in retail channel revenues.
GEOGRAPHIC MIX. Enterprise international revenues (sales outside of the
Americas) for the ten months ended October 31, 1998, and the years ended
December 31, 1997 and 1996 were 16.6%, 26.8%, and 29.8% of total revenues,
respectively. Beginning in January 1998, Netscape began offering its stand-alone
Client software for free which resulted in a significant reduction in
international Enterprise revenues as a percentage of total Enterprise revenues
from 1997 to 1998 because the mix of revenue generated by Client software was
greater internationally than in the Americas. The restructuring of Netscape's
European operations (which included a reduction in workforce--see Note 3 of
Notes to Consolidated Financial Statements), and product transition and economic
instability in the Asia Pacific region, particularly Japan, also contributed to
reductions in international Enterprise revenues during 1998. International
Enterprise revenues decreased as a percentage of total Enterprise revenues from
1996 to 1997 due to increased competition which resulted in declining prices and
a reduction in the number of large licensing transactions, late acceptance of
Infrastructure and Application products in Europe and Asia Pacific, and, in the
fourth quarter of 1997, the economic instability in the Asia Pacific region.
<TABLE>
<CAPTION>
ENTERPRISE SEGMENT
----------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------------
1997 1996
-------------------- --------------------
TEN MONTHS ENDED
OCTOBER 31, 1998
--------------------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Product Gross Margin:
Product revenues...................... $ 261,457 100.0% $ 383,951 100.0% $ 291,183 100.0%
Cost of product revenues.............. 29,896 11.4 36,579 9.5 25,552 8.8
--------- --------- --------- --------- --------- ---------
Gross margin........................ $ 231,561 88.6% $ 347,372 90.5% $ 265,631 91.2%
--------- --------- --------- --------- --------- ---------
Service Gross Margin:
Service revenues...................... $ 65,947 100.0% $ 54,552 100.0% $ 31,831 100.0%
Cost of service revenues.............. 67,194 101.9 55,961 102.6 27,901 87.7
--------- --------- --------- --------- --------- ---------
Gross margin........................ $ (1,247) (1.9)% $ (1,409) (2.6)% $ 3,930 12.3%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
PRODUCT GROSS MARGIN. Enterprise product gross margin consists of
Enterprise product revenue offset by the cost of product materials, royalties
paid for licensed technologies, and amounts paid to third-party vendors for
sales administration and order fulfillment. Enterprise product gross margins for
the ten months ended October 31, 1998 and the years ended December 31, 1997 and
1996 were 88.6%, 90.5%, and 91.2% of total revenues, respectively, and declined
over all periods due to increasing sales of products with higher third party
royalties.
SERVICE GROSS MARGIN. Enterprise service gross margin for all periods
presented consisted primarily of Enterprise service revenue offset by costs of
outside consulting services and personnel-related costs incurred in connection
with providing customer support and professional services. Enterprise service
gross margins for the ten months ended October 31, 1998 and the years ended
December 31, 1997 and 1996 were (1.9)%, (2.6)%, and 12.3% of total revenues,
respectively. Enterprise service gross margins were negative in 1998 and 1997 as
Netscape continued to build and invest in its professional services
organization.
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<PAGE>
OPERATING MARGIN. Netscape's Enterprise segment operating margin consists
of Enterprise gross profit offset by Enterprise operating expenses. Enterprise
operating margins for the ten months ended October 31, 1998 and the years ended
December 31, 1997 and 1996 were $(41.0) million, $11.1 million, and $61.7
million, or (12.6)%, 2.5%, and 19.1% of total revenues, respectively. In all
periods operating margins decreased in absolute dollars and as a percentage of
total revenues primarily due to discontinued stand-alone Client software
revenues. In addition Netscape refocused and invested in its research and
development and sales and marketing efforts on electronic commerce products.
RESULTS OF OPERATIONS--NETCENTER SEGMENT
The following tables and discussion set forth the results of operations for
the ten months ended October 31, 1998 and the years ended December 31, 1997 and
1996 for the Netcenter segment of Netscape:
<TABLE>
<CAPTION>
NETCENTER SEGMENT*
-------------------------------------------------------------------
YEAR ENDED
TEN MONTHS ENDED DECEMBER 31,
OCTOBER 31, --------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total service revenues........................ $ 120,405 100.0% $ 95,348 100.0% $ 23,280 100.0%
Total cost of service revenues................ 23,523 19.5 21,157 22.2 15,875 68.2
---------- --------- ---------- --------- ---------- ---------
Gross profit.................................. 96,882 80.5 74,191 77.8 7,405 31.8
Operating expenses:
Research and development.................... 39,121 32.5 32,343 33.9 26,500 113.8
Sales and marketing......................... 55,771 46.3 43,478 45.6 13,501 58.0
General and administrative.................. 12,740 10.6 9,752 10.2 2,295 9.9
---------- --------- ---------- --------- ---------- ---------
Total operating expenses.................. 107,632 89.4 85,573 89.7 42,296 181.7
---------- --------- ---------- --------- ---------- ---------
Operating loss................................ $ (10,750) (8.9)% $ (11,382) (11.9)% $ (34,891) (149.9)%
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
</TABLE>
- ------------------------
* The Netcenter segment operating expenses exclude purchased in-process
research and development, merger related costs and goodwill amortization.
REVENUES. Netcenter revenues for the ten months ended October 31, 1998 and
the years ended December 31, 1997 and 1996 were $120.4 million, $95.3 million,
and $23.3 million, respectively. Netcenter revenues increased in absolute
dollars between periods due to increased Netcenter transactions and general
growth in consumer and business use of the Internet.
<TABLE>
<CAPTION>
NETCENTER SEGMENT
-------------------------------------------------------------------
YEAR ENDED
TEN MONTHS ENDED DECEMBER 31,
OCTOBER 31, --------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Service Gross Margin:
Service revenues................................... $ 120,405 100.0% $ 95,348 100.0% $ 23,280 100.0%
Cost of service revenues........................... 23,523 19.5 21,157 22.2 15,875 68.2
---------- --------- ---------- --------- ---------- ---------
Gross margin....................................... $ 96,882 80.5% $ 74,191 77.8% $ 7,405 31.8%
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
</TABLE>
GROSS MARGIN. Netcenter's gross margin consisted of Netcenter revenues
offset by the cost of Netcenter operations, consisting primarily of staffing and
telecommunication costs, costs associated with free Client distribution, and
fees paid to third parties related to Netcenter advertising. Netcenter's gross
margins for the ten months ended October 31, 1998 and the years ended December
31, 1997 and 1996 were 80.5%, 77.8%, and 31.8%, respectively. Netcenter's gross
margin increased in 1998 and 1997 due to an increasing number of large dollar
transactions with higher margins. In 1996 the Netcenter business was
57
<PAGE>
just beginning and thus incurred startup costs without directly associated
revenues during the startup period.
OPERATING MARGIN. Netcenter's operating margins for the ten months ended
October 31, 1998 and the years ended December 31, 1997 and 1996 were $(10.8)
million, $(11.4) million, and $(34.9) million, or (8.9)%, (11.9)%, and (149.9)%
of total revenues, respectively. The operating margins improved among these
periods due to increased Netcenter revenue and gross profit, partially offset by
growth in operating expenses. In particular, 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 ten months ended October 31, 1998 and the
years ended December 31, 1997 and 1996 was $6.9 million, $9.1 million, and $8.7
million, respectively. Excluding the effect of the ten month 1998 fiscal year
compared to the twelve month 1997 fiscal year, the decrease from 1997 to 1998
was due primarily to a decline in weighted average invested balances from the
prior year. The increase from 1996 to 1997 was due primarily to a general rise
in interest rates. Interest income may fluctuate in future periods as a result
of changes in Netscape's average cash and investment balances, the structure and
duration of the portfolio, and changes in market interest rates for investments.
OTHER INCOME, NET
Other income, net, for the ten months ended October 31, 1998 and the years
ended December 31, 1997 and 1996 was $8.0 million, $1.9 million, and zero,
respectively. The other income in 1998 and 1997 was primarily attributable to
gains on sales of certain equity investments.
EQUITY IN NET LOSSES OF JOINT VENTURES
Netscape did not have any joint venture investments during 1998. Equity in
net losses of joint ventures for 1997 and 1996 were $5.9 million and $1.9
million, respectively, reflecting Netscape's share of the net losses of
Netscape's joint ventures under the equity method of accounting. See Note 13 of
Notes to Consolidated Financial Statements.
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<PAGE>
INCOME TAXES
Netscape recorded an income tax provision (benefit) of zero, $(11.8)
million, and $7.8 million for the ten months ended October 31, 1998 and the
years ended December 31, 1997 and 1996, respectively. The net deferred tax
assets at October 31, 1998 were $48.2 million, net of a valuation allowance of
$38.3 million, of which $5.3 million relates to certain intangible assets that
are amortizable over 15 years for tax purposes and $12.5 million relates to tax
benefits associated with employee stock options which will be credited to
additional paid-in capital when realized. Realization of Netscape's net deferred
tax assets depends on Netscape generating sufficient taxable income in future
years in appropriate tax jurisdictions to obtain benefit from the reversal of
temporary differences and from net operating loss and credit carryforwards. It
is management's assessment that future levels of taxable income will be
sufficient to realize the net deferred tax asset. See Note 12 of Notes to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, Netscape's principal source of liquidity was $177.5
million in cash, cash equivalents, and short-term investments, representing a
$7.1 million decrease from the December 31, 1997 balance of $184.6 million.
During the same period, long-term investments increased by $12.5 million from
$76.7 million at December 31, 1997 to $89.2 million at October 31, 1998,
resulting in a net increase of $5.4 million in cash, cash equivalents, and
short- and long-term investments from December 31, 1997 to October 31, 1998.
Netscape's cash, and short- and long-term investments are managed to be
available for working capital, strategic investment opportunities, or other
potential cash needs in the future. Netscape has no material debt.
In fiscal 1998, cash provided by operating activities of $27.0 million was
primarily attributable to increases in deferred revenues and accounts payable
and accrued liabilities, partially offset by the growth in accounts receivable
and a net loss for the period. Cash used in investing activities of $25.0
million for 1998 related primarily to capital expenditures of $54.9 million
partially offset by net cash of $29.0 million provided from investment activity.
The capital expenditures primarily consisted of purchases of computer hardware
and software as well as leasehold improvements and furniture and fixtures
related to additional leased facilities. Netscape anticipates that capital
expenditures will decrease in future periods. Cash flows from financing
activities of $28.7 million for 1998 was primarily attributable to proceeds from
the issuance of common stock under Netscape's stock option and employee stock
purchase plans.
In the years 1997 and 1996, cash provided by operating activities of $38.9
million and $13.7 million, respectively, was primarily attributable to increases
in deferred revenues, accounts payable and accrued liabilities, and net income,
as adjusted for non-cash transactions, partially offset by growth in accounts
receivable and other current assets. Cash used in investing activities of $95.7
million and $177.5 million during 1997 and 1996, respectively, related primarily
to capital expenditures of $100.4 million and $82.2 million, respectively, and
in 1996, a net $89.1 million utilized for investments in available-for-sale
securities. 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 flows from financing
activities of $24.3 million for 1997 were primarily attributable to net proceeds
of $24.9 million from Netscape's issuance of common stock under Netscape's stock
option and employee stock purchase plans. Cash flows from financing activities
of $196.9 million for 1996 were primarily attributable to the net proceeds of
$158.3 million from Netscape's second public offering in November 1996, $23.3
million in tax benefit related to stock options, and, to a lesser extent,
approximately $15.8 million from the issuance of common stock under Netscape's
stock plans.
Deferred revenues primarily consist of the unrecognized portion of product
and service revenues received pursuant to subscription and support contracts,
consulting, training, Netcenter services, and prepaid license royalties received
pursuant to license agreements. Deferred revenues increased to $148.6 million at
October 31, 1998 from $106.2 million at December 31, 1997 due to an increase in
59
<PAGE>
advertising prepayments offset partially by a continued decrease in the number
of subscription and support contracts.
Netscape's principal commitments as of October 31, 1998 consisted of
obligations under operating leases for monthly rent. See Note 9 of Notes to
Consolidated Financial Statements.
Netscape believes existing cash and investments together with cash flows
expected to be generated from operations, if any, will suffice to meet
Netscape's operating requirements for at least the next 12 months.
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 are 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.
We have developed a phased Year 2000 readiness plan for the current versions
of our products. The plan includes development of corporate awareness,
assessment, implementation (including remediation, upgrading, and replacement of
certain product versions), validation testing, and contingency planning. We
continue to respond to customer concerns about prior versions of our products on
a case-by-case basis.
We have largely completed all phases of our plan, except for contingency
planning, with respect to the current versions of all of our products. We have
made Year 2000 readiness disclosures stating that the current versions of all of
the products that we currently ship 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 our products are also Year 2000
Compliant. These disclosures note that, in some cases, our products require a
patch we provide with the product in order to be Year 2000 Compliant. We, our
customers, and vendors continue to test our software for compliance and may find
additional errors or defects associated with Year 2000 date functions.
We have defined "Year 2000 Compliant" to mean that the product will
accurately receive, process, and provide date data from, into, and between the
twentieth and twenty-first centuries, including the years 1999 and 2000, and
make leap year calculations, provided that all other products (whether hardware,
software, or firmware) used in or in combination with the product properly
exchange data with it. We have not tested our products on all platforms or all
versions of operating systems that we currently support and have advised our
customers to verify that their platforms and operating systems support the
transition to the year 2000.
We have not specifically tested software obtained from third parties
(licensed software, shareware, and freeware) that is incorporated into our
products, but we are seeking assurances from our vendors that licensed software
is Year 2000 Compliant. Despite our testing, testing by our current and
potential customers, and whatever assurances we may receive from developers of
products incorporated into our products, our products may contain undetected
errors or defects associated with Year 2000 date functions. Current versions of
Netscape ECXpert, Netscape BuyerXpert, Netscape SellerXpert, and Netscape
MerchantXpert include third-party Java components that may not be Year 2000
Compliant in all respects. Netscape provides no warranty to our customers with
respect to the Year 2000 compliance of third-party components embedded in our
software. Also, certain prior versions of our products are not fully Year 2000
Compliant, and we are working to address these issues. Known or unknown errors
or defects in our products could result in delay or loss of revenue, diversion
of development resources, damage to our reputation, or increased service and
warranty costs, any of which could impair our finances or business prospects.
Some commentators have predicted significant litigation regarding Year 2000
compliance
60
<PAGE>
issues, and we are aware of such lawsuits against other software vendors.
Because of the unprecedented nature of such litigation, it is uncertain whether
or to what extent we may be affected by it.
Our internal systems include both our information technology ("IT") and
non-IT systems. We have completed a baseline assessment of our material internal
IT systems (including both our own software products and third-party software
and hardware technology) and our non-IT systems (such as our security system,
building equipment, and embedded microcontrollers) and are beginning
implementation (including remediation, upgrading, and replacement). We have
retained an outside contractor to provide assistance with validation testing and
contingency planning. We expect to complete all project phases by August 31,
1999. To the extent that we are not able to test the technology provided by
third-party vendors, we are seeking assurances from such vendors that their
systems are Year 2000 compliant. Our worst case scenario would involve the
unavailability of our major internal systems to our employees and the
unavailability of Netcenter to its users. In the event of this worst case
scenario, we may incur expenses to repair our systems, face interruptions in the
work of our employees, lose advertising revenue, not be able to deliver minimum
guaranteed levels of traffic, not be able to deliver downloads of our browser
product, and suffer damage to our reputation. We estimate total costs for all
internal systems project phases to be approximately $8 million, with
approximately $5 million of this representing our internal cost of the work our
own employees have done on this project. Costs to be capitalized in connection
with purchased computer hardware are expected to approximate $1.5 million, with
the remaining costs to be expensed as incurred. In addition to the specific
problems and costs we've described, we may experience material unanticipated
problems and costs caused by undetected errors or defects in the technology used
in our internal IT and non-IT systems.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. As is the case with other similarly situated software
companies, if our 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, our finances or business prospects could be impaired.
We have funded our Year 2000 plan from operating cash flows. We estimate
that costs incurred through October 31, 1998 in connection with the Year 2000
compliance project have not been material. We will incur additional amounts
related to the Year 2000 plan for administrative personnel to manage the
project, outside contractor assistance, technical support for our products,
product engineering and customer satisfaction. We may experience material
problems and costs with Year 2000 compliance that could impair our finances and
business prospects.
We have not yet fully developed a comprehensive contingency plan to address
situations that may result if we are unable to achieve Year 2000 readiness of
our critical operations. The cost of developing and implementing such a plan may
itself be material. Finally, we are 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 agreed to adopt the
European Currency Unit (the "Euro") as the common legal currency beginning
January 1, 1999. On that same date they established fixed conversion rates
between their existing sovereign currencies and the Euro. Our e-commerce
application products are not currently "Euro Compliant." We plan to release Euro
Compliant versions of our e-commerce application products in the first calendar
quarter of 1999 (Merchant System and SellerXpert) and second calendar quarter of
1999 (BuyerXpert). Delays in developing these new Euro Compliant versions could
result in delay or loss of revenue, damage to our reputation, or increased
service and warranty costs, any of which could impair our finances or business
prospects. We have defined "Euro Compliant" to mean that our product is capable
of processing and reporting any data denominated in the
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<PAGE>
Euro in the same manner as processing and reporting data denominated in the
national currency units (the "NCUs") that comprise the currencies of those
member states that adopt the Euro without any loss of functionality or
interoperability or degradation in performance of volume capacity and, without
prejudice to the generality of the foregoing, has the ability to provide all the
following functions:
(1) Conversion of NCUs to Euro (and vice versa) at the Fixed Conversion
Rates and conversion of NCUs to NCUs using the Fixed Conversion Rates
between the relevant NCUs and the Euro and, in each case, rounding of
such amounts in accordance with applicable laws and regulations from time
to time. "Fixed Conversion Rates" means the fixed Euro/NCU conversion
rates established by the Council of the European Union pursuant to
Article 109(L) of the Treaty of Rome of 25th March 1957, as amended by
the Single European Act 1986 and the Maastricht Treaty, establishing the
European Community, as amended from time to time.
(2) Rounding of amounts denominated in Euro to the nearest "Euro cent" and
of amounts denominated in NCUs to the nearest sub-unit applicable to the
relevant NCUs and use in data of the Euro symbol;
(3) Making and receiving payment of amounts denominated in Euro and in
different denominations of the Euro and/or in NCUs (including Euro cents
and NCUs); and
(4) All functions and reporting, including regulatory reporting, in both
Euro and NCUs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INVESTMENT PORTFOLIO
Netscape does not use derivative financial instruments in its non-trading
investment portfolio. Netscape places its investments in instruments that meet
high credit quality standards, as specified in Netscape's investment policy
guidelines; the policy also limits the amount of credit exposure to any one
issue, issuer, or type of instrument. Netscape does not expect any material loss
with respect to its investment portfolio.
The table below provides information about Netscape's non-trading investment
portfolio. For investment securities, the table presents principal cash flows
and related weighted average fixed interest rates by expected maturity dates.
Netscape's investment policy requires that all investments mature in five years
or less.
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<PAGE>
Principal (Notional) Amounts by Expected Maturity in U.S. Dollars:
<TABLE>
<CAPTION>
FAIR VALUE
AT
OCTOBER 31,
AT OCTOBER 31, 1998: FY 1999 FY 2000 TOTAL 1998
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT INTEREST RATES)
Cash equivalents................................... $ 52,112 $ -- $ 52,112 $ 52,113
Weighted average interest rate..................... 4.01% -- 4.01%
Investments........................................ $ 91,357 $ 56,532 $ 147,889 $ 148,452
Weighted average interest rate..................... 4.05% 3.89% 3.99%
Total portfolio.................................... $ 143,469 $ 56,532 $ 200,001 $ 200,565
Weighted average interest rate..................... 4.04% 3.89% 4.00%
</TABLE>
<TABLE>
<CAPTION>
FAIR VALUE
AT
DECEMBER
31,
AT DECEMBER 31, 1997: FY 1998 FY 1999 TOTAL 1997
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT INTEREST RATES)
Cash equivalents................................... $ 11,534 $ -- $ 11,534 $ 11,534
Weighted average interest rate..................... 4.05% -- 4.05%
Investments........................................ $ 129,470 $ 52,607 $ 182,077 $ 182,107
Weighted average interest rate..................... 5.36% 5.97% 5.54%
Total portfolio.................................... $ 141,004 $ 52,607 $ 193,611 $ 193,641
Weighted average interest rate..................... 5.25% 5.97% 5.45%
</TABLE>
Included in Investments at October 31, 1998, is $16.3 million of fully
exercisable warrants to purchase 944,666 shares of Excite common stock. During
November 1998 through January 1999, Netscape partially exercised the warrants
and sold 498,079 shares of Excite common stock for a net gain of $22.4 million.
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 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 the ten
months ended October 31, 1998 and in the prior fiscal year ended December 31,
1997 was not material. Because foreign exchange exposure to these fluctuations
increases as sales and intercompany balances grow, Netscape initiated a hedging
program in 1998 designed to mitigate the impact on intercompany balances due to
changes in foreign exchange rates. Netscape also has foreign exchange exposure
related to transactions with third parties. However, these exposures are not
material and therefore are not hedged. This program is expected to continue in
fiscal 1999. Netscape is using foreign exchange forward contracts as a vehicle
for hedging the intercompany balances. In general, these foreign exchange
forward contracts mature in three months or less. At October 31, 1998, the
unhedged exposure is immaterial and Netscape held the following forward exchange
contracts which mature within three months. The estimated fair value of the
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<PAGE>
contracts is immaterial due to their short-term nature. See Note 6 of Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
OCTOBER 31,
1998
NOTIONAL AMOUNT
---------------
(IN THOUSANDS)
<S> <C>
Foreign Currency Forward Exchange Contracts:
700,000,000 Japanese Yen.................................................... $ 6,018
1,300,000 Canadian Dollar................................................... 843
------
$ 6,861
------
------
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required pursuant to this item are included in Part
IV, Item 14 of this Form 10-K/A and are presented beginning on page 70. The
supplementary financial information required by this item is included under the
subsection entitled "Quarterly Results of Operations/Supplementary Financial
Information," beginning on page 108.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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<PAGE>
PART III
ITEM 10. NETSCAPE'S DIRECTORS AND EXECUTIVE OFFICERS.
The current directors and executive officers of Netscape and their ages as
of January 12, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- -------------------------------- --- --------------------------------------------------------------------------
<S> <C> <C>
Marc L. Andreessen.............. 27 Director/Executive Vice President, Products
Barry M. Ariko.................. 52 Executive Vice President and Chief Operating Officer
James L. Barksdale.............. 55 Director/President and Chief Executive Officer
Eric A. Benhamou................ 43 Director
Noreen G. Bergin................ 39 Senior Vice President, Finance and Corporate Controller
William V. Campbell............. 58 Director
James H. Clark.................. 54 Director/Chairman of the Board
Peter L.S. Currie............... 42 Executive Vice President, Chief Administrative Officer, and Chief
Financial Officer
L. John Doerr................... 47 Director
Michael J. Homer................ 40 Executive Vice President, General Manager of Website
Roberta R. Katz................. 51 Senior Vice President, General Counsel and Secretary
Deborah J. Meredith............. 39 Senior Vice President, Customer Satisfaction
Lori P. Mirek................... 35 Senior Vice President, Marketing
</TABLE>
Netscape's directors and executive officers are appointed by, and serve at
the discretion of, the Board of Directors. Each executive officer is a full time
employee of Netscape. There is no family relationship between any executive
officer or director of Netscape.
Mr. Andreessen co-founded Netscape in April 1994 as Vice President,
Technology and has been a director of Netscape since September 1994. Mr.
Andreessen was elected to the position of Senior Vice President, Technology in
January 1996 and to Executive Vice President, Products in July 1997. From
December 1993 to April 1994, Mr. Andreessen served as a software engineer at
Enterprise Integration Technology. He received a B.S. from the University of
Illinois in December 1993, where he co-authored the original NCSA Mosaic Web
browser.
Mr. Ariko joined Netscape in August 1998 as Executive Vice President and
Chief Operating Officer. From April 1994 to August 1998, Mr. Ariko served as
Executive Vice President, for the Americas Division of Oracle Corporation. Prior
to joining Oracle Corporation, Mr. Ariko was Vice President and Managing
Director of the Americas Division of Tandem Computers Incorporated. He joined
Tandem in 1980, and was named Director of Headquarters Marketing in 1982, and
Vice President of U.S. Sales Operations in 1988. Before Tandem, Mr. Ariko spent
13 years in management and sales positions in the computer and defense
electronics industries. Mr. Ariko attended City College of New York, holds a
B.S. degree in management from Golden Gate University, and completed the
Executive Management Program at the Kellogg School, Northwestern University in
1992.
Mr. Barksdale joined Netscape in January 1995 as President and Chief
Executive Officer. He has served as a director of Netscape since October 1994.
From January 1992 to January 1995, Mr. Barksdale served as President and Chief
Operating Officer, and, as of September 1994, Chief Executive Officer, of AT&T
Wireless Services (formerly, McCaw Cellular Communications, Inc. (collectively,
"McCaw")), a cellular telecommunications company. From April 1983 to January
1992, Mr. Barksdale served as Executive Vice President and Chief Operating
Officer of Federal Express Corporation ("Federal Express"), an express package
delivery company. From 1979 to 1983, Mr. Barksdale served as Chief Information
Officer of Federal Express. Mr. Barksdale also held various management
positions, including Chief Information Officer, with Cook Industries Inc.,
during the mid-1970s and was employed by IBM
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from 1965 to 1972. He holds a B.A. from the University of Mississippi. Mr.
Barksdale serves as a director of 3Com Corporation, Robert Mondavi Corporation,
At Home Corporation and Network Computer, Inc.
Mr. Benhamou serves as President, Chief Executive Officer, and Chairman of
the Board of Directors of 3Com Corporation ("3Com"). Mr. Benhamou has served as
a director of Netscape since January 1997. Mr. Benhamou has been the Chairman of
the Board of 3Com since July 1994. He served as 3Com's Chief Executive Officer
since September 1990 and as its President since April 1990. Mr. Benhamou holds
an M.S. in electrical engineering from Stanford University and a Diplome
d'Ingenieur from Ecole Nationale Superieure des Arts et Metiers, Paris. Mr.
Benhamou serves as a director of Cypress Semiconductor, Inc. and Legato Systems,
Inc.
Ms. Bergin joined Netscape in November 1995 as Vice President and Corporate
Controller. Ms. Bergin was elected to Vice President, Finance and Corporate
Controller in October 1997, and Senior Vice President, Finance and Corporate
Controller in February 1998. From November 1991 to November 1995, Ms. Bergin
served as Vice President, Finance and Corporate Controller of Frame Technology
Corporation and prior to that time, she served as Corporate Controller of Boole
& Babbage, Inc. for five years. Ms. Bergin holds a B.A. from Santa Clara
University.
Mr. Campbell serves as Chairman of the Board of Directors of Intuit Inc.
("Intuit"). Mr. Campbell has served as a director of Netscape since August 1998.
He served as Intuit's President and Chief Executive Officer from 1994 to 1998
and as its Chairman of the Board of Directors since August of 1998. Mr. Campbell
holds a Bachelors and Masters degree in Economics from Columbia University. Mr.
Campbell serves as a director of Sandisk, Inc., Great Plains Software, Inc. and
Apple Computer, Inc.
Dr. Clark co-founded Netscape in April 1994 and serves as its Chairman of
the Board. From the inception of Netscape to January 1995, Dr. Clark served as
the President, Chief Executive Officer and Chief Financial Officer of Netscape.
From 1981 to 1994, Dr. Clark was Chairman of the Board of Directors of Silicon
Graphics, a computer systems company he founded in 1981. Dr. Clark also served
as Chief Technical Officer of Silicon Graphics from 1981 to 1987. Prior to
founding Silicon Graphics, Dr. Clark was an associate professor at Stanford
University. Dr. Clark holds a Ph.D. from the University of Utah and an M.S. and
a B.S. from the University of New Orleans. Dr. Clark has served as the Chairman
of the Board of Healtheon Corporation, a health care services company, since
January of 1996, and Seascape, a process control software company, since June of
1996.
Mr. Currie joined Netscape as Vice President and Chief Financial Officer in
April 1995. Mr. Currie was elected to Senior Vice President in January 1996 and
to the position of Executive Vice President and Chief Administrative Officer in
July 1997. From April 1989 to March 1995, Mr. Currie held various management
positions at McCaw, including Executive Vice President and Chief Financial
Officer, and as of February 1993, Executive Vice President of Corporate
Development. From 1982 to 1989, he held various positions at Morgan Stanley &
Co. Incorporated. Mr. Currie holds an M.B.A. from Stanford University and a B.A.
from Williams College. Mr. Currie serves as a member of the Board of Directors
of Corsair Communications, Inc. and InfoSpace.com, Inc.
Mr. Doerr serves as General Partner of Kleiner Perkins Caufield & Byers. Mr.
Doerr has served as a director of Netscape since September of 1994. Mr. Doerr
has served as a general partner of Kleiner Perkins Caufield & Byers, a venture
capital firm, since September 1980. Prior to joining Kleiner Perkins Caufield &
Byers, Mr. Doerr was employed by Intel Corporation for five years. Mr. Doerr
holds a Masters in Engineering from Rice University and an M.B.A. from Harvard
University. He is a director of Intuit Inc., @Home Corporation, Amazon.com, Inc.
Platinum Software Inc., Lightspan Partnership, Sun Microsystems, Inc. and
several privately held companies.
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Mr. Homer joined Netscape in October 1994 as Vice President, Marketing. Mr.
Homer was elected to Senior Vice President, Marketing in January 1996, Executive
Vice President, Sales and Marketing in July 1997, and Executive Vice President,
General Manager of Website in May 1998. From April 1994 to October 1994, Mr.
Homer was a consultant. From August 1993 to April 1994, Mr. Homer served as Vice
President, Engineering at EO Corporation, a hand-held computer manufacturer, and
from July 1991 to July 1993, Mr. Homer was Vice President, Marketing of GO
Corporation, a pen-based software company. He had previously been Director of
Product Marketing of Apple, where he held various technical and marketing
positions from 1982 through 1991. Mr. Homer holds a B.S. from the University of
California, Berkeley.
Dr. Katz joined Netscape in May 1995 as Vice President, General Counsel and
Secretary. Dr. Katz was elected to Senior Vice President in January 1996. From
March 1993 until joining Netscape, Dr. Katz served as Senior Vice President and
General Counsel of McCaw. In addition, from March 1992 until joining Netscape,
Dr. Katz served as Senior Vice President and General Counsel of LIN Broadcasting
Corporation, a subsidiary of McCaw. Prior to March 1992, Dr. Katz was in private
legal practice, most recently as a partner in the law firm of Heller, Ehrman,
White & McAuliffe. Dr. Katz is a Senior Fellow of the Discovery Institute. Dr.
Katz holds a J.D. from the University of Washington School of Law, a Ph.D. from
Columbia University, an M.A. from New York University, and a B.A. from Stanford
University.
Ms. Meredith joined Netscape in November 1995 and was elected to Senior Vice
President, Customer Satisfaction in May 1998. From November 1995 to February
1998, Ms. Meredith served as Senior Vice President of Strategic Technologies and
Products, Vice President of Client Product Development, and Vice President of
Client Engineering. From December 1993 to November 1995, Ms. Meredith served as
Vice President, Research & Development of Collabra Software. From November 1990
to December 1993, Ms. Meredith was Vice President of Development of Slate
Corporation. Ms. Meredith holds an M.S. in Computer Science from Stanford
University and a B.S. in Computer Science and Mathematics from the University of
Michigan.
Ms. Mirek joined Netscape in May 1998 as Senior Vice President, Marketing.
From 1996 to 1997, Ms. Mirek served as a Vice President and General Manager,
Electronic Commerce, and President, Ameritech Health Connections, and Vice
President, Marketing, Custom Business Services at Ameritech. Prior to that time,
she served as Vice President, Americas Marketing and Senior Director, Worldwide
Marketing, Director, Strategic Product Marketing and Market Development, and
Director, Marketing Massively Parallel Systems Division at Oracle Corporation.
Ms. Mirek holds an M.B.A. from Harvard University and a B.S. from Michigan
University.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act ("Section 16(a)") requires Netscape's
executive officers, directors, and persons who own more than 10% of a registered
class of Netscape's equity securities ("10% Stockholders") to file reports of
ownership on a Form 3 and changes in ownership on a Form 4 or a Form 5 with the
Commission and the Nasdaq Stock Market, Inc. Such executive officers, directors
and 10% Stockholders are also required by Commission rules to furnish Netscape
with copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by Netscape,
or written representations from certain reporting persons that no Forms 5 were
required for such persons, Netscape believes that during 1998 its executive
officers, directors and 10% Stockholders complied with all applicable Section
16(a) filing requirements.
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ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning total
compensation received for services rendered to Netscape in all capacities during
the period January 1, 1996 to October 31, 1998 by (i) the Chief Executive
Officer, (ii) each of the four most highly compensated executive officers who
were serving as of the end of fiscal 1998, and (iii) two additional persons who
served as executive officers during fiscal 1998 who would have been two of the
four most highly compensated executive officers had they been serving as of the
end of fiscal 1998 (the "Named Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------------------------------
LONG-TERM
COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS/OPTIONS(1) COMPENSATION
- -------------------------------------------------- --------- ---------- ---------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
James L. Barksdale................................ 1998 $ 1.00 -- -- --
PRESIDENT AND CHIEF EXECUTIVE OFFICER 1997 $ 1.00 -- 300,200(2) --
1996 $ 100,000 -- -- --
Marc L. Andreessen................................ 1998 $ 150,190 $ 100,000 1,500,000 $ 252
EXECUTIVE VICE PRESIDENT OF PRODUCTS AND 1997 $ 150,000 $ 100,000 100,200 --
SENIOR VICE PRESIDENT OF TECHNOLOGY 1996 $ 150,000 $ 49,668 -- --
Barry M. Ariko(3)................................. 1998 $ 170,673 $ 500,000 719,700(4) $ 1,740
EXECUTIVE VICE PRESIDENT, CHIEF 1997 -- -- -- --
OPERATING OFFICER 1996 -- -- -- --
Noreen G. Bergin.................................. 1998 $ 187,500 $ 49,423 170,200 $ 440
SENIOR VICE PRESIDENT, FINANCE 1997 $ 193,150 $ 25,000 30,200(5) --
AND CORPORATE CONTROLLER 1996 $ 154,050 $ 32,813 100,000(6) $ 1,250
Roberta R. Katz................................... 1998 $ 183,333 $ 64,523 90,200 $ 1,829
SENIOR VICE PRESIDENT, GENERAL 1997 $ 175,000 -- 50,200(7) $ 1,729
COUNSEL AND SECRETARY 1996 $ 175,000 $ 30,625 -- $ 1,044
Robert J. Lisbonne................................ 1998 $ 216,667 $ 28,116 185,200 $ 15,840(8)
SENIOR VICE PRESIDENT AND GENERAL 1997 $ 166,307 $ 17,291 15,200(9) $ 16,680(10)
MANAGER, CLIENT PRODUCTS DIVISION 1996 $ 144,953 $ 32,626 70,000(11) $ 17,520(12)
John M. Paul(13).................................. 1998 $ 241,667 $ 41,153 200,200 $ 898
SENIOR VICE PRESIDENT AND GENERAL MANAGER, 1997 $ 216,695 $ 1,617 100,200(14) $ 163,369(15)
SERVER PRODUCTS DIVISION 1996 -- -- 60,000 --
</TABLE>
- ------------------------
(1) Except where noted, the numbers in this column represent options granted
with exercise prices equal to the fair market value on the date of grant.
(2) On April 3, 1998, Mr. Barksdale revoked his right to a stock option for
300,000 shares granted on April 23, 1997.
(3) Mr. Ariko joined the company on August 10, 1998.
(4) Represents 119,700 shares from a Restricted Stock Purchase right granted at
par value that was exercised in full on August 31, 1998 and is subject to
repurchase as to unvested shares upon termination of Mr. Ariko's employment
with the company; and an option to purchase 600,000 shares with an exercise
price equal to fair market value on the date of grant.
(5) Represents options totaling 30,200 shares that were canceled and reissued
in 1998.
(6) Represents options totaling 100,000 shares that were canceled and reissued
in 1998.
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<PAGE>
(7) Represents options totaling 50,200 shares that were canceled and reissued
in 1998.
(8) Represents $15,000 of indebtedness and $840 in interest forgiven by the
Company, which indebtedness consists of a portion of the principal amount
of a loan provided to Mr. Lisbonne in connection with the purchase of a
principal residence. See "Transactions with Management."
(9) Represents options totaling 15,200 shares that were canceled and reissued
in 1998. See "Transactions with Management."
(10) Represents $15,000 of indebtedness and $1,680 in interest forgiven by the
Company, which indebtedness consists of a portion of the principal amount
of a loan provided to Mr. Lisbonne in connection with the purchase of a
principal residence. See "Transactions with Management."
(11) Represents options totaling 70,000 shares that were canceled and reissued
in 1998. See "Transactions with Management."
(12) Represents $15,000 of indebtedness and $2,520 in interest forgiven by the
Company, which indebtedness consists of a portion of the principal amount
of a loan provided to Mr. Lisbonne in connection with the purchase of a
principal resident. See "Transactions with Management."
(13) Mr. Paul joined the company on December 16, 1996.
(14) Represents options totaling 100,200 shares that were canceled and reissued
in 1998. See "Transactions with Management."
(15) Represents reimbursement provided to Mr. Paul in connection with
relocation expenses. See "Transactions with Management."
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth, as to the Named Officers, information
concerning stock options granted during the year ended October 31, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------------
NAME GRANTED(1) FISCAL YEAR(2) SHARE DATE(3) 5% 10%
- ----------------------------------- ------------ --------------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
James L. Barksdale................. -- 0% -- -- -- --
Marc L. Andreessen................. 500,000(5) 2.7997% $ 16.8125 04/08/08 $ 5,286,645 $ 13,397,397
700,000(5) 3.9195% $ 22.3750 06/02/08 $ 9,850,062 $ 24,961,991
300,000(5) 1.6798% $ 22.3750 06/02/08 $ 4,221,455 $ 10,697,996
Barry M. Ariko..................... 600,000(6) 3.3596% $ 25.0625 08/08/08 $ 9,457,003 $ 23,965,902
Noreen G. Bergin................... 30,000(7) 0.1680% $ 16.8125 04/09/07 $ 285,537 $ 707,170
200(8) 0.0011% $ 16.8125 07/07/07 $ 1,966 $ 4,904
100,000(7) 0.5599% $ 16.8125 11/08/05 $ 775,972 $ 1,847,233
40,000(5) 0.2240% $ 16.8125 04/08/08 $ 422,932 $ 1,071,792
Roberta R. Katz.................... 50,000(9) 0.2800% $ 16.8125 04/23/07 $ 478,362 $ 1,186,011
200(8) 0.0011% $ 16.8125 07/07/07 $ 1,966 $ 4,904
40,000(5) 0.2240% $ 16.8125 04/08/08 $ 422,932 $ 1,071,792
Robert J. Lisbonne................. 50,000(7) 0.2800% $ 16.8125 11/15/05 $ 389,136 $ 926,844
200(8) 0.0011% $ 16.8125 07/07/07 $ 1,967 $ 4,904
20,000(7) 0.1119% $ 16.8125 11/06/06 $ 179,629 $ 439,611
15,000(9) 0.0840% $ 16.8125 04/23/07 $ 143,508 $ 355,803
100,000(5) 0.5599% $ 16.8125 04/08/08 $ 1,057,329 $ 2,679,479
John M. Paul....................... 60,000(7) 0.3359% $ 16.8125 04/10/07 $ 571,286 $ 1,414,972
200(8) 0.0011% $ 16.8125 07/07/07 $ 1,967 $ 4,904
40,000(9) 0.2240% $ 16.8125 08/20/07 $ 399,609 $ 999,980
100,000(5) 0.5599% $ 16.8125 04/08/08 $ 1,057,329 $ 2,679,479
</TABLE>
- ------------------------
(1) The options in this table are incentive stock options or nonstatutory stock
options, except as otherwise provided, granted under the 1995 Stock Plan and
the 1998 Stock Option Plan and have exercise prices equal to the fair market
value on the date of grant. All such options have ten-year terms.
(2) Netscape granted (or assumed) options to purchase 17,859,309 shares of
Common Stock to employees in fiscal 1998. This includes 8,558,898 shares
granted with respect to a repricing.
(3) The options in this table may terminate before their expiration upon the
termination of optionee's status as an employee or consultant or upon the
optionee's disability or death.
(4) Under rules promulgated by the Commission, the amounts in these two columns
represent the hypothetical gain or "option spread" that would exist for the
options in this table based on assumed stock price appreciation from the
date of grant until the end of such options' ten-year term at assumed annual
rates of 5% and 10%. Annual compounding results in total appreciation of 63%
(at 5% per year) and 159% (at 10% per year). If the price of Netscape's
Common Stock were to increase at such rates from the price at 1998 year end
($21.4375 per share) over the next 10 years, the resulting stock price at 5%
and 10% appreciation would be $34.92 and $53.07, respectively. The 5% and
10% assumed annual rates of appreciation are specified in the Commission
rules and do not represent
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<PAGE>
Netscape's estimate or projection of future stock price growth. Netscape
does not necessarily agree that this method can properly determine the value
of an option.
(5) Vests over a period of 24 months at a rate of 50% of the shares subject to
the options at the end of 12 months from the grant date and 50% of the
shares subject to the options at the end of 24 months from the grant date.
(6) Vests over a period of 36 months at a rate of approximately 27.77% of the
shares subject to the option at the end of 10 months from the vesting
commencement date and approximately 2.77% per month thereafter.
(7) Vests over a period of 56 months at a rate of 20% of the shares subject to
the options at the end of 10 months from the vesting commencement date and
approximately 1.7% per month thereafter.
(8) Vests fully eighteen months from 7/7/97.
(9) Vests over a period of 66 months at a rate of approximately 1.5% per month
from 4/23/97.
OPTION EXERCISES AND HOLDINGS
The following table sets forth, as to the Named Officers, certain
information concerning the number of shares subject to both exercisable and
unexercisable stock options as of October 31, 1998. Also reported are values for
"in-the-money" options that represent the positive spread between the respective
exercise prices of outstanding stock options and the fair market value of
Netscape's Common Stock as of October 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END FISCAL YEAR END(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James L. Barksdale.................................. 200 -- -- --
Marc L. Andreessen.................................. 30,200 1,570,000 -- $ 2,312,500
Barry M. Ariko...................................... -- 600,000 -- --
Noreen G. Bergin.................................... 77,245 92,955 $ 357,258 $ 429,917
Roberta R. Katz..................................... 14,286 75,914 $ 66,073 $ 351,102
John M. Paul........................................ 28,907 171,293 $ 133,695 $ 792,230
</TABLE>
- ------------------------
(1) Market value of underlying securities based on the closing price of
Netscape's Common Stock on October 30, 1998 (the last trading day of fiscal
1998) on the Nasdaq National Market of $21.4375 minus the exercise price.
STOCK OPTION EXCHANGE AND REPRICING
Netscape exchanged employee options on August 15, 1996 and repriced employee
options on January 28, 1998. The stock option exchange and repricing
acknowledged the importance to Netscape of its employees and of the incentive to
employees represented by stock options, especially in considering alternative
opportunities. In deciding both the exchange and the repricing, the Board of
Directors considered such factors as the competitive environment for obtaining
and retaining qualified employees and the overall benefit to the stockholders
from a highly motivated group of employees.
On August 15, 1996, the Board of Directors offered all employees the
opportunity to exchange their outstanding stock options that had exercise prices
in excess of the closing price per share of Netscape's Common Stock on August
30, 1996 for new options that would be exercisable at the fair market value of
Netscape's Common Stock as of the closing of the stock market on August 30, 1996
($35.375). These new options would otherwise be identical to the old options
except that the new options would have an
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<PAGE>
approximately six-month period before they would become exercisable; thereafter,
the new options would become exercisable on the same schedule as the old
options.
On January 28, 1998, 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. Netscape's
Board of Directors, Chief Executive Officer, and Executive Vice Presidents were
not eligible to, and did not participate in, the repricing. Options repriced on
January 28, 1998 were generally not exercisable before July 28, 1998 and six
months was added to the vesting schedule of each repriced option.
The following table sets forth, as to all executive officers of Netscape,
certain information concerning the repricing of all such officers' options since
Netscape's inception through October 31, 1998.
<TABLE>
<CAPTION>
TEN YEAR OPTION REPRICING TABLE
----------------------------------- LENGTH OF
NUMBER OF MARKET PRICE ORIGINAL OPTION
SECURITIES OF STOCK AT EXERCISE TERM REMAINING
UNDERLYING OPTIONS TIME OF PRICE AT TIME NEW EXERCISE AT DATE OF
NAME DATE REPRICED REPRICING OF REPRICING PRICE REPRICING
- ------------------------- --------- ------------------- -------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Noreen G. Bergin......... 08/30/96 100,000 $ 35.3750 $ 49.0000 $ 35.3750 9 yrs., 2 mos.
01/28/98 100,000(1) $ 16.8125 $ 35.3750 $ 16.8125 7 yrs., 9 mos.
01/28/98 30,000 $ 16.8125 $ 27.2500 $ 16.8125 9 yrs., 2 mos.
01/28/98 200 $ 16.8125 $ 37.8750 $ 16.8125 9 yrs., 5 mos.
Larry K. Geisel.......... 08/30/96 100,000 $ 35.3750 $ 45.0000 $ 35.3750 9 yrs., 6 mos.
Eric A. Hahn............. 08/30/96 200,000 $ 35.3750 $ 69.7500 $ 35.3750 9 yrs., 4 mos.
Roberta R. Katz.......... 01/28/98 50,000 $ 16.8125 $ 27.5000 $ 16.8125 9 yrs., 2 mos.
01/28/98 200 $ 16.8125 $ 37.8750 $ 16.8125 9 yrs., 5 mos.
Robert J. Lisbonne....... 08/30/96 50,000 $ 35.3750 $ 47.8750 $ 35.3750 9 yrs., 2 mos.
01/28/98 50,000(1) $ 16.8125 $ 35.3750 $ 16.8125 7 yrs., 9 mos.
01/28/98 20,000 $ 16.8125 $ 50.2500 $ 16.8125 8 yrs., 9 mos.
01/28/98 15,000 $ 16.8125 $ 37.8750 $ 16.8125 9 yrs., 5 mos.
01/28/98 200 $ 16.8125 $ 37.8750 $ 16.8125 9 yrs., 5 mos.
Deborah J. Meredith...... 08/30/96 80,000 $ 35.3750 $ 47.8750 $ 35.3750 9 yrs., 2 mos.
01/28/98 80,000(1) $ 16.8125 $ 35.3750 $ 16.8125 7 yrs., 9 mos.
01/28/98 20,000 $ 16.8125 $ 50.2500 $ 16.8125 8 yrs., 9 mos.
01/28/98 15,000 $ 16.8125 $ 27.2500 $ 16.8125 9 yrs., 2 mos.
01/28/98 200 $ 16.8125 $ 37.8750 $ 16.8125 9 yrs., 5 mos.
Lori P. Mirek............ 01/28/98 75,000 $ 16.8125 $ 36.3750 $ 16.8125 9 yrs., 8 mos.
John M. Paul............. 01/28/98 60,000 $ 16.8125 $ 26.3750 $ 16.8125 9 yrs., 2 mos.
01/28/98 40,000 $ 16.8125 $ 38.1875 $ 16.8125 9 yrs., 6 mos.
01/28/98 200 $ 16.8125 $ 37.8750 $ 16.8125 9 yrs., 5 mos.
</TABLE>
- ------------------------
(1) Represents the same securities underlying options repriced on August 30,
1996 in the same denomination.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of Common Stock of Netscape as of January 12, 1999 for the following:
(i) each person or entity who is known by Netscape to own beneficially more than
5% of the outstanding shares of Netscape common stock; (ii) each of
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<PAGE>
Netscape's current directors; (iii) each of the officers named in the Summary
Compensation Table; and (iv) all directors and executive officers of Netscape as
a group.
Netscape has entered into an Agreement and Plan of Merger dated November 23,
1998 with America Online, Inc. pursuant to which a change in control of Netscape
may occur. In addition, certain stockholders of Netscape, as indicated below,
have entered into voting agreements agreeing, among other things, to vote their
shares of Netscape common stock in favor of the proposed merger pursuant to the
merger agreement.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
- ----------------------------------------------------------------------------------- ------------------ -----------
<S> <C> <C>
America Online, Inc.(2) ........................................................... 40,159,863 38.7%
22000 AOL Way
Dulles, VA 20166-9323
James H. Clark(3).................................................................. 14,429,336 13.9%
James L. Barksdale(4).............................................................. 5,098,459 4.9%
Marc L. Andreessen(5).............................................................. 782,017 *
Barry M. Ariko(6).................................................................. 119,700 *
Eric A. Benhamou(7)................................................................ 29,845 *
Noreen G. Bergin(8)................................................................ 64,295 *
William V. Campbell................................................................ 0 *
L. John Doerr(9)................................................................... 428,116 *
Roberta R. Katz(10)................................................................ 321,438 *
Robert J. Lisbonne(11)............................................................. 79,953 *
John M. Paul(12)................................................................... 28,080 *
All directors and executive officers as a group (15 persons)(13)................... 22,367,174 21.5%
</TABLE>
- ------------------------
* Less than 1%.
(1) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Exchange Act, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under
such rule, beneficial ownership includes any shares as to which the
individual or entity has voting power or investment power and any shares
that the individual has the right to acquire within 60 days of January 12,
1999 through the exercise of any stock option or other right. Unless
otherwise indicated in the footnotes or table, each person or entity has
sole voting and investment power (or shares such powers with his or her
spouse) with respect to the shares shown as beneficially owned and has an
address of c/o Netscape Communications Corporation, 501 East Middlefield
Road, Mountain View, CA 94043.
(2) Includes 19,887,317 shares purchasable upon exercise of an option, which
may be exercised in whole or in part, any time following the occurrence of
certain triggering events in connection with the AOL-Netscape merger
agreement, including the termination of the merger agreement. Also includes
20,272,546 shares which are subject to a voting agreement entered into with
AOL by certain stockholders of Netscape pursuant to which such stockholders
have agreed to vote all of the shares beneficially owned by them in favor
of the proposed merger.
(3) Includes (i) 200 stock option shares exercisable within 60 days of January
12, 1999, (ii) 900,000 shares held by Clark Ventures, Inc., and (iii)
11,699,643 shares held by Monaco Partners, L.P., of which Dr. Clark is sole
limited partner. All of the shares beneficially owned by Dr. Clark are
subject to a voting agreement with America Online, Inc., under which Dr.
Clark has agreed, among other things, to vote his shares of Netscape common
stock in favor of the proposed merger pursuant to the merger agreement.
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<PAGE>
(4) Includes (i) 264,000 unvested shares subject to a repurchase right of the
Company upon cessation of Mr. Barksdale's service to the Company; (ii) 200
stock option shares exercisable within 60 days of January 12, 1999; and
(iii) 40,000 shares held by a family member. All of the shares beneficially
owned by Mr. Barksdale are subject to a voting agreement with America
Online, Inc., under which Mr. Barksdale has agreed, among other things, to
vote his shares of Netscape common stock in favor of the proposed merger
pursuant to the merger agreement.
(5) Includes (i) 36,866 stock option shares exercisable within 60 days January
12, 1999 and (ii) 10,038 shares held by The Andreessen 1996 Charitable
Remainder Trust Dated 2/1/96. All of the shares beneficially owned by Mr.
Andreessen are subject to a voting agreement with America Online, Inc.,
under which Mr. Andreessen has agreed, among other things, to vote his
shares of Netscape common stock in favor of the proposed merger pursuant to
the merger agreement.
(6) Includes 109,725 shares subject to a repurchase right of the Company upon
cessation of Mr. Ariko's service to the Company.
(7) Includes 26,666 stock option shares exercisable within 60 days of January
12, 1999.
(8) Includes 63,223 stock option shares exercisable within 60 days of January
12, 1999.
(9) Includes (i) 253,264 shares, 98,041 shares, 4,790 shares, 3,237 shares and
7,718 shares held by Mr. Doerr, the Doerr Irrevocable Children's Trust
5/26/94, the LJD Trust VII, the Doerr Trust Dated 3/16/92, and the Vallejo
Foundation respectively and (ii) 61,066 stock option shares exercisable
within 60 days of January 12, 1999. Mr. Doerr disclaims beneficial
ownership of shares held by the Doerr Irrevocable Children's Trust DTD
5/26/94, the LJD Trust VII, the Doerr Trust DTD 3/16/92, and Vallejo
Foundation, except to the extent of any indirect pecuniary interest
therein.
(10) Includes (i) 72,000 unvested shares subject to a repurchase right of the
Company upon cessation of Dr. Katz's service to the Company and (ii)
17,462 stock option shares exercisable within 60 days of January 12, 1999.
(11) Includes 52,959 stock option shares exercisable within 60 days of January
12, 1999.
(12) Includes 26,677 stock option shares exercisable within 60 days of January
12, 1999.
(13) Includes (i) an aggregate of 519,236 shares issuable upon currently
exercisable options, (ii) options exercisable for 34,204 shares within 60
days of January 12, 1999 and (iii) an aggregate of 525,725 shares subject
to certain repurchase rights of the Company upon cessation of certain
executive officers' service to the Company, which repurchase rights
generally lapse at a rate of two percent per month.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EMPLOYMENT AGREEMENTS
Netscape has an employment agreement with James L. Barksdale, Netscape's
President and Chief Executive Officer, which is terminable at will by either
Netscape or Mr. Barksdale. In connection with such agreement, Mr. Barksdale was
granted an option to purchase 8,000,000 shares of Netscape's Common Stock at an
exercise price of $0.0563 per share. The option was immediately exercisable,
with 4,000,000 shares vesting immediately upon grant and an additional 80,000
shares vesting per month thereafter. Netscape retains the right to repurchase
any unvested shares at $0.0563 per share upon the cessation of Mr. Barksdale's
service for any reason. Upon a change in control of Netscape, Mr. Barksdale is
entitled to continued vesting of his stock options and restricted stock.
Netscape's merger with AOL will constitute a change of control under Mr.
Barksdale's employment agreement.
74
<PAGE>
Certain other Named Officers have agreements with Netscape entitling them to
continued vesting of their stock options and restricted stock after a change in
control of Netscape. Netscape's merger with AOL will constitute a change of
control under these agreements.
TRANSACTIONS WITH MANAGEMENT
In October of 1995 Netscape carried over a loan of $60,000 that had
originally been given to Robert J. Lisbonne, an executive officer of Netscape,
during his tenure at Collabra Software, Inc. ("Collabra"). Netscape acquired
Collabra on November 5, 1995. The loan was secured by a lien on options
exercisable while the loan was outstanding, bore no interest, and was forgivable
by Netscape over four years at a rate of 25% per year. The largest aggregate
amount of indebtedness outstanding at any time in 1998 was $15,000, which was
forgiven on August 11, 1998.
In April 1997, Netscape granted an option to purchase 60,000 shares to John
M. Paul, an executive officer of Netscape, conditioned upon the surrender and
cancellation of his existing option for 60,000 shares that was granted in
December 1996 and the execution by Mr. Paul and Netscape of the standard form of
Stock Option Agreement. In 1997, Netscape reimbursed $163,369 to Mr. Paul to
assist in his relocation to the San Francisco Bay Area.
Netscape believes that all of the transactions set forth above were made on
terms no less favorable to Netscape than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
Netscape and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested directors of the Board of
Directors, and will be on terms no less favorable to Netscape than could be
obtained from unaffiliated third parties.
75
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The following consolidated financial statements, and the related notes
thereto, of Netscape and the Report of Independent Auditors are filed as a part
of this Form 10-K/A.
<TABLE>
<CAPTION>
PAGE NUMBER
-------------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................................................... 77
Consolidated Financial Statements:
Consolidated Balance Sheets as of October 31, 1998 and December 31, 1997................................ 78
Consolidated Statements of Operations for the ten months ended October 31, 1998 and years ended December
31, 1997 and 1996..................................................................................... 79
Consolidated Statements of Stockholders' Equity for the ten months ended October 31, 1998 and years
ended December 31, 1997 and 1996...................................................................... 80
Consolidated Statements of Cash Flows for the ten months ended October 31, 1998 and years ended December
31, 1997 and 1996..................................................................................... 81
Notes to Consolidated Financial Statements.............................................................. 82
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of Netscape for the ten months
ended October 31, 1998 and each of the years ended December 31, 1997 and 1996 is
filed as part of this Form 10-K/A and should be read in conjunction with the
Consolidated Financial Statements, and related notes thereto, of Netscape.
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Schedule II--Valuation and Qualifying Accounts.......................................................... S-1
</TABLE>
Schedules other than those listed above have been omitted since they are
either not required, not applicable, or the information is otherwise included.
3. EXHIBITS.
The exhibits listed on the accompanying index to exhibits immediately
following the financial statement schedule are filed as part of, or incorporated
by reference into, this Form 10-K/A.
(b) REPORTS ON FORM 8-K.
1. A Current Report on Form 8-K was filed with the Securities and
Exchange Commission (the "Commission") by Netscape on November 25,
1998; to report that Netscape signed a merger agreement with AOL
under which AOL will acquire Netscape in a transaction that is
anticipated to be accounted for as a pooling of interests and will
qualify as a tax-free reorganization. The merger is subject to
approval by various governmental agencies and Netscape stockholders.
2. A Current Report on Form 8-K was filed with the Commission by
Netscape on December 7, 1998, to report that the Board of Directors
adopted a Preferred Share Purchase Rights Plan.
3. A Current Report on Form 8-K was filed with the Commission by
Netscape on January 8, 1999, to report that Netscape completed its
acquisition of AtWeb on December 31, 1998.
4. Amended Current Report on Form 8-K/A was filed with the Commission by
Netscape on February 17, 1999, to report the closing of Netscape's
acquisition of GEIS's membership interest in Actra.
76
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Netscape Communications Corporation
We have audited the accompanying consolidated balance sheets of Netscape
Communications Corporation as of October 31, 1998 and December 31, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the ten months ended October 31, 1998 and for each of the two years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of Netscape's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Netscape Communications Corporation at October 31, 1998 and December 31, 1997,
and the consolidated results of its operations and its cash flows for the ten
months ended October 31, 1998 and for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed more fully in Note 1 to the financial statements, the Company
has modified the methods used to value purchased in-process research and
development recorded and written-off in connection with the Company's
acquisitions of DigitalStyle Corporation, Portola Communications, Inc. and Actra
Business Systems, LLC in June and December of 1997 and, accordingly, has
restated the consolidated financial statements for the fiscal years ended
October 31, 1998 and December 31, 1997 to reflect this change.
/s/ ERNST & YOUNG LLP
Palo Alto, California
November 19, 1998, except for Note 1
"Restatement of Financial Statements",
as to which the date is February 3, 1999
77
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
1998 1997
----------- ------------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 85,885 $ 55,172
Short-term investments.............................................................. 91,598 129,426
Accounts receivable, net of allowances of $6,418 in 1998 and $8,335 in 1997......... 164,892 153,191
Deferred tax assets................................................................. 39,770 37,336
Other current assets................................................................ 24,535 19,961
----------- ------------
Total current assets.............................................................. 406,680 395,086
Property and equipment, net........................................................... 144,886 131,093
Long-term investments................................................................. 89,169 76,698
Goodwill, net......................................................................... 76,149 86,886
Other assets.......................................................................... 20,731 22,508
----------- ------------
Total assets...................................................................... $ 737,615 $ 712,271
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 50,214 $ 40,081
Accrued compensation and related liabilities........................................ 26,977 23,193
Other accrued liabilities........................................................... 35,980 34,106
Deferred revenues................................................................... 148,582 106,170
----------- ------------
Total current liabilities......................................................... 261,753 203,550
Long-term obligations and installment notes payable................................... 420 215
Commitments and contingencies.........................................................
Stockholders' equity:
Preferred stock, $0.0001 par value; issuable in series; 5,000,000 shares authorized;
no shares issued and outstanding.................................................. -- --
Common stock, $0.0001 par value; 200,000,000 shares authorized; 99,818,160 shares in
1998 and 97,984,300 shares in 1997 issued and outstanding......................... 10 10
Additional paid-in capital.......................................................... 579,842 552,100
Deferred compensation............................................................... (1,306) (3,671)
Accumulated deficit................................................................. (102,751) (42,664)
Accumulated other comprehensive income (loss)....................................... (353) 2,731
----------- ------------
Total stockholders' equity.......................................................... 475,442 508,506
----------- ------------
Total liabilities and stockholders' equity........................................ $ 737,615 $ 712,271
----------- ------------
----------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
78
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1996
----------
TEN MONTHS
ENDED
OCTOBER 31,
1998 1997
----------- -----------
(RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues:
Product revenues......................................................... $ 261,457 $ 383,950 $ 291,183
Service revenues......................................................... 186,352 149,901 55,111
----------- ----------- ----------
Total revenues......................................................... 447,809 533,851 346,294
Cost of revenues:
Cost of product revenues................................................. 29,896 36,579 25,552
Cost of service revenues................................................. 90,717 77,118 43,776
----------- ----------- ----------
Total cost of revenues................................................. 120,613 113,697 69,328
----------- ----------- ----------
Gross profit............................................................... 327,196 420,154 276,966
Operating expenses:
Research and development................................................. 123,238 132,808 86,023
Sales and marketing...................................................... 213,004 237,321 133,124
General and administrative............................................... 42,715 50,357 31,231
Purchased in-process research and development............................ -- 23,250 --
Merger related charges................................................... -- 5,848 6,100
Restructuring charges.................................................... 12,000 23,000 --
Goodwill amortization.................................................... 11,175 3,300 --
----------- ----------- ----------
Total operating expenses............................................... 402,132 475,884 256,478
----------- ----------- ----------
Operating income (loss).................................................... (74,936) (55,730) 20,488
Interest income, net....................................................... 6,873 9,062 8,720
Other income, net.......................................................... 7,976 1,860 --
Equity in net losses of joint ventures..................................... -- (5,939) (1,928)
----------- ----------- ----------
Income (loss) before income taxes.......................................... (60,087) (50,747) 27,280
Provision (benefit) for income taxes....................................... -- (11,788) 7,763
----------- ----------- ----------
Net income (loss).......................................................... $ (60,087) $ (38,959) $ 19,517
----------- ----------- ----------
----------- ----------- ----------
Basic net income (loss) per share.......................................... $ (0.63) $ (0.45) $ 0.27
----------- ----------- ----------
----------- ----------- ----------
Diluted net income (loss) per share........................................ $ (0.63) $ (0.45) $ 0.21
----------- ----------- ----------
----------- ----------- ----------
Shares used in computing basic net income (loss) per share................. 95,993 86,058 72,942
----------- ----------- ----------
----------- ----------- ----------
Shares used in computing diluted net income (loss) per share............... 95,993 86,058 90,841
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
79
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED PAID-IN- DEFERRED ACCUMULATED
STOCK COMMON STOCK CAPITAL COMPENSATION DEFICIT
------------- ------------- ----------- --------------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995...................... $ -- $ 8 $ 206,425 $ (8,584) $ (22,716)
Issuance of 1,536,364 shares of common stock
primarily upon exercise of stock options, for
cash and services, net of repurchases plus cash
received from stockholders' notes of $763....... -- -- 10,319 -- --
Issuance of 427,689 shares of common stock
(InSoft, PaperSoftware, and Netcode) and other.. -- -- 615 -- (419)
Issuance of 3,571,836 shares of common stock
(KIVA), net of issuance costs of $37 and
other........................................... -- -- 5,050 -- (87)
Amortization of deferred compensation............. -- -- -- 2,456 --
Issuance of 3,090,000 shares of common stock, net
of offering costs of $325....................... -- 1 158,314 -- --
Tax benefit related to stock options.............. -- -- 23,340 -- --
Comprehensive income:
Net income...................................... -- -- -- -- 19,517
Other comprehensive income (loss), net of tax:
Net unrealized loss on available-for-sale
securities.................................. -- -- -- -- --
Translation loss.............................. -- -- -- -- --
Other comprehensive income......................
Comprehensive income..............................
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996...................... -- 9 404,063 (6,128) (3,705)
Issuance of 1,053,667 shares of common stock
related to stock option exercises and the
employee stock purchase plan, for cash and
services, net of repurchases.................... -- -- 15,434 -- --
Issuance of 1,781,489 shares of common stock in
connection with the purchase of DigitalStyle and
Portola (restated).............................. -- -- 57,061 -- --
Issuance of 1,731,848 shares of common stock
(KIVA).......................................... -- 1 9,468 -- --
Issuance of 1,932,579 shares of common stock in
connection with the purchase of Actra........... -- -- 66,074 -- --
Amortization of deferred compensation............. -- -- -- 2,457 --
Comprehensive income:
Net loss (restated)............................. -- -- -- -- (38,959)
Other comprehensive income (loss), net of tax:
Net unrealized gain on available-for-sale
securities, net of tax of $2,208............ -- -- -- -- --
Translation loss.............................. -- -- -- -- --
Other comprehensive income........................
Comprehensive income (restated)...................
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 (RESTATED)........... -- 10 552,100 (3,671) (42,664)
Issuance of 1,833,860 shares of common stock
related to stock option exercises and the
employee stock purchase plan, for cash and
services, net of repurchases.................... -- -- 28,368 -- --
Amortization of deferred compensation............. -- -- -- 1,739 --
Reversal of deferred compensation associated with
terminated employees............................ -- -- (626) 626 --
Comprehensive income:
Net loss (restated)............................. -- -- -- -- (60,087)
Other comprehensive income (loss), net of tax:
Net unrealized loss on available-for-sale
securities, net of tax of
$(2,064).................................... -- -- -- -- --
Translation gain.............................. -- -- -- -- --
Other comprehensive income........................
Comprehensive income (restated)...................
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1998 (RESTATED)............ $ -- $ 10 $ 579,842 $ (1,306) $ (102,751)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY
--------------- -------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995...................... $ 2,254 $ 177,387
Issuance of 1,536,364 shares of common stock
primarily upon exercise of stock options, for
cash and services, net of repurchases plus cash
received from stockholders' notes of $763....... -- 10,319
Issuance of 427,689 shares of common stock
(InSoft, PaperSoftware, and Netcode) and other.. -- 196
Issuance of 3,571,836 shares of common stock
(KIVA), net of issuance costs of $37 and
other........................................... -- 4,963
Amortization of deferred compensation............. -- 2,456
Issuance of 3,090,000 shares of common stock, net
of offering costs of $325....................... -- 158,315
Tax benefit related to stock options.............. -- 23,340
Comprehensive income:
Net income...................................... -- 19,517
Other comprehensive income (loss), net of tax:
Net unrealized loss on available-for-sale
securities.................................. (2,107) (2,107)
Translation loss.............................. (164) (164)
-------------
Other comprehensive income...................... (2,271)
-------------
Comprehensive income.............................. 17,246
- --------------------------------------------------
BALANCE AT DECEMBER 31, 1996...................... (17) 394,222
Issuance of 1,053,667 shares of common stock
related to stock option exercises and the
employee stock purchase plan, for cash and
services, net of repurchases.................... -- 15,434
Issuance of 1,781,489 shares of common stock in
connection with the purchase of DigitalStyle and
Portola (restated).............................. -- 57,061
Issuance of 1,731,848 shares of common stock
(KIVA).......................................... -- 9,469
Issuance of 1,932,579 shares of common stock in
connection with the purchase of Actra........... -- 66,074
Amortization of deferred compensation............. -- 2,457
Comprehensive income:
Net loss (restated)............................. -- (38,959)
Other comprehensive income (loss), net of tax:
Net unrealized gain on available-for-sale
securities, net of tax of $2,208............ 3,383 3,383
Translation loss.............................. (635) (635)
-------------
Other comprehensive income........................ 2,748
-------------
Comprehensive income (restated)................... (36,211)
- --------------------------------------------------
BALANCE AT DECEMBER 31, 1997 (RESTATED)........... 2,731 508,506
Issuance of 1,833,860 shares of common stock
related to stock option exercises and the
employee stock purchase plan, for cash and
services, net of repurchases.................... -- 28,368
Amortization of deferred compensation............. -- 1,739
Reversal of deferred compensation associated with
terminated employees............................ -- --
Comprehensive income:
Net loss (restated)............................. -- (60,087)
Other comprehensive income (loss), net of tax:
Net unrealized loss on available-for-sale
securities, net of tax of
$(2,064).................................... (3,095) (3,095)
Translation gain.............................. 11 11
-------------
Other comprehensive income........................ (3,084)
-------------
Comprehensive income (restated)................... (63,171)
- --------------------------------------------------
BALANCE AT OCTOBER 31, 1998 (RESTATED)............ $ (353) $ 475,442
- --------------------------------------------------
- --------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
80
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1996
----------
TEN MONTHS
ENDED
OCTOBER 31,
1998 1997
----------- -----------
(RESTATED) (RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................................... $ (60,087) $ (38,959) $ 19,517
Adjustments to reconcile net income (loss) to net cash provided by
operating activities net of companies acquired:
Purchased in-process research and development........................... -- 23,250 --
Restructuring charges................................................... -- 19,315 --
Depreciation and amortization........................................... 54,874 41,981 16,369
Amortization of deferred compensation................................... 1,739 2,457 2,456
Deferred income taxes................................................... (2,479) (24,227) (23,747)
Gains on sales of equity investments.................................... (8,798) -- --
Changes in assets and liabilities:
Accounts receivable..................................................... (11,701) (42,370) (83,719)
Other current assets.................................................... (4,575) (2,933) (10,509)
Accounts payable and accrued liabilities................................ 15,636 34,550 43,749
Deferred revenues....................................................... 42,412 25,862 50,276
Long-term obligations................................................... -- -- (725)
----------- ----------- ----------
Net cash provided by operating activities................................... 27,021 38,926 13,667
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................................ (54,909) (100,368) (82,225)
Change in deposits and other assets......................................... 865 1,934 (6,166)
Purchases of investments available-for-sale................................. (193,915) (217,794) (470,085)
Maturities of investments available-for-sale................................ 192,032 104,001 239,208
Sales of investments available-for-sale..................................... 30,880 116,571 141,776
----------- ----------- ----------
Net cash used in investing activities....................................... (25,047) (95,656) (177,492)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (payments) of installment notes payable............................ 360 (599) (450)
Proceeds from issuance of common stock, net................................. 28,368 24,903 174,056
Tax benefit related to stock options........................................ -- -- 23,340
----------- ----------- ----------
Net cash provided by financing activities................................... 28,728 24,304 196,946
Effect of foreign exchange rate changes on cash and cash equivalents........ 11 (635) (164)
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents........................ 30,713 (33,061) 32,957
Cash and cash equivalents at beginning of period............................ 55,172 88,233 55,276
----------- ----------- ----------
Cash and cash equivalents at end of period.................................. $ 85,885 $ 55,172 $ 88,233
----------- ----------- ----------
----------- ----------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid (refunded), net........................................... $ -- $ 11,741 $ 1,241
----------- ----------- ----------
----------- ----------- ----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Common stock issued in connection with the acquisition of goodwill and
intangible assets......................................................... $ -- $ 101,786 $ --
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
81
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Netscape offers software, services, and Website resources to businesses and
consumers using the Internet. Netscape was incorporated in Delaware in April
1994. All references to "the Company" and "Netscape" refer to Netscape
Communications Corporation and its consolidated subsidiaries.
ENTERPRISE SOFTWARE AND SERVICES. Netscape is a provider of software and
services for businesses that want to transform the way they create and keep
customers in the emerging Net Economy. Netscape provides customers with
end-to-end electronic commerce ("e-commerce") solutions.
Netscape develops, markets, sells, and supports a broad suite of enterprise
software, which consists of e-commerce infrastructure and e-commerce
applications targeted primarily at corporate intranets and extranets, as well as
the Internet. Netscape's software allows users to share information, manage
networks, and facilitate electronic commerce. The software is based on
industry-standard protocols that can be deployed across a variety of operating
systems, platforms, and databases and interconnected with traditional
client/server applications.
NETCENTER. Netscape operates Netcenter, a key Web portal where users can
quickly and easily find useful information, products, and services. Netcenter
also showcases Netscape software, partners' software, and customer solutions.
The Netcenter business segment also includes the browser product.
RESTATEMENT OF FINANCIAL STATEMENTS
As described in Note 2, the acquisitions of DigitalStyle Corporation,
("DigitalStyle"), Portola Communications, Inc., ("Portola"), and Actra Business
Systems, LLC, ("Actra") were accounted for as business combinations using the
purchase method of accounting. In accordance with Accounting Principles Board
Opinion No. 16, "Accounting for Business Combinations", the cost of the
acquisitions was allocated to the assets acquired and the liabilities assumed
(including in-process research and development) based on their estimated fair
values using valuation methods believed to be appropriate at the time. The
estimated fair value of the in-process research and development, ("IPR&D"), of
$24.5 million and $28.1 million for DigitalStyle and Portola, respectively, was
expensed in the quarter ended June 30, 1997 and the estimated fair value of the
IPR&D of $50.5 million for Actra was expensed in the quarter ended December 31,
1997 (the periods in which the acquisitions were consummated) in accordance with
FASB Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method". Subsequent to the Securities
and Exchange Commission's letter to the AICPA dated September 9, 1998, regarding
its views on IPR&D, the Company has re-evaluated its IPR&D charges on these
acquisitions, revised the purchase price allocations, principally to reflect the
stage of completion of IPR&D projects, and restated its financial statements. As
a result, Netscape has made adjustments to decrease the amount previously
expensed as IPR&D and increase the amount capitalized as goodwill and other
intangibles relating to these acquisitions in fiscal 1997 by $79.8 million.
82
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The effect of these adjustments on the previously reported consolidated
financial statements as of, and for the ten months ended, October 31, 1998 and
the year ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
TEN MONTHS YEAR ENDED
ENDED OCTOBER 31, 1998 DECEMBER 31, 1997
------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Restated:
Purchased IPR&D........................................... $ 0 $ 0 $ 103,087 $ 23,250
Goodwill amortization..................................... 5,088 11,175 0 3,300
Total operating expenses.................................. 396,045 402,132 552,421 475,884
Operating loss............................................ (66,266) (74,936) (132,267) (55,730)
Loss before income taxes.................................. (51,417) (60,087) (127,284) (50,747)
Net loss.................................................. (51,417) (60,087) (115,496) (38,959)
Basic net loss per share.................................. (0.54) (0.63) (1.34) (0.45)
Diluted net loss per share................................ (0.54) (0.63) (1.34) (0.45)
Goodwill, net............................................. 9,992 76,149 13,835 86,886
Other assets.............................................. 16,107 20,731 16,108 22,508
Total assets.............................................. 666,834 737,615 632,820 712,271
Accumulated deficit....................................... (170,618) (102,751) (119,201) (42,664)
Total stockholders' equity................................ 404,661 475,442 429,055 508,506
</TABLE>
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Netscape and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
In February 1998, Netscape announced that its Board of Directors approved a
change in Netscape's fiscal year to November 1 through October 31, effective for
the ten month period ended 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 its Enterprise software
and services business and is designed to align Netscape's financial reporting
practices with its business strategy by taking into account the seasonal buying
patterns of Enterprise customers.
83
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is selected financial data for the ten-month transition period
ending October 31, 1998 and the comparable prior year period:
<TABLE>
<CAPTION>
TEN MONTHS ENDED
OCTOBER 31,
----------------------
1998 1997
--------- -----------
(UNAUDITED)
(IN THOUSANDS EXCEPT
PER SHARE DATA)
(RESTATED)
<S> <C> <C>
Net revenues........................................... $ 447,809 $ 425,961
Gross profit........................................... 327,196 338,488
Operating income (loss)................................ (74,936) 1,113
Income tax provision................................... -- 6,192
Net loss............................................... $ (60,087) $ (1,565)
Net loss per share..................................... $ (0.63) $ (0.02)
</TABLE>
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. The Company
believes that this reclassification of costs will more closely align Netscape's
financial presentation with industry practices and allow for more comparable
financial measurement Netcenter costs, which were previously classified as sales
and marketing expenses, have been reclassified to research and development and
to cost of service revenues. Netscape has also reclassified to cost of service
revenues all manufacturing costs, technical support expenses, and royalty
payments related to its non-revenue earning Client software and attributed these
costs to the Netcenter segment. Certain other prior year amounts have been
reclassified to conform to the 1998 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts in the financial statements and accompanying
notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Beginning in fiscal 1998, Netscape adopted Statement of Position 97-2
"Software Revenue Recognition" as amended by Statement of Position 98-4. The
effect of adoption did not have a material impact on Netscape's results of
operations.
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 software licenses and services. Services
consist of postcontract customer support ("PCS"), consulting, and, to a lesser
extent, training services. Netscape recognizes the revenue allocable to software
licenses upon delivery of the software product to the end-user, unless the fee
is not fixed or determinable or collectibility
84
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
is not probable. Netscape considers all arrangements with payment terms
extending beyond twelve months and other arrangements with payment terms longer
than normal not to be fixed or determinable. If the fee is not fixed or
determinable, revenue is recognized as payments become due from the customer. If
collectibitity is not considered probable, revenue is recognized when the fee is
collected. 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 by the OEM to the end-users.
PCS includes telephone support, bug fixes, and rights to upgrades on a
when-and-if available basis. PCS Revenue is recognized on a straight-line basis
over the period the PCS is provided. Consulting and training service revenue is
recognized as the services are provided. In software arrangements that include
rights to multiple software products, PCS, and/or other services, Netscape
allocates the total arrangement fee among each deliverable based on the relative
fair value of each of the deliverables determined based on vendor-specific
objective evidence.
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 recognizes service
fees from Netcenter advertising ratably over the term of the contract beginning
when the advertising is displayed on Netcenter. Netscape recognizes fees from
sponsorship 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.
CASH, CASH EQUIVALENTS, SHORT- AND LONG-TERM INVESTMENTS
Cash and cash equivalents consist of cash on deposit with banks, money
market instruments, and certificates of deposits with original maturities of 90
days or less. Short- and long-term investments consist of debt securities with
original maturities primarily between 90 days and three years. The debt
securities are all classified as available-for-sale. Long-term investments
additionally include equity holdings in both public and private technology
companies, which have been classified as available-for-sale. Debt securities and
unrestricted public equity securities with a readily determinable fair value are
stated at fair value, which is determined based upon the quoted market prices of
the securities. Other equity securities are stated at the lesser of cost or the
net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated using the straight-line method over
the estimated useful life of the asset, generally two to five years. Leasehold
improvements are amortized over the lesser of the term of the lease or the
estimated useful life of the asset.
INCOME TAXES
Netscape accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," which
uses the liability method to calculate deferred income taxes.
85
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
As permitted under Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," Netscape has elected to
follow Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees" in accounting for stock-based awards to employees.
See Note 10.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Netscape to concentration of
credit risk consist principally of cash investments and trade receivables.
Netscape invests its excess cash in deposits with major banks, in U.S. Treasury
and U.S. agency obligations and in debt securities of corporations with strong
credit ratings and in a variety of industries. All of those securities
classified as cash equivalents and marketable investments mature within five
years of their purchase date.
Netscape sells its products to a large number of customers in diversified
industries, primarily in the Americas, which includes Canada and Latin America,
Europe and the Asia Pacific region. Netscape performs ongoing credit evaluations
of its customers' financial condition and generally does not require collateral.
Netscape maintains reserves to provide for estimated credit losses. Actual
credit losses could differ from such estimates.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of Netscape's wholly-owned foreign subsidiaries are
translated into U.S. dollars at year-end exchange rates, and revenues and
expenses are translated at average rates prevailing during the year. Translation
adjustments are included in a separate component of stockholders' equity.
Foreign currency transaction gains and losses, which have been immaterial, are
included in results of operations.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standards No. 86 ("SFAS 86"), "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
Based on Netscape's product development process, technological feasibility
is established upon completion of a working model. Costs incurred by Netscape
between completion of the working model and the point at which the product is
ready for general release have been insignificant. All research and development
costs have been expensed.
ADVERTISING EXPENSES
Netscape expenses advertising costs in the period in which they are
incurred. Advertising expenses for 1998, 1997, and 1996, were approximately
$16.2 million, $13.3 million, and $5.4 million, respectively.
TRANSACTIONS WITH RELATED PARTIES
Netscape made loans of approximately $0.4 million, $2.0 million, and $1.3
million to executives and other employees in the ten months ended October 31,
1998, and the years ended December 31, 1997 and
86
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1996, respectively, which are due over periods of two to five years.
Approximately $1.1 million was outstanding under these loans at October 31,
1998.
In July 1996, Netscape committed $4.0 million to the Java Fund, which
intends to fund entrepreneurial ventures targeted at new markets created by the
Java technology. In the ten months ended October 31, 1998 and the year ended
December 31, 1997 approximately $2.3 million and $1.8 million, respectively, was
invested in the fund. The fund is managed by a member of the Board of Directors.
PER SHARE AMOUNTS
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 (as 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.
RECENT PRONOUNCEMENTS
In March 1998, the Accounting Standards Board issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". The Company plans to adopt the SOP on November 1,
1999. The SOP will require the capitalization of certain costs incurred after
the date of adoption in connection with developing or obtaining software for
internal use. The Company currently expenses such costs as incurred. Management
has not yet determined what the effect of SOP 98-1 will be on the Company's
consolidated financial position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activity" ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 1999. The
Statement permits early adoption as of the beginning of any fiscal quarter. The
Company has yet to determine its date of adoption. The Statement will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges of underlying transactions must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Management has not yet determined what the effect of SFAS 133 will be on the
Company's consolidated financial position, results of operations or cash flows.
SOP 98-9, "Modification of SOP 97-2, SOFTWARE REVENUE RECOGNITION, With
Respect to Certain Transactions" was issued in December 1998 and addresses
software revenue recognition as it applies to certain multiple-element
arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the Effective Date of
a Provision of SOP 97-2", to extend the deferral of application of certain
passages of SOP 97-2 through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. Netscape will comply with the
requirements of this SOP as they become effective and this is not expected to
have a material effect on Netscape's revenues and earnings.
87
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS
In April 1996, Netscape completed its business combination with InSoft, Inc.
("InSoft"), a provider of network-based communications and collaborative
multimedia software for the enterprise. Netscape exchanged an aggregate of
approximately 2.0 million shares of Netscape common stock and options for all of
the outstanding capital stock and stock options of InSoft, a privately held
company. The business combination was treated as a pooling of interests for
accounting purposes, and, accordingly, the historical financial statements of
Netscape have been restated as if the transaction occurred at the beginning of
the earliest period presented. In connection with the business combination,
Netscape incurred direct transaction costs of approximately $5.1 million which
consisted of fees for investment banking, legal and accounting services, and
other related expenses incurred in conjunction with the business combination.
Intercompany transactions between InSoft and Netscape were not material.
In April 1996, Netscape completed its business combination with Netcode
Corporation ("Netcode"), a creator of a Java-based visual interface builder and
object toolkit for rapidly developing Java applications. Netscape exchanged
shares of Netscape common stock and options for all of the outstanding capital
stock and stock options of Netcode, a privately held company. The business
combination was treated as a pooling of interests for accounting purposes. As
Netcode's historical results of operations were not material in relation to
those of Netscape, the financial information prior to January 1, 1996 has not
been restated to reflect the business combination. In connection with the
business combination, Netscape incurred direct transaction costs of
approximately $300,000 which consisted of fees for legal and accounting
services, and other related expenses incurred in conjunction with the business
combination. Intercompany transactions between Netcode and Netscape were not
material.
In May 1996, Netscape completed its business combination with Paper
Software, Inc. ("Paper"), a provider of distributed three-dimensional graphics
and maker of WebFX VRML software. Netscape exchanged shares of Netscape common
stock for all of the outstanding capital stock of Paper, a privately held
company. The business combination was treated as a pooling of interests for
accounting purposes. As Paper's historical results of operations were not
material in relation to those of Netscape, the financial information prior to
January 1, 1996 has not been restated to reflect the business combination. In
connection with the business combination, Netscape incurred direct transaction
costs of approximately $700,000 which consisted of fees for legal and accounting
services, and other related expenses incurred in conjunction with the business
combination. Intercompany transactions between Paper and Netscape were not
material.
In June 1997, Netscape acquired Portola Communications, Inc. ("Portola") and
DigitalStyle Corporation ("DigitalStyle"), each a private company. Netscape
purchased all of the outstanding capital stock of each of the corporations and
assumed all of their outstanding stock options in exchange for an aggregate of
approximately 2.0 million shares of Netscape's common stock and options. At the
time of acquisition by Netscape, options previously outstanding for the acquired
entities were exchanged for Netscape options with similar terms. The fair value
of Netscape options exchanged for outstanding options in the stock of the
acquired companies at the time of the acquisitions was included as part of the
purchase price of the respective companies. The acquisitions were accounted for
as purchase transactions in the accompanying financial statements. The purchase
price for Portola approximated $35.1 million, which primarily consisted of $34.2
million of stock issued and $934,000 of direct acquisition costs. The purchase
price for DigitalStyle approximated $26.0 million, which consisted primarily of
$22.9 million of stock issued and $2.1 million of direct acquisition costs. The
aggregate purchase prices were allocated to the fair value of the assets
acquired. At the acquisition date, Portola's primary IPR&D projects involved
work performed in
88
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
the area of high-performance messaging systems with an IMAP configuration.
DigitalStyle's IPR&D projects primarily involved Web graphics tools and
Java-based animation.
In December 1997, Netscape acquired the remaining equity interests of Actra
Business Systems LLC ("Actra") in exchange for an aggregate of approximately 1.9
million shares of Netscape common stock and approximately 637,000 options at the
time of acquisition by Netscape, rights to Actra options previously outstanding
were exchanged for Netscape options with similar terms. The fair value of
Netscape options exchanged for rights to Actra outstanding options at the time
of the acquisition was included as part of the purchase price. The acquisition
was accounted for as a purchase transaction. Actra had an aggregate purchase
price of approximately $67.8 million, which primarily consisted of $66.1 million
of stock and stock options issued and $1.7 million of direct acquisition costs.
The aggregate purchase price was allocated to the fair value of the assets
acquired. At the acquisition date, Actra's primary IPR&D projects involved the
design and delivery of next-generation Internet commerce applications.
Purchased IPR&D for each of the above acquisitions represents the present
value of the estimated after-tax cash flows expected to be generated by the
purchased technology, which, at the acquisition dates, had not yet reached
technological feasibility. The cash flow projections for revenues were based on
estimates of relevant market sizes and growth factors, expected industry trends,
the anticipated nature and timing of new product introductions by Netscape and
its competitors, individual product sales cycles, and the estimated life of each
product's underlying technology. Estimated operating expenses and income taxes
were deducted from estimated revenue projections to arrive at estimated
after-tax cash flows. Projected operating expenses include cost of goods sold,
marketing and selling expenses, general and administrative expenses, and
research and development, including estimated costs to maintain the products
once they have been introduced into the market and are generating revenue. The
amortization tax benefit assumes that the estimated technology value will be
amortized for tax purposes over a period of 15 years. The rates utilized to
discount projected cash flows were 30% to 40% for in-process technologies and
25% for developed technology and were based primarily on venture capital rates
of return and the weighted average cost of capital for Netscape at the time of
each acquisition.
As of the date of each of the acquisitions, Netscape concluded that the
in-process technology had no alternative future use after taking into
consideration the potential use of the technology in different products, the
stage of development and life cycle of each project, resale of the software, and
internal use. The value of the purchased IPR&D was expensed at the time of each
of the acquisitions. Netscape has completed development of a majority of the
acquired IPR&D and released products related to two of the acquisitions.
The purchase consideration was allocated to the acquired assets and
liabilities based on fair values as follows:
<TABLE>
<CAPTION>
PORTOLA DIGITALSTYLE ACTRA
--------- ----------- ---------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C>
Net assets acquired (net liabilities assumed)........................ $ 3,995 $ 853 $ (1,057)
Purchased intangibles................................................ 120 600 10,880
Purchased in-process research and development........................ 5,300 4,000 13,950
Goodwill............................................................. 25,675 20,526 43,985
--------- ----------- ---------
Total purchase consideration......................................... $ 35,090 $ 25,979 $ 67,758
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
89
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
The amounts allocated to purchased intangibles are being amortized on a
straight-line basis over three years from the date of each acquisition. The
amounts allocated to goodwill are being amortized on a straightline basis over
seven years from the date of each acquisition.
The pro forma results of operations of Netscape for 1997 and 1996, assuming
the Portola, DigitalStyle, Actra, and KIVA acquisitions occurred at the
beginning of each period presented, excluding the charge for purchased IPR&D of
$23.3 million, including additional goodwill amortization related to the
acquisitions and eliminating all material intercompany transactions, are as
follows:
<TABLE>
<CAPTION>
DIGITAL
PORTOLA STYLE ACTRA
----------- --------- ----------
NETSCAPE COMBINED
---------- ----------
(RESTATED)(IN THOUSANDS, EXCEPT PER SHARE DATA) (RESTATED)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Net revenues......................................... $ 533,851 $ -- $ 534 $ 4,864 $ 539,249
Net loss............................................. (25,293) (1,027) (1,153) (11,876) (39,349)
Basic net loss per share............................. (0.29) (0.46)
Diluted net loss per share........................... (0.29) (0.46)
Year ended December 31, 1996
Net revenues......................................... $ 346,294 $ -- $ 748 $ 367 $ 347,409
Net income(loss)..................................... 6,633 (502) (2,128) (2,809) 1,194
Basic net income per share........................... 0.09 0.02
Diluted net income per share......................... 0.07 0.01
</TABLE>
The proforma information for Netscape has been restated to include InSoft
and KIVA Software Corporation ("KIVA"). The pro forma information is presented
as an illustration only and does not necessarily indicate the operating results
that would have occurred had the transactions been completed at the beginning of
the period indicated, nor does it necessarily indicate future operating results.
In December 1997, Netscape completed its business combination with KIVA.
Netscape exchanged approximately 6.0 million shares of Netscape common stock,
which included approximately 740,000 shares reserved for issuance upon exercise
of options granted to KIVA employees, for all of the outstanding capital stock
and options of KIVA, a privately held company. The business combination was
treated as a pooling of interests for accounting purposes, and accordingly the
historical financial statements of Netscape have been restated as if the
transaction occurred at the beginning of the earliest period presented. In
connection with the business combination, Netscape incurred direct transaction
costs of approximately $5.8 million, which consisted primarily of fees for
investment banking, legal and accounting services incurred in conjunction with
the business combination. Intercompany transactions between KIVA and Netscape
were not material. No material adjustments were required to conform the
accounting policies of KIVA to Netscape.
90
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
The table below sets forth the combined net revenues, net income (loss), and
basic and diluted net income (loss) per share for the periods indicated.
<TABLE>
<CAPTION>
MERGER
RELATED
INSOFT KIVA CHARGES
--------- ---------- ---------
NETSCAPE COMBINED
----------- -----------
(RESTATED)(IN THOUSANDS, EXCEPT PER SHARE DATA)(RESTATED)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Net revenues....................................... $ 528,772 $ -- $ 5,079 $ -- $ 533,851
Net loss........................................... (26,900) -- (6,211) (5,848) (38,959)
Year ended December 31, 1996
Net revenues....................................... $ 344,116 2,079 $ 99 $ -- $ 346,294
Net income (loss).................................. 31,051 (4,262) (2,172) (5,100) 19,517
</TABLE>
3. RESTRUCTURING CHARGES
In December 1997 and January 1998, Netscape implemented 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 a reduction in
the workforce (approximately 400 employees, or 13% of Netscape's workforce), the
closure of certain facilities, the write-off of non-performing operating assets,
and third-party royalty payment obligations relating to canceled contracts.
The following table depicts the movements in accrued restructuring charges
and restructuring related asset reserves from December 31, 1996 to October 31,
1998:
<TABLE>
<CAPTION>
BALANCE BALANCE
DEC. 31, DEC. 31, NON CASH
1996 CHARGES 1997 CHARGES WRITE-OFFS PAYMENTS TRANSFERS
----------- ---------- --------- --------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cost to exit third-party royalty
arrangements related to
discontinued projects.............. $ -- $ 5,173 $ 5,173 $ -- $ (1,630) $ (3,543) $ --
Remaining rent payments and leasehold
improvements on abandoned
facilities, net of anticipated
sublease income.................... -- 9,000 9,000 -- (6,767) -- (1,263)
Write-down of abandoned computer
equipment and other operating
assets............................. -- 8,827 8,827 -- (10,918) -- 2,091
Severance for involuntary employee
terminations....................... -- -- -- 12,000 -- (11,172) (828)
----- ---------- --------- --------- ----------- ---------- -----------
Total................................ $ -- $ 23,000 $ 23,000 $ 12,000 $ (19,315) $ (14,715) $ --
----- ---------- --------- --------- ----------- ---------- -----------
----- ---------- --------- --------- ----------- ---------- -----------
<CAPTION>
BALANCE
OCT. 31,
1998
---------
<S> <C>
Cost to exit third-party royalty
arrangements related to
discontinued projects.............. $ --
Remaining rent payments and leasehold
improvements on abandoned
facilities, net of anticipated
sublease income.................... 970
Write-down of abandoned computer
equipment and other operating
assets............................. --
Severance for involuntary employee
terminations....................... --
---------
Total................................ $ 970
---------
---------
</TABLE>
At October 31, 1998, the remaining reserves pertain to one vacant facility
that has not been subleased. Netscape anticipates utilizing the remaining
reserve balance over the next six to twelve months.
91
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1996
---------
TEN MONTHS ENDED
OCTOBER 31,
1998
----------------- 1997
-----------
(RESTATED)
(RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income (loss)................................................... $ (60,087) $ (38,959) $ 19,517
Denominator:
Weighted average common shares outstanding.......................... 98,739 93,989 86,548
Weighted average outstanding common shares subject to repurchase.... (2,746) (7,931) (13,606)
-------- ----------- ---------
Denominator for basic net income (loss) per share................... 95,993 86,058 72,942
Employee stock options and outstanding common shares subject to
repurchase........................................................ -- -- 17,899
-------- ----------- ---------
Denominator for diluted net income (loss) per share-- adjusted
weighted average shares........................................... 95,993 86,058 90,841
-------- ----------- ---------
-------- ----------- ---------
Basic net income (loss) per share................................... $ (0.63) $ (0.45) $ 0.27
-------- ----------- ---------
-------- ----------- ---------
Diluted net income (loss) per share................................. $ (0.63) $ (0.45) $ 0.21
-------- ----------- ---------
-------- ----------- ---------
</TABLE>
For additional disclosures regarding the employee stock options and shares
subject to repurchase see Note 10.
Options to purchase 17.6 million and 14.3 million shares of common stock at
an average exercise price of $17.41 and $26.85 per share were outstanding at
October 31, 1998 and December 31, 1997, respectively, but were not included in
the computation of diluted net loss per share for those years because Netscape
reported net losses for both periods. At December 31, 1996, options to purchase
4.8 million shares of common stock at an average exercise price of $61.20 per
share were outstanding but were not included in the computation of diluted
income per share because the options' exercise price was greater than the
average market price of the common shares, and, therefore, the effect would be
antidilutive.
92
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. CASH AND INVESTMENTS
The following tables detail Netscape's investments and their contractual
maturities:
<TABLE>
<CAPTION>
OCTOBER 31, 1998
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Municipal notes and bonds......................................... $ 154,750 $ 583 $ (13) $ 155,320
Market auction preferred stock.................................... 38,594 -- (6) 38,588
Certificates of deposit........................................... 6,657 -- -- 6,657
Equity investments................................................ 32,315 -- -- 32,315
---------- ----- --- ----------
$ 232,316 $ 583 $ (19) $ 232,880
---------- ----- --- ----------
---------- ----- --- ----------
Included in cash and cash equivalents............................. $ 52,112 $ 1 $ -- $ 52,113
Included in short-term investments................................ 91,357 254 (13) 91,598
Included in long-term investments................................. 88,847 328 (6) 89,169
---------- ----- --- ----------
$ 232,316 $ 583 $ (19) $ 232,880
---------- ----- --- ----------
---------- ----- --- ----------
Due within one year............................................... $ 143,469 $ 255 $ (13) $ 143,711
Due after one year through five years............................. 88,847 328 (6) 89,169
---------- ----- --- ----------
$ 232,316 $ 583 $ (19) $ 232,880
---------- ----- --- ----------
---------- ----- --- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Municipal notes and bonds......................................... $ 168,763 $ 205 $ (132) $ 168,836
Market auction preferred stock.................................... 14,713 30 (69) 14,674
Certificates of deposit........................................... 10,135 -- (4) 10,131
Equity investments................................................ 18,394 5,623 -- 24,017
---------- ----------- ----- ----------
$ 212,005 $ 5,858 $ (205) $ 217,658
---------- ----------- ----- ----------
---------- ----------- ----- ----------
Included in cash and cash equivalents............................. $ 11,534 $ -- $ -- $ 11,534
Included in short-term investments................................ 129,470 161 (205) 129,426
Included in long-term investments................................. 71,001 5,697 -- 76,698
---------- ----------- ----- ----------
$ 212,005 $ 5,858 $ (205) $ 217,658
---------- ----------- ----- ----------
---------- ----------- ----- ----------
Due within one year............................................... $ 141,004 $ 161 $ (205) $ 140,960
Due after one year through five years............................. 71,001 5,697 -- 76,698
---------- ----------- ----- ----------
$ 212,005 $ 5,858 $ (205) $ 217,658
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</TABLE>
Included in available-for-sale equity investments at October 31, 1998, is
$16.3 million of fully exercisable warrants to purchase 944,666 shares of
Excite, Inc. ("Excite") common stock. The warrants were issued in connection
with an April 1998 Netcenter Service Agreement between Netscape and Excite. They
were valued by an independent third party utilizing the Black-Scholes model.
93
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. CASH AND INVESTMENTS (CONTINUED)
The net realized gains and losses on sales of available-for-sale securities
included in other income, net were $8.5 million, $1.8 million, and $201,000 in
the ten months ended October 31, 1998, and for the years ended December 31, 1997
and December 31, 1996, respectively, primarily due to gains on the sales of
certain equity investments. The cost of securities sold is based on the specific
identification method.
6. HEDGING OF INTERCOMPANY BALANCES
In June 1998, Netscape initiated hedging activities to mitigate the impact
on intercompany balances of changes in foreign exchange rates. Netscape is using
foreign currency forward exchange contracts as a vehicle for hedging these
intercompany balances. A foreign currency forward 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, 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. The related
amounts due to or from counterparties are included in other assets or other
liabilities. In general, these foreign currency forward exchange contracts
mature in three months or less. At October 31, 1998, Netscape held the following
foreign currency forward exchange contracts which mature within three months.
The estimated fair value of the contracts is immaterial due to their short-term
nature.
<TABLE>
<CAPTION>
OCTOBER 31,
1998
---------------
NOTIONAL AMOUNT
---------------
(IN THOUSANDS)
<S> <C>
Foreign Currency Forward Exchange Contracts:
700,000,000 Japanese Yen................................ $ 6,018
1,300,000 Canadian Dollar............................... 843
------
$ 6,861
------
------
</TABLE>
7. COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income", which establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's results
of operations or stockholders' equity. Statement 130 requires unrealized gains
or losses on the Company's available-for-sale securities and the foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
94
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMPREHENSIVE INCOME (LOSS) (CONTINUED)
The components of accumulated other comprehensive income (loss), net of
related tax, at October 31, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
1998 1997
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Unrealized gains on available-for-sale investments................. $ 338 $ 3,433
Foreign currency translation adjustments........................... (691) (702)
----- ------
Accumulated other comprehensive income (loss).................... $ (353) $ 2,731
----- ------
----- ------
</TABLE>
8. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
1998 1997
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Computers and equipment............................................ $ 143,645 $ 125,301
Furniture and fixtures............................................. 30,794 30,233
Leasehold improvements............................................. 69,841 51,646
----------- ------------
244,280 207,180
Less accumulated depreciation...................................... (99,394) (58,681)
Less restructuring-related reserves................................ -- (17,406)
----------- ------------
$ 144,886 $ 131,093
----------- ------------
----------- ------------
</TABLE>
See Note 3 for further discussion of the restructuring-related reserves.
9. LEASES
Netscape leases its facilities and certain other equipment under operating
lease agreements expiring through 2013. Future minimum payments as of October
31, 1998, excluding the leases canceled under the restructuring (see Note 3),
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fiscal 1999................................................................... $ 21,570
Fiscal 2000................................................................... 21,055
Fiscal 2001................................................................... 21,982
Fiscal 2002................................................................... 19,502
Fiscal 2003................................................................... 17,612
Fiscal 2004 and thereafter.................................................... 141,639
--------------
$ 243,360
--------------
--------------
</TABLE>
Rent expense for the ten months ended October 31, 1998 and the years ended
December 31, 1997 and 1996 was approximately $17.4 million, $15.0 million, and
$6.3 million, respectively.
95
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY
RESTRICTED STOCK
In 1995, Netscape granted an option to purchase 8,000,000 shares of common
stock outside of the stock plans discussed below. The exercise price was $0.0563
per share. This option was immediately exercisable in its entirety with
4,000,000 shares subject to repurchase at the option of Netscape on the
individual's cessation of service prior to vesting in the shares at the original
purchase price. The unvested shares vest over a 50-month period. The option was
exercised in 1995.
Netscape issued common stock to employees under restricted stock purchase
agreements and immediately exercisable stock option agreements, including
agreements which were assumed by Netscape pursuant to acquisitions. The
restricted stock issued under all of these arrangements have various vesting
schedules, although Netscape's original issue of restricted stock generally
vests over a 50-month period.
Netscape has the option to repurchase unvested shares on termination of
employment for any reason, with or without cause, at the original per share
price paid by the employee. At October 31, 1998, 1,623,478 restricted shares
were subject to repurchase. Included in this amount are 119,700 shares of
restricted stock issued to an executive at $0.0001 per share as discussed in
"STOCK PLANS" below. Netscape will recognize approximately $1 million of
compensation expense related to a grant of restricted stock to an executive
during each of the three fiscal years through October 31, 2001.
STOCK PLANS
During 1994, Netscape adopted the 1994 Stock Option Plan (the "1994 Plan")
under which incentive stock options and nonqualified stock options to purchase
common stock could be granted to employees and certain consultants or
independent contractors. Under the 1994 Plan, options to purchase common stock
could be granted at prices not less than 85% of the fair value on the date of
grant (110% of fair value in certain instances), as determined by the Board of
Directors. Generally, options granted were immediately exercisable and the
resulting shares issued to employees under the 1994 Plan are subject to certain
repurchase rights by Netscape, at the discretion of Netscape, upon the
individual's cessation of service prior to vesting in the shares, at the
original purchase price. Generally, these repurchase rights lapse over a
50-month period. The 1994 Stock Option Plan was terminated in August 1995 and no
further options were granted thereunder. At October 31, 1998, 1,135,548 shares
issued under the 1994 Plan were subject to repurchase.
In June 1995, Netscape adopted the 1995 Stock Plan (the "1995 Plan") that
provides for the granting of incentive stock options and nonqualified stock
options, stock purchase rights, and cash and stock bonus awards to employees and
consultants. Under the 1995 Plan, the Board of Directors determines the term of
each award, the award price, and conditions under which the award becomes
exercisable. In the case of incentive stock options the price may not be less
than the fair market value at the date of grant, while nonstatutory options may
have exercise prices as determined by the Board of Directors. Options granted
prior to July 1, 1998 generally vest over 50 months at the rate of 20% of the
original grant after ten months and 2% per month thereafter. New hire options
granted between July 1, 1998 and October 31, 1999 will generally vest over 36
months at the rate of 27.77% of the original grant after ten months, and 2.77%
per month thereafter until fully vested. Options expire no later than ten years
from the date of grant.
In June 1995, Netscape also adopted the 1995 Director Option Plan (the
"Director Plan") and reserved 200,000 shares of common stock for issuance under
that plan. In May 1998, Netscape's stockholders approved an increase to the
Director Plan reserve of an additional 150,000 shares. The
96
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
Director Plan provides for the granting of nonstatutory stock options to non
employee directors of Netscape. Under the Director Plan, upon joining the board,
each non-employee director automatically receives an option to purchase 40,000
shares of Netscape's common stock at an exercise price equal to the fair market
value on the date of grant. These options vest at a rate of 20% of the original
grant after ten months and 2% per month thereafter. On each January 1
thereafter, provided the director has served at least six months, an additional
10,000 nonstatutory stock options will be granted at the fair market value on
that date, vesting monthly over a two year period.
Netscape assumed the Collabra 1993 Incentive Stock Plan in November 1995,
which provided for the grant of incentive stock options and nonstatutory stock
options to employees and consultants of Netscape at prices ranging from 85% to
110% of the fair market value of the common stock on the date of grant as
determined by the Board of Directors. The vesting and exercise provisions of the
option grants were determined by the Board of Directors. Options generally vest
at the rate of 24% of the original grant, after 12 months and 2% per month
thereafter. Options expire no later than ten years from the date of the grant.
This plan was terminated in November 1995 and no further options were granted
thereunder.
Netscape assumed the InSoft 1993 Stock Option Plan which provided for the
granting of incentive stock options and nonqualified stock options to certain
officers, key employees, consultants and directors of InSoft. The options
entitle the holders to purchase shares of common stock within one to ten years
from the date of grant at option prices equal to the fair market value as
determined by the Board of Directors at the date of grant. A total of 247,851
shares of Netscape's common stock were reserved for issuance on the exercise of
options assumed in connection with the business combination with InSoft. This
plan was terminated in April 1996, and no further options were granted under it.
Netscape assumed the Netcode 1996 Stock Option Plan which provided for the
granting of incentive and nonqualified options to employees and consultants at
prices ranging from 85% to 110% of the fair-market-value as determined by the
Board of Directors. A total of 33,882 shares were reserved for issuance on the
exercise of options assumed in connection with the business combination with
Netcode. The options generally vest over four years from the date of grant. A
specific portion of the shares vest immediately, and the remaining shares vest
at the rate of 2.1% per month at the end of each month thereafter. This plan was
terminated in April 1996 and no further options were granted thereunder.
Netscape assumed the Portola 1996 Stock Option Plan (the "Portola Plan") and
the DigitalStyle 1996 Stock Option Plan (the "DigitalStyle Plan") in June 1997.
These plans provide for the grant of incentive stock options and nonqualified
stock options to employees and consultants at prices from 85% to 110% of the
fair market value of the common stock on the date of grant as determined by the
Board of Directors. Generally, options granted were immediately exercisable and
the resulting shares issued to employees under the Portola Plan and DigitalStyle
Plan are subject to certain repurchase rights by Netscape, at the discretion of
Netscape, upon the individual's cessation of service prior to vesting in the
shares, at the original purchase price. Generally, these repurchase rights lapse
over a 48-month period. Options generally vest at the rate of 25% of the
original grant, after 12 months after the date of grant or employment, and 1/48
per month thereafter. Options expire no later than ten years from the date of
grant. A total of 82,972 and 110,876 shares of Netscape common stock have been
reserved for issuance on the exercise of options assumed in connection with the
acquisition of Portola and DigitalStyle, respectively. The Portola Plan and
DigitalStyle Plan were terminated in June 1997 and no further options were
granted under these plans.
97
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
In December 1997 Netscape issued 636,835 stock options in connection with
the acquisition of Actra Business Systems, LLC ("Actra").
Netscape assumed the KIVA 1995 Stock Option Plan (the "KIVA Plan") in
December 1997 which provides for the grant of incentive stock options and
nonstatutory stock options to employees and consultants of Netscape at prices
from 85% to 110% of the fair market value of the common stock on the date of
grant as determined by the Board of Directors. Generally, options granted were
immediately exercisable and the resulting shares issued to employees under the
KIVA Plan are subject to certain repurchase rights by Netscape, at the
discretion of Netscape, upon the individual's cessation of service prior to
vesting in the shares, at the original purchase price. Generally, these
repurchase rights lapse over a 48-month period. Options generally vest at the
rate of 25% of the original grant, commencing twelve months after the date of
grant or employment, and 1/48 per month thereafter. Options expire no later than
ten years from the date of grant. A total of 740,631 shares of Netscape common
stock have been reserved for issuance on the exercise of options assumed in
connection with the business combination with KIVA. The KIVA Plan was terminated
in December 1997 and no further options were granted under the KIVA Plan.
In April 1998, Netscape adopted the 1998 Stock Option Plan (the "1998 Plan")
and reserved 4,000,000 shares of common stock for issuance under that plan,
which provides for the granting of nonqualified stock options to employees and
consultants. Under the 1998 Plan, the Board of Directors determines the term of
each award, the award price, and conditions under which the award becomes
exercisable. Options granted prior to July 1, 1998 generally vest over 50 months
at the rate of 20% of the original grant after ten months and 2% per month
thereafter. Options granted between July 1, 1998 and October 31, 1999 will
generally vest over 36 months at the rate of 27.77% of the original grant after
ten months, and 2.77% per month thereafter until fully vested. Options expire no
later than ten years from the date of grant.
At October 31, 1998, options to purchase 3,915,581 shares were vested and
17,633,727 shares were reserved for issuance on exercise of stock options. A
summary of activity under all plans, including options
98
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
and restricted stock assumed by Netscape as a result of all business
combinations (adjusted for the respective merger exchange ratios), is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------------------------
SHARES WEIGHTED AVERAGE
AVAILABLE NUMBER OF EXERCISE PRICE EXERCISE PRICE
FOR GRANT SHARES PER SHARE PER SHARE
--------------- ------------- --------------------- -----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.................. 7,220,465 5,962,091 $ 0.0563 - $69.7500 $ 17.17
Shares reserved............................... 33,882 -- -- --
Options granted............................... (8,536,610) 8,536,610 1.3300 - 82.1200 42.91
Options canceled.............................. 4,238,702 (4,238,702) 0.6150 - 82.1200 56.67
Options exercised............................. -- (1,138,968) 0.0563 - 47.8750 4.69
Plan shares expired........................... (106,283) -- -- --
--------------- ------------- --------------------- ------
Balance at December 31, 1996.................. 2,850,156 9,121,031 $ 0.0563 - $82.1200 $ 25.19
Shares reserved............................... 3,711,284 -- -- --
Options granted............................... (7,225,564) 7,225,564 0.3200 - 55.5000 27.38
Options canceled.............................. 1,323,707 (1,323,707) 0.0563 - 82.1200 7.41
Options exercised............................. -- (758,862) 0.0563 - 35.3570 29.31
Plan shares expired........................... (184,747) -- -- --
--------------- ------------- --------------------- ------
Balance at December 31, 1997.................. 474,836 14,264,026 $ 0.0563 - $67.6875 $ 26.85
Shares reserved............................... 8,069,372 -- -- --
Options granted*.............................. (18,044,521) 18,044,521 $ .0001 - $37.0625 18.56
Options canceled*............................. 12,931,127 (12,931,127) $ .11 - $64.25 30.38
Options exercised............................. -- (1,743,693) $ .0001 - $36.875 10.34
Plan shares expired........................... (334,007) -- -- --
--------------- ------------- --------------------- ------
Balance at October 31, 1998................... 3,096,807 17,633,727 $ .0563 - $67.6875 $ 17.41
--------------- ------------- --------------------- ------
--------------- ------------- --------------------- ------
</TABLE>
The following table summarizes information about stock options and
restricted stock outstanding at October 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL LIFE EXERCISE EXERCISE
EXERCISE NUMBER (YEARS) PRICE NUMBER PRICE
- ---------------------- ------------ ------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.0563 - $2.8436 904,631 8.25 $ 1.4797 399,405 $ 1.1280
$ 4.8000 1,150,314 6.69 $ 4.8000 1,049,306 $ 4.8000
$ 6.6300 - $15.7200 95,616 7.63 $ 13.8311 44,131 $ 12.3259
$ 16.8125 10,765,374 8.68 $ 16.8125 2,529,956 $ 16.8125
$ 17.0625 - $20.8750 531,450 9.46 $ 19.1400 1,492 $ 19.6748
$ 21.0000 - $24.7500 2,043,650 9.69 $ 22.3792 40,428 $ 22.7103
$ 25.0625 - $37.0625 2,063,775 9.55 $ 28.1551 122,359 $ 27.7144
$ 37.8750 - $67.6875 78,917 7.95 $ 49.4319 54,884 $ 54.2250
------------ --- ---------- ---------- ----------
$ 0.0563 - $67.6875 17,633,727 8.76 $ 17.4149 4,241,961 $ 13.1733
------------ --- ---------- ---------- ----------
------------ --- ---------- ---------- ----------
</TABLE>
*Includes 8,558,898 shares pertaining to options repriced in January 1998.
99
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
At October 31, 1998, and December 31, 1997 and 1996, 1,623,478, 7,015,766
and 12,652,000 shares, respectively, of common stock were subject to repurchase.
In the ten months ended October 31, 1998 and the years ended December 31, 1997,
and 1996, Netscape repurchased 636,648, 129,360 and 99,120 shares, respectively,
of common stock at the original exercise price.
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 $1.7 million, $2.5 million, and $2.5 million of non-cash charges
associated with the amortization of such deferred compensation for each of the
ten months ended October 31, 1998 and the years ended December 31, 1997 and
1996, respectively. The remaining deferred compensation of $1.3 million is being
amortized to operating expense over the related 50-month vesting period of the
shares and will, therefore, continue to adversely affect Netscape's operating
results through the third quarter of the 1999 fiscal year. Additionally,
Netscape will recognize $1.0 million of compensation expense during each of the
three fiscal years ended October 31, 2001 in connection with a grant of
restricted common stock made to an executive of Netscape.
In August 1996, the Board of Directors authorized the repricing of options
to purchase 3,990,708 shares of common stock effective as of the close of
business on August 30, 1996 to the then fair market value of $35.375 per share.
Under the terms of the repricing, the repriced options maintain the same vesting
and expiration terms, except they may not be exercised until February 24, 1997.
No employees owning 3% or more of Netscape's common stock participated in the
repricing.
In January 1998, the Board of Directors authorized the repricing of options
to purchase 8,558,898 shares of common stock effective as of the close of
business on January 28, 1998 to the then fair market value of $16.8125 per
share. Under the terms of the repricing, the vesting schedule for repriced
options was lengthened by six months, but retained the same expiration terms.
Additionally, repriced options were locked up from exercise for six months from
the date of the repricing, except in cases where employees with repriced options
were involuntary terminated other than for cause. The Chief Executive Officer
and five executive vice presidents did not participate in the repricing.
EMPLOYEE STOCK PURCHASE PLAN
In June 1995, Netscape adopted an Employee Stock Purchase Plan ("ESPP")
under Section 423 of the Internal Revenue Code and reserved 2,000,000 shares of
common stock for issuance under the plan. In May 1998, Netscape's shareholders
approved an increase to this reserve of an additional 1,500,000 shares.
Additionally, Netscape's Board of Directors in 1998 amended the ESPP to increase
the maximum percentage of payroll deductions which any participant may
contribute from his or her eligible compensation to 15%; amended the ESPP from a
two-year rolling offering period to a six-month fixed offering period effective
with the offering period beginning March 1999; amended the limit to the number
of shares any employee may purchase in any purchase period to a maximum of 2,000
shares; and changed the offering dates for each purchase period to March 1 and
September 1 of each year. Under this plan, qualified employees are entitled to
purchase shares at 85% of fair market value. There were 713,453, 509,158, and
276,506 shares issued under the ESPP during the ten months ended October 31,
1998, and the years ended December 31, 1997 and 1996, respectively.
100
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION
Under Accounting Principles Board Opinion No. 25 ("APB 25"), Netscape
generally recognizes no compensation expense with respect to stock-based awards
to employees. Pro forma information regarding net income (loss) and earnings
(loss) per share is required by Statement of Financial Accounting Standard No.
123 ("SFAS 123") for awards granted after December 31, 1994 as if Netscape had
accounted for its stock-based awards to employees under the fair value method of
SFAS 123. The fair value of Netscape's stock-based awards to employees was
estimated using a Black-Scholes option pricing model (minimum value model for
awards prior to Netscape's initial public offering). The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. The
Black-Scholes model requires the input of highly subjective assumptions
including the expected stock price volatility. Because Netscape's stock-based
awards to employees have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock-based awards to employees. The fair value of Netscape's stock-based
awards to employees was estimated assuming no expected dividends and the
following weighted-average assumptions:
<TABLE>
<CAPTION>
OPTIONS AND RESTRICTED STOCK
ESPP
----------------------------------- -----------------------------------
TEN MONTHS YEAR ENDED DECEMBER TEN MONTHS YEAR ENDED DECEMBER
ENDED OCTOBER 31, ENDED OCTOBER 31,
31, -------------------- 31, --------------------
1998 1997 1996 1998 1997 1996
------------- --------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Expected life (year)................. 3.6 3.6 3.1 0.5 0.5 0.5
Expected volatility.................. 60.0% 55.0% 55.6% 71.0% 74.0% 73.0%
Risk-free interest rate.............. 4.7% 5.7% 6.1% 4.6% 5.6% 5.6%
</TABLE>
The weighted-average fair value of stock options and employee stock purchase
rights granted during the ten months ended 1998 was $10.62 and $7.78 per share,
respectively. The weighted-average fair value of stock options and employee
stock purchase rights granted during 1997 was $16.60 and $9.62 per share,
respectively. For pro forma purposes, the estimated fair value of Netscape's
stock-based awards to employees is generally amortized over the vesting period
(for options and restricted stock) and the
101
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
six-month purchase period (for stock purchases under the ESPP). Netscape's pro
forma information is as follows:
<TABLE>
<CAPTION>
TEN MONTHS YEAR ENDED DECEMBER 31,
ENDED ------------------------
OCTOBER 31, 1997 1996
1998 ----------- -----------
-----------
(RESTATED)
(RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income (loss)....................... As reported $ (60,087) $ (38,959) $ 19,517
Pro forma $ (149,139) $ (110,596) $ (41,262)
Basic net income (loss) per share....... As reported $ (0.63) $ (0.45) $ 0.27
Pro forma $ (1.55) $ (1.29) $ (0.56)
Diluted net income (loss) per share..... As reported $ (0.63) $ (0.45) $ 0.21
Pro forma $ (1.55) $ (1.29) $ (0.56)
</TABLE>
Because SFAS 123 is applicable only to awards granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until approximately
1999.
11. BENEFIT PLAN
Netscape maintains a 401(k) retirement savings plan (the "Plan") for its
full time employees. Each participant in the Plan may elect to contribute from
1% to 15% of his or her annual compensation to the Plan. Netscape, at its
discretion, may make contributions to the Plan; however, Netscape has made no
contributions through October 31, 1998.
12. INCOME TAXES
The United States and foreign components of income (loss) before taxes
consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1996
1997 ---------
TEN MONTHS ----------
ENDED
OCTOBER 31, (RESTATED)
1998
-----------
(RESTATED)(IN THOUSANDS)
<S> <C> <C> <C>
United States............................................. $ (50,332) $ (51,992) $ 21,034
Foreign................................................... (9,755) 1,245 6,246
----------- ---------- ---------
Income (loss) before income taxes......................... $ (60,087) $ (50,747) $ 27,280
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
102
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
TEN MONTHS YEAR ENDED
ENDED DECEMBER 31,
OCTOBER 31, ---------------------
1998 1997 1996
----------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................. $ -- $ 7,718 $ 23,148
State................................................... -- 873 4,232
Foreign................................................. 2,479 3,848 4,912
----------- ---------- ---------
2,479 12,439 32,292
Deferred:
Federal................................................. (2,479) (22,651) (21,203)
State................................................... -- (1,576) (3,326)
----------- ---------- ---------
(2,479) (24,227) (24,529)
----------- ---------- ---------
Provision (benefit) for income taxes...................... $ -- $ (11,788) $ 7,763
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
The tax benefits associated with employee stock options provide a deferred
tax benefit of $6.8 million and $5.7 million in 1998 and 1997, respectively, and
reduce current taxes payable by $23.3 million in 1996. The deferred tax benefit
associated with the employee stock options in 1998 and 1997 has been fully
offset by a valuation allowance and will be credited to additional paid-in
capital when realized.
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before income taxes.
The sources and tax effects of the difference are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1996
1997 ---------
TEN MONTHS ----------
ENDED
OCTOBER (RESTATED)
31, 1998
----------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C>
Expected tax at federal statutory rate...................... $ (21,031) $ (17,761) $ 9,548
State taxes, net of federal benefit......................... (1,798) (939) 2,441
Effect of foreign operations................................ 1,611 2,516 2,801
Tax-exempt interest......................................... (1,649) (2,087) (1,488)
Merger costs................................................ -- 1,442 2,135
Goodwill amortization....................................... 2,638 1,155 --
Tax credits................................................. (3,082) (3,105) (436)
Purchased in-process research and development............... -- 3,255 --
Change in valuation allowance............................... 22,727 3,106 (9,381)
Other....................................................... 584 630 2,143
---------- ---------- ---------
Provision (benefit) for income taxes........................ $ -- $ (11,788) $ 7,763
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
103
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Netscape's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
1998 1997
------------ ------------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Deferred revenue............................................... $ 29,162 $ 15,592
Reserves and accrued expenses.................................. 11,396 12,721
Compensation not currently deductible.......................... 2,438 2,917
Restructuring reserves......................................... 1,151 9,044
Acquired intangibles........................................... 7,530 5,092
Net operating loss carryforwards............................... 26,708 7,843
Tax credit carryforwards....................................... 7,803 --
Other, net..................................................... 3,163 4,018
------------ ------------
Total before valuation allowance................................. 89,351 57,227
Valuation allowance for deferred tax assets...................... (38,349) (8,828)
------------ ------------
Total deferred tax assets........................................ 51,002 48,399
Deferred tax liabilities:
Unrealized gain on investments................................. (61) (2,288)
Unremitted earnings of foreign subsidiaries.................... (2,763) (2,639)
------------ ------------
Total deferred tax liabilities................................... (2,824) (4,927)
------------ ------------
$ 48,178 $ 43,472
------------ ------------
------------ ------------
Recorded on the balance sheet as:
Current deferred tax asset....................................... $ 39,770 $ 37,336
Noncurrent deferred tax asset (included in Other Assets)......... 8,408 6,136
------------ ------------
$ 48,178 $ 43,472
------------ ------------
------------ ------------
</TABLE>
Realization of Netscape's net deferred tax assets is dependent on Netscape
generating sufficient taxable income in future years in appropriate tax
jurisdictions to obtain benefit from the reversal of temporary differences and
from net operating loss and tax credit carryforwards. The amount of deferred tax
assets considered realizable is subject to adjustment in future periods if
estimates of future taxable income are reduced. The valuation allowance
increased by $29.5 million in 1998 and $8.8 million in 1997. The valuation
allowance at October 31, 1998 includes approximately $12.5 million of tax
benefits associated with employee stock options which will be credited to
stockholders' equity when realized.
As of October 31, 1998, Netscape had federal net operating loss
carryforwards of approximately $52.8 million that will expire between 2008 and
2018 and may be subject to certain restrictions on their utilization. There are
also foreign loss carryforwards of approximately $18.6 million which have
various expiration dates.
104
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. JOINT VENTURES AND EQUITY INVESTMENTS
Equity investments in which Netscape has a 20% to 50% interest or otherwise
has the ability to exercise significant influence are accounted for under the
equity method of accounting. Equity investments in which Netscape has a less
than 20% interest, including Network Computer, Inc., ("NCI") and Novonyx, Inc.,
("Novonyx"), are carried at cost or estimated realizable value, if less.
In June 1997, Netscape completed the formation of a joint venture, Novonyx,
with Novell, Inc. ("Novell"). Novell and Netscape will collaborate to integrate
certain products and services for networked enterprise customers building
intranet and extranet applications. Netscape acquired for cash a minority
interest in the outstanding capital stock of Novonyx.
In August 1997, Netscape completed the merger of Navio Communications, Inc.,
a joint venture of Netscape, with and into NCI, a wholly-owned subsidiary of
Oracle Corporation ("Oracle"). The surviving company, NCI, creates software for
open standards-based network computers and other Internet appliances that will
be used in homes, businesses, and schools. Oracle retains majority ownership in
NCI and Netscape retains a minority equity interest in NCI.
The balance of investments in joint ventures at October 31, 1998 was
immaterial.
14. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
On October 31, 1998 Netscape adopted Statement of Financial Accounting
Standard No. 131 "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for public
companies relating to the reporting of financial information about operating
segments. The adoption of SFAS 131 did not have a material effect on Netscape's
primary consolidated financial statements but did affect Netscape's segment
information disclosures.
SEGMENT INFORMATION
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 the rights to updates. Netscape derives its Netcenter
revenue from service fees for Netcenter advertising, sponsorship, and other
Netcenter services. Netcenter sponsorship revenue primarily includes trademark
fees, fees from revenue sharing arrangements, and search and directory services
Upon adoption of SFAS 131, Netscape began to present segment financial
information for its two reportable operating segments: Enterprise software and
Netcenter. The Enterprise software segment 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 and
client business that helps companies build, buy, or outsource Internet
applications. These segments were identified based on the different nature of
the products and, in general, the type of customers for those products.
Netscape's Chief Operating Decision Maker ("CODM"), James L. Barksdale,
President and CEO, evaluates performance and allocates resources based on a
measure of segment profit or loss from operations. The accounting policies of
the reportable segments are the same as those described in the summary of
significant accounting policies except that depreciation and amortization are
allocated to each segment from functional department totals based on certain
assumptions which include, among other
105
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION (CONTINUED)
things, revenues and headcount measures. Also, Netscape's CODM does not view
segment results below operating profit (loss), therefore, net interest income,
other income, equity in net losses of joint ventures, and the provision for
income taxes are not broken out by segment below.
Netscape does not account for nor report to the CODM its assets or capital
expenditures by segment. The segments comprising Netscape's operations, as
described previously, are not considered capital-intensive and, thus, asset
information is not considered meaningful on a segment basis.
A summary of the segment financial information reported to the CODM is as
follows:
<TABLE>
<CAPTION>
TEN MONTHS ENDED OCTOBER 31, 1998
------------------------------------------------------
NETCENTER
----------
ENTERPRISE ALL CONSOLIDATED
---------- OTHER(1) TOTAL
----------- -----------------
(RESTATED)
(RESTATED) (RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Product revenues.................... $ 261,457 $ -- $ -- $ 261,457
Service revenues.................... 65,947 120,405 -- 186,352
---------- ---------- ----------- --------
Total revenues...................... $ 327,404 $ 120,405 $ -- $ 447,809
Depreciation and amortization
expense........................... $ 29,909 $ 13,790 $ 11,175 $ 54,874
Operating loss...................... $ (41,011) $ (10,750) $ (23,175) $ (74,936)
</TABLE>
- ------------------------
(1) Includes approximately $12.0 million of restructuring charges and $11.2
million of goodwill amortization not considered directly related to either
segment.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------
ENTERPRISE NETCENTER
---------- ----------
ALL CONSOLIDATED
OTHER(2) TOTAL
----------- -----------------
(RESTATED) (RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Product revenues..................... 383,951 $ -- $ -- $ 383,951
Service revenues..................... 54,552 95,348 -- 149,900
---------- ---------- ----------- -----------------
Total revenues....................... $ 438,503 $ 95,348 $ -- $ 533,851
Depreciation and amortization
expense............................ $ 30,238 $ 8,443 $ 3,300 $ 41,981
Operating income (loss).............. $ 11,051 $ (11,382) $ (55,399) $ (55,730)
</TABLE>
- ------------------------
(2) Includes approximately $23.3 million, $5.8 million, $23.0 million and $3.3
million of purchased IPR&D, merger related charges, restructuring charges
and goodwill amortization, respectively, not considered directly related to
either segment.
106
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------
ALL CONSOLIDATED
ENTERPRISE NETCENTER OTHER(3) TOTAL
---------- ---------- ----------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Product revenues..................... $ 291,183 $ -- $ -- $ 291,183
Service revenues..................... 31,831 23,280 -- 55,111
---------- ---------- ----------- --------
Total revenues....................... $ 323,014 $ 23,280 $ -- $ 346,294
Depreciation and amortization
expense............................ $ 13,393 $ 2,976 $ -- $ 16,369
Operating income (loss).............. $ 61,729 $ (34,891) $ (6,350) $ 20,488
</TABLE>
- ------------------------
(3) Includes approximately $6.1 million of merger and property rights charges
not considered directly related to either segment.
107
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION (CONTINUED)
GEOGRAPHIC INFORMATION
Revenues are attributed to specific geographical areas based on origin of
order generation. Transfers between geographic areas are accounted for at prices
that are representative of unaffiliated party transactions and consistent with
the rules and regulations of governing tax authorities.
Netscape operates in three main geographic areas as follows:
<TABLE>
<CAPTION>
TEN MONTHS ENDED OCTOBER 31,1998
--------------------------------------------------------------------
ASIA PACIFIC
EUROPE AND ELIMINATIONS
----------- --------------- ------------
U.S. CONSOLIDATED
---------- ------------
(RESTATED) (IN THOUSANDS) (RESTATED)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers............. $ 399,922 $ 43,506 $ 4,381 $ -- $ 447,809
Transfers between geographic areas.......... 10,240 -- 9,729 (19,969) --
---------- ----------- ------- ------------ ------------
Total revenues.............................. $ 410,162 $ 43,506 $ 14,110 $ (19,969) $ 447,809
Operating loss.............................. $ (64,101) $ (9,426) $ (1,409) $ -- $ (74,936)
Long-lived assets........................... $ 224,065 $ 6,017 $ 3,276 $ -- $ 233,358
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,1997
---------------------------------------------------------------------
ASIA PACIFIC
EUROPE AND ELIMINATIONS
----------- --------------- ------------
U.S. CONSOLIDATED
----------- ------------
(RESTATED) (IN THOUSANDS) (RESTATED)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers............ $ 452,665 $ 59,485 $ 21,701 $ -- $ 533,851
Transfers between geographic areas......... 17,632 28,839 13,332 (59,803) --
----------- ----------- ------- ------------ ------------
Total revenues............................. $ 470,297 $ 88,324 $ 35,033 $ (59,803) $ 533,851
Operating income (loss).................... $ (57,996) $ (750) $ 2,939 $ 77 $ (55,730)
Long-lived assets.......................... $ 227,008 $ 4,145 $ 3,198 $ -- $ 234,351
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,1996
-------------------------------------------------------------------
ASIA PACIFIC
U.S. EUROPE AND ELIMINATIONS CONSOLIDATED
----------- --------- --------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers............. $ 291,579 $ 30,367 $ 24,348 $ -- $ 346,294
Transfers between geographic areas.......... 17,952 1,007 341 (19,300) --
----------- --------- ------- ------------ ------------
Total revenues.............................. $ 309,531 $ 31,374 $ 24,689 $ (19,300) $ 346,294
Operating income............................ $ 14,285 $ 1,665 $ 4,817 $ (279) $ 20,488
Long-lived assets........................... $ 91,930 $ 2,451 $ 914 $ -- $ 95,295
</TABLE>
CUSTOMER INFORMATION
For the ten months ended October 31, 1998, and the years ended December 31,
1997, and December 31, 1996, no single customer accounted for 10% or more of
total revenues.
15. LEGAL PROCEEDINGS
Netscape is subject to various legal proceedings and claims, either asserted
or unasserted, which arise in the ordinary course of business. Netscape has also
learned of several suits related to its proposed merger with America Online (see
Note 16). Netscape believes these suits lack merit, and it intends to defend
against them vigorously. While the outcome of these claims cannot be predicted
with certainty,
108
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. LEGAL PROCEEDINGS (CONTINUED)
Netscape does not believe that the outcome of any of these legal matters will
have a material adverse effect on Netscape's business, consolidated operating
results, or consolidated financial position. However, an unfavorable resolution
of these matters could materially affect Netscape's future results of operations
or cash flows in a particular period.
16. SUBSEQUENT EVENTS (UNAUDITED)
In November 1998, America Online, Inc. ("AOL") signed an agreement to
acquire Netscape in a transaction designed to extend America Online's leadership
in interactive services. The stock-for-stock pooling of interests transaction,
in which stockholders of Netscape will receive 0.45 shares of AOL common stock
for each share of Netscape common stock, is expected to close in the Spring of
1999, subject to various conditions, including customary regulatory approvals
and approval by Netscape's stockholders. If the merger is not completed for any
reason, Netscape may be subject to the following contingencies:
- Netscape may be required to pay AOL a termination fee of $100 million
- the option for 19,887,317 shares of Netscape common stock with an exercise
price of $33.94 per share Netscape granted to AOL in November, 1998 may
become exercisable
In November 1998, Netscape adopted a Preferred Shares Purchase Rights Plan.
The Plan provides for the distribution of a preferred stock purchase right as a
dividend for each share of the Company's common stock held of record at the
close of business on December 11, 1998. The rights are not currently
exercisable. Under certain conditions involving an acquisition or proposed
acquisition by any person or group other than AOL of 15% or more of the common
stock, the rights permit the holders (other than the 15% holder) to purchase
Netscape common stock at a 50% discount from the market price at that time, upon
payment of an exercise price of $225.00 per right. Before the acquiror acquires
50% of Netscape stock, a majority of the Netscape Board of Directors may
exchange the rights (other than the acquiror's rights), in whole or in part, for
shares of Netscape common stock at an exchange ratio of one right per share of
common stock. In addition, in the event of certain business combinations other
than the AOL merger, the rights permit the purchase of the common stock of the
acquirer at a 50% discount from the market price at that time. Under certain
conditions, the rights may be redeemed by the Company's Board of Directors in
whole, but not in part, at a price of $0.001 per right. The rights have no
voting privileges and are attached to and automatically trade with the common
stock. The rights expire on the earlier of November 23, 2008, the exchange or
redemption of the rights, or the effectiveness of the AOL merger.
In November 1998, Netscape signed an agreement to acquire AtWeb Inc.
("AtWeb"), an online web site service company. In December 1998, the transaction
closed, and Netscape purchased all of the outstanding capital stock of AtWeb and
assumed all of AtWeb's outstanding stock options in exchange for 2,685,970
shares of Netscape common stock and 677,801 options. The AtWeb acquisition will
be accounted for as a pooling of interests. Netscape's financial results will
not be restated as the effect of the AtWeb acquisition is not considered to be
material to Netscape's financial condition and results of operations.
During November 1998 through January 1999, Netscape partially exercised the
Excite warrants and sold 498,079 shares of Excite common stock for a net gain of
$22.4 million.
109
<PAGE>
QUARTERLY RESULTS OF OPERATIONS/SUPPLEMENTARY FINANCIAL INFORMATION
Subsequent to the Securities and Exchange Commission's letter to the AICPA
dated September 9, 1998, regarding its views on in-process research and
development, ("IPR&D"), the Company has re-evaluated its IPR&D charges on the
acquisitions of DigitalStyle Corporation, ("DigitalStyle"), Portola
Communications, Inc., ("Portola"), and Actra Business Systems, LLC, ("Actra"),
revised the purchase price allocations and restated its financial statements.
Amounts for all quarters subsequent to the quarter ended June 30, 1997, have
been restated to adjust the allocations of the purchase prices of these business
combinations.
<TABLE>
<CAPTION>
QUARTER ENDED ONE MONTH ENDED
---------------------------------------------------------------------------- ------------------------
OCT. 31, 1998 JULY 31, 1998 APRIL 30, 1998 JAN. 31, 1998
------------------------ ------------------------ ------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues............ $ 162,025 $ 162,025 $ 150,234 $ 150,234 $ 127,230 $ 127,230 $ 8,320 $ 8,320
Gross profit (loss)....... 121,363 120,588 114,297 113,522 96,186 95,411 (2,067) (2,325)
Income (loss) before
income taxes............ 2,672 71 88 (2,513) 8 (2,593) (54,185) (55,052)
Net income (loss)......... 2,672 71 88 (2,513) 8 (2,593) (54,185) (55,052)
Basic net income (loss)
per share............... $ 0.03 $ -- $ -- $ (0.03) $ -- $ (0.03) $ (0.58) $ (0.59)
Diluted net income (loss)
per share............... $ 0.03 $ -- $ -- $ (0.03) $ -- $ (0.03) $ (0.58) $ (0.59)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------------------
DEC. 31, 1997 SEP. 30, 1997 JUNE 30, 1997 MAR. 31, 1997
------------------------ ------------------------ ------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues............ $ 125,280 $ 125,280 $ 152,068 $ 152,068 $ 135,970 $ 135,970 $ 120,533 $ 120,533
Gross profit (loss)....... 89,574 89,574 121,062 121,062 111,051 111,051 98,468 98,468
Purchased in-process
research and
development............. 50,500 13,950 -- -- 52,587 9,300 -- --
Merger-related charges.... 5,848 5,848 -- -- -- -- -- --
Income (loss) before
income taxes............ (113,754) (78,856) 15,702 14,055 (40,455) 2,831 11,223 11,223
Net income (loss)......... (88,330) (53,252) 10,223 8,765 (44,697) (1,780) 7,308 7,308
Basic net income (loss)
per share............... $ (0.98) $ (0.59) $ 0.12 $ 0.10 $ (0.53) $ (0.01) $ 0.09 $ 0.09
Diluted net income (loss)
per share............... $ (0.98) $ (0.59) $ 0.10 $ 0.09 $ (0.53) $ (0.01) $ 0.08 $ 0.08
</TABLE>
- ------------------------
(1) The restated fourth quarter of 1997 loss before income taxes, net loss,
basic and diluted net loss per share each include $19.8 million of purchased
in-process research and development and merger related charges, $23.0
million of restructuring charges and $1.7 million of goodwill amortization.
Excluding these charges, net of tax effect, the net loss was $21.6 million
and basic and diluted net loss per share was $0.24.
(2) The restated second quarter of 1997 loss before income taxes, net loss,
basic and diluted net loss per share each include $9.3 million of purchased
in-process research and development. Excluding this charge, net of tax
effect, net income was $7.9 million, and basic and diluted net income per
share were $0.09 and $0.08, respectively.
110
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized on this 27th
day of January 1999.
<TABLE>
<S> <C> <C>
NETSCAPE COMMUNICATIONS CORPORATION
By: /s/ PETER L.S. CURRIE
-----------------------------------------
Peter L.S. Currie,
EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James L. Barksdale, Roberta R Katz, and Peter
L.S. Currie jointly and severally, as such person's attorney-in-fact, each with
the power of substitution, for him or her in any and all capacities, to sign any
amendments to this Transition Report on Form 10-K/A and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorney-in-fact, or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K/A has been signed below by the following persons on January 27, 1999
on behalf of the Registrant and in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ------------------------------ --------------------------
<C> <S>
President, Chief Executive
/s/ JAMES L. BARKSDALE Officer (PRINCIPAL
- ------------------------------ EXECUTIVE OFFICER) and
James L. Barksdale Director
Executive Vice President
/s/ PETER L.S. CURRIE and Chief Administrative
- ------------------------------ Officer (PRINCIPAL
Peter L.S. Currie FINANCIAL OFFICER)
Senior Vice President and
/s/ NOREEN G. BERGIN Corporate Controller
- ------------------------------ (PRINCIPAL ACCOUNTING
Noreen G. Bergin OFFICER)
/s/ JAMES H. CLARK
- ------------------------------ Chairman of the Board of
James H. Clark Directors
/s/ MARC L. ANDREESSEN
- ------------------------------ Executive Vice President,
Marc L. Andreessen Products and Director
/s/ ERIC A. BENHAMOU
- ------------------------------ Director
Eric A. Benhamou
/s/ L. JOHN DOERR
- ------------------------------ Director
L. John Doerr
/s/ WILLIAM V. CAMPBELL
- ------------------------------ Director
William V. Campbell
</TABLE>
111
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
TEN MONTHS ENDED OCTOBER 31, 1998,
YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING COSTS AND BALANCE AT
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS/WRITE-OFFS END OF PERIOD
- ----------------------------------------------------- ----------- ----------- ------------------- -------------
<S> <C> <C> <C> <C>
Ten months ended October 31, 1998
Allowance for doubtful accounts.................... $ 8,335 $ 2,506 $ (4,423) $ 6,418
Year ended December 31, 1997
Allowance for doubtful accounts.................... $ 4,896 $ 7,858 $ (4,419) $ 8,335
Year ended December 31, 1996
Allowance for doubtful accounts.................... $ 667 $ 4,376 $ (147) $ 4,896
</TABLE>
112
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of November 23, 1998 by and among Registrant, Apollo Acquisition
Corporation, and AOL.
2.2 Agreement and Plan of Reorganization dated as of November 10, 1998, as amended by Amendment No. 1 to the
Agreement and Plan of Reorganization dated as of December 4, 1998, by and among Registrant, Fifi
Acquisition Corporation, and AtWeb (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 2.1 TO THE
REGISTRANT'S FORM 8-K DATED JANUARY 8, 1999).
2.3 Agreement and Plan of Merger dated December 31, 1998, by and between AtWeb and Fifi (WHICH IS
INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 2.2 TO THE REGISTRANT'S FORM 8-K DATED JANUARY 8, 1999).
3.1 Restated Certificate of Incorporation, as amended through January 23, 1996 (WHICH IS INCORPORATED HEREIN
BY REFERENCE TO EXHIBIT 3.(I) TO THE REGISTRANT'S 1995 10-K).
3.2 Certificate of Designations of Rights, Preferences and Privileges of Series A Participating Preferred
Stock of Registrant, filed December 1, 1998 (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT A
CONTAINED IN EXHIBIT 4.1 TO THE REGISTRANT'S 8-K DATED DECEMBER 7, 1998).
3.3 Amended and Restated Bylaws of Registrant, as amended through January 24, 1997 (WHICH IS INCORPORATED
HEREIN BY REFERENCE TO EXHIBIT 3.(II) TO THE REGISTRANT'S 1996 10-K).
4.1 Form of Registrant's Common Stock Certificate (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 4.1
TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1, REGISTRATION NO. 33-93862 ("REGISTRANT'S 1995
S-1).
4.2 Second Amended and Restated Investors' Rights Agreement dated April 5, 1995 (WHICH IS INCORPORATED
HEREIN BY REFERENCE TO EXHIBIT 4.2 TO THE REGISTRANT'S 1995 S-1).
4.3 Preferred Shares Rights Agreement dated November 23, 1998 (WHICH IS INCORPORATED HEREIN BY REFERENCE TO
EXHIBIT 4.1 TO THE REGISTRANT'S 8-K DATED DECEMBER 7, 1998).
9.1 Voting Agreement by and between AOL and the parties identified on Schedule A thereto (the
"Stockholders").
10.1* Form of Indemnification Agreement entered into by Registrant with each of its directors and executive
officers (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.1 TO THE REGISTRANT'S 1995 S-1).
10.2* 1994 Stock Option Plan and related agreements, as amended (WHICH IS INCORPORATED HEREIN BY REFERENCE TO
EXHIBIT 10.3 TO THE REGISTRANT'S 1995 S-1).
10.3* 1995 Stock Plan and related agreements (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 4.5 TO THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8 DATED DECEMBER 10, 1998).
10.4* 1995 Employee Stock Purchase Plan and related agreements (WHICH IS INCORPORATED HEREIN BY REFERENCE TO
EXHIBIT 4.4 TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8 DATED JUNE 4, 1998).
10.5* 1995 Director Option Plan and related agreements (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT
4.5 TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8 DATED JUNE 4, 1998).
10.6* 1998 Stock Option Plan (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 4.6 TO THE REGISTRANT'S
REGISTRATION STATEMENT ON FORM S-8 DATED JUNE 4, 1998).
10.7* AtWeb, Inc. 1997 Stock Plan.
</TABLE>
113
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.8* Collabra Software, Inc. 1993 Incentive Stock Plan (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT
4.3 TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO. 33-99198).
10.9* InSoft, Inc. 1993 Stock Option Plan (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 4.3 TO THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO. 333-4222).
10.10* Netcode Corporation 1996 Stock Plan (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 4.3 TO THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO. 333-4478).
10.11* DigitalStyle Corporation 1995 Stock Option/Stock Issuance Plan (WHICH IS INCORPORATED HEREIN BY
REFERENCE TO EXHIBIT 4.4 TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO.
333-29931).
10.12* Portola Communications, Inc. 1996 Stock Option Plan (WHICH IS INCORPORATED HEREIN BY REFERENCE TO
EXHIBIT 4.8 TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO. 333-29931).
10.13* KIVA Software Corporation 1995 Stock Option Plan (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT
4.4 TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO. 333-44135).
10.14* Employment Agreement between Registrant and James L. Barksdale dated January 4, 1995 (WHICH IS
INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.7 TO THE REGISTRANT'S 1995 S-1).
10.15* Employment Agreement between Registrant and Roberta R. Katz dated April 4, 1995, as amended January 23,
1997.
10.16* Employment Agreement between Registrant and Noreen G. Bergin dated October 13, 1995, as amended January
23, 1997.
10.17+ License and Series A Stock Purchase Agreement between Registrant and RSA Data Security, Inc. dated
August 19, 1994 (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.9 TO THE REGISTRANT'S 1995
S-1).
10.18 Lease between Registrant and Ellis-Middlefield Business Park dated October 14, 1994 (WHICH IS
INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.11 TO THE REGISTRANT'S 1995 S-1).
10.19 Lease between Registrant and Ellis-Middlefield Business Park dated April 28, 1995 (WHICH IS INCORPORATED
HEREIN BY REFERENCE TO EXHIBIT 10.12 TO THE REGISTRANT'S 1995 S-1).
10.20 Lease between Registrant and Sobrato Development Companies dated August 1995 (WHICH IS INCORPORATED
HEREIN BY REFERENCE TO EXHIBIT 10.14 TO THE REGISTRANT'S 1995 10-K).
10.21 Lease between Registrant and Renault & Handley Employees Investment Co. dated December 12, 1995 (WHICH
IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.15 TO THE REGISTRANT'S 1995 10-K).
10.22 Lease between Registrant and 464 Ellis Street Associates, L.P. dated January 23, 1997 (includes Phase I
and Phase II) (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.17 TO THE REGISTRANT'S 1996
10-K).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Powers of Attorney (included as part of the signature page of this transition report).
27.1 Financial Data Schedule for the transition period ended October 31, 1998.
</TABLE>
- ------------------------
+ Confidential treatment has been previously granted for certain portions of
these exhibits.
* Indicates management compensatory plan, contract or arrangement.
114
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the (i) Registration
Statement (Form S-8 No. 33-95536) pertaining to the 1994 Stock Option Plan, 1995
Stock Plan, 1995 Employee Stock Purchase Plan, and 1995 Director Option Plan of
Netscape Communications Corporation, (ii) Registration Statement (Form S-8 No.
33-99198) pertaining to the 1993 Incentive Stock Option Plan of Collabra
Software, Inc., (iii) Registration Statement (Form S-8 No. 333-4222) pertaining
to the 1993 Stock Option Plan of InSoft, Inc., (iv) Registration Statement (Form
S-8 No. 333-4478) pertaining to the 1996 Stock Plan of Netcode Corporation, (v)
Registration Statement (Form S-8 No. 333-29931) pertaining to the 1995 Stock
Option/Issuance Plan of DigitalStyle Corporation and the 1996 Stock Option Plan
of Portola Communications, Inc., (vi) Registration Statement (Form S-8 No.
333-38469) pertaining to the 1995 Stock Plan of Netscape Communications
Corporation, (vii) Registration Statement (Form S-8 No. 333-44135) pertaining to
the 1995 Stock Option Plan of KIVA Software Corporation and the 1995 Stock Plan
of Netscape Communications Corporation, (viii) Registration Statement (Form S-8
No. 333-55987) pertaining to the 1995 Director Option Plan, 1995 Employee Stock
Purchase Plan, and 1998 Stock Option Plan of Netscape Communications
Corporation, (ix) Registration Statement (Form S-8 No. 333-57419) pertaining to
the 1998 Stock Option Plan of Netscape Communications Corporation, (x)
Registration Statement (Form S-8 No. 333-68713) pertaining to the 1995 Stock
Plan of Netscape Communications Corporation, and (xi) Registration Statement
(Form S-8 No. 333-71079) pertaining to the 1997 Stock Plan of AtWeb, Inc., of
our report dated November 19, 1998 (except for Note 1 "Restatement of Financial
Statements," as to which the date is February 3, 1999) with respect to the
consolidated financial statements and schedule of Netscape Communications
Corporation, as amended, included in the Transition Report (Form 10-K/A) of
Netscape Communications Corporation for the ten months ended October 31, 1998.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Palo Alto, California
February 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
NETSCAPE COMMUNICATIONS CORPORATION'S ANNUAL REPORT ON FORM 10K/A FOR THE
PERIOD ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 10-MOS YEAR
<FISCAL-YEAR-END> OCT-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> OCT-31-1998 DEC-31-1997
<CASH> 85,885 55,172
<SECURITIES> 91,598 129,426
<RECEIVABLES> 171,310 161,526
<ALLOWANCES> (6,418) (8,335)
<INVENTORY> 0 0
<CURRENT-ASSETS> 406,680 395,086
<PP&E> 244,280 207,180
<DEPRECIATION> (99,394) (58,681)
<TOTAL-ASSETS> 737,615 712,271
<CURRENT-LIABILITIES> 261,753 203,550
<BONDS> 0 0
0 0
0 0
<COMMON> 10 10
<OTHER-SE> 475,432 508,496
<TOTAL-LIABILITY-AND-EQUITY> 737,615 712,271
<SALES> 261,457 383,950
<TOTAL-REVENUES> 447,809 533,851
<CGS> 29,896 36,579
<TOTAL-COSTS> 120,613 113,697
<OTHER-EXPENSES> 402,132 475,884
<LOSS-PROVISION> 2,506 7,858
<INTEREST-EXPENSE> 99 425
<INCOME-PRETAX> (60,087) (50,747)
<INCOME-TAX> 0 (11,788)
<INCOME-CONTINUING> (60,087) (38,959)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (60,087) (38,959)
<EPS-PRIMARY> (0.63) (0.45)
<EPS-DILUTED> (0.63) (0.45)
</TABLE>
