<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 March 31, 1998
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)
(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 33,974,117
- -------------------------------------- ---------------------------
Class Outstanding at May 11, 1998
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FTP SOFTWARE, INC.
Table of Contents
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1998
and December 31, 1997 (unaudited) 3
Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 (unaudited) 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 21
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FTP SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,969 $ 37,569
Short-term investments 12,100 14,234
Accounts receivable, net of allowance for doubtful
accounts of $1,250 and $1,100 for 1998 and 1997,
respectively 7,759 8,282
Prepaid expenses and other current assets 3,108 2,580
Refundable income taxes 3,165 3,165
-------- --------
Total current assets 63,101 65,830
Property and equipment, net 7,268 8,301
Purchased software, net 2,166 2,621
Investments 16,381 19,767
Other assets 1,148 956
-------- --------
Total assets $ 90,064 $ 97,475
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,242 $ 10,976
Income taxes payable 1,818 1,613
Accrued employee compensation and benefits 2,039 3,652
Deferred revenue 5,691 5,715
-------- --------
Total current liabilities 18,790 21,956
-------- --------
Stockholders' equity:
Preferred stock, $0.01 par value; authorized
5,000,000 shares; none issued and outstanding -- --
Common stock, $0.01 par value; authorized 100,000,000
shares; issued and outstanding 33,973,140 and
33,801,769 in 1998 and 1997, respectively 340 339
Additional paid-in capital 136,808 136,792
Accumulated deficit (65,863) (62,046)
Equity adjustments (11) 434
-------- --------
Total stockholders' equity 71,274 75,519
-------- --------
Total liabilities and stockholders' equity $ 90,064 $ 97,475
======== ========
</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 MARCH 31,
1998 1997
-------- --------
<S> <C> <C>
Revenue:
Product revenue $ 7,699 $ 16,826
Service revenue 3,229 4,529
------- --------
Total revenue 10,928 21,355
------- --------
Cost of revenue:
Product cost 1,180 2,987
Service cost 1,365 2,894
------- --------
Total cost of revenue 2,545 5,881
------- --------
Gross margin 8,383 15,474
------- --------
Operating expenses:
Sales and marketing 6,160 14,281
Product development 3,609 7,857
General and administrative 3,341 4,335
------- --------
Total operating expenses 13,110 26,473
------- --------
Loss from operations (4,727) (10,999)
Investment and other income, net 1,010 635
------- --------
Loss from operations
before income taxes (3,717) (10,364)
Provision for income taxes 100 650
------- --------
Net loss $(3,817) $(11,014)
======= ========
Basic and diluted net loss per share $ (0.11) $ (0.33)
======= ========
Weighted average common and common
equivalent shares outstanding 33,973 33,688
======= ========
</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>
THREE MONTHS ENDED MARCH 31,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (3,817) $(11,014)
Adjustments to reconcile net loss from continuing
operations to net cash provided by (used for)
operating activities:
Depreciation and amortization 1,568 2,945
Loss on disposition of property and equipment 15 593
Amortization of discounts and premiums on
investments 10 (31)
Changes in operating assets and liabilities:
Accounts receivable 523 2,083
Prepaid expenses and other current assets (528) (568)
Income taxes -- 240
Other assets (239) 113
Accounts payable and accrued expenses (1,528) 1,337
Accrued employee compensation and benefits (1,613) 1,081
Deferred revenue (24) (375)
-------- --------
Net cash used for continuing operations (5,633) (3,596)
Net cash provided by discontinued operations -- 41
-------- --------
Net cash used for operating activities (5,633) (3,555)
-------- --------
Cash flows from investing activities:
Capital expenditures (51) (1,223)
Purchase of investments -- (15,167)
Maturities of investments 5,552 13,580
-------- --------
Net cash provided by (used for) investing
activities 5,501 (2,810)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 16 277
Principal payments on long-term obligations -- (240)
-------- --------
Net cash provided by financing activities 16 37
-------- --------
Effect of exchange rate changes on cash (484) 17
-------- --------
Net decrease in cash and cash equivalents (600) (6,311)
Cash and cash equivalents, beginning of period 37,569 22,036
-------- --------
Cash and cash equivalents, end of period $ 36,969 $ 15,725
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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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, 1997.
The results of the three-month period ended March 31, 1998 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. RESTRUCTURE CHARGES
In July 1997, 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 strategic business
opportunities. This restructuring resulted in a charge of approximately
$17.1 million ($0.50 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 losses related to
cancelled contracts; such costs were substantially completed in 1997.
In late December 1997, following a review of the financial results of its
business units for the second half of 1997, the Company decided to further
streamline its operations and to recombine its business units into one worldwide
organization. This restructuring resulted in a charge of approximately
$1.3 million ($0.04 per share) in the fourth quarter of 1997. This charge
included costs similar to those incurred in connection with the third quarter
restructuring; these costs were substantially completed in the first quarter of
1998.
The following summarizes the 1997 restructuring charges, the related
write-offs and cash paid in connection with the restructurings for the three
months ended March 31, 1998 (dollars in thousands, unaudited):
6
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FTP SOFTWARE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
<TABLE>
<CAPTION> Severance Excess
Payments Facilities Other Total
--------- ---------- ----- -------
<S> <C> <S> <C> <C>
Accrued restructuring charge at
December 31, 1997 $ 766 $ 1,710 $268 $ 2,744
Cash paid (900) (774) (25) (1,699)
Reclassifications 134 (134) -- --
----- ------- ---- -------
Accrued restructuring charge at
March 31, 1998 $ 0 $ 802 $243 $ 1,045
===== ======= ==== =======
</TABLE>
Amounts related to severance with respect to the July 1997 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 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.
Amounts related to severance with respect to the December 1997 workforce
reduction involved approximately 21 employees, primarily in development, at the
Company's European locations. Amounts related to facilities reflect the cost of
the lease of excess space at the Company's U.K. facility.
3. LEGAL PROCEEDINGS
In March 1996, a class action lawsuit was filed in the United States
District Court for the District of Massachusetts, naming the Company and certain
of its current and former officers as defendants. The lawsuit, captioned
LAWRENCE M. GREEBEL v. FTP SOFTWARE, INC., ET AL., Civil Action No. 96-10544,
alleges that the defendants publicly issued false and misleading statements and
omitted to disclose material facts 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
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FTP SOFTWARE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
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. On February 13, 1998,
FTP filed a motion for partial summary judgment and renewed motion to dismiss;
plaintiffs filed their response on March 20, 1998. The court has not yet set a
date for a hearing on these motions.
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 Communications Inc.,
which the Company acquired in July 1996 ("Firefox"), and certain of its current
and former officers and former directors as defendants. The original complaint
alleged that the defendants misrepresented or failed to disclose material facts
about Firefox's operations and financial results, which the plaintiffs contended
resulted in an artificial inflation in the price of Firefox's common stock. The
suit was purportedly brought on behalf of a class of purchasers of Firefox's
common stock during the period from August 3, 1995 to January 2, 1996. The
complaint alleged claims for violations of Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 thereunder and sought relief in the form of
unspecified compensatory damages, pre- and post-judgment interest, attorneys'
and expert witness fees and such extraordinary, equitable and/or injunctive
relief as permitted by law, equity and the federal statutory provisions under
which the suit was brought. In June 1996, the District Court entered an order
dismissing plaintiffs' complaint. In the order, the court dismissed with
prejudice certain of plaintiffs' claims that warnings and disclosures in
Firefox's Form 10-Qs were false and misleading, while granting plaintiffs
permission to amend their complaint as it concerned certain of plaintiffs'
claims that Firefox was responsible for false and misleading analysts reports,
Firefox statements and financial statements.
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
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FTP SOFTWARE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
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 to the Ninth Circuit Court of Appeals. The appeal is fully briefed;
the court has not yet set a date for oral argument.
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.
4. EARNINGS PER SHARE
The earnings per share ("EPS") amounts have been computed in accordance
with SFAS No. 128, "Earnings per Share," which requires the presentation of
basic and diluted EPS. This Statement requires restatement of all prior period
EPS amounts presented after the effective date. Adoption of the provisions of
SFAS No. 128 had no impact on reported EPS for the three-month periods ended
March 31, 1998 and 1997, as the effect of common stock equivalents would have
been anti-dilutive during such periods. A reconciliation of the loss and share
information used in the basic and diluted per share computation for the first
quarter of 1998 and 1997 is as follows (in thousands, except per share amounts,
unaudited):
QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net loss $(3,817) 33,973 $(0.11)
======
Effect of dilutive securities -- --
------- ------
DILUTED EPS
Net loss $(3,817) 33,973 $(0.11)
======= ====== ======
</TABLE>
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FTP SOFTWARE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
QUARTER ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net loss $(11,014) 33,688 $(0.33)
======
Effect of dilutive securities -- --
-------- ------
DILUTED EPS
Net loss from continuing operations $(11,014) 33,688 $(0.33)
======== ====== ======
</TABLE>
For the first quarter of 1998 and 1997, the diluted EPS computations did
not include approximately 6,197 and 5,453 additional shares at a weighted-
average exercise price of $5.47 and $10.20, respectively, because these shares
are attributable to outstanding options where the effect would have been
anti-dilutive.
5. COMPREHENSIVE INCOME (LOSS):
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 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. This statement also requires that an entity classify items of other
comprehensive earnings by their nature in a financial statement. For example,
other comprehensive earnings may include foreign currency translation
adjustments and unrealized gains and losses on marketable securities classified
as available-for-sale. The Company adopted the provisions of SFAS No. 130
effective January 1, 1998. The Company's total comprehensive losses for the
three months ended March 31, 1998 and 1997 were as follows (in thousands,
unaudited):
THREE MONTHS ENDED MARCH 31,
1998 1997
------- --------
Net loss $(3,817) $(11,014)
Other comprehensive income (loss)
Foreign currency translation adjustments (484) 235
Unrealized gain (loss) on securities 37 (1,899)
Add: reclassification adjustment for losses
included in net income 36 --
------- --------
Other comprehensive loss $ (411) $ (1,664)
------- --------
Comprehensive loss $(4,228) $(12,678)
======= ========
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FTP SOFTWARE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
6. OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise." SFAS No. 131 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. The
Company intends to adopt SFAS No. 131 for its fiscal year ending December 31,
1998. Management does not expect such adoption to have any material impact on
the way it reports information.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition," which
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and supersedes SOP 91-1, "Software
Revenue Recognition." The Company adopted SOP 97-2 effective January 1, 1998;
such adoption did not have a material impact on revenue recognition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 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, CHANGES IN PERSONNEL, THE EFFECTS OF THE COMPANY'S 1997
RESTRUCTURINGS DESCRIBED BELOW, TECHNOLOGICAL AND OTHER MARKET CHANGES,
DEPENDENCE ON NEW PRODUCTS, DISTRIBUTION RISKS AND OTHER RISKS THAT ARE OUTLINED
BELOW AND IN EXHIBIT 99, "CAUTIONARY FACTORS," TO THIS REPORT.
RECENT DEVELOPMENTS
The Company is engaged in the design, development, marketing and support of
connectivity software applications that enable users to connect to information
across TCP/IP networks, including data residing on mainframes, minicomputers and
servers. These applications include terminal emulation, NFS file sharing and
printing, file transfer and legacy host access.
In July 1997, the Company reorganized its business into strategic business
units in order to create greater focus on the different product, sales and
economic models that the Company believed would most effectively enable it to
take advantage of strategic opportunities in its products and technologies,
ultimately focusing primarily on its client and web-based connectivity products.
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 the 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 recognized a 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 disposition of other physical
assets, and approximately $0.9 million consisted of other restructuring-related
items such as losses related to cancelled 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.
In late December 1997, following a review of the financial results of its
business units for the second half of 1997, the Company decided to further
streamline its operations and to recombine its business units into one worldwide
organization. This restructuring resulted in a charge of approximately $1.3
million in the fourth quarter of 1997, which included costs similar to those
incurred in connection with the third quarter restructuring.
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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 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 $10.9 million for the first
quarter of 1998 from approximately $21.4 million for the first quarter of 1997.
Product revenue decreased to approximately $7.7 million for the first quarter of
1998 from approximately $16.8 million for the first quarter of 1997. Service
revenue decreased to approximately $3.2 million for the first quarter of 1998
from approximately $4.5 million for the first quarter of 1997. As a percentage
of total revenue, product revenue decreased to approximately 71% for the first
quarter of 1998 from approximately 79% for the first quarter of 1997, and
service revenue increased to approximately 29% for the first quarter of 1998
from approximately 21% for the first quarter of 1997.
PRODUCT REVENUE. Product revenue decreased in the first quarter of 1998
compared to the first quarter of 1997 both in dollar amount and as a percentage
of total revenue primarily as a result of decreases in sales volumes and sales
prices over such periods. The Company believes these decreases are 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 decreases in customer demand for
DOS-based and 16-bit Windows-based products since 1996. The Company also
believes that the impact of the Company's July 1997 restructuring on the
business activities of the Company, as well as a disruption in U.S. 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, also
contributed to the decrease in sales for the first quarter of 1998. See also
"-- Factors Affecting Revenue" below. In addition, product revenue for the first
quarter of 1997 included a payment from a strategic partner in the amount of
approximately $1 million payable under a contract for the completion of certain
milestones, primarily product deliverables, and did not depend upon the amount
of royalties actually earned in that quarter. Quarterly royalties under such
contract for the first quarter of 1998 were payable based on actual product
sales, the amounts of which will not be known until, and will not be reflected
in product revenue until, the second quarter of 1998; there can be no assurance
that payments under this contract with respect to the first quarter of 1998 will
meet or exceed payments under this contract for the first quarter of 1997.
SERVICE REVENUE. The dollar decrease in service revenue for the first
quarter of 1998 compared to the first quarter of 1997 is primarily attributable
to the disruption in the business activities of the Company resulting from the
Company's July 1997 reorganization, a decrease in the Company's installed
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product base during 1997 and an increase in the sale of support contracts
through indirect channels (which resulted in a decrease in the Company's
operating margins on such sales due to the lower per unit revenue realized by
the Company on such sales) beginning in the third quarter of 1997. The
percentage increase in the first quarter of 1998 compared to the first quarter
of 1997 is primarily due to the decrease in product revenue described above.
INTERNATIONAL REVENUE. International sales consist of export sales,
primarily to customers in Europe, Asia Pacific, Latin America and Canada.
International sales of approximately $5.2 million and $9.5 million accounted for
approximately 48% and 44% of the Company's total revenue for the first quarter
of 1998 and 1997, respectively. The dollar decrease in the first quarter of 1998
is attributable to the same factors that resulted in the decrease in total
product revenue described above under "-- Product Revenue."
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.
FACTORS AFFECTING REVENUE. The Company has experienced a decrease in sales
volumes since 1995 and a decrease in sales prices during various periods since
1995, which decreases 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 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
strategies to most effectively take advantage of strategic opportunities in its
various product categories, (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 new product
strategies, 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 number of the Company's employees decreased significantly during 1997
and the first quarter of 1998, both prior to and following the Company's 1997
restructurings, as a result both of the restructurings and significant
competition for qualified personnel in the industry. The Company believes that
this decrease, which resulted in significant turnover in the Company's U.S.
sales force, contributed to the decline in revenue for the first quarter of
1998. In connection with the 1997 restructurings, the Company reduced its
workforce by approximately 320 employees in total. The Company has experienced
additional attrition during late 1997 and the first quarter of 1998. As a result
of the Company's December 1997 restructuring, which included a workforce
reduction involving approximately 21 employees, and attrition experienced in the
first quarter of 1998, the number of the Company's employees has decreased from
approximately 350 at December 31, 1997 to approximately 280 at March 31, 1998.
The Company's ability to maintain or increase revenue will depend in part on its
ability to retain, hire and train qualified personnel.
14
<PAGE> 15
During the third quarter of 1997, the Company increased its focus in the
United States on sales through distributors, value-added resellers, systems
integrators and OEMs rather than direct sales, including, among other things, by
entering into an agreement with a third party that provides for the sale by such
party on behalf of the Company of certain maintenance 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 a more indirect sales model resulted in a disruption in
sales during the second half of 1997. While the third party arrangement
described above was 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. As noted above under "-- Service Revenue," service revenue was lower
than expected for the first quarter of 1998 due in part to an increase in sales
of support contracts through indirect channels. 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.
See "-- Liquidity and Capital Resources" below for a description of certain
legal proceedings and Exhibit 99, "Cautionary Factors," 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
85% and 82% in the first quarter of 1998 and 1997, respectively. This increase
resulted primarily from a decrease in both costs associated with the
amortization of technologies licensed or purchased in 1995 and 1996 and costs
associated with the localization of certain of the Company's products, partially
offset by the decrease in product revenue described under "-- Product Revenue"
above. Amortization expense was approximately $0.5 million and $1.1 million in
the first quarter of 1998 and 1997, respectively.
Service gross margin as a percentage of service revenue increased to
approximately 58% in the first quarter of 1998 from approximately 36% in the
first quarter of 1997. This increase was primarily due to a reduction in costs
related to a decrease in professional services and 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 strategy and mix, price competition,
technological changes, cost changes and changes in product distribution
channels.
SALES AND MARKETING
Sales and marketing expenses were approximately $6.2 million and
$14.3 million in the first quarter of 1998 and 1997, respectively. Such expenses
as a percentage of total revenue were approximately 56% and 67% in the first
quarter of 1998 and 1997, respectively. The $8.1 million decrease in the first
quarter of 1998 compared to the first quarter of 1997 reflects a decrease in
sales and marketing personnel resulting primarily from the Company's 1997
restructurings, as well as a decrease
15
<PAGE> 16
in the levels of the Company's advertising, tradeshow and other marketing
activities over such periods. The percentage decrease over such periods was also
primarily due to such factors.
FTP expects that sales and marketing expenses will continue to decrease in
1998 from 1997 dollar amounts as a result of the Company's 1997 restructurings.
PRODUCT DEVELOPMENT
Product development expenses were approximately $3.6 million and
$7.9 million in the first quarter of 1998 and 1997, respectively, representing
approximately 33% and 37% of total revenue for each period, respectively. The
$4.3 million decrease in the first quarter of 1998 compared to the same period
in 1997 primarily reflects a decrease in development personnel resulting
primarily from the Company's 1997 restructurings. The percentage decrease over
such periods was also primarily due to such factor.
FTP expects that product development expenses will continue to decrease in
1998 from 1997 dollar amounts as a result of the Company's 1997 restructurings.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were approximately $3.3 million and
$4.3 million in the first quarter of 1998 and 1997, respectively, representing
approximately 31% and 20% of total revenue for each period, respectively. The
$1.0 million decrease in the first quarter of 1998 compared to the same period
in 1997 was primarily the result of a decrease in general and administrative
personnel resulting primarily from the Company's 1997 restructurings. The
percentage increase over such periods was primarily due to the decrease in total
revenue over such periods described above under "-- Total Revenue."
FTP expects that general and administrative expenses will continue to
decrease in 1998 from 1997 dollar amounts as a result of the Company's 1997
restructurings.
OPERATING LOSS
The Company experienced losses from operations of approximately
$3.8 million and $11.0 million in the first quarter of 1998 and 1997,
respectively, representing approximately 35% and 52% of total revenue for each
period, respectively. These losses were primarily due to the decrease in total
revenue over such periods described above under "-- Total Revenue."
INVESTMENT AND OTHER INCOME, NET
Investment and other income, net, was approximately $1.0 million and
$0.6 million for the first quarter of 1998 and 1997, respectively. This increase
was primarily due to a loss on disposal of fixed assets recognized in the first
quarter of 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 $0.1 million and
$0.7 million in the first quarter of 1998 and 1997, respectively. The provision
represents certain foreign and state tax obligations
16
<PAGE> 17
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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had an aggregate of approximately
$65.5 million in cash and cash equivalents, short-term investments and long-term
investments. Of this amount, approximately $37.0 million was invested primarily
in highly liquid investments with original maturities of three months or less,
approximately $12.1 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 $16.4 million was invested in U.S. government
obligations, commercial paper and municipal obligations with maturities of
greater than one year.
The Company used approximately $5.6 million of cash for operations in the
first quarter of 1998. The Company made capital expenditures of approximately
$0.04 million and $1.2 million in the first quarter of 1998 and 1997,
respectively.
Accounts receivable, net, decreased to approximately $7.8 million at
March 31, 1998 from approximately $8.3 million at December 31, 1997. This
decrease is primarily attributable to the decrease in total revenue during the
first quarter of 1998 described above under "-- Total Revenue," as well as to an
increase in the Company's reserves for doubtful accounts.
To date, inflation has not had a material impact on the Company's financial
results.
On March 14, 1996, a class action lawsuit was filed against FTP 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 3 to the Company's 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 "-- Recent
Developments" above, the Company expects to continue to make substantial
investments in its businesses. 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.
17
<PAGE> 18
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(2)
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(2)
10.8 Amendment No. 1 to Employment Agreement between the Company and
Glenn C. Hazard dated as of June 19, 1997(4)
10.9 Amendment No. 2 to Employment Agreement between the Company and
Glenn C. Hazard dated as of September 4, 1997(5)
18
<PAGE> 19
EXHIBIT NO. TITLE
- ---------- -----
10.10 Amended and Restated Employment Agreement between the Company and
Glenn C. Hazard dated as of December 12, 1997(6)
10.11 Employment Agreement between the Company and Douglas F. Flood
dated as of July 23, 1996(2)
10.12 Amendment No. 1 to Employment Agreement between the Company and
Douglas F. Flood dated as of June 19, 1997(4)
10.13 Amendment No. 2 to Employment Agreement between the Company and
Douglas F. Flood dated as of September 4, 1997(5)
10.14 Amended and Restated Employment Agreement between the Company and
Douglas F. Flood dated as of December 12, 1997(6)
10.15 Employment Agreement between the Company and John A. Kimberley
dated as of the "Effective Date" of the Firefox merger(2)
10.16 Amendment No. 1 to Employment Agreement between the Company and
John A. Kimberley dated as of June 19, 1997(4)
10.17 Employment Agreement between the Company and Dennis Leibl dated as
of December 12, 1997(6)
10.18 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(2)
10.19 Amendment No. 2 to Employment Agreement between Company and Peter
R. Simkin dated as of December 15, 1996(3)
10.20 Amendment No. 3 to Employment Agreement between Company and Peter
R. Simkin dated as of June 19, 1997(4)
10.21 Employment Agreement between the Company and James A. Tholen dated
as of April 6, 1997(4)
10.22 Amended and Restated Employment Agreement between the Company and
James A. Tholen dated as of December 12, 1997(6)
10.23 FTP Software, Inc. Stock Option Plan(1)
10.24 FTP Software, Inc. 1996 Executive Equity Incentive Plan(2)
10.25 FTP Software, Inc. 1997 Employee Equity Incentive Plan(3)
10.26 Composite FTP Software, Inc. 1993 Non-Employee Directors' Stock
Option Plan incorporating Amendment No. 1 effective as of June 2,
1995, Amendment No. 2 effective as of August 22, 1996(2), as
amended by Amendment No. 3 effective as of December 18, 1997(6)
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)
19
<PAGE> 20
EXHIBIT NO. TITLE
- ---------- -----
10.30 Amended and Restated Agreement and Plan of Merger by and among the
Company, Firefox Acquisition Corp. and Firefox Communications Inc.
dated as of May 21, 1996(7)
27 Financial Data Schedule*
99 Cautionary Factors(8)
- ---------------------
*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 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.
(3) 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.
(4) 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.
(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
September 30, 1997 filed with the Commission on November 14, 1997.
(6) 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,
1997 filed with the Commission on March 30, 1998.
(7) 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.
(8) Included as, and incorporated by reference to, Appendix A to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 filed with
the Commission on March 30, 1998.
b. REPORTS ON FORM 8-K:
None.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FTP SOFTWARE, INC.
Date: May 15, 1998 By: /s/ James A. Tholen
----------------------------------------------
James A. Tholen,
Senior Vice President, Chief Operating Officer
and Chief Financial Officer
(principal financial and accounting officer)
21
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