<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
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(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- - - --- Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
Transition report pursuant to section 13 or 15(d) of the Securities and
- - - --- Exchange Act of 1934
COMMISSION FILE NUMBER: 33-90436
FIREFOX COMMUNICATIONS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0397507
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2099 GATEWAY PLACE
SAN JOSE, CA 95110-1017
(408) 467-1100
(Address of principal executive offices, zip code and telephone number)
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 and 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
--- ---
The number of shares outstanding of the Registrant's Common Stock was 6,735,484
as of March 31, 1996.
This report, including exhibits, consists of 20 pages. The index of exhibits is
located on page 18.
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<PAGE> 2
FIREFOX COMMUNICATIONS INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
PAGE NO
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<S> <C> <C>
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets
as of March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
<CAPTION>
PART II: OTHER INFORMATION
<S> <C> <C>
ITEM 1: LEGAL PROCEEDINGS 14
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 17
INDEX TO EXHIBITS 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIREFOX COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---- ----
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,519 $ 6,547
Short-term investments 9,021 9,774
Accounts receivable (net of allowances
of $105 and $56) 5,654 6,695
Prepaid license fees 3,015 3,079
Prepaid income taxes 492 --
Prepaid expenses and other assets 1,468 1,241
Deferred income taxes 208 314
------- -------
TOTAL CURRENT ASSETS 26,377 27,650
Property and equipment - net 1,679 1,887
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TOTAL ASSETS $28,056 $29,537
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,209 $ 1,069
Income taxes payable -- 649
Accrued liabilities 1,604 1,497
Deferred revenue and customer deposits 2,194 2,132
Current portion of capital lease obligations 137 151
------- -------
TOTAL CURRENT LIABILITIES 5,144 5,498
Capital lease obligations, less current portion 62 104
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TOTAL LIABILITIES 5,206 5,602
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STOCKHOLDERS' EQUITY:
Common stock 23,673 23,673
Deferred stock compensation (17) (25)
Net unrealized gain (loss) on short-term investments (6) 3
Accumulated translation adjustment (46) (3)
Retained earnings (accumulated deficit) (754) 287
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TOTAL STOCKHOLDERS' EQUITY 22,850 23,935
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $28,056 $29,537
======= =======
</TABLE>
See accompanying notes.
3
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FIREFOX COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
<S> <C> <C>
NET REVENUES
Licenses $ 3,538 $ 4,409
Services and other 645 313
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Total net revenues 4,183 4,722
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COST OF REVENUES
Licenses 651 663
Services and other 322 191
------- -------
Total cost of revenues 973 854
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GROSS MARGIN 3,210 3,868
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OPERATING EXPENSES
Research and development 917 558
Sales and marketing 3,069 2,148
General and administrative 1,176 651
------- -------
Total operating expenses 5,162 3,357
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INCOME (LOSS) FROM OPERATIONS (1,952) 511
Interest income (expense), net 213 (46)
------- -------
INCOME (LOSS) BEFORE INCOME TAXES (1,739) 465
Provision (credit) for income taxes (697) 186
------- -------
NET INCOME (LOSS) (1,042) 279
Accretion for preference shares -- (45)
------- -------
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK $(1,042) $ 234
======= =======
NET INCOME (LOSS) PER SHARE $ (0.15) $ 0.04
======= =======
Shares used in per share computation 6,735 5,486
======= ======
</TABLE>
See accompanying notes.
4
<PAGE> 5
FIREFOX COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,042) $ 279
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 135 107
Deferred income taxes 106 (13)
Stock compensation expense 8 1
Changes in assets and liabilities:
Accounts receivable 1,041 85
Prepaid license fees 64 (333)
Prepaid expenses and other assets (265) (252)
Accounts payable 140 (334)
Prepaid income taxes/taxes payable (1,141) 206
Accrued liabilities 107 190
Deferred revenue and customer deposits 62 79
------- -------
Net cash provided by (used in) operating activities (785) 15
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (7) (126)
Loss on disposal of assets 34 --
Proceeds from sales or maturities of short-term investments 3,298 --
Purchases of short-term investments (2,554) --
------- -------
Net cash provided by (used in) investing activities 771 (126)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings, net -- 324
Principal payments under capital lease obligations (52) (46)
------- -------
Net cash provided by (used in) financing activities (52) 278
------- -------
Effect of exchange rate changes on cash 38 12
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (28) 179
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,547 191
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,519 $ 370
======= =======
Noncash investing and financing activities:
Property and equipment acquired under capital leases $ -- $ 52
Net unrealized loss on investments available for sale $ (6) $ --
Accrued Deferred Offering Costs $ -- $ (547)
Supplemental disclosure of cash flow information-
Cash paid during the period:
Interest $ 8 $ 31
Income Taxes $ 250 $ 3
</TABLE>
See accompanying notes
5
<PAGE> 6
FIREFOX COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not contain all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation of
the Company's financial condition at March 31, 1996 and for the three month
periods ended March 31, 1996 and 1995. These financial statements should be read
in conjunction with the audited financial statements of the Company as included
in the Company's Form 10-K as originally filed with the Commission on March 29,
1996 and as amended on April 29, 1996. The interim results presented herein are
not necessarily representative of the results that may be expected for the year
ended December 31, 1996 or for any other future period.
2. ACCOUNTING FOR CERTAIN INVESTMENTS
The Company has classified its investments as securities
available-for-sale. Available-for-sale securities are carried at fair market
value, with unrealized holding gains and losses reported as a separate component
of stockholders' equity until realized.
As of March 31, 1996, the Company had short-term investments of $9.0
million which consisted primarily of highly liquid corporate bonds and
commercial paper purchased with a maturity date of less than one year. The
net unrealized holding losses totaled $6,000 which has been recorded as a
separate component of stockholders' equity.
3. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
periods. Common equivalent shares include convertible preferred stock and common
stock options; such common equivalent shares are excluded from the per share
calculation in loss periods as they would be anti-dilutive. All common shares
issued and stock options granted by the Company at a price less than the initial
public offering price subsequent to March 17, 1994 and prior to the IPO (using
the treasury stock method for outstanding options) have been included in the
computation of common and common equivalent shares outstanding for all periods
prior to the IPO (May, 1995).
4. PROPOSED MERGER WITH FTP SOFTWARE, INC.
The Company has entered into an Amended and Restated Agreement and Plan
of Merger, dated as of March 25, 1996, which amends and restates the Agreement
and Plan of Merger, dated as of January 17, 1996, (as amended and restated, the
"Merger Agreement"), by and among FTP Software, Inc., a Massachusetts
corporation ("FTP"), Firefox Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of FTP ("FAC"), and Firefox Communications Inc.
("Firefox"), pursuant to which FAC will be merged with and into Firefox (the
"Merger") and Firefox (the "Continuing Corporation") will become a
wholly-owned subsidiary of FTP.
6
<PAGE> 7
By virtue of the Merger, each outstanding share of Common
Stock of Firefox will automatically be converted into one share of FTP Common
Stock, subject to adjustment as described below (the "Exchange Ratio"). Cash
(without interest) will be paid in lieu of issuing fractional shares. The
Exchange Ratio will be subject to adjustment as follows: (i) if the average
closing (last sale) price of the FTP Common Stock as quoted on the Nasdaq
National Market for the 10 trading days immediately preceding the date of the
Firefox Meeting (as that term is defined in the Merger Agreement) (the "Average
Price") is greater than $8.60 per share but less than $11.60 per share, the
Exchange Ratio will be equal to the amount obtained by dividing $11.60 by the
Average Price; and (ii) if the Average Price is less than $17.50 per share but
greater than $14.50 per share, the Exchange Ratio will be equal to the amount
obtained by dividing $14.50 by the Average Price.
The Merger Agreement may be terminated at any time by either FTP or
Firefox upon the occurrence of certain events specified therein, including,
among others, if immediately preceding the date of the Firefox Meeting, the
Average Price of the FTP Common Stock is less than $8.60 or greater than $17.50
per share (in which event the parties are required to negotiate in good faith
for 30 days to adjust the Exchange Ratio prior to such termination). Each
outstanding option to purchase Firefox Common Stock granted under certain
Firefox employee and director stock option plans (a "Firefox Option") will be
assumed by FTP and will automatically be converted into an option to purchase a
number of shares of FTP Common Stock subject to the Firefox Option multiplied
by the Exchange Ratio, at an exercise price equal to the exercise price of the
Firefox Option at the Effective Time (as that term is defined in the Merger
Agreement) divided by the Exchange Ratio. FTP Common Stock to be issued in the
Merger with a value of $15 million will be placed in an escrow at closing as
indemnity for claims arising from litigation recently filed against the
Company, but will be subject to claims only to the extent that all claims
exceed Firefox's $10 million directors and officers liability coverage and
certain other contributions plus $5 million. The Merger is subject to
customary closing conditions, including regulatory approvals and stockholder
approval by the holders of both FTP and Firefox Common Stock, pooling of
interest accounting treatment, the delivery of tax opinions and additional
conditions, and, accordingly, there can be no assurance that the Merger will
be consummated.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking statements in this section include terms such as "believes,"
"may be," "anticipates," "is likely," "in the future," "expects" or similar
phrases. All forward-looking statements involve risks and uncertainties, and
actual results could differ materially from those projected in the
forward-looking statements contained herein as a result of competition,
technological change, risks of integration relating to the proposed Merger with
FTP Software, Inc., changes in distributor terms of performance or other risks
outlined in POTENTIAL QUARTERLY FLUCTUATIONS IN QUARTERLY RESULTS.
OVERVIEW
Firefox Communications Inc. develops, markets and supports server-based
internetworking software for Novell Netware LANs. The Company's connectivity
products enable Netware LAN workgroups to access applications and services on
workstations, minicomputers, mainframes and the Internet. The Company's
client-server products enable client-server applications running on Netware LANs
to integrate with application servers running on mainframe and minicomputer host
systems, and the Company's mail product is an electronic mail system enabling
Netware LANs to connect to UNIX mail systems and the Internet. The Company began
shipping its connectivity products in late 1990 with the introduction of its
NOV*OS products, which enable Netware to OSI connectivity. In late 1992, the
Company introduced the first of its NOV*IX products, which enable Netware to
TCP/IP connectivity. In late 1993, the Company introduced the first of its
NOV*AX products, which enables Netware to DEC LAT connectivity. The Company
introduced its client-server products in 1993 and its mail products in 1995.
The Company markets its products through its direct sales force, which
is focused on organizations with large enterprise networks, as well as through
selected distributors, systems integrators and value-added resellers. The
Company has derived substantially all of its revenues to date from sales of its
connectivity products, and, specifically, sales of the Company's NOV*IX products
have accounted for the majority of these revenues. The Company expects that its
NOV*IX and other connectivity products will continue to account for the
substantial majority of the Company's net revenues for the foreseeable future.
Furthermore, because NOV*IX and Firefox's other products have been developed for
LANs running Novell's NetWare LAN operating system, sales of Firefox's products
could be materially adversely affected by market developments adverse to Novell
or NetWare. Firefox may be required to enhance such products to anticipate or
respond adequately to changes in technology and customer preferences. There can
be no assurance that Firefox will be successful at making such enhancements at
all or in a timely fashion.
Firefox's operating results will depend in substantial part upon its
ability to increase unit volume sales of its connectivity products and to begin
to generate significant product revenues from its client-server and mail
products and from messaging products currently under development. Any failure to
increase net revenues from connectivity products or to generate net revenues
from other products, whether due to competition, technological change or
otherwise, would have a material adverse effect on the Company's business and
results of operations. For example, in each of the fourth quarters of 1995 and
the first quarter of 1996, Firefox's net revenues from connectivity products
declined from third quarter levels, and contributed significantly to the net
losses experienced by Firefox during those quarters.
8
<PAGE> 9
Firefox expanded the size of its operations significantly in 1995, and
its plans call for continued expansion in the number of its employees and the
geographic scope of its sales efforts and operations. The length of time
required to consummate the proposed merger with FTP Software, Inc. has resulted
in a loss of momentum for Firefox's business, has resulted in the loss of key
sales management personnel and is likely to result in the loss of additional
management and staff; all of which are likely to have an adverse effect on
Firefox's operating results and financial condition at least in the near term.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of net sales represented by certain line items from the Company's
Condensed Consolidated Statements of Operations for the Three Months Ended on
March 31, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1995
<S> <C> <C>
NET REVENUES
License 84.6% 93.4%
Services and other 15.4 6.6
----- -----
Total net revenues 100.0 100.0
----- -----
COST OF REVENUES
License 15.6 14.0
Services and other 7.7 4.1
----- -----
Total cost of revenues 23.3 18.1
----- -----
GROSS MARGIN 76.7 81.9
----- -----
OPERATING EXPENSES:
Research and development 21.9 11.8
Sales and marketing 73.4 45.5
General and administrative 28.1 13.8
----- -----
Total operating expenses 123.4 71.1
----- -----
INCOME (LOSS) FROM OPERATIONS (46.7) 10.8
Interest income (expense), net 5.1 (0.9)
----- -----
INCOME (LOSS) BEFORE INCOME TAXES (41.6) 9.9
Provision (credit) for income taxes (16.7) 3.9
----- -----
NET INCOME (LOSS) (24.9)% 6.0%
===== =====
</TABLE>
NET REVENUES
Net revenues consist primarily of fees for licenses of the Company's
software products and customer support. The Company recognizes revenue from
software licenses after shipment of the product and fulfillment of acceptance
terms, if any, and when no significant contractual obligations remain
outstanding. When the Company receives payment prior to shipment or fulfillment
of significant vendor obligations, such payments are recorded as deferred
revenue and customer deposits and are recognized as revenue upon shipment
9
<PAGE> 10
or fulfillment of significant vendor obligations. Customer support revenue is
deferred and recognized ratably over the term of the support agreement, which is
typically one year. Total net revenues for the first quarter of 1996 decreased
by 11.4% to $4.2 million from $4.7 million in the first quarter of 1995.
License revenues for the first quarter of 1996 decreased by 19.8% to
$3.5 million from $4.4 million in the first quarter of 1995. The decrease was
primarily due to decreased shipments of the Company's connectivity products as a
result of the loss of momentum in the Company's business due to the length of
time required to consummate the proposed merger with FTP Software, Inc. and
loss of sales management personnel in the United States, as well as the
timing of receipt of certain orders in the United Kingdom.
Services and other revenue for the first quarter of 1996 increased by
106.0% to $645,000 from $313,000 in the first quarter of 1995. The increase in
service and other income was primarily attributable to revenue from service
contracts due to the increased number of users of the Company's connectivity
products.
In the first quarter of 1996, sales in the United States accounted for
50.2% of the Company's net revenues compared with 45.0% in the first quarter of
1995, and sales in the United Kingdom accounted for 36.8% of the Company's net
revenues compared with 42.0% in the first quarter of 1995. The reduction of
revenues derived from the United Kingdom as a percentage of total revenues
results from the timing of receipt of certain UK orders. Sales in the rest of
the world remained constant at 13.0% of the Company's net revenues in the first
quarter of both 1996 and 1995.
Firefox expects that sales in the United States and the United Kingdom
will continue to account for a substantial majority of Firefox's revenues for
the foreseeable future. There can be no assurances that Firefox will achieve
significant penetration in the United States, United Kingdom or other markets.
GROSS MARGIN
Gross margin consists of net revenues less cost of sales, including
royalties, materials, manufacturing costs, warranty expenses and service costs.
Gross margin as a percentage of net revenues decreased from 81.9% in the first
quarter of 1995 to 76.7% in the first quarter of 1996. Gross margins from
licenses as a percentage of net revenues from licenses were 81.6% in the first
quarter of 1996 compared to 85.0% in the comparable 1995 quarter. Gross margins
from services and other as a percentage of net revenues from service and other
was 50.1% in the first quarter of 1996 and 39.0% for the quarter ended March 31,
1995.
The decrease in percentage gross margins from licenses from 1995 to
1996 is primarily due to higher manufacturing costs associated with Firefox's
products and in particular royalty costs relating to the sale of the Company's
internet products. Firefox expects that, over time, average selling prices for
its connectivity products may decline as the market for these products becomes
more competitive, reducing the gross margins on these products. The increase in
percentage gross margins from services and other between the same periods is
primarily due to spreading associated costs over higher services revenues.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of employee costs,
costs of material consumed in developing and designing new products, and, to a
lesser extent, outside contract service costs, equipment rentals, depreciation
and occupancy costs. Expenditures for research and development
10
<PAGE> 11
increased from $558,000 in the first quarter of 1995 to $917,000 in the first
quarter 1996. Research and development expenses increased as a percentage of net
revenues from 11.8% in the first quarter of 1995 to 21.9% in the first quarter
of 1996. The increase in research and development expenses in absolute dollars
resulted primarily from increased development efforts relating to Firefox's
client-server products, mail products and Internet connectivity tools, including
Firefox's efforts to develop NOV*IX products for use in conjunction with
Microsoft Windows NT network operating system.
The Company believes that continued commitment to research and
development will be required for the Company to remain competitive. There can be
no assurance, however, that the Company's research and development efforts,
including those related to Windows NT, will result in products or enhancements
to existing products which will be available on a timely basis or generate any
significant revenues for the Company. Nonetheless, the Company intends to
continue to allocate substantial resources to research and development, but
research and development expenses may vary as a percentage of net revenues.
Costs for the development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized in accordance with Statement of Financial Accounting
Standards No. 86, "Computer Software to be Sold, Leased, or Otherwise Marketed."
To date, the Company has essentially completed its software development
concurrently with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and
commissions of sales and marketing personnel, advertising and promotion expenses
and pre-sales customer service and technical support costs. Sales and marketing
expenses increased from $2.1 million in the first quarter of 1995 to $3.1
million in the comparable 1996 quarter. The increase in sales and marketing
expenses resulted from an expansion of the Company's sales and support
organization, particularly in the United States and Europe during 1995 in
anticipation of increased shipments of the company's connectivity products. The
decreased shipments of the Company's connectivity products between the first
quarter of 1995 and the comparable 1996 quarter resulted from a loss of momentum
in the Company's business due to the length of time required to consummate the
proposed merger with FTP Software, Inc. and the loss of sales management
personnel in the United States.
As a percentage of net revenues, sales and marketing expenses increased
from 45.5% in the first quarter of 1995 to 73.4% in the comparable quarter of
1996.
As is typical in the software industry, the Company grants to its
distributors limited right to return unsold inventories of the Company's
products in exchange for new purchases. In addition, the Company provides price
protection to its distributors, and a decrease in the price of the Company's
products could have a material adverse effect on the Company's operating
results. The Company provides allowances for projected returns and price
protection. However, there can be no assurance that the balances will be
sufficient to offset product returns and price protection in the future.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $651,000 in the first
quarter of 1995 to $1.2 million in the comparable quarter of 1996. The Company
completed its Initial Public Offering of stock on May 11, 1995 and general and
administrative costs for the quarter ended March 31, 1996 include costs
11
<PAGE> 12
associated with being a publicly-held company. During the quarter ended March
31, 1996, the Company incurred approximately $340,000 of non-recurring pre-tax
charges relating to the proposed merger with FTP Software, Inc. As a percentage
of net revenues, general and administrative expenses increased from 13.8% in the
first quarter of 1995 to 28.1% in the first quarter of 1996. The Company
anticipates that general and administrative expenses may continue to increase in
absolute dollars if required to support operations. However, general and
administrative expenses may continue to vary as a percentage of net revenues.
PROVISION (CREDIT) FOR INCOME TAXES
The provision for income taxes as a percentage of pretax loss was 40.0%
for the first quarter of 1996 which compared to a similar provision for pretax
income in the first quarter of 1995.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly financial results may vary significantly as a
result of a number of factors including, among others, the size and timing of
individual orders; customer order deferrals in anticipation of new products;
timing of introduction or enhancement of products by the Company or its
competitors; market acceptance of new products; technological changes in
computer networking; competitive pricing pressures; seasonality of revenues;
changes in resellers inventory practices; the exercise of stock rotation or
inventory price protection rights by distributors; the accuracy of resellers'
forecasts of end user demand; changes in the Company's operating expenses;
personnel changes; foreign currency exchange rates; mix of products sold;
quality control of products sold; and general economic conditions.
In addition, the Company is expanding its direct sales efforts to large
customers, which tend to order networking software products in relatively large
volumes. Sales to those customers typically involve longer sales cycles.
Accordingly cancellation or deferral of one or a small number of such orders
could cause significant fluctuations in quarterly operating results. Further,
the company typically generates a large percentage of its quarterly revenues in
the last weeks of the quarter.
The Company's expense levels are based in part on its expectations as
to future revenues and to a large extent are fixed. Therefore, Firefox may be
unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, any significant shortfall of demand in relation
to Firefox's expectations or any material delay of customer orders would have an
almost immediate adverse impact on Firefox's operating results and on Firefox's
ability to maintain profitability. In fact, Firefox believes these circumstances
contributed significantly to its net loss experienced in the quarter.
The Company may also reduce prices or increase spending in response to
competition or to pursue new market opportunities. As a result, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Fluctuations in operating results may also result in volatility in
the price of shares of the Company's common stock.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date through private and
public sales of equity securities, short-term bank borrowings and with cash from
operations. On May 11, 1995, the Company completed its initial public offering
of common stock. Through this offering, the Company sold an additional 1.5
million shares of its common stock which generated approximately $23.1 million
of cash, net of expenses.
Net cash used in operating activities was $785,000 for the first three
months of 1996 which resulted primarily from the net loss incurred in the
period, an increase in prepaid expenses and other assets, a decrease in income
taxes payable and an increase in prepaid income taxes. This was partially offset
by a decrease in accounts receivable and increases in accounts payable and
accrued liabilities. Cash provided by investing activities totaled $771,000,
and was primarily generated by the net sales of short-term investments.
As of March 31, 1996, accounts receivable totaled $5.7 million compared
to $3.1 million at March 31, 1995. Following its initial public offering,
Firefox ended its factoring arrangement with Lombard NatWest Limited, a
factoring company located in the United Kingdom which had been purchasing a
significant percentage of Firefox's receivables shortly after invoice
generation. As a consequence of terminating this factoring relationship and the
granting of extended payment terms to certain customers, Firefox's accounts
receivable have increased substantially. Firefox has taken steps to reduce the
accounts receivable balance, including pursuing outstanding receivables more
aggressively. However, there can be no assurance that Firefox will be able to
reduce its level of accounts receivables in the future.
On February 23, 1996, a class action lawsuit was filed in the United
States District Court for the Northern District of California, San Francisco
Division, naming Firefox and certain of its officers and directors as
defendants. The lawsuit alleges that the defendants misrepresented or failed to
disclose material facts about Firefox's operations and financial results, which
the plaintiffs contend resulted in an artificial inflation of the price of the
Firefox Common Stock. The suit is purportedly brought on behalf of a class of
purchasers of the Firefox Common Stock during the period from August 3, 1995 to
January 2, 1996. The complaint alleges claims for violations of Section 10(b)
and 20(a) of the Exchange Act. Specifically, the complaint alleges that each of
the defendants knew or had access to allegedly material adverse non-public
information about Firefox's financial results and business conditions which
allegedly was not disclosed and participated in drafting, reviewing and/or
approving alleged misleading statements, releases, reports and other public
representations of and about Firefox. Firefox has reviewed the allegations in
the lawsuit, believes them to be without merit, and intends to defend itself and
its officers and directors vigorously. In order to support an adequate defense,
Firefox may be required to expend substantial sums for legal and expert fees and
costs. The cost of defending the litigation and the outcome of the litigation
are uncertain and cannot be estimated. If the lawsuit were determined adversely
to Firefox, Firefox could be required to pay a substantial judgment.
As of March 31, 1996, the Company had working capital of $21.2 million
and cash, cash equivalents and short-term investments of $15.5 million. The
Company had no bank indebtedness and no long-term commitments other than minimum
capital and operating lease obligations. The Company believes that the existing
cash, cash equivalents and short-term investments and funds generated from
operations will provide the Company with sufficient funds to finance its
operations through at least the next 12 months. Thereafter, the Company may
require additional funds to support its working capital requirements or for
other purposes and may seek to raise such additional funds through public or
private equity financing or from other sources.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 23, 1996, a class action lawsuit was filed in the United
States District Court for the Northern District of California, San Francisco
Division, naming Firefox and certain of its officers and directors as
defendants. The lawsuit alleges that the defendants misrepresented or failed to
disclose material facts about Firefox's operations and financial results, which
the plaintiffs contend resulted in an artificial inflation of the price of the
Firefox Common Stock. The suit is purportedly brought on behalf of a class of
purchasers of the Firefox Common Stock during the period from August 3, 1995 to
January 2, 1996. The complaint alleges claims for violations of Section 10(b)
and 20(a) of the Exchange Act. Specifically, the complaint alleges that each of
the defendants knew or had access to allegedly material adverse non-public
information about Firefox's financial results and business conditions which
allegedly was not disclosed and participated in drafting, reviewing and/or
approving alleged misleading statements, releases, reports and other public
representations of and about Firefox. Firefox has reviewed the allegations in
the lawsuit, believes them to be without merit, and intends to defend itself and
its officers and directors vigorously.
A former employee filed a complaint against the Company on March 23,
1995 in the Superior Court of the State of California, County of Santa Clara,
claiming rights to compensation and punitive damages in connection with the
cessation of his employment with the company. Although litigation is inherently
uncertain, the Company believes that such claims are without merit and that the
ultimate resolution of this matter will not be material to its future financial
position or results of operations, and the Company intends to defend against
this claim vigorously. The Company has demurred to the complaint, but no
resolution of this matter has been obtained or is likely to occur in the near
future.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
-------- -------------
<S> <C>
2.3 Amended and Restated Agreement and Plan of Merger among
FTP Software, Inc., Firefox Acquisition Corp. and
Firefox Communications Inc. dated March 25, 1996.(4)
10.1 Form of indemnity agreement for officers and
directors.(1)
10.2 Investment and Shareholders Agreement, dated November
29, 1993.(1)
10.3 1994 Firefox UK non-Approved Share Option Scheme.(1)
10.4 1995 Stock Option Plan and forms of agreement used
thereunder.(1),(3)
10.5 Technology License and Manufacturing Agreement between
the Company and Novell/UNIX System Laboratories, Inc.,
dated November 1993.(1),(2)
10.6 Desktop Systems OEM Software License Agreement between
the Company and Novell, Inc., dated December
1992.(1),(2)
10.7 Technology License and Manufacturing Agreement between
the Company and Novell, Inc., dated August 1,
1992.(1),(2)
10.8 Facilities Underlease between the Company and McDonnell
Information Systems Limited, dated September 29,
1994.(1)
10.9 Credit Facility Agreement between the Company and
National Westminster Bank, dated September 6, 1994.(1)
10.10 Service Agreement between the Company and John
Kimberley, dated November 29, 1993.(1),(2)
10.11 Service Agreement between the Company and Richard
Whitehead, dated November 29, 1993.(1),(2)
10.12 Service Agreement between the Company and Peter Simkin,
dated November 29, 1993.(1)
10.13 Facilities Lease between Firefox Inc. and Speiker
Properties, L.P., dated February 3, 1995.(1)
10.14 Facilities Lease between Firefox Inc. and Metropolitan
Life Insurance Co., dated January 18, 1994.(1)
10.15 Facilities Lease between Firefox Inc. and Metropolitan
Life Insurance Co., dated August 31, 1994.(1)
10.16 Consultancy Agreement between the Company and Arch One
Limited, dated December 17, 1994.(1)
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
10.17 Deed between the Company and Peter Simkin, dated
November 29, 1993.(1)
10.18 1995 Outside Directors Stock Option Plan and form of
agreement used thereunder.(1),(3)
10.19 Distribution Agreement between the Company and Vitek
Systems, dated January 7, 1994.(1)
10.20 Amendment to Facilities Lease between Firefox Inc. and
Speiker Properties, L.P., dated March 30, 1995.(1)
11.1 Computation of net income (loss) per share.
27.1 Financial Data Schedule (Only Provided Electronically)
</TABLE>
(1) Incorporated by reference from exhibits of the same
number in Registrant's Registration Statement on Form
S-1 (File No. 33-90436), effective May 3, 1995.
(2) The Securities and Exchange Commission (the
"Commission") has granted confidential treatment for
portions of this document.
(3) Compensatory or employment arrangement.
(4) Included with and incorporated herein by reference to
the Company's Proxy Statement for Special Meeting of
Stockholders filed with the Commission on March 27,
1996.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended March 31, 1996.
16
<PAGE> 17
SIGNATURES
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.
FIREFOX COMMUNICATIONS INC.
(Registrant)
DATE: May 14, 1996 /s/ Mark A. Rowlinson
------------------ ------------------------------
Mark A. Rowlinson
Vice President, Finance, Chief
Financial Officer and Secretary
(Principal Financial and Accounting
Officer).
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - - --------------------------------------------------------------------------------
<S> <C> <C>
2.3 Amended and Restated Agreement and Plan of Merger
among FTP Software, Inc., Firefox Acquisition Corp.
and Firefox Communications Inc. dated March 25,
1996.(4)
10.1 Form of indemnity agreement for officers and
directors.(1)
10.2 Investment and Shareholders Agreement, dated
November 29, 1993.(1)
10.3 1994 Firefox UK non-Approved Share Option Scheme.(1)
10.4 1995 Stock Option Plan and forms of agreement used
thereunder.(1),(3)
10.5 Technology License and Manufacturing Agreement
between the Company and Novell/UNIX System
Laboratories, Inc., dated November 1993.(1),(2)
10.6 Desktop Systems OEM Software License Agreement
between the Company and Novell, Inc., dated
December 1992.(1),(2)
10.7 Technology License and Manufacturing Agreement
between the Company and Novell, Inc., dated August
1, 1992.(1),(2)
10.8 Facilities Underlease between the Company and
McDonnell Information Systems Limited, dated
September 29, 1994.(1)
10.9 Credit Facility Agreement between the Company and
National Westminster Bank, dated September 6,
1994.(1)
10.10 Service Agreement between the Company and John
Kimberley, dated November 29, 1993.(1),(2)
10.11 Service Agreement between the Company and Richard
Whitehead, dated November 29, 1993.(1),(2)
10.12 Service Agreement between the Company and Peter
Simkin, dated November 29, 1993.(1)
10.13 Facilities Lease between Firefox Inc. and Speiker
Properties, L.P., dated February 3, 1995.(1)
10.14 Facilities Lease between Firefox Inc. and
Metropolitan Life Insurance Co., dated January 18,
1994.(1)
10.15 Facilities Lease between Firefox Inc. and
Metropolitan Life Insurance Co., dated August 31,
1994.(1)
10.16 Consultancy Agreement between the Company and Arch
One Limited, dated December 17, 1994.(1)
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C>
10.17 Deed between the Company and Peter Simkin, dated
November 29, 1993.(1)
10.18 1995 Outside Directors Stock Option Plan and form
of agreement used thereunder.(1),(3)
10.19 Distribution Agreement between the Company and
Vitek Systems, dated January 7, 1994.(1)
10.20 Amendment to Facilities Lease between Firefox Inc.
and Speiker Properties, L.P., dated March 30,
1995.(1)
11.1 Computation of net income (loss) per share. 20
27.1 Financial Data Schedule (Only Provided
Electronically)
</TABLE>
(1) Incorporated by reference from exhibits of the same number in
Registrant's Registration Statement on Form S-1 (File No.
33-90436), effective May 3, 1995.
(2) The Securities and Exchange Commission (the "Commission") has
granted confidential treatment for portions of this document.
(3) Compensatory or employment arrangement.
(4) Included with and incorporated herein by reference to the
Company's Proxy Statement for Special Meeting of Stockholders
filed with the Commission on March 27, 1996.
19
<PAGE> 1
EXHIBIT 11.1
FIREFOX COMMUNICATIONS INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
<S> <C> <C>
Net income (loss) $(1,042) $ 279
Accretion for preference shares -- (45)
------- -------
Income (loss) attributable to common stock (1,042) 234
------- -------
Weighted average common shares outstanding 6,735 4,000
Weighted average convertible preferred stock -- 917
Common shares issued and options granted (using the
treasury stock method) subsequent to March 17, 1994
and prior to the IPO, included pursuant to Securities and
Exchange Commission rules -- 569
------- -------
Shares used in per share computation 6,735 5,486
======= =======
Net income (loss) per share $ (0.15) $ 0.04
======= =======
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 6,519
<SECURITIES> 9,021
<RECEIVABLES> 5,759
<ALLOWANCES> 105
<INVENTORY> 0
<CURRENT-ASSETS> 26,377
<PP&E> 2,655
<DEPRECIATION> 976
<TOTAL-ASSETS> 28,056
<CURRENT-LIABILITIES> 5,144
<BONDS> 0
0
0
<COMMON> 23,673
<OTHER-SE> (823)
<TOTAL-LIABILITY-AND-EQUITY> 28,056
<SALES> 3,538
<TOTAL-REVENUES> 4,183
<CGS> 651
<TOTAL-COSTS> 973
<OTHER-EXPENSES> 5,162
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (1,739)
<INCOME-TAX> (697)
<INCOME-CONTINUING> (1,042)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,042)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
