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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
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Exchange Act of 1934
For the quarterly period ended March 31, 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 Identification No.)
incorporation or organization)
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 26,966,222
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Class Outstanding at May 6, 1996
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FTP SOFTWARE, INC.
Table of Contents
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1996
and December 31, 1995 (unaudited) 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 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 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 18
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FTP SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
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March 31, December 31,
1996 1995
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ASSETS
Current assets:
Cash and cash equivalents $ 31,446 $ 30,417
Short-term investments 17,357 36,211
Accounts receivable, net of allowance for doubtful
accounts of $1,600 for 1996 and 1995 22,024 30,787
Inventories 894 1,063
Prepaid expenses and other current assets 6,932 3,623
Income taxes 15,969 9,969
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Total current assets 94,622 112,070
Property and equipment, net 19,651 18,703
Purchased software, net 6,192 4,359
Investments 57,303 52,751
Deferred income taxes 1,396 1,717
Other assets 3,927 368
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Total assets $183,091 $189,968
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 12,794 9,904
Accrued employee compensation and 3,546 4,533
benefits
Current portion of long-term obligations 576 811
Deferred revenue 8,406 9,091
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Total current liabilities 25,322 24,339
Long-term obligations 821 821
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Total liabilities 26,143 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 26,966,222 and
26,506,729 in 1996 and 1995, respectively 270 265
Additional paid-in capital 93,358 92,607
Retained earnings 63,688 72,130
Equity adjustments (368) (194)
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Total stockholders' equity 156,948 164,808
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Total liabilities and stockholders' equity $183,091 $189,968
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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)
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Three Months Ended March 31,
1996 1995
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REVENUE:
Product revenue $ 24,974 $28,661
Service revenue 4,030 2,653
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Total revenue 29,004 31,314
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COST OF REVENUE:
Product cost 2,576 1,948
Service cost 2,650 2,363
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Total cost of revenue 5,226 4,311
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GROSS MARGIN 23,778 27,003
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OPERATING EXPENSES:
Sales and marketing 12,494 7,083
Product development 20,773 5,560
General and administrative 4,940 2,844
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Total operating expenses 38,207 15,487
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Income (loss) from operations (14,429) 11,516
Investment income 1,029 1,043
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Income (loss) before income taxes (13,400) 12,559
Provision (benefit) for income taxes (4,958) 4,709
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Net income (loss) $ (8,442) $ 7,850
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Net income (loss) per share (fully
diluted) $ (0.31) $ 0.27
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Weighted average common and common
equivalent shares outstanding (fully diluted) 26,939 28,721
======== ========
</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)
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Three Months Ended March 31,
1996 1995
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Cash flows from operating activities:
Net income (loss) $ (8,442) $ 7,850
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,289 1,556
Write-off of acquired in-process technology 11,912 1,129
Amortization of discounts and premiums on investments 70 --
Deferred income taxes 321 (465)
Tax benefit of stock option activity -- 5,960
Changes in operating assets and liabilities net of effects
from acquisition of business and product line:
Accounts receivable 8,763 (1,608)
Inventories 169 (236)
Prepaid expenses and other current assets (2,358) (3,504)
Income taxes (6,000) (892)
Other assets (354) (87)
Accounts payable 2,890 1,735
Accrued employee compensation and benefits (987) (1,021)
Deferred revenue (685) 932
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Net cash provided by operating activities 7,588 11,349
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Cash flows from investing activities:
Capital expenditures (3,226) (1,547)
Maturities of investments 14,056 5,669
Acquisition of business and product line (13,681) (2,365)
Increase in notes receivable (4,171) --
Other investing activities (35) --
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Net cash (used for) provided by
investing activities (7,057) 1,757
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Cash flows from financing activities:
Proceeds from issuance of common stock 756 2,247
Principal payments on long-term obligations (235) --
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Net cash provided by financing activities 521 2,247
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Effect of exchange rate changes on cash (23) --
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Net increase in cash and cash equivalents 1,029 15,353
Cash and cash equivalents, beginning of period 30,417 10,896
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Cash and cash equivalents, end of period $ 31,446 $26,249
========== =========
</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. (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-month period ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full fiscal year.
The preparation of 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
In February 1996, the Company acquired the Mariner product line of Network
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 $1.8 million primarily to
completed technology, which is included in purchased software and will be
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
from operations include activity from the Mariner product line and the assets of
HyperDesk Corporation since the date of the respective acquisitions in February
and March 1996. Pro forma presentation for prior periods is not reflected as
the impact would be immaterial.
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 the completed technology. In-process
technology that had not reached technological feasibility and that had no
alternative future use was valued 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 not fully deductible in the same period
for tax purposes.
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In April 1996, FTP acquired Campbell Services, Inc., the Southfield,
Michigan-based developer of OnTime, by merger for a net cash purchase price of
approximately $15 million.
3. STOCK OPTION ACTIVITY
During the first quarter of 1996, the Company granted options to purchase
1,885,500 shares of its common stock at prices ranging from $11.625 to $13.625
per share.
4. RECLASSIFICATION
Certain components of the statement of cash flows for the three-month
period ended March 31, 1995 have been reclassified to appropriately reflect the
acquisition of substantially all of the assets Keyword Office Technologies Ltd.
in March 1995. These reclassifications had no impact on the net increase in
cash and cash equivalents during that period.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
The following discussion and analysis provides information that
management of FTP Software, Inc. ("FTP" or the "Company") believes is relevant
to an assessment and understanding of FTP's consolidated results of operations
and financial condition. 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
change, increased demands on management as a result of planned expansion,
changes in distributor terms or performance or other factors that are outlined
in Exhibit 99, "Cautionary Factors Relevant to Forward-Looking Statements," to
FTP's Annual Report on Form 10-K for the year ended December 31, 1995,
incorporated herein by reference.
In early July 1995, FTP reorganized its business into two business units,
the Networking Products Business Unit and the New Ventures Business Unit. The
Networking Products Business Unit included FTP's core OnNet and PC/TCP product
lines, and was responsible for extending those product lines to new platforms,
including secure, wireless and mobile connectivity, and developing and acquiring
server and other products to provide services for enterprise networks. To date,
substantially all of FTP's revenue has been attributable to sales of its OnNet
and PC/TCP product lines.
The New Ventures Business Unit was formed to develop, acquire and
commercialize new technologies. Since the July 1995 reorganization, FTP has made
substantial investments in new technologies. 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 Campbell Services, Inc. ("Campbell Services"), the Southfield, Michigan
based developer of OnTime, a client-server solution for group scheduling, for a
net cash purchase price of approximately $15 million through a merger of a
subsidiary of FTP into Campbell Services, which continues to operate as a
wholly-owned subsidiary of FTP.
As described in FTP's Annual Report on Form 10-K for the year ended
December 31, 1995, FTP has entered into an Amended and Restated Agreement and
Plan of Merger, dated as of March 25, 1996, with Firefox Acquisition Corp., a
wholly-owned subsidiary of FTP, and Firefox Communications Inc. ("Firefox")
providing for the merger of such subsidiary into Firefox (the "Firefox Merger"),
which will survive such merger as a wholly-owned subsidiary of FTP.
Since the July 1995 reorganization described above, 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 to
both the capabilities and the interplay of the various TCP/IP and Internet
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
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measures, FTP decided to recombine its business units and reorganize its
operations to better position itself to deal with such confusion and to take
advantage of the market potential for intranet product suites incorporating
traditional 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.
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.
Results of Operations
The following discussion of FTP's results of operations principally
reflects the results of operations from FTP's former Networking Products
Business Unit, except as otherwise indicated. Because the activities associated
with what was FTP's New Ventures Business Unit were immaterial for all periods
prior to July 1, 1995, the results of operations of FTP for the first three
months of 1995 are treated as being the results of operations of the former
Networking Products Business Unit. As a result of the 1996 reorganization
described above under "-- Overview," FTP does not intend to report separate
financial information for these former business units in subsequent periods.
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 and training
contracts and is recognized ratably over contract periods.
Total revenue from the Networking Products Business Unit decreased from
approximately $31.3 million for the first quarter of 1995 to approximately $26.8
million for the first quarter of 1996. Product revenue for this unit decreased
from approximately $28.7 million for the first quarter of 1995 to approximately
$22.9 million for the first quarter of 1996. Service revenue for this unit
increased from approximately $2.6 million for the first quarter of 1995 to
approximately $3.9 million for the first quarter of 1996. As a percentage of
total revenue, product revenue decreased from approximately 92% for the first
quarter of 1995 to approximately 85% for the first quarter of 1996 while service
revenue increased from approximately 8% for the first quarter of 1995 to
approximately 15% for the first quarter of 1996.
While unit sales for the Networking Products Business Unit increased from
the first quarter of 1995 to the first quarter of 1996, product revenue
decreased over such periods, primarily as a result of an increase in the number
of competitors and products offered in the TCP/IP market and lower average unit
sales prices for FTP's products, which FTP believes was attributable to not only
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. In addition, FTP 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 compared to the first quarter of 1995, which also contributed to
the dollar decrease in product revenue. The dollar increase in service revenue
from 1995 to 1996 was 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
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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 in Europe, Asia
Pacific and Canada. International sales of the Networking Products Business Unit
of approximately $15.0 million and $13.1 million accounted for approximately 44%
and 49% of this unit's total revenue for the three months ended March 31, 1995
and 1996, respectively. The dollar decrease from 1995 to 1996 was primarily due
to increased competition and lower average unit sales prices as described in the
preceding paragraph. In addition, unfavorable monetary conditions in certain
Latin American countries resulted in a decrease in sales and/or a decrease in
average unit sales prices to customers in those countries, which also
contributed to the dollar decrease in international sales. The percentage
increase from 1995 to 1996 was primarily due to the greater effect of increased
competition in the United States than outside the United States and the federal
government budgetary uncertainties described above, as a result of which the
decrease in sales in the United States exceeded the decrease in international
sales.
Total revenue of the New Ventures Business Unit for the first quarter of
1996 was approximately $2.2 million, of which 94% consisted of product revenue.
Of such amount, approximately $0.9 million (or 41% of its total revenue)
consisted of international sales, primarily in Europe, Asia Pacific and Canada.
FTP prices, invoices and collects international sales primarily in United
States dollars. Accordingly, currency fluctuations have not had a material
effect on FTP's income from operations. FTP anticipates that as the size of its
international customers and contracts increases, it will transact a greater
number of sales in local currencies. If this occurs, currency fluctuations may
in the future have an increased effect on FTP's results of operations and
financial condition.
As indicated in Exhibit 99, "Cautionary Statements Relevant to Forward-
Looking Statements -- Declining Average Selling Prices," FTP is facing
increasing pricing pressures from competitors which, as indicated above, has
resulted in a decrease in average unit sales prices for FTP's products. 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,
with possible adverse effects on FTP's results of operations and financial
condition. In addition, recent announcements of slowing PC and semiconductor
sales growth by several manufacturers may in turn result in a slowing in the
growth of the networking software market, which may also adversely affect FTP's
revenue. See Exhibit 99, "Cautionary Statements Relevant to Forward-Looking
Statements -- General Economic Conditions." Furthermore, FTP believes that the
federal government budgetary uncertainties that existed during 1995 and the
first three months of 1996 may continue to impact revenue through at least the
second quarter of 1996.
Gross Margin
For the Networking Products Business Unit, product gross margin as a
percentage of product revenue was approximately 93% for the first quarter of
both 1995 and 1996. The gross margin percentage included a decrease in material
costs in 1996 associated with increased efficiencies in product packaging, which
decrease was offset by increases in other costs, primarily those associated the
amortization of technologies purchased in 1995 and 1996.
For the Networking Products Business Unit, service gross margin as a
percentage of service revenue was approximately 11% and 39% for the three months
ended March 31, 1995 and 1996,
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respectively. The increase from 1995 to 1996 is primarily attributable to an
increase in FTP's installed product base from which such revenues are derived.
The Networking Products Business Unit's gross margin decreased from
approximately 86% in the first quarter 1995 to approximately 85% in the first
quarter of 1996, primarily as a result of the increase in costs associated with
the amortization of technologies purchased in 1995 and 1996.
The gross margin of the New Ventures Business Unit for the first quarter
of 1996 was approximately 45%.
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 for the Networking Products Business Unit
increased from approximately $7.1 million in the first quarter of 1995 to
approximately $10.1 million in the first quarter of 1996. Such expenses as a
percentage of this unit's total revenue were approximately 23% and 38% in the
first quarter of 1995 and 1996, respectively. The dollar increase from the first
quarter of 1995 to the first quarter of 1996 was 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 Singapore and
Japan), increasing the number of sales and marketing employees, and increasing
the levels of advertising, trade show and international marketing activities.
The percentage increase over such periods was due to both the dollar increase in
such expenses described above and the dollar decrease in revenue over such
periods described under "-- Total Revenue" above. FTP expects to continue to
incur significant expenses during 1996 relating to domestic and international
sales and marketing activities and expansion of certain of FTP's international
offices. If the Firefox Merger is consummated, FTP expects to incur both
proportionately and incrementally higher sales and marketing expenses in 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.
Sales and marketing expenses for the New Ventures Business Unit,
consisting primarily of personnel and advertising expenses, amounted to
approximately $2.4 million for the first quarter of 1996.
Product Development
Product development expenses for the Networking Products Business Unit
increased from approximately $5.6 million for the first quarter of 1995 (which
included a $1.1 million non-recurring charge for certain acquired in-process
technology) to approximately $5.9 million for the first quarter of 1996,
representing approximately 18% and 22% of this unit's total revenue for each
period, respectively. Excluding the non-recurring charge of $1.1 million in
1995, product development expenses as a percentage of this unit's total revenue
was approximately 14% for the first quarter of 1995.
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The increase from the first quarter of 1995 to the first quarter of 1996
of product development expenses of the Networking Products Business Unit as a
percentage of its total revenue (excluding the charge described above) is the
result of both an increase in such expenses over such periods, which was
primarily attributable to additional compensation expenses incurred in 1996 in
connection with increases in the use of outside contractors and the hiring of
personnel during 1995 and the first quarter of 1996, and the decrease in revenue
over such periods described above under "--Total Revenue."
Product development expenses for the New Ventures Business Unit amounted
to approximately $14.9 million for the first quarter of 1996, which included
$11.9 million of non-recurring charges for certain acquired in-process
technologies. The remaining $3.0 million of product development expenses is
primarily attributable to personnel-related costs and fees paid to outside
contractors.
FTP expects product development expenses to continue to increase in the
remainder of 1996 as a result of the growing demand of customers for increased
functionality in networking software products as well as the proposed Firefox
Merger and recent acquisition of Campbell Services described above under
"--Overview."
FTP 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 FTP.
Amounts charged to product development expense for in-process technology are not
fully deductible in the same period for tax purposes.
General and Administrative
General and administrative expenses for the Networking Products Business
Unit increased from approximately $2.8 million for the first quarter of 1995 to
approximately $4.0 million for the first quarter of 1996, representing
approximately 9% and 15% of total revenue for the first quarter of 1995 and
1996, respectively. The dollar increase from the first quarter of 1995 to the
first quarter of 1996 is primarily attributable to increased staffing and
associated expenses to manage and support the expansion of FTP's operations over
such periods. The percentage increase from the first quarter of 1995 to the
first quarter of 1996 is also due to such factors as well as to the decrease in
revenue over such periods described above under "-- Total Revenue."
General and administrative expenses for the New Ventures Business Unit
amounted to approximately $1.0 million, representing approximately 44% of its
total revenue, for the first quarter of 1996.
Income from Operations
Income from operations for the Networking Products Business Unit
decreased from approximately $11.5 million in the first quarter of 1995 to
approximately $2.8 million in the first quarter of 1996, representing
approximately 37% and 11% of total revenue for the first quarter of 1995 and
1996, respectively. Excluding the $1.1 million charge for the acquisition of in-
process technology
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decribed above under "--Product Development," income from operations for this
unit was approximately $12.6 million for the first quarter of 1995, representing
approximately 40% of its total revenue.
For the first quarter of 1996, the New Ventures Business Unit experienced
a loss of approximately $17.3 million, which includes the $11.9 million charges
described above under "--Product Development" and total recurring expenses of
approximately $7.6 million (consisting primarily of sales and marketing and
product development expenses) against approximately $2.2 million in total
revenue generated by this unit. Excluding such charges, the loss for this unit
for the first quarter of 1996 was approximately $5.4 million.
For the first quarter of 1996, combined loss from operations (including
the results of the New Ventures Business Unit) totaled approximately $14.4
million. Excluding the $11.9 million charges described above under "--Product
Development," the combined loss from operations for the first quarter of 1996
totaled approximately $2.5 million.
Provision for Income Taxes
The provision for income taxes was $4.7 million in the first quarter of
1995 compared to a tax benefit of approximately $5.0 million in the first
quarter of 1996. FTP's effective tax rate for the first quarter of 1995 and 1996
was 37.5% and 37.0%, respectively. The difference between the statutory rate and
the effective rate resulted primarily from the effects of FTP's foreign sales
corporation in 1995 and 1996 and the benefits received from research and
experimentation credits in 1995. The decrease in effective tax rate from 1995 to
1996 is mainly attributable to relative increases in benefits received from
FTP's foreign sales corporation and tax exempt interest income. Because certain
of the expenses incurred or to be incurred by FTP in connection with the Firefox
Merger and the acquisition of Campbell Services described above under
"--Overview" will not be deductible for federal income tax purposes, FTP
anticipates that the effective tax rate for subsequent quarters of 1996 will be
adversely affected.
Liquidity and Capital Resources
At March 31, 1996, FTP had an aggregate of approximately $106.1 million
in cash and cash equivalents, short-term investments and long-term investments.
Of this amount, approximately $31.4 million was invested primarily in highly
liquid investments with original maturities of three months or less,
approximately $17.4 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 $57.3 million was invested in investments consisting
of U.S. government obligations, commercial paper and municipal obligations with
maturities of greater than one year and in equity investments.
FTP generated funds from operations of approximately $11.3 million and
$7.6 million in the first quarter of 1995 and 1996, respectively. FTP made
capital expenditures of approximately $1.5 million and $3.2 million in the three
months ended March 31, 1995 and 1996, respectively.
Accounts receivable, net, totaled approximately $30.8 million at December
31, 1995 and $22.0 million at March 31, 1996. This decrease is primarily
attributable to a decrease in revenue in the first quarter of 1996 and to the
payment in early 1996 of a substantial portion of the accounts receivable
outstanding at December 31, 1995.
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FTP paid approximately $2.4 million and $14.5 million for acquired
technology and related assets for the three months ended March 31, 1995 and
1996, respectively.
As noted above under "-- Overview," in April 1996 FTP acquired Campbell
Services by merger for a net cash purchase price of approximately $15 million.
In connection with the 1996 reorganization described above under
"--Overview," FTP expects to record a restructuring charge during the second
quarter of 1996, currently estimated to be between $1 million and $2 million,
which includes severance payments and other related expenses expected to be
incurred in connection with such reorganization.
Looking forward, FTP believes that its available cash, 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 future acquisitions through its cash from operations, the
issuance of shares of its common stock, 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.
To date, inflation has not had a material impact on FTP's financial
results.
14
<PAGE>
PART II OTHER INFORMATION
Item 1. 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 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. 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. 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.
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(10)
3.3 Amended and Restated Bylaws of the Company(1)
4.1 Specimen common stock certificate(3)
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)(8)
10.1 Indenture of Lease between the Company and North Andover Mills
Realty dated November 19, 1991, with Amendments Nos. 1, 2 and 3(1)
10.2 Amendment No. 4 to Indenture of Lease between the Company and
North Andover Mills Realty, dated September 30, 1993(2)
10.3 Amendment No. 5 to Indenture of Lease between the Company and North
Andover Mills Realty Limited Partnership(7)
10.4 Employment Agreement dated March 1, 1993 between the Company and
David H. Zirkle(1)
10.5 Amendment to Employment Agreement dated June 14, 1993 between
the Company and David H. Zirkle(1)
10.6 Amendment to Employment Agreement dated August 15, 1994
between the Company and David H. Zirkle(5)
15
<PAGE>
Exhibit No. Title
- ----------- -----
10.7 Amendment to Employment Agreement dated February 28, 1995 between
the Company and David H. Zirkle(7)
10.8 FTP Software, Inc. Stock Option Plan(1)
10.9 FTP Software, Inc. 1993 Non-employee Directors' Stock Option Plan(1)
10.10 Amendment No. 1 to FTP Software, Inc. 1993 Non-employee Directors'
Stock Option Plan effective as of June 2, 1995(6)
10.11 FTP Software, Inc. 1993 Executive Compensation Plan(7)
10.12 FTP Software, Inc. 1994 Executive Compensation Plan(7)
10.13 FTP Software, Inc. 1995 Executive Compensation Plan(7)
10.14 Indenture of Lease between the Company and Andover Mills Realty
Limited Partnership dated October 1, 1993, with Amendments No. 1 and
2(7)
10.15 Amended and Restated Agreement and Plan of Merger by and among the
Company, Firefox Acquisition Corp. and Firefox Communications Inc.
dated as of January 17, 1996, amended and restated as of March 16,
1996 and further amended and restated as of March 25, 1996(9)
10.16 The Company's V-P Sales Plan(10)
11 Weighted Shares Used in Computation of Earnings Per Share*
27 Article 5 Financial Data Schedule*
99 Cautionary Statements Relevant to Forward-Looking Statements(10)
_____________________
*Filed herewith
(1) Included with, and incorporated herein by reference to, the Company's
Registration Statement on Form S-1 (No. 33-69278) filed with the Securities
and Exchange Commission (the "Commission") on September 23, 1993.
(2) Included with, and incorporated herein by reference to, the Company's Pre-
Effective Amendment No. 1 to Registration Statement on Form S-1 (No. 33-
69278) filed with the Commission on October 28, 1993.
(3) Included with, and incorporated herein by reference to, the Company's Pre-
Effective Amendment No. 2 to Registration Statement on Form S-1 (No. 33-
69278) filed with the Commission on November 9, 1993.
(4) Included with, and incorporated herein by reference to, the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 filed
with the Commission on August 15, 1994.
(5) Included with, and incorporated herein by reference to, the Company's
Annual Report on Form 10-K for the year ended December 31, 1994 filed with
the Commission on March 31, 1995.
(6) Included with, and incorporated herein by reference to, the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 filed
with the Commission on August 14, 1995.
(7) Included with, and incorporated herein by reference to, the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995
filed with the Commission on November 15, 1995.
16
<PAGE>
(8) Included with, and incorporated herein by reference to, the Company's
Current Report on Form 8-K dated December 1, 1995 and filed with the
Commission on December 12, 1995.
(9) Included with, and incorporated herein by reference to, the Company's Joint
Proxy Statement/Prospectus for its Special Meeting of Stockholders filed
with the Commission on March 27, 1996.
(10) Included with, and incorporated herein by reference to, the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 filed with
the Commission on April 1, 1996.
17
<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.
Date: May 15, 1996 By: /s/ John J. Warnock, Jr.
----------------------------------------
John J. Warnock, Jr.
Senior Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT 11
FTP SOFTWARE, INC.
WEIGHTED SHARES USED IN COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FULLY DILUTED PRIMARY
<S> <C> <C>
For the three months ended March 31, 1995:
Common stock outstanding, beginning of period 23,344,122 23,344,122
Weighted average common stock issued during the
three months ended March 31, 1995 588,913 588,913
Weighted average common stock equivalents 6,300,693 6,300,693
Weighted average treasury shares acquired using
the treasury stock method (1,513,043) (1,709,660)
---------- ----------
Weighted average shares of common stock
outstanding, end of period 28,720,685 28,524,068
========== ==========
For the three months ended March 31, 1996:
Common stock outstanding, beginning of period 26,506,729 26,506,729
Weighted average common stock issued during the
three months ended March 31, 1996 432,279 432,279
---------- ----------
Weighted average shares of common stock outstanding,
end of period 26,939,008 26,939,008
========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 31,446 30,417
<SECURITIES> 17,357 36,211
<RECEIVABLES> 23,624 32,387
<ALLOWANCES> 1,600 1,600
<INVENTORY> 894 1,063
<CURRENT-ASSETS> 94,622 112,070
<PP&E> 19,651 18,703
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 183,091 189,968
<CURRENT-LIABILITIES> 25,322 24,339
<BONDS> 0 0
0 0
0 0
<COMMON> 270 265
<OTHER-SE> 182,821 164,543
<TOTAL-LIABILITY-AND-EQUITY> 183,091 189,968
<SALES> 24,974 28,661
<TOTAL-REVENUES> 29,004 31,314
<CGS> 2,576 1,948
<TOTAL-COSTS> 5,226 4,311
<OTHER-EXPENSES> 38,207 15,487
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (13,400) 12,559
<INCOME-TAX> (4,958) 4,709
<INCOME-CONTINUING> (8,442) 7,850
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,442) 7,850
<EPS-PRIMARY> 0 0
<EPS-DILUTED> (0.31) 0.27
</TABLE>
