------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10Q 5-15-97 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-26310
NETSCAPE COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3200270
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification
organization) No.)
501 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (415) 254-1900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
The number of shares outstanding of the registrant's Common Stock as of May 5,
1997 was 88,252,277.
INDEX
NETSCAPE COMMUNICATIONS CORPORATION
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (Unaudited)
(a) Condensed Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996 . . . . . . . 3
(b) Condensed Consolidated Statements of Income for the Three Months Ended March 31, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(c) Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,
1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(d) Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . $103,289 $87,530
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . 114,682 113,034
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . 117,727 110,627
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,956 20,347
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,012 16,892
------------------------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . 373,666 348,430
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 103,039 86,567
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,881 90,504
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,235 11,949
------------------------------------
$570,821 $537,450
------------------------------------
------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33,085 $27,634
Accrued compensation and related liabilities . . . . . . . . . . . . . . . 15,435 17,162
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 14,353 12,781
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,829 7,731
Deferred revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,214 80,294
Current portion of long-term obligations and installment notes payable . . 893 714
------------------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 166,809 146,316
Long-term obligations and installment notes payable . . . . . . . . . . . . . 70 484
Stockholders' equity:
Preferred stock, common stock and additional paid-in capital . . . . . . . 403,346 399,022
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . (5,514) (6,128)
Retained earnings (accumulated deficit). . . . . . . . . . . . . . . . . . 5,717 (2,227)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393 (17)
------------------------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 403,942 390,650
------------------------------------
$570,821 $537,450
------------------------------------
------------------------------------
See accompanying notes.
3
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
QUARTERS ENDED MARCH 31,
-----------------------
1997 1996
---- ----
(Unaudited)
Revenues:
Product revenues . . . . . . . . . . . . . . . . $89,769 $49,051
Service revenues . . . . . . . . . . . . . . . . 30,472 7,070
----------------------
Total revenues . . . . . . . . . . . . . . . . 120,241 56,121
Cost of revenues:
Cost of product revenues . . . . . . . . . . . . 9,751 6,811
Cost of service revenues . . . . . . . . . . . . 6,067 1,683
----------------------
Total cost of revenues . . . . . . . . . . . . 15,818 8,494
----------------------
Gross profit. . . . . . . . . . . . . . . . . . . . 104,423 47,627
Operating expenses:
Research and development . . . . . . . . . . . . 28,975 14,126
Sales and marketing. . . . . . . . . . . . . . . 54,042 25,805
General and administrative . . . . . . . . . . . 9,691 5,206
----------------------
Total operating expenses . . . . . . . . . . . 92,708 45,137
----------------------
Operating income. . . . . . . . . . . . . . . . . . 11,715 2,490
Interest income, net . . . . . . . . . . . . . . 2,395 2,431
Equity in net losses of joint ventures . . . . . (1,501) --
----------------------
Interest and other income, net . . . . . . . . 894 2,431
----------------------
Income before income taxes. . . . . . . . . . . . . 12,609 4,921
Provision for income taxes. . . . . . . . . . . . . 4,665 1,332
----------------------
Net income. . . . . . . . . . . . . . . . . . . . . $7,944 $3,589
----------------------
----------------------
Net income per share. . . . . . . . . . . . . . . . $0.09 $0.04
----------------------
----------------------
Shares used in computing net income per share . . . 90,785 85,003
----------------------
----------------------
See accompanying notes.
4
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
QUARTERS ENDED MARCH 31,
------------------------
1997 1996
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,944 $3,589
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,573 2,306
Amortization of deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . 614 614
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,609) _
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,100) (22,424)
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880 (3,932)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,451 12,644
Accrued compensation and related liabilities . . . . . . . . . . . . . . . . . . . . . . . (1,727) 2,462
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,572 676
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,098 1,065
Deferred revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,920 24,313
------------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . 28,616 21,313
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,045) (14,341)
Increase in other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,286) 731
Purchases of investments available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . (41,059) (168,839)
Maturities of investments available-for-sale. . . . . . . . . . . . . . . . . . . . . . . . . 34,016 137,608
Sales of investments available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,993 26,126
------------------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,381) (18,715)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on installment notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (235) (141)
Proceeds from issuance of common stock, net . . . . . . . . . . . . . . . . . . . . . . . . . 4,324 1,363
------------------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . 4,089 1,222
Effect of foreign exchange rate changes on cash and cash equivalents. . . . . . . . . . . . . 435 --
------------------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 15,759 3,820
Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . . . . . . . . . . 87,530 55,276
------------------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . $103,289 $59,096
------------------
------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,176 $19
See accompanying notes.
5
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments consisting of normal recurring adjustments which, in the opinion
of management, are necessary for a fair presentation of the results for the
periods shown. The results of operations for such periods do not necessarily
indicate the results expected for the full fiscal year or for any future period.
The accompanying financial statements should be read in conjunction with the
audited consolidated financial statements of Netscape Communications Corporation
("Netscape" or the "Company") for the year ended December 31, 1996 and the notes
thereto incorporated by reference into the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
PER SHARE AMOUNTS
Net income per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of the shares issuable upon the exercise of stock
options (using the treasury stock method).
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of Statement 128 on the
calculation of primary and fully diluted earnings per share for the first
quarter ended March 31, 1997 and March 31, 1996 is not material.
REVENUE RECOGNITION
The Company's product revenues are derived from product licensing fees, while
service revenues are derived from fees for support, training, consulting, and
Web advertising and content. Product revenues, net of allowances for future
returns, are generally recognized when a license agreement is in effect, the
product has been shipped, the license fee is fixed or determinable, no
significant vendor obligations remain, and collectibility is reasonably
assured. Product revenues from OEMs are generally recognized upon delivery
of product masters provided that the license fees are fixed and
collectibility is not dependent upon resale to the end users. Otherwise,
these product revenues are recognized upon notification of delivery to the
end user. Product and service revenues from customer subscription and
technical support contracts are recognized ratably over the term of the
contract period, which is typically 12 months. Payments for subscription and
support fees are generally made in advance and are nonrefundable. Service
revenues from training and consulting are recognized when the services are
performed. Service revenues from the sale of Web advertising and content are
recognized in the period in which the content is displayed on a Web page of
the Company. Costs related to insignificant obligations, primarily telephone
support, are accrued upon shipment and included in cost of revenues.
CASH, CASH EQUIVALENTS, SHORT- AND LONG-TERM INVESTMENTS
Cash and cash equivalents consist of cash on deposit with banks and money
market instruments with original maturities of 90 days or less. Short- and
long-term investments consist of debt securities with original maturities
primarily between 90 days and five years. The debt securities are all
classified as available-for-sale. Long-term investments additionally include
equity holdings in both public and private high-technology companies, which
have been classified as available-for-sale. Unrestricted public equity
securities with a readily determinable fair value, and debt securities, are
stated at fair value, which is determined based upon the quoted market prices
of the securities. Other equity securities are stated at cost.
JOINT VENTURES
6
In April 1996, the Company formed a joint venture with GE Information Services
to form Actra Business Systems L.L.C. ("Actra") to develop and market software
for Internet-based business-to-business electronic commerce. The Company
acquired for cash a 50% joint venture interest in the outstanding common stock
of Actra.
In July 1996, the Company formed a joint venture called Navio
Communications, Inc. ("Navio"), an independent Internet software company, to
deliver core, scaleable technology for the Netscape Navigator for a wide-variety
of consumer and non-PC products such as televisions, telephones, set-top boxes,
game players, and the new breed of network computers and information appliances.
The Company acquired for cash and the contribution of certain technology
licenses a 50% joint venture interest in the outstanding voting capital stock of
Navio.
The Company reports its share of earnings and losses of the joint
ventures under the equity method of accounting. In the quarter ended March
31, 1997, the Company entered into a preliminary agreement to form an
additional joint venture with Novell, Inc. The joint ventures are in the
development stage and will incur escalating losses in the near term. The
balance of investments in joint ventures at March 31, 1997 was immaterial.
SUBSEQUENT EVENTS
On April 30, 1997, the Company announced the signing of definitive agreements to
acquire DigitalStyle Corporation ("DigitalStyle"), a Web graphics tools vendor,
and Portola Communications, Inc. ("Portola"), a company with expertise in high
performance messaging systems. Under the terms of the agreements, the Company
will purchase all of the outstanding capital stock and will assume all of the
outstanding stock options of DigitalStyle and Portola, both privately held
companies, for an aggregate of approximately 2.1 million shares of the Company's
common stock, subject to adjustment. Both acquisitions will be accounted for as
purchase transactions. The Company anticipates that a substantial portion of
the purchase price for each acquisition will be written off as in-process
research and development in the quarter in which the transactions close. The
transactions are currently anticipated to close in the second or third quarter
of this year and are subject to customary conditions of closing, including
regulatory and other approvals.
7
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE
PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. SUCH FORWARD LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS,
ESTIMATES AND PROJECTIONS ABOUT NETSCAPE'S INDUSTRY, MANAGEMENT'S BELIEFS,
AND CERTAIN ASSUMPTIONS MADE BY NETSCAPE'S MANAGEMENT. WORDS SUCH AS
"ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS,"
"ESTIMATES," VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES
OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY SUCH
FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE THOSE SET
FORTH IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996
UNDER "FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND
FINANCIAL CONDITION" ON PAGES 27 THROUGH 42 THEREOF. PARTICULAR ATTENTION
SHOULD BE PAID TO THE CAUTIONARY LANGUAGE IN THE SECTIONS ENTITLED "PLANNED
PRODUCTS AND RELEASES," "FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION --PRODUCT INTRODUCTIONS AND TRANSITIONS" AND
"-- COMPETITION." UNLESS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. HOWEVER, READERS
SHOULD CAREFULLY REVIEW THE RISK FACTORS SET FORTH IN OTHER REPORTS OR
DOCUMENTS THE COMPANY FILES 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's operating performance each quarter is subject to various
risks and uncertainties as discussed in the Company's Form 10-K and the 1996
Annual Report to Stockholders (the "Annual Report"). The following discussion
should be read in conjunction with the section entitled "Factors Affecting the
Company's Business, Operating Results and Financial Condition" in the Form 10-K,
and the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Annual Report.
OVERVIEW
Netscape Communications Corporation ("Netscape" or the "Company") is a leading
provider of open software for linking people and information over private
enterprise networks ("intranets") based on transmission control
protocol/Internet protocol ("TCP/IP") and the Internet. The Company was
incorporated in April 1994 and completed business combinations with Collabra
Software, Inc. ("Collabra") in November 1995 and InSoft, Inc. ("InSoft") in
April 1996. InSoft was incorporated in September 1991, and Collabra was
incorporated in February 1993. The business combinations were treated as
poolings of interest for accounting purposes, and accordingly, the historical
financial statements for the Company have been restated as if the transactions
occurred at the beginning of the earliest period presented. The Company
additionally completed business combinations with Netcode Corporation
("Netcode") and Paper Software, Inc. ("Paper") in April 1996 and May 1996,
respectively, in transactions accounted for as poolings of interest. Operating
results since January 1, 1996, have been restated to reflect the operating
results of Netcode and Paper.
CERTAIN FACTORS AFFECTING OPERATING RESULTS
RECENT EVENTS
On April 30, 1997, the Company announced the signing of definitive agreements to
acquire DigitalStyle Corporation ("DigitalStyle"), a Web graphics tools vendor,
and Portola Communications, Inc. ("Portola"), a company with expertise in high
performance messaging systems. Under the terms of the agreements, the Company
will purchase all of the outstanding capital stock and will assume all of the
outstanding stock options of DigitalStyle and Portola, both privately held
companies, for an aggregate of approximately 2.1 million shares of the Company's
common stock, subject to adjustment. Both acquisitions will be accounted for as
purchase transactions. The Company anticipates that a substantial portion of
the purchase price for each acquisition will be written off as in-process
research and development in the quarter in which the transactions close. The
transactions are currently anticipated to close in the second or third quarter
of this year and are subject to customary conditions of closing, including
regulatory and other approvals.
There can be no assurance that Netscape will complete the proposed mergers
or that the Company will not incur additional charges in subsequent quarters to
reflect costs associated with the mergers or that management will be successful
in its efforts to integrate the operations of the acquired companies. Although
the Company believes the
8
proposed acquisitions described above are in the best interest of the Company
and its stockholders, there are significant risks associated with these
transactions, including but not limited to: (i) difficulties in integration
of the companies, (ii) difficulties in maintaining revenue levels during
product transitions, (iii) difficulties or delays in achieving product and
technology integration benefits, and (iv) increased competition from other
software companies. Further, the proposed acquisitions described above all
relate to companies that are in their early stages of development. As a
result, the Company believes that the increases in costs of revenue and in
operating expenses (due in part to amortization of goodwill and other
intangible assets and charges associated with in-process research and
development) associated with the development and integration of these new
technologies will, in the near term, greatly exceed any associated increases
in revenues, which will have an adverse impact on operating results.
In the quarter ended March 31, 1997 the Company entered into a
preliminary agreement to form a joint venture with Novell, Inc. ("Novell").
Regulatory approval was granted in May 1997. See "--Results of
Operations--Revenues--Product Revenues." The Company expects to make further
acquisition |
