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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] 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 0-69278
FTP SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS 04-2906463
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
100 BRICKSTONE SQUARE, FIFTH FLOOR, ANDOVER, MA 01810
(Address of principal executive offices) (Zip Code)
(508) 685-4000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: COMMON STOCK ($.01 PAR VALUE)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $197,618,000 on March 21, 1997, based on the
closing sales price of the registrant's Common Stock as reported on the Nasdaq
National Market as of such date.
The number of shares outstanding of each of the registrant's classes of common
stock as of March 21, 1997 was as follows:
Common Stock, $.01 par value 33,760,883
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference:
Part III: Portions of the registrant's definitive Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the
registrant's 1997 Annual Meeting of Stockholders.
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FTP SOFTWARE, INC.
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TABLE OF CONTENTS
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PART I PAGE
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Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 4A. Executive Officers of the Registrant 13
PART II
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Item 5. Market for the Registrant's Common Equity and Related Stockholder 15
Matters
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and 17
Results of Operations
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting and 48
Financial Disclosure
PART III
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Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners and Management 48
Item 13. Certain Relationships and Related Transactions 48
PART IV
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Item 14. Exhibits, Financial Schedules and Reports on Form 8-K 48
Signatures 52
Appendix A A-1
Schedule II II-1
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PART I
ITEM 1. BUSINESS.
In September 1996, the Company unveiled its vision for the VIP Network, a
software architecture concept designed to enable organizations to secure, manage
and transparently extend their networks beyond traditional boundaries, intranets
and the Internet. The VIP Network is intended to allow an organization to
support mobile personal computer users and remote sites, to build virtual
collaborative workgroups within and across the organization and to facilitate
electronic commerce by building federated networks between and among the
organization and its customers, suppliers and other business partners. FTP's
current and planned VIP Network products will function as important components
of an enterprise's VIP Network solution. These products generally fall into
three categories: client networking products; server networking products; and
agent applications. FTP's existing VIP Network products are intended to operate
either separately or in combination with each other as well as with many
third-party products as part of an enterprise's overall VIP Network solution.
The Company has been engaged in the design, development, marketing and
support of client networking software products since 1986. These products, which
are based upon the industry standard Transmission Control Protocol/Internet
Protocol ("TCP/IP") data communications protocol suite, enable personal computer
("PC") users to find, access and use heterogeneous hardware, information and
applications resources across local area, enterprise-wide and global networks
and a variety of operating systems, computing platforms and network
environments.
The Company's server networking products are based on technology developed
by Firefox Communications Inc., which was acquired by the Company in July 1996.
Firefox began shipping its first server connectivity product in 1990. The
Company's current server products provide connectivity for local area networks
("LANs") running Novell NetWare and allow workgroups to access local and remote
computing resources, including the Internet, across different networking
protocols and client operating systems. These 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.
As part of its VIP Network strategy, FTP is also developing a number of
agent applications. These applications will provide platform-independent agents
that can be deployed in network communities to automate traditional network
management functions through IP-connected devices. With agent technology,
managers can manage, monitor and troubleshoot end user systems and network
devices in a bi-directional manner from a single location. FTP's agent
applications are being designed to be mobile, have built-in security and be
dispatched from any client or server to a community of hosts on an intranet.
Primarily designed with Java and ActiveX standards, these agents will help
enable critical network points to be VIP Network-ready. This agent technology is
also being integrated into other FTP VIP Network components.
While FTP has already developed several VIP Network products, FTP's ability
to fully implement the VIP Network concept depends in part on its ability to
develop additional planned VIP Network products and technologies in a timely
manner. This in turn depends in part on the Company's success in entering into
and implementing strategic alliances providing for the joint development of some
of those planned products and technologies. For a discussion of these and other
factors that could affect the Company's future operating results, see Appendix
A, "Cautionary Factors."
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The Company was incorporated in Massachusetts in 1986. Its corporate
headquarters are located at 100 Brickstone Square, Andover, Massachusetts 01810,
telephone number (508) 685-4000.
INDUSTRY BACKGROUND
The fundamental building block of an enterprise computer network is the
"LAN," or local area network. A LAN typically consists of at least one central
computer that acts as a "server" for a workgroup consisting of multiple PCs, or
"clients." The LAN allows individual users to share data, applications and
computing resources. An enterprise typically connects and integrates a LAN with
computing resources located outside of the LAN, such as UNIX workstations and
legacy minicomputer and mainframe systems.
As networking technology has advanced, enterprises have become able to
expand their networks through the connection of both local and geographically
dispersed LANs to form wide area networks ("WANs"). Internal networks that
employ a TCP/IP-based communications protocol, such as that included in FTP's
networking products, can connect multiple LANs and WANs, including remote
networks and mobile PCs, to form "intranets".
Communications among LANs, WANs and other computing resources, or
networking, is a significant technological challenge due to the multitude of
computing standards and communications protocols used within and across
enterprises. Different client PCs within an organization may run different
operating systems, the most popular of which are Windows (including Windows 3.x,
Windows 95 and Windows NT), DOS and MacOS, as well as different client-server
applications, such as different e-mail programs. Similarly, LANs may run
different NOSs, the most widely used of which is Novell NetWare. Finally, LANs,
workstations, minicomputers and mainframes may use different networking
communications protocols, the most popular of which is TCP/IP. This complexity
places a premium on efficient management of the network.
The development of the Internet has resulted in further evolution of the
enterprise network. The Internet is a global web of computer networks that
enables businesses, educational institutions, government agencies and
individuals to communicate, access and share information and conduct business
remotely. The networks that comprise the Internet are connected in a variety of
ways, including by the public switched telephone network and by high speed
dedicated leased lines. Open communications on the Internet are enabled by the
TCP/IP communications protocol. TCP/IP also enables an organization to use the
Internet as a low-cost communications backbone for a WAN, allowing the
organization to extend internal information systems and enterprise applications
to geographically dispersed facilities and mobile employees.
While there has been significant usage of the Internet by individuals and
educational institutions for several years, the recent growth in commercial
usage of the Internet has been driven primarily by the increasing popularity of
two Internet applications, the World Wide Web (the "Web") and e-mail.
Organizations are increasingly recognizing that the Internet can enhance
communications both among their geographically dispersed locations and employees
as well as with their customers, suppliers and other business partners, and have
become increasingly dependent on electronic communications in conducting their
daily business. Computers are increasingly used by mobile employees and small
workgroups in their daily work routines. Portable and other non-networked
computers are a large and fast-growing segment of the computing industry, and
full-featured, remote, real-time, secure access to enterprise networks is
assuming critical importance in today's global economy. With current technology,
however, an enterprise is constrained from fully, manageably and securely
extending network services to remote sites, mobile users, business partners and
cross-organizational groups.
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FTP'S VIP NETWORK STRATEGY
Following the Firefox acquisition, the Company recognized that it had many
of the building blocks for the client-server, agent, security and directory
services products and technologies that would enable it to develop the
foundation for a set of software infrastructure solutions that would address the
following emerging networking market needs:
* the need to securely provide remote sites and mobile users with the
same network access and computing environment as centralized users;
* the need to facilitate electronic commerce and the exchange of
information between an organization and its customers, suppliers and
business partners by extending the reach of the organization's network
to build federated networks with those customers, partners and
suppliers, enabling users in the different organizations to work
together in a way that is secure, managed and auditable, while
ensuring that each organization's network remains separate; and
* the need to build temporary and permanent collaborative workgroups,
both internal and external, in a secure, controlled and cost-effective
manner.
The Company envisions the VIP Network as a set of software solutions that
will enable an organization to meet these goals by functioning as a software
layer in the enterprise network infrastructure, creating a secure, manageable
and transparent virtual network that seamlessly connects all users, regardless
of location, hardware or network protocol. FTP's strategy is to develop and
market products that, separately or in conjunction with each other and with
third-party products, will enable the enterprise to design a VIP Network
solution that will:
* identify the users who are allowed access to the system and the types
of services they can use based on software user profiles and
privileges, rather than hardware or IP addresses;
* transparently provide authentication, validation, encryption and
firewalling to secure the user's environment and data;
* enable access and connectivity throughout the network by building
links between the applications, domains, security systems, network
operating systems, end user systems and proprietary hardware on the
enterprise network;
* simplify the challenge of multiple directories and complex hardware
infrastructure by introducing a user-centric management layer enabling
the enterprise network manager to create and manage a single set of
participation profiles across the VIP Network;
* provide transparency by overlaying the network infrastructure
(including LANs, backbones and routers) with a virtual network that is
defined in software by the network manager, to allow the manager to
administer the network as a single unit, through an intuitive
interface;
* simplify the enormous complexity of enterprise networks by supplying
the intelligence in the network infrastructure to handle routine tasks
in both the network infrastructure and end user systems, allowing
network managers to focus on higher level issues; and
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* preserve existing technology investments by providing products that
are based on open standards and are therefore protocol-, platform- and
applications-independent, thus enabling network managers to create and
manage their virtual networks without changing the network
infrastructure already in place.
While FTP has already developed several products that will function as
important components of an organization's VIP Network solution, FTP's ability to
fully implement the VIP Network concept depends on its ability (i) to
successfully market the VIP Network concept, (ii) to enter into and implement
strategic alliances that will enable the Company both to expand its distribution
channels and to develop the additional products and technologies necessary to
fully implement the VIP Network concept (through both the incorporation of the
Company's technologies in the products of third parties and the incorporation of
the technologies of third parties, possibly including security and directory
services technologies, in certain planned VIP Network products) and (iii) to
successfully develop and timely release the additional VIP Network products
necessary to fully implement the VIP Network concept. See Appendix A,
"Cautionary Factors -- Competition," "-- Rapid Technological and Other Market
Changes; Dependence on New Products," "-- Interoperability with Third Party
Products and Technologies" and "-- Reliance on Strategic Alliances."
PRODUCTS
FTP's current and planned VIP Network component products generally fall
into three categories: client networking products; server networking products;
and agent applications. The Company has designed its products based on open
technology standards, with an emphasis on compatibility, reliability and
robustness to both enhance and protect its customers' investments in different
networking hardware and software and to provide its customers with flexibility
for future investments.
CLIENT NETWORKING PRODUCTS FOR THE VIP NETWORK
FTP's client networking products enable managers to provide end user
systems with user-friendly, intuitive interfaces to VIP Networks. These products
also include the client components necessary to allow users to take advantage of
VIP Networks in a secure and managed way. The following is a brief description
of FTP's current VIP Network client networking products.
SECURE CLIENT FOR WINDOWS 95, the foundation for the VIP Network, provides
a secure, robust and manageable advanced connectivity foundation for Windows
95-based systems. Based on FTP's implementation of the TCP/IP protocol stack
technology included in its OnNet products described below, Secure Client
contains a variety of advanced diagnostic utilities (including IPTrace) and
worldwide remote access capabilities. Through its support of IPSECurity, Secure
Client supports point-to-point and point-to-firewall security for both packet
data and IP information. Secure Client also provides support for the latest IP
standards, including IPv6, Mobile IP, IP Multicasting and WinSock 2.0. These
standards are built upon the same open standards, such as the BSD code base,
upon which FTP's products are based. Secure Client is agent-enabled for
compatibility with FTP's planned agent applications.
The Company's ONNET family of products includes OnNet16 Connectivity Suite
for Windows 3.1 and Windows for Workgroups and OnNet32 Connectivity Suite for
Windows 95 and Windows NT. These products provide a robust 32-bit version of
FTP's own implementation of the TCP/IP protocol suite (called the OnNet Kernel)
that enables network administrators to centrally install, configure and manage a
secure TCP/IP infrastructure and provide end users with a full suite of
applications designed to reach and share information on corporate intranets and
the Internet and across legacy systems. FTP's OnNet products are compatible with
most major personal computer client-server
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and network operating systems, including 16-bit and 32-bit Windows (including
Windows 95 and Windows NT), NetWare, LAN Manager, Pathworks, Windows for
WorkGroups and Vines.
OnNet contains numerous networking applications and features, including:
mobile support; network file and printer sharing; advanced terminal emulation;
electronic mail ("e-mail"); KEYview for converting, viewing and printing
documents, spreadsheets, graphics and other file formats; remote file transfer;
remote command, remote printing and remote tape backup; and installation and
configuration utilities. OnNet32 also supports IPv6 and WinSock 2.0. For those
customers that may already have a stack provided by FTP or a third party in
their network infrastructure, FTP is also developing a Network Access Suite
software product which is intended to provide many of the client applications
provided by FTP's OnNet products and to be agent-enabled for compatibility with
FTP's planned agent applications.
FTP also sells OnNet Kernel for Windows, a high performance, highly
reliable implementation of the core TCP/IP suite of protocols which runs in
multi-tasking environments such as Windows and DesqView/X. The OnNet Kernel
includes a number of advanced features, such as gateway fallback and router
discovery, that allow for performance optimization, network redundancy, easy
configuration and error recovery in complex networks. The OnNet Kernel is sold
both bundled with FTP's networking applications and separately as a stand-alone
product to OEMs for embedding in their products and to end users to run third
party applications or other resource sharing products.
FTP's INTERDRIVE family of network file system solutions includes
InterDrive Client NFS for Windows 95 and InterDrive Client NFS for Windows NT,
which are client applications that provide network users with access to
printers, directories and files systems on network servers running the NFS
server software, and InterDrive Server NFS for Windows NT, a server product that
lets users share applications, information and devices (such as CD-ROMs) that
are located on the NFS server as if it were connected directly to a desktop PC.
FTP's X ONNET products allow Windows users to access networked applications
based on the X-Windows (X.11) standard. X OnNet is both powerful and easy to
use, and can run on any Windows Sockets compliant network software. FTP offers
16-bit and 32-bit versions of this product. X OnNet is available for Windows 3.1
and Windows for Workgroups and X OnNet32 is available for Window 95.
SERVER NETWORKING PRODUCTS FOR THE VIP NETWORK
FTP's VIP server networking products are intended to provide a fast, easy
way for managers to connect users to the extended enterprise VIP Network. These
products are being designed to be able to integrate with existing and planned
enterprise network infrastructures to enable user-based VIP Networks in a secure
and managed environment. The Company's technology focus in the VIP server
networking product area has included security policies and directory services.
The Company expects to devote significant development efforts during 1997
relating to these technologies.
The Company currently has two VIP Network server products, both belonging
to the Company's INTERNET GATEWAY family of products. Internet Gateway for
NetWare and Internet Gateway for Windows NT are server-based products that allow
Novell NetWare networks to connect to TCP/IP-based corporate intranets and the
Internet. These products provide a wide range of features that allow network
managers to manage, secure and audit connectivity to an organization's IP
networks and the Internet through a single centralized interface. Because the
TCP/IP stack is installed centrally on the NetWare or Windows NT server rather
than on each desktop, only one IP address is required, dramatically simplifying
network management.
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AGENT APPLICATIONS FOR THE VIP NETWORK
Agents are generally self-contained intelligent software solutions that
perform a variety of tasks on behalf of a user, such as simple message
broadcasts to users, delivery of software, auditing, remote execution and
network monitoring control. Intelligent agents also have the ability to make
real-time decisions and modify their behavior based on the changing conditions
of a network. For example, an agent can modify its pre-set travel plan to return
to a busy PC again at a later time or generate a report listing unavailable PCs.
"Agent-enabled" applications can automatically run tasks triggered by events
without user interaction.
FTP is designing its agent applications as platform-independent agents that
can be deployed in network communities to automate traditional network
management functions through IP-connected devices. With agent technology,
managers can manage, monitor and troubleshoot end user systems and network
devices in a bi-directional manner from a single location. FTP's agent
applications are being designed to be mobile, have built-in security and be
dispatched from any client or server to a community of hosts on an intranet.
Primarily designed with Java and ActiveX standards, these agents will help
enable critical network points to be VIP Network-ready. FTP's agent applications
are based on "push" technology architecture, which allows data to be "pushed" to
a client using a Java-based agent without any user interaction or
decision-making. The push model requires the Java Virtual Machine and an agent
responder (a small Java-based footprint which has built-in security and receives
an agent), which is included in FTP's agent-enabled products. FTP's agent
technology is also being integrated into other FTP VIP Network components.
FTP has a number of agent applications under development. For example, an
auditor application is under development that will dispatch an agent to
inventory hardware, software and configuration information of target systems
within a network community; the data collected by the agent will be stored in
databases which can be accessed by the auditor as well as by other FTP agent
applications. Also under development is a distributor agent application that
will dispatch an agent carrying a payload, such as software updates, to be
distributed to targeted systems within a network community.
OTHER PRODUCTS
FTP continues to derive significant revenue from its PC/TCP product line,
particularly outside the United States. Based on FTP's PC/TCP Kernel
implementation of the TCP/IP protocol suite, FTP's PC/TCP products allow PC
users to share information, access data from other sources, run host-based
applications and use network services across an organization's entire computing
environment. FTP's PC/TCP products are compatible with MS-DOS, NetWare, LAN
Manager, Windows for WorkGroups and Vines, but are generally deployed in MS-DOS
environments.
The PC/TCP Kernel is a high performance, highly reliable implementation of
the core TCP/IP suite of protocols. PC/TCP includes a number of advanced
features such as gateway fallback and router discovery that allow for
performance optimization, network redundancy, easy configuration and error
recovery in complex networks. The PC/TCP Kernel is sold as part of other FTP
products and is also sold separately as a stand-alone product to OEMs for
embedding in their products and to end users to run third party applications or
other resource sharing products. In addition, FTP offers a software development
kit to enable end users and third parties to develop DOS application programs.
The Company also continues to sell Firefox's NOV*IX connectivity products.
These products enable Novell NetWare LAN workgroups to access applications and
services on workstations, minicomputers, mainframes and the Internet. These
products employ a client-server architecture, with
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the server portion providing centralized management and security features and
the client portion providing terminal emulation, file transfer and other client
services. NOV*IX for WorkGroups also provides a UNIX command interface and IP
tools. NOV*IX for Internet provides mail, news, a web browser and a gopher
application.
SALES AND MARKETING
FTP distributes its products through multiple channels, including
value-added resellers, systems integrators, OEMs, distributors and direct sales.
FTP's distribution strategy is to select and to utilize the various channels to
address cost-effectively the broadest available market while minimizing
conflicts among its distribution channels. This strategy has resulted and is
expected to continue to result in changes from time to time in the Company's
distribution model. See Appendix A, "Cautionary Factors -- Marketing and
Distribution Risks."
As described above under "-- FTP's VIP Network Strategy," the Company
intends to enter into strategic alliances providing for the joint development
and/or distribution of certain VIP Network products. FTP entered into the first
of such agreements with IBM in February 1997. That agreement provides for the
development and marketing of networking technologies related to IP
communications. FTP's ability to fully implement the VIP Network concept depends
in part on its success in entering into and implementing such strategic
alliances. See Appendix A, "Cautionary Factors -- Reliance on Strategic
Alliances."
FTP generally seeks to market its products to large and mid-size
organizations with a wide range of networking requirements by identifying
various features and applications of FTP's products that address the customer's
networking needs. Marketing activities include advertising in trade
publications, direct mailings to target customers, participating in trade shows
and conferences, publishing articles in newsletters and technical journals, and
participating in the TCP/IP, Internet and other emerging standards setting
processes.
As of December 31, 1996, FTP had 188 sales employees and 65 marketing
employees. FTP's sales and marketing operations are conducted from its principal
offices in Andover, Massachusetts, and additional offices in San Jose,
California and Arlington, Virginia. FTP also has sales support and marketing
offices in England, France, Germany, Japan and Singapore. During the first
quarter of 1997, FTP opened a sales office in the Chicago area and a sales
support and marketing office in Sweden.
UNITED STATES. In the United States, FTP markets its products directly to
large and mid-size companies and educational institutions. These companies and
institutions generally have complex enterprise and networking requirements that
include a wide range of applications. FTP also markets its products in the
United States through distributors, value-added resellers, systems integrators
and OEMs. FTP's sales to the United States federal, state and local governments
are conducted directly and through government resellers and OEMs. The Company
intends to increase its focus on selling its products in the United States
through distributors, value-added resellers, systems integrators and OEMs rather
than directly. See Appendix A, "Cautionary Factors -- Marketing and Distribution
Risks."
INTERNATIONAL. In the years ended December 31, 1996, 1995 and 1994, FTP
derived 42%, 46% and 44% of its sales, respectively, from outside the United
States. FTP relies on a network of resellers, systems integrators and
distributors located in Europe, the Middle East, South America, Canada, Russia
and Asia Pacific to sell its products internationally. FTP's offices in England,
France, Germany, Sweden, Japan and Singapore provide assistance to resellers,
systems integrators and distributors in their efforts to license FTP's products.
Versions of OnNet are available in French, German, Italian, Japanese
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and Spanish. A Kanji version of PC/TCP has been sold in Japan since 1988. A
Korean version of PC/TCP has been sold in Korea since 1993. See Appendix A,
"Cautionary Factors -- Marketing and Distribution Risks" and "-- International
Sales."
For financial information about industry segments, see Note J of the Notes
to the Consolidated Financial Statements included under Item 8 of this Report.
CUSTOMERS
FTP's customers include large corporations in the aerospace, automotive,
cable television, data processing, energy, financial services, mobile
communications, retail, telecommunications and other industries; federal, state,
local and foreign government organizations; and educational and research
institutions. No single customer accounted for more than 10% of FTP's revenue
for 1996.
CUSTOMER SERVICE AND SUPPORT
FTP believes that a high level of continuing customer support and service
is critical to its objectives of developing long-term relationships with its
customers and establishing FTP as the leader in networking solutions. FTP's
service and support activities are related to software and network configuration
issues and are provided by telephone support and remote telephone access from
FTP's facilities located in North Andover, Massachusetts. FTP also provides
customers with on-site installation support and training. FTP has a toll-free
technical support number available from 8:00 a.m. to 8:00 p.m. (Eastern time),
Monday through Friday. Support is also available through e-mail and electronic
bulletin boards. During the second quarter of 1997, FTP intends to open a
service and support center in Europe.
FTP currently offers maintenance contracts for site licenses. Site license
customers can purchase an initial 15-month maintenance contract at a price equal
to 15% of the aggregate site license price, which entitles them both to
unlimited telephone support and to free updates of the product during the
maintenance period. After the first 15 months, annual 12-month renewals may be
purchased.
FTP also currently offers a Partnership Support Program for its strategic
customers that provides 24-hour support seven days a week. This program requires
the customer to establish and maintain a help desk on site to provide front-line
support to all users. A group of support engineers at FTP is available to assist
customer personnel at these help desks in providing support.
During the second quarter of 1997, FTP intends to introduce a modified
support program. Under the new program, customers would have the option of
purchasing one of three levels of technical telephone support at varying price
levels. In addition, customers would be able to separately subscribe and pay for
software updates. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations -- Total Revenue --
Factors Affecting Revenue."
COMPETITION
The software industry is extremely competitive. The principal competitive
factors in the market are performance, reliability, compatibility,
functionality, price, customer support, ease of use, memory requirements,
availability of third party applications and technical reputation.
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The Company believes that none of its competitors presently is offering a
set of software solutions designed to provide all of the features intended to be
provided by the VIP Network when fully implemented. However, the Company
believes that the major U.S. computer and communications systems vendors,
including Microsoft Corporation ("Microsoft"), Novell, Inc. ("Novell") and Sun
Microsystems, Inc. ("Sun"), alone or in conjunction with other software
companies, could either design and implement their own versions of the VIP
Network concept or design and develop an alternative solution that might achieve
the same goals as the VIP Network concept. The Company also believes that
hardware companies, such as Cisco Systems, Inc., could develop competing
hardware solutions designed to achieve the goals of the VIP Network.
In the networking market, FTP competes with major computer and
communications systems vendors, including Microsoft, Novell and Sun, as well as
networking software companies such as NetManage, Inc., Attachmate Corporation
and Wall Data, Inc. The Company competes with a wide variety of software
companies in the markets for agent, directory services and security software
products and technologies.
Many of FTP's competitors have substantially greater financial, technical,
sales, marketing and other resources than FTP. Several of these vendors,
including Novell, have developed proprietary protocols that compete with TCP/IP.
Also, certain of such vendors, such as Microsoft, Novell and Sun, include
versions of the TCP/IP protocol in their products at little or no additional
cost. Because FTP's products are based upon an open non-proprietary protocol,
other companies may enter the market with their own implementations of TCP/IP.
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 had a material adverse effect on its business, financial
condition and results of operations during 1996 and are expected to continue to
have such an effect during 1997. See Appendix A, "Cautionary Statements --
Competition" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Total Revenue -- Factors Affecting
Revenue."
PROPRIETARY RIGHTS AND LICENSING
The technology included in the Company's products is principally owned by
FTP. A portion of the technology included in certain of FTP's products is
licensed to FTP by third parties, generally under irrevocable licenses that also
provide FTP with access to source code to enable FTP to enhance and maintain the
technology. As described above under "-- FTP's VIP Network Strategy," the
Company intends to enter into strategic alliances providing for the joint
development and/or distribution of certain VIP Network products. Accordingly,
the Company expects that its products will increasingly include technologies of
third parties. See Appendix A, "Cautionary Factors -- Interoperability with
Third Party Products and Technologies."
FTP relies on a combination of copyrights, trademarks, trade secret law and
contracts to protect its proprietary technology. FTP generally provides software
products to end users under non-exclusive shrink-wrap licenses, which provide
that the license may be terminated by FTP if the end user breaches the terms of
the license. These licenses generally require that the software be used only
internally and on a single PC or server. FTP authorizes its dealers to
sublicense software products to end users under similar terms. FTP also makes
available to end users master software licenses which permit either a specified
limited number of copies or an unlimited number of copies of the software to be
made for internal use. Certain provisions of these licenses, including
provisions protecting against unauthorized use, copying, transfer and
disclosure, may be unenforceable under the laws of certain jurisdictions. FTP
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<PAGE> 12
generally enters into confidentiality and/or license agreements with its
employees, consultants, distributors, customers and potential customers and
limits access to and distribution of its source code and other proprietary
information. See Appendix A, "Cautionary Factors -- Proprietary Rights."
FTP has registered or applied for the registration of the trademarks FTP
Software, VIP Network, OnNet, InterDrive and PC/TCP in the United States and in
certain foreign countries. Several other registrations are in process in both
the United States and in various foreign countries.
EMPLOYEES
As of December 31, 1996, FTP had 804 full-time employees, including 253 in
marketing and sales, 116 in technical support, 257 in product development, 27 in
manufacturing and 151 in general and administrative functions and management. Of
such employees, approximately 630 are employed in the United States and
approximately 100 are employed in the United Kingdom. FTP's employees are not
represented by a labor union or other collective bargaining agent, and FTP
believes that its relations with its employees are good.
SUBSIDIARIES
FTP currently conducts its operations directly and through several
subsidiaries. FTP's subsidiaries include Firefox Communications Inc., Firefox
(U.S.) Inc., FTP Software Limited (U.K.), FTP Software Worldwide, Inc. (France),
FTP Software GmbH (Germany), FTP Software (Asia Pacific) Pte Ltd (Asia Pacific
other than Japan and Korea) and FTP Software K.K. (Japan and Korea). The
operations of Campbell Services, Inc. and FTP Software Canada Ltd., each of
which is also a subsidiary of FTP, are reflected in discontinued operations in
the Company's consolidated financial statements included under Item 8 of this
Report.
DISCONTINUED OPERATIONS
From 1994 to 1996, the Company explored technology opportunities in the
then-emerging collaborative and Internet software markets. In February 1996, FTP
acquired the Mariner Internet software 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 collaborative GroupWorks software product, for a net
cash purchase price of approximately $6.3 million; and in April 1996, FTP
acquired Campbell Services, Inc., the developer of OnTime, a scheduling software
product, for a net cash purchase price of approximately $15.0 million. The
Company also acquired a line of document viewer and conversion products from
Keyword Office Technologies Ltd. in early 1995 for a net cash purchase price of
approximately $2.4 million.
In May 1996, as a result of significant changes in the networking software
industry and the increasingly rapid evolution of the Internet market 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.
In September 1996, as part of the announcement of its new strategic vision
and as a result of its determination to focus on the client-server, agent,
security and directory services products and technologies necessary to implement
that strategy, the Company announced a formal plan to spin off, through the sale
to third parties, its collaborative lines of business and to discontinue other
selected
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<PAGE> 13
product lines, including those described above. Accordingly, these operations
are treated as discontinued operations in the Company's consolidated financial
statements included under Item 8 of this Report, and the Company recorded a $4.8
million charge in the third quarter of 1996 to write down the related assets to
estimated net realizable values. During the fourth quarter of 1996, the Company
sold certain non-material product lines for amounts consistent with initial
estimates. The Company continues to seek opportunities to sell the remaining
product and business lines and has made no significant changes to its plans with
respect to such sales. The Company expects to complete remaining dispositions
within the time frame announced in September 1996.
ITEM 2. PROPERTIES.
FTP leases approximately 107,000 square feet at its corporate headquarters
in Andover, Massachusetts (of which approximately 49,700 square feet are
subleased to a third party), approximately 135,000 square feet at its facility
in North Andover, Massachusetts and approximately 32,000 square feet at its
manufacturing facility in Wilmington, Massachusetts. FTP also leases
approximately 125,000 square feet for sales, sales support and marketing offices
in San Jose, California, the Chicago area, the Detroit area, Arlington,
Virginia, England, France, Germany, Sweden, Singapore and Japan and office space
in Calgary, Canada.
ITEM 3. LEGAL PROCEEDINGS.
In March 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 original complaint alleged that
the defendants knowingly concealed adverse facts and made false or misleading
forward and non-forward looking statements concerning the operating results and
financial condition of FTP, the effects of FTP'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 Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and Rule 10b-5 thereunder and seeks relief in
the form of unspecified compensatory damages, costs and expenses and such other
relief as the court deems proper and just. In August 1996, plaintiffs filed an
amended complaint adding allegations concerning what plaintiffs claim were
wrongful sales and accounting practices by FTP during the class period, but
asserting the same causes of action as the original complaint. In October 1996,
FTP filed a motion to dismiss the complaint on the grounds that the plaintiffs
had not met the pleading requirements of the Private Securities Reform Act of
1995. This motion was denied by the court on February 13, 1997. As a result, the
case is now in the discovery phase. 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 has spent and
expects to continue to spend substantial sums for legal and expert fees and
costs. The cost of defending the litigation and the outcome of the litigation
are uncertain and cannot be estimated. If the lawsuit were determined adversely
to 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.
In February 1996, a class action lawsuit, captioned RICHARD ZEID AND SIOM
MISRAH ET AL. V. JOHN KIMBERLEY, FRANK M. RICHARDSON, MARK A. ROWLINSON AND
FIREFOX COMMUNICATIONS, INC., Case No. C96 20136, was filed in the United States
District Court for the Northern District of California, San Francisco
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<PAGE> 14
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 contend resulted in an artificial inflation in the price of Firefox's
common stock. The suit was purportedly brought on behalf of a class of
purchasers of Firefox's common stock during the period from August 3, 1995 to
January 2, 1996. The complaint alleged claims for violations of Sections 10(b)
and 20(a) of the Exchange Act and Rule 10b-5 thereunder and sought relief in the
form of unspecified compensatory damages, pre- and post-judgment interest,
attorneys' and expert witness fees and such extraordinary, equitable and/or
injunctive relief as permitted by law, equity and the federal statutory
provisions under which the suit was brought. In June 1996, the District Court
entered an order dismissing plaintiffs' complaint. In the order, the court
dismissed with prejudice certain of plaintiffs' claims that warnings and
disclosures in Firefox's Form 10-Qs were false and misleading, while granting
plaintiffs permission to amend their complaint as it concerned certain of
plaintiffs' claims that Firefox was responsible for false and misleading
analysts reports, Firefox statements and financial statements.
In July 1996, plaintiffs filed their 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 that they
participated in drafting, reviewing and/or approving allegedly misleading
statements, releases, analysts reports and other public representations,
including disclaimers and warnings of and about Firefox. The amended complaint
also alleges that John A. Kimberley, then an officer and director of Firefox,
and Frank Richardson, a former officer and director of Firefox, are liable as
"controlling persons" of Firefox. In September 1996, Firefox filed a motion to
dismiss the amended complaint on the grounds that the plaintiffs had not met the
pleading requirements of the Private Securities Reform Act of 1995. The motion
was heard by the court on December 3, 1996. As of March 26, 1997, the court had
not yet issued a ruling on the motion.
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 has spent and
expects to continue to spend substantial sums for legal and expert fees and
costs. The cost of defending the litigation and the outcome of the litigation
are uncertain and cannot be estimated. If the lawsuit were determined adversely
to 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of its security holders
during the fourth quarter of 1996 through the solicitation of proxies or
otherwise.
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<PAGE> 15
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following is a list of the Company's executive officers as of March 28,
1997:
NAME AGE POSITION
- ---- --- --------
Glenn C. Hazard 45 President and Chief Executive Officer and a Director
Susan L. Bostrom 36 Senior Vice President of Global Marketing and
Strategic Planning
Douglas F. Flood 39 Senior Vice President of Business Development and
Planning, General Counsel and Clerk
John F. Geraghty 34 Vice President, Treasurer and Controller
John H. Keller 45 Senior Vice President of Global Engineering and
Development and a Director
John A. Kimberley 49 Vice Chairman of FTP, Executive Vice President of
Firefox and a Director
John G. McAughtry 50 Senior Vice President of Global Sales
Peter R. Simkin 44 Chief Technology Officer
David H. Zirkle 60 Chairman and a Director(1)
- ------------------
(1) Mr. Zirkle has announced that he will retire from such positions effective
March 31, 1997.
Glenn C. Hazard has served as President and a director of FTP since April
1996 and as Chief Executive Officer since October 1996. From April to October
1996, he also served as Chief Operating Officer. Mr. Hazard has been elected
Chairman of the Board effective April 1, 1997, following Mr. Zirkle's retirement
from FTP. From March to December 1995, Mr. Hazard served as Senior Vice
President of Business Transformation of Legent Corporation, a systems management
software company acquired by Computer Associates in August 1995. Before that,
Mr. Hazard held various management positions with AT&T Corp. and its
subsidiaries from 1983 to 1995, including Senior Vice President of Business
Transformation of AT&T Corp. from June 1994 to March 1995, Vice President of
Business Process Reengineering of AT&T Global Information Systems from September
1993 to June 1994, Vice President of Process Reengineering of AT&T Global
Business Communications Systems from August 1992 to September 1993 and Director
of Process Reengineering of AT&T Global Business Communications Systems from
1990 to August 1992.
Susan L. Bostrom joined FTP in July 1996 as Senior Vice President of Global
Marketing and Strategic Planning. Before joining the Company, Ms. Bostrom served
as Director, Strategic Planning for National Semiconductor Corporation from June
1994 through June 1996 and as Senior Engagement Manager in electronics for
McKinsey & Company, Inc., a management consulting firm, from 1986 to March 1994.
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<PAGE> 16
Douglas F. Flood joined FTP as General Counsel in June 1993. In June 1994,
he was elected Clerk of FTP, in January 1995 he became Vice President, in August
1995 he was promoted to Senior Vice President of Administration and in February
1996 he became Senior Vice President of Business Development and Planning. From
1991 to June 1993, he practiced law at Fish & Richardson, concentrating in the
areas of licensing and copyright. From 1987 to 1991, Mr. Flood was Associate
General Counsel at Interactive Data, a Dun & Bradstreet corporation, and from
1983 to 1987 he served as an attorney for Raytheon Company.
John F. Geraghty has served as Controller of FTP since May 1993. Mr.
Geraghty was elected Vice President in October 1995 and acting Treasurer in
March 1997 following the February 28, 1997 resignation of John J. Warnock, Jr.,
the Company's former Chief Financial Officer and Treasurer. From 1985 to May
1993, Mr. Geraghty was a certified public accountant with Tonneson & Co.
John H. Keller joined FTP in November 1993 as Vice President of Technical
Services. In May 1994 he became Vice President of Engineering, in August 1995 he
was promoted to Senior Vice President of Business Operations and in July 1996 he
became Senior Vice President of Global Engineering and Development. Mr. Keller
has served as a director of FTP since February 1995. From 1986 to November 1993,
Mr. Keller was employed by the Spartacus Division of Fibronics International,
Inc., a networking software company, in various capacities, including Vice
President of Operations from 1992 to November 1993 and Director of Operations
from 1991 to 1992.
John A. Kimberley joined FTP in July 1996 as Vice Chairman of FTP and
Executive Vice President of Firefox. Prior to joining FTP, Mr. Kimberley was
employed by Firefox from 1990 to July 1996 as Chairman of the Board, President
and Chief Executive Officer. From 1986 to 1990 he was employed as Managing
Director of TIS Systems Limited, a UNIX hardware and software distributor. From
1968 to 1986, Mr. Kimberley held sales, marketing and management positions with
a number of hardware and software companies. Mr. Kimberley has served as a
director of FTP since July 1996.
John G. McAughtry joined FTP in September 1996 as Senior Vice President of
Global Sales. From July 1993 through August 1996, Mr. McAughtry served as Vice
President - Asia Pacific/Latin America for Centura Software Corporation, an
application development and database software company. From 1992 to July 1993,
Mr. McAughtry acted as a software consultant, and from 1970 to 1992 held
management positions with a number of hardware and software companies.
Peter R. Simkin joined FTP in July 1996 as Chief Technology Officer. Mr.
Simkin came to FTP from Firefox, where he served as Vice President and Chief
Technical Officer from January 1994 to July 1996 and as Vice President of
Marketing and Product Strategy from 1989 until January 1994. Mr. Simkin, one of
the founders of Firefox, also served as a director of Firefox from 1989 to
February 1995. Before that time, Mr. Simkin held sales and marketing positions
with a number of hardware and software companies over a 20-year period.
David H. Zirkle has served as Chairman and a director of FTP since January
1993. Mr. Zirkle also served as President of FTP from January 1993 to April 1996
and as Chief Executive Officer of FTP from January 1993 to October 1996. Mr.
Zirkle has announced that he will retire from all positions he holds with FTP on
March 31, 1997. Mr. Zirkle served as a consultant to FTP from February through
December 1992.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
<TABLE>
The Company's common stock, $.01 par value ("Common Stock"), is traded on
the Nasdaq National Market under the symbol "FTPS". The following table shows
the high and low sales price per share for the Common Stock, as quoted on the
Nasdaq National Market, for each quarter since January 1, 1995:
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995:
First Quarter............................. $35.50 $25.125
Second Quarter............................ 32.375 20.25
Third Quarter............................. 32.50 20.50
Fourth Quarter............................ 40.625 21.75
1996:
First Quarter............................. $29.375 $10.375
Second Quarter............................ 14.375 7.625
Third Quarter............................. 9.50 5.875
Fourth Quarter............................ 8.625 4.875
1997:
First Quarter (through March 21, 1997).... $ 8.375 $ 5.875
</TABLE>
The last sales price of the Common Stock as reported on the Nasdaq National
Market on March 21, 1997 was $6.1875 per share. As of March 21, 1997, there were
approximately 409 record holders of the Common Stock and approximately 20,000
beneficial holders of the Common Stock.
The Company has not paid any cash dividends on its Common Stock since 1992
(see footnote 5 to the table included under Item 6 of this Report) and does not
intend to pay any cash dividends on its Common Stock in the foreseeable future.
The Company did not issue any securities during 1996 that were not
registered under the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is certain selected financial data of the Company for each
of the five years in the period ended December 31, 1996 and as of December 31,
1996, 1995, 1994, 1993 and 1992 (in thousands, except per share data). The
following statement of operations data for the years ended December 31, 1996,
1995 and 1994 and balance sheet data as of December 31, 1996 and 1995 were
derived from the financial statements of the Company for and as of such dates
included under Item 8 of this Report. The following statement of operations data
for the years ended December 31, 1993 and 1992 and balance sheet data as of
December 31, 1994, 1993 and 1992 were derived from the consolidated financial
statements of the Company for and as of such dates that are not included in this
Report. The following data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and FTP's consolidated financial statements and the notes related
thereto included under Item 8 of this Report.
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<PAGE> 18
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Total revenue $101,091 $128,815 $92,180 $57,616 $32,672
Income (loss) from continuing operations(2) (47,035) 41,373 36,684 25,140 12,643
Net income (loss)(3) (77,577) 24,634 22,975 16,324 8,047
Income (loss) per share from continuing
operations(4):
Primary $ (1.57) $ 1.47 $ 1.28 $ 1.00 $ .54
Fully diluted (1.57) 1.46 1.26 .92 .54
Net income (loss) per share(4):
Primary $ (2.59) $ .87 $ .80 $ .65 $ .34
Fully diluted (2.59) .87 .79 .60 .34
Weighted average common and common
equivalent shares outstanding(4):
Primary 29,896 28,215 28,553 25,129 23,429
Fully diluted 29,896 28,263 29,070 27,361 23,429
DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ------------ ---------- ---------- ----------
BALANCE SHEET DATA:
Working capital $ 54,843 $ 88,785 $ 53,053 $69,242 $ 9,575
Total assets(1) 158,035 189,629 127,368 83,711 18,775
Total liabilities 26,758 24,821 14,684 7,633 5,739
Stockholders' equity 131,277 164,808 112,684 76,078 13,036
Dividends(5) -- -- -- -- 7,365
Dividends per share -- -- -- -- $ .44
<FN>
- --------------
(1) During September 1996, the Company announced a formal plan to spin off, through the sale to third parties,
certain lines of business and to discontinue selected product lines. Accordingly, the Company's consolidated
financial statements, and all prior periods presented, have been restated to report separately the net assets
and operating results of the discontinued operations. See Note C of the Notes to Consolidated Financial
Statements included under Item 8 of this Report.
(2) Product development expenses for 1996 include a charge of approximately $37.9 million for certain acquired
in-process technology related to the acquisition of Firefox.
(3) From January 1, 1990 through June 30, 1992, FTP operated as an S corporation under Subchapter S of the
Internal Revenue Code of 1986, as amended, and comparable provisions of certain state tax laws. The provision
for income taxes for the year ended December 31, 1992 reflects pro forma federal and state income taxes as if
FTP had been subject to federal and state income taxation as a C corporation during those periods. Pro forma
adjustments are not applicable to the years ended December 31, 1996, 1995, 1994 and 1993.
(4) The Company effected an 8-for-1 and 30-for-1 split of the Common Stock during 1993 and 1992, respectively.
All share and per share amounts have been restated to reflect this split.
(5) Dividends in 1992 include distributions made to stockholders of approximately $3.5 million to satisfy federal
and state income tax obligations of the stockholders attributable to FTP's S corporation earnings.
</TABLE>
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis provides information that management
of FTP 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 consolidated financial statements and
the notes related thereto included under Item 8 of this Report.
FORWARD-LOOKING STATEMENTS IN THIS SECTION AND ELSEWHERE IN THIS REPORT ARE
MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT FOR A VARIETY OF
REASONS. THESE REASONS INCLUDE, BUT ARE NOT LIMITED TO, COMPETITION, COMPETITIVE
PRICING PRESSURES, TECHNOLOGICAL AND OTHER MARKET CHANGES, DEPENDENCE ON NEW
PRODUCTS AND STRATEGIC ALLIANCES, DISTRIBUTION RISKS, CHANGES IN PERSONNEL AND
OTHER RISKS OUTLINED BELOW AND IN APPENDIX A, "CAUTIONARY FACTORS," TO THIS
REPORT.
RECENT DEVELOPMENTS
In September 1996, the Company unveiled its vision for the VIP Network, a
software architecture concept designed to enable organizations to secure, manage
and transparently extend their networks beyond traditional boundaries. The VIP
Network is intended to allow an organization to support mobile personal computer
users and remote sites, to build virtual collaborative workgroups within and
across the organization and to facilitate electronic commerce by building
federated networks between and among the organization and its customers,
suppliers and other business partners. FTP's current and planned VIP Network
products, which will function as important components of an enterprise's VIP
Network solution, generally fall into three categories: client networking
products; server networking products; and agent applications.
The Company's server networking products are based on technology developed
by Firefox. FTP acquired Firefox in July 1996 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 6.4 million shares of Common Stock and
approximately $9.1 million in cash, and outstanding employee options to purchase
shares of the common stock of Firefox were converted into options to purchase
approximately 336,000 shares of Common Stock.
In May 1996, as a result of significant changes in the networking software
industry and the increasingly rapid evolution of the Internet market 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.
From 1994 to 1996, the Company explored technology opportunities in the
then-emerging collaborative and Internet software markets. In February 1996, FTP
acquired the Mariner Internet software 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 collaborative GroupWorks software product, for a net
cash purchase price of approximately $6.3 million; and in April 1996, FTP
acquired Campbell Services, Inc., the developer of
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<PAGE> 20
OnTime, a scheduling software product, for a net cash purchase price of
approximately $15.0 million. The Company also acquired a line of document viewer
and conversion products from Keyword Office Technologies Ltd. in early 1995 for
a net cash purchase price of approximately $2.4 million. The majority of the
purchase price for these acquisitions was attributable to incomplete technology
and charged to product development expenses at the time of the respective
acquisitions, which charges are currently reported in discontinued operations.
As part of the announcement in September 1996 of its new strategic vision
and as a result of its determination to focus on the client-server, agent,
security and directory services products and technologies necessary to implement
that strategy, the Company announced a formal plan to spin off, through the sale
to third parties, its collaborative lines of business and to discontinue other
selected product lines, including those described in the preceding paragraph.
Accordingly, these operations are treated as discontinued operations in the
Company's consolidated financial statements included under Item 8 of this
Report, and the Company recorded a $4.8 million charge in the third quarter of
1996 to write down the related assets to estimated net realizable values.
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
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 CONTINUING OPERATIONS
TOTAL REVENUE
Total revenue consists of product revenue and service revenue. Product
revenue includes revenue from product sales and royalties from certain OEM
customers. Service revenue includes revenue from maintenance, consulting and
training contracts and is recognized ratably over the length of the contract
periods.
Total revenue for 1996 was approximately $101.1 million, compared to
approximately $128.8 million in 1995 and approximately $92.2 million in 1994.
Product revenue for 1996 was approximately $84.6 million, compared to
approximately $115.7 million in 1995 and approximately $85.1 million in 1994.
Service revenue for 1996 was approximately $16.5 million, compared to
approximately $13.1 million in 1995 and approximately $7.0 million in 1994. As a
percentage of total revenue, product revenue decreased to approximately 84% in
1996 from approximately 90% in 1995 and approximately 92% in 1994 while service
revenue increased to approximately 16% in 1996 from approximately 10% in 1995
and approximately 8% in 1994. To date, substantially all of FTP's revenue has
been from sales of its OnNet and PC/TCP networking software products. See "Item
1. Business -- Products."
PRODUCT REVENUE. Product revenue decreased in 1996 compared to 1995
primarily as a result of longer product sales cycles and lower average unit
sales prices for FTP's products and, beginning in the second half of 1996, a
decrease in unit sales, all of which FTP believes were attributable to an
increase in the number of competitors and competing products offered in the
TCP/IP market, 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. See "-- Factors Affecting
Revenue" below. The dollar increase in product revenue in 1995 compared to 1994
was primarily due to increased unit sales, which FTP believes resulted primarily
from the establishment of sales support and marketing
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<PAGE> 21
offices in France, Germany and the United Kingdom during the first half of 1995
and from product developments, including the release in the first quarter of
1995 of enhanced versions of both FTP's OnNet and PC/TCP products.
SERVICE REVENUE. The dollar increases in service revenue both in 1996
compared to 1995 and in 1995 compared to 1994 were primarily attributable to
growth over such periods in FTP's installed product base from which such
revenues are obtained.
INTERNATIONAL REVENUE. International sales consist of export sales,
primarily to customers in Europe, Asia Pacific and Canada. International sales
of approximately $42.6 million, $59.2 million and $40.4 million accounted for
approximately 42%, 46% and 44% of the Company's total revenue for the years
ended December 31, 1996, 1995 and 1994, respectively. The decrease in 1996
compared to 1995 was primarily attributable to the same factors that resulted in
the decrease in product revenue over such periods, as described above under "--
Product Revenue." The increase in 1995 compared to 1994 was primarily
attributable to increased unit sales to existing international resellers and
sales to new international resellers, which FTP believes resulted in part from
the establishment of local offices in France, Germany and the United Kingdom.
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 results of operations; however, Firefox prices,
invoices and collects a substantial portion of its sales in foreign currencies,
primarily British pounds sterling, and FTP anticipates that it will transact a
proportionately greater number of sales in local currencies as its distribution
channels are combined with those of Firefox. Accordingly, the Company
anticipates that currency fluctuations may have an increased effect on its
results of operations and financial condition in the future.
FACTORS AFFECTING REVENUE. As indicated above, the Company is facing
increasing competition in the TCP/IP market, which has resulted in longer sales
cycles and a decrease in average unit sales prices for certain of FTP's products
and, beginning in the second half of 1996, a decrease in unit sales. The Company
believes these trends are 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 PC's, and to slower sales rates similar
in effect to those experienced and announced by hardware and other software
manufacturers. Looking forward, FTP anticipates that some or all of these trends
will continue, and believes that the Company's future is substantially dependent
on the successful implementation of its new VIP Network strategy. This in turn
depends on the ability of the Company (i) to successfully market the VIP Network
concept, (ii) to enter into and implement strategic alliances that will enable
the Company both to expand its distribution channels and to develop the
additional products and technologies necessary to fully implement the VIP
Network concept (through both the incorporation of the Company's technologies in
the products of third parties and the incorporation of the technologies of third
parties, possibly including security and directory services technologies, in
certain planned VIP Network products) and (iii) to successfully develop and
timely release the additional VIP Network products necessary to fully implement
the VIP Network concept. If the Company is unsuccessful in any such regard, the
Company believes that the trends described above will continue to have a
material adverse effect on the Company's business, results of operations and
financial condition. Even if the Company is successful in implementing its new
corporate strategy, there can be no assurance that it will result in a material
improvement in the Company's business, results of operations or financial
condition. In addition, the Company is investing significantly in the training
of its sales and marketing personnel with respect to the VIP Network strategy
and the Company's VIP Network products. The amount of training necessary to
enable the Company's employees to successfully market and sell such products
could result in a delay of the revenue expected to be derived from the sale of
such products.
-19-
<PAGE> 22
Due to the encryption technology contained and expected to be contained in
certain of the Company's current and planned VIP Network products, such products
are and will be subject to U.S. export controls, and there can be no assurance
that such export controls will not limit the Company's ability to distribute
such products outside the United States or that international customers will
accept the products that the Company is allowed to export under such controls,
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company believes that wide fluctuations in the number of personnel
during 1996 also may have contributed to the decline in the Company's operating
results. The number of the Company's full-time employees increased from
approximately 740 at January 1, 1996 to approximately 880 at April 30, 1996. The
number of the Company's employees subsequently decreased by approximately 10% as
a result of the May 1996 workforce reduction described above, then increased by
approximately 125 as a result of the Firefox acquisition, then decreased to
approximately 800 at December 31, 1996. The Company believes that the loss of
personnel during the latter half of 1996 is attributable to increased
competition for qualified personnel in the industry, the decline in the
Company's financial results and the trading prices of its Common Stock during
1996 and, to a lesser extent, the integration of Firefox. FTP's ability to
maintain or increase revenue will also depend upon its ability to both hire and
retain qualified personnel.
The Company also believes that an expansion of the Company's sales and
marketing force during 1995 and early 1996 and the opening and expansion of
several offices outside of the United States during the same periods resulted in
inefficiencies in the Company's sales and marketing organizations during 1996.
During the fall of 1996, the Company hired a number of experienced management
personnel to reorganize the Company's sales and marketing organizations and
eliminate such inefficiencies. However, if the Company is unsuccessful in
eliminating such inefficiencies, it will not be able to take full advantage of
the expansion of its sales and marketing organizations, which may have a
material adverse effect on its results of operations.
Finally, the acquisitions completed by the Company during 1996,
particularly the acquisition of Firefox, required the attention and dedication
of management and other resources throughout the year, which caused a disruption
of the business activities of the Company and, in the case of the Firefox
acquisition, the business activities of Firefox, as well as a loss of momentum
in the business of Firefox, which the Company believes also adversely affected
its results of operations for 1996.
The Company and Firefox are in the process of integrating their
distribution channels. Firefox has relied significantly on its independent
distributors, systems integrators and value-added resellers for certain elements
of the marketing and distribution of its products. There can be no assurance
that any of Firefox's current distributors, systems integrators or value-added
resellers will be retained. In addition, the Company intends to increase its
focus in the United States on sales through distributors, value-added resellers,
systems integrators and OEMs rather than direct sales. Changes in distribution
channels may adversely affect sales of the Company's products and consequently
may adversely affect the Company's business, financial condition and results of
operations, at least in the near term. Any material increase in sales through
indirect channels may have an adverse effect on the Company's operating margins
due to the lower per unit revenue realized by the Company on sales through
indirect channels if the Company is unable to reduce selling, general and
administrative expenses.
During the second quarter of 1997, the Company intends to implement two
changes to its customer support and service programs that may affect both
product and service revenue for future periods. First, the Company intends to
modify its customer support program to separately provide and
-20-
<PAGE> 23
invoice for customer support and customer product updates. Second, the Company
intends to open a service and support center in Europe. See "Item 1. Business --
Customer Service and Support." While these changes are intended to increase
revenue, there can be no assurance that this will be the case or that such
changes will not have a material adverse effect on the Company's revenue if
customers react negatively to these changes.
See Appendix A for additional discussion of the factors described above and
other factors which may affect the Company's business, financial condition and
results of operations.
GROSS MARGIN
Product gross margin as a percentage of product revenue was approximately
92%, 94% and 93% in 1996, 1995 and 1994, respectively. The decrease in 1996
compared to 1995 resulted primarily from an increase in costs associated with
the amortization of technologies licensed or purchased in 1995 and 1996, and
lower revenues during 1996. The increase in 1995 compared to 1994 was primarily
due to a decrease in material costs in 1995 associated with increased
efficiencies in product packaging, which was partially offset both by increased
costs associated with releases of enhanced versions of FTP's OnNet and PC/TCP
products in mid-1995 and by increased amortization costs related to technology
licenses entered into by FTP in 1995 compared to 1994. Amortization expense was
approximately $2.7 million, $2.2 million and $0.9 million in 1996, 1995 and
1994, respectively.
Service gross margin as a percentage of service revenue increased to
approximately 41% in 1996 from approximately 30% in 1995. This increase is
primarily attributable to a higher rate of increase in FTP's installed product
base from which such revenues are obtained compared to the rate of increase in
the cost of providing such services. Service revenue has exceeded service costs
since the third quarter of 1994, including for the years ended December 31, 1996
and 1995, primarily as a result of an increase in FTP's installed product base.
Service costs exceeded service revenue in 1994, reflecting FTP's significant
investment in technical support personnel, systems and infrastructure.
The gross margins reported above are not necessarily indicative of gross
margin for future periods, which may vary significantly depending on, among
other things, changes in product mix resulting from the Company's new corporate
strategy, price competition, technological changes, cost changes and changes in
product distribution channels.
SALES AND MARKETING
Sales and marketing expenses increased to approximately $46.9 million in
1996 from approximately $36.6 million in 1995 and approximately $16.7 million in
1994. Such expenses as a percentage of total revenue were approximately 46%, 28%
and 18% in 1996, 1995 and 1994, respectively. The $10.3 million increase in 1996
compared to 1995 was primarily the result of (i) an increase in compensation
expenses associated with an increase in the number of sales and marketing
employees and an increase in compensation levels of existing sales and marketing
employees and (ii) increases in the levels of advertising, trade show and
international marketing activities compared to 1995. The percentage increase
over this period was due to both the dollar increase in such expenses described
above and the dollar decrease in revenue described under "-- Total Revenue"
above. The $19.9 million increase in 1995 compared to 1994 principally reflected
the opening and expansion of several international and domestic offices during
1995 (including the opening and expansion of offices in Europe and the opening
of offices in Singapore and Japan) as well as higher compensation expenses
associated both with an increase in the number of sales and marketing employees
during 1995 and with a significant increase in advertising, trade show and
international marketing activities.
-21-
<PAGE> 24
FTP expects to incur sales and marketing expenses during 1997 at or above
1996 levels, primarily for the implementation of its new corporate strategy,
continued domestic and international sales and marketing activities and the
integration of FTP's and Firefox's distribution channels and international
offices.
PRODUCT DEVELOPMENT
Product development expenses increased to approximately $64.7 million in
1996 from approximately $22.3 million in 1995 and approximately $16.5 million in
1994, representing approximately 64%, 17% and 18% of total revenue for each
period, respectively. Product development expenses for 1996 included a charge of
approximately $37.9 million for certain acquired in-process technology related
to the acquisition of Firefox. Excluding this charge, product development
expenses as a percentage of total revenue was approximately 27%,17% and 18%
for 1996, 1995 and 1994, respectively.
The increase in product development expenses of approximately $42.4 million
in 1996 compared to 1995 was primarily due to the $37.9 million charge for
acquired in-process technology described above. An increase in compensation
expenses related to an increase in development personnel during 1996 (resulting
in part from the Firefox acquisition), as well as an increase in the use of
outside contractors in connection with new product releases in 1996, in each
case compared to 1995, also contributed to the 1996 increase in product
development expenses. The percentage increase in 1996 compared to 1995
(excluding the charge described above) is primarily attributable to the decrease
in total revenue for 1996 and the increase in compensation expenses and the use
of outside contractors described above.
The increase in product development expenses of approximately $5.8 million
in 1995 compared to 1994 was primarily due to an increase in compensation
expenses related to an increase in the number of development personnel during
1995 and an increase in the use of outside contractors during such year.
FTP expects product development expenses to increase in 1997 from 1996
levels (excluding the $37.9 million charge described above) as the Company
continues to develop the products and technologies necessary to implement its
VIP Network strategy and as a result of the increase in the number of
development personnel that resulted from the Firefox acquisition.
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 either are not fully deductible in the same period or are
not deductible for tax purposes.
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<PAGE> 25
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to approximately $19.8
million in 1996 from approximately $12.7 million in 1995 and approximately $9.4
million in 1994, representing approximately 20% of total revenue for 1996 and
approximately 10% of total revenue for 1995 and 1994. The dollar increase in
1996 was primarily due to expenses relating to an increase in personnel during
1996 (including the hiring of several senior executive officers), costs incurred
in connection with the defense of the legal proceedings described under "--
Liquidity and Capital Resources" below and increased general and administrative
expenses resulting from the Firefox acquisition. The percentage increase in 1996
was also due to such factors as well as to the decrease in revenue described
above under "-- Total Revenue." The dollar increase in 1995 was primarily
attributable to increased staffing and associated expenses to manage and support
the expansion of FTP's operations during that year.
INCOME (LOSS) FROM CONTINUING OPERATIONS
For 1996, the Company experienced a loss from continuing operations of
approximately $47.0 million, representing approximately 47% of total revenue for
1996. In 1995, the Company had income from continuing operations of
approximately $41.4 million, compared to approximately $36.7 million in 1994,
representing approximately 32% and 40% of total revenue for 1995 and 1994,
respectively. The percentage decrease in 1996 compared to 1995 was primarily due
to the decrease in total revenue over such periods described above under "--
Total Revenue," the $37.9 million charge for the acquisition of in-process
technology in 1996 described above under "-- Product Development" and the 1996
increases in sales and marketing and general and administrative expenses
described above. Excluding the $37.9 million charge, the loss from continuing
operations for 1996 was approximately $9.1 million, or approximately 9% of total
revenue. The percentage decrease in 1995 compared to 1994 was primarily due to
the increase in sales and marketing expenses over such periods described above
under "-- Sales and Marketing."
INVESTMENT INCOME
Investment income was approximately $4.3 million in 1996, approximately
$6.2 million in 1995 and approximately $3.1 million in 1994. The Company invests
excess cash in high grade municipal bonds, U.S. government treasury obligations,
high grade corporate obligations and equity investments. The decrease in
investment income in 1996 compared to 1995 was primarily due to a reduction in
the Company's investment portfolio resulting from the investment of cash in the
1996 acquisitions described above under "-- Recent Developments." The increase
in 1995 compared to 1994 was primarily due to the investment of excess cash in
the Company's investment portfolio.
PROVISION FOR INCOME TAXES
The provision for income taxes for 1996, 1995 and 1994 was approximately
$1.0 million, $17.6 million and $14.9 million, respectively. FTP's effective tax
rate for 1996, 1995 and 1994 was 2.4%, 37.0% and 37.5%, respectively. Due to the
uncertainty as to when the deferred tax assets may be realized, the Company has
recorded a valuation allowance for all tax assets in excess of amounts available
to be recovered pursuant to tax loss carrybacks for the year ended December 31,
1996. The difference between the statutory rate and the effective rate for 1995
and 1994 resulted primarily from the benefits received from FTP's foreign sales
corporation and research and experimentation credits.
-23-
<PAGE> 26
DISCONTINUED OPERATIONS
As described above under "-- Recent Developments," in September 1996 the
Company announced a formal plan to spin off, through the sale to third parties,
its collaborative lines of business and to discontinue other selected product
lines. Accordingly, these operations are treated as discontinued operations in
the accompanying financial statements, and the Company recorded a $4.8 million
charge in the year ended December 31, 1996 to write down the related assets to
estimated net realizable values. As described in the notes to the accompanying
financial statements, such financial statements have been restated to report
separately in all periods presented the net assets and operating results of the
discontinued operations. Net assets of discontinued operations consist primarily
of purchased software and fixed assets less accounts payable and accrued
expenses. During the fourth quarter of 1996, the Company sold certain
non-material product lines for amounts consistent with initial estimates. The
Company continues to seek opportunities to sell the remaining product and
business lines and has made no significant changes to its plans with respect to
such sales. The Company expects to complete remaining dispositions within the
time frame announced in September 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, FTP had an aggregate of approximately $99.0 million
in cash and cash equivalents, short-term investments and long-term investments.
Of this amount, approximately $22.0 million was invested primarily in highly
liquid investments with original maturities of three months or less,
approximately $29.0 million was invested in short-term investments consisting of
U.S. government obligations and commercial paper with maturities of less than
one year and in equity investments, and approximately $48.0 million was invested
in U.S. government obligations, commercial paper and municipal obligations with
maturities of greater than one year. Cash and investments reflect approximately
$44.8 million of the net proceeds from FTP's 1993 and 1994 public offerings.
FTP generated funds from continuing operations of approximately $23.5
million, $35.1 million and $37.4 million in 1996, 1995 and 1994, respectively.
FTP made capital expenditures of approximately $9.1 million, $11.9 million and
$11.5 million in 1996, 1995 and 1994, respectively. Included in the capital
expenditures for 1996, 1995 and 1994 were payments for acquired technologies and
related assets in the amounts of approximately $5.6 million, $2.0 million and
$4.5 million, respectively.
Accounts receivable, net, decreased to approximately $16.6 million at
December 31, 1996 from approximately $30.8 million at December 31, 1995. This
decrease is primarily attributable to the decrease in revenue in 1996 and to the
payment in early 1996 of a substantial portion of the accounts receivable
outstanding at December 31, 1995.
As noted above under "-- Recent Developments," 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; in February 1996, FTP
acquired the Mariner Internet software 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, Inc.
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 6.4 million
shares of Common Stock and approximately $9.1 million in cash. In connection
with the Firefox acquisition, the Company incurred approximately $3.7
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<PAGE> 27
million of acquisition-related expenses (consisting primarily of investment
advisory fees and legal and accounting expenses).
To date, inflation has not had a material impact on FTP's financial
results.
On March 14, 1996, a class action lawsuit was filed against FTP, certain of
its officers and two former officers alleging violations of Sections 10(b) and
20(a) of the Exchange Act and Rule 10b-5 thereunder. On February 23, 1996, a
class action lawsuit was filed against Firefox and certain of its officers and
directors also alleging violations of Sections 10(b) and 20(a) of the Exchange
Act and Rule 10b-5 thereunder. For a more detailed description of these legal
proceedings, see "Item 3. Legal Proceedings" above and Note I to the Company's
consolidated financial statements included under Item 8 below. Each of FTP and
Firefox has reviewed the allegations in the lawsuit against it, believes such
allegations to be without merit and intends to defend itself and its officers
vigorously. In order to support an adequate defense, each of FTP and Firefox has
spent and expects to continue to spend substantial sums for legal and expert
fees and costs. The costs of defending each lawsuit and the outcome of each
lawsuit are uncertain and cannot be estimated. If the lawsuit against FTP were
determined adversely to FTP, or if the lawsuit against Firefox were determined
adversely to Firefox, such company could be required to pay a substantial
judgment, which could have a material adverse effect on the Company's
consolidated business, financial condition and results of operations.
Looking forward, FTP believes that its available cash, cash equivalents and
short-term investments and expected cash flow from continuing operations will be
sufficient to fund FTP's operations at least through 1997. As noted above under
"-- Recent Developments," FTP intends to make substantial investments in the
development of products and technologies necessary to implement its new
strategic vision. There can be no assurance, however, that the capital resources
necessary to continue to fund such investments will be available or that, if
available, such resources will be on terms acceptable to FTP.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FTP Software, Inc.:
We have audited the accompanying consolidated balance sheets of FTP Software,
Inc. as of December 31, 1996 and 1995 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FTP Software, Inc.
as of December 31, 1996 and 1995 and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 3, 1997
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<PAGE> 29
<TABLE>
FTP SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,036 $ 30,237
Short-term investments 29,026 36,211
Accounts receivable, net of allowance for doubtful accounts
of $1,300 and $1,600 for 1996 and 1995, respectively 16,586 30,787
Prepaid expenses and other current assets 4,430 4,628
Refundable income taxes 2,953 7,775
Deferred income taxes 1,244 2,194
Net assets of discontinued operations 5,263 953
-------- --------
Total current assets 81,538 112,785
Property and equipment, net 20,734 18,355
Purchased software, net 6,962 3,653
Investments 47,971 52,751
Deferred income taxes -- 1,717
Other assets 830 368
-------- --------
Total assets $158,035 $189,629
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 12,446 9,614
Accrued employee compensation and benefits 4,000 4,484
Current portion of long-term obligations 191 811
Deferred revenue 10,058 9,091
-------- --------
Total current liabilities 26,695 24,000
Long-term obligations 63 821
-------- --------
Total liabilities 26,758 24,821
-------- --------
Commitments and contingencies (Note I)
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued and outstanding -- --
Common stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
33,646,203 and 26,506,729 shares in 1996
and 1995, respectively 336 265
Additional paid-in capital 136,151 92,607
Retained earnings (accumulated deficit) (5,447) 72,130
Equity adjustments 237 (194)
-------- --------
Total stockholders' equity 131,277 164,808
-------- --------
Total liabilities and stockholders' equity $158,035 $189,629
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 30
<TABLE>
FTP SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Revenue:
Product revenue $ 84,579 $115,715 $85,142
Service revenue 16,512 13,100 7,038
-------- -------- -------
Total revenue 101,091 128,815 92,180
-------- -------- -------
Cost of revenue:
Product cost 6,995 6,725 5,602
Service cost 9,801 9,127 7,389
-------- -------- -------
Total cost of revenue 16,796 15,852 12,991
-------- -------- -------
Gross margin 84,295 112,963 79,189
-------- -------- -------
Operating expenses:
Sales and marketing 46,896 36,593 16,668
Product development 64,652 22,298 16,475
General and administrative 19,782 12,699 9,362
-------- -------- -------
Total operating expenses 131,330 71,590 42,505
-------- -------- -------
Income (loss) from continuing operations (47,035) 41,373 36,684
Investment income 4,284 6,156 3,132
-------- -------- -------
Income (loss) from continuing operations before
income taxes (42,751) 47,529 39,816
Provision for income taxes 1,027 17,587 14,918
-------- -------- -------
Net income (loss) from continuing operations (43,778) 29,942 24,898
Discontinued operations, net of income tax benefits:
Operating losses (29,039) (5,308) (1,923)
Provision for disposition (4,760) -- --
-------- -------- -------
Net income (loss) $(77,577) $ 24,634 $22,975
======== ======== =======
Net income (loss) per share:
Continuing operations $ (1.46) $ 1.06 $ .87
Discontinued operations (1.13) (.19) (.07)
-------- -------- -------
$ (2.59) $ .87 $ .80
======== ======== =======
Weighted average common and common equivalent
shares outstanding 29,896 28,215 28,553
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 31
<TABLE>
FTP SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
RETAINED FOREIGN NET
COMMON STOCK ADDITIONAL EARNINGS EXCHANGE UNREALIZED TOTAL
---------------- PAID-IN (ACCUMULATED TRANSLATION INVESTMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENTS GAINS (LOSSES) EQUITY
------ ------ ------- -------- ----------- -------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 21,693,780 $217 $51,340 $24,521 -- -- $ 76,078
Issuance of common stock 1,650,342 16 5,148 -- -- -- 5,164
Tax benefit of stock option
activity -- -- 8,467 -- -- -- 8,467
Net income -- -- -- 22,975 -- -- 22,975
---------- ---- -------- ------- ----- ----- --------
Balance at December 31, 1994 23,344,122 233 64,955 47,496 -- -- 112,684
Issuance of common stock 3,162,607 32 8,852 -- -- -- 8,884
Tax benefit of stock option
activity -- -- 18,800 -- -- -- 18,800
Net income -- -- -- 24,634 -- -- 24,634
Foreign exchange
translation adjustments -- -- -- -- $ 14 -- 14
Net unrealized investment
losses -- -- -- -- -- $(208) (208)
---------- ---- -------- ------- ----- ----- --------
Balance at December 31, 1995 26,506,729 265 92,607 72,130 14 (208) 164,808
Issuance of common stock 7,139,474 71 43,544 -- -- -- 43,615
Net loss -- -- -- (77,577) -- -- (77,577)
Foreign exchange translation
adjustments -- -- -- -- (425) -- (425)
Net unrealized investment
gains -- -- -- -- -- 856 856
---------- ---- -------- ------- ----- ----- --------
Balance at December 31, 1996 33,646,203 $336 $136,151 $(5,447) $(411) $ 648 $131,277
========== ==== ======== ======= ===== ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-29-
<PAGE> 32
<TABLE>
FTP SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations $(43,778) $29,942 $24,898
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 9,260 6,137 3,333
Loss on disposition of property and equipment 422 255 --
Provision for doubtful accounts (300) 600 400
Purchase of in-process technology 37,852 -- --
Amortization of discounts and premiums on investments 29 (1,407) --
Deferred income taxes 1,221 (1,324) (1,828)
Tax benefit of stock option activity -- 18,800 8,467
Changes in operating assets and liabilities, net of effects from
acquisition of business:
Accounts receivable 17,184 (14,741) (6,889)
Prepaid expenses and other current assets 895 (2,405) 519
Refundable income taxes 2,394 (7,775) --
Other assets (376) -- (211)
Accounts payable and accrued expenses (84) 4,688 2,485
Income taxes payable -- (2,044) 2,044
Accrued employee compensation and benefits (1,989) 568 1,653
Deferred revenue 740 3,837 2,566
--------- -------- --------
Net cash provided by continuing operations 23,470 35,131 37,437
Net cash used for discontinued operations (4,920) (1,834) (1,201)
--------- -------- --------
Net cash provided by operating activities 18,550 33,297 36,236
--------- -------- --------
Cash flows from investing activities:
Capital expenditures (9,072) (11,905) (11,461)
Maturities (purchase) of investments 18,900 (7,454) (30,903)
Acquisition of business, net of cash acquired (3,776) -- --
Other investing activities, net (97) 15 --
--------- -------- --------
Net cash provided by (used for) continuing operations 5,955 (19,344) (42,364)
Net cash used for discontinued operations (32,809) (2,365) (900)
--------- -------- --------
Net cash used for investing activities (26,854) (21,709) (43,264)
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,536 8,884 5,164
Principal payments on long-term obligations (1,589) (1,142) --
--------- -------- --------
Net cash provided by (used for) financing activities (53) 7,742 5,164
--------- -------- --------
Effect of exchange rate changes on cash 156 11 --
--------- -------- --------
Net (decrease) increase in cash and cash equivalents (8,201) 19,341 (1,864)
Cash and cash equivalents, beginning of year 30,237 10,896 12,760
--------- -------- --------
Cash and cash equivalents, end of year $ 22,036 $ 30,237 $ 10,896
========= ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid -- $ 1,952 $ 5,843
========= ======== ========
Non-cash financing activities:
Acquisition of business $ 42,079 -- --
Financed purchased software -- $ 1,000 --
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-30-
<PAGE> 33
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS:
FTP Software, Inc. (the "Company") is engaged in the design, development,
marketing and support of client networking software products, server networking
software products and agent applications. These products are intended to
function as important components of the VIP Network concept announced by the
Company in September 1996. The VIP Network is a software architecture concept
designed to enable organizations to secure, manage and transparently extend
their networks beyond traditional boundaries. The VIP Network is intended to
allow an organization to support mobile personal computer users and remote
sites, to build virtual collaborative workgroups within and across the
organization and to facilitate electronic commerce by building federated
networks between and among the organization and its customers, suppliers and
other business partners.
B. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated.
Revenue Recognition
Revenue is generally recognized from the license of software upon shipment
when collection of the resulting receivable is deemed probable. At the time the
Company recognizes revenue from licensed software products, no significant
vendor or post-contract support obligations remain. Service revenue includes
revenue from support, training and consulting. Payments received in advance for
support contracts are initially recorded as deferred revenue and are recognized
ratably over the term of the contract, typically one year. Revenue from training
and consulting is recognized as the services are performed.
Cash Equivalents
Cash equivalents consist of money market funds, commercial paper and
government obligations with original maturities of three months or less and are
carried at amortized cost, which approximates market value. The Company places
its temporary cash investments in money market investments with high credit
quality financial institutions.
Investments
The Company has established guidelines for credit ratings, diversification
and maturities for its investment portfolio that are intended to maintain safety
and liquidity. The Company's investments are widely diversified, consisting
primarily of investment grade debt securities classified as available-for-sale.
Accordingly, investments are reported at market value with unrealized holding
gains and losses reflected net as a separate component of stockholders' equity
until realized. The cost of short-term investments and investments is determined
on the specific identification method and the market value is based on quoted
market prices. The Company has not experienced any significant losses on its
investments.
-31-
<PAGE> 34
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Inventories
Inventories, consisting of finished goods and raw materials (stated at the
lower of cost, determined on a first-in, first-out basis, or market), are
included in prepaid expenses and other current assets.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives, ranging from three to
seven years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining term of the lease. Expenditures for
maintenance and repairs are expensed as incurred. Upon retirement or other
disposition of assets, the cost and related accumulated depreciation are
eliminated from the accounts and the resulting gain or loss is included in net
income (loss).
Purchased Software
Purchased software includes acquired technology being amortized, using the
straight-line method, over the assets' estimated remaining useful lives. The
Company evaluates the possible impairment of such long-lived assets whenever
events or circumstances indicate that the carrying value of the assets may not
be recoverable.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local
currency. Accordingly, assets and liabilities of these operations are translated
at exchange rates in effect at year-end. Income and expense items are translated
at average rates of exchange for the period. Resulting translation adjustments
are accumulated in a separate component of stockholders' equity. Gains and
losses from foreign currency transactions, which are immaterial, are included in
net income (loss).
Product Development Costs
Costs related to research, design and development of computer software are
charged to product development expense as incurred. The Company capitalizes
eligible software costs incurred after technological feasibility of the product
has been established, which is generally demonstrated by the initial beta
release. The capitalizable costs of internally developed software to date have
not been material. Purchased software of approximately $5.6 million and $2.0
million was acquired in 1996 and 1995, respectively. These assets are being
amortized over a one- to four-year period based on the expected useful life of
the product. Related amortization charges, reflected in cost of revenue, were
approximately $2.7 million, $2.2 million and $0.9 million in 1996, 1995 and
1994, respectively.
Income Taxes
Deferred income tax assets and liabilities arise from temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements that are expected to result in taxable or deductible
amounts in future years. The Company periodically evaluates the realizability
-32-
<PAGE> 35
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of its deferred tax assets. A valuation allowance against net deferred tax
assets is established if, based on the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number
of shares of common stock outstanding and dilutive common stock equivalents from
stock options using the treasury stock method. During periods that the Company
has recorded a net loss, common stock equivalents are not included in the
computation as the effect would be anti-dilutive.
Risks and Uncertainties
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.
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from expectations include, but are
not limited to, competition, competitive pricing pressures, technological and
other market changes, dependence on new products and strategic alliances,
distribution risks and changes in personnel.
The Company sells its products outside the United States primarily through
a network of resellers in North and South America, Europe, the Middle East,
Canada, Russia and Asia Pacific. In the United States, the Company distributes
its products through multiple channels, including direct sales, value-added
resellers, systems integrators, OEMs and distributors. The Company performs
ongoing credit evaluations of its customers and maintains reserves for potential
credit risk as determined by management. The Company generally requires no
collateral. Accounts receivable are from customers that are geographically and
industry dispersed. No one customer accounted for more than 10% of consolidated
revenue for any period presented.
Accounting for Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," during 1996. This Statement
defines a fair value based method of accounting for stock-based employee
compensation and requires that companies either recognize compensation expense
for grants of stock, stock options and other equity instruments or provide pro
forma disclosure of net income (loss) and net income (loss) per share in the
notes to the financial statements. The Company has elected to continue measuring
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations and has disclosed
pro forma net income (loss) and net income (loss) per share for 1996 and 1995 as
if the fair value based method of accounting had been applied. As such, adoption
of this Statement had no effect on the Company's results of operations.
-33-
<PAGE> 36
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," and SFAS No. 129, "Disclosure of Information about
Capital Structure." SFAS No. 128, which is effective for fiscal years ending
after December 15, 1997, including interim periods, requires the presentation of
basic and diluted earnings per share ("EPS"). Basic EPS, which replaces primary
EPS, excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS under the existing rules. This Statement requires restatement of all
prior period EPS amounts presented after the effective date. The Company will
adopt the provisions of SFAS No. 128 in 1997; however, the impact of adoption
has not yet been determined. SFAS No. 129, which is also effective for fiscal
years ending after December 15, 1997, establishes standards for disclosing
information about an entity's capital structure. The Company will adopt the
disclosure requirements of this Statement during the year ending December 31,
1997.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
C. ACQUISITIONS AND DISCONTINUED OPERATIONS:
During September 1996, the Company announced its vision for the VIP
Network. The Company also announced a formal plan to spin off, through the sale
to third parties within the next year, its collaborative lines of business and
to discontinue selected product lines which were not specifically related to the
Company's continuing network connectivity business. These operations are treated
as discontinued operations in the accompanying financial statements. As a
result, the Company recorded a charge of approximately $4.8 million to write
down the related assets to estimated net realizable values.
The consolidated financial statements have been restated to report
separately in all periods presented the net assets and operating results of the
discontinued operations. Prior year operating results and all footnote
disclosures have been restated to reflect continuing operations. Net assets of
discontinued operations consist primarily of purchased software and fixed assets
less accounts payable and accrued expenses.
During the fourth quarter of 1996, the Company sold certain non-material
product lines for amounts consistent with initial estimates. The Company
continues to seek opportunities to sell the remaining product and business lines
and has made no significant changes to its plans with respect to such sales. The
Company expects to complete remaining dispositions within the time frame
announced in September 1996.
-34-
<PAGE> 37
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
Summary operating results for the discontinued operations (which include
charges of approximately $21.8 million, $1.1 million and $4.0 million in 1996,
1995 and 1994, respectively, for certain acquired in-process technology) are as
follows (in thousands):
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Revenue $ 9,907 $ 7,561 $ 1,065
Gross margin 5,255 5,569 965
Operating loss before income taxes (31,441) (8,427) (3,075)
Net loss (33,799) (5,308) (1,923)
</TABLE>
During 1995 and 1996, the Company made the following acquisitions: in March
1995, the Company acquired substantially all of the assets of Keyword Office
Technologies Ltd., a developer of document viewer and conversion software
products, for approximately $2.4 million; in February 1996, the Company acquired
the Mariner Internet software 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 collaborative GroupWorks product, for a net cash purchase price of
approximately $6.3 million; and in April 1996, the Company acquired all of the
outstanding stock of Campbell Services, Inc., the developer of OnTime, a
scheduling software product, for a net cash purchase price of approximately
$15.0 million. All of these acquisitions were accounted for as purchases, with
the majority of the purchase price recorded as in-process technology, and are
now reflected in discontinued operations.
In July 1996, the Company acquired Firefox Communications Inc. ("Firefox"),
a supplier of server-centric departmental and LAN-based IP solutions and
services, for a net purchase price of approximately $61.0 million, through the
merger of a wholly-owned subsidiary of the Company into Firefox (the "Firefox
Merger"). Pursuant to the Firefox Merger, all of the outstanding shares of the
common stock of Firefox were converted into a total of approximately 6.4 million
shares of the Company's common stock ("Common Stock") valued at approximately
$40.6 million and approximately $9.1 million in cash. In addition, outstanding
employee stock options to purchase Firefox common stock were converted into
options to purchase approximately 336,000 shares of Common Stock valued at
approximately $1.5 million. The Company also incurred acquisition-related costs
of approximately $3.7 million and liabilities treated as assumed totaling
approximately $6.1 million which are included in the net purchase price. The
transaction was accounted for as a purchase. Based upon a valuation of the
assets acquired, approximately $2.6 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 $37.9 million was
allocated to in-process technology and charged to product development expense;
and approximately $20.5 million was allocated to the remaining assets of
Firefox, primarily short-term investments and accounts receivable. Results of
operations include activity from Firefox since the date of the acquisition.
-35-
<PAGE> 38
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
The unaudited pro forma consolidated results of continuing operations would
have been as follows if the Firefox Merger had occurred on January 1, 1995 (in
thousands, except per share amounts):
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenue $109,396 $148,583
Net income (loss) (9,243) 29,787
Net income (loss) per share $ (.31) $ .87
</TABLE>
These unaudited pro forma results are presented for informational purposes
only and include certain adjustments such as additional amortization expense as
a result of purchased software. They do not include the approximately $37.9
million charge to product development expenses for acquired in-process
technology and do not purport to be indicative of the Company's actual results
of operations had the Firefox Merger occurred on January 1, 1995, nor are they
indicative of the Company's results of operations for any future period.
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 completed technology. In-process
technology that has not reached technological feasibility and that has no
alternative future use is valued by 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 potential changes in the future
target markets and to the completion of the products expected to be ultimately
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.
D. INVESTMENTS:
<TABLE>
Investments consist of the following (in thousands):
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ -----------------------
MARKET AMORTIZED MARKET AMORTIZED
VALUE COST VALUE COST
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. government obligations $42,127 $42,707 $54,469 $54,500
Corporate obligations 18,727 18,822 12,963 13,257
Municipal obligations 9,171 9,153 20,418 20,412
Equity securities 6,972 5,224 1,112 1,140
------- ------- ------- -------
$76,997 $75,906 $88,962 $89,309
======= ======= ======= =======
</TABLE>
At December 31, 1996 and 1995, gross unrealized investment gains amounted
to approximately $1.9 million and $0.6 million, respectively, and gross
unrealized investment losses amounted to approximately $0.8 million and $0.9
million, respectively. Proceeds from dispositions of available for sale
securities during 1996 were approximately $3.0 million. Gross gains from such
dispositions were not significant.
-36-
<PAGE> 39
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
The Company's investments, at market value based on quoted market prices,
mature as follows (in thousands):
<CAPTION>
DECEMBER 31,
-----------------------
YEARS TO MATURITY 1996 1995
------- -------
<S> <C> <C>
0-1 $29,026 $36,211
1-5 41,258 46,478
5-10 258 268
Over 10 6,455 6,005
------- -------
$76,997 $88,962
======= =======
</TABLE>
Included in the above table as having 0-1 years to maturity are equity
securities of approximately $7.0 million and $1.1 million at December 31, 1996
and 1995, respectively.
E. PROPERTY AND EQUIPMENT:
<TABLE>
Property and equipment consist of the following (in thousands):
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
--------- --------
<S> <C> <C>
Development equipment $ 7,266 $ 5,737
Equipment 21,164 14,697
Furniture and leasehold improvements 8,784 7,138
-------- -------
37,214 27,572
Less accumulated depreciation and amortization (16,480) (9,217)
-------- -------
$ 20,734 $18,355
======== =======
</TABLE>
F. PROFIT SHARING RETIREMENT PLAN:
The Company sponsors a profit sharing retirement plan for eligible
employees established under the provisions of Section 401(k) of the Internal
Revenue Code (the "401(k) Plan"), under which participants may defer a portion
of their annual compensation on a pre-tax basis. Contributions by the Company to
the 401(k) Plan are at the discretion of the Company's Board of Directors (the
"Board of Directors") and amounted to approximately $1.2 million, $1.0 million
and $0.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
While the Company expects to continue the 401(k) Plan indefinitely, it has
reserved the right to modify, amend or terminate the plan. In the event of
termination, the entire amount contributed under the 401(k) Plan, at the time of
termination, must be applied to the payment of benefits to the participants or
their beneficiaries.
The Company does not currently offer post-retirement or post-employment
benefits.
-37-
<PAGE> 40
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
G. INCOME TAXES:
The loss from continuing operations before income taxes for the year ended
December 31, 1996 for domestic operations and for foreign operations was
approximately $40.2 million and $2.6 million, respectively.
<TABLE>
The provision for income taxes consists of the following (in thousands):
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current (benefit) provision:
Federal $(3,252) $15,657 $13,997
State 210 2,859 2,749
Foreign 2,848 395 --
------- ------- -------
(194) 18,911 16,746
------- ------- -------
Deferred (benefit) provision:
Federal 982 (1,024) (1,410)
State 239 (300) (418)
------- ------- -------
1,221 (1,324) (1,828)
------- ------- -------
$ 1,027 $17,587 $14,918
======= ======= =======
</TABLE>
The tax benefit from discontinued operations was approximately $2.5
million, $3.1 million and $1.2 million in 1996, 1995 and 1994, respectively.
<TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income (loss) from continuing
operations before income taxes as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Tax (benefit) at U.S. statutory rate (35.0)% 35.0% 35.0%
Non-deductible merger-related costs 31.1 -- --
Foreign tax 4.7 -- --
Operating loss with no current tax benefit 3.5 -- --
State income taxes net of federal tax benefit (1.2) 4.3 4.2
Other (0.7) (2.3) (1.7)
---- ---- ----
2.4% 37.0% 37.5%
==== ==== ====
</TABLE>
The current federal and state provisions for income taxes do not reflect
tax savings resulting from deductions associated with the Company's various
stock plans of approximately $18.8 million and $8.5 million in 1995 and 1994,
respectively, which were credited to stockholders' equity. There were no tax
savings resulting from deductions associated with these stock plans in 1996.
-38-
<PAGE> 41
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
The components of deferred income taxes are as follows (in thousands):
DECEMBER 31,
--------------------------------------
1996 1995
-------- -------
<S> <C> <C>
State tax benefit of net operating loss
carryforward and credits $ 1,616 $ --
Depreciation and amortization expense 1,551 --
Accounts receivable reserve 1,259 642
Employee compensation and benefits accruals 1,063 848
Foreign tax benefit of net operating loss
carryforward 513 --
Deferred revenue 148 380
Capitalized inventory costs 135 170
Other reserves and liabilities -- 224
In-process technology charges -- 2,656
-------- -------
6,285 4,920
Valuation allowance for deferred tax assets (2,676) --
-------- -------
3,609 4,920
-------- -------
Deferred tax liabilities:
Depreciation and amortization expense (1,085) (1,009)
Purchased technology (1,008) --
Other reserves and liabilities (272) --
-------- -------
(2,365) (1,009)
-------- -------
Deferred income taxes $ 1,244 $ 3,911
======= =======
</TABLE>
The Company has recorded a valuation allowance of approximately $9.7
million against the deferred tax assets of which approximately $7.0 million has
been recorded in the net assets of discontinued operations. The realization of
these deferred tax assets is dependent upon future earnings in specific tax
jurisdictions. Due to the uncertainty as to when the deferred tax assets may be
realized, the Company has recorded a valuation allowance for all tax assets
in excess of amounts available to be recovered pursuant to tax loss carrybacks
for the year ended December 31, 1996. The Company periodically reviews the need
for the valuation allowance and if the valuation allowance is reduced, the tax
benefit will be recorded as a reduction of the Company's income tax expense
except for approximately $1.3 million which is attributable to stock options
and will be credited to additional paid in capital when realized.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $13.3 million available to offset future taxable income in several
state jurisdictions expiring at various dates beginning in 2000 through 2011.
Similarly, research and experimentation credit carryforwards for state tax
purposes of approximately $0.2 million and investment tax credits of
approximately $0.2 million were available at December 31, 1996, expiring in
2010. In addition, the Company had a net operating loss of approximately $1.5
million available to offset future taxable income in a foreign jurisdiction and
carry forward indefinitely.
-39-
<PAGE> 42
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
H. STOCKHOLDERS' EQUITY:
Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed
by law, to issue up to an aggregate of 5,000,000 shares of the Company's
preferred stock ("Preferred Stock"), $.01 par value per share, with such powers,
designations, preferences and relative, participating, optional or other special
rights and such qualifications, limitations or restrictions thereof, as shall be
determined by the Board of Directors in a resolution or resolutions providing
for the issuance of such Preferred Stock.
On December 1, 1995, pursuant to the shareholder rights plan described
below, the Board of Directors designated 500,000 shares of Preferred Stock as
Junior Preferred Stock, $.01 par value per share. Dividends accrue on the Junior
Preferred Stock at a quarterly rate equal to the greater of $1.00 or, subject to
adjustment, 100 times the aggregate per share amount of all dividends paid
during the quarter on the Common Stock. The Junior Preferred Stock carries a
liquidation preference of $100 per share, is redeemable, and entitles the holder
to 100 votes per share on all matters submitted to a vote of the Company's
stockholders. The Company has not issued any shares of Junior Preferred Stock.
Shareholder Rights Plan
On December 1, 1995, the Company adopted a shareholder rights plan (the
"Rights Plan") whereby each share of Common Stock issued after December 8, 1995
will have an attached right which, when exercisable, will entitle the holder to
purchase 1/100th of a share of Junior Preferred Stock at a price of $150 (the
"Rights"). Additionally, the Board of Directors declared a dividend of one Right
for each share of Common Stock outstanding on December 8, 1995.
The Rights become exercisable if a person acquires or announces a tender or
exchange offer for 15% or more of the outstanding Common Stock. The Rights Plan
also provides that if a person (an "Acquiring Person") acquires or obtains the
right to acquire 15% or more of the outstanding Common Stock (other than
pursuant to certain approved offers), each of the Rights (other than the Rights
held by the Acquiring Person) will entitle the holder to purchase shares of
Common Stock having a market value of twice the exercise price of the Rights. In
addition, if the Company is involved in a merger or other business combination
with another person in which it is not the surviving corporation or in
connection with which the Common Stock is changed or converted into securities
of any other person or other property, or if the Company sells or transfers 25%
or more of its assets or earning power to another person, each Right that has
not previously been exercised will entitle its holder to purchase shares of the
common stock of such other person having a market value of twice the exercise
price of the Right.
In November 1996, the Company amended the Rights Plan to permit Kopp
Investment Advisors, Inc. (but not any transferee of Kopp) to acquire up to
6,722,400 shares of Common Stock (approximately 19.9% of the outstanding shares
of Common Stock as of the date of such amendment) without triggering the
exercisability of the Rights.
The Board of Directors may redeem the Rights at any time prior to their
expiration on December 1, 2005 at a redemption price of $.01 for each of the
Rights. The Company has reserved 500,000 shares of Junior Preferred Stock for
issuance upon exercise of the Rights.
-40-
<PAGE> 43
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock Option Plans
In January 1987, the Company adopted the FTP Software, Inc. Stock Option
Plan (the "1987 Option Plan"). Under the 1987 Option Plan, as amended, the
Company had the right to grant to certain employees either incentive or
non-qualified stock options to purchase up to 26,400,000 shares of Common Stock
which vested over four years. The exercise price of each option could not be
less than the fair market value of Common Stock on the date of grant, as
determined by the Board of Directors, and the term of each option could not
exceed 10 years.
During 1996, the Company offered its employees (other than executive
officers) the opportunity to exchange each stock option granted during 1994,
1995 and 1996 for a new option covering 50% of the number of shares of Common
Stock covered by the original option, having a new exercise price fixed at the
date of exchange and otherwise having the same or similar terms as the original
option. During the option exchange offer period, options to purchase
approximately 2,130,000 shares of Common Stock at exercise prices ranging from
$9.50 to $31.75 per share were exchanged for options to purchase approximately
1,065,000 shares of Common Stock at exercise prices ranging from $7.25 to $9.063
per share.
In September 1993, the Company adopted the 1993 Non-Employee Directors'
Stock Option Plan, which provides for the granting of stock options to purchase
up to 500,000 shares of Common Stock to non-employee directors which generally
vest over three years. The exercise price of each option may not be less than
the fair market value of Common Stock on the date of the grant, as determined by
the Board of Directors, and the term of each option may not exceed 10 years.
In August 1996, the Company adopted the FTP Software, Inc. 1996 Executive
Equity Incentive Plan, which enables the Company to grant either incentive or
non-qualified stock options, stock appreciation rights, restricted stock and
unrestricted stock to its executive officers. The aggregate maximum number of
shares of Common Stock that may be delivered under this plan is 1,500,000. The
exercise price for the options, which vest over four years, may not be less than
the fair market value of Common Stock on the date of the grant, as determined by
the Board of Directors, and the term of each option may not exceed 10 years.
Prior to the Company's acquisition of Firefox, Firefox granted options to
certain of its employees under the Firefox 1994 Share Option Scheme, prior to
Firefox's initial public offering. Options granted under that plan were
generally scheduled to vest over three years and were required to be exercised
no later than seven years from the date of grant. Pursuant to the Firefox
Merger, each option outstanding under this plan was converted into an option to
purchase shares of Common Stock at a new exercise price determined in accordance
with the merger agreement. In addition, each optionholder had the right to have
the Company assume the holder's converted options, in which case the converted
options would otherwise continue on the same terms and conditions that applied
prior to the conversion of the options. If a holder chose not to have the
Company assume a converted option, the converted option became exercisable in
full for a period of six months beginning on July 22, 1996 (the closing date of
the Firefox Merger) and ending on January 22, 1997.
Prior to the Company's acquisition of Firefox, Firefox also maintained the
Firefox 1995 Stock Option Plan. This plan provided for the grant of incentive
stock options and nonqualified stock options at an exercise price not less than
100% and 85%, respectively, of the fair market value of Firefox's common stock
at the date of grant. Options granted under this plan were generally scheduled
to vest
-41-
<PAGE> 44
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
over four years and were required to be exercised no later than 10 years from
the date of grant. Pursuant to the Firefox Merger, each option outstanding under
this plan was automatically assumed by the Company and converted into an option
to purchase shares of Common Stock at a new exercise price determined in
accordance with the merger agreement, but otherwise continued on the same terms
and conditions that applied prior to the conversion of the options. Holders of
options granted under this plan had the opportunity to participate in the option
exchange offer described above.
<TABLE>
Stock option activity under the Company's various stock option plans is
summarized as follows:
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
----------- --------------
<S> <C> <C>
Outstanding, January 1, 1994 8,272,704 $ 3.72
Granted 1,023,417 28.21
Exercised (1,550,342) 2.37
Canceled (300,750) 7.50
---------- ------
Outstanding, December 31, 1994 7,445,029 7.21
Granted 1,754,286 30.59
Exercised (3,137,635) 2.71
Canceled (1,795,361) 6.25
--------- ------
Outstanding, December 31, 1995 4,266,319 20.54
Granted 5,414,978 9.60
Converted Firefox options 336,424 5.44
Exercised (703,332) 1.80
Canceled (3,759,520) 22.29
--------- ------
Outstanding, December 31, 1996 5,554,869 $10.16
========= ======
</TABLE>
<TABLE>
Information about stock options outstanding at December 31, 1996 is
summarized as follows:
<CAPTION>
OUTSTANDING EXERCISABLE
- ----------------------------------------------------------------------------------- --------------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED-
CONTRACTUAL WEIGHTED- AVERAGE
RANGE OF EXERCISE LIFE AVERAGE EXERCISE
PRICES SHARES (IN YEARS) EXERCISE PRICE SHARES PRICE
- ------------------ --------- ----------- ---------------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.14 - $ 0.14 32,000 1.3 $ 0.14 23,124 $ 0.14
1.40 - 1.75 314,004 5.7 1.66 314,004 1.66
5.77 - 8.63 3,029,633 8.6 7.39 428,459 6.26
9.00 - 12.50 1,577,511 8.9 10.69 19,387 9.37
13.63 - 16.89 11,641 9.1 13.99 895 16.56
24.75 - 31.75 590,080 7.9 27.92 320,345 27.95
- ------ ------ --------- --- ------ --------- ------
$ 0.14 - $31.75 5,554,869 8.4 $10.16 1,106,214 $11.17
====== ====== ========= === ====== ========= ======
</TABLE>
-42-
<PAGE> 45
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The weighted-average grant-date fair value of options granted during
1996 and 1995 was $6.34 and $17.80 per share, respectively.
At December 31, 1995 and 1994, the number of shares of Common Stock for
which options were exercisable totaled 1,159,729 and 2,873,662, respectively, at
a weighted average exercise price of $9.87 and $3.08 per share, respectively. At
December 31, 1996, the number of shares of Common Stock available for future
stock option grants amounted to 2,450,726.
In January 1997, the Company adopted the FTP Software, Inc. 1997 Employee
Equity Incentive Plan. Under this plan, the Company has the right to grant to
certain employees non-qualified stock options, stock appreciation rights,
restricted stock and unrestricted stock. The aggregate maximum number of shares
of Common Stock that may be delivered under this plan is 2,780,000 plus the
number of shares subject to options granted under the 1987 Option Plan that
terminate unexercised after January 20, 1997. The exercise price of the options,
which vest over four years, may not be less than the fair market value of Common
Stock on the date of grant, as determined by the Board of Directors, and the
term of each option may not exceed 10 years.
Employee Stock Purchase Plans
Effective January 1, 1994, the Company adopted the FTP Software, Inc.
Employee Stock Purchase Plan. This plan provides a maximum of 1,000,000 shares
of Common Stock for purchase by eligible employees at 85% of the fair market
value of Common Stock on the first or last trading day of each six-month
purchase period under the plan, whichever is lower. During 1996, 1995 and 1994,
31,301, 12,580 and 18,810 shares of Common Stock, respectively, were issued
under this plan at a weighted-average purchase price of $6.11, $25.07 and $12.63
per share, respectively, and a fair value of $7.18, $29.49 and $28.11 per share,
respectively.
In October 1995, the Company adopted the FTP Software, Inc. Non-Qualified
Stock Purchase Plan for Employees of Certain Subsidiaries. This plan is for the
benefit of non-U.S. employees employed outside of the United States by
subsidiaries of the Company approved for participation in the plan by the
Compensation Committee of the Board of Directors. This plan provides a maximum
of 100,000 shares of Common Stock for purchase by eligible employees at 85% of
the fair market value of the Common Stock on the first or last trading day of
each six-month purchase period under the plan, whichever is lower. The first
purchase period under the plan began on January 1, 1996. Accordingly, no shares
of Common Stock were issued under this plan during 1995. During 1996, 3,564
shares of Common Stock were issued under this plan at a weighted-average
purchase price of $6.20 per share and a fair value of $7.30 per share.
-43-
<PAGE> 46
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock-Based Compensation
<TABLE>
If compensation cost for the Company's stock-based compensation plans had
been determined based on the fair value at the grant dates as calculated in
accordance with SFAS No. 123, the Company's net income (loss) and net income
(loss) per share for the years ended December 31, 1996 and 1995 would have been
reported as the pro forma amounts indicated below (in thousands, except per
share amounts):
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
-------------------------
<S> <C> <C>
Net income (loss) as reported $(77,577) $24,634
Pro forma net income (loss) (84,232) 19,308
Net income (loss) per share as reported $ (2.59) $ .87
Pro forma net income (loss) per share (2.82) .68
</TABLE>
The pro forma amounts include the effects of all activity under the
Company's stock-based compensation plans since January 1, 1995. The Company
anticipates that it will have additional activity under these plans in the
future.
For the purpose of providing pro forma disclosures, the fair value of each
stock option granted was estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions: an expected life of 4.8 years;
expected volatility of 83.4% and 64.4% in 1996 and 1995, respectively; no
expected dividends; and a risk-free interest rate of 6.1% and 5.5% in 1996 and
1995, respectively.
I. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases its corporate and administrative office facilities under
long-term non-cancelable operating lease agreements expiring at various dates
through August 2002. The agreements generally require the payment of utilities,
real estate taxes, insurance and repairs. Total rent expense for the years ended
December 31, 1996, 1995 and 1994 amounted to approximately $4.8 million, $3.0
million and $2.1 million, respectively.
<TABLE>
At December 31, 1996, future minimum annual rental payments, net of
sublease rental payments of approximately $7.0 million, required under the
operating lease agreements are as follows (in thousands):
<S> <C>
1997 $ 3,405
1998 3,715
1999 3,856
2000 3,999
2001 3,468
Thereafter 7,379
-------
$25,822
=======
</TABLE>
-44-
<PAGE> 47
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Litigation
In March 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 such statements not false
and misleading, which the plaintiffs contend caused an artificial inflation in
the price of the Company's common stock. Specifically, the original complaint
alleged that the defendants knowingly concealed adverse facts and made false or
misleading forward and non-forward looking statements concerning the operating
results and financial condition of the Company, the effects of the Company's
July 1995 corporate restructuring and changing competitive factors in the
Company's industry. The lawsuit, which is purportedly brought on behalf of a
class of purchasers of the Company's common stock during the period from July
14, 1995 to January 3, 1996, alleges violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule
10b-5 thereunder and seeks relief in the form of unspecified compensatory
damages, costs and expenses and such other relief as the court deems proper and
just. In August 1996, plaintiffs filed an amended complaint adding allegations
concerning what plaintiffs claim were wrongful sales and accounting practices by
the Company during the class period, but asserting the same causes of action as
the original complaint. In October 1996, the Company filed a motion to dismiss
the complaint on the grounds that the plaintiffs had not met the pleading
requirements of the Private Securities Reform Act of 1995. This motion was
denied by the court on February 13, 1997. As a result, the case is now in the
discovery phase. The Company has reviewed the allegations in the lawsuit,
believes them to be without merit, and intends to defend itself and its officers
vigorously. In order to support an adequate defense, the Company has spent and
expects to continue to spend substantial sums for legal and expert fees and
costs. The cost of defending the litigation and the outcome of the litigation
are uncertain and cannot be estimated. If the lawsuit were determined adversely
to the Company, the Company could be required to pay a substantial judgment,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
In February 1996, a class action lawsuit, captioned RICHARD ZEID AND SIOM
MISRAH ET AL. V. JOHN KIMBERLEY, FRANK M. RICHARDSON, MARK A. ROWLINSON AND
FIREFOX COMMUNICATIONS, INC., Case No. C96 20136, was filed in the United States
District Court for the Northern District of California, San Francisco Division
(transferred to the San Jose Division), naming Firefox and certain of its
current and former officers and former directors as defendants. The original
complaint alleged that the defendants misrepresented or failed to disclose
material facts about Firefox's operations and financial results, which the
plaintiffs contend resulted in an artificial inflation in the price of Firefox's
common stock. The suit was purportedly brought on behalf of a class of
purchasers of Firefox's common stock during the period from August 3, 1995 to
January 2, 1996. The complaint alleged claims for violations of Sections 10(b)
and 20(a) of the Exchange Act and Rule 10b-5 thereunder and sought relief in the
form of unspecified compensatory damages, pre- and post-judgment interest,
attorneys' and expert witness fees and such extraordinary, equitable and/or
injunctive relief as permitted by law, equity and the federal statutory
provisions under which the suit was brought. In June 1996, the District Court
entered an order dismissing plaintiffs' complaint. In the order, the court
dismissed with prejudice certain of plaintiffs' claims that warnings and
disclosures in Firefox's Form 10-Qs were false and misleading, while granting
plaintiffs permission to amend their complaint as it concerned certain of
plaintiffs' claims that Firefox was responsible for false and misleading
analysts reports, Firefox statements and financial statements.
-45-
<PAGE> 48
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In July 1996, plaintiffs filed their 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 that they
participated in drafting, reviewing and/or approving allegedly misleading
statements, releases, analysts reports and other public representations,
including disclaimers and warnings of and about Firefox. The amended complaint
also alleges that John A. Kimberley, then an officer and director of Firefox,
and Frank Richardson, a former officer and director of Firefox, are liable as
"controlling persons" of Firefox. In September 1996, Firefox filed a motion to
dismiss the amended complaint on the grounds that the plaintiffs had not met the
pleading requirements of the Private Securities Reform Act of 1995. The motion
was heard by the court on December 3, 1996. As of March 26, 1997, the court had
not yet issued a ruling on the motion.
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 has spent and
expects to continue to spend substantial sums for legal and expert fees and
costs. The cost of defending the litigation and the outcome of the litigation
are uncertain and cannot be estimated. If the lawsuit were determined adversely
to 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.
Joint Marketing and Development Agreement
In August 1995, the Company entered into a multi-year joint marketing and
development agreement with Open Market, Inc. under which the Company has the
right to sell certain server products and to develop the server technology onto
future platforms. The Company allocated $3.7 million paid under this agreement
to in-process technology and charged it to product development expense in 1995.
Under this agreement, the Company has future minimum royalty obligations for
1997, 1998 and 1999.
-46-
<PAGE> 49
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
J. SEGMENT INFORMATION:
The Company is active in only one business segment: designing, developing,
marketing and supporting networking and other software products.
<TABLE>
The Company's international export sales can be grouped into the following
geographic areas (in thousands):
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Geographic area:
North and South America
(other than U.S.) $ 6,142 $ 9,789 $ 7,033
Asia Pacific 8,965 9,601 5,667
Europe 27,282 38,075 27,143
Other 170 1,693 585
------- ------- -------
Total $42,559 $59,158 $40,428
======= ======= =======
</TABLE>
Marketing and development operations outside the United States are
conducted through subsidiaries and branches located principally in Europe and
the Asia Pacific region. The Company's United States operations accounted for
greater than 90% of the Company's revenue, income (loss) from operations
and identifiable assets.
-47-
<PAGE> 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the executive officers of the Company is included
in Item 4A of Part I of this Report.
Information relating to the directors of the Company is incorporated in
this Report by reference to the information set forth under "Election of
Directors" in the Company's definitive proxy statement to be filed with the
Securities and Exchange Commission in connection with the 1997 Annual Meeting of
Stockholders (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under "Executive Compensation" in the Proxy
Statement is incorporated in this Report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement is incorporated in this Report by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under "Certain Transactions" in the Proxy
Statement is incorporated in this Report by reference.
-48-
<PAGE> 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as part of this Report:
FINANCIAL STATEMENTS:
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations For the Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity For the Years Ended December 31,
1994, 1995 and 1996
Consolidated Statements of Cash Flows For the Years Ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
EXHIBITS:
EXHIBIT NO. TITLE
- ----------- -----
3.1 Restated Articles of Organization of the Company(1)
3.2 Certificate of Designation, Preferences and Rights of Junior
Preferred Stock of the Company(1)
3.3 Articles of Amendment to Restated Articles of Organization of the
Company(4)
3.4 Amended and Restated Bylaws of the Company(1)
4.1 Specimen common stock certificate(1)
4.2 Rights Agreement dated as of December 1, 1995 between the Company
and State Street Bank and Trust Company, as Rights Agent
(including form of Rights Certificate)(1)
4.3 Amendment to Rights Agreement dated as of November 7, 1996
between the Company and State Street Bank and Trust Company, as
Rights Agent(3)
10.1 Indenture of Lease between the Company and North Andover Mills
Realty dated November 19, 1991(1)
10.2 Amendment No. 1 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of September 1, 1992(1)
10.3 Amendment No. 2 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of January 6, 1993(1)
-49-
<PAGE> 52
EXHIBIT NO. TITLE
- ----------- -----
10.4 Amendment No. 3 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of June 18, 1993(1)
10.5 Amendment No. 4 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of September 30, 1993(1)
10.6 Amendment No. 5 to Indenture of Lease between the Company and
North Andover Mills Realty Limited Partnership dated August 12,
1995(1)
10.7 Employment Agreement between the Company and David H. Zirkle
dated as of July 26, 1996(3)
10.8 Employment Agreement between the Company and David H. Zirkle
dated as of March 1, 1993(1)
10.9 Amendment No. 1 to Employment Agreement between the Company and
David H. Zirkle dated as of June 14, 1993(1)
10.10 Amendment No. 2 to Employment Agreement between the Company and
David H. Zirkle dated as of August 15, 1994(1)
10.11 Amendment No. 3 to Employment Agreement between the Company and
David H. Zirkle dated as of February 28, 1995(1)
10.12 Employment Agreement between the Company and Glenn C. Hazard
dated as of July 29, 1996(3)
10.13 Employment Agreement between the Company and Susan L. Bostrom
dated as of July 23, 1996(3)
10.14 Employment Agreement between the Company and Douglas F. Flood
dated as of July 23, 1996(3)
10.15 Employment Agreement between the Company and John H. Keller dated
as of July 23, 1996(3)
10.16 Employment Agreement between the Company and John A. Kimberley
dated as of the "Effective Date" of the Firefox merger(3)
10.17 Employment Agreement between the Company and Peter R. Simkin
dated as of the "Effective Date" of the Firefox merger, together
with Amendment No. 1 thereto dated August 24, 1996(3)
10.18 Amendment No. 2 to Employment Agreement between Company and Peter
R. Simkin dated as of December 15, 1996*
10.19 Employment Agreement between the Company and John J. Warnock,
Jr., dated as of July 31, 1996(3)
10.20 FTP Software, Inc. Stock Option Plan(1)
10.21 FTP Software, Inc. 1996 Executive Equity Incentive Plan(3)
10.22 FTP Software, Inc. 1997 Employee Equity Incentive Plan*
10.23 Composite FTP Software, Inc. 1993 Non-Employee Directors' Stock
Option Plan incorporating Amendment No. 1 effective as of June 2,
1995 and Amendment No. 2 effective as of August 22, 1996(3)
10.24 FTP Software, Inc. 1994 Executive Compensation Plan(1)
10.25 FTP Software, Inc. 1995 Executive Compensation Plan(1)
-50-
<PAGE> 53
EXHIBIT NO. TITLE
- ----------- -----
10.26 FTP Software, Inc. 1995 V-P Sales Plan(1)
10.27 Indenture of Lease between the Company and Andover Mills Realty
Limited Partnership dated as of October 1, 1993(1)
10.28 Amendment No. 1 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of February 10,
1994(1)
10.29 Amendment No. 2 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of June 7,
1995(1)
10.30 Amended and Restated Agreement and Plan of Merger by and among
the Company, Firefox Acquisition Corp. and Firefox Communications
Inc. dated as of May 21, 1996(2)
11 Weighted Shares Used in Computation of Earnings Per Share*
21 List of subsidiaries*
23 Consent of Coopers & Lybrand L.L.P.*
27 Financial Data Schedule*
99 Cautionary Statements Relevant to Forward-Looking Statements(4)
- ---------------------
*Filed with this Report.
(1) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Registration Statement on Form S-4 (No. 333-06917) filed with
the Securities and Exchange Commission (the "Commission") on June 26, 1996.
(2) Included as Appendix A to, and incorporated in this Report by reference to,
the Company's Joint Proxy Statement/Prospectus filed with the Commission on
July 1, 1996.
(3) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996 filed with the Commission on November 14, 1996.
(4) Included as, and incorporated by reference to, Appendix A to this Report.
REPORTS ON FORM 8-K:
None.
-51-
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 28th day of
March, 1997.
FTP SOFTWARE, INC.
By: /s/ Glenn C. Hazard
-------------------------------------
Glenn C. Hazard,
President and Chief Executive Officer
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Glenn C. Hazard President and Chief Executive Officer March 28, 1997
- ------------------------- and a Director
Glenn C. Hazard (principal executive officer)
/s/ John F. Geraghty Vice President, Treasurer and Controller March 28, 1997
- ------------------------- (principal financial and accounting officer)
John F. Geraghty
/s/ John H. Keller Senior Vice President of Global Engineering March 28, 1997
- ------------------------- and Development and a Director
John H. Keller
/s/ John A. Kimberley Vice Chairman and a Director March 28, 1997
- -------------------------
John A. Kimberley
/s/ Vinton G. Cerf Director March 28, 1997
- -------------------------
Vinton G. Cerf
/s/ David D. Clark Director March 28, 1997
- -------------------------
David D. Clark
</TABLE>
-52-
<PAGE> 55
<TABLE>
<S> <C> <C>
/s/ F. David Fowler Director March 28, 1997
- -------------------------
F. David Fowler
/s/ Louise A. Mathews Director March 28, 1997
- -------------------------
Louise A. Mathews
/s/ David H. Zirkle Chairman and a Director March 28, 1997
- -------------------------
David H. Zirkle
</TABLE>
-53-
<PAGE> 56
APPENDIX A
CAUTIONARY FACTORS
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, STATEMENTS MADE 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 AND OTHER FACTORS OUTLINED
BELOW AND IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" OF THE COMPANY'S REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1996 (THE "FORM 10-K") TO WHICH THIS APPENDIX IS
ATTACHED.
As used in this Appendix, the term the "Company" generally refers to FTP
and its subsidiaries, including Firefox Communications Inc. ("Firefox"), which
the Company acquired in July 1996.
Competition. As described under "Item 1. Business" of the Form 10-K, in
September 1996 the Company announced its vision for the VIP Network. The Company
believes that none of its competitors presently is offering a set of software
solutions designed to provide all of the features intended to be provided by the
VIP Network when fully implemented. However, the Company believes that the major
U.S. computer and communications systems vendors, including Microsoft
Corporation ("Microsoft"), Novell, Inc. ("Novell") and Sun Microsystems, Inc.
("Sun"), alone or in conjunction with other software companies, could either
design and implement their own versions of the VIP Network concept or design and
develop an alternative solution that might achieve the same goals as the VIP
Network concept. Such vendors have substantially greater financial, technical,
sales, marketing and other resources than the Company, as well as greater name
recognition and a larger customer base. The Company also believes that hardware
companies, such as Cisco Systems, Inc., could develop competing hardware
solutions designed to achieve the goals of the VIP Network. The successful
implementation by any such companies of any such solutions could have material
adverse effect on the Company's business, results of operations and financial
condition.
The software industry is extremely 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's networking software products compete
with major computer and communications systems vendors, including Microsoft,
Novell and Sun, as well as smaller networking software companies, such as
NetManage, Inc.. 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 at little
or no additional cost. The introduction of such protocol suites has lengthened
the sales cycles of, and has resulted in a decrease in average unit sales prices
for and a decrease in unit sales of, certain of the Company's products, which
materially adversely affected the Company's results of operations in 1996
A-1
<PAGE> 57
and is expected to continue to have this effect in 1997. 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 and Wall Data, Inc. 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.
The market for agent, directory services and security software products and
technologies 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. The Company competes with many
software companies in these areas, such as Microsoft, Novell and Sun. Many of
such competitors have longer operating histories, greater name recognition,
larger installed customer bases and significantly greater financial, technical
and marketing resources than does the Company. Further, the Company's current
products and technologies are being designed around certain standards, and
industry acceptance of competing standards could adversely affect demand for the
Company's products. For example, Microsoft is proposing an alternative security
standard, and widespread adoption of such 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 had a material adverse effect on its business, financial
condition and results of operations during 1996 and are expected to continue to
have such an effect during 1997.
Rapid Technological and Other Market Changes; Dependence on New Products.
The market for networking, agent, directory services and security software
products and technologies 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
successfully market its new strategic VIP Network concept and 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 new VIP Network products and
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
the VIP Network concept, new products or product enhancements will be developed
or marketed successfully by the Company on a timely basis or at all, that the
VIP Network concept and any new product or product enhancements will achieve
market acceptance, that other software vendors will not develop and market
solutions or products which are superior to the Company's VIP Network solution
or products or that any such other solutions or products will not achieve
greater market acceptance. In addition, the ability of the Company to develop
and market the VIP Network concept and new products and product enhancements is
dependent upon its ability to enter into and implement certain strategic
alliances as described below under "Strategic Alliances" and to retain qualified
employees as described below under "Changes in Personnel." 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.
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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.
Interoperability with Third Party Products and Technologies. 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 that will meet changing customer needs on a timely and
cost-effective basis, 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 those 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 and results of operations.
As described below under "Reliance on Strategic Alliances," the Company intends
to enter into strategic alliances providing for the joint development of certain
VIP Network products, and therefore expects that its products will increasingly
include technologies of third parties.
In connection with the development and enhancement of certain of its
products, the Company from time to time receives pre-release access to products
of some of the major software companies. There can be no assurance that such
third parties will continue to make such pre-release access available on a
timely basis or at all, and any discontinuance of or delay in such access could
have a material adverse effect on the Company's ability to provide timely
enhancements to its products, which could have a material adverse effect on the
business, financial condition and results of operations of the Company.
Similarly, the Company's ability to provide timely enhancements to its products
and, as a consequence, its business, financial condition and results of
operations could be materially adversely affected by market developments adverse
to such other software companies or their products.
Reliance on Strategic Alliances. In addition to internal development, the
Company expects to implement its new VIP Network strategy in part through
strategic alliances with industry partners that have developed products and
technologies that are complementary to those of the Company (both for the
purpose of incorporating the Company's technologies in the products of third
parties and the incorporation of the technologies of third parties, possibly
including security and directory services technologies, in certain planned
Company products) as well as strategic alliances with industry partners that
have developed complementary distribution channels. While the Company is
searching for strategic alliance opportunities, there can be no assurance that
it will be successful in identifying or developing such alliances or that such
alliances will achieve their intended purposes.
The Company continues to evaluate potential acquisitions and may pursue
acquisition candidates if it determines that an acquisition would further its
new corporate strategy. 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
A-3
<PAGE> 59
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.
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 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. In addition, the Company is
investing significantly in the training of its sales and marketing personnel
with respect to its VIP Network strategy and its VIP Network products. The
amount of training necessary to enable the Company's employees to successfully
market and sell such products could result in a delay of the revenue expected to
be derived from the sale of such products.
The Company and Firefox are in the process of integrating their
distribution channels. Firefox has relied significantly on its independent
distributors, systems integrators and value-added resellers for certain elements
of the marketing and distribution of its products. There can be no assurance
that any of Firefox's current distributors, systems integrators or value-added
resellers will be retained. In addition, the Company intends to increase its
focus in the United States on sales through distributors, value-added resellers,
systems integrators and OEMs rather than direct sales. Changes in distribution
channels may adversely affect sales of the Company's products and consequently
may adversely affect the Company's business, financial condition and results of
operations, at least in the near term. Any material increase in sales through
indirect channels may have an adverse effect on the Company's operating margins
due to the lower per unit revenue realized by the Company on sales through
indirect channels if the Company is unable to reduce selling, general and
administrative expenses.
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.
A-4
<PAGE> 60
Changes in Personnel. The Company experienced rapid growth during 1995 and
early 1996, from approximately 474 employees at January 1, 1995 to approximately
880 employees at April 30, 1996, which placed a significant demand on the
Company's management and other resources. 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, to the decline in the Company's operating results and
the trading prices of its Common Stock during 1996 and, to a lesser extent, the
integration of Firefox. In connection with the Firefox acquisition in July 1996,
the number of the Company's employees increased by approximately 124 persons,
and subsequently decreased to approximately 800 persons at December 31, 1996
(approximately 690 persons of such persons are employed in the Company's
continuing operations).
Additionally, management of the Company believes that an expansion of its
sales and marketing force during 1995 and early 1996 and the opening and
expansion of several offices outside of the United States during the same
periods resulted in certain inefficiencies in its sales and marketing
organizations. During the fall of 1996, the Company hired a number of
experienced management personnel to reorganize the Company's sales and marketing
organizations and eliminate such inefficiencies. However, if the Company is
unsuccessful in eliminating such inefficiencies, it will not be able to take
full advantage of the expansion of its sales and marketing organizations, which
may have a material adverse effect on its results of operations.
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 hire and retain qualified personnel and
the continued contributions of its key management, marketing, sales, product
development and operational personnel. As a result of increasing competition in
the software industry for qualified employees, it has become increasingly
difficult for the Company to hire qualified new employees and to retain existing
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.
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, led to a
decrease in average unit sales prices for certain of the Company's products
during 1996, 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.
International Sales. Sales outside the United States accounted for
approximately 42%, 46% and 44% of the Company's total revenues in 1996, 1995 and
1994, respectively. Sales in the United Kingdom accounted for approximately 39%
and 40% of Firefox's net revenues in 1995 and 1994, 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 decreased in 1996 primarily as
a result of increased competition, longer sales cycles, lower average unit sales
prices
A-5
<PAGE> 61
and, beginning in the second half of 1996, decreased unit sales as described
above. There can be no assurance that the Company will be able to maintain or
increase international sales of its products or that its international
distribution channels will be able to service and support its products
adequately.
Due to the encryption technology contained and to be contained in certain
of the Company's current and planned VIP Network products, such products are and
will be subject to U.S. export controls, and there can be no assurance that such
export controls will not limit the Company's ability to distribute such products
outside the United States or that international customers will accept the
products that the Company is allowed to export under such controls, which could
have a material adverse effect on the Company's business, results of operations
and financial condition. See "Government Regulation and Legal Uncertainties"
below.
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, and FTP anticipates that
it will transact a proportionately greater number of sales in local currencies
as its distribution channels are combined with those of Firefox. 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.
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;
competitive pricing pressures; 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; 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,
A-6
<PAGE> 62
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, 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.
Proprietary Rights. The Company considers its implementations of the TCP/IP
protocol, its OnNet Kernel software and PC/TCP 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 employees, consultants, distributors, customers and potential customers
and limits access to and distribution of its source code and other proprietary
information. Despite these precautions, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult, and, while the Company is unable to determine the extent
to which piracy of software exists, software piracy can be expected to be a
persistent problem, particularly in some international markets. The laws and
enforcement authorities of some foreign countries do not protect the Company's
proprietary rights to as great an extent as the laws of the United States, and
because of the Company's significant international presence, there can be no
assurance that the Company will be able to protect its proprietary rights
abroad. Although the Company's implementation of TCP/IP is proprietary, the
basic TCP/IP protocols are non-proprietary. Anyone who wishes to use them may do
so, without having to pay for the right.
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. As of March
26, 1997, the Company had not received any notice from a third party alleging
any material patent infringement. However, 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 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.
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 (with the exception of regulations
controlling the export and import of encryption technology referred to below)
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
A-7
<PAGE> 63
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 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
and results of operations. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, libel and personal
privacy is uncertain.
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 or that international
customers will accept the products that the Company is allowed to export within
the limits of those controls. 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.
Legal Proceedings Against FTP and Firefox. See "Item 3. Legal Proceedings"
of the Form 10-K for a description of certain legal proceedings against FTP and
Firefox which could materially adversely affect the Company's future business,
operations and financial condition.
A-8
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of FTP Software, Inc.
has been included in this Annual Report on Form 10-K for the year ended December
31, 1996. In connection with our audits of such financial statements, we have
also audited the related financial statement schedule listed in Item 14 of this
Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 3, 1997
II-1
<PAGE> 65
FTP SOFTWARE, INC.
<TABLE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts $1,600,000 $702,708 -- $(1,002,708) $1,300,000
Year ended December 30, 1995
Allowance for doubtful accounts $1,000,000 $666,182 -- $ (66,182) $1,600,000
Year ended December 31, 1994
Allowance for doubtful accounts $ 600,000 $608,475 -- $ (208,475) $1,000,000
</TABLE>
II-2
<PAGE> 66
EXHIBIT INDEX
-------------
EXHIBIT NO. TITLE
- ----------- -----
3.1 Restated Articles of Organization of the Company(1)
3.2 Certificate of Designation, Preferences and Rights of Junior
Preferred Stock of the Company(1)
3.3 Articles of Amendment to Restated Articles of Organization of the
Company(4)
3.4 Amended and Restated Bylaws of the Company(1)
4.1 Specimen common stock certificate(1)
4.2 Rights Agreement dated as of December 1, 1995 between the Company
and State Street Bank and Trust Company, as Rights Agent
(including form of Rights Certificate)(1)
4.3 Amendment to Rights Agreement dated as of November 7, 1996
between the Company and State Street Bank and Trust Company, as
Rights Agent(3)
10.1 Indenture of Lease between the Company and North Andover Mills
Realty dated November 19, 1991(1)
10.2 Amendment No. 1 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of September 1, 1992(1)
10.3 Amendment No. 2 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of January 6, 1993(1)
10.4 Amendment No. 3 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of June 18, 1993(1)
10.5 Amendment No. 4 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of September 30, 1993(1)
10.6 Amendment No. 5 to Indenture of Lease between the Company and
North Andover Mills Realty Limited Partnership dated August 12,
1995(1)
10.7 Employment Agreement between the Company and David H. Zirkle
dated as of July 26, 1996(3)
10.8 Employment Agreement between the Company and David H. Zirkle
dated as of March 1, 1993(1)
10.9 Amendment No. 1 to Employment Agreement between the Company and
David H. Zirkle dated as of June 14, 1993(1)
10.10 Amendment No. 2 to Employment Agreement between the Company and
David H. Zirkle dated as of August 15, 1994(1)
10.11 Amendment No. 3 to Employment Agreement between the Company and
David H. Zirkle dated as of February 28, 1995(1)
10.12 Employment Agreement between the Company and Glenn C. Hazard
dated as of July 29, 1996(3)
10.13 Employment Agreement between the Company and Susan L. Bostrom
dated as of July 23, 1996(3)
i
<PAGE> 67
EXHIBIT NO. TITLE
- ----------- -----
10.14 Employment Agreement between the Company and Douglas F. Flood
dated as of July 23, 1996(3)
10.15 Employment Agreement between the Company and John H. Keller dated
as of July 23, 1996(3)
10.16 Employment Agreement between the Company and John A. Kimberley
dated as of the "Effective Date" of the Firefox merger(3)
10.17 Employment Agreement between the Company and Peter R. Simkin
dated as of the "Effective Date" of the Firefox merger, together
with Amendment No. 1 thereto dated August 24, 1996(3)
10.18 Amendment No. 2 to Employment Agreement between Company and Peter
R. Simkin dated as of December 15, 1996*
10.19 Employment Agreement between the Company and John J. Warnock,
Jr., dated as of July 31, 1996(3)
10.20 FTP Software, Inc. Stock Option Plan(1)
10.21 FTP Software, Inc. 1996 Executive Equity Incentive Plan(3)
10.22 FTP Software, Inc. 1997 Employee Equity Incentive Plan*
10.23 Composite FTP Software, Inc. 1993 Non-Employee Directors' Stock
Option Plan incorporating Amendment No. 1 effective as of June 2,
1995 and Amendment No. 2 effective as of August 22, 1996(3)
10.24 FTP Software, Inc. 1994 Executive Compensation Plan(1)
10.25 FTP Software, Inc. 1995 Executive Compensation Plan(1)
10.26 FTP Software, Inc. 1995 V-P Sales Plan(1)
10.27 Indenture of Lease between the Company and Andover Mills Realty
Limited Partnership dated as of October 1, 1993(1)
10.28 Amendment No. 1 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of February 10,
1994(1)
10.29 Amendment No. 2 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of June 7,
1995(1)
10.30 Amended and Restated Agreement and Plan of Merger by and among
the Company, Firefox Acquisition Corp. and Firefox Communications
Inc. dated as of May 21, 1996(2)
11 Weighted Shares Used in Computation of Earnings Per Share*
21 List of subsidiaries*
23 Consent of Coopers & Lybrand L.L.P.*
27 Financial Data Schedule*
99 Cautionary Statements Relevant to Forward-Looking Statements(4)
- ---------------------
*Filed with this Report.
ii
<PAGE> 68
(1) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Registration Statement on Form S-4 (No. 333-06917) filed with
the Securities and Exchange Commission (the "Commission") on June 26, 1996.
(2) Included as Appendix A to, and incorporated in this Report by reference to,
the Company's Joint Proxy Statement/Prospectus filed with the Commission on
July 1, 1996.
(3) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996 filed with the Commission on November 14, 1996.
(4) Included as, and incorporated by reference to, Appendix A to this Report.
iii
<PAGE> 1
EXHIBIT 10.18
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
This Amendment No. 2 to Employment Agreement (this "Amendment") is made and
entered into by and between FTP Software, Inc., a Massachusetts corporation (the
"Company"), and Peter R. Simkin ("Employee"), effective as of the 15th day of
December, 1996.
WHEREAS, the Company and Employee have entered into an Employment Agreement
dated as of the Effective Time (as defined in that certain Amended and Restated
Agreement and Plan of Merger, dated as of May 21, 1996, among the Company,
Firefox Acquisition Corp. and Firefox Communications Inc.), as amended by
Amendment No. 1 to Employment Agreement effective as of August 22, 1996 (as so
amended, the "Agreement"); and
WHEREAS, the Company and Employee desire to further amend the Agreement;
NOW, THEREFORE, in consideration of the premises and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
1. AMENDMENTS. Section 5.g.i. of the Agreement is hereby amended by adding the
words "to two times" immediately before the words "the greater of" appearing in
the seventh line thereof.
2. EFFECT ON AGREEMENT. Except as specifically amended hereby, the Agreement
shall continue in full force and effect.
IN WITNESS WHEREOF, this Amendment has been executed as a sealed instrument by
the Company, by its duly authorized representative, and by Employee, effective
as of the date first above written.
EMPLOYEE: FTP SOFTWARE, INC.
By:
- ----------------------------------- ----------------------------------
Peter R. Simkin Glenn C. Hazard
President and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.22
FTP SOFTWARE, INC.
1997 EMPLOYEE EQUITY INCENTIVE PLAN
1. PURPOSE
The purpose of this Employee Equity Incentive Plan (the "Plan") is to
advance the interests of FTP Software, Inc. (the "Company") by enhancing its
ability to attract and retain qualified employees and encourage them to make
significant contributions to the success of the Company and its subsidiaries
through ownership of shares of the Company's common stock ("Stock").
The Plan is intended to accomplish these goals by enabling the Company to
grant awards hereunder ("Awards") in the form of Options, Stock Appreciation
Rights, Restricted Stock and Unrestricted Stock Awards, or combinations thereof,
all as defined and more fully described below.
2. ADMINISTRATION
The Plan will be administered by a committee (the "Committee") of the Board
of Directors (the "Board of Directors" or the "Board") of the Company consisting
of one or more directors. If the Committee consists of more than one director, a
majority of the members of the Committee shall constitute a quorum, and all
determinations of the Committee shall be made by a majority of its members. Any
determination of the Committee under the Plan may be made without notice or
meeting of the Committee by a writing signed by a majority of the Committee
members or, if applicable, the sole Committee member.
The Committee will have authority, not inconsistent with the express
provisions of the Plan and in addition to other authority granted under the
Plan, to: (a) grant Awards at such time or times as it may choose; (b) determine
the size of each Award, including the number of shares of Stock subject to the
Award; (c) determine the type or types of each Award; (d) determine the terms
and conditions of each Award; (e) waive compliance by the holder of an Award
with any obligations to be performed by such holder under the Award and waive
any term or condition of an Award; (f) amend or cancel an existing Award in
whole or in part (and if an Award is canceled, grant another Award in its place
on such terms as the Committee shall specify), except that the Committee may
not, without the consent of the holder of an Award, take any action under this
clause with respect to such Award if such action would adversely affect the
rights of such holder; (g) prescribe the form or forms of instruments that are
required or deemed appropriate under the Plan, including any written notices and
elections required of Participants (as defined below), and change such forms
from time to time; (h) adopt, amend and rescind rules and regulations for the
administration of the Plan; and (i) interpret the Plan and decide any questions
and settle all controversies and disputes that may arise in connection with the
Plan.
<PAGE> 2
Such determinations and actions of the Committee, and all other determinations
and actions of the Committee made or taken under authority granted by any
provision of the Plan, shall be conclusive and shall bind all parties. Nothing
in this paragraph shall be construed as limiting the power of the Committee to
make adjustments under Section 7.3 or Section 8.6.
3. EFFECTIVE DATE AND TERM OF PLAN
The Plan shall become effective on January 20, 1997.
No Award may be granted under the Plan after January 20, 2007, but Awards
previously granted may extend beyond that date.
4. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 8.6 below, the maximum
aggregate number of shares of Stock that may be delivered under the Plan is
2,780,000 which number shall be automatically increased from time to time by the
number of shares as to which each option granted under the Company's Stock
Option Plan remains unexercised as of the time of any termination or forfeiture
of such option occurring after the Effective Date of this Plan, with each such
automatic increase to be effective at the time of such termination or
forfeiture. If any Award requiring exercise by the Participant for delivery of
Stock terminates without having been exercised in full, or if any Award payable
in Stock or cash is satisfied in cash rather than Stock, the number of shares of
Stock as to which such Award was not exercised or for which cash was substituted
shall be available for future grants.
Stock delivered under the Plan may be either authorized but unissued Stock
or previously issued Stock acquired by the Company and held in treasury. No
fractional shares of Stock may be delivered under the Plan.
Subject to Sections 7.3 and 8.6(a): (i) the maximum aggregate number of
shares of Stock as to which Options may be granted under the Plan to any
Participant during any calendar year is 1,000,000; (ii) the maximum aggregate
number of shares of Stock as to which Stock Appreciation Rights may be granted
under the Plan to any Participant during any calendar year is 1,000,000; and
(iii) the maximum aggregate number of shares of Stock as to which Restricted
Stock Awards may be granted under the Plan is 100,000. For purposes of this
paragraph, except as otherwise provided in regulations or other guidelines
issued under Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"), any repricing of an Option or Stock Appreciation Right shall be
treated as a new grant and shall count against the applicable limit set forth in
this paragraph.
-2-
<PAGE> 3
5. ELIGIBILITY AND PARTICIPATION
Those eligible to receive Awards under the Plan ("Participants") are all
full-time employees of the Company or any of its subsidiaries ("Employees")
other than those who are eligible to participate in the Company's 1996 Executive
Equity Incentive Plan. A "subsidiary" for purposes of the Plan shall be a
corporation in which the Company owns, directly or indirectly, stock possessing
50% or more of the total combined voting power of all classes of stock. A
"parent" of another corporation for purposes of the Plan shall be any
corporation which owns, directly or indirectly, stock possessing 50% or more of
the total combined voting power of all classes of stock of such other
corporation.
6. TYPES OF AWARDS
6.1. OPTIONS.
(A) NATURE OF OPTIONS. An Option is an Award entitling the holder on
exercise thereof to purchase Stock at a specified exercise price.
Both "incentive stock options," as defined in Section 422 of the Code (any
Option intended to qualify as an incentive stock option being hereinafter
referred to as an "ISO"), and Options that are not incentive stock options, may
be granted under the Plan.
(B) EXERCISE PRICE. The exercise price of an Option shall be determined by
the Committee subject to the following:
(1) The exercise price of an ISO shall not be less than 100% (110% in
the case of an ISO granted to a ten-percent shareholder) of the fair market
value of the Stock subject to the Option, determined as of the time the
Option is granted. A "ten-percent shareholder" is any person who at the
time of grant owns, directly or indirectly, or is deemed to own by reason
of the attribution rules of Section 424(d) of the Code, stock possessing
more than 10% of the total combined voting power of all classes of stock of
the Company or of any of its subsidiaries.
(2) In no case may the exercise price paid for Stock which is part of
an original issue of authorized Stock be less than the par value per share
of the Stock.
(3) The Committee may reduce the exercise price of an Option at any
time after the time of grant, but in the case of an Option originally
awarded as an ISO, only with the consent of the Participant.
(C) DURATION OF OPTIONS. The latest date on which an Option may be
exercised shall be the tenth anniversary (fifth anniversary, in the case of an
ISO granted to a ten-percent shareholder) of the date on which the Option was
granted, or such earlier date as may have been specified by the Committee at the
time the Option was granted.
-3-
<PAGE> 4
(D) EXERCISE OF OPTIONS. Options granted under any single Award shall
become exercisable at such time or times, and on such conditions, as the
Committee may specify; provided, however, that if the Committee does not so
specify, 25% of the shares subject to the Award may be purchased commencing one
year after the date of grant, and an additional 25% of such shares may be
purchased commencing on the second, third and fourth anniversaries of the date
of grant. The Committee may at any time and from time to time (i) accelerate the
time at which all or any part of an Option may be exercised, (ii) provide for
the acceleration of the exercisability of an Option upon the occurrence of
certain events, and (iii) extend the time by which an Option must be exercised
(e.g., following death or termination) up to the latest date by which such
Option could have been exercised without regard to Section 7; provided, that an
extension of an ISO under (iii) shall not be effective without the consent of
the holder of the ISO.
Any exercise of an Option must be in writing, signed by the proper person
and delivered or mailed to the Company, accompanied by (i) any documents
required by the Committee and (ii) payment in full in accordance with paragraph
(e) below for the number of shares for which the Option is exercised.
(E) PAYMENT FOR STOCK. Stock purchased on exercise of an Option must be
paid for as follows: (i) in cash or by check (acceptable to the Company in
accordance with guidelines established for this purpose), bank draft or money
order payable to the order of the Company or (ii) if so permitted by the
instrument evidencing the Option (or in the case of an Option which is not an
ISO, by the Committee at or after grant of the Option), (A) through the delivery
of shares of Stock which have been outstanding for at least six months (unless
the Committee expressly approves a shorter period) and which have a fair market
value on the last business day preceding the date of exercise equal to the
exercise price, or (B) by delivery of a promissory note of the Option holder to
the Company, payable on such terms as are specified by the Committee, or (C) by
delivery of an unconditional and irrevocable undertaking by a broker to deliver
promptly to the Company sufficient funds to pay the exercise price, or (D) by
any combination of the foregoing permissible forms of payment; provided, that if
the Stock delivered upon exercise of the Option is an original issue of
authorized Stock, at least so much of the exercise price as represents the par
value of such Stock must be paid other than by the Option holder's promissory
note or personal check.
(F) FAIR MARKET VALUE. For all purposes under this Plan, "fair market
value" shall mean with respect to the Common Stock and at any date, (i) the
reported closing price of such stock on the Nasdaq National Market or New York
Stock Exchange or other established stock exchange on such date, or if no sale
of such stock shall have been made on the Nasdaq National Market or such an
exchange on that date, on the preceding date on which there was such a sale,
(ii) if such stock is not then quoted on the Nasdaq National Market and is not
then listed on such an exchange, the average of the closing bid and asked prices
per share for such stock in the over-the-counter market as quoted on the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") on such date, or (iii) if such stock is not then listed on such an
exchange or quoted on NASDAQ or the Nasdaq National Market, an amount determined
in good faith by the Committee in its sole discretion.
-4-
<PAGE> 5
6.2. STOCK APPRECIATION RIGHTS.
(A) NATURE OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right
("SAR") is an Award entitling the holder on exercise of the Right to receive an
amount, in cash or Stock or a combination thereof (such form to be determined
by the Committee), determined in whole or in part by reference to appreciation
in Stock value.
In general, a Stock Appreciation Right entitles the Participant to receive,
with respect to each share of Stock as to which the Right is exercised, the
excess of the share's fair market value on the date of exercise over its fair
market value on the date the Right was granted.
(B) GRANT OF STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be
granted only in tandem with Options granted under the Plan. A Stock Appreciation
Right granted in tandem with an Option which is not an ISO may be granted either
at or after the time the Option is granted. A Stock Appreciation Right granted
in tandem with an ISO may be granted only at the time the Option is granted.
(C) RULES APPLICABLE TO SAR AWARDS.
(1) The Stock Appreciation Right shall be exercisable only at such
time or times, and to the extent, that the related Option is exercisable
and shall be exercisable in accordance with the procedure required for
exercise of the related Option.
(2) The Stock Appreciation Right shall terminate and no longer be
exercisable upon the termination or exercise of the related Option, except
that a Stock Appreciation Right granted with respect to less than the full
number of shares covered by an Option will not be reduced until the number
of shares as to which the related Option has been exercised or has
terminated exceeds the number of shares not covered by the Stock
Appreciation Right.
(3) The Option shall terminate and no longer be exercisable upon the
exercise of the related Stock Appreciation Right.
(4) The Stock Appreciation Right shall be transferable only with the
related Option.
(5) A Stock Appreciation Right granted in tandem with an ISO may be
exercised only when the fair market value of the Stock subject to the
Option exceeds the exercise price of such Option.
6.3. RESTRICTED AND UNRESTRICTED STOCK.
(A) NATURE OF RESTRICTED STOCK AWARD. A Restricted Stock Award entitles
the holder to acquire, for a purchase price specified by the Committee (but in
no event less than par value), shares of Stock subject to the restrictions
described in paragraph (d) below ("Restricted Stock").
-5-
<PAGE> 6
(B) ACCEPTANCE OF AWARD. A Participant who is granted a Restricted Stock
Award will have no rights with respect to such Award unless the Participant
accepts the Award by written instrument delivered or mailed to the Company
accompanied by payment in full of the specified purchase price of the shares
covered by the Award. Payment may be by certified or bank check or other
instrument acceptable to the Committee.
(C) RIGHTS AS A STOCKHOLDER. A Participant who receives Restricted Stock
shall have all the rights of a stockholder with respect to the Stock, including
voting and dividend rights, subject to the restrictions described in paragraph
(d) below and any other conditions imposed by the Committee at the time of
grant. Unless the Committee otherwise determines, certificates evidencing shares
of Restricted Stock shall remain in the possession of the Company until such
shares are free of all restrictions under the Plan.
(D) RESTRICTIONS. Except as otherwise specifically provided by the Plan,
Restricted Stock may not be sold, assigned, transferred, pledged or otherwise
encumbered or disposed of, and if the Participant dies or otherwise suffers a
Status Change (as defined in Section 7.2 below) for any reason, must be offered
to the Company for purchase at the price originally paid for the Stock. These
restrictions shall lapse at such time or times, and on such conditions, as the
Committee may specify. The Committee may at any time accelerate the time at
which the restrictions on all or any part of the shares of Restricted Stock
shall lapse. Upon lapse of all restrictions, Stock shall cease to be restricted
for purposes of the Plan.
(E) NOTICE OF ELECTION. Any Participant making an election under Section
83(b) of the Code with respect to Restricted Stock must provide a copy thereof
to the Company within 10 days of the filing of such election with the Internal
Revenue Service.
(F) OTHER AWARDS SETTLED WITH RESTRICTED STOCK. The Committee may, at the
time any Award described in this Section 6 is granted, provide that any or all
the Stock delivered pursuant to the Award will be Restricted Stock.
(G) UNRESTRICTED STOCK. The Committee may, in its sole discretion, approve
the sale to any Participant of shares of Stock free of restrictions under the
Plan for a price which is not less than the par value of the Stock.
7. EVENTS AFFECTING OUTSTANDING AWARDS
7.1. DEATH.
If a Participant dies, the following shall apply:
(a) All Options and Stock Appreciation Rights held by the Participant
immediately prior to death, to the extent then exercisable, may be
exercised by the Participant's executor or administrator or the person or
persons to whom the Option or Right is transferred by will or the
applicable laws of descent and distribution, at any time
-6-
<PAGE> 7
within the one-year period ending with the first anniversary of the
Participant's death (or such shorter or longer period as the Committee may
determine at any time), and shall terminate on the last day of such period.
In no event, however, shall an Option or Stock Appreciation Right remain
exercisable beyond the latest date on which it could have been exercised
without regard to this Section 7.1. Except as otherwise determined by the
Committee, all Options and Stock Appreciation Rights held by a Participant
immediately prior to death that are not then exercisable shall terminate at
death.
(b) Except as otherwise determined by the Committee, all Restricted
Stock held by the Participant must be transferred to the Company upon the
Participant's death (and, in the event the certificates representing such
Restricted Stock are held by the Company, such Restricted Stock shall be
deemed to be so transferred at such time without any further action by the
Participant) in accordance with Section 6.3(d) above.
7.2. TERMINATION OF SERVICE (OTHER THAN BY DEATH).
If a Participant ceases to be an Employee for any reason other than death
(such termination of the employment relationship being hereinafter referred to
as a "Status Change"), the following shall apply:
(a) Except as otherwise determined by the Committee, all Options and
Stock Appreciation Rights held by the Participant that were not exercisable
immediately prior to the Status Change shall terminate at the time of the
Status Change. Any Options or SARs that were exercisable immediately prior
to the Status Change shall continue to be exercisable for a period of three
months following the date of such Status Change (or such longer period as
the Committee may determine at any time), and shall terminate on the last
day of such period, unless the Award provides by its terms for immediate
termination in the event of a Status Change or unless the Status Change
results from a termination for cause as determined by the Committee in its
sole discretion, provided, however, if such Status Change results from the
Participant's permanent and total disability, such three-month period shall
be increased to a one-year period. In no event, however, shall an Option or
Stock Appreciation Right remain exercisable beyond the latest date on which
it could have been exercised without regard to this Section 7.2. For
purposes of this paragraph, a Status Change shall not be deemed to have
resulted by reason of (i) a bona fide leave of absence approved for
purposes of the Plan by the Committee, or (ii) a transfer of employment
between the Company and a subsidiary or between subsidiaries, or to the
employment of a corporation (or a parent or subsidiary corporation of such
corporation) issuing or assuming an option in a transaction to which
Section 424(a) of the Code applies.
(b) Except as otherwise determined by the Committee, all Restricted
Stock held by the Participant at the time of the Status Change must be
transferred to the Company (and, in the event the certificates representing
such Restricted Stock are held by the Company, such Restricted Stock shall
be deemed to be so transferred at such time without any further action by
the Participant) in accordance with Section 6.3 above.
-7-
<PAGE> 8
7.3. CERTAIN CORPORATE TRANSACTIONS.
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company as a result of which the
outstanding securities of the class then subject to options hereunder are
changed into or exchanged for cash or property or securities not of the
Company's issue, or upon a sale of substantially all the property of the Company
to, or the acquisition of stock representing more than eighty percent (80%) of
the voting power of the stock of the Company then outstanding by, another
corporation or person, the Plan shall terminate, and all options theretofore
granted hereunder shall terminate, unless provision be made in writing in
connection with such transaction for the continuance of the Plan and/or for the
assumption of options theretofore granted, or the substitution for such options
of options covering the stock of a successor employer corporation, or a parent
or a subsidiary thereof, with appropriate adjustments as to the number and kind
of shares and prices, in which event the Plan and options theretofore granted
shall continue in the manner and under the terms so provided. If the Plan and
unexercised options shall terminate pursuant to the foregoing sentence, all
persons entitled to exercise any unexercised portions of options then
outstanding shall have the right, at such time prior to the consummation of the
transaction causing such termination as the Company shall designate, to exercise
the unexercised portions of their options, including the portions thereof which
would, but for this Section 7.3, not yet be exercisable.
8. GENERAL PROVISIONS
8.1. DOCUMENTATION OF AWARDS.
Awards will be evidenced by such written instruments, if any, as may be
prescribed by the Committee from time to time. Such instruments may be in the
form of agreements to be executed by both the Participant and the Company, or
certificates, letters or similar instruments, which need not be executed by the
Participant but acceptance of which shall evidence agreement by the Participant
to the terms thereof.
8.2. RIGHTS AS A STOCKHOLDER, DIVIDEND EQUIVALENTS.
Except as specifically provided by the Plan, the receipt of an Award shall
not give a Participant any rights as a stockholder; the Participant will obtain
such rights, subject to any limitations imposed by the Plan or the instrument
evidencing the Award, upon actual receipt of the Stock issued under the Award.
However, the Committee may, on such conditions as it deems appropriate, provide
that a Participant will receive a benefit in lieu of cash dividends that would
have been payable on any or all Stock subject to the Participant's Award had
such Stock been outstanding from the date of grant of the Award. Without
limitation, the Committee may provide for payment to the Participant of amounts
representing such dividends, either currently or in the future, or for
investment of such amounts on behalf of the Participant.
-8-
<PAGE> 9
8.3. CONDITIONS ON DELIVERY OF STOCK.
The Company will not be obligated to deliver any shares of Stock pursuant
to the Plan or to remove restrictions from shares previously delivered under the
Plan (i) until all conditions of the applicable Award have been satisfied or
removed, (ii) until, in the opinion of the Company's counsel, all applicable
federal and state laws and regulations have been complied with, (iii) if the
outstanding Stock is at the time listed on any stock exchange or the Nasdaq
National Market, until the shares to be delivered have been listed or authorized
to be listed on such exchange or such Market upon official notice of issuance,
and (iv) until all other legal matters in connection with the issuance and
delivery of such shares have been approved by the Company's counsel. If the sale
of Stock issuable under the Plan has not been registered under the Securities
Act of 1933, as amended, the Company may require, as a condition to exercise of
the Award, such representations or agreements as counsel for the Company may
consider appropriate to avoid violation of such Act and may require that the
certificates evidencing such Stock bear an appropriate legend restricting
transfer.
If an Award is exercised by the Participant's legal representative, the
Company shall be under no obligation to deliver Stock pursuant to such exercise
until the Company is satisfied as to the authority of such representative.
8.4. TAX WITHHOLDING.
The Company shall withhold from any cash payment made pursuant to an Award
an amount sufficient to satisfy all federal, state and local withholding tax
requirements (the "withholding requirements").
In the case of an Award pursuant to which Stock may be delivered, the
Committee shall have the right to require that the Participant or other
appropriate person remit to the Company an amount sufficient to satisfy the
withholding requirements, or make other arrangements satisfactory to the
Committee with regard to such requirements, prior to the delivery of any Stock.
If and to the extent that such withholding is required, the Committee may permit
the Participant or such other person to elect at such time and in such manner as
the Committee provides to have the Company hold back from the shares to be
delivered, or to deliver to the Company, shares of Stock having a value
calculated to satisfy the withholding requirement.
If at the time an ISO is exercised, the Committee determines that the
Company could be liable for withholding requirements with respect to a
disposition of any of the shares of Stock received upon exercise, the Committee
may require as a condition of exercise that the person exercising the ISO agree
(i) to inform the Company promptly of any disposition (within the meaning of
Section 424(c) of the Code) of Stock received upon exercise, and (ii) to give
such security as the Committee deems adequate to meet the potential liability of
the Company for the withholding requirements and to augment such security from
time to time in any amount reasonably deemed necessary by the Committee to
preserve the adequacy of such security.
-9-
<PAGE> 10
8.5. NONTRANSFERABILITY OF AWARDS.
No Award (other than an Award in the form of an outright transfer of cash
or Unrestricted Stock) may be transferred other than by will or by the laws of
descent and distribution, and during a Participant's lifetime an Award requiring
exercise may be exercised only by him or her (or in the event of the
Participant's incapacity, the person or persons legally appointed to act on the
Participant's behalf).
8.6. ADJUSTMENTS IN THE EVENT OF CERTAIN TRANSACTIONS.
(a) In the event of a stock dividend, stock split or combination of shares,
recapitalization or other change in the Company's capitalization, or other
distribution to common stockholders other than normal cash dividends, after the
effective date of the Plan, the Committee shall make any appropriate adjustments
to the maximum number of shares that may be delivered under the Plan and,
subject to paragraph (c) of this Section 8.6, the other limitations set forth in
Section 4 above.
(b) In any event referred to in paragraph (a) of this Section 8.6, the
Committee shall also make any appropriate adjustments to the number and kind of
shares of stock or securities with respect to which Awards are then outstanding
or subsequently granted, any exercise prices relating to Awards and any other
provision of Awards affected by such change. The Committee may also make such
adjustments to take into account material changes in law or in accounting
practices or principles, mergers, consolidations, acquisitions, dispositions or
similar corporate transactions, or any other event, if it is determined by the
Committee that adjustments are appropriate to avoid distortion in the operation
of the Plan.
(c) In the case of ISOs, or for purposes of making adjustments to the
per-Participant limits set forth in the third paragraph of Section 4, the
adjustments described above in this Section 8.6 shall be made only to the extent
consistent with continued qualification of the option under Section 422 of the
Code (in the case of an ISO) or the rules under Section 162(m) of the Code (in
the case of the limitations set forth in the third paragraph of Section 4).
8.7. EMPLOYMENT RIGHTS, ETC.
Neither the adoption of the Plan nor the grant of Awards shall confer upon
any person any right to continued retention by the Company or any subsidiary as
an Employee or otherwise, or affect in any way the right of the Company or any
subsidiary to terminate an employment relationship. Except as specifically
provided by the Committee in any particular case, the loss of existing or
potential profit in Awards granted under the Plan will not constitute an element
of damages in the event of termination of an employment relationship even if the
termination is in violation of an obligation of the Company to the Participant.
-10-
<PAGE> 11
8.8. DEFERRAL OF PAYMENTS.
The Committee may agree at any time, upon request of the Participant, to
defer the date on which any payment under an Award will be made.
8.9. PAST SERVICES AS CONSIDERATION.
Where a Participant purchases Stock under an Award for a price equal to the
par value of the Stock, the Committee may determine that such price has been
satisfied by past services rendered by the Participant.
9. EFFECT, AMENDMENT, SUSPENSION AND TERMINATION
Neither adoption of the Plan nor the grant of Awards to a Participant shall
affect the Company's right to grant to such Participant awards that are not
subject to the Plan, to issue to such Participant Stock as a bonus or otherwise,
or to adopt other plans or arrangements under which Stock may be issued to
Employees.
The Company may at any time or times amend the Plan or any outstanding
Award for any purpose which may at the time be permitted by law, or may at any
time terminate or suspend the Plan as to any further grants of any or all types
of Awards.
As adopted by the Board of Directors of the Company on January 20, 1997.
-11-
<PAGE> 1
<TABLE>
EXHIBIT 11
FTP SOFTWARE, INC.
WEIGHTED SHARES USED IN COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
FULLY DILUTED PRIMARY
<S> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996:
Common stock outstanding, beginning of the year 26,506,729 26,506,729
Weighted average common stock issued during 1996 3,389,301 3,389,301
---------- ----------
Weighted average shares of common stock outstanding,
end of the year 29,896,030 29,896,030
========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1995:
Common stock outstanding, beginning of the year 23,344,122 23,344,122
Weighted average common stock issued during 1995 1,811,161 1,811,161
Weighted average common stock equivalents 4,304,545 4,304,545
Weighted average treasury shares acquired using
the treasury stock method (1,197,232) (1,244,628)
---------- ----------
Weighted average shares of common stock outstanding,
end of the year 28,262,596 28,215,200
========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1994:
Common stock outstanding, beginning of the year 21,693,780 21,693,780
Weighted average common stock issued during 1994 768,112 768,112
Weighted average common stock equivalents 7,911,313 7,940,918
Weighted average treasury shares acquired using
the treasury stock method (1,303,289) (1,849,923)
---------- ----------
Weighted average shares of common stock outstanding,
end of the year 29,069,916 28,552,887
========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF FTP SOFTWARE, INC.
----------------------------------
JURISDICTION OF
NAME ORGANIZATION
- ---- ------------
Campbell Services, Inc. Michigan
FTP Software Asia, Inc. Massachusetts
FTP Software (Asia Pacific) Pte Ltd Singapore
FTP Software Canada Ltd. Alberta, Canada
FTP Software Export, Inc. Bahamas
FTP Software Kabushiki Kaisha Japan
(a/k/a FTP Software K.K.)
FTP Software GmbH Germany
FTP Software Limited U.K.
FTP Software Security Corp., Inc. Massachusetts
FTP Software Worldwide, Inc. Massachusetts
Firefox Communications Inc. Delaware
Firefox (U.S.) Inc. Delaware
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation of our reports dated February 3, 1997, on
our audits of the consolidated financial statements and financial statement
schedule of FTP Software, Inc. as of December 31, 1996 and 1995, and for the
years ended December 31, 1996, 1995, and 1994 which reports are included in
this Annual Report on Form 10-K, into the Company's previously filed
Registration Statements on Form S-8, File Nos. 33-77506, 33-80427, 333-08585,
and 333-14669.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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0
0
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