<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-22466
FTP SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2906463
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2 HIGH STREET
NORTH ANDOVER, MASSACHUSETTS 01845
(Address of principal executive offices)
(Zip Code)
(978) 685-4000
(Registrant's telephone number, including area code)
100 BRICKSTONE SQUARE
ANDOVER, MASSACHUSETTS 01810
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 34,013,658
- -------------------------------------- --------------------------------
Class Outstanding at November 10, 1997
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FTP SOFTWARE, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1997
and December 31, 1996 (unaudited) 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 (unaudited) 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 22
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FTP SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,076 $ 22,036
Short-term investments 20,857 29,026
Accounts receivable, net of allowance for doubtful
accounts of $1,300 for 1997 and 1996 6,487 16,586
Prepaid expenses and other current assets 4,009 4,430
Income taxes 4,350 4,197
Net assets of discontinued operations 2,677 5,263
-------- --------
Total current assets 65,456 81,538
Property and equipment, net 10,930 20,734
Purchased software, net 3,516 6,962
Investments 23,752 47,971
Other assets 1,056 830
-------- --------
Total assets $104,710 $158,035
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses (Note 2) $ 15,988 $ 12,509
Accrued employee compensation and benefits 5,675 4,000
Current portion of long-term obligations -- 191
Deferred revenue 6,525 10,058
-------- --------
Total liabilities 28,188 26,758
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued and outstanding -- --
Common stock, $.01 par value; authorized 100,000,000
shares; issued and outstanding 33,926,166 and
33,646,203 in 1997 and 1996, respectively 339 336
Additional paid-in capital 136,724 136,151
Accumulated deficit (60,504) (5,447)
Equity adjustments (37) 237
-------- --------
Total stockholders' equity 76,522 131,277
-------- --------
Total liabilities and stockholders' equity $104,710 $158,035
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FTP SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product revenue $ 10,089 $ 18,158 $ 39,988 $ 62,837
Service revenue 4,142 4,116 13,344 12,051
-------- -------- -------- --------
Total revenue 14,231 22,274 53,332 74,888
-------- -------- -------- --------
Cost of revenue:
Product cost 2,833 1,903 9,786 4,704
Service cost 2,094 2,509 7,912 7,384
-------- -------- -------- --------
Total cost of revenue 4,927 4,412 17,698 12,088
-------- -------- -------- --------
Gross margin 9,304 17,862 35,634 62,800
-------- -------- -------- --------
Operating expenses:
Sales and marketing 10,265 10,836 37,661 33,007
Product development 6,320 44,558 22,550 57,238
General and administrative 3,750 5,310 12,697 14,479
Restructuring charge 17,079 -- 17,079 --
-------- -------- -------- --------
Total operating expenses 37,414 60,704 89,987 104,724
-------- -------- -------- --------
Loss from continuing operations (28,110) (42,842) (54,353) (41,924)
Investment and other income, net 719 1,265 2,504 3,450
-------- -------- -------- --------
Loss from continuing operations
before income taxes (27,391) (41,577) (51,849) (38,474)
Provision (benefit) for income taxes 216 (2,364) 1,208 (1,473)
-------- -------- -------- --------
Net loss from continuing operations (27,607) (39,213) (53,057) (37,001)
Operating loss from discontinued
operations, net of income tax benefits -- (5,238) -- (29,039)
Provision for dispositions (2,000) (4,760) (2,000) (4,760)
-------- -------- -------- --------
Net loss $(29,607) $(49,211) $(55,057) $(70,800)
======== ======== ======== ========
Net loss per share:
Continuing operations $ (.81) $ (1.23) $ (1.57) $ (1.29)
Discontinued operations (.06) (.31) (.06) (1.18)
-------- -------- -------- --------
$ (.87) $ (1.54) $ (1.63) $ (2.47)
======== ======== ======== ========
Weighted average common shares
outstanding 33,900 32,013 33,815 28,645
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FTP SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $(53,057) $(37,001)
Adjustments to reconcile net loss from continuing
operations to net cash provided by (used for) operating activities:
Provision for doubtful accounts -- 200
Depreciation and amortization 9,778 6,329
Loss on disposition of property and equipment 6,920 --
Purchase of in-process technology -- 37,852
Amortization of discounts and premiums on investments 589 --
Changes in operating assets and liabilities:
Accounts receivable 10,099 20,388
Inventories 253 (311)
Prepaid expenses and other current assets 169 (785)
Income taxes 285 (5,557)
Other assets (218) (650)
Accounts payable and accrued expenses 3,542 (1,312)
Accrued employee compensation and benefits 1,667 (2,460)
Deferred revenue (3,533) (314)
-------- --------
Net cash provided by (used for) continuing operations (23,506) 16,379
Net cash provided by (used for) discontinued operations 369 (5,952)
-------- --------
Net cash provided by (used for) operating activities (23,137) 10,427
-------- --------
Cash flows from investing activities:
Capital expenditures (3,230) (6,203)
Maturities of investments, net 31,139 16,532
Acquisitions, net of cash acquired -- (3,776)
-------- --------
Net cash provided by continuing operations 27,909 6,553
Net cash used for discontinued operations -- (32,809)
-------- --------
Net cash provided by (used for) investing activities 27,909 (26,256)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 576 1,402
Principal payments on long-term obligations (240) (1,582)
-------- --------
Net cash provided by (used for) financing activities 336 (180)
-------- --------
Effect of exchange rate changes on cash (68) (18)
-------- --------
Net increase (decrease) in cash and cash equivalents 5,040 (16,027)
Cash and cash equivalents, beginning of period 22,036 30,237
-------- --------
Cash and cash equivalents, end of period $ 27,076 $ 14,210
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FTP SOFTWARE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL DATA
The accompanying unaudited consolidated financial statements have been
prepared by FTP Software, Inc. (the "Company") in accordance with generally
accepted accounting principles. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments, consisting
only of those of a normal recurring nature, necessary for a fair presentation of
the Company's financial position, results of operations and cash flows at the
dates and for the periods indicated. While the Company believes that the
disclosures presented are adequate to make the information not misleading, these
financial statements should be read in conjunction with the audited consolidated
financial statements and notes related thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
The results of the three- and nine-month periods ended September 30,
1997 are not necessarily indicative of the results to be expected for the full
fiscal year. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. RESTRUCTURING CHARGE
In July 1997, as a result of continuing losses, the Company reorganized
its operations into business units and effected a worldwide workforce reduction
in order to lower the Company's overall cost structure and create greater focus
on specific business opportunities. This restructuring resulted in a
nonrecurring charge of approximately $17.1 million ($.50 per share) in the third
quarter of 1997. This charge included severance related payments, excess
facilities costs, the write-off of fixed assets and other restructuring-related
items such as charges related to canceled contracts. The following summarizes
this charge, the related write-off and cash paid in connection with the
restructuring (dollars in thousands):
<TABLE>
<CAPTION>
Severance Excess
Payments Facilities Fixed Assets Other Total
-------- ---------- ------------ ----- -----
<S> <C> <C> <C> <C> <C>
1997 restructuring charge $ 7,025 $ 2,921 $ 6,270 $ 863 $ 17,079
Noncash write-off -- -- (6,270) -- (6,270)
Cash paid (6,689) (506) -- (163) (7,358)
------- ------- ------- ----- --------
Accrued restructuring charge
at September 30, 1997 $ 336 $ 2,415 $ -- $ 700 $ 3,451
======= ======= ======= ===== ========
</TABLE>
Amounts related to severance with respect to the workforce reduction
involved approximately 300 employees, primarily in sales and marketing, product
development and general and administrative functions at the Company's domestic
and European locations. Amounts related to facilities reflect the cost of the
lease of the excess space arising primarily from the consolidation of the
Company's Massachusetts headquarters and manufacturing facilities into the
Company's North Andover, Massachusetts development offices.
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FTP SOFTWARE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. DISCONTINUED OPERATIONS
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 product lines. As a result, the Company recorded a $4.8
million charge to write down the related assets to estimated net realizable
value at September 30, 1996. In the third quarter of 1997, the Company recorded
an additional $2.0 million charge in connection with the termination of a
long-term obligation associated with one of those lines of business.
4. LEGAL PROCEEDINGS
In March 1996, a class action lawsuit was filed in the United States
District Court for the District of Massachusetts, naming the Company and certain
of its current and former officers as defendants. The lawsuit, captioned
LAWRENCE M. GREEBEL V. FTP SOFTWARE, INC., ET AL., Civil Action No. 96-10544,
alleges that the defendants publicly issued false and misleading statements and
omitted to disclose material facts necessary to make such statements not false
and misleading, which the plaintiffs contend caused an artificial inflation in
the price of the Company's common stock. Specifically, the original complaint
alleged that the defendants knowingly concealed adverse facts and made false or
misleading forward and non-forward looking statements concerning the operating
results and financial condition of the Company, the effects of the Company's
July 1995 corporate restructuring and changing competitive factors in the
Company's industry. The lawsuit, which is purportedly brought on behalf of a
class of purchasers of the Company's common stock during the period from July
14, 1995 to January 3, 1996, alleges violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule
10b-5 thereunder and seeks relief in the form of unspecified compensatory
damages, costs and expenses and such other relief as the court deems proper and
just. In August 1996, plaintiffs filed an amended complaint adding allegations
concerning what plaintiffs claim were wrongful sales and accounting practices by
the Company during the class period, but asserting the same causes of action as
the original complaint. In October 1996, the Company filed a motion to dismiss
the complaint on the grounds that the plaintiffs had not met the pleading
requirements of the Private Securities Litigation Reform Act of 1995. The motion
was denied by the court on February 13, 1997. As a result, the case is now in
the discovery phase.
The Company has reviewed the allegations in the lawsuit, believes them
to be without merit, and intends to defend itself and its officers vigorously.
In order to support an adequate defense, the Company has spent and expects to
continue to spend substantial sums for legal and expert fees and costs. The cost
of defending the litigation and the outcome of the litigation are uncertain and
cannot be estimated. If the lawsuit were determined adversely to the Company,
the Company could be required to pay a substantial judgment, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In February 1996, a class action lawsuit, captioned RICHARD ZEID AND
SIOM MISRAH, ET AL. V. JOHN KIMBERLEY, FRANK M. RICHARDSON, MARK A. ROWLINSON
AND FIREFOX COMMUNICATIONS, INC., Case No. C96 20136, was filed in the United
States District Court for the Northern District of California, San Francisco
Division (transferred to the San Jose Division), naming Firefox and certain of
its current and former officers and former directors as defendants. The original
complaint alleged that the defendants
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FTP SOFTWARE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
misrepresented or failed to disclose material facts about Firefox's operations
and financial results, which the plaintiffs contended resulted in an artificial
inflation in the price of Firefox's common stock. The suit was purportedly
brought on behalf of a class of purchasers of Firefox's common stock during the
period from August 3, 1995 to January 2, 1996. The complaint alleged claims for
violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
thereunder and sought relief in the form of unspecified compensatory damages,
pre- and post-judgment interest, attorneys' and expert witness fees and such
extraordinary, equitable and/or injunctive relief as permitted by law, equity
and the federal statutory provisions under which the suit was brought. In June
1996, the District Court entered an order dismissing plaintiffs' complaint. In
the order, the court dismissed with prejudice certain of plaintiffs' claims that
warnings and disclosures in Firefox's Form 10-Qs were false and misleading,
while granting plaintiffs permission to amend their complaint as it concerned
certain of plaintiffs' claims that Firefox was responsible for false and
misleading analysts reports, Firefox statements and financial statements.
In July 1996, plaintiffs filed their amended complaint. The amended
complaint alleged that defendants misrepresented or failed to disclose material
facts about Firefox's operations and financial results which the plaintiffs
contended resulted in an artificial inflation of the price of Firefox's common
stock. The amended complaint was purportedly brought on behalf of a class of
purchasers of Firefox's common stock during the period from July 20, 1995 to
January 2, 1996. The amended complaint again alleged claims for violations of
Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder and
sought relief in the form described above. Specifically, the amended complaint
alleged that defendants knew allegedly material adverse non-public information
about Firefox's financial results and business conditions which allegedly was
not disclosed, that they improperly directed that certain sales and revenues be
recognized and failed to keep adequate reserves and that they participated in
drafting, reviewing and/or approving allegedly misleading statements, releases,
analysts reports and other public representations, including disclaimers and
warnings of and about Firefox. The amended complaint also alleged that John A.
Kimberley, then an officer and director of Firefox, and Frank Richardson, a
former officer and director of Firefox, were liable as "controlling persons" of
Firefox. In September 1996, Firefox filed a motion to dismiss the amended
complaint on the grounds that the plaintiffs had not met the pleading
requirements of the Private Securities Litigation Reform Act of 1995. On May 8,
1997, the court dismissed the amended complaint on such grounds, without leave
to amend. Plaintiffs have appealed the dismissal; plaintiffs' appellate brief is
due in November 1997.
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 Firefox's business, financial condition and
results of operations.
5. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share," which is effective for fiscal years ending after December 15, 1997,
including interim periods, and requires the presentation of basic
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FTP SOFTWARE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
and diluted earnings per share ("EPS"). Basic EPS, which replaces primary EPS,
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding during
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS under the existing rules. This Statement requires restatement of all
prior period EPS amounts presented after the effective date.
Adoption of the provisions of SFAS No. 128 will have no impact on
reported EPS for the three-and nine-month periods ended September 30, 1997 and
1996, as the effect of common stock equivalents would be anti-dilutive during
such periods.
6. OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. Management has not yet evaluated the
effects of this change on its reporting of income. The Company intends to adopt
SFAS No. 130 for its fiscal year ending December 31, 1998.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which changes the way public
companies report information about operating segments. SFAS No. 131, which is
based on the management approach to segment reporting, establishes requirements
to report selected segment information quarterly and to report entity-wide
disclosures about products and services, major customers and the material
countries in which the entity holds assets and reports revenue. Management has
not yet evaluated the effects of this change on its reporting of segment
information. The Company intends to adopt SFAS No. 131 for its fiscal year
ending December 31, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW; RECENT DEVELOPMENTS
The following discussion and analysis provides information that
management of FTP Software, Inc. ("FTP" or the "Company") believes is relevant
to an assessment and understanding of the Company's consolidated results of
operations and financial condition. This discussion should be read in
conjunction with the Company's unaudited consolidated financial statements and
the related notes included above.
FORWARD-LOOKING STATEMENTS IN THIS SECTION AND ELSEWHERE IN THIS REPORT
ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT FOR A VARIETY OF
REASONS. THESE REASONS INCLUDE, BUT ARE NOT LIMITED TO, COMPETITION, COMPETITIVE
PRICING PRESSURES, TECHNOLOGICAL AND OTHER MARKET CHANGES, THE EFFECTS OF THE
COMPANY'S JULY 1997 RESTRUCTURING DESCRIBED BELOW, DEPENDENCE ON NEW PRODUCTS,
DISTRIBUTION RISKS, CHANGES IN PERSONNEL AND OTHER RISKS THAT ARE OUTLINED BELOW
AND IN APPENDIX A, "CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING STATEMENTS,"
TO THIS REPORT.
The Company is engaged in the design, development, marketing and support
of open, secure and managed networking applications connectivity products that
enable users to easily access and share information, regardless of computer
platform, operating system or location.
During the third quarter of 1997, the Company reorganized its business
into two strategic business units: the VIP Network(TM) Applications Business
Unit, to develop and market the Company's client and web-based networking
applications products; and the IP Technology Business Unit, to develop and
market the Company's server-based networking products. The Company effected this
restructuring in order to create greater focus on the different product, sales
and economic models that will most effectively enable the Company to take
advantage of strategic opportunities in its various product categories. In
connection with the restructuring, and in order to reduce its overall cost
structure, the Company also effected a reduction in its worldwide workforce in
continuing operations of approximately 44%. The restructuring was substantially
complete, and Company had paid a substantial majority of all related expenses
(including severance expenses), as of the end of the third quarter of 1997. The
Company has recognized a pretax charge of approximately $17.1 million in the
third quarter of 1997, of which approximately $7.0 million related to the
workforce reduction, approximately $2.9 million related to the consolidation of
the Company's Andover, Massachusetts headquarters and Wilmington, Massachusetts
manufacturing facility into its North Andover, Massachusetts development
offices, approximately $6.3 million related to the reduction of other physical
assets, and approximately $0.9 consisted of other restructuring-related items
such as charges related to canceled contracts. In addition, the Company's
operating expenses for the third quarter of 1997 included approximately $8
million in transition-related expenses, consisting primarily of compensation
expenses associated with personnel employed on a transitional basis through
various periods ending on or before December 31, 1997 and with short-term
retention incentives as well as certain transitional facilities expenses. Such
expenses are expected to decrease in dollar amount in the fourth quarter of
1997.
Looking forward, the Company expects to continue to make substantial
investments in its businesses (including through internal and joint third party
product development, marketing and
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distribution activities, licensing agreements and technology and other
acquisitions) over the foreseeable future, through the use of the Company's
internal cash resources, the issuance of shares of its common stock or other
securities, or a combination thereof. There can be no assurance, however, that
the capital resources necessary to make such investments will be available or
that, if available, such resources will be on terms acceptable to the Company.
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 support, consulting and
training. Payments received in advance for support contracts are initially
recorded as deferred revenue and are recognized ratably over the term of the
contract. Revenue from consulting and training is recognized as the services are
performed.
Total revenue decreased to approximately $14.2 million for the third
quarter of 1997 from approximately $22.3 million for the third quarter of 1996.
Product revenue decreased to approximately $10.1 million for the third quarter
of 1997 from approximately $18.2 million for the third quarter of 1996. Service
revenue was approximately $4.1 million for the third quarter of both 1997 and
1996. As a percentage of total revenue, product revenue decreased to
approximately 71% for the third quarter of 1997 from approximately 82% for the
third quarter of 1996 while service revenue increased to approximately 29% for
the third quarter of 1997 from approximately 18% for the third quarter of 1996.
Total revenue decreased to approximately $53.3 million in the first nine
months of 1997 from approximately $74.9 million in the first nine months of
1996. Product revenue decreased to approximately $40.0 million in the first nine
months of 1997 from approximately $62.8 million in the first nine months of
1996. Service revenue increased to approximately $13.3 million in the first nine
months of 1997 from approximately $12.1 million in the first nine months of
1996. As a percentage of total revenue, product revenue decreased to
approximately 75% for the first nine months of 1997 from approximately 84% for
the first nine months of 1996 while service revenue increased to approximately
25% for the first nine months of 1997 from approximately 16% for the first nine
months of 1996.
PRODUCT REVENUE. Product revenue decreased for the three- and nine-month
periods ended September 30, 1997 compared to same periods of 1996 primarily as a
result of decreases in sales volumes and sales prices for certain of the
Company's products over such periods, which the Company believes were primarily
attributable to the increase in lower-priced or no cost TCP/IP connectivity
products introduced by certain of the Company's competitors commencing in late
1995, an increase in competition in the networking applications segment of the
networking software industry during 1997 and, to a lesser extent, a decrease in
customer demand for DOS- and 16-bit Windows-based products during 1996 and 1997.
The Company also believes that disruption of the business activities of the
Company resulting from its July 1997 reorganization and a decrease in sales in
Europe during the third quarter of 1997, which the Company attributes to the
factors described above, as well as a transitional delay in sales resulting from
the implementation during the third quarter of 1997 of the Company's plans to
increase sales in the U.S. through indirect channels, may have contributed to
the decrease in sales for the third quarter of 1997. See also "-- Factors
Affecting Revenue" below. Product revenue for the three- and nine-month periods
ended September 30, 1997 were lower than expected by the Company due in
significant part to lower than expected sales (i) in Europe and the Asia Pacific
region, for the reasons described under "-- International Revenue" below, (ii)
to the U.S. government, primarily as a result of
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the increase in competition in the networking applications business, and (iii)
from the Company's gateway and server products, attributable in significant part
to difficulties in the integration of the organizations of the Company and
Firefox Communications Inc. ("Firefox"), which the Company acquired in July
1996.
SERVICE REVENUE. Service revenue for the third quarter of both 1997 and
1996 was approximately $4.1 million, although service revenue for the first nine
months of 1997 exceeded service revenue for the first nine months of 1996. The
dollar increase in service revenue in the first nine months of 1997 compared to
the first nine months of 1996 was primarily attributable to growth over such
periods in FTP's installed product base from which such revenues are obtained.
The Company believes that the decrease in growth in service revenue for the
third quarter of 1997 compared to the preceding quarters of 1997 was primarily a
result of adverse customer reaction to a new support program offered by the
Company during the second quarter of 1997 and to the disruption in the business
activities of the Company resulting from the Company's July 1997 reorganization.
See "-- Factors Affecting Revenue" below.
INTERNATIONAL REVENUE. International sales consist of export sales,
primarily to customers in Europe, Asia Pacific, Canada and Latin America.
International sales of approximately $5.0 million and $9.5 million accounted for
approximately 35% and 43% of the Company's total revenue for the third quarter
of 1997 and 1996, respectively. International sales of approximately $22.7
million and $33.2 million accounted for approximately 43% and 44% of the
Company's total revenue for the first nine months of 1997 and 1996,
respectively. The dollar decreases in the third quarter of 1997 and the first
nine months of 1997 compared to the same periods in 1996 were attributable in
substantial part to the disruption of the Company's business activities
resulting from its July 1997 reorganization, which affected total Company sales,
decreases in sales to customers in Europe and the Asia Pacific region, which are
primarily attributable to the factors that resulted in the decrease in total
product revenue described above under "-- Product Revenue" as well as, in the
case of Asia Pacific sales, to a delay in the localization of certain of the
Company's products and a period of negative foreign currency rates which
resulted in a relative increase in the price of the Company's products.
International sales decreased as a percentage of total revenue in the three- and
nine-month periods ended September 30, 1997 compared to the same periods of 1996
primarily as a result of the decrease in sales to customers in Europe in the
third quarter of 1997.
The Company prices, invoices and collects international sales primarily
in United States dollars. To date, currency fluctuations have not had a material
effect on the Company's results of operations and financial condition. The
Company intends to begin selling certain of its products in Europe directly from
the U.K. commencing late in the fourth quarter of 1997 or in early 1998;
however, the Company anticipates that substantially all of such sales will
continue to be paid in U.S. dollars.
FACTORS AFFECTING REVENUE. As indicated above, the Company has
experienced a decrease in sales volumes since 1995 and a decrease in sales
prices for certain of the Company's products during 1996 and early 1997, all of
which the Company believes are primarily attributable to increased competition,
particularly the increase during 1997 in competition in the networking
applications software market, as well as to technological changes in the market.
Looking forward, the Company 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 strategy, including its new product
strategy focused on the emerging web-based networking applications software
market. This in turn depends on the ability of the Company (i) to create greater
focus on specific product opportunities and customer needs within the Company's
product categories, (ii) to formulate and implement its sales and distribution
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<PAGE> 13
strategies to most effectively take advantage of strategic opportunities in its
various product categories, particularly in the United States, (iii) to
successfully develop new product strategies and to timely release new products
and product enhancements, (iv) to take advantage of the emerging web-based
networking applications software market and the continued development of such
market and (v) to enter into and implement strategic alliances and OEM
relationships to develop necessary products or technologies, to expand the
Company's distribution channels or to jointly market or gain market awareness
for the Company's products. If the Company is unsuccessful in any such regard,
or if the web-based networking applications software market does not develop as
anticipated by the Company, 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 business 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.
The restructuring of the Company described above has required the
dedication of management and other resources that has temporarily detracted from
attention to the daily business of the Company, which has caused a disruption of
the business activities and a loss of momentum in the business of the Company
and, as a result, had an adverse effect on the Company's results of operations
for the second and third quarters of 1997 and may have an adverse effect on the
Company's results of operations for the fourth quarter of 1997.
The number of the Company's employees has decreased significantly during
1997, both prior to and as a result of the Company's July 1997 restructuring.
The Company believes this decrease may also have contributed to the decline in
the Company's operating results for the three- and nine-month periods ended
September 30, 1997. The Company experienced a substantial loss of personnel
during 1996 and the first quarter of 1997, which the Company believes was
attributable to increased competition for qualified personnel in the industry,
the decline in the Company's financial results and the market prices of its
common stock during 1996 and, to a lesser extent, the integration of Firefox. In
connection with its July 1997 restructuring, the Company reduced its workforce
by approximately 300 employees. The Company expects that it will experience
additional attrition during the remainder of 1997. The Company's ability to
maintain or increase revenue will depend in part on its ability to hire, retain
and train qualified personnel.
During the third quarter of 1997, the Company implemented its plans to
increase its focus in the United States on sales through distributors,
value-added resellers, systems integrators and OEMs rather than direct sales, by
entering into an agreement with a third party that provides for the sale by such
party on behalf of the Company of certain subscription services, support
services and products in the U.S. and Canada, with certain limited geographic
exclusivity with respect to certain of such services. As noted above, the
Company believes that the transition to an indirect sales model may have
resulted in a delay in sales during the third quarter of 1997. While such
arrangement is intended to increase sales of the Company's products and services
in the U.S., there can be no assurance that such arrangement will be successful
or that sales of such products and services will not decrease as a result. The
Company continues to evaluate its other distribution channels in the ordinary
course of business. Additional 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 proportionately reduce selling, general and administrative
expenses.
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<PAGE> 14
Due to the encryption and other technology contained and expected to be
contained in certain of the Company's current and planned 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.
During the second quarter of 1997, the Company implemented two changes
to its customer support and service programs. First, the Company modified its
customer support program to separately provide and invoice for customer support
and customer product updates. As a result of negative customer reaction to this
change, the Company returned to a bundled customer support and product update
program in the third quarter of 1997. Second, the Company opened a service and
support center in Europe. While these changes are intended to increase revenue,
there can be no assurance that this will be the case or that such changes will
not have a material adverse effect on the Company's revenue if customers react
negatively to these changes.
See "-- Liquidity and Capital Resources" below for a description of
certain legal proceedings and Appendix A, "Cautionary Factors Relevant to
Forward-Looking Statements," for additional discussion of the factors described
above and other factors which may affect the Company's business, financial
condition and results of operations.
GROSS MARGIN
Product gross margin as a percentage of product revenue was
approximately 72% and 90% in the third quarter of 1997 and 1996, respectively.
Product gross margin as a percentage of product revenue was approximately 76%
and 93% in the first nine months of 1997 and 1996, respectively. These decreases
resulted primarily from the decrease in product revenue described under
"-- Product Revenue" above. Amortization expense was approximately $1.4 million
and $0.9 million in the third quarter of 1997 and 1996, respectively, and
approximately $4.1 million and $1.7 million in the first nine months of 1997
and 1996, respectively.
Service gross margin as a percentage of service revenue was
approximately 49% and 39% in the third quarter of 1997 and 1996, respectively,
and approximately 41% and 39% in the first nine months of 1997 and 1996,
respectively. These increases were primarily due to a decrease in technical
support personnel resulting from the Company's July 1997 restructuring and
workforce reduction.
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 strategy,
price competition, technological changes, cost changes and changes in product
distribution channels.
SALES AND MARKETING
Sales and marketing expenses decreased to approximately $10.3 million in
the third quarter of 1997 from approximately $10.8 million in the third quarter
of 1996. Such expenses as a percentage of total revenue were approximately 72%
and 49% in the third quarter of 1997 and 1996, respectively. Sales and marketing
expenses increased to approximately $37.7 million in the first nine months of
1997 from approximately $33.0 million in the first nine months of 1996. Such
expenses as a percentage of total revenue were approximately 71% and 44% for the
nine-month periods ended September 30, 1997
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<PAGE> 15
and 1996, respectively. The $0.5 million decrease in the third quarter of 1997
reflects the reduction in expense resulting from the Company's July 1997
reorganization and workforce reduction, and a reduction in the levels of the
Company's advertising and tradeshow activities in the third quarter of 1997,
offset by the cost of employee retention incentives put in place during the
third quarter of 1997. The $4.7 million increase in the first nine months of
1997 was primarily the result of (i) an increase in compensation expenses
resulting from a general increase in the compensation levels of sales and
marketing employees over such periods, (ii) expenses related to an increase in
sales personnel over such periods, primarily in the first six months of 1997,
and (iii) increases in the levels of advertising, trade show and international
marketing activities over such periods, primarily in the first six months of
1997. The percentage increases over these periods were primarily due to the
decrease in total revenue over such periods described above under "-- Total
Revenue."
FTP expects that sales and marketing expenses during the remainder of
1997 will continue to decrease in dollar amount as a result of the Company's
July 1997 restructuring.
PRODUCT DEVELOPMENT
Product development expenses decreased to approximately $6.3 million in
the third quarter of 1997 from approximately $44.6 million in the third quarter
of 1996, representing approximately 44% and 200% of total revenue for each
period, respectively. Product development expenses decreased to approximately
$22.6 million in the first nine months of 1997 from approximately $57.2 million
in the first nine months of 1996, representing approximately 42% and 76% of
total revenue for each period, respectively.
The decrease in product development expenses of approximately $38.3
million and $34.6 million for the three- and nine-month periods ended September
30, 1997, respectively, are primarily attributable to the charge in the third
quarter of 1996 of approximately $37.9 million for acquired in-process
technology related to the July 1996 acquisition of Firefox. Excluding such
charge, product development expenses decreased to approximately $6.3 million for
the three-month period ended September 30, 1997 from approximately $6.7 million
for the three-month period ended September 30, 1996, representing approximately
44% and 30% of total revenue for each period, respectively. Again excluding such
charge, product development expenses increased to approximately $22.6 million
for the nine-month period ended September 30, 1997 from approximately $19.3
million for the nine-month period ended September 30, 1996, representing
approximately 42% and 26% of total revenue for each period, respectively. The
$0.4 million decrease in the third quarter of 1997 primarily reflects the
reduction in expenses resulting from the Company's July 1997 reorganization and
workforce reduction. The $3.3 million increase in the first nine months of 1997
was primarily due to an increase in compensation expense related to an increase
in development personnel over such period (resulting primarily from the Firefox
acquisition), net of the effect of the workforce reduction effected in
connection with the Company's July 1997 reorganization.
FTP expects that product development expenses during the remainder of
1997 will continue to decrease in dollar amount as a result of the Company's
July 1997 restructuring.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to approximately $3.8
million in the third quarter of 1997 from approximately $5.3 million in the
third quarter of 1996, representing approximately 26% and 24% of total revenue
for each period, respectively. General and administrative expenses decreased
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<PAGE> 16
to approximately $12.7 million in the first nine months of 1997 from
approximately $14.5 million in the first nine months of 1996. Such expenses as a
percentage of total revenue were approximately 24% and 19% for the nine-month
periods ended September 30, 1997 and 1996, respectively. The $1.5 million
decrease in the third quarter of 1997 was primarily attributable to the
reduction in expenses resulting from the Company's July 1997 reorganization. The
$1.8 million decrease in the first nine months of 1997 was primarily the result
of the incurrence in the second quarter of 1996 of approximately $1.0 million in
severance-related expenses related to the Company's May 1996 workforce reduction
and the reduction in expenses resulting from the Company's July 1997
reorganization and workforce reduction, partially offset by an increase in
administrative expenses incurred in 1997 resulting primarily from an increase in
general and administrative personnel over such period (due primarily to the
Firefox acquisition). The percentage increases over these periods were primarily
due to the decrease in total revenue over such periods described above under "--
Total Revenue."
FTP expects that general and administrative expenses during the
remainder of 1997 will continue to decrease in dollar amount as a result of the
Company's July 1997 restructuring.
LOSS FROM CONTINUING OPERATIONS
The Company experienced a loss from continuing operations of
approximately $28.1 million in the third quarter of 1997 compared to a loss from
continuing operations of approximately $42.8 million in the third quarter of
1996, representing approximately 198% and 192% of total revenue for each period,
respectively. The Company had a loss from continuing operations of approximately
$54.4 million in the nine months ended September 30, 1997 compared to income
from operations of approximately $41.9 million in the nine months ended
September 30, 1996, representing approximately 102% and 56% of total revenue for
each period, respectively.
Excluding the restructuring charge of $17.1 million included in the
three- and nine-month periods ended September 30, 1997 and the $37.9 million
charge for acquired in-process technology included in the three- and nine-month
periods ended September 30, 1996, the Company experienced a loss from continuing
operations of approximately $11.0 million in the third quarter of 1997 compared
to a loss from continuing operations of approximately $4.9 million in the third
quarter of 1996, representing approximately 77% and 22% of total revenue for
each period, respectively. Again excluding such charges, the Company had a loss
from continuing operations of approximately $37.3 million in the nine months
ended September 30, 1997 compared to income from operations of approximately
$4.0 million in the nine months ended September 30, 1996, representing
approximately 70% and 5% of total revenue for each period, respectively. These
incremental losses were primarily due to the decrease in total revenue over such
periods described under above "-- Total Revenue."
INVESTMENT AND OTHER INCOME, NET
Investment and other income, net, was approximately $0.7 million and
$1.3 million in the third quarter of 1997 and 1996, respectively. Investment and
other income, net, decreased to approximately $2.5 million in the first nine
months of 1997 from approximately $3.5 million in the first nine months of 1996.
The approximate $0.6 million decrease in the third quarter of 1997 compared to
the third quarter of 1996 was primarily due to a reduction in the Company's cash
and investment balances during such period. The approximate $1.0 million
decrease in the first nine months of 1997 compared to the first nine months of
1996 was primarily due to the loss on disposals during the first quarter of 1997
of approximately $0.6 million in office equipment and leasehold improvements in
connection with the subleasing by the Company of excess space at certain of its
offices and a reduced cash and investment
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<PAGE> 17
balance in 1997. The Company invests excess cash in high grade municipal bonds,
U.S. government treasury obligations, high grade corporate obligations and
equity investments.
PROVISION FOR INCOME TAXES
The provision for income taxes was approximately $0.2 million for the
third quarter of 1997 and approximately $1.2 million for the first nine months
of 1997 compared to an income tax benefit of approximately $2.4 million for the
third quarter of 1996 and approximately $1.5 million for the first nine months
of 1997. The provisions in 1997 represent certain foreign and state tax
obligations which cannot be offset by the Company's net operating losses. 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. The provision for
income taxes in the accompanying financial statements has been reclassified to
report separately in all periods presented the provision for income taxes of
discontinued operations.
DISCONTINUED OPERATIONS
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.
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 cash, receivables,
purchased software and fixed assets less accounts payable and accrued expenses.
As a result, the Company recorded a $4.8 million charge to write down the
related assets to estimated net realizable value at September 30, 1996. In the
third quarter of 1997, the Company recorded an additional $2.0 million charge in
connection with the termination of a long-term obligation associated with one of
those lines of business.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had an aggregate of approximately
$71.7 million in cash and cash equivalents, short-term investments and long-term
investments. Of this amount, approximately $27.1 million was invested primarily
in highly liquid investments with original maturities of three months or less,
approximately $20.9 million was invested in short-term investments consisting of
U.S. government obligations and commercial paper with maturities of less than
one year, and approximately $23.7 million was invested in U.S. government
obligations, commercial paper and municipal obligations with maturities of
greater than one year.
The Company used approximately $23.5 million of cash for continuing
operations in the first nine months of 1997 and generated funds from continuing
operations of approximately $16.4 million in the first nine months of 1996. The
Company made capital expenditures of approximately $3.2 million and $6.2 million
in the first nine months of 1997 and 1996, respectively.
Accounts receivable, net, decreased to approximately $6.5 million at
September 30, 1997 from approximately $16.6 million at December 31, 1996. This
decrease is primarily attributable to the decrease in total revenue in the first
nine months of 1997 described above under "-- Total Revenue."
To date, inflation has not had a material impact on the Company's
financial results.
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<PAGE> 18
On March 14, 1996, a class action lawsuit was filed against FTP and
certain of its current and former officers alleging violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and Rule 10b-5 thereunder. On February 23, 1996, a class action lawsuit
was filed against Firefox and certain of its current and former officers and
former directors also alleging violations of Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5. For a more detailed description of these legal
proceedings, see Note 4 to the Company's unaudited consolidated financial
statements included above. Each of FTP and Firefox has reviewed the allegations
in the lawsuit against it, believes such allegations to be without merit and
intends to defend itself and its officers vigorously. In order to support an
adequate defense, each of FTP and Firefox has spent and expects to continue to
spend substantial sums for legal and expert fees and costs. The costs of
defending each lawsuit and the ultimate outcome of each lawsuit are uncertain
and cannot be estimated. If the lawsuit against FTP were ultimately determined
adversely to FTP, or if the lawsuit against Firefox were ultimately determined
adversely to Firefox, such company could be required to pay a substantial
judgment, which could have a material adverse effect on the Company's
consolidated business, financial condition and results of operations.
Looking forward, the Company believes that its available cash, cash
equivalents and short-term investments will be sufficient to fund its ordinary
operating expenses at least through 1998. As noted under "-- Overview; Recent
Developments" above, the Company expects to make substantial investments in the
development of products and technologies necessary to implement its new
strategy. There can be no assurance, however, that the capital resources
necessary to make such investments will be available or that, if available, such
resources will be on terms acceptable to the Company.
18
<PAGE> 19
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of certain legal proceedings involving FTP and a
description of certain legal proceedings involving Firefox, see "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part I of this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. EXHIBITS
EXHIBIT NO. TITLE
- ----------- -----
3.1 Restated Articles of Organization of the Company(1)
3.2 Certificate of Designation, Preferences and Rights of Junior
Preferred Stock of the Company(1)
3.3 Articles of Amendment to Restated Articles of Organization of the
Company(3)
3.4 Amended and Restated Bylaws of the Company(1)
4.1 Specimen common stock certificate(1)
4.2 Rights Agreement dated as of December 1, 1995 between the Company
and State Street Bank and Trust Company, as Rights Agent
(including form of Rights Certificate)(1)
4.3 Amendment to Rights Agreement dated as of November 7, 1996
between the Company and State Street Bank and Trust Company, as
Rights Agent(3)
10.1 Indenture of Lease between the Company and North Andover Mills
Realty dated November 19, 1991(1)
10.2 Amendment No. 1 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of September 1, 1992(1)
10.3 Amendment No. 2 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of January 6, 1993(1)
10.4 Amendment No. 3 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of June 18, 1993(1)
10.5 Amendment No. 4 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of September 30, 1993(1)
10.6 Amendment No. 5 to Indenture of Lease between the Company and
North Andover Mills Realty Limited Partnership dated August 12,
1995(1)
10.7 Employment Agreement between the Company and Glenn C. Hazard
dated as of July 29, 1996(3)
10.8 Amendment No. 1 to Employment Agreement between the Company and
Glenn C. Hazard dated as of June 19, 1997(5)
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<PAGE> 20
EXHIBIT NO. TITLE
- ----------- -----
10.9 Amendment No. 2 to Employment Agreement between the Company and
Glenn C. Hazard dated as of September 4, 1997*
10.10 Employment Agreement between the Company and Douglas F. Flood
dated as of July 23, 1996(3)
10.11 Amendment No. 1 to Employment Agreement between the Company and
Douglas F. Flood dated as of June 19, 1997(5)
10.12 Amendment No. 2 to Employment Agreement between the Company and
Douglas F. Flood dated as of September 4, 1997*
10.13 Employment Agreement between the Company and John H. Keller dated
as of July 23, 1996(3)
10.14 Employment Agreement between the Company and John A. Kimberley
dated as of the "Effective Date" of the Firefox merger(3)
10.15 Amendment No. 1 to Employment Agreement between the Company and
John A. Kimberley dated as of June 19, 1997(5)
10.16 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)
10.17 Amendment No. 2 to Employment Agreement between Company and Peter
R. Simkin dated as of December 15, 1996(4)
10.18 Amendment No. 3 to Employment Agreement between Company and Peter
R. Simkin dated as of June 19, 1997(5)
10.19 Employment Agreement between the Company and James A. Tholen
dated as of April 6, 1997(5)
10.20 FTP Software, Inc. Stock Option Plan(1)
10.21 FTP Software, Inc. 1996 Executive Equity Incentive Plan(3)
10.22 FTP Software, Inc. 1997 Employee Equity Incentive Plan(4)
10.23 Composite FTP Software, Inc. 1993 Non-Employee Directors' Stock
Option Plan incorporating Amendment No. 1 effective as of June 2,
1995 and Amendment No. 2 effective as of August 22, 1996(3)
10.24 FTP Software, Inc. 1994 Executive Compensation Plan(1)
10.25 FTP Software, Inc. 1995 Executive Compensation Plan(1)
10.26 FTP Software, Inc. 1995 V-P Sales Plan(1)
10.27 Indenture of Lease between the Company and Andover Mills Realty
Limited Partnership dated as of October 1, 1993(1)
10.28 Amendment No. 1 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of February 10,
1994(1)
10.29 Amendment No. 2 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of June 7,
1995(1)
11 Weighted Shares Used in Computation of Earnings Per Share*
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<PAGE> 21
27 Financial Data Schedule*
99 Cautionary Statements Relevant to Forward-Looking Statements(6)
- ----------
* Filed with this Report.
(1) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Registration Statement on Form S-4 (No. 333-06917)
filed with the Securities and Exchange Commission (the "Commission") on
June 26, 1996.
(2) Included as Appendix A to, and incorporated in this Report by reference
to, the Company's Joint Proxy Statement/Prospectus filed with the
Commission on July 1, 1996.
(3) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 filed with the Commission on November 14, 1996.
(4) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Annual Report on Form 10-K for the year ended December
31, 1996 filed with the Commission on March 31, 1997.
(5) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 filed with the Commission on August 14, 1997.
(6) Included as, and incorporated by reference to, Appendix A to this
Report.
b. REPORTS ON FORM 8-K
The Company filed the following Reports on Form 8-K during the quarter
ended September 30, 1997:
Report on Form 8-K dated July 17, 1997, relating to the Company's press
release announcing the restructuring of its business into strategic business
units, including a reduction in the Company's worldwide workforce and a related
restructuring charge, as well as certain information relating to the Company's
financial results for the quarter ended June 30, 1997.
Report on Form 8-K dated August 19, 1997, relating to the Company's
press release announcing the completion of the plans regarding the restructuring
of its business into strategic business units.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FTP SOFTWARE, INC.
Date: November 14, 1997 By: /s/ James A. Tholen
--------------------------------------------
James A. Tholen,
Senior Vice President and
Chief Financial and Operating Officer
(principal financial and accounting officer)
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<PAGE> 23
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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" OF THE COMPANY'S REPORT ON FORM 10-Q FOR
THE QUARTER ENDED SEPTEMBER 30, 1997 (THE "FORM 10-Q") 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. 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 Corporation ("Microsoft"), Novell, Inc. ("Novell")
and Sun Microsystems, Inc. ("Sun"), as well as smaller networking software
companies, such as Hummingbird Communications Ltd. and 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 installed 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 Novell, provide a TCP/IP
protocol suite in their products at little or no additional cost. Microsoft has
embedded a TCP/IP protocol suite in its Windows 95 and Windows NT operating
systems. The introduction of such protocol suites has resulted in a decrease in
sales volumes of, and sales prices for, certain of the Company's products, which
materially adversely affected the Company's results of operations in 1996 and
the first nine months of 1997 and is expected to continue to have this effect,
at least in the near term. 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 and other concessions, adversely affecting the Company's gross
margins and operating results.
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 have had and are expected to
continue to have such an effect during 1997.
A-1
<PAGE> 24
Rapid Technological and Other Market Changes; Dependence on New
Products. The market for networking software products and technologies is
subject to rapid changes in technology and customer preferences, such as the
decrease in customer demand for DOS- and 16-bit Windows-based products, the
embedding of competing products into new PCs, and the emergence of the web-based
networking applications market. The Company's growth and future financial
performance will depend upon its ability to successfully and timely implement
the Company's new business unit and product strategy described under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Form 10-Q 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 and other products and to generate significant
product revenues from products currently under development. Any failure to
increase revenues from connectivity products or to generate significant revenues
from such other products could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that new products or product enhancements will be developed or
marketed successfully by the Company on a timely basis or at all, that any new
product or product enhancements will achieve market acceptance, that other
software vendors will not develop and market solutions or products which are
superior to the Company's 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 new products and product enhancements is dependent
in part on upon its ability to enter into and implement certain strategic
alliances as described below under "Reliance on Strategic Alliances and OEM
Relationships" and its ability to hire and retain qualified employees as
described below under "Impact of Restructuring; 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 hire and retain qualified
employees, could have a material adverse effect on its business, financial
condition and results of operations.
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.
Impact of Restructuring; Changes in Personnel. As described in the Form
10-Q, the Company's July 1997 restructuring has required the dedication of
management and other resources that has temporarily detracted from attention to
the daily business of the Company, which has caused a disruption of the business
activities and a loss of momentum in the business of the Company and, as a
result, had an adverse effect on the Company's results of operations for the
second and third quarters of 1997 and may have such an effect on the Company's
results of operations for the fourth quarter of 1997.
As also described in the Form 10-Q, the number of the Company's
employees has decreased significantly during 1997, both prior to and as a result
of the Company's July 1997 restructuring. The Company believes that this
decrease may also have contributed to the decline in the Company's operating
results for the three- and nine-month periods ended September 30, 1997. The
Company experienced a substantial loss of personnel during the latter half of
1996 and the first quarter of 1997, which the Company believes was attributable
to increased competition for qualified personnel in the industry, the decline in
the Company's financial results and the market prices of its common stock during
1996 and, to a lesser extent, the integration of Firefox. In connection with its
July 1997 restructuring, the Company reduced its workforce by approximately 290
employees.
A-2
<PAGE> 25
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 the workforce reduction and other factors described
above, the Company expects that it will experience additional attrition during
the remainder of 1997. If the Company is unable to hire, retain and train key
technical, sales and other personnel, the Company's business, financial
condition and results of operations could be materially adversely affected.
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 and OEM
Relationships," the Company may from time to time enter into strategic alliances
providing for the joint development of certain future products, and therefore
expects that its products could 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.
Distribution Risks. Historically, the Company has relied 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.
During the third quarter of 1997, the Company implemented its plans to
increase sales in the U.S. through distributors, value-added resellers, systems
integrators and OEMs rather than direct sales, by entering into an agreement
with a third party that provides for the sale by such party on behalf of the
Company of certain subscription services, support services and products in the
U.S. and Canada, with
A-3
<PAGE> 26
certain limited geographic exclusivity with respect to certain of such services.
While such arrangement is intended to increase sales of the Company's products
and services in the U.S., there can be no assurance that such arrangement will
be successful or that sales of such products and services will not decrease as a
result. The Company continues to evaluate its other distribution channels in the
ordinary course of business. Additional 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 proportionately reduce selling, general and
administrative expenses.
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.
Declining Sales 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 sales prices for certain of the Company's products during 1996 and
the first quarter of 1997, could continue to have this effect on 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 and the
first nine months of 1997, particularly in the third quarter of 1997, primarily
as a result of increased competition, lower sales prices and, beginning in the
second half of 1996, decreased sales volumes 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. See also "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.
A-4
<PAGE> 27
Reliance on Strategic Alliances and OEM Relationships. In addition to
internal development of new products and technologies, the future success of the
Company depends to a certain extent on the ability of the Company to enter into
and implement strategic alliances and OEM relationships to develop necessary
products or technologies, to expand the Company's distribution channels or to
jointly market or gain market awareness for the Company's products. There can be
no assurance that the Company will be successful in identifying or developing
such alliances and relationships or that such alliances and relationships will
achieve their intended purposes.
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, 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
A-5
<PAGE> 28
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
November 11, 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 and other 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 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. 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 and other 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 Note 4 of the notes to
the Company's unaudited consolidated financial statements included in the Form
10-Q 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-6
<PAGE> 29
EXHIBIT INDEX
EXHIBIT NO. TITLE
- ----------- -----
3.1 Restated Articles of Organization of the Company(1)
3.2 Certificate of Designation, Preferences and Rights of Junior
Preferred Stock of the Company(1)
3.3 Articles of Amendment to Restated Articles of Organization of
the Company(3)
3.4 Amended and Restated Bylaws of the Company(1)
4.1 Specimen common stock certificate(1)
4.2 Rights Agreement dated as of December 1, 1995 between the
Company and State Street Bank and Trust Company, as Rights Agent
(including form of Rights Certificate)(1)
4.3 Amendment to Rights Agreement dated as of November 7, 1996
between the Company and State Street Bank and Trust Company, as
Rights Agent(3)
10.1 Indenture of Lease between the Company and North Andover Mills
Realty dated November 19, 1991(1)
10.2 Amendment No. 1 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of September 1, 1992(1)
10.3 Amendment No. 2 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of January 6, 1993(1)
10.4 Amendment No. 3 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of June 18, 1993(1)
10.5 Amendment No. 4 to Indenture of Lease between the Company and
North Andover Mills Realty dated as of September 30, 1993(1)
10.6 Amendment No. 5 to Indenture of Lease between the Company and
North Andover Mills Realty Limited Partnership dated August 12,
1995(1)
10.7 Employment Agreement between the Company and Glenn C. Hazard
dated as of July 29, 1996(3)
10.8 Amendment No. 1 to Employment Agreement between the Company and
Glenn C. Hazard dated as of June 19, 1997(5)
10.9 Amendment No. 2 to Employment Agreement between the Company and
Glenn C. Hazard dated as of September 4, 1997*
10.10 Employment Agreement between the Company and Douglas F. Flood
dated as of July 23, 1996(3)
10.11 Amendment No. 1 to Employment Agreement between the Company and
Douglas F. Flood dated as of June 19, 1997(5)
10.12 Amendment No. 2 to Employment Agreement between the Company and
Douglas F. Flood dated as of September 4, 1997*
10.13 Employment Agreement between the Company and John H. Keller
dated as of July 23, 1996(3)
i
<PAGE> 30
EXHIBIT NO. TITLE
- ----------- -----
10.14 Employment Agreement between the Company and John A. Kimberley
dated as of the "Effective Date" of the Firefox merger(3)
10.15 Amendment No. 1 to Employment Agreement between the Company and
John A. Kimberley dated as of June 19, 1997(5)
10.16 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)
10.17 Amendment No. 2 to Employment Agreement between Company and
Peter R. Simkin dated as of December 15, 1996(4)
10.18 Amendment No. 3 to Employment Agreement between Company and
Peter R. Simkin dated as of June 19, 1997(5)
10.19 Employment Agreement between the Company and James A. Tholen
dated as of April 6, 1997(5)
10.20 FTP Software, Inc. Stock Option Plan(1)
10.21 FTP Software, Inc. 1996 Executive Equity Incentive Plan(3)
10.22 FTP Software, Inc. 1997 Employee Equity Incentive Plan(4)
10.23 Composite FTP Software, Inc. 1993 Non-Employee Directors' Stock
Option Plan incorporating Amendment No. 1 effective as of June
2, 1995 and Amendment No. 2 effective as of August 22, 1996(3)
10.24 FTP Software, Inc. 1994 Executive Compensation Plan(1)
10.25 FTP Software, Inc. 1995 Executive Compensation Plan(1)
10.26 FTP Software, Inc. 1995 V-P Sales Plan(1)
10.27 Indenture of Lease between the Company and Andover Mills Realty
Limited Partnership dated as of October 1, 1993(1)
10.28 Amendment No. 1 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of February
10, 1994(1)
10.29 Amendment No. 2 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of June 7,
1995(1)
11 Weighted Shares Used in Computation of Earnings Per Share*
27 Financial Data Schedule*
99 Cautionary Statements Relevant to Forward-Looking Statements(6)
- ---------------------
*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
ii
<PAGE> 31
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
filed with the Commission on November 14, 1996.
(4) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 filed with the Commission on March 31, 1997.
(5) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 filed with the Commission on August 14, 1997.
(6) Included as, and incorporated by reference to, Appendix A to this
Report.
iii
<PAGE> 1
EXHIBIT 10.9
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 Glenn C. Hazard ("Employee"), effective as of the 4th day of
September, 1997.
WHEREAS, the Company and Employee have entered into an Employment Agreement
dated as of July 29, 1996, as amended by Amendment No. 1 to Employment Agreement
dated as of June 19, 1997 between such parties (as amended, the "Agreement")
(capitalized terms used but not defined herein shall have the meanings specified
in the Agreement);
WHEREAS, the Company and Employee desire to extend the term of 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. EXTENSION OF TERM. The term of the Agreement is hereby extended to
December 31, 1997. From and after the date hereof, the term "Term" as used in
the Agreement shall mean the period beginning on the Effective Date and ending
on December 31, 1997.
2. EFFECT ON AGREEMENT. Except as specifically amended hereby, the
Agreement shall continue in full force and effect. From and after the date
hereof, references in the Agreement to "this Agreement" shall be deemed to be
references to the Agreement as amended hereby.
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.
/s/ Glenn C. Hazard By: /s/ Douglas F. Flood
- ------------------------------ -----------------------------------
Glenn C. Hazard Douglas F. Flood
Senior Vice President
<PAGE> 1
EXHIBIT 10.12
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 Douglas F. Flood ("Employee"), effective as of the 4th day of
September, 1997.
WHEREAS, the Company and Employee have entered into an Employment Agreement
dated as of July 23, 1996, as amended by Amendment No. 1 to Employment Agreement
dated as of June 19, 1997 between such parties (as amended, the "Agreement")
(capitalized terms used but not defined herein shall have the meanings specified
in the Agreement);
WHEREAS, the Company and Employee desire to extend the term of 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. EXTENSION OF TERM. The term of the Agreement is hereby extended to
December 31, 1997. From and after the date hereof, the term "Term" as used in
the Agreement shall mean the period beginning on the Effective Date and ending
on December 31, 1997.
2. EFFECT ON AGREEMENT. Except as specifically amended hereby, the
Agreement shall continue in full force and effect. From and after the date
hereof, references in the Agreement to "this Agreement" shall be deemed to be
references to the Agreement as amended hereby.
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.
/s/ Douglas F. Flood By: /s/ Glenn C. Hazard
- ----------------------------- -----------------------------------
Douglas F. Flood Glenn C. Hazard
President and Chief Executive
Officer
<PAGE> 1
EXHIBIT 11
FTP SOFTWARE, INC.
WEIGHTED SHARES USED IN COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
------------ -----------
<S> <C> <C>
FOR THE PERIOD ENDED SEPTEMBER 30, 1997:
Common stock outstanding, beginning of the period 33,874,166 33,646,203
Weighted average common stock issued during the
period ended September 30, 1997 25,739 168,804
---------- ----------
Weighted average shares of common stock outstanding 33,899,905 33,815,007
========== ==========
FOR THE PERIOD ENDED SEPTEMBER 30, 1996:
Common stock outstanding, beginning of the period 26,967,104 26,506,729
Weighted average common stock issued during the
period ended September 30, 1996 5,045,542 2,138,445
---------- ----------
Weighted average shares of common stock outstanding 32,012,646 28,645,174
========== ==========
</TABLE>
For the three- and nine-month periods ended September 30, 1997 and 1996,
there was no material difference between the computation of fully diluted and
primary weighted shares of common stock equivalents outstanding.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FTP
SOFTWARE INC'S. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT ON FORM
10-Q.
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 27,076
<SECURITIES> 20,857
<RECEIVABLES> 7,787
<ALLOWANCES> 1,300
<INVENTORY> 371
<CURRENT-ASSETS> 65,456
<PP&E> 31,823
<DEPRECIATION> 20,893
<TOTAL-ASSETS> 104,710
<CURRENT-LIABILITIES> 28,188
<BONDS> 0
0
0
<COMMON> 339
<OTHER-SE> 76,183
<TOTAL-LIABILITY-AND-EQUITY> 104,710
<SALES> 39,988
<TOTAL-REVENUES> 53,332
<CGS> 9,786
<TOTAL-COSTS> 17,698
<OTHER-EXPENSES> 89,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (51,849)
<INCOME-TAX> 1,208
<INCOME-CONTINUING> (53,057)
<DISCONTINUED> (2,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,057)
<EPS-PRIMARY> (1.63)
<EPS-DILUTED> (1.63)
</TABLE>
