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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 JUNE 30, 1996
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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 (I.R.S. Employer
incorporation or organization) 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 33,436,471
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Class Outstanding at August 8, 1996
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FTP SOFTWARE, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1996
and December 31, 1995 (unaudited) 3
Consolidated Statements of Operations for the three and six
months ended June 30, 1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1996 and 1995 (unaudited) 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 22
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FTP SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,150 $ 30,417
Short-term investments 27,836 36,211
Accounts receivable, net of allowance
for doubtful accounts of $1,800
for 1996 and $1,600 for 1995 18,036 30,787
Inventories 1,277 1,063
Prepaid expenses and other current
assets 7,077 3,623
Income taxes 14,626 9,969
---------- ------------
Total current assets 83,002 112,070
Property and equipment, net 21,018 18,703
Purchased software, net 8,267 4,359
Investments 53,849 52,751
Deferred income taxes 2,774 1,717
Other assets 5,469 368
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Total assets $174,379 $189,968
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 10,946 $ 9,904
Accrued employee compensation and
benefits 3,180 4,533
Current portion of long-term
obligations 576 811
Deferred revenue 8,750 9,091
---------- ------------
Total current liabilities 23,452 24,339
Deferred income taxes 2,283 --
Long-term obligations 821 821
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Total liabilities 26,556 25,160
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Stockholders' equity:
Preferred stock, $0.01 par value;
authorized 5,000,000 shares;
none issued and outstanding -- --
Common stock, $0.01 par value;
authorized 50,000,000 shares;
issued and outstanding
26,967,104 and 26,506,729
in 1996 and 1995,
respectively 270 265
Additional paid-in capital 93,360 92,607
Retained earnings 50,541 72,130
Equity adjustments 3,652 (194)
---------- ------------
Total stockholders' equity 147,823 164,808
Total liabilities and ---------- ------------
stockholders' equity $174,379 $189,968
========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FTP SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, June 30,
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
REVENUE:
Product revenue $ 23,922 $30,884 $ 48,896 $ 59,545
Service revenue 4,209 3,199 8,239 5,852
-------- ------- -------- --------
Total revenue 28,131 34,083 57,135 65,397
-------- ------- -------- --------
COST OF REVENUE:
Product cost 2,659 1,705 5,235 3,653
Service cost 2,997 2,463 5,647 4,826
-------- ------- -------- --------
Total cost of revenue 5,656 4,168 10,882 8,479
-------- ------- -------- --------
GROSS MARGIN 22,475 29,915 46,253 56,918
-------- ------- -------- --------
OPERATING EXPENSES:
Sales and marketing 13,081 8,420 25,575 15,503
Product development 18,619 4,934 39,392 10,494
General and administrative 5,623 3,088 10,563 5,932
-------- ------- -------- --------
Total operating expenses 37,323 16,442 75,530 31,929
-------- ------- -------- --------
Income (loss) from operations (14,848) 13,473 (29,277) 24,989
Investment income 1,156 1,253 2,185 2,296
-------- ------- -------- --------
Income (loss) taxes (13,692) 14,726 (27,092) 27,285
(Benefit) provision for
income taxes (545) 5,412 (5,503) 10,121
-------- ------- -------- --------
Net income (loss) $(13,147) $ 9,314 $(21,589) $ 17,164
======== ======= ======== ========
Net income (loss) per
share $(.49) $.33 $(.80) $.61
======== ======= ======== ========
Weighted average common
and common equivalent
shares outstanding 26,966 28,344 26,953 28,189
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FTP SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(21,589) $17,164
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 5,425 2,611
Gain on disposition of property and
equipment (6) --
Provision for doubtful accounts 200 --
Write-off of acquired in-process
technology 21,761 1,129
Amortization of discounts and
premiums on investments 20 --
Tax benefit of stock option activity -- 9,883
Changes in operating assets and
liabilities net of effects
from acquisitions:
Accounts receivable 13,726 (5,791)
Inventories (87) (310)
Prepaid expenses and other
current assets (2,122) (488)
Income taxes (6,629) (1,849)
Other assets (371) (138)
Accounts payable and accrued expenses 127 (1,008)
Accrued employee compensation and
benefits (1,924) 149
Deferred revenue (341) 2,106
-------- ----------
Net cash provided by operating
activities 8,190 23,458
-------- ----------
Cash flows from investing activities:
Capital expenditures (5,820) (2,966)
Proceeds from disposition of property
and equipment 16 --
Maturities of investments 13,716 6,453
Acquisitions, net of cash acquired (28,638) (2,365)
Increase in notes receivable (4,171) --
Other investing activities (56) --
-------- ----------
Net cash (used for) provided by
investing activities (24,953) 1,122
-------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 758 4,163
Principal payments on long-term
obligations (235) --
-------- ----------
Net cash provided by financing
activities 523 4,163
-------- ----------
Effect of exchange rate changes on cash (27) --
-------- ----------
Net (decrease) increase in cash and
cash equivalents (16,267) 28,743
Cash and cash equivalents, beginning of
period 30,417 10,896
-------- ----------
Cash and cash equivalents, end of period $ 14,150 $39,639
======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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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. ("FTP" or 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, 1995.
The results of the three- and six-month periods ended June 30, 1996 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. ACQUISITIONS
On April 1, 1996, the Company acquired all of the outstanding stock of
Campbell Services, Inc. ("Campbell Services"), the Southfield, Michigan-based
developer of OnTime, for a net cash purchase price of approximately $15.0
million through the merger of a subsidiary of FTP into Campbell Services, which
continues to operate as a wholly-owned subsidiary of FTP. This transaction was
accounted for as a purchase. Based upon a valuation of the assets acquired,
approximately $3.2 million was allocated to completed technology, which is
included in purchased software and is being amortized over its estimated useful
life of three years; approximately $9.8 million was allocated to in-process
technology and charged to product development expense in the three-month period
ended June 30, 1996; approximately $0.5 million was allocated to the net assets
of Campbell Services; and the remaining $1.5 million was recorded as goodwill,
which is included in other assets and is being amortized over its estimated
useful life of three years.
In February 1996, the Company acquired the Mariner product line of
Networking Computing Devices, Inc. for a net cash purchase price of
approximately $7.4 million. In March 1996, the Company acquired substantially
all of the assets of HyperDesk Corporation, including its GroupWorks product,
for a net cash purchase price of approximately $6.3 million. These transactions
were accounted for as purchases and accordingly the Company has allocated
approximately $1.8 million primarily to completed technology, which is included
in purchased
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software and is being amortized over their estimated useful lives
of three years. The remaining $11.9 million was allocated to in-process
technology and charged to product development expense in the three-month period
ended March 31, 1996.
Results of operations include activity from the Mariner, HyperDesk and
Campbell Services acquisitions since the dates of the acquisitions in February,
March and April of 1996, respectively. Pro forma presentation as if these
transactions occurred at January 1, 1996 is not presented as the impact would be
immaterial.
On July 22, 1996, the Company acquired Firefox Communications Inc.
("Firefox"), a supplier of server-centric departmental and LAN-based IP
solutions and services, through a merger of a wholly-owned subsidiary of the
Company into Firefox (the "Merger"). Pursuant to the Merger, all of the
outstanding shares of the common stock of Firefox were converted into a total of
approximately 6,397,324 shares of the Company's common stock and approximately
$9.1 million in cash. The transaction will be accounted for as a purchase, and
the Company expects that a significant portion of the purchase price will be
allocated to in-process technology and charged to operations in the third
quarter of 1996.
The Company allocates the purchase price of acquired technologies to
completed technology and in-process technology based upon their respective fair
values. Completed technology that had reached technological feasibility was
valued using a risk adjusted cash flow model under which future cash flows were
discounted, taking into account risks related to existing and future markets and
assessments of the life expectancy of completed technology. In-process
technology that had not reached technological feasibility and that had no
alternative future use was valued by using the same method. Expected future
cash flows associated with in-process technology were discounted considering
risks and uncertainties related to the viability of and to potential changes in
the future target markets and to the completion of the products expected to
ultimately be marketed by the Company. Amounts charged to product development
expense for in-process technology are either not fully deductible in the same
period or are non-deductible for tax purposes.
3. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year's presentations.
Certain components of the statement of cash flows for the six-month period
ended June 30, 1995 have been reclassified to appropriately reflect the
acquisition of substantially all of the assets of Keyword Office Technologies
Ltd. in March 1995. These reclassifications had no impact on the net increase
in cash and cash equivalents during the period.
4. LEGAL PROCEEDINGS
On March 14, 1996, a class action lawsuit was filed in the United States
District Court for the District of Massachusetts, naming FTP, certain of its
officers and two 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 necessary to make such statements not false and
misleading, which the plaintiffs contend caused an artificial inflation in the
price of FTP's
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common stock. Specifically, the complaint alleges 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 FTP, the effects of the Company's July 1995 corporate
restructuring and changing competitive factors in FTP's industry. The lawsuit,
which is purportedly brought on behalf of a class of purchasers of FTP's common
stock during the period from July 14, 1995 to January 3, 1996, alleges
violations of Section 10(b) and Section 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. Plaintiffs have indicated
that they intend to file an amended complaint sometime in the near future.
Until then, defendants are not required to respond to the complaint. FTP 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, FTP may be required to expend 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 FTP, FTP 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.
On February 23, 1996, a class action lawsuit, captioned Richard Zeid and
----------------
Siom Misrahi 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 of 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 other extraordinary, equitable and/or
injunctive relief as permitted by law, equity and the federal statutory
provisions under which the suit was brought. On June 5, 1996, the District
Court entered an order dismissing plaintiffs' complaint. Certain of plaintiffs'
claims that alleged that Firefox was responsible for false and misleading
analysts reports, Firefox statements and financial statements were dismissed
with leave to amend. In addition, certain of plaintiffs' claims that warnings
and disclosures in Firefox's Form 10-Qs were false and misleading were dismissed
with prejudice.
On July 19, 1996, plaintiffs filed an amended complaint. The amended
complaint alleges that defendants misrepresented or failed to disclose material
facts about Firefox's operations and financial results which the plaintiffs
contend resulted in an artificial inflation of the price of Firefox's common
stock. The amended complaint is 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 also alleges claims for violations of
Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder and seeks
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 is permitted by law, equity and the federal
statutory provisions under which the suit was brought. Specifically, the
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amended complaint alleges 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
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 alleges that John A. Kimberley, an officer and director of Firefox, and
Frank Richardson, a former officer and director of Firefox, are liable as
"controlling persons" of Firefox.
Firefox has reviewed the allegations in the lawsuit, believes them to be
without merit and intends to defend itself and its officers and directors
vigorously. In order to support an adequate defense, Firefox may be required to
expend 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 Firefox,
Firefox 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW; RECENT DEVELOPMENTS
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 FTP's consolidated results of operations and
financial condition for the three- and six-month periods ended June 30, 1996.
This discussion should be read in conjunction with FTP's unaudited consolidated
financial statements and the notes related thereto included elsewhere herein.
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 herein for a variety of reasons.
These reasons include, but are not limited to, competition, technological and
other market changes, increased demands on management as a result of recent
acquisitions, changes in distributor terms or performance, and other risks
outlined in Exhibit 99, "Cautionary Factors Relevant to Forward-Looking
Statements," to this Report ("Exhibit 99"), incorporated herein by reference.
FTP designs, develops, markets and supports software products that enable
personal computer users to find, access and use heterogeneous hardware,
information and applications resources across local area, enterprise-wide and
global networks. The Company's principal networking products, OnNet(R) and
PC/TCP(R), which are based upon the industry standard Transmission Control
Protocol/Internet Protocol ("TCP/IP") data communications protocol suite, enable
remote access, file and resource sharing and other applications across a variety
of operating systems, computing platforms and network environments. To date,
substantially all of FTP's revenue has been attributable to sales of its OnNet
and PC/TCP product lines. Other FTP products allow users to search, organize and
share information, view and convert documents in a large number of different
formats, including legacy formats, and collaborate with other users. The
Company's products emphasize performance, reliability, functionality, robustness
and compatibility, which the Company believes are the key purchasing criteria,
along with technical support and special engineering capability, for
organizations establishing and expanding computer networks.
FTP made substantial investments in new technologies during the six-month
period ended June 30, 1996. In February 1996, FTP acquired the Mariner product
line of Network Computing Devices, Inc. for a net cash purchase price of
approximately $7.4 million. In March 1996, FTP acquired substantially all of the
assets of HyperDesk Corporation, including its GroupWorks product, for a net
cash purchase price of approximately $6.3 million. In April 1996, FTP acquired
all of the outstanding stock of Campbell Services, Inc. ("Campbell Services"),
the Southfield, Michigan-based developer of OnTime, for a net cash purchase
price of approximately $15.0 million through the merger of a subsidiary of FTP
into Campbell Services, which continues to operate as a wholly-owned subsidiary
of FTP.
In 1996, it became evident that the increasingly rapid evolution of the
Internet market was resulting in confusion among even sophisticated users of
TCP/IP and Internet products as
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to the capabilities and the interplay of the various products available in the
market, including the potential for the combination of such products to form
private intranets. As a result, and in connection with its determination to
effect certain cost-cutting measures, FTP decided to reorganize its operations
to better position itself to address customer needs and to take advantage of the
market potential for intranet product suites incorporating both TCP/IP and
Internet products. Such cost-cutting measures included a reduction of
approximately 10% in the number of FTP's full-time employees, effected May 1,
1996. See "-- Liquidity and Capital Resources" below.
On July 22, 1996, FTP acquired Firefox Communications Inc. ("Firefox")
through the merger of a subsidiary of FTP into Firefox, which continues to
operate as a wholly-owned subsidiary of FTP. Pursuant to the merger, all of the
outstanding common stock of Firefox was converted into a total of approximately
6,397,324 shares of FTP's common stock and approximately $9.1 million in cash.
Firefox develops, markets and supports server-based networking connectivity and
communications software. Firefox's products provide connectivity for local area
networks ("LANs") running Novell NetWare and allow work groups to access local
and remote computing resources, including the Internet, across different
networking protocols and client operating systems. Firefox's products are
centrally configured on the server and integrated with the network operating
system ("NOS"), thereby taking advantage of the management and security features
already implemented in the NOS and enhancing control, administration and
security of the LAN.
Looking forward, FTP 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 FTP'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 FTP.
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 from approximately $34.1 million in the second
quarter of 1995 to approximately $28.1 million in the second quarter of 1996.
Product revenue decreased from approximately $30.9 million in the second quarter
of 1995 to approximately $23.9 million in the second quarter of 1996. As a
percentage of total revenue, product revenue decreased from approximately 91% in
the second quarter of 1995 to approximately 85% in the same period in 1996.
Service revenue increased from approximately $3.2 million in the second quarter
of 1995 to approximately $4.2 million in the second quarter of 1996. As a
percentage of total revenue, service revenue increased from approximately 9% in
the second quarter of 1995 to approximately 15% in the same quarter of 1996.
The Company's total revenue decreased from approximately $65.4 million
in the first six months of 1995 to approximately $57.1 million in the first six
months of 1996. Product revenue
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decreased from approximately $59.5 million (approximately 91% of total revenue)
in the first six months of 1995 to approximately $48.9 million (approximately
86% of total revenue) in the first six months of 1996. Service revenue increased
from approximately $5.9 million (approximately 9% of total revenue) in the first
six months of 1995 to approximately $8.2 million (approximately 14% of total
revenue) in the first six months of 1996.
While unit sales increased from the three- and six-month periods ended
June 30, 1995 to the three- and six-month periods ended June 30, 1996, product
revenue decreased over such periods primarily as a result of an increase in the
number of competitors and competing products offered in the TCP/IP market, and
both a lengthening of the product sales cycles and lower average unit sales
prices for FTP's products, which FTP believes was attributable not only to such
increased competition but also to an increase in lower-priced or no-cost
products introduced by certain of FTP's competitors in the third and fourth
quarters of 1995 and a decrease in customer demand for DOS-based products. In
addition, the Company believes that federal government budgetary uncertainties
that existed during 1995 and the first three months of 1996 resulted in a
decrease in sales to federal government customers during the first quarter of
1996, which also contributed to the product revenue decrease in the current year
six-month period. The increases in service revenue from the three- and six-
month periods ended June 30, 1995 to the three- and six-month periods ended June
30, 1996 were primarily attributable to increased growth in FTP's installed
product base from which such revenues are obtained. FTP anticipates that
service revenue will continue to increase as a percentage of total revenue as
FTP's installed product base continues to grow and as FTP markets its services
more effectively to customers.
International sales consist of export sales, primarily to customers in
Europe, Asia Pacific and Canada. International sales of approximately $14.6
million and $9.9 million accounted for approximately 43% and 35% of total
revenue for the second quarter of 1995 and 1996, respectively. International
sales of approximately $29.6 million and $23.8 million accounted for
approximately 45% and 42% of the Company's total revenue for the six months
ended June 30, 1995 and 1996, respectively. The decreases from the second
quarter of 1995 to the second quarter of 1996 and from the first six months of
1995 to the first six months of 1996 were primarily due to increased
competition, longer sales cycles and lower average unit sales prices as
described in the preceding paragraph. Also contributing to the percentage
decreases over such periods was the effect of an increase in the Company's U.S.
sales base resulting from the acquisition of Campbell Services. Unfavorable
monetary conditions that existed in certain Latin American countries during the
first quarter of 1996 resulted in a slight decrease in sales and/or a slight
decrease in average unit sales prices to customers in those countries during
that quarter, which also contributed to the product revenue decrease in the
current year six-month period.
Historically, FTP has priced, invoiced and collected international sales
primarily in United States dollars. Accordingly, currency fluctuations have not
had a material effect on FTP's income from operations. However, Firefox prices,
invoices and collects a substantial portion of its sales in foreign currencies,
primarily British pounds sterling. In addition, FTP anticipates that as the size
of its international customers and contracts increases, it will also transact a
greater number of sales in local currencies. Accordingly, the Company
anticipates that currency fluctuations will have an increased effect on its
results of operations and financial condition.
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As indicated above, FTP is facing increasing competition in the TCP/IP
market which has resulted in a lengthening of the sales cycles and a decrease in
average unit sales prices for FTP's products. In response to increased pricing
pressures from competitors, FTP may further reduce the average unit sales prices
for its products. If this occurs and if FTP is unable to increase unit sales to
offset any such reduction or effect offsetting cost reductions, there may be a
material adverse effect on FTP's results of operations and financial condition.
The slow-down in FTP's sales is also due, in part, to technological changes in
the market such as the decline in the use of DOS-based computing systems, to the
embedding of competing products into new PCs, and to slower sales rates similar
in effect to those experienced and announced by hardware and other software
manufacturers. The continuation of these trends may continue to have a material
adverse effect on FTP's revenue.
Additionally, management of FTP believes that the rapid expansion of its
sales and marketing force since January 1, 1995, from 220 persons at December
31, 1994 to 329 persons at December 31, 1995 to 375 persons at May 2, 1996, and
the opening and expansion of several new offices outside of the United States
during 1995 and early 1996 has resulted in certain inefficiencies in its sales
and marketing organizations. If such inefficiencies cannot be eliminated, FTP
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. Also, the Company's recent acquisitions, particularly its
acquisition of Firefox, have required the attention and dedication of management
and other resources, which has caused a disruption of the business activities of
the Company and, in the case of the Firefox acquisition, Firefox, as well as a
loss of momentum in the business of Firefox. Finally, the Company has
experienced a loss of additional personnel since the May 1996 reorganization
described above under "-- Overview," which the Company believes is attributable
to increased competition for qualified personnel in the industry and, to a
lesser extent, the integration of Firefox and other recent acquisitions. FTP's
ability to maintain or increase revenue will be dependent upon its ability to
effectively respond to these factors. See Exhibit 99 for additional discussion
of these and other factors which may affect FTP's business, revenue and
financial condition.
GROSS MARGIN
Product gross margin as a percentage of product revenue was approximately
94% for both the three- and six-month periods ended June 30, 1995 and
approximately 89% for both the three- and six-month periods ended June 30, 1996.
The product gross margin percentage decreases from 1995 to 1996 reflected both
the decreases in product revenue described above under "-- Total Revenue" and
increases in costs, primarily those associated with the amortization of
technologies licensed or purchased in 1995 and 1996. Amortization expenses were
approximately $0.8 million and $2.2 million for the three- and six-month periods
ended June 30, 1996, respectively, compared to approximately $0.7 million and
$1.6 million, respectively, for the same periods in 1995.
Service gross margin as a percentage of service revenue was approximately
23% and 29% for the second quarter of 1995 and 1996, respectively, and
approximately 18% and 31% for the six months ended June 30, 1995 and 1996,
respectively. These increases are primarily attributable to a higher rate of
increase in FTP's installed product base from which such revenues are obtained
over the cost of providing such services.
13
<PAGE>
The gross margins reported above are not necessarily indicative of gross
margin for future periods, which may vary significantly depending on, among
other things, product mix, price competition, technological change, cost changes
and changes in product distribution channels. As noted above under "-- Total
Revenue," FTP believes that average unit sales prices for its products may
continue to decrease as the markets for those products continue to become more
competitive, reducing gross margin on those products.
SALES AND MARKETING
Sales and marketing expenses increased from approximately $8.4 million
in the second quarter of 1995 to approximately $13.1 million in the second
quarter of 1996. Such expenses as a percentage of total revenue were
approximately 25% in the second quarter of 1995 and approximately 47% in the
second quarter of 1996. Sales and marketing expenses increased from
approximately $15.5 million in the first six months of 1995 to approximately
$25.6 million in the first six months of 1996. Such expenses as a percentage of
total revenue were approximately 24% and 45% for the six-month periods ended
June 30, 1995 and 1996, respectively. The $4.7 million increase in the second
quarter of 1996 and the $10.1 million increase in the first six months of 1996
were primarily the result of efforts to increase sales through the opening and
expansion of several international and domestic offices beginning in the first
quarter of 1995 (including the opening and expansion of offices in Europe and
the opening of offices in Japan and Singapore), increasing the number of sales
and marketing employees and increasing the levels of advertising, trade show and
international marketing activities. The percentage increases over these periods
were due to both the dollar increases in such expenses described above and the
dollar decreases in revenue over such periods described under "-- Total Revenue"
above.
FTP expects to continue to incur significant expenses during 1996 relating
to continued domestic and international sales and marketing activities and the
expansion of certain of FTP's international offices. In addition, FTP expects to
incur both proportionately and incrementally higher sales and marketing expenses
in the remainder of 1996 related to the integration of Firefox. As a result of
these factors, sales and marketing expenses are expected to continue to increase
both in dollars and as a percentage of revenue in 1996.
PRODUCT DEVELOPMENT
Product development expenses increased from approximately $4.9 million in
the second quarter of 1995 to approximately $18.6 million in the second quarter
of 1996, representing approximately 14% and 66% of total revenue for each
period, respectively. Product development expenses increased from approximately
$10.5 million in the first six months of 1995 to approximately $39.4 million in
the first six months of 1996, representing approximately 16% and 69% of total
revenue for each period, respectively.
The $13.7 million increase in product development expenses in the second
quarter of 1996 is primarily attributable to a charge of approximately $9.8
million (approximately 35% of total revenue) for acquired in-process technology
related to the acquisition of Campbell Services and to additional compensation
expenses related to an increase in personnel compared to the prior year period.
The $28.9 million increase in product development expenses in the first six
months of 1996 is primarily attributable to charges totaling approximately $21.8
million (approximately 38% of total revenue) for acquired in-process
14
<PAGE>
technologies related to the Campbell Services, HyperDesk and Mariner
acquisitions described under "-- Overview" and to additional compensation
expenses related to the aforementioned increase in personnel.
Excluding the $9.8 million charge for acquired in-process technology in the
second quarter of 1996, product development expenses as a percentage of total
revenue increased from approximately 14% for the second quarter of 1995 to
approximately 31% for the second quarter of 1996. Excluding a $1.1 million
charge for acquired in-process technology in the first quarter of 1995 and the
$21.8 million charges for acquired in-process technologies in the current year
six-month period, product development expenses as a percentage of total revenue
increased from approximately 14% for the six months ended June 30, 1995 to
approximately 31% for the six months ended June 30, 1996. Such percentage
increases are primarily attributable to the decreases in total revenue and the
increases in personnel-related expenses in the current year periods compared to
the prior year periods.
FTP expects product development expenses to continue to increase in the
remainder of 1996 both as a result of the growing demand of customers for
increased functionality in networking software products and as a result of the
Campbell Services and Firefox acquisitions.
The Company allocates the purchase price of acquired technologies to
completed technology and in-process technology based upon their respective fair
values. Completed technology that has reached technological feasibility is
valued using a risk adjusted cash flow model under which future cash flows are
discounted, taking into account risks related to existing and future markets and
assessments of the life expectancy of the completed technology. In-process
technology that has not reached technological feasibility and that has no
alternative future use is valued using the same method. Expected future cash
flows associated with in-process technology are discounted considering risks and
uncertainties related to the viability of and to the potential changes in future
target markets and to the completion of the products expected to ultimately be
marketed by the Company. Amounts charged to product development expense for in-
process technology are either not fully deductible in the same period or are
non-deductible for tax purposes.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from approximately $3.1
million in the second quarter of 1995 to approximately $5.6 million in the
second quarter of 1996, representing approximately 9% and 20% of total revenue
for such periods, respectively. General and administrative expenses increased
from approximately $5.9 million in the first six months of 1995 to approximately
$10.6 million in the first six months of 1996, representing approximately 9% and
18% of total revenue, respectively. Approximately $1.0 million of both the $2.5
million increase in the second quarter of 1996 and the $4.7 million increase in
the first six months of 1996 was related to expenses incurred in connection with
the May 1996 reorganization of the Company described above under "-- Overview";
the remainder of the increases in the current year three- and six-month periods
was primarily due to expenses relating to an increase in personnel compared to
the same periods of 1995. The percentage increases over such periods were also
due to such factors as well as to the decreases in revenue over such periods
described above under "-- Total Revenue."
15
<PAGE>
INCOME (LOSS) FROM OPERATIONS
The Company had income from operations of approximately $13.5 million in
the second quarter of 1995 compared to a loss from operations of approximately
$14.8 million in the second quarter of 1996, representing approximately 40% and
(53)% of total revenue for each period, respectively. The Company had income
from operations of approximately $25.0 million in the six months ended June 30,
1995 compared to a loss from operations of approximately $29.3 million in the
six months ended June 30, 1996, representing approximately 38% and (51)% of
total revenue for each period respectively. These decreases were primarily due
to the decreases in total revenue described above under "--Total Revenue," the
charges for the acquisitions of in-process technologies described above under
"--Product Development," the expenses related to the Company's May 1996
reorganization described above under "-- General and Administrative," and the
other increases in expenses described above.
Excluding the $9.8 million charge for acquired in-process technology in the
second quarter of 1996 and the $1.0 million of expenses related to the Company's
May 1996 reorganization referred to above, loss from operations was
approximately $4.0 million (approximately (14)% of total revenue) for the second
quarter of 1996. For the six months ended June 30, 1995, excluding a $1.1
million charge for acquired in-process technology in the first quarter of 1995,
income from operations was approximately $26.1 million (approximately 40% of
total revenue); for the six months ended June 30, 1996, excluding the $21.8
million of charges for acquired in-process technology and the expenses of the
May 1996 reorganization, loss from operations was approximately $6.5 million
(approximately (11)% of total revenue).
As described in its Joint Proxy Statement/Prospectus dated June 26, 1996
relating to the Firefox acquisition, the Company expects that a significant
portion of the purchase price for the Firefox acquisition will be allocated to
in-process technology and charged to operations in the third quarter of 1996,
which is expected to cause the Company to incur a loss from operations both for
that quarter and for 1996.
INVESTMENT INCOME
Investment income decreased from approximately $1.3 million in the second
quarter of 1995 to approximately $1.2 million in the second quarter of 1996 and
from approximately $2.3 million in the first six months of 1995 to approximately
$2.2 million in the first six months of 1996. The decreases from 1995 to 1996
were primarily attributable to a reduction in the Company's investment portfolio
resulting from the investment of cash in the acquisition of new technologies in
1996 as described above under "-- Overview." The Company places net cash
provided by operating activities into high grade tax-free 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 $5.4 million in the
second quarter of 1995 compared to a benefit of approximately $0.5 million in
the second quarter of 1996. The effective tax rate decreased from 37% in the
second quarter of 1995 to 4% in the second quarter of 1996. The provision for
income taxes was approximately $10.1 million in the first six months of 1995
compared to a benefit of approximately $5.5 million in the first six months of
1996. The effective tax rate decreased from 37% in the first six months of 1995
to 20% in the
16
<PAGE>
first six months of 1996. The Company has decreased its effective tax rate in
the current year periods to adjust for the non-deductibility for federal income
tax purposes of certain of the expenses incurred or to be incurred by the
Company in connection with the Campbell Services acquisition and the decline in
operating results in 1996. Also contributing to the difference between the
statutory rate and the effective rate for each period were the tax benefits from
the Company's foreign sales corporation, exempt interest income and research and
experimentation credits.
Because certain of the additional expenses incurred or to be incurred by
FTP subsequent to the second quarter of 1996 in connection with the Firefox
acquisition will not be deductible for federal income tax purposes, FTP
anticipates that the effective tax rate for subsequent quarters of 1996 will
continue to be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, FTP had an aggregate of approximately $95.8 million in
cash and cash equivalents, short-term investments and long-term investments. Of
this amount, approximately $14.2 million was invested primarily in highly liquid
investments with original maturities of three months or less, approximately
$27.8 million was invested in short-term investments consisting of U.S.
government obligations and commercial paper with maturities of less than one
year and approximately $53.8 million was invested U.S. government obligations,
commercial paper and municipal obligations with maturities of greater than one
year and in equity investments. For the six months ended June 30, 1995 and 1996,
FTP generated funds from operations of approximately $23.5 million and $8.2
million, respectively.
Accounts receivable, net, totaled approximately $30.8 million at December
31, 1995 and approximately $18.0 million at June 30, 1996. The decrease in
accounts receivable from December 31, 1995 to June 30, 1996 is primarily
attributable to the decrease in revenue in the first six months of 1996 and to
the payment in early 1996 of a substantial portion of the accounts receivable
outstanding at December 31, 1995.
In March 1995, FTP acquired substantially all of the assets of Keyword
Office Technologies Ltd. for a net cash purchase price of approximately $2.4
million. As noted above under "-- Overview," in February 1996, FTP acquired the
Mariner product line of Network Computing Devices, Inc. for a net cash purchase
price of approximately $7.4 million; in March 1996, FTP acquired substantially
all of the assets of HyperDesk Corporation for a net cash purchase price of
approximately $6.3 million; and in April 1996, FTP acquired all of the
outstanding stock of Campbell Services by merger for a net cash purchase price
of approximately $15.0 million. In July 1996, FTP acquired Firefox by merger
pursuant to which all of the outstanding common stock of Firefox was converted
into a total of approximately 6,397,324 shares of FTP's common stock and
approximately $9.1 million in cash.
FTP made capital expenditures of approximately $3.0 million and $5.8
million in the six months ended June 30, 1995 and 1996, respectively. The
increase in capital expenditures in the six months ended June 30, 1996 is
primarily the result of the purchase of equipment, primarily relating to
information systems.
In connection with the May 1996 reorganization described above under
"-- Overview," FTP recorded a restructuring charge during the second quarter of
1996 of approximately $1.0
17
<PAGE>
million, which includes severance payments and other related expenses incurred
in connection with such reorganization.
To date, inflation has not had a material impact on the Company's financial
results.
Looking forward, FTP believes that its available cash, cash equivalents and
short-term investments and expected cash flow from operations will be sufficient
to fund FTP's operations at least through 1996. As noted above under
"-- Overview," FTP intends to fund its future acquisitions through its 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 to continue to fund its operations or such acquisitions will
be available or that, if available, such resources will be on terms acceptable
to FTP.
On March 14, 1996, a class action lawsuit was filed in the United States
District Court for the District of Massachusetts, naming FTP, certain of its
officers and two 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 necessary to make such statements not false
and misleading, which the plaintiffs contend caused an artificial inflation in
the price of FTP's common stock. Specifically, the complaint alleges 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 FTP, the effects of the Company's July 1995 corporate
restructuring and changing competitive factors in FTP's industry. The lawsuit,
which is purportedly brought on behalf of a class of purchasers of FTP's common
stock during the period from July 14, 1995 to January 3, 1996, alleges
violations of Section 10(b) and Section 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. Plaintiffs have indicated
that they intend to file an amended complaint sometime in the near future.
Until then, defendants are not required to respond to the complaint. FTP 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, FTP may be required to expend 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 FTP, FTP 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.
On February 23, 1996, a class action lawsuit, captioned Richard Zeid
------------
and Siom Misrahi 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 of 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
18
<PAGE>
unspecified compensatory damages, pre- and post-judgment interest, attorneys and
expert witness fees and other extraordinary, equitable and/or injunctive relief
as permitted by law, equity and the federal statutory provisions under which the
suit was brought. On June 5, 1996, the District Court entered an order
dismissing plaintiffs' complaint. Certain of plaintiffs' claims that alleged
that Firefox was responsible for false and misleading analysts reports, Firefox
statements and financial statements were dismissed with leave to amend. In
addition, certain of plaintiffs' claims that warnings and disclosures in
Firefox's Form 10-Qs were false and misleading were dismissed with prejudice.
On July 19, 1996, plaintiffs filed an amended complaint. The amended
complaint alleges that defendants misrepresented or failed to disclose material
facts about Firefox's operations and financial results which the plaintiffs
contend resulted in an artificial inflation of the price of Firefox's common
stock. The amended complaint is 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 also alleges claims for violations of
Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder and seeks
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 is permitted by law, equity and the federal
statutory provisions under which the suit was brought. Specifically, the
amended complaint alleges 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
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 alleges that John A. Kimberley, an officer and director of Firefox, and
Frank Richardson, a former officer and director of Firefox, are liable as
"controlling persons" of Firefox.
Firefox has reviewed the allegations in the lawsuit, believes them to be
without merit and intends to defend itself and its officers and directors
vigorously. In order to support an adequate defense, Firefox may be required to
expend 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 Firefox,
Firefox 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.
19
<PAGE>
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 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. 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 Amended and Restated Bylaws of the Company(1)
4.1 Specimen common stock certificate(1)
4.2 Rights Agreement dated as of December 2, 1995 between the
Company and State Street Bank and Trust Company, as Rights
Agent (including form of Rights Certificate)(1)
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 March 1, 1993(1)
10.8 Amendment No. 1 to Employment Agreement between the Company and
David H. Zirkle dated as of June 14, 1993(1)
10.9 Amendment No. 2 to Employment Agreement between the Company and
David H. Zirkle dated as of August 15, 1994(1)
10.10 Amendment No. 3 to Employment Agreement between the Company and
David H. Zirkle dated as of February 28, 1995(1)
20
<PAGE>
EXHIBIT NO. TITLE
- ----------- -----
10.11 FTP Software, Inc. Stock Option Plan(1)
10.12 FTP Software, Inc. 1993 Non-Employee Directors' Stock
Option Plan(1)
10.13 Amendment No. 1 to FTP Software, Inc. 1993 Non-Employee
Directors' Stock Option Plan effective as of June 2, 1995(1)
10.14 FTP Software, Inc. 1993 Executive Bonus Plan(1)
10.15 FTP Software, Inc. 1994 Executive Compensation Plan(1)
10.16 FTP Software, Inc. 1995 Executive Compensation Plan(1)
10.17 Indenture of Lease between the Company and Andover Mills Realty
Limited Partnership dated as of October 1, 1993(1)
10.18 Amendment No. 1 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of
February 10, 1994(1)
10.19 Amendment No. 2 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of
June 7, 1995(1)
10.20 FTP Software, Inc. 1995 V-P Sales Plan(1)
10.21 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*
_____________________
*Filed herewith
(1) Included with, and incorporated herein 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 herein by reference to, the
Company's Joint Proxy Statement/Prospectus for its Special Meeting of
Stockholders filed with the Commission on July 1, 1996.
21
<PAGE>
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.
/s/ John J. Warnock, Jr.
Date: August 14, 1996 By:--------------------------------------
John J. Warnock, Jr.
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
22
<PAGE>
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 Amended and Restated Bylaws of the Company(1)
4.1 Specimen common stock certificate(1)
4.2 Rights Agreement dated as of December 2, 1995 between the
Company and State Street Bank and Trust Company, as Rights
Agent (including form of Rights Certificate)(1)
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 March 1, 1993(1)
10.8 Amendment No. 1 to Employment Agreement between the Company
and David H. Zirkle dated as of June 14, 1993(1)
10.9 Amendment No. 2 to Employment Agreement between the Company
and David H. Zirkle dated as of August 15, 1994(1)
10.10 Amendment No. 3 to Employment Agreement between the Company
and David H. Zirkle dated as of February 28, 1995(1)
10.11 FTP Software, Inc. Stock Option Plan(1)
10.12 FTP Software, Inc. 1993 Non-Employee Directors' Stock Option
Plan(1)
10.13 Amendment No. 1 to FTP Software, Inc. 1993 Non-Employee
Directors' Stock Option Plan effective as of June 2, 1995(1)
i
<PAGE>
EXHIBIT NO. TITLE
----------- -----
10.14 FTP Software, Inc. 1993 Executive Bonus Plan(1)
10.15 FTP Software, Inc. 1994 Executive Compensation Plan(1)
10.16 FTP Software, Inc. 1995 Executive Compensation Plan(1)
10.17 Indenture of Lease between the Company and Andover Mills
Realty Limited Partnership dated as of October 1, 1993(1)
10.18 Amendment No. 1 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of
February 10, 1994(1)
10.19 Amendment No. 2 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of June 7,
1995(1)
10.20 FTP Software, Inc. 1995 V-P Sales Plan(1)
10.21 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*
_____________________
*Filed herewith
(1) Included with, and incorporated herein 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 herein by reference to, the
Company's Joint Proxy Statement/Prospectus for its Special Meeting of
Stockholders filed with the Commission on July 1, 1996.
ii
<PAGE>
EXHIBIT 11
FTP SOFTWARE, INC.
WEIGHTED SHARES USED IN COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
------------ ----------
<S> <C> <C>
FOR THE PERIOD ENDED JUNE 30, 1996:
Common stock outstanding, beginning of
the period 26,966,222 26,506,729
Weighted average common stock issued
during the period ended June 30, 1996 190 445,922
------------ ------------
Weighted average shares of common
stock outstanding 26,966,412 26,952,651
============ ============
FOR THE PERIOD ENDED JUNE 30, 1995:
Common stock outstanding, beginning of
the period 24,382,216 23,344,122
Weighted average common stock issued
during the period ended
June 30, 1995 397,179 718,181
Weighted average common stock
equivalents 6,547,266 6,485,453
Weighted average treasury shares
acquired using the treasury
stock method (2,983,111) (2,358,876)
------------ ------------
Weighted average shares of common
stock outstanding 28,343,550 28,188,880
============ ============
</TABLE>
For the three- and six-month periods ended June 30, 1996 and 1995 there was no
material difference between the computation of fully diluted and primary
weighted shares of common stock equivalents outstanding.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 JUN-30-1995
<CASH> 14,150 30,417
<SECURITIES> 27,836 36,211
<RECEIVABLES> 19,836 32,387
<ALLOWANCES> 1,800 1,600
<INVENTORY> 1,277 1,063
<CURRENT-ASSETS> 83,002 112,070
<PP&E> 34,358 27,987
<DEPRECIATION> 13,340 9,284
<TOTAL-ASSETS> 174,379 189,968
<CURRENT-LIABILITIES> 23,452 24,339
<BONDS> 0 0
0 0
0 0
<COMMON> 270 265
<OTHER-SE> 147,553 164,543
<TOTAL-LIABILITY-AND-EQUITY> 174,379 189,968
<SALES> 48,896 59,545
<TOTAL-REVENUES> 57,135 65,397
<CGS> 5,235 3,653
<TOTAL-COSTS> 10,882 8,479
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
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<PAGE>
EXHIBIT 99
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING STATEMENTS
From time to time management of FTP Software, Inc. ("FTP" or the "Company")
has made, and may in the future make, forward-looking statements, based on
management's then-current expectations, including statements made in Securities
and Exchange Commission filings, in press releases and oral statements. These
forward-looking statements 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 set forth in the forward-looking statements for a variety
of reasons. These reasons include, but are not limited to, competition,
technological and other market changes, increased demands on management as a
result of recent acquisitions, and other factors outlined below.
As used herein, the term the "Company" is generally deemed to refer to FTP
and its subsidiaries, including Firefox Communications Inc. ("Firefox"), which
the Company acquired on July 22, 1996 through a merger of a subsidiary of the
Company with Firefox.
Competition. The networking software industry is highly competitive, and
is characterized by evolving industry standards, frequent introduction of new
products and product enhancements, and continuous improvement in product
reliability, compatibility, memory use and performance. The Company competes
with major computer and communications systems vendors, including International
Business Machines Corporation ("IBM"), Microsoft Corporation ("Microsoft"),
Novell, Inc. ("Novell") and Sun Microsystems, Inc. ("Sun"), as well as smaller
networking software companies, such as NetManage, Inc. ("NetManage"). Some of
the Company's competitors have substantially greater financial, technical,
sales, marketing and other resources than the Company, as well as greater name
recognition and a larger customer base. In addition, the Company's core product
lines are based upon the Transmission Control Protocol/Internet Protocol
("TCP/IP"), an open non-proprietary data communications protocol suite. Several
of the Company's competitors have developed proprietary networking applications
and certain of such vendors, including Microsoft, provide a TCP/IP protocol
suite in their products. The introduction of such protocol suites is currently
lengthening the sales cycles and has resulted in a decrease in average unit
sales prices for certain of the Company's products and may continue to have this
effect, which has materially adversely affected the Company's results of
operations in the first half of 1996 and may continue to have this effect in the
remainder of 1996. The Company anticipates that other companies may also enter
the market with their own implementations of TCP/IP. The Company is also facing
competition from makers of terminal emulation software, such as Attachmate
Corporation ("Attachmate") and Wall Data, Inc. ("Wall Data"). In addition,
existing competitors could devote additional resources to the development of
TCP/IP or expand their existing TCP/IP product lines. Increased competition
from existing or new products could adversely affect demand for the Company's
products and has led, and could continue to lead, to increased price
competition, longer sales cycles and other concessions, adversely affecting the
Company's gross margins and operating results.
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The market for Internet-based software and services is new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition in this market to persist, intensify and increase in
the future. Some of the Company's current and potential competitors have longer
operating histories, greater name recognition, larger installed customer bases
and significantly greater financial, technical and marketing resources than does
the Company. Such competition could materially adversely affect the Company's
business, operating results or financial condition. The Company's current and
potential competitors include Microsoft, browser software vendors including
Netscape Communications Corporation ("Netscape"), Web server software and
service vendors, PC and UNIX software vendors and other vendors, including Apple
Computer, Inc., Sun, Hewlett-Packard Co. ("Hewlett-Packard"), IBM, Digital
Equipment Corp. ("Digital"), The Santa Cruz Operation, Inc. and Silicon
Graphics, Inc. Certain operating system companies, such as Microsoft, have
incorporated Web client functionality into their software products and offer
this functionality at little or no additional cost to customers. If client
products incorporated into operating systems by such operating system vendors
gain market acceptance, these organizations may be better positioned than the
Company to sell Web server and applications software products. In addition,
software companies which have server products in other product categories may
choose in the future to enhance the functionality of existing products or
develop new competitive products. 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. For example,
Microsoft and IBM are each proposing an alternative security standard, and
widespread adoption of either standard could have a material adverse effect on
the Company's business, financial condition and results of operations. There
can be no assurance that the Company will be able to compete successfully
against current or future competitors. Competitive pressures faced by the
Company have materially adversely affected its business, financial condition and
results of operations in the first half of 1996 and are expected to continue to
have such an effect during the remainder of 1996.
Because NOV*IX and other Firefox products have been developed for LANs
running Novell's NetWare LAN operating system, sales of such products (and, as a
result, the business, financial condition and results of operations of the
Company) could be materially adversely affected by market developments adverse
to Novell or NetWare.
Rapid Technological and Other Market Changes and Dependence on New
Products. The market for networking software products is subject to rapid
changes in technology and customer preferences, such as the recent decline in
the use of DOS-based computing systems and the embedding of competing products
into new PCs. The Company's growth and future financial performance will depend
upon its ability to develop and introduce new products and enhancements of
existing products that accommodate the latest technological advances and
customer requirements, and also on its ability to increase unit volume sales of
its connectivity products and to generate significant product revenues from its
client-server and mail products and from its messaging products currently under
development. Any failure to increase revenues from connectivity products or to
generate significant revenues from such other products could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that new products or product enhancements
will be developed or marketed successfully by the Company on a timely basis or
at all, that any new product or product enhancements will achieve market
acceptance, that other software vendors will not develop and market products
which are superior to the Company's products or that such other products will
not achieve greater market acceptance. In
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addition, the ability of the Company to develop and market new products and
product enhancements is dependent upon its ability to retain qualified
employees. Any failure by the Company to anticipate or respond adequately to
changes in technology and customer preferences, to develop and introduce new
products or product enhancements in a timely fashion, or to retain qualified
employees, could have a material adverse effect on its business, financial
condition and results of operations.
Because certain of the Company's products incorporate software and other
technologies developed and maintained by third parties, the Company is to a
certain extent dependent upon such third parties' ability to enhance their
current products, to develop new products on a timely and cost-effective basis
that will meet changing customer needs, and to respond to emerging industry
standards and other technological changes. There can be no assurance that the
Company would be able to replace the functionality provided by the third party
technologies currently offered in conjunction with the Company's products if
such technologies become unavailable to the Company or obsolete or incompatible
with future versions of the Company's products or market standards. The absence
of or any significant delay in the replacement of that functionality could have
a material adverse effect on the Company's business, financial condition or
results of operations.
Networking software products as complex as those offered by the Company may
contain undetected errors or failures when first introduced or as new versions
are released. There can be no assurance that, despite testing by the Company
and current and potential customers, errors will not be found in new products
and product enhancements after commencement of commercial shipments, resulting
in loss of or delay in market acceptance. Such loss or delay could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Declining Average Selling Prices. Until 1995, the market for the Company's
products was not characterized by significant price competition; however, as
noted above, the Company is facing increasing pricing pressures from
competitors. These pressures are likely to continue to increase, have led to a
decrease in average unit sales prices for certain of the Company's products,
could continue to have this effect on average unit sales prices for the
Company's products, and have had and could continue to have a material adverse
effect on the Company's results of operations and financial condition.
Management of Earlier Expansion; Dependence on Key Personnel. The Company
experienced rapid growth in recent periods. This growth has placed, and will
continue to place, a significant demand on the Company's management and other
resources. From January 1, 1995 through April 30, 1996, the number of the
Company's employees grew from approximately 474 to approximately 880. Included
in such increase were key members of management as well as approximately 150
employees hired in connection with business acquisitions. In early May 1996, in
connection with a reorganization of the Company's operations, the Company
decided to effect certain cost-cutting measures, including a reduction of
approximately 10% in the number of the Company's full-time employees. Since the
May reorganization, the number of the Company's employees has decreased further,
which the Company believes is primarily attributable to increased competition
for qualified personnel in the market and, to a lesser extent, the integration
of Firefox and the Company's other recent acquisitions. In connection with the
Firefox acquisition, the number of the Company's employees increased by
approximately 124 persons.
3
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Additionally, management of FTP believes that the rapid expansion of its
sales and marketing force since January 1, 1995, from 220 persons at December
31, 1994 to 329 persons at December 31, 1995 to 375 persons at May 2, 1996, and
the opening and expansion of several new offices outside of the United States
during 1995 and early 1996 has resulted in certain inefficiencies in its sales
and marketing organizations. If such inefficiencies cannot be eliminated, FTP
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.
Competition for qualified personnel in the software industry is intense and
there can be no assurance that the Company will be able to retain a sufficient
number of qualified employees. The success of the Company will depend to a
significant degree upon its ability to retain qualified personnel and the
continued contributions of its key management, marketing, product development
and operational personnel. It may become increasingly difficult for the Company
to hire, train and assimilate new employees. If the Company is unable to
recruit or retain key technical, sales and other personnel, the Company's
business, financial condition and results of operations could be materially
adversely affected.
Reliance on Acquisitions. In addition to internal development, the Company
expects to continue its strategy of expanding its products and technology in
part through the acquisition of specific complementary products and of
businesses that have developed products and technologies similar to those of the
Company. This strategy is an important component of the Company's ability to
achieve its goal of providing to its customers a comprehensive suite of client-
based and server-based solutions addressing TCP/IP-based applications and
networks, and the Company believes that its future growth depends, in part, upon
the success of this strategy. While the Company is continually searching for
product development opportunities, there can be no assurance that it will be
successful in identifying, acquiring and developing such products and
technology. If any potential acquisition opportunities are identified, there
can be no assurance that the Company will consummate such acquisitions or
successfully integrate the technology or businesses acquired into the Company.
The Company may in the future face increased competition for acquisition
opportunities, which may inhibit its ability to consummate suitable acquisitions
and increase the cost of completing acquisitions.
Acquisitions involve a number of special risks and factors, including,
among other things, the diversion of management's attention, the assimilation of
the operations and personnel of the acquired company or business, the
incorporation of acquired products into existing product lines, adverse short-
term effects on reported operating results, the amortization of acquired
intangible assets, the loss of key employees of the acquired company or business
and the difficulty of presenting a unified corporate image. No assurance can be
given that any acquisition by the Company will or will not occur, that if an
acquisition does occur that it will not materially and adversely affect the
Company or that any such acquisition will be successful in enhancing its
business. If the operations of an acquired company or business do not meet
expectations, the Company may be required to restructure the acquired business
or write off the value of some or all of the assets of the acquired business.
Integration of Firefox. The successful combination of companies in the
rapidly changing high technology industry requires coordination of sales and
marketing and research and development efforts and may be more difficult to
accomplish than in some other industries. In the case of the Firefox
acquisition, the difficulties of such integration may initially be increased
4
<PAGE>
by the necessity of coordinating geographically separated organizations (in
suburban Boston, Massachusetts, in Santa Clara, California, and in Solihull,
England) and integrating personnel with disparate business backgrounds and
corporate cultures. The length of time necessary to consummate the acquisition
caused a loss of momentum in the business of Firefox and resulted in a loss of
key Firefox sales and marketing management personnel in the United States and
the United Kingdom, and may result in a loss of additional key personnel. The
integration of the two companies has required the attention and dedication of
management resources that has caused and may continue to cause a disruption of
the business activities of the two companies and a loss of momentum in the
business of Firefox. The foregoing could have an adverse effect on the revenue
and operating results of the Company, at least in the near term. Changes
necessitated by the acquisition that may be made to the operations or management
of Firefox and the Company could have a material adverse effect on the business,
financial condition and results of operations of the Company. In addition, the
Company recently completed three other business acquisitions which it is still
in the process of integrating. These and any future acquisitions may impose
additional difficulties on the integration of Firefox into the Company.
The Company believes that certain Firefox and FTP customers may have
deferred purchasing decisions while evaluating the Company's future product
strategy and competitive position in the industry. Any such deferrals could
have a material adverse effect on the Company's business, financial condition
and results of operations at least in the near term.
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. Any changes in distribution channels may adversely affect sales of
the Firefox product line and consequently may adversely affect the Company's
business, financial condition and results of operations, at least in the near
term.
Potential Fluctuations in Operating Results. The Company's operating
results have in the past and may in the future fluctuate from period to period
as a result of a variety of factors, including, among other things: the
purchasing patterns of its customers; the lengthening of sales cycles; the mix
of products sold; customer order deferrals in anticipation of new products or
product enhancements; market acceptance and timing of the introductions of new
products and product enhancements by the Company and its competitors; variations
in sales by product and distribution channel; changes in resellers' inventory
practices; the exercise of stock rotation or inventory price protection
practices by distributors; the accuracy of resellers' forecasts of customer
demands; fluctuations in domestic and foreign economic conditions; competitive
pricing pressures; and the Company's sales compensation programs, which are
based on both quarterly and annual sales levels. In addition, substantially all
of the Company's product revenue and profit in each quarter result from orders
received in that quarter, and an increasingly large portion of orders are
received during the last month of such quarter. If revenue does not meet
expectations in any given quarter, operating results may be materially adversely
affected. There can be no assurance that the Company will not experience
significant fluctuations in operating results in the future. 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 may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. Accordingly, any significant shortfall of
demand for the Company's products and services in relation to the Company's
expectations would have an immediate adverse impact on the Company's business,
5
<PAGE>
financial condition and results of operations. To the extent that expenses
precede or are not subsequently followed by increased revenue, the Company's
business, financial condition and results of operations will be materially
adversely affected. Based on the foregoing, the Company believes that period to
period comparisons of results of operations are not necessarily meaningful and
should not be relied upon as an indicator of future performance.
International Sales. Sales outside the United States accounted for
approximately 44% and 46% of the Company's total revenues in 1994 and 1995,
respectively. Sales in the United Kingdom accounted for approximately 40% and
39% of Firefox's net revenues in 1994 and 1995, respectively. The Company
expects that sales outside the United States will continue to account for a
substantial portion of revenue for the foreseeable future. Growth in
international sales is expected to be a significant factor in the future success
of the Company. The Company's international sales have decreased in 1996,
primarily as a result of increased competition, longer sales cycles and lower
average unit sales prices as described above. There can be no assurance that
the Company will be able to increase international sales of its products or that
its international distribution channels will be able to service and support its
products adequately.
There are certain general risks inherent in conducting international
business, including exposure to currency exchange rate fluctuations, changes in
markets caused by various political, social and economic factors, unexpected
changes in regulatory requirements, tariffs and other trade barriers, costs and
risks of localizing products for foreign countries, longer payment terms,
potentially adverse tax consequences, repatriation of earnings, the burdens of
complying with a wide variety of foreign laws and the difficulties of managing
international operations. In addition, revenue of the Company earned in various
countries where the Company does business may be subject to taxation by more
than one jurisdiction, thereby adversely affecting the Company's earnings.
There can be no assurance that such factors will not have a material adverse
effect on the revenue from the Company's future international sales and,
consequently, the Company's business, financial condition and results of
operations.
An increase in the value of the U.S. dollar relative to foreign currencies
would make the Company's products more expensive and therefore potentially less
competitive in those markets. While the Company has historically priced,
invoiced and collected international sales primarily in United States dollars,
Firefox prices, invoices and collects a substantial portion of its sales in
foreign currencies, primarily British pounds sterling. In addition, the Company
anticipates that as the size of its international customers and contracts
increases, it will also transact a greater number of sales in local currencies.
Accordingly, the Company anticipates that fluctuations in currency exchange
rates could in the future have an adverse effect on its results of operations
and financial condition.
Because substantially all of the Company's international sales are
indirect, any material increase in the Company's international sales as a
percentage of total revenue may have an adverse effect on its gross margins due
to the lower per unit revenue realized by the Company on sales through indirect
channels.
Developing Internet Market; New Entrants; Unproven Acceptance of Products;
Price Erosion. The market for certain of the Company's software and services
for the Internet and corporate intranet markets has only recently begun to
develop, is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced or developed
6
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products and services for communication and commerce over the Internet and
private Internet Protocol ("IP") networks. 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 young and has few proven products. Moreover, critical issues
concerning the commercial use of the Internet (including profitability,
security, reliability, cost, ease of use and access, and quality of service)
remain unresolved and may impact the growth of Internet use. While the Company
believes its software products offer significant advantages for commerce and
communication over the Internet and private IP networks, there can be no
assurance that commerce and communication over the Internet or private IP
networks will become as widespread as quickly as expected, or that the Company's
products will become widely adopted for these purposes. In addition, the
Company's client software products for the Internet market are subject to
pricing pressures and marketing risks due to free client software distributed by
on-line service providers, Internet access providers and others. Further,
companies such as Microsoft, IBM, Netscape and Intuit are now bundling or are
planning to bundle or otherwise offer client software with their operating
systems or other product offerings at little or no additional cost to users.
Both of these factors have resulted in a decrease in average selling prices for
the Company's client software products for the Internet market. Further, there
can be no assurance that such products, even if accepted, will generate
significant profits for the Company. If the Internet or intranet markets fail to
develop, develop more slowly than expected or become saturated with competitors,
or if the Company's products for the Internet or intranet markets do not achieve
market acceptance, the Company's business, financial condition and results of
operations will be materially adversely affected.
Dependence on TCP/IP Protocol. The Company's core networking products are
designed to utilize TCP/IP, an open non-proprietary data communications protocol
suite. Continued widespread commercial use and development of TCP/IP is
critical to the Company's success. While TCP/IP is currently the leading
networking data communications protocol standard, other organizations, including
the International Standards Organization, have developed or are developing other
open protocol standards that compete with TCP/IP. In addition, certain
competitors, such as IBM and Novell, have developed proprietary protocols that
compete with TCP/IP. If any of these alternative protocols becomes widely
accepted in the networking marketplace, there may be a reduction in the
acceptance of TCP/IP, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
Proprietary Rights. The Company considers its implementations of the
TCP/IP protocol, its OnNet(R) Kernel software and PC/TCP(R) Kernel software, to
be proprietary and relies primarily on a combination of copyrights, trademarks,
trade secret law and contracts to protect such proprietary implementations.
However, the basic TCP/IP protocols are non-proprietary and other parties have
developed their own versions. See "Competition" above.
The Company generally enters into confidentiality and/or license agreements
with its consultants, distributors, customers and potential customers and limits
access to and distribution of its source code and other proprietary information.
Although the Company currently has no issued patents, the number of patents
granted on software inventions is increasing. Consequently, there is a growing
risk of third parties asserting patent claims against the Company. In the
future, the Company may receive communications from third parties asserting that
the Company's products infringe, or may infringe, the patents or other
proprietary rights of such third parties, or seeking indemnification against
such infringement, or
7
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asserting that the Company must obtain a license from such third parties. Such
communications, and any resulting litigation, could result in substantial costs
and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and results of operations. If any claims
or actions were to be asserted against the Company and the Company were required
to seek a license of a third party's intellectual property, there can be no
assurance that the Company would be able to acquire such a license on reasonable
terms or at all, and no prediction can be made about the effect that such
license might have on the Company's business, financial condition or results of
operations. Should litigation with respect to any such claim commence, such
litigation could be extremely expensive and time consuming and could materially
adversely affect the Company's business, financial condition and results of
operations regardless of the outcome of the litigation.
Marketing and Distribution Risks. As part of its sales and marketing
strategies, the Company intends to continue to exert significant sales and
marketing efforts. There can be no assurance that these efforts will be
successful. For example, there can be no assurance that the Company will be
able to attract or retain qualified direct sales personnel, that such efforts
will result in increased sales of the Company's products, or that such efforts
will enable the Company to compete successfully against the larger and better
funded sales and marketing organizations of some of its competitors.
The Company relies significantly on its independent distributors, systems
integrators and value-added resellers for certain elements of the marketing and
distribution of its products. The agreements in place with these organizations
are generally non-exclusive. These organizations are not within the control of
the Company, may represent other product lines in addition to those of the
Company and are not obligated to purchase products from the Company. There can
be no assurance that such organizations will give a high priority to the
marketing of the Company's products, and such organizations may give a higher
priority to other products, which may include the products of the Company's
competitors. Actions of this nature by such organizations could result in a
lower sales effort applied to the Company's products and a consequent reduction
in the Company's operating results. The Company's results of operations can
also be materially adversely affected by changes in the inventory strategies of
its resellers, which can occur rapidly and in many cases may not be related to
end-user demand.
The Company may grant its distributors limited rights to exchange unsold
products for other products and provide inventory price protection in the event
of price reductions by the Company. While the Company provides allowances for
projected returns and price protection in certain instances, there can be no
assurance that allowances will be sufficient to offset product returns and price
protection in the future. Substantial returns of products or a decrease in the
price of the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations.
Government Regulation and Legal Uncertainties. The Company is not
currently subject to direct regulation by any government agency, other than
regulations applicable to business 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
possible that various laws and regulations may be adopted with respect to the
Internet, covering issues such as user privacy, pricing and characteristics and
quality of products and services. For example, the relatively new
Communications Decency Act prohibits distribution of
8
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obscene, lascivious or indecent communications on the Internet. The adoption of
any such laws or regulations may decrease the growth of the Internet, which
could in turn decrease the demand for certain of the Company's products and
increase the Company's cost of doing business or otherwise have an adverse
effect on the Company's business, financial condition or results of operations.
Moreover, the applicability to the Internet of existing laws governing issues
such as property ownership, libel and personal privacy is uncertain. Further,
due to the encryption technology contained in certain of the Company's products,
such products are subject to U.S. export controls. There can be no assurance
that such export controls, either in their current form or as may be
subsequently enacted, will not limit the Company's ability to distribute
products outside of the United States or electronically. While the Company takes
precautions against unlawful exportation, the global nature of the Internet
makes it virtually impossible to effectively control the distribution of the
Company's products. In addition, federal or state legislation or regulation may
further limit levels of encryption or authentication technology. Any such export
restrictions, new legislation or regulation or unlawful exportation could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Litigation Against the Company. On March 14, 1996, a class action lawsuit
was filed in the United States District Court for the District of Massachusetts,
naming the Company, certain of its officers and two 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 necessary
to make statements not false and misleading, which the plaintiffs contend caused
an artificial inflation in the price of the Company's common stock.
Specifically, the complaint alleges 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 Section 10(b) and Section 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 and further relief as the Court deems proper and just. 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 may be required to expend substantial sums for
legal and expert fees and costs. The cost of defending the litigation and the
outcome of the litigation are uncertain and are not subject to precise
estimation. 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.
Litigation Against Firefox. On February 23, 1996, a class action lawsuit,
captioned Richard Zeid and Siom Misrahi 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 of the price of Firefox's
9
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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 original 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 other extraordinary,
equitable and/or injunctive relief as permitted by law, equity and the federal
statutory provisions under which the suit was brought. On June 5, 1996, the
District Court entered an order dismissing plaintiffs' complaint. Certain of
plaintiffs' claims that alleged that Firefox was responsible for false and
misleading analysts reports, Firefox statements and financial statements were
dismissed with leave to amend. In addition, certain of plaintiffs' claims that
warnings and disclosures in Firefox's Form 10-Qs were false and misleading were
dismissed with prejudice.
On July 19, 1996, plaintiffs filed an amended complaint. The amended
complaint alleges that defendants misrepresented or failed to disclose material
facts about Firefox's operations and financial results which the plaintiffs
contend resulted in an artificial inflation of the price of Firefox's common
stock. The amended complaint is 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 alleges claims for violations of
Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder and seeks
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 is permitted by law, equity and the federal
statutory provisions under which the suit was brought. Specifically, the
amended complaint alleges 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
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 alleges that John A. Kimberley, an officer and director of Firefox, and
Frank Richardson, a former officer and director of Firefox, are liable as
"controlling persons" of Firefox.
Firefox has reviewed the allegations in the lawsuit, believes them to be
without merit and intends to defend itself and its officers and directors
vigorously. In order to support an adequate defense, Firefox will be required
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 Firefox,
Firefox 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.
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