Document/Exhibit Description Pages Size
1: 10-K Annual Report 53 328K
2: EX-3.II Articles of Incorporation/Organization or By-Laws 21 118K
3: EX-10.17 Exhibit 10.17 Lease Between Registrant & 464 Ellis 246 658K
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 210K
6: EX-21.1 Exhibit 21.1 Subsidiaries 1 7K
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
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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
2
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."
3
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
4
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
5
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.
6
NETSCAPE ENTERPRISE LICENSE FEES
----------------------------------------------
[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.
7
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.
8
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 the Company's revenues have been derived, and
substantially all of the Company's future revenues are expected to be derived,
from the license of its software and sale of associated services. Accordingly,
broad acceptance of the Company's software products and services by customers is
critical to the Company's future success. However, the markets for the Company's
products are characterized by rapidly changing technology, evolving industry
standards and frequent new product introductions; therefore, the Company's
future success will depend on its ability to design, develop, test and support
new software products and enhancements that meet changing customer needs and
respond to technological developments and emerging industry standards on a
timely and cost-effective basis. There can be no assurance that the Company will
successfully identify new product opportunities and develop and bring new
products, such as Netscape SuiteSpot 3.0 and Netscape Communicator, to market in
a timely and cost-effective manner, or that products or technologies developed
by others will not render the Company's products or technologies obsolete or
noncompetitive. While the Company has addressed the need to develop new products
and enhancements primarily through its internal development efforts, the Company
18
has also addressed this need through acquisitions and the license of third party
technology. Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies and products of the acquired
companies, the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no or limited direct prior
experience and where competitors in such markets have stronger market positions,
and the potential loss of key employees of the acquired company. Licensing of
third party technology also involves numerous risks, including product liability
claims based on licensed technology, liability for licensed technology which
infringes the proprietary rights of others, the potential inability of third
party licensors to indemnify the Company for intellectual property infringement
claims, the risk that the scope of third party licensor indemnification is not
as broad as the indemnification the Company provides to its customers, and the
unavailability of similar technology on commercially reasonable terms in the
event that the third party technology is unavailable. See "Proprietary Rights"
and "Factors Affecting the Company's Business, Operating Results and Financial
Condition--Uncertain Protection of Intellectual Property; Unisys Patent
Enforcement; Risks Associated with Licensed Third Party Technology." The failure
of the Company's new product development efforts could have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company's current products are designed around certain standards, including,
for example, security standards, and current and future sales of the Company's
products will be dependent, in part, on widespread adoption of such standards by
enterprises, consumers, developers and other software providers. Widespread
adoption of a standard not supported by Netscape could have a material adverse
effect on the Company's business, operating results or financial condition. In
addition, there can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of new products and enhancements, such as Netscape
SuiteSpot 3.0 and Netscape Communicator, or that its new products and
enhancements, including Netscape SuiteSpot 3.0 and Netscape Communicator, will
adequately meet the requirements of the marketplace and achieve market
acceptance. Further, because the Company has only recently commenced shipment of
many of its products, there can be no assurance that, despite testing by the
Company and by current and potential customers, errors will not be found in the
Company's products, or, if discovered, successfully corrected in a timely and
cost-effective manner. If the Company is unable to develop on a timely and cost-
effective basis new software products, enhancements to existing products or
error corrections, or if such new products or enhancements do not achieve market
acceptance, the Company's business, operating results and financial condition
will be materially adversely affected. See "Planned Products and Releases,"
"Products," "Product Introductions and Transitions," and "Research and
Development."
COMPETITION
The market for software and services for intranets and the Internet is
relatively new, intensely competitive, rapidly evolving and subject to rapid
technological change. The Company expects competition to persist, intensify and
increase in the future. Many of the Company's current and potential competitors
have longer operating histories, larger installed customer bases and
significantly greater financial, technical, marketing, public relations and
distribution resources than the Company. Such competition could materially
adversely affect the Company's business, operating results or financial
condition. The Company's current and potential competitors can be divided into
several groups: Microsoft, Web server software and service vendors, browser
software vendors, and other operating system vendors.
In particular the market for intranet software is rapidly evolving and
increasingly competitive. The Company's intranet solution of SuiteSpot server
software and Netscape Navigator client software has recently been upgraded to
include more robust email features. The Company's intranet solution currently
competes with Lotus Notes and Microsoft Exchange, both of which offer electronic
mail and groupware capability. In addition, Oracle has announced its intention
to compete in this market through its InterOffice products. Lotus (a subsidiary
of IBM), Microsoft and Oracle all have significantly greater financial,
technical, marketing and public relations resources, larger installed customer
bases, greater
19
distribution capability and significantly greater name recognition and
experience in selling to enterprises than the Company.
MICROSOFT. Microsoft is devoting a significant portion of its substantial
resources to developing, marketing and distributing Internet and intranet
software and services in an attempt to gain market share. Microsoft has bundled
its own browser with its Windows 95 operating system, allows it to be downloaded
for free over the Internet and offers it as a free product to distributors and
end-users, including distributors and end-users of the Company's products.
Microsoft recently introduced a new version of this browser that has similar
features and functionality to the browser features of Netscape Navigator 3.0,
and this new version has reduced Netscape Navigator's market share. Microsoft
has also announced that future versions of its Microsoft Office Applications
suite will offer enhanced Internet and intranet capability that may be dependent
upon certain functionality of Microsoft's browser. Further, in August 1996,
Microsoft shipped Version 2.0 of its Internet Information Server ("IIS") that is
bundled with Microsoft's Windows NT Advanced Server operating system at no
additional cost, and in December 1996, Microsoft shipped Version 3.0 of its IIS
that can be downloaded from the Internet at no additional cost. The release of
such products may cause further price pressure on Netscape's server products and
may reduce Netscape's market share. Microsoft has also been adding Internet and
intranet capability to its range of server software offered on the Windows NT
operating system. Microsoft is bundling a Web authoring tool for free with its
NT Server and recently introduced a server that will compete with Netscape Proxy
Server. Further, Microsoft is expected to soon begin offering products in the
commercial applications software area, particularly products competitive to
Netscape Merchant System. In June 1996, Microsoft announced server products for
Internet service providers ("ISPs") and content providers to set up Web servers
and related services. In the intranet software market, Microsoft has recently
begun offering Microsoft Exchange, an email and groupware product that operates
in conjunction with Microsoft's Back Office and browser products. Microsoft also
recently announced its Outlook product, which is intended to be an email client
for intranets and the Internet.
Microsoft's significant focus and product development activity in the market
for Internet and intranet products and services and the penetration of
Microsoft's software into its installed base of PC users has significantly
increased the competitive pressures on the Company. Such pressures have placed
significant price pressure on the Company and in the future may result in price
reductions in Netscape's products and may also materially reduce Netscape's
market share. If this were to occur, sales of Netscape's products in particular,
and Netscape's business, operating results and financial condition in general,
could be materially adversely affected.
The Company believes that Microsoft has attempted to create competitive
advantages for its browser and server products by bundling these products with
its operating systems, often at no additional cost. Moreover, Microsoft has
announced its intention to bundle its browser and server products in a more
tightly integrated fashion with its underlying operating systems. If Microsoft's
browser and server products are more tightly integrated with Microsoft's
operating systems, the ability of Microsoft's competitors, including Netscape,
to obtain effective access to Microsoft's operating systems could be impeded,
particularly if such competitors do not obtain the application programming
interfaces or other technical information necessary to access Microsoft's
operating systems in a timely fashion. Microsoft may also use other means of
attempting to restrict access to its operating systems. For example, Microsoft
may assert licensing or other restrictions which could restrict the access of
competitors to its operating systems. In particular, Microsoft has asserted that
its Windows NT Workstation operating system is not meant to be used as a server
operating system for a Web site. If Microsoft is successful in restricting
access to its operating systems, sales of Netscape's products in particular, and
Netscape's business, operating results and financial condition in general, could
be materially adversely affected.
The Company also believes that Microsoft has used, and will continue to use,
its dominant position in desktop software to secure preferential distribution
and bundling contracts with third parties such as ISPs, online service providers
and VARs, including third parties with whom the Company has relationships. In
20
addition, the Company believes that Microsoft may be using co-marketing funds
and other inducements to have Web sites developed exclusively for Internet
Explorer or using technology that may only be accessed by Internet Explorer.
Further, the Company believes that Microsoft may promote technologies and
standards with which Netscape's products are not compatible. For example,
Microsoft is promoting its proprietary ActiveX technology as an alternative to
the Java programming language for Internet application software, while also
developing Java-based tools that may be optimized for use with Microsoft
products. Although Netscape has announced that it will provide native support
for ActiveX on the Windows 95 platform in Netscape Communicator, if Microsoft is
successful in promoting widespread adoption of its ActiveX technology as an
alternative to Java or promoting the widespread adoption of proprietary
extensions of Java, Netscape's business, operating results and financial
condition could be materially adversely affected. Similarly, Microsoft is
promoting its proprietary Distributed Common Object Model ("DCOM") technology as
an alternative to the CORBA and IIOP standards for a cross-platform,
network-based environment. The Company has endorsed the CORBA and IIOP standards
in its products, and if Microsoft is successful in promoting widespread adoption
of its DCOM technology, the Company's business, operating results and financial
condition could be materially adversely affected.
Microsoft has a longer operating history, a much larger installed base and
number of employees and dramatically greater financial, technical, marketing and
public relations resources, access to distribution channels and name recognition
than the Company, all of which are a significant competitive advantage. For
example, Microsoft is currently offering certain of its Internet and intranet
products for free or for no additional charge when bundled with another product
and may eventually offer all of its Internet and intranet products for free or
for no additional charge when bundled with another product. In addition to
offering its browser and server products for free, Microsoft is also offering
special incentives, such as free access to Web sites that would otherwise
require a subscription fee, to users of its browser product. In addition,
Microsoft is investing significantly in localizing its Internet and intranet
software in non-English languages, which may be a competitive threat as Netscape
attempts to expand its international business. As a result of all of the
foregoing, there can be no assurance that Netscape's business, operating results
and financial condition will not be materially adversely affected.
OTHER COMPETITION. In addition to Microsoft, several companies are
currently offering Web server software products that compete directly with the
Company's Web server products. Organizations offering competing Web server
products for the Internet include the Apache (which has the largest measured
share of Web servers on the Internet as of July 1996), Microsoft and the NCSA.
Unlike Netscape, which charges for its Web server products for the Internet, the
Web servers from Apache, Microsoft and NCSA are offered for free. Companies
offering competing Web server products for intranets include Microsoft, IBM,
Oracle and Novell, among others. Some of these companies are enhancing the
functionality of their existing products through their Web server product
offerings. In addition to Microsoft's bundling of IIS with its Windows NT
Advanced Server, Lotus, a subsidiary of IBM, has developed a Web server based on
its popular Notes group software program. Oracle's Web server product works with
its large installed base of database software. Companies that offer Web server
and client products that are or can be bundled with operating systems or
databases are particularly formidable competition in the market for intranet
software. The Company also expects competition from companies that offer
products competitive with the Company's commercial application products by
enabling Web site creation and maintenance and a framework for online commerce.
These companies include Open Market, Inc., BroadVision, Inc., Connect, Inc. and
Edify Corporation. In the future, software companies which have server products
in other product categories may choose to enhance the functionality of existing
products or develop new products which are competitive with the Company's Web
server and commercial applications products.
In addition to Microsoft, several companies are currently offering a
client-based Web browser that competes directly with the Company's Netscape
Navigator product line. NCSA distributes its product, NCSA Mosaic, for free for
noncommercial use.
21
The Company believes that other operating system vendors may become
competitors. Although IBM and Apple have each announced an intention to
incorporate Netscape Navigator client software into their operating systems, IBM
and Apple are each currently offering competing browsers and may continue to do
so. In addition, IBM and Apple may also incorporate some Web server
functionality into their operating systems which would compete with the
Company's Web server and commercial applications products. The Company also
expects Unix operating systems vendors, such as Sun, Hewlett-Packard, IBM,
Digital, Santa Cruz and Silicon Graphics, to incorporate Web client and server
software into their operating systems. If these companies incorporate Web client
or server functionality into their software products and such technology is not
licensed from Netscape or is licensed from Netscape at significantly reduced
prices, the Company's business, operating results and financial condition could
be materially adversely affected.
Additional competition could come from client/server applications and tools
vendors, multimedia companies, document management companies, networking
software companies, network management companies and educational software
companies. Further, the Company's current products are designed around certain
standards, and industry acceptance of competing standards could decrease the
demand for the Company's products.
Competitive factors in the market for Internet and intranet software and
services include core technology, breadth of product features, product quality,
marketing and distribution resources, pricing, and customer service and support.
Except as set forth above, the Company believes it presently competes favorably
with respect to each of these factors. However, the market and competition are
still new and rapidly emerging, especially the intranet software market, and
there can be no assurance that the Company will be able to compete successfully
against current or future competitors, nor can there be any assurance that this
competition will not result in price reductions of the Company's products or
loss of market share or will not in some other manner materially adversely
affect the Company's business, operating results and financial condition. See
"Product Introductions and Transitions."
GOVERNMENT REGULATION
The Company is not currently subject to direct government regulation, other
than pursuant to securities laws and the regulations thereunder applicable to
all publicly owned companies and laws and regulations applicable to businesses
generally, and there are currently few laws or regulations directly applicable
to access to or commerce on the Internet. However, due to the increasing
popularity and use of the Internet, it is likely that a number of laws and
regulations may be adopted at the local, state, national or international levels
with respect to the Internet, covering issues such as user privacy and
expression, pricing of products and services, taxation, advertising,
intellectual property rights, information security or the convergence of
traditional communication services with Internet communications. For example,
the Telecommunications Reform Act of 1996 (the constitutionality of which is
currently under challenge) was recently enacted and imposes criminal penalties
(via the Communications Decency Act or "CDA") on anyone who distributes obscene,
lascivious or indecent communications over the Internet. Moreover, the adoption
of any such laws or regulations may decrease the growth of the Internet, which
could in turn decrease the demand for the Company's products or increase the
Company's cost of doing business or in some other manner have a material adverse
effect on the Company's business, operating results or financial condition. In
addition, the applicability to the Internet of existing laws governing issues
such as property ownership, copyrights and other intellectual property issues,
taxation, libel and personal privacy is uncertain. The vast majority of such
laws were adopted prior to the advent of the Internet and related technologies
and, as a result, do not contemplate or address the unique issues of the
Internet and related technologies. Changes to such laws intended to address
these issues, including some recently proposed changes, could create uncertainty
in the marketplace which could reduce demand for the Company's products, could
increase the Company's cost of doing business as a result of costs of litigation
or increased product development costs, or could in some other manner have a
material adverse effect on the Company's business, operating results or
financial condition.
22
Because the encryption technology contained in the Company's products is
deemed to be a "munition," such products are subject to U.S. export controls
pertaining to munitions. There can be no assurance that such export controls,
either in their current form or as may be subsequently revised, will not limit
the Company's ability to distribute certain encrypted products outside of the
United States or electronically. While Netscape takes precautions against
unlawful exportation, such exportation may occur from time to time. In addition,
federal or state legislation or regulation may further limit levels of
encryption or authentication technology, and foreign governments could enact
import laws or regulations that may restrict the type of encryption software
that is permitted for distribution in their countries. Moreover, as a
consequence of such export controls, Netscape must develop and market both
domestic and international versions of its products that contain encryption
software, with the version for the U.S. market having a stronger level of
encryption than the version for export to international markets. Along with the
additional costs associated with the duplication of effort and expense in
research, development, manufacturing and distribution of different versions of
products, the Company may lose sales from customers who wish to have the same
level of encryption security throughout their organization. The Company may also
encounter difficulties competing with non-U.S. producers of strong encryption
products, which producers have the ability to both import their products into
the United Stated and sell products overseas. Finally, due to the weaker level
of encryption contained in the Company's products shipped internationally, the
Company may not acquire the installed international base necessary to make the
functionality of its products part of an international standard.
Additionally, some countries have enacted import laws requiring the
alteration of the Company's products in order for the government of such
countries to maintain a level of control over the content of products entering
such countries. In addition to the costs incurred by the Company in complying
with varying international regulations, alteration of the Company's products may
cause such products to perform at a level below their intended level and thereby
subject the Company to potential liability and other adverse consequences. Any
such export restrictions, import restrictions, new legislation or regulation or
unlawful exportation could have a material adverse impact on the Company's
business, operating results or financial condition. See "Marketing and
Distribution--International."
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
internally developed technology. While the Company relies on patents, trademark,
trade secret and copyright law to protect its technology, the Company believes
that factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are more essential to establishing and maintaining
a technology leadership position. There can be no assurance that others will not
develop technologies that are similar or superior to the Company's technology.
The Company generally enters into confidentiality or license agreements with its
employees, consultants and vendors, and generally controls access to and
distribution of its software, documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. In addition,
effective patents, copyright and trade secret protection may be unavailable or
limited in certain foreign countries. To license its products, the Company
relies in part on "shrink wrap" licenses that are not signed by the end-user
and, therefore, may be unenforceable under the laws of certain jurisdictions.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain and
use information that the Company regards as proprietary. Policing unauthorized
use of the Company's products is difficult. There can be no assurance that the
steps taken by the Company will prevent misappropriation of its technology or
that such agreements will be enforceable. In addition, litigation may be
necessary in the future to enforce the Company's intellectual property rights,
to protect the Company's trade secrets, to determine the validity and scope of
the proprietary rights of others, or to defend against claims of infringement or
23
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results or financial condition.
Unisys Corporation ("Unisys") has announced its intention to require the
payment of royalties for the use of compression technology associated with the
Graphics Interchange Format ("GIF"). Unisys asserts that this popular file
format is based on compression technology patented by Unisys. The Company's
products have the ability to decompress files, including files stored in GIF.
The Company and, to the Company's knowledge, other licensees, have received
notice of Unisys' intention to enforce or license such patent. The Company could
incur additional costs and liability should its products be found to be within
the scope of the Unisys patent, including costs and liability from claims for
indemnification resulting from infringement. The assertion of these patent
rights by Unisys, if successful, could prevent the Company's products from
enabling users to view files compressed in GIF. The Company does not believe its
products infringe the Unisys patent; however, there can be no assurance that the
Company's products are not within the scope of the Unisys patent or that the
Company's business, operating results and financial condition will not be
materially adversely affected if the Company's products are found to be within
the scope of the Unisys patent.
From time to time the Company has, in addition to the notice from Unisys,
received, and may receive in the future, notice of claims of infringement of
other parties' proprietary rights. Although the Company does not believe that
its products infringe the proprietary rights of any third parties, there can be
no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company or that any such assertions or prosecutions will
not materially adversely affect the Company's business, financial condition or
results of operations. Irrespective of the validity or the successful assertion
of such claims, the Company would incur significant costs and diversion of
resources with respect to the defense thereof which could have a material
adverse effect on the Company's business, financial condition or results of
operations. In addition, the assertion of such infringement claims could result
in injunctions preventing Netscape from distributing certain products, which
could have a material adverse effect on the Company's business, financial
condition or results of operations. If any claims or actions are asserted
against the Company, the Company may seek to obtain a license under a third
party's intellectual property rights. There can be no assurance, however, that
under such circumstances, a license would be available on reasonable terms or at
all.
The Company also relies on certain other technology which it licenses from
third parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions. There can
be no assurance that these third party technology licenses will continue to be
available to the Company on commercially reasonable terms. The loss of or
inability to maintain any of these technology licenses could result in delays or
reductions in product shipments until equivalent technology could be identified,
licensed and integrated. Any such delays or reductions in product shipments
could materially adversely affect the Company's business, operating results or
financial condition. Moreover, although the Company is generally indemnified by
the third parties against claims that the third parties' technology infringes
the proprietary rights of others, such indemnification is not always available
for all types of intellectual property rights (for example, patents may be
excluded) and in some cases the geographical scope of such indemnification is
limited. The result is that the indemnity that the Company receives against such
claims is often less broad than the indemnity that the Company provides to its
customers. Even in cases in which the indemnity that the Company receives from a
third party licensor is as broad as the indemnity that the Company provides to
its customers, often the third party licensors from whom the Company would be
receiving indemnity are not well-capitalized and may not be able to indemnify
the Company in the event that such third party technology infringes the
proprietary rights of others. Accordingly, the Company could have substantial
exposure in the event that technology licensed from a third party infringes
another party's proprietary rights. The Company currently does not have any
liability insurance to protect against the risk that licensed third party
technology infringes the proprietary rights of others. There can be no assurance
that infringement or invalidity claims arising from the
24
incorporation of third party technology, and claims for indemnification from the
Company's customers resulting from such infringement claims will not be asserted
or prosecuted against the Company or that any such assertions or prosecutions
will not materially adversely affect the Company's business, financial condition
or results of operations. Irrespective of the validity or successful assertion
of such claims, the Company would incur significant costs and the diversion of
resources with respect to the defense thereof, in addition to potential product
redevelopment costs and delays, all of which could have a material adverse
effect on the Company's business, financial condition or results of operations.
BUSINESS COMBINATIONS AND JOINT VENTURES
In April 1996, the Company entered into a business combination with InSoft,
Inc. ("InSoft"), a privately-held company that provides network-based
communications and collaborative multimedia software for the enterprise.
Netscape purchased all of the outstanding capital stock and assumed all of the
outstanding stock options of InSoft. The business combination was accounted for
as a pooling of interests. In May 1996, the Company entered into a business
combination with Paper Software, Inc. ("Paper Software"), a privately-held
company that provides distributed three-dimensional graphics and is the maker of
WebFX Virtual Reality Markup Language ("VRML") software. Netscape purchased all
of the outstanding capital stock of Paper Software. The business combination was
accounted for as a pooling of interests. In May 1996, the Company entered into a
business combination with Netcode Corporation ("Netcode"), a privately-held
company that created a Java-based object toolkit and visual interface builder
for developing Java applications. Netscape purchased all of the outstanding
capital stock and assumed all of the outstanding options of Netcode. The
business combination was accounted for as a pooling of interests.
In April 1996, the Company entered into a joint venture with GE Information
Services ("GEIS") to form Actra Business Systems L.L.C. that intends to develop
and market software for Internet-based business-to-business electronic commerce.
In August 1996, the Company entered into a joint venture called Navio
Communications, Inc. ("Navio"), an independent Internet software company in
which Netscape has an equity position. Navio plans to deliver core, scalable
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 will continue to consider business combinations, investments or
strategic alliances that it believes can complement its overall business
strategy. See "Factors Affecting the Company's Business, Operating Results and
Financial Condition--Risks of Acquisitions and Investments."
EMPLOYEES
As of February 28, 1997, the Company had approximately 1,811 employees. The
Company's future success depends in significant part upon the continued service
of its key technical and senior management personnel and its continuing ability
to attract and retain highly qualified technical and managerial personnel,
especially software developers. Competition for highly qualified personnel is
intense, and there can be no assurance that the Company will be able to retain
its key managerial and technical employees or that it will be able to attract
and retain additional highly qualified technical and managerial personnel in the
future. None of the Company's employees is represented by a labor union. The
Company has not experienced any work stoppages and considers its relations with
its employees to be good.
The rapid execution necessary for the Company to fully exploit the market
window for its products and services requires an effective planning and
management process. The Company's rapid growth has placed, and its planned
growth is expected to continue to place, a significant strain on the Company's
managerial, operational and financial resources. As of February 28, 1997, the
Company had grown to approximately 1,811 employees from approximately 203
employees on December 31, 1994. In addition, the Company has completed four
acquisitions since November 1995; assimilating the operations and personnel
25
of such acquired companies has also placed a significant strain on the Company's
managerial, operational and financial resources. To manage its growth, the
Company must continue to implement and improve its operational and financial
systems and to expand, train and manage its employee base. Further, the Company
is required and will continue to be required to manage multiple relationships
among various customers, suppliers, resellers, licensors, strategic partners and
other third parties. Although the Company believes that it has made adequate
allowances for the costs and risks associated with this expansion, there can be
no assurance that the Company's systems, procedures or controls will be adequate
to support the Company's current or future operations or that Company management
will be able to effectively manage this expansion and still achieve the rapid
execution necessary to fully exploit the market window for the Company's
products and services in a timely and cost-effective manner. The Company's
future operating results will also depend on its ability to manage its expanding
product line, expand its sales and marketing organizations, implement and manage
new distribution channels to penetrate different and broader markets, including
the market for intranet software for the enterprise, and expand its support
organization commensurate with the increasing base of its installed products. If
the Company is unable to manage growth effectively or unable to achieve the
rapid execution necessary to fully exploit the market window for the Company's
products and services in a timely and cost-effective manner, the Company's
business, operating results and financial condition will be materially adversely
affected. See "Factors Affecting the Company's Business, Operating Results and
Financial Condition--Management of Growth" and "-- Dependence on Key Personnel."
26
FACTORS AFFECTING THE COMPANY'S
BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
IN ADDITION TO OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K AND IN
THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, THE FOLLOWING RISK FACTORS
SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS
BECAUSE SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT IMPACT OR MAY HAVE A
SIGNIFICANT IMPACT IN THE COMPANY'S BUSINESS, OPERATING RESULTS OR FINANCIAL
CONDITION. THE SECTION ENTITLED "BUSINESS--PLANNED PRODUCTS AND RELEASES" IN
THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT
TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE FOLLOWING RISK FACTORS SET FORTH
BELOW AND ELSEWHERE IN THIS FORM 10-K, SPECIFICALLY THE RISK FACTORS ENTITLED
"PRODUCT INTRODUCTIONS AND TRANSITIONS" AND "NEW PRODUCT DEVELOPMENT AND
TECHNOLOGICAL CHANGE."
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 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,
27
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 predominately 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 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
28
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.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
As a result of the Company's relatively limited operating history and recent
"pooling of interests" acquisitions, the Company does not have relevant
historical financial data for a significant number of periods on which to base
planned operating expenses. Accordingly, the Company's expense levels, which are
to a large extent fixed, are based in part on its expectations as to future
revenues. In addition, the Company typically operates with minimal backlog,
therefore, quarterly sales and operating results generally depend on the volume
and timing of and ability to fulfill orders received within the quarter, which
are difficult to forecast. The Company typically recognizes a substantial
portion of its revenues in the last month of each quarter. Accordingly, the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. As a result, any significant shortfall of
demand for the Company's products and services in relation to the Company's
expectations would have an immediate material adverse impact on the Company's
business, operating results and financial condition. Further, as the Company
becomes increasingly focused on sales to enterprise customers, the Company
expects that a limited number of large sales may account for a significant
portion of revenue in some quarters, resulting in fluctuations in revenue in
future periods and adversely impacting operating results in periods of lower
than expected revenue. Moreover, the Company (i) plans to continue to increase
its operating expenses to fund greater levels of research and development,
increase its sales and marketing operations, develop new distribution channels,
improve its operational and financial systems and broaden its customer support
capabilities and (ii) may continue to incur significant merger-related charges
and other increases in operating expenses associated with recently completed and
any future acquisitions. To the extent that such expenses precede or are not
subsequently followed by increased revenues, the Company's business, operating
results and financial condition will be materially adversely affected.
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including demand
for the Company's products, introduction or enhancement of products by the
Company and its competitors, market acceptance of new products, the timing of
large sales (particularly to enterprise customers), more complex products with
higher prices and longer sales cycles, price changes by the Company or its
competitors, the mix of distribution channels through which products are sold,
the mix of products and services sold, the mix of international and North
American revenues, costs of litigation, and general economic conditions. In
particular, as the Company becomes increasingly focused on larger sales of
intranet and messaging solutions to enterprise customers the Company believes
that quarterly operating results may fluctuate due to the timing of revenue from
such large sales. In addition, as a strategic response to changes in the
competitive environment, the Company may from time to time make certain pricing
or marketing decisions (such as the pricing changes announced in February 1997
and October 1996) or enter into business combinations (such as the Collabra,
InSoft, Netcode and Paper business combinations) that could have a material
adverse effect on the Company's business, results of operations or financial
condition. As a result, the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as any indication of future performance. Because of all of the
foregoing factors, it is likely that in some future quarters the Company's
operating results will be below the expectations of public market
29
analysts and investors. In such event, the price of the Company's common stock
would likely be materially adversely affected.
COMPETITION
The market for software and services for intranets and the Internet is
relatively new, intensely competitive, rapidly evolving and subject to rapid
technological change. The Company expects competition to persist, intensify and
increase in the future. Many of the Company's current and potential competitors
have longer operating histories, larger installed customer bases and
significantly greater financial, technical, marketing, public relations and
distribution resources than the Company. Such competition could materially
adversely affect the Company's business, operating results or financial
condition. The Company's current and potential competitors can be divided into
several groups: Microsoft, Web server software and service vendors, browser
software vendors, and other operating system vendors.
In particular the market for intranet software is rapidly evolving and
increasingly competitive. The Company's intranet solution of SuiteSpot server
software and Netscape Navigator client software has recently been upgraded to
include more robust email features. The Company's intranet solution currently
competes with Lotus Notes and Microsoft Exchange, both of which offer electronic
mail and groupware capability. In addition, Oracle has announced its intention
to compete in this market through its InterOffice products. Lotus (a subsidiary
of IBM), Microsoft and Oracle all have significantly greater financial,
technical, marketing and public relations resources, larger installed customer
bases, greater distribution capability and significantly greater name
recognition and experience in selling to enterprises than the Company.
MICROSOFT. Microsoft is devoting a significant portion of its substantial
resources to developing, marketing and distributing Internet and intranet
software and services in an attempt to gain market share. Microsoft has bundled
its own browser with its Windows 95 operating system, allows it to be downloaded
for free over the Internet and offers it as a free product to distributors and
end-users, including distributors and end-users of the Company's products.
Microsoft recently introduced a new version of this browser that has similar
features and functionality to the browser features of Netscape Navigator 3.0,
and this new version has reduced Netscape Navigator's market share. Microsoft
has also announced that future versions of its Microsoft Office Applications
suite will offer enhanced Internet and intranet capability that may be dependent
upon certain functionality of Microsoft's browser. Further, in August 1996,
Microsoft shipped Version 2.0 of its Internet Information Server ("IIS") that is
bundled with Microsoft's Windows NT Advanced Server operating system at no
additional cost, and in December 1996, Microsoft shipped Version 3.0 of its IIS
which can be downloaded from the Internet at no additional cost. The release of
such products may cause further price pressure on Netscape's server products and
may reduce Netscape's market share. Microsoft has also been adding Internet and
intranet capability to its range of server software offered on the Windows NT
operating system. Microsoft is bundling a Web authoring tool for free with its
NT Server and recently introduced a server that will compete with Netscape Proxy
Server. Further, Microsoft is expected to soon begin offering products in the
commercial applications software area, particularly products competitive to
Netscape Merchant System. In June 1996, Microsoft announced server products for
Internet service providers ("ISPs") and content providers to set up Web servers
and related services. In the intranet software market, Microsoft has recently
begun offering Microsoft Exchange, an email and groupware product that operates
in conjunction with Microsoft's Back Office and browser products. Microsoft also
recently announced its Outlook product, which is intended to be an email client
for intranets and the Internet.
Microsoft's significant focus and product development activity in the market
for Internet and intranet products and services and the penetration of
Microsoft's software into its installed base of PC users has significantly
increased the competitive pressures on the Company. Such pressures have placed
significant price pressure on the Company and in the future may result in price
reductions in Netscape's products and may also materially reduce Netscape's
market share. If this were to occur, sales of Netscape's products in
30
particular, and Netscape's business, operating results and financial condition
in general, could be materially adversely affected.
The Company believes that Microsoft has attempted to create competitive
advantages for its browser and server products by bundling these products with
its operating systems, often at no additional cost. Moreover, Microsoft has
announced its intention to bundle its browser and server products in a more
tightly integrated fashion with its underlying operating systems. If Microsoft's
browser and server products are more tightly integrated with Microsoft's
operating systems, the ability of Microsoft's competitors, including Netscape,
to obtain effective access to Microsoft's operating systems could be impeded,
particularly if such competitors do not obtain the application programming
interfaces or other technical information necessary to access Microsoft's
operating systems in a timely fashion. Microsoft may also use other means of
attempting to restrict access to its operating systems. For example, Microsoft
may assert licensing or other restrictions which could restrict the access of
competitors to its operating systems. In particular, Microsoft has asserted that
its Windows NT Workstation operating system is not meant to be used as a server
operating system for a Web site. If Microsoft is successful in restricting
access to its operating systems, sales of Netscape's products in particular, and
Netscape's business, operating results and financial condition in general, could
be materially adversely affected.
The Company also believes that Microsoft has used, and will continue to use,
its dominant position in desktop software to secure preferential distribution
and bundling contracts with third parties such as ISPs, online service providers
and VARs, including third parties with whom the Company has relationships. In
addition, the Company believes that Microsoft may be using co-marketing funds
and other inducements to have Web sites developed exclusively for Internet
Explorer or using technology that may only be accessed by Internet Explorer.
Further, the Company believes that Microsoft may promote technologies and
standards with which Netscape's products are not compatible. For example,
Microsoft is promoting its proprietary ActiveX technology as an alternative to
the Java programming language for Internet application software, while also
developing Java-based tools that may be optimized for use with Microsoft
products. Although Netscape has announced that it will provide native support
for ActiveX on the Windows 95 platform in Netscape Communicator, if Microsoft is
successful in promoting widespread adoption of its ActiveX technology as an
alternative to Java or promoting the widespread adoption of proprietary
extensions of Java. Netscape's business, operating results and financial
condition could be materially adversely affected. Similarly, Microsoft is
promoting its proprietary Distributed Common Object Model ("DCOM") technology as
an alternative to the CORBA and IIOP standards for a cross-platform,
network-based environment. The Company has endorsed the CORBA and IIOP standards
in its products, and if Microsoft is successful in promoting widespread adoption
of its DCOM technology, the Company's business, operating results and financial
condition could be materially adversely affected.
Microsoft has a longer operating history, a much larger installed base and
number of employees and dramatically greater financial, technical, marketing and
public relations resources, access to distribution channels and name recognition
than the Company, all of which are a significant competitive advantage. For
example, Microsoft is currently offering certain of its Internet and intranet
products for free or for no additional charge when bundled with another product
and may eventually offer all of its Internet and intranet products for free or
for no additional charge when bundled with another product. In addition to
offering its browser and server products for free, Microsoft is also offering
special incentives, such as free access to Web sites that would otherwise
require a subscription fee, to users of its browser product. In addition,
Microsoft is investing significantly in localizing its Internet and intranet
software in non-English languages, which may be a competitive threat as Netscape
attempts to expand its international business. As a result of all of the
foregoing, there can be no assurance that Netscape's business, operating results
and financial condition will not be materially adversely affected.
OTHER COMPETITION. In addition to Microsoft, several companies are
currently offering Web server software products that compete directly with the
Company's Web server products. Organizations offering competing Web server
products for the Internet include the Apache (which has the largest measured
share
31
of Web servers on the Internet as of July 1996), Microsoft and the NCSA. Unlike
Netscape, which charges for its Web server products for the Internet, the Web
servers from Apache, Microsoft and NCSA are offered for free. Companies offering
competing Web server products for intranets include Microsoft, IBM, Oracle and
Novell, among others. Some of these companies are enhancing the functionality of
their existing products through their Web server product offerings. In addition
to Microsoft's bundling of IIS with its Windows NT Advanced Server, Lotus, a
subsidiary of IBM, has developed a Web server based on its popular Notes group
software program. Oracle's Web server product works with its large installed
base of database software. Companies that offer Web server and client products
that are or can be bundled with operating systems or databases are particularly
formidable competition in the market for intranet software. The Company also
expects competition from companies that offer products competitive with the
Company's commercial application products by enabling Web site creation and
maintenance and a framework for online commerce. These companies include Open
Market, Inc., BroadVision, Inc., Connect, Inc. and Edify Corporation. In the
future, software companies which have server products in other product
categories may choose to enhance the functionality of existing products or
develop new products which are competitive with the Company's Web server and
commercial applications products.
In addition to Microsoft, several companies are currently offering a
client-based Web browser that competes directly with the Company's Netscape
Navigator product line. NCSA distributes its product, NCSA Mosaic, for free for
noncommercial use.
The Company believes that other operating system vendors may become
competitors. Although IBM and Apple have each announced an intention to
incorporate Netscape Navigator client software into their operating systems, IBM
and Apple are each currently offering competing browsers and may continue to do
so. In addition, IBM and Apple may also incorporate some Web server
functionality into their operating systems which would compete with the
Company's Web server and commercial applications products. The Company also
expects Unix operating systems vendors, such as Sun, Hewlett-Packard, IBM,
Digital, Santa Cruz and Silicon Graphics, to incorporate Web client and server
software into their operating systems. If these companies incorporate Web client
or server functionality into their software products and such technology is not
licensed from Netscape or is licensed from Netscape at significantly reduced
prices, the Company's business, operating results and financial condition could
be materially adversely affected.
Additional competition could come from client/server applications and tools
vendors, multimedia companies, document management companies, networking
software companies, network management companies and educational software
companies. Further, the Company's current products are designed around certain
standards, and industry acceptance of competing standards could decrease the
demand for the Company's products.
Competitive factors in the market for Internet and intranet software and
services include core technology, breadth of product features, product quality,
marketing and distribution resources, pricing, and customer service and support.
Except as set forth above, the Company believes it presently competes favorably
with respect to each of these factors. However, the market and competition are
still new and rapidly emerging, especially the intranet software market, and
there can be no assurance that the Company will be able to compete successfully
against current or future competitors, nor can there be any assurance that this
competition will not result in price reductions of the Company's products or
loss of market share or will not in some other manner materially adversely
affect the Company's business, operating results and financial condition. See
"--Product Introductions and Transitions."
NEED TO MANAGE EVOLVING MARKET AND PRODUCTS
The Company's software business initially was characterized by relatively
short sales cycles, relatively small initial sales orders, relatively simple
uses for its software, short product development cycles and low aggregate
royalty payments to third parties for embedded technology. However, the Company
has evolved and expanded its product lines, and, as the Company has increased
its focus on sales to enterprise
32
customers, the Company's business has been, and, will continue to be,
characterized by longer sales cycles, larger initial sales orders, more complex
use of its software, longer product development cycles and higher aggregate
royalty payments to third parties for embedded technology. For example, the
Company's server product line has evolved from software products which merely
enabled publication of HTML-based documents to SuiteSpot, an integrated suite of
server products that address an array of complex information technology issues
such as email, groupware, calendaring, security for internal information and
online commerce, as well as information publication. Further, the Company now
offers complex commercial application software to accompany its server and
client software. Organizations which initially purchased Internet and intranet
products for trial use are now building complex intranets. The Company expects
that sales of its software will be increasingly made to enterprises, especially
once Netscape SuiteSpot 3.0 and Netscape Communicator are commercially
available, and that due to higher price points and more complex uses, these
sales will require approval at the highest levels of the customer's
organization. These sales are likely to be more difficult, expensive and
time-consuming for the Company, and will require greater training of the
Company's sales personnel and reseller partners. Further, these sales generally
involve a significant commitment of capital by prospective customers, with the
attendant delays frequently associated with large capital expenditures and
lengthy acceptance procedures. For these and other reasons, the sales cycle
associated with the license of the Company's software products has lengthened,
may continue to lengthen and is subject to a number of significant risks over
which the Company has little or no control. The Company has relatively limited
experience with these types of sales, and there can be no assurance that the
Company will be able to successfully manage this evolution in its business, and
the failure to successfully manage this evolution in its business could have a
material adverse effect on the Company's business, operating results and
financial condition. "--Product Introductions and Transitions."
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
Substantially all of the Company's revenues have been derived, and
substantially all of the Company's future revenues are expected to be derived,
from the license of its software and sale of associated services. Accordingly,
broad acceptance of the Company's software products and services by customers is
critical to the Company's future success. However, the markets for the Company's
products are characterized by rapidly changing technology, evolving industry
standards and frequent new product introductions; therefore, the Company's
future success will depend on its ability to design, develop, test and support
new software products and enhancements on a timely and cost-effective basis that
meet changing customer needs and respond to technological developments and
emerging industry standards. There can be no assurance that the Company will
successfully identify new product opportunities and develop and bring new
products, such as Netscape SuiteSpot 3.0 and Netscape Communicator, to market in
a timely and cost-effective manner, or that products or technologies developed
by others will not render the Company's products or technologies obsolete or
noncompetitive. While the Company has addressed the need to develop new products
and enhancements primarily through its internal development efforts, the Company
has also addressed this need through acquisitions and the license of third party
technology. Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies and products of the acquired
companies, the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no or limited direct prior
experience and where competitors in such markets have stronger market positions,
and the potential loss of key employees of the acquired company. Licensing of
third party technology also involves numerous risks, including product liability
claims based on licensed technology, liability for licensed technology which
infringes the proprietary rights of others, the potential inability of third
party licensors to indemnify the Company for intellectual property infringement
claims, the risk that the scope of third party licensor indemnification is not
as broad as the indemnification the Company provides to its customers, and the
unavailability of similar technology on commercially reasonable terms in the
event that the third party technology is unavailable. See "--Uncertain
Protection of Intellectual Property; Unisys Patent Enforcement; Risks
33
Associated with Licensed Third Party Technology." The failure of the Company's
new product development efforts, especially with respect to Netscape SuiteSpot
3.0 or Netscape Communicator, could have a material adverse effect on the
Company's business, financial condition or results of operations. The Company's
current products are designed around certain standards, including, for example,
security standards, and current and future sales of the Company's products will
be dependent, in part, on widespread adoption of such standards by enterprises,
consumers, developers and other software providers. Widespread adoption of a
standard not supported by Netscape could have a material adverse effect on the
Company's business, operating results or financial condition. In addition, there
can be no assurance that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of new
products and enhancements, such as Netscape SuiteSpot 3.0 and Netscape
Communicator, or that its new products and enhancements, including Netscape
SuiteSpot 3.0 and Netscape Communicator, will adequately meet the requirements
of the marketplace and achieve market acceptance. Further, because the Company
has only recently commenced shipment of many of its products, there can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in the Company's products, or, if
discovered, successfully corrected in a timely and cost-effective manner. If the
Company is unable to develop on a timely and cost-effective basis new software
products, enhancements to existing products or error corrections, or if such new
products or enhancements do not achieve market acceptance, the Company's
business, operating results and financial condition will be materially adversely
affected. See "Planned Products and Releases, "Products," "Product Introductions
and Transitions," and "Research and Development."
DEVELOPING MARKET; NEW ENTRANTS; UNCERTAIN ACCEPTANCE OF THE COMPANY'S PRODUCTS;
PRICE EROSION; UNCERTAIN ADOPTION OF INTERNET AND INTRANETS AS A MEDIUM OF
COMMERCE AND COMMUNICATIONS
The market for the Company's software and services, especially for its
intranet products and services such as Netscape SuiteSpot 3.0 and Netscape
Communicator, is relatively new, is rapidly evolving and is characterized by an
increasing number of market entrants who have introduced or developed products
and services for communication and commerce over the Internet and intranets. As
is typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced products and services are subject to a high
level of uncertainty. The industry is relatively young and has a limited number
of proven products. Moreover, critical issues concerning the use of intranets
and of the Internet (including security, reliability, cost, ease of deployment
and administration and quality of service) remain unresolved and may impact the
growth of intranet and Internet use. While the Company believes that its
software products offer significant advantages for commerce, collaboration and
communication over the Internet and intranets, there can be no assurance that
commerce, collaboration and communication over the Internet or intranets will
become widespread, or that the Company's products for commerce, collaboration
and communication over the Internet or intranets will become widely adopted for
these purposes.
In particular, the Company's client software competes with free client
software distributed by online service providers, Internet access providers and
others. In addition, computer operating systems companies, notably Microsoft,
bundle client software with their operating systems at little or no additional
cost to users, which may cause the price of the Company's client products to
decline. The Company announced significant price reductions in its server
product line during the quarter ended December 31, 1995 and announced further
price reductions in its server product line in March 1996. See "--Competition."
Moreover, continued market acceptance of the Company's server and commercial
applications software products is substantially dependent upon the adoption of
the Internet and intranets for commerce, collaboration and communications. The
adoption of the Internet or intranets for commerce, collaboration and
communications, particularly by those individuals and enterprises which have
historically relied upon alternative means of commerce, collaboration and
communication, generally requires the acceptance of a new way of conducting
business and exchanging, collaborating information. In particular, enterprises
that have already invested substantial resources in other means of conducting
commerce collaboration and exchanging information may be particularly reluctant
or slow to adopt a new strategy that may make some
34
or all of their existing information systems technology, software and systems
obsolete. In addition, there can be no assurance that individual PC users in
business or at home will adopt or, if adopted, continue to use the Internet or
intranets for online commerce, collaboration or communication.
Because the market for the Company's products and services, especially its
intranet products and services such as Netscape SuiteSpot 3.0 and Netscape
Communicator, is relatively new and evolving, it is difficult to predict the
future growth rate, if any, and size of this market. There can be no assurance
that the market for the Company's products and services will continue to
develop, that the Company's new products or services, especially its intranet
products and services such as Netscape SuiteSpot 3.0 and Netscape Communicator,
will be adopted or that existing products and services will continue to be
adopted, or that the Internet or intranets will be widely adopted for commerce,
collaboration and communication. If the market for the Company's products fails
to continue to develop, develops more slowly than expected or becomes saturated
with competitors, or if the Company's new products and services, especially its
intranet products and services such as Netscape SuiteSpot 3.0 and Netscape
Communicator, do not achieve market acceptance, the Company's business,
operating results and financial condition will be materially adversely affected.
MANAGEMENT OF GROWTH
The rapid execution necessary for the Company to fully exploit the market
window for its products and services requires an effective planning and
management process. The Company's rapid growth has placed, and its planned
growth is expected to continue to place, a significant strain on the Company's
managerial, operational and financial resources. As of February 28, 1997, the
Company had grown to approximately 1,811 employees from approximately 203
employees on December 31, 1994. In addition, the Company has completed four
acquisitions since November 1995; assimilating the operations and personnel of
such acquired companies has also placed a significant strain on the Company's
managerial, operational and financial resources. To manage its growth, the
Company must continue to implement and improve its operational and financial
systems and to expand, train and manage its employee base. Further, the Company
is required and will continue to be required to manage multiple relationships
among various customers, suppliers, resellers, licensors, strategic partners and
other third parties. Although the Company believes that it has made adequate
allowances for the costs and risks associated with this expansion, there can be
no assurance that the Company's systems, procedures or controls will be adequate
to support the Company's current or future operations or that Company management
will be able to effectively manage this expansion and still achieve the rapid
execution necessary to fully exploit the market window for the Company's
products and services in a timely and cost-effective manner. The Company's
future operating results will also depend on its ability to manage its expanding
product line, expand its sales and marketing organizations, implement and manage
new distribution channels to penetrate different and broader markets, including
the market for intranet software for the enterprise, and expand its support
organization commensurate with the increasing base of its installed products. If
the Company is unable to manage growth effectively or unable to achieve the
rapid execution necessary to fully exploit the market window for the Company's
products and services in a timely and cost-effective manner, the Company's
business, operating results and financial condition will be materially adversely
affected. See "Employees."
RISKS OF ACQUISITIONS AND INVESTMENTS
In 1996, the Company completed business combinations with InSoft, Paper
Software and Netcode and incurred an aggregate of $6.1 million in acquisition
and related costs. In addition, in 1996, the Company formed two joint ventures
and made several equity investments in companies with complementary technology.
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. As
part of its overall strategy, the Company plans to enter into further
35
business combinations and make significant investments in complementary
companies, products or technologies and to enter into joint ventures and
strategic alliances with other companies. Any such transactions would be
accompanied by the risks commonly encountered in such transactions. In
particular, business combinations with high technology companies include such
risks as the difficulty of assimilating the operations and personnel of the
combined companies, the potential disruption of the Company's ongoing business,
the inability to retain key technical and managerial personnel, the inability of
management to maximize the financial and strategic position of the Company
through the successful integration of acquired businesses, additional expenses
associated with amortization of acquired intangible assets, the maintenance of
uniform standards, controls, procedures and policies and the impairment of
relationships with employees and customers as a result of any integration of new
personnel. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with such
business combinations, investments or joint ventures or that such transactions
will not materially adversely affect the Company's business, financial condition
or results of operations.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT
The Company was incorporated in April 1994, and, although the Company has
acquired a number of companies which were incorporated prior to that time, the
Company only commenced shipment of its products for intranets and the Internet
in December 1994. Accordingly, the Company has a relatively limited operating
history upon which an evaluation of the Company and its prospects can be based.
The Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their earlier stages of
development, particularly companies in new and rapidly evolving markets. To
address these risks, the Company must, among other things, respond to
competitive developments, continue to attract, retain and motivate qualified
persons, expand its management processes and capabilities and continue to
upgrade its technologies and successfully commercialize products and services
incorporating such technologies. There can be no assurance that the Company will
be successful in addressing such risks. As of December 31, 1996, the Company had
an accumulated deficit of $2.2 million. Although the Company has experienced
revenue growth in recent periods, historical growth rates will not be sustained
and are not indicative of future operating results. There can be no assurance
that the Company will sustain profitability.
EVOLVING DISTRIBUTION CHANNELS
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 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
36
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, such as Netscape SuiteSpot 3.0 and Netscape Communicator, or their
inability to penetrate their respective market segments, could materially
adversely affect the Company's business, operating results or financial
condition. See "Marketing and Distribution."
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.
SECURITY RISKS AND SYSTEM DISRUPTIONS; LACK OF PRODUCT LIABILITY INSURANCE FOR
PRODUCTS INCORPORATING SECURITY FEATURES
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.
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
37
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.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct government regulation, other
than pursuant to securities laws and the regulations thereunder applicable to
all publicly owned companies and laws and regulations applicable to businesses
generally, and there are currently few laws or regulations directly applicable
to access to or commerce on the Internet. However, due to the increasing
popularity and use of the Internet, it is likely that a number of laws and
regulations may be adopted at the local, state, national or international levels
with respect to the Internet, covering issues such as user privacy and
expression, pricing of products and services, taxation, advertising,
intellectual property rights, information security or the convergence of
traditional communication services with Internet communications. For example,
the Telecommunications Reform Act of 1996 (the constitutionality of which is
currently under challenge) was recently enacted and imposes criminal penalties
(via the Communications Decency Act or "CDA") on anyone who distributes obscene,
lascivious or indecent communications over the Internet. Moreover, the adoption
of any such laws or regulations may decrease the growth of the Internet, which
could in turn decrease the demand for the Company's products or increase the
Company's cost of doing business or in some other manner have a material adverse
effect on the Company's business, operating results or financial condition. In
addition, the applicability to the Internet of existing laws governing issues
such as property ownership, copyrights and other intellectual property issues,
taxation, libel and personal privacy is uncertain. The vast majority of such
laws were adopted prior to the advent of the Internet and related technologies
and, as a result, do not contemplate or address the unique issues of the
Internet and related technologies. Changes to such laws intended to address
these issues, including some recently proposed changes, could create uncertainty
in the marketplace which could reduce demand for the Company's products, could
increase the Company's cost of doing business as a result of costs of litigation
or increased product development costs, or could in some other manner have a
material adverse effect on the Company's business, operating results or
financial condition.
Because the encryption technology contained in the Company's products is
deemed to be a "munition," such products are subject to U.S. export controls
pertaining to munitions. There can be no assurance
38
that such export controls, either in their current form or as may be
subsequently revised, will not limit the Company's ability to distribute certain
encrypted products outside of the United States or electronically. While
Netscape takes precautions against unlawful exportation, such exportation may
occur from time to time. In addition, federal or state legislation or regulation
may further limit levels of encryption or authentication technology, and foreign
governments could enact import laws or regulations that may restrict the type of
encryption software that is permitted for distribution in their countries.
Moreover, as a consequence of such export controls, Netscape must develop and
market both domestic and international versions of its products that contain
encryption software, with the version for the U.S. market having a stronger
level of encryption than the version for export to international markets. Along
with the additional costs associated with the duplication of effort and expense
in research, development, manufacturing and distribution of different versions
of products, the Company may lose sales from customers who wish to have the same
level of encryption security throughout their organization. The Company may also
encounter difficulties competing overseas with competitors that are subject to
less restrictive controls. Finally, due to the weaker level of encryption
contained in the Company's products shipped internationally, the Company may not
acquire the installed international base necessary to make the functionality of
its products part of an international standard.
Additionally, some countries have enacted import laws requiring the
alteration of the Company's products in order for the government of such
countries to maintain a level of control over the content of products entering
such countries. In addition to the costs incurred by the Company in complying
with varying international regulations, alteration of the Company's products may
cause such products to perform at a level below their intended level and thereby
subject the Company to potential liability and other adverse consequences. Any
such export restrictions, import restrictions, new legislation or regulation or
unlawful exportation could have a material adverse impact on the Company's
business, operating results or financial condition. See "Marketing and
Distribution--International."
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY; UNISYS PATENT ENFORCEMENT; RISKS
ASSOCIATED WITH LICENSED THIRD PARTY TECHNOLOGY
The Company's success and ability to compete is dependent in part upon its
internally developed technology. While the Company relies on patents, trademark,
trade secret and copyright law to protect its technology, the Company believes
that factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are more essential to establishing and maintaining
a technology leadership position. There can be no assurance that others will not
develop technologies that are similar or superior to the Company's technology.
The Company generally enters into confidentiality or license agreements with its
employees, consultants and vendors, and generally controls access to and
distribution of its software, documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. In addition,
effective patents, copyright and trade secret protection may be unavailable or
limited in certain foreign countries. To license its products, the Company
relies in part on "shrink wrap" licenses that are not signed by the end-user
and, therefore, may be unenforceable under the laws of certain jurisdictions.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain and
use information that the Company regards as proprietary. Policing unauthorized
use of the Company's products is difficult. There can be no assurance that the
steps taken by the Company will prevent misappropriation of its technology or
that such agreements will be enforceable. In addition, litigation may be
necessary in the future to enforce the Company's intellectual property rights,
to protect the Company's trade secrets, to determine the validity and scope of
the proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results or financial condition.
39
Unisys Corporation ("Unisys") has announced its intention to require the
payment of royalties for the use of compression technology associated with the
Graphics Interchange Format ("GIF"). Unisys asserts that this popular file
format is based on compression technology patented by Unisys. The Company's
products have the ability to decompress files, including files stored in GIF.
The Company and, to the Company's knowledge, other licensees, have received
notice of Unisys' intention to enforce or license such patent. The Company could
incur additional costs and liability should its products be found to be within
the scope of the Unisys patent, including costs and liability from claims for
indemnification resulting from infringement. The assertion of these patent
rights by Unisys, if successful, could prevent the Company's products from
enabling users to view files compressed in GIF. The Company does not believe its
products infringe the Unisys patent; however, there can be no assurance that the
Company's products are not within the scope of the Unisys patent or that the
Company's business, operating results and financial condition will not be
materially adversely affected if the Company's products are found to be within
the scope of the Unisys patent.
From time to time the Company has, in addition to the notice from Unisys,
received, and may receive in the future, notice of claims of infringement of
other parties' proprietary rights. Although the Company does not believe that
its products infringe the proprietary rights of any third parties, there can be
no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company or that any such assertions or prosecutions will
not materially adversely affect the Company's business, financial condition or
results of operations. Irrespective of the validity or the successful assertion
of such claims, the Company would incur significant costs and diversion of
resources with respect to the defense thereof which could have a material
adverse effect on the Company's business, financial condition or results of
operations. In addition, the assertion of such infringement claims could result
in injunctions preventing Netscape from distributing certain products, which
could have a material adverse effect on the Company's business, financial
condition or results of operations. If any claims or actions are asserted
against the Company, the Company may seek to obtain a license under a third
party's intellectual property rights. There can be no assurance, however, that
under such circumstances, a license would be available on reasonable terms or at
all.
The Company also relies on certain other technology which it licenses from
third parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions. There can
be no assurance that these third party technology licenses will continue to be
available to the Company on commercially reasonable terms. The loss of or
inability to maintain any of these technology licenses could result in delays or
reductions in product shipments until equivalent technology could be identified,
licensed and integrated. Any such delays or reductions in product shipments
could materially adversely affect the Company's business, operating results or
financial condition. Moreover, although the Company is generally indemnified by
the third parties against claims that the third parties' technology infringes
the proprietary rights of others, such indemnification is not always available
for all types of intellectual property rights (for example, patents may be
excluded) and in some cases the geographical scope of such indemnification is
limited. The result is that the indemnity that the Company receives against such
claims is often less broad than the indemnity that the Company provides to its
customers. Even in cases in which the indemnity that the Company receives from a
third party licensor is as broad as the indemnity that the Company provides to
its customers, often the third party licensors from whom the Company would be
receiving indemnity are not well-capitalized and may not be able to indemnify
the Company in the event that such third party technology infringes the
proprietary rights of others. Accordingly, the Company could have substantial
exposure in the event that technology licensed from a third party infringes
another party's proprietary rights. The Company currently does not have any
liability insurance to protect against the risk that licensed third party
technology infringes the proprietary rights of others. There can be no assurance
that infringement or invalidity claims arising from the incorporation of third
party technology, and claims for indemnification from the Company's customers
resulting from such infringement claims will not be asserted or prosecuted
against the Company or that any such assertions or prosecutions will not
materially adversely affect the Company's business, financial
40
condition or results of operations. Irrespective of the validity or successful
assertion of such claims, the Company would incur significant costs and the
diversion of resources with respect to the defense thereof, in addition to
potential product redevelopment costs and delays, all of which could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Proprietary Rights."
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its executive officers and key employees, some of whom have worked together for
only a short period of time. Given the Company's relatively early stage of
development, the Company is dependent on its ability to retain and motivate
highly qualified personnel, especially its management and highly skilled
development teams. The Company does not have "key person" life insurance
policies on any of its employees. The loss of the services of any of its
executive officers or other key employees could have a material adverse effect
on the business, operating results or financial condition of the Company.
The Company's future success also depends on its continuing ability to
identify, hire, train and retain other highly qualified technical and managerial
personnel, especially software developers. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to attract,
assimilate or retain other highly qualified technical and managerial personnel
in the future. The inability to attract and retain the necessary technical and
managerial personnel could have a material adverse effect on the Company's
business, operating results or financial condition. See "Employees."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION
International revenues (sales outside of North America) were approximately
17.2% and 29.3% of total revenues for the years ended December 31, 1995 and
1996, respectively. 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
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 "Marketing and Distribution--International."
DEPENDENCE ON THE INTERNET
Although some sales of the Company's products will depend upon growth of
intranets, sales of the Company's products will continue to depend in large part
upon a robust industry and infrastructure for providing Internet access and
carrying Internet traffic. The Internet may not prove to be a viable commercial
marketplace because of inadequate development of the necessary infrastructure
(e.g., reliable network backbone), untimely development of complementary
products (e.g., high speed modems), delays
41
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased government
regulation. In addition, to the extent that the Internet continues to experience
significant growth in the number of users and the level of use, there can be no
assurance that the Internet infrastructure will continue to be able to support
the demands placed on it by such potential growth. Because global commerce and
online exchange of information on the Internet and other similar open wide area
networks are new and evolving, it is difficult to predict with any assurance
whether the Internet will prove to be a viable commercial marketplace. If the
necessary infrastructure or complementary products are not developed, or if the
Internet does not become a viable commercial marketplace, the Company's
business, operating results and financial condition will be materially adversely
affected.
ITEM 2. PROPERTIES.
The Company leases and occupies various facilities in Mountain View,
California, which provide for approximately 500,000 square feet of office space
and contain the Company's principal executive, administrative, engineering,
sales, marketing, customer support and research and development functions. Such
leases expire at various dates ranging from 1999 through 2006. The Company has
executed leases for an additional 800,000 square feet in Mountain View and
Sunnyvale, California beginning in 1997 and 1998 and expiring at various times
through 2013 for general corporate use. The Company believes that its existing
facilities and facilities subject to lease will be adequate until 1999 and that
sufficient additional space will be available as needed thereafter. The Company
also has short-term operating leases for sales offices in North America, Europe,
Asia and Australia.
In addition, the Company maintains secure computers which contain
confidential information of the Company and its customers. The Company's
operations are dependent in part upon its ability to protect its internal
network infrastructure against damage from physical break-ins, natural
disasters, operational disruptions and other events. Physical break-ins could
result in the theft or loss of confidential or critical business information of
the Company or its customers. Any such break-in or damage or failure that causes
interruptions in the Company's operations could materially adversely affect the
Company's business, operating results or financial condition.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's business, operating results or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
42
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of March 17, 1997
are as follows:
[Enlarge/Download Table]
NAME AGE POSITION(S)
------------------------------ --- ------------------------------------------------------------------
James H. Clark................ 52 Chairman of the Board
James L. Barksdale............ 54 President and Chief Executive Officer
Marc L. Andreessen............ 25 Senior Vice President, Technology
Noreen G. Bergin.............. 37 Vice President, Finance and Corporate Controller
Peter L.S. Currie............. 40 Senior Vice President and Chief Financial Officer
Larry K. Geisel............... 56 Senior Vice President, Information Systems and Chief Information
Officer
Eric A. Hahn.................. 36 Senior Vice President and General Manager of the Server Product
Division
Michael J. Homer.............. 39 Senior Vice President, Marketing
Roberta R. Katz............... 49 Senior Vice President, General Counsel and Secretary
Kandis Malefyt................ 42 Senior Vice President, Human Resources
Conway Rulon-Miller........... 46 Senior Vice President, Sales and Field Operations
Richard M. Schell............. 47 Senior Vice President and General Manager of the Client Product
Division
James C.J. Sha................ 46 Senior Vice President and General Manager, Integrated Applications
The Company's executive officers are appointed by, and serve at the
discretion of, the Board of Directors. Each executive officer is a full time
employee of the Company. There is no family relationship between any executive
officer or director of the Company.
Dr. Clark co-founded the Company in April 1994 and serves as its Chairman of
the Board. From inception of the Company to January 1995, Dr. Clark served as
the President and Chief Executive Officer of the Company. From 1981 to 1994, Dr.
Clark was Chairman of the Board of Directors of Silicon Graphics, a computer
systems company he founded in 1981. Dr. Clark also served as Chief Technical
Officer of Silicon Graphics from 1981 to 1987. Prior to founding Silicon
Graphics, Dr. Clark was an associate professor at Stanford University. Dr. Clark
holds a Ph.D. from the University of Utah and an M.S. and a B.S. from the
University of New Orleans.
Mr. Barksdale joined the Company in January 1995 as President and Chief
Executive Officer. He has served as a director of the Company since October
1994. From January 1992 to January 1995, Mr. Barksdale served as President and
Chief Operating Officer, and, as of September 1994, Chief Executive Officer, of
AT&T Wireless Services (formerly, McCaw Cellular Communications, Inc.
(collectively, "McCaw")), a cellular telecommunications company. From April 1983
to January 1992, Mr. Barksdale served as Executive Vice President and Chief
Operating Officer of Federal Express Corporation ("Federal Express"), an express
package delivery company. From 1979 to 1983, Mr. Barksdale served as Chief
Information Officer of Federal Express. Mr. Barksdale also held various
management positions, including Chief Information Officer, with Cook Industries
Inc., during the mid-1970s and was employed by IBM from 1965 to 1972. He holds a
B.A. from the University of Mississippi. Mr. Barksdale serves as a director of
3Com Corporation, Harrah's Entertainment, Inc., Robert Mondavi Corp. and @Home
Corporation.
43
Mr. Andreessen co-founded the Company in April 1994. He currently serves as
Senior Vice President, Technology and has been a director of the Company since
September 1994. He received a B.S. from the University of Illinois in December
1993, where he co-authored the original NCSA Mosaic Web browser.
Ms. Bergin joined the Company in November 1995 as Vice President and
Corporate Controller and was elected to Vice President, Finance and Corporate
Controller in January 1997. From November 1991 to November 1995, Ms. Bergin
served as Vice President, Finance and Corporate Controller of Frame Technology
Corporation, a document publishing software firm. Prior to that time, she served
as Corporate Controller of Boole & Babbage, Inc., a mainframe performance
software company for five years. Ms. Bergin holds a B.A. from Santa Clara
University.
Mr. Currie joined the Company as Vice President and Chief Financial Officer
in April 1995 and was elected to Senior Vice President in January 1996. From
April 1989 to March 1995, Mr. Currie held various management positions at McCaw,
including Executive Vice President and Chief Financial Officer, and as of
February 1993, Executive Vice President of Corporate Development. From 1982 to
1989, he held various positions at Morgan Stanley & Co. Incorporated. Mr. Currie
holds an M.B.A. from Stanford University and a B.A. from Williams College.
Mr. Geisel joined the Company in March 1996 as Senior Vice President,
Information Systems and Chief Information Officer. From June 1994 to March 1996,
Mr. Geisel served as Executive Vice President, Global Solutions Delivery for
Xerox Corporation, an office equipment company. From May 1993 to June 1994, Mr.
Geisel was a consultant. From September 1992 to June 1993, Mr. Geisel served as
President and Chief Executive Officer of White Pine Software, Inc., a desktop
connectivity software company. From February 1987 to September 1992, Mr. Geisel
was President and Chief Executive Officer of IIS Inc., a software, systems and
information services firm he founded in 1987. Mr. Geisel holds an M.S.E. and a
B.S.E. from Arizona State University.
Mr. Hahn joined the Company in November 1995 as Vice President, Enterprise
Technology, in connection with the Company's acquisition of Collabra Software,
Inc., a collaborative computing software company, where Mr. Hahn served as
President and Chief Executive Officer from February 1993 to November 1995. Mr.
Hahn was elected to Senior Vice President in January 1996 and in October 1996
was elected Senior Vice President and General Manager of the Server Product
Division. From September 1992 to February 1993, Mr. Hahn was employed by
Merrill, Pickard, Anderson & Eyre, a venture capital firm. From June 1990 to
August 1992, he served as Vice President, General Manager of the cc:Mail
Division of Lotus Development Corporation, now a subsidiary of IBM. Prior to
that time, he served as Vice President and General Manager, Server Products
Division at Convergent Technologies/Unysis Corporation. Mr. Hahn holds a B.S.
from the Worcester Polytechnic Institute.
Mr. Homer joined the Company in October 1994 as Vice President, Marketing
and was elected to Senior Vice President in January 1996. From April 1994 to
October 1994, Mr. Homer was a consultant. From August 1993 to April 1994, Mr.
Homer served as Vice President, Engineering at EO Corporation, a handheld
computer manufacturer, and from July 1991 to July 1993, Mr. Homer was Vice
President, Marketing of GO Corporation, a pen-based software company. He had
previously been Director of Product Marketing of Apple, where he held various
technical and marketing positions from 1982 through 1991. Mr. Homer holds a B.S.
from the University of California, Berkeley.
Ms. Katz joined the Company in May 1995 as Vice President, General Counsel
and Secretary and was elected to Senior Vice President in January 1996. From
March 1993 until joining the Company, Ms. Katz served as Senior Vice President
and General Counsel of McCaw. In addition, from March 1992 until joining the
Company, Ms. Katz served as Senior Vice President and General Counsel of LIN
Broadcasting Corporation, a subsidiary of McCaw. Prior to March 1992, Ms. Katz
was in private legal practice, most recently as a partner in the law firm of
Heller, Ehrman, White & McAuliffe. Ms. Katz is a Fellow of the Discovery
Institute and serves as a member of the Board of Directors of the Software
Publishers
44
Association. Ms. Katz holds a J.D. from the University of Washington School of
Law, a Ph.D. from Columbia University, an M.A. from New York University and a
B.A. from Stanford University.
Ms. Malefyt joined the Company in December 1994 as Vice President, Human
Resources and was elected to Senior Vice President in January 1996. From May
1988 to December 1994, Ms. Malefyt served as a Director, Human Resources at
Silicon Graphics. Prior to that time, she served as Vice President, Human
Resources at ISI. Ms. Malefyt holds an M.S. from Antioch University and a B.A.
from Harding University.
Mr. Rulon-Miller joined the Company in October 1994 as Vice President, Sales
and Field Operations and was elected to Senior Vice President in January 1996.
From December 1992 to October 1994, Mr. Rulon-Miller was President and Chief
Executive Officer of Software Alliance Corp., a software company and a
subsidiary of Teknekron Communications Systems Inc. From October 1986 to
December 1992, he served as Vice President, Sales, of North American Operations
of NeXT Software, Inc., a software company. Mr. Rulon-Miller has previously held
management positions at Tandem Computers, Inc., American Express Company and
IBM. Mr. Rulon-Miller holds a B.A. from Princeton University.
Dr. Schell joined the Company in October 1994 as Vice President, Engineering
and was elected to Senior Vice President in January 1996. In October 1996, Dr.
Schell was elected to the position of Senior Vice President and General Manager
of the Client Product Division. From January 1993 to October 1994, Dr. Schell
was employed by Symantec Corporation, a software company, most recently as Vice
President/ General Manager of the Central Point Division (formerly Central Point
Software, Inc.). From March 1989 to December 1992, he served as Vice President,
Languages and dBase at Borland International, a database software company. Prior
to that time, Dr. Schell held various management positions at Sun and Intel
Corporation. Dr. Schell holds a Ph.D., an M.S. and a B.A. from the University of
Illinois.
Mr. Sha joined the Company in August 1994 as Vice President and General
Manager, Integrated Applications and was elected to Senior Vice President in
January 1996. From June 1990 to August 1994, Mr. Sha served as Vice President,
Unix Division at Oracle, a database software company. From June 1986 to June
1990, he served as Vice President/General Manager, Advanced Systems Division at
Wyse Technology, Inc. Mr. Sha holds an M.S.E.E. from the University of
California, Berkeley, an M.B.A. from Santa Clara University and a B.S.E.E. from
National Taiwan University.
45
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company made its initial public offering on August 8, 1995 at a price of
$14.00 per share (as adjusted to reflect a two-for-one stock split effective
January 1996). The Company's common stock is listed on the Nasdaq National
Market under the symbol "NSCP." The following table sets forth the high and low
sale prices per share of the Company's common stock for the periods indicated,
as adjusted to reflect the two-for-one stock split.
[Download Table]
HIGH LOW
-------- --------
1995
Third Quarter (beginning August
9, 1995)...................... $ 37 3/8 $ 22 7/8
Fourth Quarter.................. $ 87 $ 28
1996
First Quarter................... $ 86 $ 34 3/4
Second Quarter.................. $ 75 1/4 $ 42 1/2
Third Quarter................... $ 65 1/2 $ 34 1/2
Fourth Quarter.................. $ 66 $ 38 1/2
1997
First Quarter (through March 17,
1997)......................... $ 59 1/2 $ 25 1/2
As of March 17, 1997, there were 2,468 holders of record of the Company's
common stock. Because many of the Company's shares of common stock are held by
brokers and other institutions on behalf of stockholders, the Company is unable
to estimate the total number of stockholders represented by these record
holders. The Company has never declared or paid any cash dividends on its common
stock. Since the Company currently intends to retain all future earnings to
finance future growth, it does not anticipate paying any cash dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is incorporated by reference to the
section entitled "Selected Consolidated Financial Data" in the Company's 1996
Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's 1996 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is incorporated by reference to the
Consolidated Financial Statements, and the related notes thereto, Report of
Independent Auditors and the Supplementary Quarterly Consolidated Financial Data
in the Company's 1996 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
With the exception of the information specifically incorporated by reference
from the 1996 Annual Report to Stockholders in Parts II and IV of this Form
10-K, the Company's 1996 Annual Report to Stockholders is not to be deemed filed
as part of this Form 10-K.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the sections entitled
"Proposal One--Election of Directors" and "Compliance with Section 16(a) of the
Exchange Act" in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended December 31, 1996, except that the information
required by this item concerning the executive officers of the Company is
incorporated by reference to the information set forth in the section entitled
"Executive Officers of the Company" at the end of Part I of this Annual Report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the sections entitled
"Proposal One--Election of Directors--Director Compensation" and "Executive
Officer Compensation" in the Company's Proxy Statement for the 1997 Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of the Company's fiscal year ended December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Share Ownership by Principal
Stockholders and Management" in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Transactions with Management" in the Company's
Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of the Company's fiscal year ended
December 31, 1996.
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Form 10-K:
1. FINANCIAL STATEMENTS. The following consolidated financial statements,
and the related notes thereto, of the Company and the Report of
Independent Auditors are incorporated by reference to the Company's 1996
Annual Report to Stockholders.
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1996
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1996
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1996
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule of the Company for each of the years ended December 31, 1996,
1995 and 1994 is filed as part of this Form 10-K and should be read in
conjunction with the Consolidated Financial Statements, and related notes
thereto, of the Company.
[Download Table]
PAGE
NUMBER
-----------
Schedule II--Valuation and Qualifying Accounts.................. S-1
Schedules other than those listed above have been omitted since they are
either not required, not applicable, or the information is otherwise
included.
3. EXHIBITS: The exhibits listed on the accompanying index to exhibits
immediately following the financial statement schedule are filed as part
of, or incorporated by reference into, this Form 10-K.
(b) REPORTS ON FORM 8-K. No Current Report on Form 8-K was filed by the Company
in the fourth quarter ended December 31, 1996.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized on this 28th day of
March 1997.
NETSCAPE COMMUNICATIONS CORPORATION
By: /s/ PETER L.S. CURRIE
-----------------------------------------
Peter L.S. Currie,
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on March 28, 1997 on
behalf of the Registrant and in the capacities and indicated:
SIGNATURE TITLE
------------------------------ ------------------------------
President and Chief Executive
/s/ JAMES L. BARKSDALE Officer and Director
------------------------------ (principal executive
James L. Barksdale officer)
Senior Vice President and
/s/ PETER L.S. CURRIE Chief Financial Officer
------------------------------ (principal financial
Peter L.S. Currie officer)
Vice President, Finance and
/s/ NOREEN G. BERGIN Corporate Controller
------------------------------ (principal accounting
Noreen G. Bergin officer)
/s/ JAMES H. CLARK
------------------------------ Chairman of the Board
James H. Clark
/s/ MARC L. ANDREESSEN
------------------------------ Director
Marc L. Andreessen
/s/ ERIC A. BENHAMOU
------------------------------ Director
Eric A. Benhamou
/s/ L. JOHN DOERR
------------------------------ Director
L. John Doerr
/s/ JOHN E. WARNOCK
------------------------------ Director
John E. Warnock
49
NETSCAPE COMMUNICATIONS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
[Enlarge/Download Table]
BALANCE AT BALANCE AT
BEGINNING OF COST AND DEDUCTIONS/ END OF
CLASSIFICATION PERIOD EXPENSES WRITE-OFFS PERIOD
---------------------------------------------------------------- --------------- ----------- ------------- -----------
Year ended December 31, 1994
Allowance for doubtful accounts................................. $ -- $ 104 $ -- $ 104
----- ----------- ----- -----------
----- ----------- ----- -----------
Year ended December 31, 1995
Allowance for doubtful accounts................................. $ 104 $ 572 $ (9) $ 667
----- ----------- ----- -----------
----- ----------- ----- -----------
Year ended December 31, 1996
Allowance for doubtful accounts................................. $ 667 $ 4,376 $ (147) $ 4,896
----- ----------- ----- -----------
----- ----------- ----- -----------
S-1
INDEX TO EXHIBITS
[Enlarge/Download Table]
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
---------- --------------------------------------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization dated as of September 21, 1995 by and among Registrant, NSCP
Acquisition Corporation ("Merger Sub") and Collabra Software, Inc. ("Collabra") (WHICH IS INCORPORATED
HEREIN BY REFERENCE TO EXHIBIT 2.1 TO THE REGISTRANT'S CURRENT REPORT ON FORM 8-K DATED NOVEMBER 9, 1995
("REGISTRANT'S 1995 8-K")).
2.2 Agreement of Merger dated November 8, 1995 by and between Merger Sub and Collabra (WHICH IS INCORPORATED
HEREIN BY REFERENCE TO EXHIBIT 2.2 TO THE REGISTRANT'S 1995 8-K).
2.3 Agreement and Plan of Reorganization dated as of January 31, 1996 by and among Registrant, NSCP
Corporation ("Sub") and InSoft, Inc. ("InSoft") (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT
2.3 TO THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
("REGISTRANT'S 1995 10-K")).
2.4 Agreement of Merger dated April 25, 1996 by and between Sub and InSoft (WHICH IS INCORPORATED HEREIN BY
REFERENCE TO EXHIBIT 2.2 TO THE REGISTRANT'S CURRENT REPORT ON FORM 8-K DATED APRIL 25, 1996).
3.(i) Restated Certificate of Incorporation, as amended through January 23, 1996 (WHICH IS INCORPORATED HEREIN
BY REFERENCE TO EXHIBIT 3.(I) TO THE REGISTRANT'S 1995 10-K).
3.(ii) Amended and Restated Bylaws of Registrant, as amended through January 24, 1997.
4.1 Form of Registrant's Common Stock Certificate (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 4.1
TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1, REGISTRATION NO. 33-93862 ("REGISTRANT'S 1995
S-1").
4.2 Second Amended and Restated Investors' Rights Agreement dated April 5, 1995 (WHICH IS INCORPORATED
HEREIN BY REFERENCE TO EXHIBIT 4.2 TO THE REGISTRANT'S 1995 S-1).
10.1* Form of Indemnification Agreement entered into by Registrant with each of its directors and executive
officers (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.1 TO THE REGISTRANT'S 1995 S-1).
10.2* Form of Restricted Stock Purchase Agreement (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.2
TO THE REGISTRANT'S 1995 S-1).
10.3* 1994 Stock Option Plan and related agreements, as amended (WHICH IS INCORPORATED HEREIN BY REFERENCE TO
EXHIBIT 10.3 TO THE REGISTRANT'S 1995 S-1).
10.4* 1995 Stock Plan and related agreements (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.4 TO THE
REGISTRANT'S 1995 S-1).
10.5* 1995 Employee Stock Purchase Plan and related agreements (WHICH IS INCORPORATED HEREIN BY REFERENCE TO
EXHIBIT 10.5 TO THE REGISTRANT'S 1995 S-1).
10.6* 1995 Director Option Plan and related agreements (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT
10.6 TO THE REGISTRANT'S 1995 S-1).
10.7* Collabra Software, Inc. 1993 Incentive Stock Plan (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT
4.3 TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO. 33-99198).
10.8* InSoft, Inc. 1993 Stock Option Plan (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 4.3 TO THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO. 333-4222).
10.9* Netcode Corporation 1996 Stock Plan (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 4.3 TO THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8, REGISTRATION NO. 333-4478).
10.10* Employment Agreement between Registrant and James L. Barksdale dated January 4, 1995 (WHICH IS
INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.7 TO THE REGISTRANT'S 1995 S-1).
10.11* Employment Offer Letter from Registrant to Conway Rulon-Miller dated October 3, 1994 (WHICH IS
INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.16 TO THE REGISTRANT'S 1995 S-1).
10.12+ License and Series A Stock Purchase Agreement between Registrant and RSA Data Security, Inc. dated
August 19, 1994 (WHICH IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.9 TO THE REGISTRANT'S 1995
S-1).
10.13 Lease between Registrant and Ellis-Middlefield Business Park dated October 14, 1994 (WHICH IS
INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10.11 TO THE REGISTRANT'S 1995 S-1).
[Enlarge/Download Table]
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
---------- --------------------------------------------------------------------------------------------------------
10.14 Lease between Registrant and Ellis-Middlefield Business Park dated April 28, 1995 (WHICH IS INCORPORATED
HEREIN BY REFERENCE TO EXHIBIT 10.12 TO THE REGISTRANT'S 1995 S-1).
10.15 Lease between Registrant and Sobrato Development Companies dated August 1995 (WHICH WAS PREVIOUSLY FILED
AS EXHIBIT 10.14 TO THE REGISTRANT'S 1995 10-K).
10.16 Lease between Registrant and Renault & Handley Employees Investment Co. dated December 12, 1995 (WHICH
WAS PREVIOUSLY FILED AS EXHIBIT 10.15 TO THE REGISTRANT'S 1995 10-K).
10.17 Lease between Registrant and 464 Ellis Street Associates, L.P. dated January 23, 1997 (includes Phase I
and Phase II).
11.1 Statement of computation of earnings per share.
13.1 Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 1996 expressly
incorporated by reference herein.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule for the fiscal year ended December 31, 1996.
------------------------
+ Confidential treatment has been previously granted for certain portions of
these exhibits.
* Indicates management compensatory plan, contract or arrangement.
Dates Referenced Herein and Documents Incorporated by Reference
↑Top
Filing Submission 0000912057-97-010695 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Sat., Apr. 20, 9:26:35.3am ET 
