1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-22466
FTP SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2906463
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
100 BRICKSTONE SQUARE, FIFTH FLOOR
ANDOVER, MASSACHUSETTS 01810
(Address of principal executive offices) (Zip Code)
(508) 685-4000
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 33,877,671
- -------------------------------------- --------------------------------
Class Outstanding at May 12, 1997
2
FTP SOFTWARE, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 (unaudited) 3
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 (unaudited) 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 19
-2-
3
FTP SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,725 $ 22,036
Short-term investments 25,259 29,026
Accounts receivable, net of allowance for doubtful
accounts of $1,300 for 1997 and 1996 14,503 16,586
Prepaid expenses and other current assets 4,998 4,430
Income taxes 4,395 4,197
Net assets of discontinued operations 5,222 5,263
--------- ---------
Total current assets 70,102 81,538
Property and equipment, net 19,640 20,734
Purchased software, net 5,959 6,962
Investments 51,011 47,971
Other assets 725 830
--------- ---------
Total assets $ 147,437 $ 158,035
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 13,783 12,446
Accrued employee compensation and benefits 5,081 4,000
Current portion of long-term obligations 14 191
Deferred revenue 9,683 10,058
--------- ---------
Total current liabilities 28,561 26,695
Long-term obligations -- 63
--------- ---------
Total liabilities 28,561 26,758
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued and outstanding -- --
Common stock, $.01 par value; authorized 100,000,000
shares; issued and outstanding 33,801,769 and
33,646,203 in 1997 and 1996, respectively 338 336
Additional paid-in capital 136,426 136,151
Accumulated deficit (16,461) (5,447)
Equity adjustments (1,427) 237
--------- ---------
Total stockholders' equity 118,876 131,277
--------- ---------
Total liabilities and stockholders' equity $ 147,437 $ 158,035
========= =========
The accompanying notes are an integral part of these financial statements.
-3-
4
FTP SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1997 1996
--------- --------
Revenue:
Product revenue $ 16,826 $ 22,922
Service revenue 4,529 3,910
-------- --------
Total revenue 21,355 26,832
-------- --------
Cost of revenue:
Product cost 2,987 1,037
Service cost 2,894 2,364
-------- --------
Total cost of revenue 5,881 3,401
-------- --------
Gross margin 15,474 23,431
-------- --------
Operating expenses:
Sales and marketing 14,281 10,247
Product development 7,857 6,548
General and administrative 4,335 4,124
-------- --------
Total operating expenses 26,473 20,919
-------- --------
Income (loss) from continuing operations (10,999) 2,512
Investment and other income, net 635 1,029
-------- --------
Income (loss) from continuing operations
before income taxes (10,364) 3,541
Provision for income taxes 650 1,310
-------- --------
Net income (loss) from continuing operations (11,014) 2,231
Operating loss from discontinued operations,
net of income tax benefits -- (10,673)
-------- --------
Net loss $(11,014) $ (8,442)
======== ========
Net income (loss) per share:
Continuing operations $ (.33) $ .08
Discontinued operations -- (.39)
-------- --------
$ (.33) $ (.31)
======== ========
Weighted average common and common
equivalent shares outstanding 33,688 26,939
======== ========
The accompanying notes are an integral part of these financial statements.
-4-
5
FTP SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1997 1996
--------- -------
Cash flows from operating activities:
Net income (loss) from continuing operations $(11,014) $ 2,231
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by (used for) operating activities:
Depreciation and amortization 2,945 1,908
Loss on disposition of property and equipment 593 --
Amortization of discounts and premiums on investments (31) 70
Changes in operating assets and liabilities:
Accounts receivable 2,083 8,763
Prepaid expenses and other current assets (568) (1,980)
Income taxes 240 (5,679)
Other assets 113 (354)
Accounts payable and accrued expenses 1,337 2,799
Accrued employee compensation and benefits 1,081 (988)
Deferred revenue (375) (685)
-------- --------
Net cash provided by used for continuing operations (3,596) 6,085
Net cash provided by discontinued operations 41 1,544
-------- --------
Net cash by (used for) operating activities (3,555) 7,629
-------- --------
Cash flows from investing activities:
Capital expenditures (1,223) (3,261)
Purchase of investments (15,167) (6,001)
Maturities of investments 13,580 20,057
-------- --------
Net cash provided by (used for) continuing operations (2,810) 10,795
Net cash used for discontinued operations -- (17,852)
-------- --------
Net cash used for investing activities (2,810) (7,057)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 277 756
Principal payments on long-term obligations (240) (235)
-------- --------
Net cash provided by financing activities 37 521
-------- --------
Effect of exchange rate changes on cash 17 (23)
-------- --------
Net increase (decrease) in cash and cash equivalents (6,311) 1,070
Cash and cash equivalents, beginning of period 22,036 30,237
-------- --------
Cash and cash equivalents, end of period $ 15,725 $ 31,307
======== ========
The accompanying notes are an integral part of these financial statements.
-5-
6
FTP SOFTWARE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL DATA
The accompanying unaudited consolidated financial statements have been
prepared by FTP Software, Inc. (the "Company") in accordance with generally
accepted accounting principles. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments, consisting
only of those of a normal recurring nature, necessary for a fair presentation of
the Company's financial position, results of operations and cash flows at the
dates and for the periods indicated. While the Company believes that the
disclosures presented are adequate to make the information not misleading, these
financial statements should be read in conjunction with the audited consolidated
financial statements and notes related thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
The results of the three-month period ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full fiscal year.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. DISCONTINUED OPERATIONS AND RECLASSIFICATIONS
The accompanying consolidated financial statements have been restated
to report separately in all periods presented the net assets and operating
results of discontinued operations. Prior year operating results have been
restated to reflect continuing operations. Net assets of discontinued operations
consist primarily of purchased software and fixed assets less accounts payable
and accrued expenses. Summary operating results for the discontinued operations
(which include charges of approximately $11.9 million for certain acquired
in-process technology in the three-month period ended March 31, 1996) are as
follows (in thousands):
THREE MONTHS ENDED
MARCH 31, 1996
------------------
Revenue $ 2,172
Gross margin 347
Operating loss before income taxes (16,941)
Net loss (10,673)
In addition, certain prior year amounts have been reclassified to
conform to the current year's presentation.
3. LEGAL PROCEEDINGS
In March 1996, a class action lawsuit was filed in the United States
District Court for the District of Massachusetts, naming the Company and certain
of its current and former officers as defendants. The lawsuit, captioned
LAWRENCE M. GREEBEL V. FTP SOFTWARE, INC. ET AL., Civil Action No. 96-10544,
alleges that the defendants publicly issued false and misleading statements and
omitted to disclose material facts
-6-
7
FTP SOFTWARE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
necessary to make such statements not false and misleading, which the
plaintiffs contend caused an artificial inflation in the price of the Company's
common stock. Specifically, the original complaint alleged that the defendants
knowingly concealed adverse facts and made false or misleading forward and
non-forward looking statements concerning the operating results and financial
condition of the Company, the effects of the Company's July 1995 corporate
restructuring and changing competitive factors in the Company's industry. The
lawsuit, which is purportedly brought on behalf of a class of purchasers of the
Company's common stock during the period from July 14, 1995 to January 3, 1996,
alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and Rule 10b-5 thereunder and seeks
relief in the form of unspecified compensatory damages, costs and expenses and
such other relief as the court deems proper and just. In August 1996,
plaintiffs filed an amended complaint adding allegations concerning what
plaintiffs claim were wrongful sales and accounting practices by the Company
during the class period, but asserting the same causes of action as the
original complaint. In October 1996, the Company filed a motion to dismiss the
complaint on the grounds that the plaintiffs had not met the pleading
requirements of the Private Securities Litigation Reform Act of 1995. The
motion was denied by the court on February 13, 1997. As a result, the case is
now in the discovery phase.
The Company has reviewed the allegations in the lawsuit, believes them
to be without merit, and intends to defend itself and its officers vigorously.
In order to support an adequate defense, the Company has spent and expects to
continue to spend substantial sums for legal and expert fees and costs. The cost
of defending the litigation and the outcome of the litigation are uncertain and
cannot be estimated. If the lawsuit were determined adversely to the Company,
the Company could be required to pay a substantial judgment, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In February 1996, a class action lawsuit, captioned RICHARD ZEID AND
SIOM MISRAH ET AL. V. JOHN KIMBERLEY, FRANK M. RICHARDSON, MARK A. ROWLINSON AND
FIREFOX COMMUNICATIONS, INC., Case No. C96 20136, was filed in the United States
District Court for the Northern District of California, San Francisco Division
(transferred to the San Jose Division), naming Firefox and certain of its
current and former officers and former directors as defendants. The original
complaint alleged that the defendants misrepresented or failed to disclose
material facts about Firefox's operations and financial results, which the
plaintiffs contended resulted in an artificial inflation in the price of
Firefox's common stock. The suit was purportedly brought on behalf of a class of
purchasers of Firefox's common stock during the period from August 3, 1995 to
January 2, 1996. The complaint alleged claims for violations of Sections 10(b)
and 20(a) of the Exchange Act and Rule 10b-5 thereunder and sought relief in the
form of unspecified compensatory damages, pre- and post-judgment interest,
attorneys' and expert witness fees and such extraordinary, equitable and/or
injunctive relief as permitted by law, equity and the federal statutory
provisions under which the suit was brought. In June 1996, the District Court
entered an order dismissing plaintiffs' complaint. In the order, the court
dismissed with prejudice certain of plaintiffs' claims that warnings and
disclosures in Firefox's Form 10-Qs were false and misleading, while granting
plaintiffs permission to amend their complaint as it concerned certain of
plaintiffs' claims that Firefox was responsible for false and misleading
analysts reports, Firefox statements and financial statements.
-7-
8
FTP SOFTWARE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
In July 1996, plaintiffs filed their amended complaint. The amended
complaint alleged that defendants misrepresented or failed to disclose material
facts about Firefox's operations and financial results which the plaintiffs
contended resulted in an artificial inflation of the price of Firefox's common
stock. The amended complaint was purportedly brought on behalf of a class of
purchasers of Firefox's common stock during the period from July 20, 1995 to
January 2, 1996. The amended complaint again alleged claims for violations of
Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder and
sought relief in the form described above. Specifically, the amended complaint
alleged that defendants knew allegedly material adverse non-public information
about Firefox's financial results and business conditions which allegedly was
not disclosed, that they improperly directed that certain sales and revenues be
recognized and failed to keep adequate reserves and that they participated in
drafting, reviewing and/or approving allegedly misleading statements, releases,
analysts reports and other public representations, including disclaimers and
warnings of and about Firefox. The amended complaint also alleged that John A.
Kimberley, then an officer and director of Firefox, and Frank Richardson, a
former officer and director of Firefox, were liable as "controlling persons" of
Firefox. In September 1996, Firefox filed a motion to dismiss the amended
complaint on the grounds that the plaintiffs had not met the pleading
requirements of the Private Securities Litigation Reform Act of 1995. The motion
was heard by the court on December 3, 1996, and on May 8, 1997, the court
dismissed the amended complaint on such grounds, without leave to amend.
Plaintiffs have the right to appeal the dismissal within 30 days of judgment
being entered on the court's docket, which is expected to occur during mid-May.
As noted in prior reports, Firefox believes the allegations in the
lawsuit to be without merit, and has spent substantial sums for legal and expert
fees and costs in defending the lawsuit. If plaintiffs appeal the dismissal of
the lawsuit, Firefox intends to continue to vigorously defend the lawsuit and
may expend significant additional sums in such defense.
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which is effective for fiscal years ending after December 15, 1997,
including interim periods, and requires the presentation of basic and diluted
earnings per share ("EPS"). Basic EPS, which replaces primary EPS, excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS
under the existing rules. This Statement requires restatement of all prior
period EPS amounts presented after the effective date.
During the three-month periods ended March 31, 1997 and 1996, adoption
of the provisions of SFAS No. 128 will have no impact on reported EPS for such
periods, as the effect of common stock equivalents would be anti-dilutive during
such periods.
-8-
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The following discussion and analysis provides information that
management of FTP Software, Inc. ("FTP" or the "Company") believes is relevant
to an assessment and understanding of the Company's consolidated results of
operations and financial condition. This discussion should be read in
conjunction with the Company's unaudited consolidated financial statements and
the related notes included above.
FORWARD-LOOKING STATEMENTS IN THIS SECTION AND ELSEWHERE IN THIS REPORT
ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT FOR A VARIETY OF
REASONS. THESE REASONS INCLUDE, BUT ARE NOT LIMITED TO, COMPETITION, COMPETITIVE
PRICING PRESSURES, TECHNOLOGICAL AND OTHER MARKET CHANGES, DEPENDENCE ON NEW
PRODUCTS AND STRATEGIC ALLIANCES, DISTRIBUTION RISKS, CHANGES IN PERSONNEL AND
OTHER RISKS THAT ARE OUTLINED BELOW AND IN EXHIBIT 99, "CAUTIONARY FACTORS
RELEVANT TO FORWARD-LOOKING STATEMENTS," TO THIS REPORT.
In September 1996, the Company announced its vision for the VIP
Network(TM), a software architecture concept designed to enable organizations to
secure, manage and transparently extend their networks beyond traditional
boundaries, intranets and the Internet. The VIP Network is intended to allow an
organization to support mobile personal computer users and remote sites, to
build virtual collaborative workgroups within and across the organization and to
facilitate electronic commerce by building federated networks between and among
the organization and its customers, suppliers and other business partners. The
Company's current and planned VIP Network products will function as important
components of an enterprise's overall VIP Network solution and generally fall
into three categories: client networking products; server networking products;
and agent applications.
As part of its announcement in September 1996 of its new strategic
vision and as a result of its determination to focus on the client-server,
agent, security and directory services products and technologies necessary to
implement that strategy, the Company announced a formal plan to spin off,
through the sale to third parties, its collaborative lines of business and to
discontinue other selected product lines. Accordingly, these operations are
treated as discontinued operations in the accompanying financial statements. As
described in the notes to such financial statements, such financial statements
have been restated to report separately in all periods presented the net assets
and operating results of the discontinued operations. Except as otherwise
indicated below, the following discussion of the Company's results of operations
relates to continuing operations.
Looking forward, the Company intends to continue to make substantial
investments in its business (including through internal and joint third party
development activities, royalty agreements and acquisitions) over the
foreseeable future, through the use of the Company's internal cash resources,
the issuance of shares of its common stock or other securities, or a combination
thereof. There can be no assurance, however, that the capital resources
necessary in order to fund such investments will be available or that, if
available, such resources will be on terms acceptable to the Company.
-9-
10
RESULTS OF CONTINUING OPERATIONS
TOTAL REVENUE
Total revenue consists of product revenue and service revenue. Product
revenue includes revenue from product sales and royalties from certain OEM
customers. Service revenue includes revenue from maintenance, consulting and
training contracts and is recognized ratably over the length of the contract
periods.
Total revenue decreased to approximately $21.4 million for the first
quarter of 1997 from approximately $26.8 million for the first quarter of 1996.
Product revenue decreased to approximately $16.8 million for the first quarter
of 1997 from approximately $22.9 million for the first quarter of 1996. Service
revenue increased to approximately $4.5 million for the first quarter of 1997
from approximately $3.9 million for the first quarter of 1996. As a percentage
of total revenue, product revenue decreased to approximately 79% for the first
quarter of 1997 from approximately 85% for the first quarter of 1996 while
service revenue increased to approximately 21% for the first quarter of 1997
from approximately 15% for the first quarter of 1996.
PRODUCT REVENUE. Product revenue decreased in the first quarter of 1997
compared to the first quarter of 1996 primarily as a result of decreases both in
average unit sales prices and in unit sales for certain of the Company's
products over such periods, which the Company believes were primarily
attributable to the increase in lower-priced or no cost products introduced by
certain of the Company's competitors and, to a lesser extent, the decrease in
customer demand for DOS-based products that occurred during 1996. See also "--
Factors Affecting Revenue" below. Product revenue for the first quarter of 1997
was lower than expected by the Company due in significant part to lower than
expected sales of the Company's gateway and server products, which the Company
believes is primarily attributable both to difficulties in the integration of
the organizations of the Company and Firefox Communications Inc. ("Firefox"),
which the Company acquired in July 1996, and to increased competition in the
server market.
SERVICE REVENUE. The dollar increase in service revenue in 1997
compared to 1996 was primarily attributable to growth over such periods in FTP's
installed product base from which such revenues are obtained.
INTERNATIONAL REVENUE. International sales consist of export sales,
primarily to customers in Europe, Asia Pacific, Canada and Latin America.
International sales of approximately $9.5 million and $12.9 million accounted
for approximately 44% and 48% of the Company's total revenue for the first
quarter of 1997 and 1996, respectively. The decrease in the first quarter of
1997 compared to the first quarter of 1996 was attributable in substantial part
to a decrease in sales to customers in the Asia Pacific region, which decrease
is primarily attributable both to the factors that resulted in the decrease in
product revenue described above under "--Product Revenue" as well as to a delay
in the localization of certain of the Company's products.
Historically, FTP has priced, invoiced and collected international
sales primarily in United States dollars. However, Firefox has historically
priced, invoiced and collected a substantial portion of its sales in foreign
currencies, primarily British pounds sterling. FTP and Firefox are in the
process of combining their distribution channels. To date, currency fluctuations
have not had a material effect on the Company's results of operations and
financial condition.
-10-
11
FACTORS AFFECTING REVENUE. As indicated above, since 1995, the Company
has experienced a decrease in average unit sales prices and a decrease in unit
sales for certain of the Company's products as well as, during 1996, longer
product sales cycles, all of which the Company believes are primarily
attributable to increased competition as well as to technological changes in the
market. Looking forward, FTP anticipates that some or all of these trends will
continue, and believes that the Company's future is substantially dependent on
the successful implementation of its new VIP Network strategy. This in turn
depends on the ability of the Company (i) to successfully market the VIP Network
concept, (ii) to enter into and implement strategic alliances that will enable
the Company both to expand its distribution channels and to develop the
additional products and technologies necessary to fully implement the VIP
Network concept (through both the incorporation of the Company's technologies in
the products of third parties and the incorporation of the technologies of third
parties, possibly including security and directory services technologies, in
certain planned VIP Network products) and (iii) to successfully develop and
timely release the additional VIP Network products necessary to fully implement
the VIP Network concept. If the Company is unsuccessful in any such regard, the
Company believes that the trends described above will continue to have a
material adverse effect on the Company's business, results of operations and
financial condition. Even if the Company is successful in implementing its new
corporate strategy, there can be no assurance that it will result in a material
improvement in the Company's business, results of operations or financial
condition. In addition, the Company is investing significantly in the training
of its sales and marketing personnel with respect to the VIP Network strategy
and the Company's VIP Network products. The amount of training necessary to
enable the Company's employees to successfully market and sell such products
could result in a delay of the revenue expected to be derived from the sale of
such products.
Due to the encryption technology contained and expected to be contained
in certain of the Company's current and planned VIP Network products, such
products are and will be subject to U.S. export controls, and there can be no
assurance that such export controls will not limit the Company's ability to
distribute such products outside the United States or that international
customers will accept the products that the Company is allowed to export under
such controls, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company believes that wide fluctuations in the number of personnel
during 1996 also may have contributed to the decline in the Company's operating
results for the first quarter of 1997. The number of the Company's full-time
employees increased from approximately 740 at January 1, 1996 to approximately
880 at April 30, 1996. The number of the Company's employees subsequently
decreased by approximately 10% as a result of the Company's May 1996 workforce
reduction, then increased by approximately 125 as a result of the Firefox
acquisition, then decreased to approximately 800 at December 31, 1996. While the
number of the Company's employees remained at approximately 800 at March 31,
1997, such number reflects the hiring of approximately 55 new employees. The
Company believes that the loss of personnel during the latter half of 1996 and
the first quarter of 1997 is attributable to increased competition for
qualified personnel in the industry, the decline in the Company's financial
results and the trading prices of its common stock during 1996 and, to a lesser
extent, the integration of Firefox. FTP's ability to maintain or increase
revenue will also depend upon its ability to hire, train and retain qualified
personnel.
The Company also believes that an expansion of the Company's sales and
marketing force during 1995 and early 1996 and the opening and expansion of
several offices outside of the United States during the same periods resulted in
inefficiencies in the Company's sales and marketing organizations during 1996.
During the fall of 1996, the Company hired a number of experienced management
-11-
12
personnel to reorganize the Company's sales and marketing organizations and
eliminate such inefficiencies. However, if the Company is unsuccessful in
eliminating such inefficiencies, it will not be able to take full advantage of
the expansion of its sales and marketing organizations, which may have a
material adverse effect on its results of operations.
Finally, the acquisitions completed by the Company during 1996,
particularly the acquisition of Firefox, required the attention and dedication
of management and other resources throughout the year, which caused a disruption
of the business activities of the Company and, in the case of the Firefox
acquisition, the business activities of Firefox, as well as a loss of momentum
in the business of Firefox, which the Company believes also adversely affected
its results of operations for the first quarter of 1997.
As indicated above, the Company and Firefox are in the process of
integrating their distribution channels. Firefox has relied significantly on its
independent distributors, systems integrators and value-added resellers for
certain elements of the marketing and distribution of its products. There can be
no assurance that any of Firefox's current distributors, systems integrators or
value-added resellers will be retained. In addition, the Company intends to
increase its focus in the United States on sales through distributors,
value-added resellers, systems integrators and OEMs rather than direct sales.
Changes in distribution channels may adversely affect sales of the Company's
products and consequently may adversely affect the Company's business, financial
condition and results of operations, at least in the near term. Any material
increase in sales through indirect channels may have an adverse effect on the
Company's operating margins due to the lower per unit revenue realized by the
Company on sales through indirect channels if the Company is unable to reduce
selling, general and administrative expenses.
During the second quarter of 1997, the Company implemented two changes
to its customer support and service programs that may affect both product and
service revenue for future periods. First, the Company modified its customer
support program to separately provide and invoice for customer support and
customer product updates. Second, the Company opened a service and support
center in Europe. While these changes are intended to increase revenue, there
can be no assurance that this will be the case or that such changes will not
have a material adverse effect on the Company's revenue if customers react
negatively to these changes.
See "-- Liquidity and Capital Resources" below for a description of
certain legal proceedings and Exhibit 99, "Cautionary Factors Relevant to
Forward-Looking Statements," for additional discussion of the factors described
above and other factors which may affect the Company's business, financial
condition and results of operations.
GROSS MARGIN
Product gross margin as a percentage of product revenue was
approximately 82% and 95% in the first quarter of 1997 and 1996, respectively.
This decrease resulted primarily from an increase in costs associated with the
amortization of technologies licensed or purchased in 1996 and the decrease in
total revenue described under "-- Total Revenue" above. Amortization expense was
approximately $1.1 million and $0.5 million in the first quarter of 1997 and
1996, respectively.
Service gross margin as a percentage of service revenue was
approximately 36% and 40% in the first quarter of 1997 and 1996, respectively.
This decrease resulted primarily from increased costs associated with the
Company's formation during the summer of 1996 of its new professional
services department.
-12-
13
The gross margins reported above are not necessarily indicative of
gross margin for future periods, which may vary significantly depending on,
among other things, changes in product mix resulting from the Company's new
corporate strategy, price competition, technological changes, cost changes and
changes in product distribution channels.
SALES AND MARKETING
Sales and marketing expenses increased to approximately $14.3 million
in the first quarter of 1997 from approximately $10.2 million in the first
quarter of 1996. Such expenses as a percentage of total revenue were
approximately 67% and 38% in the first quarter of 1997 and 1996, respectively.
The dollar increase in the first quarter of 1997 compared to the first quarter
of 1996 was primarily the result of (i) an increase in compensation expenses
resulting from a general increase in the compensation levels of sales and
marketing employees over such periods and (ii) increases in the levels of
advertising, trade show and international marketing activities over such
periods. The percentage increase over these periods was due to both the dollar
increase in such expenses described above and the dollar decrease in total
revenue described under "-- Total Revenue" above.
FTP expects to incur sales and marketing expenses during 1997 at or
above 1996 levels, primarily for the implementation of its new corporate
strategy, continued domestic and international sales and marketing activities
and the integration of FTP's and Firefox's distribution channels and
international offices.
PRODUCT DEVELOPMENT
Product development expenses increased to approximately $7.9 million in
the first quarter of 1997 from approximately $6.5 million in the first quarter
of 1996. Such expenses as a percentage of total revenue were approximately 37%
and 24% in the first quarter of 1997 and 1996, respectively. The dollar increase
in the first quarter of 1997 compared to the first quarter of 1996 was primarily
due to an increase in compensation expenses related to an increase in
development personnel during the first quarter of 1997 compared to the first
quarter of 1996 (resulting primarily from the Firefox acquisition). The
percentage increase over these periods was due to both the dollar increase in
such expenses described above and the decrease in total revenue described under
"-- Total Revenue" above.
FTP expects product development expenses to increase in 1997 from 1996
levels as the Company continues to develop the products and technologies
necessary to implement its VIP Network strategy and as a result of the increase
in the number of development personnel that resulted from the Firefox
acquisition.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to approximately $4.3
million in the first quarter of 1997 from approximately $4.1 million in the
first quarter of 1996. Such expenses as a percentage of total revenue were
approximately 20% and 15% of total revenue in the first quarter of 1997 and
1996, respectively. The percentage increase over this period was primarily due
to the decrease in total revenue described under "-- Total Revenue" above.
-13-
14
INCOME (LOSS) FROM CONTINUING OPERATIONS
In the first quarter of 1997, the Company experienced a loss from
continuing operations of approximately $11.0 million, representing approximately
52% of total revenue for the first quarter of 1997. In the first quarter of
1996, the Company had income from continuing operations of approximately $2.5
million, representing approximately 9% of total revenue for the first quarter of
1996. The decrease in the first quarter of 1997 compared to the first quarter of
1996 was primarily due to the decrease in total revenue over such periods
described under "-- Total Revenue" above, as well as to the increases in sales
and marketing and product development expenses described above.
INVESTMENT AND OTHER INCOME, NET
Investment and other income, net decreased to approximately $0.6
million in the first quarter of 1997 from approximately $1.0 million in the
first quarter of 1996. This decrease was primarily due to the write-off during
the first quarter of 1997 of approximately $0.6 million in office equipment and
leasehold improvements in connection with the subleasing by the Company of
excess space at certain of its offices. The Company invests excess cash in high
grade municipal bonds, U.S. government treasury obligations, high grade
corporate obligations and equity investments.
PROVISION FOR INCOME TAXES
The provision for income taxes was approximately $0.7 million in the
first quarter of 1997 compared to approximately $1.3 million in the first
quarter of 1996, which represents certain foreign and state tax obligations
where the Company cannot use net operating losses. The Company's effective tax
rate for the first quarter of 1997 and 1996 was 6.3% and 37.0%, respectively.
Due to the uncertainty as to when the deferred tax assets may be realized, the
Company has recorded a valuation allowance for all tax assets in excess of
amounts available to be recovered pursuant to tax loss carrybacks.
DISCONTINUED OPERATIONS
As noted above, in September 1996, the Company announced a formal plan
to spin off, through the sale to third parties, its collaborative lines of
business and to discontinue other selected product lines. Accordingly, these
operations are treated as discontinued operations in the accompanying financial
statements. As described in the notes to the accompanying financial statements,
such financial statements have been restated to report separately in all periods
presented the net assets and operating results of the discontinued operations.
Net assets of discontinued operations consist primarily of purchased software
and fixed assets less accounts payable and accrued expenses.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had an aggregate of approximately $92.0
million in cash and cash equivalents, short-term investments and long-term
investments. Of this amount, approximately $15.7 million was invested primarily
in highly liquid investments with original maturities of three months or less,
approximately $25.3 million was invested in short-term investments consisting of
U.S. government obligations and commercial paper with maturities of less than
one year and in equity investments, and approximately $51.0 million was invested
in U.S. government obligations, commercial paper and municipal obligations with
maturities of greater than one year.
-14-
15
The Company used approximately $3.6 million of cash for continuing
operations in the first quarter of 1997 and generated funds from continuing
operations of approximately $6.1 million in the first quarter of 1996. The
Company made capital expenditures of approximately $1.2 million and $3.3 million
in the first quarter of 1997 and 1996, respectively.
Accounts receivable, net, decreased to approximately $14.5 million at
March 31, 1997 from approximately $16.6 million at December 31, 1996. This
decrease is primarily attributable to the decrease in total revenue in the first
quarter of 1997 described above.
To date, inflation has not had a material impact on the Company's
financial results.
On March 14, 1996, a class action lawsuit was filed against FTP,
certain of its current and former officers alleging violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and Rule 10b-5 thereunder. On February 23, 1996, a class action lawsuit
was filed against Firefox and certain of its current and former officers and
former directors also alleging violations of Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5. For a more detailed description of these legal
proceedings, see Note 3 to the Company's unaudited consolidated financial
statements included above. Each of FTP and Firefox has reviewed the allegations
in the lawsuit against it, believes such allegations to be without merit and
intends to defend itself and its officers vigorously. In order to support an
adequate defense, each of FTP and Firefox has spent and expects to continue to
spend substantial sums for legal and expert fees and costs. The costs of
defending each lawsuit and the ultimate outcome of each lawsuit are uncertain
and cannot be estimated. If the lawsuit against FTP were ultimately determined
adversely to FTP, or if the lawsuit against Firefox were ultimately determined
adversely to Firefox, such company could be required to pay a substantial
judgment, which could have a material adverse effect on the Company's
consolidated business, financial condition and results of operations.
Looking forward, the Company believes that its available cash, cash
equivalents and short-term investments will be sufficient to fund its
operations at least through 1997. As noted above under "--Overview," the Company
intends to make substantial investments in the development of products and
technologies necessary to implement its new strategic vision. There can be no
assurance, however, that the capital resources necessary to continue to fund
such investments will be available or that, if available, such resources will be
on terms acceptable to the Company.
-15-
16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of certain legal proceedings involving FTP and a
description of certain legal proceedings involving Firefox, see "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part I of this Report.
ITEM 5. OTHER INFORMATION.
Effective March 31, 1997, Mr. David H. Zirkle, who served as President
and Chief Executive Officer of the Company from January 1993 to April 1996 and
October 1996, respectively, and Chairman and a director since January 1993,
retired as Chairman and a Class II Director. On April 16, 1997, the Company's
Board of Directors elected Mr. Glenn C. Hazard, President and Chief Executive
Officer and a director, as Chairman of the Board and Mr. Kevin J. Burns as a
Class II Director to fill such vacancies. Also on April 16, 1997, Mr. John H.
Keller resigned as a Class II Director; Mr. Keller continues to serve as the
Company's Senior Vice President of Global Engineering and Development.
Mr. John J. Warnock, Jr. resigned as Senior Vice President, Chief
Financial Officer and Treasurer effective February 28, 1997. On April 6, 1997,
the Company's Board of Directors elected James A. Tholen as Senior Vice
President and Chief Financial Officer of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. EXHIBITS
EXHIBITS:
EXHIBIT NO. TITLE
- ----------- -----
3.1 Restated Articles of Organization of the Company(1)
3.2 Certificate of Designation, Preferences and Rights of Junior
Preferred Stock of the Company(1)
3.3 Articles of Amendment to Restated Articles of Organization of the
Company(3)
3.4 Amended and Restated Bylaws of the Company(1)
4.1 Specimen common stock certificate(1)
4.2 Rights Agreement dated as of December 1, 1995 between the Company
and State Street Bank and Trust Company, as Rights Agent
(including form of Rights Certificate)(1)
4.3 Amendment to Rights Agreement dated as of November 7, 1996 between
the Company and State Street Bank and Trust Company, as Rights
Agent(3)
10.1 Indenture of Lease between the Company and North Andover Mills
Realty dated November 19, 1991(1)
10.2 Amendment No. 1 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of September 1, 1992(1)
-16-
17
EXHIBIT NO. TITLE
- ----------- -----
10.3 Amendment No. 2 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of January 6, 1993(1)
10.4 Amendment No. 3 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of June 18, 1993(1)
10.5 Amendment No. 4 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of September 30, 1993(1)
10.6 Amendment No. 5 to Indenture of Lease between the Company and
North Andover Mills Realty Limited Partnership dated August 12,
1995(1)
10.7 Employment Agreement between the Company and David H. Zirkle dated
as of July 26, 1996(3)
10.8 Employment Agreement between the Company and David H. Zirkle dated
as of March 1, 1993(1)
10.9 Amendment No. 1 to Employment Agreement between the Company and
David H. Zirkle dated as of June 14, 1993(1)
10.10 Amendment No. 2 to Employment Agreement between the Company and
David H. Zirkle dated as of August 15, 1994(1)
10.11 Amendment No. 3 to Employment Agreement between the Company and
David H. Zirkle dated as of February 28, 1995(1)
10.12 Employment Agreement between the Company and Glenn C. Hazard dated
as of July 29, 1996(3)
10.13 Employment Agreement between the Company and Susan L. Bostrom
dated as of July 23, 1996(3)
10.14 Employment Agreement between the Company and Douglas F. Flood
dated as of July 23, 1996(3)
10.15 Employment Agreement between the Company and John H. Keller dated
as of July 23, 1996(3)
10.16 Employment Agreement between the Company and John A. Kimberley
dated as of the "Effective Date" of the Firefox merger(3)
10.17 Employment Agreement between the Company and Peter R. Simkin dated
as of the "Effective Date" of the Firefox merger, together with
Amendment No. 1 thereto dated August 24, 1996(3)
10.18 Amendment No. 2 to Employment Agreement between Company and Peter
R. Simkin dated as of December 15, 1996(4)
10.19 Employment Agreement between the Company and John J. Warnock, Jr.,
dated as of July 31, 1996(3)
10.20 FTP Software, Inc. Stock Option Plan(1)
10.21 FTP Software, Inc. 1996 Executive Equity Incentive Plan(3)
10.22 FTP Software, Inc. 1997 Employee Equity Incentive Plan(4)
-17-
18
EXHIBIT NO. TITLE
- ----------- -----
10.23 Composite FTP Software, Inc. 1993 Non-Employee Directors' Stock
Option Plan incorporating Amendment No. 1 effective as of June 2,
1995 and Amendment No. 2 effective as of August 22, 1996(3)
10.24 FTP Software, Inc. 1994 Executive Compensation Plan(1)
10.25 FTP Software, Inc. 1995 Executive Compensation Plan(1)
10.26 FTP Software, Inc. 1995 V-P Sales Plan(1)
10.27 Indenture of Lease between the Company and Andover Mills Realty
Limited Partnership dated as of October 1, 1993(1)
10.28 Amendment No. 1 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of February 10,
1994(1)
10.29 Amendment No. 2 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of June 7,
1995(1)
10.30 Amended and Restated Agreement and Plan of Merger by and among the
Company, Firefox Acquisition Corp. and Firefox Communications Inc.
dated as of May 21, 1996(2)
11 Weighted Shares Used in Computation of Earnings Per Share*
27 Financial Data Schedule*
99 Cautionary Statements Relevant to Forward-Looking Statements(5)
- ---------------------
*Filed with this Report.
(1) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Registration Statement on Form S-4 (No. 333-06917)
filed with the Securities and Exchange Commission (the "Commission") on
June 26, 1996.
(2) Included as Appendix A to, and incorporated in this Report by reference
to, the Company's Joint Proxy Statement/Prospectus filed with the
Commission on July 1, 1996.
(3) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 filed with the Commission on November 14, 1996.
(4) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 filed with the Commission on March 31, 1997.
(5) Included as, and incorporated by reference to, Appendix A to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996 filed with the Commission on March 31, 1997.
-18-
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FTP SOFTWARE, INC.
Date: May 14, 1997 By:/s/ James A. Tholen
-------------------------------
James A. Tholen
Senior Vice President and Chief Financial Officer
(principal financial officer)
-19-
20
EXHIBIT INDEX
-------------
EXHIBIT NO. TITLE
3.1 Restated Articles of Organization of the Company(1)
3.2 Certificate of Designation, Preferences and Rights of Junior
Preferred Stock of the Company(1)
3.3 Articles of Amendment to Restated Articles of Organization of the
Company(3)
3.4 Amended and Restated Bylaws of the Company(1)
4.1 Specimen common stock certificate(1)
4.2 Rights Agreement dated as of December 1, 1995 between the Company
and State Street Bank and Trust Company, as Rights Agent
(including form of Rights Certificate)(1)
4.3 Amendment to Rights Agreement dated as of November 7, 1996 between
the Company and State Street Bank and Trust Company, as Rights
Agent(3)
10.1 Indenture of Lease between the Company and North Andover Mills
Realty dated November 19, 1991(1)
10.2 Amendment No. 1 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of September 1, 1992(1)
10.3 Amendment No. 2 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of January 6, 1993(1)
10.4 Amendment No. 3 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of June 18, 1993(1)
10.5 Amendment No. 4 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of September 30, 1993(1)
10.6 Amendment No. 5 to Indenture of Lease between the Company and
North Andover Mills Realty Limited Partnership dated August 12,
1995(1)
10.7 Employment Agreement between the Company and David H. Zirkle dated
as of July 26, 1996(3)
10.8 Employment Agreement between the Company and David H. Zirkle dated
as of March 1, 1993(1)
10.9 Amendment No. 1 to Employment Agreement between the Company and
David H. Zirkle dated as of June 14, 1993(1)
10.10 Amendment No. 2 to Employment Agreement between the Company and
David H. Zirkle dated as of August 15, 1994(1)
10.11 Amendment No. 3 to Employment Agreement between the Company and
David H. Zirkle dated as of February 28, 1995(1)
10.12 Employment Agreement between the Company and Glenn C. Hazard dated
as of July 29, 1996(3)
10.13 Employment Agreement between the Company and Susan L. Bostrom
dated as of July 23, 1996(3)
i
21
EXHIBIT NO. TITLE
10.14 Employment Agreement between the Company and Douglas F. Flood
dated as of July 23, 1996(3)
10.15 Employment Agreement between the Company and John H. Keller dated
as of July 23, 1996(3)
10.16 Employment Agreement between the Company and John A. Kimberley
dated as of the "Effective Date" of the Firefox merger(3)
10.17 Employment Agreement between the Company and Peter R. Simkin dated
as of the "Effective Date" of the Firefox merger, together with
Amendment No. 1 thereto dated August 24, 1996(3)
10.18 Amendment No. 2 to Employment Agreement between Company and Peter
R. Simkin dated as of December 15, 1996(4)
10.19 Employment Agreement between the Company and John J. Warnock, Jr.,
dated as of July 31, 1996(3)
10.20 FTP Software, Inc. Stock Option Plan(1)
10.21 FTP Software, Inc. 1996 Executive Equity Incentive Plan(3)
10.22 FTP Software, Inc. 1997 Employee Equity Incentive Plan(4)
10.23 Composite FTP Software, Inc. 1993 Non-Employee Directors' Stock
Option Plan incorporating Amendment No. 1 effective as of June 2,
1995 and Amendment No. 2 effective as of August 22, 1996(3)
10.24 FTP Software, Inc. 1994 Executive Compensation Plan(1)
10.25 FTP Software, Inc. 1995 Executive Compensation Plan(1)
10.26 FTP Software, Inc. 1995 V-P Sales Plan(1)
10.27 Indenture of Lease between the Company and Andover Mills Realty
Limited Partnership dated as of October 1, 1993(1)
10.28 Amendment No. 1 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of February 10,
1994(1)
10.29 Amendment No. 2 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of June 7,
1995(1)
10.30 Amended and Restated Agreement and Plan of Merger by and among the
Company, Firefox Acquisition Corp. and Firefox Communications Inc.
dated as of May 21, 1996(2)
11 Weighted Shares Used in Computation of Earnings Per Share*
27 Financial Data Schedule*
99 Cautionary Statements Relevant to Forward-Looking Statements(5)
- ---------------------
*Filed with this Report.
(1) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Registration Statement on Form S-4 (No. 333-06917)
filed with the Securities and Exchange Commission (the "Commission") on
June 26, 1996.
ii
22
(2) Included as Appendix A to, and incorporated in this Report by reference
to, the Company's Joint Proxy Statement/Prospectus filed with the
Commission on July 1, 1996.
(3) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 filed with the Commission on November 14, 1996.
(4) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 filed with the Commission on March 31, 1997.
(5) Included as, and incorporated by reference to, Appendix A to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996 filed with the Commission on March 31, 1997.
iii