Filed On 3/28/97 · SEC File 0-26310 · Accession Number 912057-97-10695
As Of Filer Filing On/For/As Docs:Pgs Issuer Agent
3/28/97 Netscape Communications Corp 10-K 12/31/96 8:355 912057
Document/Exhibit Description Pages Size
1: 10-K Annual Report 53 348K
2: EX-3.II Articles of Incorporation/Organization or By-Laws 21 126K
3: EX-10.17 Exhibit 10.17 Lease Between Registrant & 464 Ellis 246 680K
4: EX-11.1 Statement re: Computation of Earnings Per Share 2± 10K
5: EX-13.1 Exhibit 13.1 Portions of the Annual Report 29 225K
6: EX-21.1 Exhibit 21.1 Subsidiaries 1 6K
7: EX-23.1 Exhibit 23.1 Consent of Ernst & Young 1 8K
8: EX-27.1 Exhibit 27.1 Financial Data Schedule 2 9K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(Mark One)
/X/
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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)
· Download Table
DELAWARE 94-3200270
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
501 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW,
CALIFORNIA 94043
(Address of principal executive offices) (zip
code)
Registrant's telephone number, including area code: (415) 254-1900
------------------------
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 or any amendment to this
Form 10-K. / /
As of March 17, 1997, there were 88,213,535 shares of the Registrant's
common stock outstanding, and 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 March 17, 1997) was approximately
$1,327,268,690. 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.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's Annual Report to Stockholders for the
year ended December 31, 1996 are incorporated by reference in Parts II and IV of
this Form 10-K to the extent stated herein. Also, certain
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sections of the Registrant's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders to be held on May 30, 1997 are incorporated by reference
in Part III of this Form 10-K to the extent stated herein.
PART I
THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE CONTAIN 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 HEREIN UNDER "FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS
AND FINANCIAL CONDITION" ON PAGES 27 THROUGH 42, AS WELL AS THOSE NOTED IN THE
DOCUMENTS INCORPORATED HEREIN BY REFERENCE. PARTICULAR ATTENTION SHOULD BE PAID
TO THE CAUTIONARY LANGUAGE IN THE SECTIONS ENTITLED "PLANNED PRODUCTS AND
RELEASES" AND "FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND
FINANCIAL CONDITION--PRODUCT INTRODUCTIONS AND TRANSITIONS." 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 1. BUSINESS.
OVERVIEW
Netscape Communications Corporation ("Netscape" or the "Company") is a
leading provider of open software for linking people and information over
intranets and the Internet. Netscape develops, markets and supports a broad
suite of enterprise server and client software, development tools and commercial
applications to create a single shared communications platform for network-based
solutions. Netscape software is based on industry standard protocols and
therefore can be deployed across a variety of computer operating systems,
platforms and databases and can be interconnected with traditional client/
server applications. Using Netscape solutions, organizations can extend their
internal information systems and applications to geographically dispersed
facilities as well as to third party partners and customers. In addition,
Netscape's products allow individuals and organizations to access information
and to execute transactions across the Internet such as the buying and selling
of information, software, and other merchandise.
Netscape released its first product, Navigator 1.0, in December 1994, which
offered an easy to use graphical user interface for browsing the World Wide Web
(the "Web"). Since that time, the Company has become increasingly focused on
offering user and network services for use in intranet applications, including
features with email and graphics. The Company currently offers a broad suite of
software products and tools, targeted primarily at corporate intranets, for use
in a variety of information sharing, network management and commerce-enabling
applications.
To reach a diverse and worldwide customer base, Netscape delivers its suite
of products and services through multiple distribution channels. The Company
offers its products via a direct sales force, telesales, and the Internet as
well as through resellers such as original equipment manufacturers ("OEMs"),
value-added resellers (together with systems integrators referred to herein as
"VARs") and software retailers (collectively, "Resellers"). To accelerate the
market acceptance of the Company's products, Netscape has entered into reseller
agreements with leading telecommunications and technology companies with
complementary resources. These companies include, among others, Apple Computer,
Inc. ("Apple"), Compaq Computer Corporation ("Compaq"), Digital Equipment
Corporation ("Digital"), Hewlett-Packard Company ("Hewlett-Packard"),
International Business Machines Corporation ("IBM"), Informix
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Software, Inc. ("Informix"), Novell, Inc. ("Novell"), Olivetti SPA ("Olivetti"),
Siemens AG ("Siemens"), Silicon Graphics, Inc. ("Silicon Graphics"), Sybase,
Inc. ("Sybase") and Sun Microsystems, Inc. ("Sun").
Netscape was incorporated in Delaware in April 1994, and in April 1996
acquired InSoft, Inc., which was incorporated in September 1991. Netscape's home
page can be located on the Web at http:// home.netscape.com. The Company's
principal executive office is located at 501 East Middlefield Road, Mountain
View, California 94043, and its telephone number at this location is (415)
254-1900. Netscape's common stock is listed on the Nasdaq National Market under
the symbol "NSCP." Except as otherwise noted herein, all references to
"Netscape" or the "Company" shall mean Netscape Communications Corporation and
its subsidiaries.
RECENT DEVELOPMENTS
BOARD OF DIRECTORS
In January 1997, Eric A. Benhamou, Chairman, President and Chief Executive
Officer of 3Com Corporation, was appointed to the Company's Board of Directors
and will serve as a Class I director.
NEW PRODUCTS
In October 1996, the Company introduced Netscape SuiteSpot 3.0 and Netscape
Communicator, are expected to be commercially available in the second quarter of
1997. See "Planned Products and Releases." In addition, to provide further
support for its developer and customer community, the Company announced Netscape
SuiteTools, a comprehensive family of tools for developing and managing intranet
applications, interactive content and Web sites with Netscape's Open Network
Environment ("Netscape ONE").
BUSINESS COMBINATIONS AND JOINT VENTURES
In March 1997, the Company entered into an agreement to enter into a joint
venture with Novell subject to required governmental approvals, to deliver a
broad range of intranet solutions on current and future Novell platforms. In
addition, the Company entered into other business combinations and joint
ventures in 1996. See "Business Combinations and Joint Ventures."
PLANNED PRODUCTS AND RELEASES
In October 1996, the Company announced a matched server/client solution
focused on the intranet market as an upgrade and extension of its server and
client products. Netscape SuiteSpot 3.0, an upgrade to Netscape SuiteSpot 2.0
that is planned to be commercially available in the second quarter of 1997, is
designed to be an integrated suite of server software that offers advanced
messaging and groupware functionality, provides an open foundation for the
creation of network-based applications and enables flexible content management.
Netscape Communicator, an upgrade to Netscape Navigator that is planned to be
commercially available in the second quarter of 1997, is designed to be a
componentized suite of client software for open HTML-based email, groupware,
authoring, calendaring and Web browsing. Together, the Netscape SuiteSpot 3.0
and Netscape Communicator solution are designed to offer a matched feature
approach enabling organizations to use email, groupware and other enterprise
applications across an open network.
Netscape SuiteSpot 3.0 and Netscape Communicator, unlike current Netscape
products, are designed primarily for email, groupware and other enterprise
applications across an open network and represent a significant product
transition for the Company. Therefore, particular attention should be paid to
"Factors Affecting the Company's Business, Operating Results and Financial
Condition--Product Introductions and Transitions."
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NETSCAPE SUITESPOT 3.0.
The Company's next-generation server software suite will be comprised of ten
server and tool products for building corporate intranets. Together with the
announced Netscape Communicator client, Netscape SuiteSpot 3.0 is expected to
provide enterprise customers with an integrated solution for building and
maintaining Web sites, open email, publishing and groupware solutions on
intranets. In addition, Netscape SuiteSpot 3.0 is designed to support the
Netscape ONE framework that allows developers to build cross-platform,
network-based applications. Netscape SuiteSpot 3.0 is planned to be commercially
available in the second quarter of 1997. Below is a description of each server
and tool that collectively comprise Netscape SuiteSpot 3.0.
NETSCAPE ENTERPRISE SERVER 3.0. This enterprise server is designed to be
the platform that will enable users to share, locate and publish information.
Among the features the Company plans to include are the ability to manage
documents in a variety of formats, including Microsoft Office and Adobe PDF,
full-text search capability, agent technology, custom views, access controls and
document control with versioning. Netscape Enterprise Server 3.0, an upgrade of
Netscape's currently shipping Enterprise Server 2.0 is currently available in
public beta version and is planned to be commercially released as a standalone
product in the second quarter of 1997.
NETSCAPE MESSAGING SERVER 3.0. This server is designed to expand its native
support of Internet standards and is designed to extend beyond a traditional
client/server messaging architecture through interoperability with native
Internet and proprietary LAN-based mail systems. Among the features the Company
plans to include are LDAP directory services support, offline and mobile user
support, tools for migration from proprietary messaging solutions and IMAP4 and
POP3 support. Netscape Messaging Server 3.0, an upgrade to Netscape Mail Server
2.0, is currently available in public beta version and is planned to be
commercially released as a standalone product in the second quarter of 1997.
NETSCAPE COLLABRA SERVER 3.0. This open discussion server is designed to
allow group-to-group collaboration and knowledge-sharing among teams both inside
and outside an organization. Among the features the Company plans to include are
support for full-text search across all discussion forums, enhanced encryption,
single point administration and advanced replication capabilities. Netscape
Collabra Server 3.0, an upgrade to Netscape Collabra Server 2.1, is currently
available in public beta version and is planned to be commercially released as a
standalone product in the second quarter of 1997.
NETSCAPE CALENDAR SERVER 1.0. This server is designed to be the open
standards-based server for calendaring and scheduling across the enterprise.
Among the features the Company plans to include are access controls to protect
data and enterprise scalability. Netscape Calendar Server 1.0 is currently
commercially available.
NETSCAPE MEDIA SERVER 1.0. This server is designed to be the audio
broadcasting and publishing extension to the Netscape Enterprise Server. Among
the features the Company plans to include are the ability to deliver audio
across a TCP/IP network, integration of audio with text and graphics and support
for industry-standard protocols and file formats including RTSP. Netscape Media
Server 1.0 is currently commercially available.
NETSCAPE CATALOG SERVER 1.0. This is the automated search and discovery
server for creating, managing and maintaining an online catalog of files
residing on enterprise intranets and the Internet. This server features an
automated catalog that is easy to manage and customize with the ability to
catalog in multiple file formats. Netscape Catalog Server 1.0 is currently
commercially available.
NETSCAPE DIRECTORY SERVER 1.0. This is the server for managing "white
pages" information such as names, email addresses, phone numbers and
certificates. Its features include universal access to directory information
through LDAP, support for distributed searches, replication capabilities and
safeguarding of
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directory information using both access control lists and SSL. Netscape
Directory Server 1.0 is currently commercially available.
NETSCAPE CERTIFICATE SERVER 1.0. This server enables organizations to
issue, sign and manage public-key certificates. Its features include single user
login, SSL support and software signing using the industry-standard RSA digital
signature algorithm. Netscape Certificate Server 1.0 is currently commercially
available.
NETSCAPE PROXY SERVER 2.5. This server is designed to replicate and filter
access to content on an intranet or the Internet. Among the features the Company
plans to include are access and control points for encrypted traffic, automatic
proxy configuration and replication on demand and on command. Netscape Proxy
Server 2.5, an upgrade to Netscape Proxy Server 2.0, is currently available in
public beta version and is planned to be commercially released as a standalone
product in the second quarter of 1997.
NETSCAPELIVEWIRE/NETSCAPE LIVEWIRE PRO. These are visual tools suites
designed for managing Web sites and creating online applications. Features
include the ability to create and import Web page content with a site
downloader, a JavaScript compiler and interoperability with Oracle, Informix,
Sybase and ODBC databases. Both Netscape LiveWire 1.01 and LiveWire Pro 1.01 are
currently commercially available.
NETSCAPE COMMUNICATOR
The Company's next generation client product, Netscape Communicator, will
aggregate a set of features for the user to share and access information on
intranets or the Internet. Additionally, the Company announced the Netscape
Communicator Professional Edition, which is expected to include calendaring and
centralized management capabilities. The Netscape Communicator and Netscape
Communicator Professional Edition are currently available in public beta version
and are planned to be commercially released in the second quarter of 1997. Below
is a description of each component that collectively comprise the Netscape
Communicator.
NETSCAPE NAVIGATOR 4.0. This component is designed to enable access to
information and network applications on intranets and the Internet using the
intuitive Netscape Navigator interface. Among the features the Company plans to
include are an improved user interface, JavaScript style sheets, layers,
improved Java performance and platform support, multiple user profiles and
embedded object support. The Netscape Navigator 4.0 component is designed to
offer a point-and-click graphical user interface that enables users to navigate
the Internet's vast array of network resources. Netscape Navigator 4.0 is
planned to be an extension of the browser functionality in Netscape Navigator
3.0.
NETSCAPE MESSENGER. This component is designed to enable corporate email
built on open standards. Among the features to be included are integration with
Netscape Composer to create HTML mail with embedded objects and images, S/MIME
encrypted and digitally signed messages, LDAP Internet-wide directory
technology, additional support for IMAP4, POP3 and SMTP/MIME, message filters,
an integrated spelling checker, hierarchical folders and search capabilities.
Netscape Messenger will be an extension of the mail functionality in Netscape
Navigator 3.0.
NETSCAPE COLLABRA. This component is designed to enable enterprise
discussion groups based on Internet standards. Among the features the Company
plans to include are NNTP support for threaded discussion groups, HTML content,
forum names for discussions, access controls for private discussions, searching
across all forums and offline reading and posting.
NETSCAPE COMPOSER. This component is designed to be an HTML editor for Web
pages, email and discussion groups. Among the features the Company plans to
include are one-button publishing, formatting which includes fonts and styles,
drag-and-drop images, an extensible editor plug-in API and FTP and
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HTTP publishing support. Netscape Composer is designed to be an extension of the
authoring functionality in Netscape Navigator Gold.
NETSCAPE CONFERENCE. This component is designed to enable live connection
of people and information with Internet telephones, shared whiteboards and file
transfer. Among the features the Company plans to include are audio
conferencing, voicemail, collaborative browsing, full-duplex echo and silence
suppression, H.323 support and integration with Netscape Messenger address book.
Netscape Conference is designed to be an extension of the Netscape CoolTalk
plug-in for Netscape Navigator 3.0.
NETSCAPE CALENDAR. This component is designed to enable enterprise
calendaring and scheduling. Among the features the Company plans to include are
local and remote server searching, schedule delegation, offline support and
drag-and-drop events. Netscape Calendar will be bundled exclusively with the
Netscape Communicator Professional Edition.
NETSCAPE AUTOADMIN. This component is designed to enable centralized
management to install, deploy and configure the Netscape Communicator. Among the
features the Company plans to include are automatic download and installation of
new Netscape Communicator plug-ins and components and the capability to restrict
the downloading of such components to those authorized. Netscape AutoAdmin will
be bundled exclusively with the Netscape Communicator Professional Edition.
THE FOREGOING SECTION CONTAINS FORWARDING-LOOKING STATEMENTS THAT HAVE BEEN
MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, REGARDING THE COMPANY'S PLANNED PRODUCTS AND ENHANCEMENTS, INCLUDING
FORWARD-LOOKING STATEMENTS REGARDING PLANNED FEATURES AND PLANNED RELEASE DATES.
WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "DESIGNS,"
"BELIEVES," "SEEKS," "ESTIMATES," VARIATIONS OF SUCH WORDS AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING
STATEMENTS IN THE FOREGOING SECTION, PARTICULARLY THOSE WITH RESPECT TO PLANNED
RELEASE DATES AND PLANNED FEATURES. THE RESULTS ANTICIPATED BY SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO NUMEROUS DIFFERENT RISKS AND
UNCERTAINTIES AS SET FORTH IN "FACTORS AFFECTING THE COMPANY'S BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION," SPECIFICALLY THE FACTORS ENTITLED
"PRODUCT INTRODUCTIONS AND TRANSITIONS" AND "NEW PRODUCT DEVELOPMENT AND
TECHNOLOGICAL CHANGE." FOR EXAMPLE, THE COMPANY'S ABILITY TO RELEASE SUCH
PLANNED PRODUCTS AND ENHANCEMENTS WITH THEIR PLANNED FEATURES IN A TIMELY AND
COST-EFFECTIVE MANNER, OR AT ALL, COULD BE MATERIALLY ADVERSELY AFFECTED BY ANY
TECHNICAL OR OTHER PROBLEMS IN, OR DIFFICULTIES WITH, SUCH PLANNED PRODUCTS OR
ENHANCEMENTS, THIRD PARTY PRODUCTS OR TECHNOLOGIES WHICH RENDER THE COMPANY'S
PLANNED PRODUCTS AND ENHANCEMENTS OBSOLETE, THE UNAVAILABILITY OF REQUIRED THIRD
PARTY TECHNOLOGY LICENSES ON COMMERCIALLY REASONABLE TERMS, THE LOSS OF KEY
RESEARCH AND DEVELOPMENT PERSONNEL, THE INABILITY OR FAILURE TO RECRUIT AND
RETAIN ADDITIONAL QUALIFIED RESEARCH AND DEVELOPMENT PERSONNEL, OR THE ADOPTION
OF COMPETING STANDARDS.
RECENT PRICING AND SUPPORT ANNOUNCEMENTS
In conjunction with the announcement of the Company's matched server and
client solution, the Company announced a new pricing program that reflects the
enterprise scalability of the Company's products. The Company's new pricing
program will make its Netscape SuiteSpot 3.0 and Netscape Communicator products
available on a per seat basis. In addition, the Netscape Messaging, Netscape
Collabra, Netscape Directory and Netscape Calendar servers will be available as
standalone products with a certain number of client access licenses ("CALs"). As
customers increase the number of users to prescribed levels, additional
incremental license charges will apply, subject to volume and other discounts.
This pricing model is noted in the table below.
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NETSCAPE ENTERPRISE LICENSE FEES
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· Download Table
PRODUCT PRICE/USER*
Netscape SuiteSpot $69
Netscape SuiteSpot +
Netscape Communicator $104**
Netscape SuiteSpot +
Netscape Communicator Professional Ed. $119
* Price includes software, CALs, support, and 1 year
subscription. Minimum user-level is 500.
** Reflects most recent pricing announcement in February
1997.
In February 1997, the Company announced revised pricing and support
initiatives for the enterprise market. In particular, the Company announced its
five-tiered support program to deliver a level of support that matches the needs
of various sized organizations. In addition, the Company increased the per user
charge for Netscape Communicator and Netscape SuiteSpot 3.0 from $99 to $104,
and the Company raised the overall price of Netscape SuiteSpot 3.0 from $3,995
to $4,995 and enterprise server standalone from $995 to $1,295. These pricing
charges will be effective April 1, 1997.
The Company's server and client product lines account for the vast majority
of the Company's total revenues. The Company has in the past changed, and may in
the future change, the pricing of its products. The pricing changes announced in
February 1997 and October 1996 and any future pricing changes could materially
adversely affect sales of the Company's products and consequently materially
adversely affect the Company's business, operating results and financial
condition.
PRODUCTS
The Company is a leading provider of open software for linking people and
information over intranets and the Internet. Netscape develops, markets and
supports a broad suite of enterprise server and client software, development
tools and commercial applications to create a single shared communications
platform for network-based solutions. Netscape software is based on industry
standard protocols and therefore can be deployed across a variety of computer
operating systems, platforms and databases and can be interconnected with
traditional client/server applications. Using Netscape solutions, organizations
can extend their internal information systems and applications to geographically
dispersed facilities as well as to third party partners and customers. In
addition, Netscape's products allow individuals and organizations to access
information and to execute transactions across the Internet such as the buying
and selling of information, software, and other merchandise.
In addition to the products discussed above under "Planned Products and
Releases," Netscape's product line currently includes the following products:
NETSCAPE NAVIGATOR CLIENT SOFTWARE
Netscape Navigator features a point-and-click graphical user interface that
enables users to navigate the Internet's vast array of networked resources as
well as to exchange information and participate in commerce on the Internet.
Netscape Navigator brings Web exploring, email, newsgroups, chat and FTP
together in an integrated package designed to be easy to use and learn. In
addition, Netscape Navigator provides a platform for live online applications,
supporting Live Objects and other interactive multimedia content such as Java
applets, frames and Netscape online plug-ins. The Company currently offers three
versions of its Netscape Navigator client software and a product bundle of
add-on features that work in conjunction with Netscape Navigator.
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The Netscape Navigator product line is as follows:
NETSCAPE NAVIGATOR LAN EDITION. Netscape Navigator LAN Edition is intended
for users who already have TCP/IP connections to the Internet or intranets. It
incorporates all of the features of Netscape Navigator and is available for
Microsoft Windows, Apple Macintosh and various Unix platforms. It is compatible
with standard TCP/IP implementations on these platforms.
NETSCAPE NAVIGATOR PERSONAL EDITION. Netscape Navigator Personal Edition is
intended for companies and individuals without direct TCP/IP connections who
want dial-up access to the Internet. It includes a TCP/IP stack, an
implementation of the Point to Point Protocol and a dialer. Components are
installed and configured through installation programs designed for ease of use.
Netscape Navigator Personal Edition features automatic access to a choice of
Internet service providers.
NETSCAPE NAVIGATOR GOLD. Netscape Navigator Gold includes the standard
features of Netscape Navigator and adds a WYSIWYG editor that allows a user to
create and publish live, online Web pages in one integrated program. Netscape
Navigator Gold is designed to make building a Web page as easy as using a word
processor.
NETSCAPE POWER PACK. Netscape Power Pack is a suite of add-on applications
that extends the capabilities of Netscape Navigator in the Windows environment.
Netscape Power Pack combines Netscape SmartMarks, Netscape Chat and multimedia
add-on applications from such vendors as Adobe, Apple and Progressive Networks.
Netscape SmartMarks provides advanced bookmark and Web monitoring services for
users of Netscape Navigator. Netscape Chat is an interaction tool that
integrates with Netscape Navigator to support real-time communications.
Licenses of Netscape Navigator and related client products accounted for
57.1% of the Company's total revenues in the year ended December 31, 1996.
NETSCAPE SERVER SOFTWARE
Netscape server products combine encryption features, intuitive graphical
administration, high performance and adherence to standards to enable
communications and electronic commerce over the Internet and intranets. These
products can either be used independently for implementing and operating Web
server sites, email or newsgroups, or they can be integrated to provide a
seamless, high performance TCP/IP-based communication solution, as well as
provide a platform to create next-generation, live, online applications.
Netscape markets its servers individually and collectively through the
Netscape SuiteSpot server bundle. Netscape SuiteSpot is a flexible suite of up
to five integrated servers which enables business workgroups to communicate and
collaborate utilizing open Internet standards, thereby providing the basis for a
client/server workgroup environment.
NETSCAPE FASTTRACK SERVER. The Netscape FastTrack Server is an easy to use,
entry level Web server that enables non-programmers to create and manage a Web
site. It is designed to be a complete solution for creating and managing Web
sites on the Internet and intranets. The Netscape FastTrack Server is an open
platform for publishing traditional Internet documents as well as developing and
deploying live network-centric and media-rich applications. The Netscape
FastTrack Server enables end-users to install an Internet site. The installation
wizard automatically detects system configuration information to assist the user
in optimizing server performance. The server also includes an editor for HTML
documents, forms and applications, and supports one-button publishing. The
Netscape FastTrack Server also offers encryption features to restrict access to
server resources (such as applications, documents and administrative tools), as
well as to encrypt the information that flows between the server and client.
Flexible access control allows users to select which resources to protect. While
the Netscape FastTrack Server is the only server not shipping in Netscape
SuiteSpot, it is designed to be easily upgradeable to the Netscape Enterprise
Server.
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NETSCAPE SUITESPOT 2.0
Netscape SuiteSpot 2.0 includes Netscape LiveWire Pro for creating live
online applications and Web sites plus the choice of any five of the following
servers:
NETSCAPE ENTERPRISE SERVER. This server is a high-performance Web server
for creating, managing and intelligently distributing information throughout an
enterprise or across the Internet. It is an open platform for developing and
serving live, online applications using next-generation development tools based
on the Java and JavaScript programming languages. It includes full-text and
database search capabilities, enterprise-wide management and control features,
and tools for creating and maintaining data.
The Netscape Enterprise Server provides advanced capabilities for content
creation and management, including WYSIWYG editing, full text search and
revision control. It extends the development platform to include open,
server-side applications using Java and JavaScript applications. The Netscape
Enterprise Server also provides encryption and network management capabilities
including SSL and advanced access control with remote, cross-platform
administration, SNMP and reporting. The Netscape Enterprise Server also delivers
second generation performance enhancements including multi-processor support.
NETSCAPE MESSAGING SERVER. This server is server software that enables the
transport of email and messages within an intranet and over the Internet. The
Netscape Mail Server complies with HTML and other standard document formats and
is designed to make installation and integration easy for the user.
NETSCAPE CALENDAR SERVER. This server is designed to be an open
standards-based server for calendaring and scheduling across the enterprise.
Among the features included are access controls to protect data and enterprise
scalability.
NETSCAPE MEDIA SERVER. This server is designed to be the audio broadcasting
and publishing extension to the Netscape Enterprise Server. Among the features
included are the ability to deliver audio across a TCP/IP network, integration
of audio with text and graphics and support for industry-standard protocols and
file formats including RTSP.
NETSCAPE PROXY SERVER. This server is server software designed to improve
the performance and security of communications across a TCP/IP network.
Performance is improved because the server stores frequently-accessed pages
locally. Security is enhanced because the server provides encrypted
communications through a firewall onto the Internet.
NETSCAPE CATALOG SERVER. This server is a new class of server software that
automatically builds and maintains a common directory of resources, cataloging
and indexing information so users can locate and access it quickly, regardless
of where the information is stored on intranets. It can also be configured to
catalog selected resources on the Web. The server is designed to be efficient,
automated, open, customizable and cross-platform, enabling companies to deploy
it network-wide across different brands of operating systems and Web servers.
NETSCAPE DIRECTORY SERVER. This server manages "white pages" information
such as names, email addresses, phone numbers and certificates. Its features
include universal access to directory information through LDAP, support for
distributed searches, replication capabilities and safeguarding of directory
information using both access control lists and SSL.
NETSCAPE CERTIFICATE SERVER. This server enables organizations to issue,
sign and manage public-key certificates. Its features include single user login,
SSL support and software signing using the industry-standard RSA digital
signature algorithm.
COMMERCIAL APPLICATIONS
Netscape commercial applications are designed to enable organizations to
conduct electronic commerce on the Internet. These applications are intended to
address different business needs, including the presentation of multimedia
formats, support for large numbers of merchants and products, the need for
9
real time data management, support for special communities of interest and the
automation of high volumes of online transactions. The commercial applications
are designed to provide the capability to manage large-scale commercial sites on
the Internet.
Certain commercial applications are designed to enable credit authorization
and transaction settlement. Credit card authorization occurs online by checking
records to ensure no abnormal activity has occurred and that the transaction
does not exceed the authorized credit limit. A merchant bank performs
transaction settlement by transferring funds from the customer's account to the
merchant's account.
The Company's commercial applications product line is currently comprised of
the following products:
NETSCAPE MERCHANT SYSTEM. Netscape Merchant System allows users to create
and manage virtual storefronts. By storing product information in a relational
database, it provides the flexibility to add and delete products, change prices
and import new graphics. Furthermore, display pages are automatically updated,
which simplifies the task of managing products.
With Netscape Merchant System, shoppers may browse or make multi-level
queries and view automatically generated pages displaying items that meet their
stated criteria. An electronic shopping basket allows shoppers to hold items and
allows purchases of any one or many products at a time of a customer's choosing,
even if the basket contains items from several merchants in the mall. At the
point of sale, Netscape Merchant System automatically forwards the shopping
basket and payment information to credit card authorization and processing
partners.
NETSCAPE PUBLISHING SYSTEM. Netscape Publishing System is designed for
users who want to create subscription-based online publications. This software
is not only for news services, but for anyone publishing large amounts of
information, such as banks communicating daily news information and services,
car manufacturers publishing specifications on new vehicles, industry analysts
issuing reports on new market developments and departments within an enterprise.
Netscape Publishing System manages critical data for a publisher, such as
content, files, pricing information, access authorization, user demographic
information and advertising response rates. It is designed to display
context-sensitive advertising to subscribers based upon specified criteria,
including available demographic information, entry path and time. Netscape
Publishing System archives past issues, links related stories and creates HTML
pages on the fly in response to user queries by concept or keyword.
NETSCAPE COMMERCE PLATFORM. The Netscape Commerce Platform is comprised of
two major components the Netscape SuiteSpot line of software and the Netscape
Commerce Extensions (such as Netscape LivePayment) that allow developers and
businesses to create a customized commerce environment. The Netscape Commerce
Platform provides a server/client system that scales seamlessly between
workgroups, across an intranet as well as the Internet.
10
Licenses of the Company's server and commercial applications software
accounted for 27.0% of the Company's total revenues in the year ended December
31, 1996.
DEVELOPMENT TOOLS
Netscape's development tools are designed to allow developers to efficiently
create and manage live online applications that combine rich multimedia content
with application logic and database connectivity. These applications can take
advantage of many multimedia datatypes, such as Adobe Acrobat files, Macromedia
Director movies, Progressive Networks' RealAudio real-time audio, Apple
QuickTime and QuickTime VR movies, and VRML and SGML documents. They also
incorporate application logic consisting of Java applets and Netscape
JavaScripts, and connections to enterprise-class SQL databases. The resulting
live online applications operate on a variety of processors and operating
systems together with Netscape client and server software.
NETSCAPE LIVEWIRE. Netscape LiveWire is a visual application development
tool designed for creating live online applications and managing Web sites.
LiveWire includes Netscape Navigator Gold, LiveWire Site Manager, LiveWire
Server Extension Engine and LiveWire Server Front Panel.
NETSCAPE LIVEWIRE PRO. Netscape LiveWire Pro includes all of the components
and features included in Netscape LiveWire with the addition of a run-time
version of the Informix Online relational database and database connectivity,
with extensions to the Netscape Server Language to support reading from and
writing to SQL databases from Informix, Oracle, Sybase and Microsoft.
NETSCAPE ONE
In July 1996, Netscape announced the creation of its Netscape ONE, which
provides a framework for developers to build cross-platform, network-based
applications. Netscape ONE is intended to promote a standards-based approach to
managing distributed objects on the network and to serve as an alternative to
platform-specific application development. Netscape ONE incorporates
technologies such as Java Script 1.1, HTTP and HTML, among others, and, in
combination with CORBA, permits developers to write distributed applications and
integrate information systems running on a broad range of operating systems.
NETSCAPE APPFOUNDRY
In September 1996, Netscape announced the AppFoundry Program to demonstrate
applications developed using the Netscape ONE framework. These applications can
be deployed and customized by an enterprise, and demonstrate the speed at which
applications can be built using an open Internet-standard platform. Applications
include programs for internal purchasing, travel and expense reporting, job
posting and applicant processing and sales trend analysis. The combination of
Netscape ONE and AppFoundry create an environment where the enterprise customer
can enable communication and share information and applications within its own
departments as well as with its third party partners and customers through a
single common intranet infrastructure.
PRODUCT INTRODUCTIONS AND TRANSITIONS
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
In October 1996, the Company introduced Netscape SuiteSpot 3.0 and Netscape
Communicator. Although some individual components of Netscape SuiteSpot 3.0 are
currently available, Netscape SuiteSpot 3.0 and Netscape Communicator are not
expected to be commercially available until the second quarter of 1997. These
new products, unlike current Netscape products, are designed primarily for
email, groupware and other enterprise applications across
11
an open network, and represent a significant product transition for the Company.
There are several risks inherent in such a product transition:
POSSIBLE DEFERRAL OF PURCHASES; POSSIBLE DELAY IN COMMERCIAL AVAILABILITY;
POSSIBLE PRODUCT DEFECTS. In the near term, the Company's revenues may be
materially adversely affected as prospective customers defer purchases of the
Company's current products in anticipation of the commercial release of the new
products. Furthermore, the Company has in the past experienced delays in the
commercial availability of new products, and there can be no assurance that
Netscape SuiteSpot 3.0 and Netscape Communicator will be commercially available
in the second quarter of 1997, particularly since the software in these products
is more complex than the Company's previous products, needs extensive testing to
ensure compatibility with a variety of other software programs, and needs
debugging prior to commercial release. Delays in the commencement of commercial
shipment of Netscape SuiteSpot 3.0 or Netscape Communicator may result in
customer dissatisfaction and delay or loss of revenues. In addition, software
products as complex as those offered by the Company frequently contain errors or
bugs, especially when first made commercially available. Although the Company
conducts extensive product testing, the Company has in the past released
products that contain such defects. Therefore, there can be no assurance that,
despite testing by the Company and by current and potential customers, errors or
bugs will not be discovered after the new 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 the Company's
reputation, or increased service and warranty costs, any of which could have
material adverse effect upon the Company's business, operating results or
financial condition.
NO ASSURANCE OF MARKET ACCEPTANCE. Even if Netscape SuiteSpot 3.0 and
Netscape Communicator are commercially available in the second quarter of 1997,
there can be no assurance that these products will achieve market acceptance and
become widely adopted. The market for intranet software has only recently begun
to develop, is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced or developed products and services for
communication and collaboration over enterprise networks. As is typical in the
case of a new and rapidly evolving market, demand and market acceptance for
recently introduced products and services are subject to a high level of
uncertainty. The industry is young and has few proven products. Moreover,
Netscape does not have the name recognition in the enterprise software market
that most of its competitors have and has limited experience, relative to its
competitors, in selling to this market. Market acceptance of Netscape SuiteSpot
3.0 and Netscape Communicator could also be limited by how the Company prices
these products.
NEED TO EXECUTE NEW AND DIFFICULT TYPE OF SALE. In order for Netscape
SuiteSpot 3.0 and Netscape Communicator to achieve market acceptance, the
Company will need to successfully execute a different type of sale than it has
historically executed and adjust to longer sales cycles. Sales of Netscape
SuiteSpot 3.0 and Netscape Communicator are expected to be made predominantly to
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. The Company will likely experience delays following initial
contact with a prospective customer and expend substantial funds and management
effort in connection with these sales. The Company has very little experience
with these types of sales, and there can be no assurance that the Company will
be able to successfully execute such sales. In order to successfully accomplish
these new, difficult and lengthy sales, the Company will be required to expand
its direct sales force, extensively train its sales personnel, invest greater
resources in the sales effort and educate the indirect channels. There can be no
assurance that the Company will be able to accomplish any of the foregoing on a
timely and cost-effective basis, and failure to do so could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company will need to add trained, technical personnel to help it
implement the Netscape SuiteSpot 3.0 and Netscape Communicator
12
solutions for its enterprise customers. Personnel with the sufficient level of
expertise and experience for these positions are in great demand, and there can
be no assurance that the Company will be able to hire and retain a sufficient
number of qualified personnel for these purposes, and failure to do so could
have a material adverse effect on the Company's business, operating results and
financial condition.
FLUCTUATIONS IN OPERATING RESULTS FROM ENTERPRISE SOFTWARE SALES. Revenue
from sales of Netscape SuiteSpot 3.0 and Netscape Communicator are expected to
fluctuate substantially from quarter to quarter as a result of the timing of
significant orders. Moreover, because, as discussed above, the procurement
process of the Company's customers may take a significant amount of time from
initial contact to order placement and may involve competing capital budget
considerations, sales of the Company's new enterprise software products will be
difficult to predict. If single, large sales of enterprise software products
become a larger percentage of revenue, as the Company anticipates may happen,
the loss or deferral of one or more significant sales could have a material
adverse impact on quarterly results of operations, particularly if there are
significant sales and marketing expenses associated with the deferred sale.
While the Company attempts to pursue multiple enterprise software sales
opportunities at any given time, there can be no assurance that the Company will
not experience fluctuations in revenue.
The Company's revenues are also likely to fluctuate due to factors which
impact the organizations that are likely to be prospective customers of the
Company's enterprise software products. Expenditures by these organizations tend
to vary in cycles that reflect overall economic conditions and budgeting and
buying patterns of these organizations. The Company's business would be
adversely affected by a decline in the economic prospects of its customers or
the economy generally, which could alter current or prospective customers'
capital spending priorities or budget cycles or extend the Company's sales cycle
with respect to certain customers. In addition, many large organizations defer
capital expenditures beyond the first quarter, meaning that the Company may
realize lower revenue from enterprise software sales in the first quarter than
in later quarters of the year. For these reasons, among others, there can be no
assurance that the Company will be able to maintain profitability on a
quarter-to-quarter basis.
COMPETITION; MANAGEMENT OF GROWTH. With the introduction of Netscape
SuiteSpot 3.0 and Netscape Communicator, the Company will face new competition
from providers of enterprise software, most of whom have longer operating
histories, larger installed customer bases, existing relationships with
prospective enterprise customers and significantly greater financial, technical,
marketing, public relations and distribution resources than the Company. The
Company's future success will depend to a large degree upon its ability to
address the increasingly sophisticated needs of its customers in the face of
such intense competition, and there can be no assurance that the Company will be
able to compete successfully in this market, particularly given the advantages
many of its competitors have. See "Competition." In addition, expansion of the
Company's product line will require more management attention. This may place a
significant strain on the Company's management and operations. The Company's
inability to effectively compete or manage its expanding product line would have
a material adverse effect on the Company's business, results of operations and
financial condition.
SECURITY RISKS
The Company has included in its products security protocols which operate in
conjunction with encryption and authentication technology licensed from RSA Data
Security Inc. ("RSA"). Despite the existence of these technologies, the
Company's products have been found to be vulnerable to break-ins and similar
disruptive problems caused by Internet users. In the last two years, there have
been several instances in which weaknesses or vulnerabilities in the Company's
security implementation were discovered. In each instance in which a
vulnerability or weakness was discovered and verified in the Company's security
implementation, the Company attempted to address the vulnerability or weakness
by making the various design changes in its security and reviewing those changes
both internally and with a broad set of outside industry experts. The design
changes appear to have resolved known security vulnerabilities and weaknesses in
the Company's products.
13
In addition, the Company's products incorporate technology from other
software companies which could be vulnerable to security flaws. For example, in
March 1996 certain security flaws were discovered in the Java programming
language; in particular, one security flaw was discovered which could have
jeopardized the security of information stored in the computer of Netscape
Navigator users. Sun, the licensor of Java, has corrected this particular
security flaw and has distributed the software fix to the Company. However,
there can be no assurance that the Company's products will not be susceptible to
other security flaws, whether in the Company's products or technologies, in Java
or in other technology incorporated into the Company's products.
Despite the Company's attempts to address the vulnerabilities and weaknesses
in its security implementation, the Company's products and licensed technology
incorporated in such products may continue to be vulnerable to break-ins and
similar disruptive problems caused by Internet users. Further, as is generally
known, weaknesses in the environment in which Netscape products are used may
compromise the security of confidential electronic information exchanges across
the Internet. This includes, but is not limited to, the security of the physical
network, security of the physical machines used for the information transfer and
the security of the operating system on top of which the Netscape products are
running. Any such flaws in the Internet or the end-user environment, or
weaknesses or vulnerabilities in the Company's products or licensed technology
incorporated in such products, would jeopardize the security of confidential
information sent over the Internet using Netscape software, such as credit card
numbers and email, and might enable others to dismantle the special security
techniques meant to protect such transactions.
Any further computer break-ins or other disruptions could jeopardize the
security of information stored in and transmitted through the computer systems
of end-users of the Company's products, which may result in significant
liability to the Company and may also deter potential customers. Moreover, the
security and privacy concerns of existing and potential customers, as well as
concerns related to computer viruses, may inhibit the growth of the Internet and
intranet market generally, and the Company's customer base and revenues in
particular. The Company attempts to limit its liability to its customers,
including liability arising from failure of the security implementation
contained in the Company's products, through contractual provisions. However,
there can be no assurance that such limitations will be effective. The Company
currently does not have product liability insurance to protect against risks
associated with forced break-ins or disruptions. There can be no assurance that
additional security vulnerabilities and weaknesses will not be discovered in the
Company's products or licensed technology incorporated in such products or that
weaknesses in the end-user environments will not limit the use of the Internet
as a commercial medium. Any additional security related problems in the
Company's products or licensed technology incorporated in such products may
require significant expenditures of capital and resources by the Company to
alleviate such problems, may result in lawsuits against the Company, may result
in loss of customers and may cause interruptions, delays or cessations of
product shipments to the Company's customers. Any such expenditures, lawsuits,
loss of customers, interruptions, cessations or delays would likely have a
material adverse effect on the Company's business, operating results and
financial condition.
SERVICES
SUPPORT PROGRAMS
The Company has made a commitment to provide timely, high quality technical
support to meet the diverse needs of its customers and partners and to
facilitate the adoption and use of its products. The Company offers several
support products:
NETSCAPE HELP DESK SUPPORT. The Company offers an annual support program
intended for organizations that need to internally support a large-scale
deployment of Netscape Navigator software and for authorized VARs and systems
integrators providing direct support to their customers. This program offers a
full spectrum of support, including access to technical experts, support and
training materials, support tools, call histories, maintenance releases and
software updates.
14
NETSCAPE CONSULTATION SUPPORT. For individuals and for small groups using
Netscape Navigator software, the Company offers support through a toll-free
telephone number on a time and materials payment basis. This service provides
online technical support and bug fixes or software releases as required.
Netscape Consultation Support is particularly economical for self-supporting
departments that consolidate questions through a department system
administrator.
NETSCAPE SERVER ANNUAL SUPPORT. The Company offers an annual support
program targeted at system administrators who have licensed Netscape servers.
The program features are similar to those in Netscape Help Desk Support but are
oriented toward the Netscape server software.
NETSCAPE PREMIUM SUPPORT. The Company offers medium to large-sized
organizations and strategic partners 24-hour support, partner specific training
and consulting, online access to support information, and early access to new
software releases.
CONSULTING
The Company offers consulting services for particularly complex application
design, integration and installation. Consulting services are provided at
negotiated rates and typically include on-site support during the installation
process by Company engineers.
TRAINING
Netscape offers hands-on training courses and materials to resellers and
end-users covering installation, configuration and troubleshooting. In addition,
courses and materials cover security and encryption, user support, data loading
and content creation, HTML user interface design, HTML template scripting and
integration with the database.
ADVERTISING SPACE
For its most frequently visited Web pages, Netscape has created a program
which enables advertisers to display their logo or message on a hyperlinked
button with access to their Web site. The Company charges a monthly fee for the
advertising spots, which varies depending on the specific page location and the
number of visits to the page.
MARKETING AND DISTRIBUTION
MARKETING
The Company uses a variety of marketing programs designed to stimulate
demand for its products and services. In addition, the Company has developed
co-marketing programs with channel partners designed to take advantage of their
complementary marketing capabilities. The key elements of the Company's
marketing strategy include:
MARKETING ON THE INTERNET. Netscape Navigator is designed to automatically
access the Netscape home page on the Company's Web server each time it starts
up. The home page provides frequently updated help for new users, news about the
Company, directories to interesting sites on the Internet, a variety of product
and technical support information and access to the Company's electronic store
where goods and services can be purchased. The Company makes its products
available for evaluation and purchase through its home page. 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. The Company is additionally involved in various
forms of electronic advertising and electronic promotions on the Internet.
TARGET MARKETING. The Company focuses direct marketing efforts on decision
makers in medium and large-sized enterprises, new electronic merchants and
companies now publishing on the Web. The
15
Company addresses these customers through a referral program for Netscape
Navigator users, outbound telemarketing, direct response advertising, trade
shows and seminar programs. The goal of these efforts is to identify potential
buyers of the Company's products, create awareness of the Company's product
offerings and generate leads for follow-on sales.
MARKETING TO PC USERS. Client products are marketed widely to PC users in
both the business and home PC market segments. Retail distribution through
national resellers, reseller agreements with Internet service providers, and
bundling arrangements with PC hardware and software OEMs are being used to make
the Company's client products available to a large number of potential
customers. In order to stimulate demand for its products, the Company also
advertises in PC industry publications and engages in sales promotions with
distribution partners.
DISTRIBUTION
The Company has designed its distribution strategy to address the particular
requirements of its diverse institutional and individual target customers. The
Company's direct distribution efforts consist of a direct sales force and
telesales as well as marketing directly via the Netscape home page on the
Internet. The Company's products are distributed indirectly through OEMs, VARs
and software retailers.
DIRECT SALES. The Company's direct sales force targets primarily medium to
large-sized organizations, including telecommunications companies,
manufacturers, retailers, publishers and financial service companies. The
Company believes that these organizations are most likely to become the
electronic merchants and information publishers for commerce on the Internet. 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, the Company's direct sales force works with complementary
hardware OEMs, VARs and systems integrators to deliver complete solutions for
major customers.
TELESALES. The Company's telesales organization, based in Mountain View,
California, receives customer orders as well as proactively contacts potential
customers.
INTERNET SALES. The Company offers its products and services electronically
via the Internet through an implementation of the Company's Merchant System
commercial application. Internet sales and distribution is particularly well
suited to address the large base of Internet users.
OEMS. The Company has established OEM relationships to leverage its sales
efforts. For example, the Company has OEM reseller agreements with Apple,
Compaq, Digital, Hewlett-Packard, IBM, Informix, Novell, Olivetti, Siemens,
Silicon Graphics, Sun and Sybase to bundle Netscape's server or client software
with certain of their product offerings.
VARS. VARs and systems integrators customize, configure and install the
Company's 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. The
Company may also help these VARs design customized applications to meet the
unique requirements of these customers.
RETAIL DISTRIBUTION. The Company currently distributes its Netscape
Navigator Personal Edition, Netscape Navigator Gold and Power Pack retail
products through a network of retail distributors in North America.
The Company sells its products directly to end-users and via the Internet.
In addition, the Company offers its products indirectly through OEMs, VARs and
software retailers. The Company is currently pursuing a strategy which is
intended to increase sales through OEMs, VARs and system integrators as a
percentage of total revenues, especially in international markets. The Company
expects that any material increase in sales through Resellers as a percentage of
total revenues, especially any increase in the
16
percentage of sales through OEMs, VARs and system integrators, will adversely
affect the Company's average selling prices and gross margins due to the lower
unit prices that are typically charged when selling through indirect channels.
In recent quarters, sales through indirect channels have increased as a
percentage of total revenues, which has adversely impacted average selling
prices; however, gross margins to date have not decreased due to the large
percentage of sales through OEMs, which have lower associated costs of revenues
than other Resellers due to the absence of packaging costs. Other potential
adverse consequences of the Company's focus on increasing 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
SuiteSpot 3.0 and Netscape Communicator (a large percentage of which are
expected to be made through direct sales due to the nature of the sale), and
greater revenue fluctuation due to a greater percentage of retail revenue, which
tends to fluctuate with product releases and may be subject to seasonality.
Moreover, there can be no assurance that the Company will be able to continue to
attract and retain Resellers that will be able to market the Company's products
effectively, particularly Resellers of intranet software for the enterprise,
such as Netscape SuiteSpot 3.0 and Netscape Communicator, and will be qualified
to provide timely and cost-effective customer support and service. There also
can be no assurance that the Company will be able to manage conflicts among its
Resellers. In addition, the Company's 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 the Company
has granted exclusive distribution rights that are limited by territory and in
duration. Consequently, the Company may be adversely affected should any
Reseller fail to adequately penetrate its market segment. The inability to
recruit, manage, educate or retain important Resellers, particularly Resellers
of intranet software for the enterprise, or their inability to penetrate their
respective market segments, could materially adversely affect the Company's
business, operating results or financial condition. See "Product Introductions
and Transitions" and "Factors Affecting the Company's Business, Operating
Results and Financial Condition--Evolving Distribution Channels."
In addition to expanding its direct sales channels, the Company will
continue to distribute its products electronically through the Internet.
Distributing the Company's products through the Internet makes the Company's
software more susceptible than other software to unauthorized copying and use.
The Company has historically allowed and currently intends to continue to allow
potential customers to electronically download its client and server software
for a free evaluation period. There can be no assurance that, upon expiration of
the evaluation period, the Company will be able to collect payment from users
that retain a copy of the Company's software. In addition, by distributing its
products for free evaluation over the Internet, the Company may have reduced the
future demand for its products. If, as a result of changing legal
interpretations of liability for unauthorized use of the Company's software or
otherwise, users were to become less sensitive to avoiding copyright
infringement, the Company's business, operating results and financial condition
would be materially adversely affected.
INTERNATIONAL
International revenues (sales outside of North America) accounted for
approximately 17.2% and 29.3% of total revenues for the years ended December 31,
1995 and 1996, respectively, and were immaterial in the year ended December 31,
1994.
The Company believes it is important to have a strong international presence
and intends to conduct business in markets outside the United States through a
combination of subsidiaries and distributors. The Company intends to primarily
address this market through the use of Resellers.
A key component of the Company's strategy is its continued expansion into
international markets. To date, the Company has only limited experience in
developing localized versions of its products and marketing and distributing its
products internationally, and the Company is currently incurring, and expects to
continue to incur, significant costs in developing, marketing and distributing
localized versions. If the international revenues are not adequate to offset the
expense of establishing and maintaining foreign
17
operations and the costs of localizing the Company's products, the Company's
business, operating results or financial condition could be materially adversely
affected. There can be no assurance that the Company will be able to
successfully market, sell and deliver its products in foreign markets. In
addition to the uncertainty as to the Company's ability to continue to generate
revenues from its foreign operations and expand its 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 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
certain other parts of the world and potentially adverse tax consequences, which
could adversely impact the success of the Company's international operations.
There can be no assurance that one or more of such factors will not have a
material adverse effect on the Company's future international operations and,
consequently, on the Company's business, operating results and financial
condition. See "Government Regulation."
RESEARCH AND DEVELOPMENT
The Company's current development efforts are focused on new products,
product enhancements and adapting existing products to new operating systems.
See "Planned Products and Releases." There can be no assurance, however, that
such products, product enhancements or product adaptations will be made
commercially available as planned or otherwise on a timely and cost-effective
basis, or that if introduced, these products will achieve market acceptance.
The Company believes that its software development team represents a
significant competitive advantage for the Company. The team includes key members
of the engineering teams which developed the original Mosaic Web client at NCSA,
the original Web server software at CERN and NCSA, and the original Lightweight
Directory Access Protocol (LDAP) standard at the University of Michigan, as well
as leading software security specialists. The Company's ability to attract and
retain highly qualified employees will continue to be the principal determinant
of its success in maintaining technological leadership. Netscape has a policy of
using equity-based compensation programs to reward and motivate significant
contributors among its employees.
Research and development expenses were $4.1 million, $26.8 million and $83.0
million in the years ended December 31, 1994, 1995 and 1996, respectively. To
date, principally all software development costs have been expensed as incurred.
The Company believes that significant investments in research and development
are required to remain competitive. As a consequence, the Company intends to
continue to increase the absolute amount of its research and development
expenditures in the future.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
Substantially all of 