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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] 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)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: COMMON STOCK ($.01 PAR VALUE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $102,773,850 on March 20, 1998, based on the
closing sales price of the registrant's Common Stock as reported on the Nasdaq
National Market as of such date.
The number of shares outstanding of each of the registrant's classes of common
stock as of March 20, 1998 was as follows:
<TABLE>
<S> <C>
Common Stock, $.01 par value 33,973,140
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference:
Part III: Portions of the registrant's definitive Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the
registrant's 1998 Annual Meeting of Stockholders.
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FTP SOFTWARE, INC.
TABLE OF CONTENTS
<TABLE>
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PART I PAGE
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Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 4A. Executive Officers of the Registrant 9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder 10
Matters
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and 12
Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting and 47
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 47
Item 12. Security Ownership of Certain Beneficial Owners and Management 47
Item 13. Certain Relationships and Related Transactions 47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 48
Signatures 51
Appendix A A-1
Schedule II II-1
</TABLE>
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PART I
ITEM 1. BUSINESS.
FTP Software, Inc. ("FTP" or 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. The Company's recently announced products, including OnWeb(TM) Host, a
web-based host access product, and the latest versions of OnNet(R) Host and
InterDrive(R) Client, provide capabilities for ease of use and secure access to
corporate information across TCP/IP networks for end users, and user-based
management features to enable centralized desktop administration.
The Company has been engaged in the development of client networking
software products since 1986. These products, which are based upon the industry
standard Transmission Control Protocol/Internet Protocol ("TCP/IP") data
communications protocol suite, enable PC users to find, access and use
heterogeneous hardware, information and applications resources across local
area, enterprise-wide and global networks and a variety of operating systems,
computing platforms and network environments. The Company began to offer server
networking products following its acquisition of Firefox Communications Inc.
("Firefox"), a provider of server-based networking connectivity and
communications software, in July 1996. For a description of the principal
products currently sold by the Company, see "-- Products" below.
From time to time during the past five years, the Company has explored
other opportunities in the computer software market. In September 1996, the
Company announced its VIP Network strategy, a software architecture concept
designed to enable organizations to secure, manage and transparently extend
their networks beyond traditional boundaries, intranets and the Internet. The
Company narrowed its focus during 1997 to embedding key VIP Network attributes
of security and user-based and user-specific centralized management into its
core connectivity software products. From 1995 to 1996, the Company also
explored, including through acquisitions, opportunities in the then-emerging
collaborative and Internet software markets. The Company subsequently determined
to focus on its core connectivity products and technologies and disposed of
certain lines of business and product lines during 1996 and 1997. See "--
Discontinued Operations" below.
In July and December 1997, the Company effected an internal
reorganization of its operations. For a description of these reorganizations,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments."
The Company was incorporated in Massachusetts in 1986. Its corporate
headquarters are located at 2 High Street, North Andover, Massachusetts 01845,
telephone number (978) 685-4000.
PRODUCTS
The following is a brief description of the principal products
currently marketed by the Company. The Company has designed its products based
on open technology standards, with an emphasis on ease of use, security and
centralized management both to enhance and protect its customers' investments in
different networking hardware and software and to provide its customers with
flexibility for future investments. The Company offers products that include one
or more networking applications as either point solutions or suites to target
customer operating system and networking requirements.
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The Company's OnNet family of products includes applications for
Windows 3.x, Windows 95 and Windows NT operating systems. Most significant in
this family are the suite products OnNet32, targeting 32-bit operating systems,
and OnNet16, targeting 16-bit operating systems. These products provide end
users with a full range of applications designed to reach and share information
on corporate intranets and the Internet and across legacy systems, such as FTP's
implementation of NFS file and print sharing (also sold separately as part of
FTP's InterDrive product family described below) and advanced terminal
emulation. These products may include FTP's own implementation of the TCP/IP
protocol suite described below and/or be designed to alternatively operate on
the TCP/IP kernel embedded in the operating system.
FTP's terminal emulation applications include VT 52-420, IBM PC, 3270
and 5250, SCO ANSI, BBS ANSI, Wyse 50/60, Telnet and serial support enabling
access to IBM, DEC and other host systems, and include usability features for
highly configurable emulation sessions, such as full keyboard remapping and a
customizable toolbar, as well as management and other features.
Certain OnNet products also include other networking applications,
utilities and features, including: mobile IP support; electronic mail
("e-mail"); remote file transfer; remote command, remote printing and remote
tape backup; and installation and configuration utilities.
FTP's TCP/IP kernel is a high performance, highly reliable
implementation of FTP's core TCP/IP suite of protocols which includes a number
of advanced features, such as gateway fallback and router discovery, that allow
for performance optimization, network redundancy, easy configuration and error
recovery in complex networks. The kernel is made available in both a 16-bit
implementation and a Winsock 2.0 compliant 32-bit version.
The newest offering in FTP's applications products is OnWeb Host, a
web-based terminal emulation software product that enables host access through
any Java-enabled web browser. Because OnWeb Host is installed only on the
server, deployment, upgrades and support are handled centrally, permitting
control and audit of user-based host access. OnWeb Host includes the OnWeb
Application server, a Java servlet, that delivers applets containing the
terminal emulation engine and works with the web server to manage and audit
security and network activity.
FTP's InterDrive family of network file system solutions includes
InterDrive Client NFS for Windows 95 and InterDrive Client NFS for Windows NT,
client applications that provide network users with access to printers,
directories and file systems on network servers running the NFS server software,
and InterDrive Server NFS for Windows NT, a server product that lets users share
applications, information and devices (such as CD-ROMs) that are located on the
NFS server as if it were connected directly to a desktop PC.
FTP's X OnNet products allow Windows users to access networked
applications based on the X-Windows (X.11) standard. X OnNet is designed to be
both powerful and easy to use, and can run on any Windows Sockets compliant
network software. X OnNet is available for Windows 3.x, Windows 95 and Windows
NT.
FTP continues to derive significant revenue from its PC/TCP Network
Software product line, particularly outside the United States. FTP's PC/TCP
products are compatible with MS-DOS, NetWare, LAN Manager, Windows for
WorkGroups and Vines, but are generally deployed in MS-DOS environments, and
include a TCP/IP kernel for that environment. FTP's PC/TCP products allow PC
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users to share information, access data from other sources, run host-based
applications and use network services across an organization's computing
environment.
The Company's family of gateway products, which includes its Internet
Gateway products for NetWare and for Windows NT, are server-based products that
allow Novell NetWare workgroups to access applications and services on
TCP/IP-based corporate intranets and the Internet. In addition to these IPX to
IP gateway products, the Company also offers IP to IP and IPX to OSI gateway
products. These products provide a wide range of features that allow network
managers to manage, secure and audit connectivity to an organization's IP
networks and the Internet through a single centralized interface.
SALES AND MARKETING
FTP distributes its products through multiple channels, including
value-added resellers, systems integrators, OEMs, distributors and direct sales.
FTP's distribution strategy is to select and to utilize the various channels to
address cost-effectively the broadest available market while minimizing
conflicts among its distribution channels. The Company also seeks to enter into
strategic alliances to extend the Company's distribution channels or to jointly
market or gain market awareness for the Company's products, such as through the
Company's agreement with IBM, which provides for the development and marketing
of networking technologies related to IP communications. The Company's
distribution strategy has resulted and is expected to continue to result in
changes from time to time in the Company's distribution model. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Total Revenue -- Factors Affecting Revenue" and Appendix A, "Cautionary Factors
- -- Distribution Risks" and "-- International Sales."
FTP generally seeks to market its products to large and mid-size
organizations with a wide range of networking requirements by identifying
various features and applications of FTP's products that address the customer's
networking needs. Marketing activities include advertising in trade
publications, direct mailings to target customers, participating in trade shows
and conferences, publishing articles in newsletters and technical journals, and
participating in the TCP/IP, Internet and other emerging standards setting
processes.
As of December 31, 1997, FTP had approximately 106 sales employees and
17 marketing employees. FTP's sales and marketing operations are conducted from
its principal offices in North Andover, Massachusetts, and additional offices in
San Jose, California and Arlington, Virginia. FTP's principal European sales
support and marketing offices are located in England, France and Germany.
UNITED STATES. In the United States, FTP markets its products through
distributors, value-added resellers, systems integrators and OEMs, as well as
directly to large and mid-size companies and educational institutions. These
companies and institutions generally have complex enterprise and networking
requirements that include a wide range of applications. FTP's sales to the
United States federal, state and local governments are conducted directly and
through government resellers and OEMs. During 1997, the Company increased its
focus on selling its products in the United States through distributors,
value-added resellers, systems integrators and OEMs rather than directly. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Total Revenue -- Factors Affecting Revenue."
INTERNATIONAL. In the years ended December 31, 1997, 1996 and 1995, FTP
derived 41%, 42% and 46% of its sales, respectively, from outside the United
States. FTP relies on a network of resellers,
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systems integrators and distributors located in Europe, the Middle East, South
America, Canada, Russia and Asia Pacific to sell its products internationally.
FTP's offices in England, France and Germany provide assistance to resellers,
systems integrators and distributors in their efforts to license FTP's products
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Total Revenue -- Factors Affecting Revenue."
For financial information about geographic industry segments, see Note
K of the Notes to Consolidated Financial Statements included under Item 8 of
this Report.
CUSTOMERS
FTP's customers include large corporations in the aerospace,
automotive, cable television, data processing, energy, financial services,
mobile communications, retail, telecommunications and other industries; federal,
state, local and foreign government organizations; and educational and research
institutions. No single customer accounted for more than 10% of FTP's revenue
for 1997.
CUSTOMER SERVICE AND SUPPORT
FTP believes that a high level of continuing customer support and
service is critical to its objectives of developing long-term relationships with
its customers. FTP's service and support activities are related to software and
network configuration issues and are provided by telephone support and remote
telephone access from FTP's facilities located in North Andover, Massachusetts.
FTP also provides customers with on-site installation support. FTP has a
toll-free technical support number available from 8:00 a.m. to 8:00 p.m.
(Eastern time), Monday through Friday. Support is also available through e-mail
and electronic bulletin boards. Since the second quarter of 1997, the Company
has also maintained a service and support center in Europe.
FTP currently offers maintenance contracts for site licenses. Site
license customers can purchase maintenance contracts at a price generally equal
to 15% of the suggested retail site license price, which entitles them both to
unlimited telephone support and to free updates of the product during the
maintenance period. During the third quarter of 1997, the Company entered 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Total Revenue --
Factors Affecting Revenue."
FTP also currently offers a Partnership Support Program for its
strategic customers that provides 24-hour support seven days a week. This
program requires the customer to establish and maintain a help desk on site to
provide front-line support to all users. A group of support engineers at FTP is
available to assist customer personnel at these help desks in providing support.
COMPETITION
The software industry is extremely competitive, and is characterized by
evolving industry standards, frequent introduction of new products and product
enhancements, and continuous improvement in product reliability, compatibility,
functionality, memory requirements, ease of use, performance and customer
support. The Company's networking software products compete with major computer
and communications systems vendors, including Microsoft Corporation
("Microsoft"), Novell, Inc. ("Novell") and Sun Microsystems, Inc. ("Sun"), as
well as smaller networking software companies,
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such as Hummingbird Communications Ltd. and NetManage, Inc. Many of the
Company's competitors have substantially greater financial, technical, sales,
marketing and other resources than the Company, as well as greater name
recognition and a larger installed customer base. In addition, the Company's
core product lines are based upon the Transmission Control Protocol/Internet
Protocol ("TCP/IP"), an open non-proprietary data communications protocol suite.
Several of the Company's competitors have developed proprietary networking
applications and certain of such vendors, including Novell, provide a TCP/IP
protocol suite in their products at little or no additional cost. Microsoft has
embedded a TCP/IP protocol suite in its Windows 95 and Windows NT operating
systems. The introduction of such protocol suites has resulted in a decrease in
sales volumes of, and sales prices for, certain of the Company's products,
which, together with a general increase in competition in the networking
software industry during 1997, materially adversely affected the Company's
results of operations in 1996 and 1997 and is expected to continue to have a
material adverse effect on the Company's results of operations during 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Total Revenue -- Product Revenue" and "-- Factors Affecting
Revenue." The Company is also facing competition from makers of terminal
emulation software, such as Attachmate Corporation and Wall Data, Inc. In
addition, existing competitors could devote additional resources to the
development of TCP/IP or expand their existing TCP/IP product lines. Increased
competition from existing or new products could adversely affect demand for the
Company's products and has led, and could continue to lead, to increased price
competition and other concessions, adversely affecting the Company's gross
margins and operating results.
There can be no assurance that the Company will be able to compete
successfully against current or future competitors. Competitive pressures faced
by the Company had a material adverse effect on its business, financial
condition and results of operations during 1996 and 1997 and are expected to
continue to have such an effect during 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Total Revenue --
Factors Affecting Revenue."
PROPRIETARY RIGHTS AND LICENSING
The technology included in the Company's products is principally owned
by FTP. A portion of the technology included in certain of FTP's products is
licensed to FTP by third parties, generally under irrevocable licenses that also
provide FTP with access to source code to enable FTP to enhance and maintain the
technology. See Appendix A, "Cautionary Factors -- Interoperability with Third
Party Products and Technologies."
FTP relies on a combination of copyrights, trademarks, trade secret law
and contracts to protect its proprietary technology. FTP generally provides
software products to end users under non-exclusive shrink-wrap or "click-wrap"
licenses, which provide that the license may be terminated by FTP if the end
user breaches the terms of the license. These licenses generally require that
the software be used only internally and on a single PC or server. FTP
authorizes its dealers to sublicense software products to end users under
similar terms. Certain provisions of these licenses, including provisions
protecting against unauthorized use, copying, transfer and disclosure, may be
unenforceable under the laws of certain jurisdictions. FTP generally enters into
confidentiality and/or license agreements with its employees, consultants,
distributors, customers and potential customers and limits access to and
distribution of its source code and other proprietary information. See Appendix
A, "Cautionary Factors -- Proprietary Rights."
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FTP has registered or applied for the registration of the trademarks
FTP Software, OnNet, OnWeb, InterDrive and PC/TCP in the United States and in
certain foreign countries. Several other registrations are in process in both
the United States and in various foreign countries.
EMPLOYEES
As of December 31, 1997, FTP had approximately 350 full-time employees,
including 123 in marketing and sales, 46 in technical support, 99 in product
development, 12 in manufacturing and 70 in general and administrative functions
and management. Approximately 248 of such employees were based in the United
States and approximately 104 were based in Europe. Such number of employees was
reduced by approximately 21 persons, primarily in development at the Company's
European locations, in connection with the Company's December 1997 restructuring
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments." FTP's employees are not
represented by a labor union or other collective bargaining agent.
SUBSIDIARIES
FTP currently conducts its operations directly and through several
subsidiaries. FTP's subsidiaries include Firefox Communications Inc., Firefox
(U.S.) Inc., FTP Software Limited (U.K.), FTP Software Worldwide, Inc. (France)
and FTP Software GmbH (Germany).
DISCONTINUED OPERATIONS
In 1995 and 1996, the Company explored technology opportunities in the
then-emerging collaborative and Internet software markets. During 1996, FTP
acquired the following for an aggregate net cash purchase price of approximately
$28.7 million: the Mariner Internet software product line of Network Computing
Devices, Inc.; substantially all of the assets of HyperDesk Corporation,
including its collaborative GroupWorks software product; and Campbell Services,
Inc., the developer of OnTime, a scheduling software product. The Company also
acquired a line of document viewer and conversion products from Keyword Office
Technologies Ltd. in early 1995 for a net cash purchase price of approximately
$2.4 million. The majority of the purchase price for these acquisitions was
attributable to incomplete technology and charged to product development
expenses at the time of the respective acquisitions, which charges are reported
in discontinued operations as described below.
In September 1996, the Company announced a formal plan to spin off,
through the sale to third parties, its collaborative lines of business and to
discontinue other selected product lines, including those described above.
Accordingly, these operations are treated as discontinued operations in the
Company's consolidated financial statements included under Item 8 of this
Report, and the Company recorded a $4.8 million charge in the third quarter of
1996 to write down the related assets to estimated net realizable values. The
Company completed the dispositions of its discontinued operations during 1997;
the actual aggregate loss from such dispositions was approximately $3.6 million
(this actual loss being approximately $1.2 million lower than originally
estimated).
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ITEM 2. PROPERTIES.
FTP leases approximately 135,000 square feet at its corporate
headquarters in North Andover, Massachusetts. FTP also leases approximately
130,000 square feet at its former headquarters facility in Andover,
Massachusetts, of which approximately 84,000 square feet are subleased to third
parties, and approximately 32,000 square feet at its former manufacturing
facility in Wilmington, Massachusetts. FTP also leases approximately 98,000
square feet for sales, sales support and marketing offices in San Jose,
California, Arlington, Virginia, England, France, Germany and Sweden.
ITEM 3. LEGAL PROCEEDINGS.
In March 1996, a class action lawsuit was filed in the United States
District Court for the District of Massachusetts, naming the Company and certain
of its current and former officers as defendants. The lawsuit, captioned
Lawrence M. Greebel v. FTP Software, Inc., et al., Civil Action No. 96-10544,
alleges that the defendants publicly issued false and misleading statements and
omitted to disclose material facts necessary to make such statements not false
and misleading, which the plaintiffs contend caused an artificial inflation in
the price of the Company's common stock. Specifically, the original complaint
alleged that the defendants knowingly concealed adverse facts and made false or
misleading forward and non-forward looking statements concerning the operating
results and financial condition of the Company, the effects of the Company's
July 1995 corporate restructuring and changing competitive factors in the
Company's industry. The lawsuit, which is purportedly brought on behalf of a
class of purchasers of the Company's common stock during the period from July
14, 1995 to January 3, 1996, alleges violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule
10b-5 thereunder and seeks relief in the form of unspecified compensatory
damages, costs and expenses and such other relief as the court deems proper and
just. In August 1996, plaintiffs filed an amended complaint adding allegations
concerning what plaintiffs claim were wrongful sales and accounting practices by
the Company during the class period, but asserting the same causes of action as
the original complaint. In October 1996, the Company filed a motion to dismiss
the complaint on the grounds that the plaintiffs had not met the pleading
requirements of the Private Securities Litigation Reform Act of 1995. The motion
was denied by the court on February 13, 1997. 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. FTP intends to request the court to
permit it to file a reply memorandum in further support of such motion. If
permitted to do so, FTP will file its reply memorandum by April 10, 1998, after
which time the motion will be before the court for resolution.
The Company has reviewed the allegations in the lawsuit, believes them
to be without merit, and intends to defend itself and its officers vigorously.
In order to support an adequate defense, the Company has spent and expects to
continue to spend substantial sums for legal and expert fees and costs. The cost
of defending the litigation and the outcome of the litigation are uncertain and
cannot be estimated. If the lawsuit were determined adversely to the Company,
the Company could be required to pay a substantial judgment, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In February 1996, a class action lawsuit, captioned Richard Zeid and
Siom Misrah, et al. v. John Kimberley, Frank M. Richardson, Mark A. Rowlinson
and Firefox Communications, Inc., Case No. C96 20136, was filed in the United
States District Court for the Northern District of California, San Francisco
Division (transferred to the San Jose Division), naming Firefox and certain of
its current and former officers and former directors as defendants. The original
complaint alleged that the defendants
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misrepresented or failed to disclose material facts about Firefox's operations
and financial results, which the plaintiffs contended resulted in an artificial
inflation in the price of Firefox's common stock. The suit was purportedly
brought on behalf of a class of purchasers of Firefox's common stock during the
period from August 3, 1995 to January 2, 1996. The complaint alleged claims for
violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
thereunder and sought relief in the form of unspecified compensatory damages,
pre- and post-judgment interest, attorneys' and expert witness fees and such
extraordinary, equitable and/or injunctive relief as permitted by law, equity
and the federal statutory provisions under which the suit was brought. In June
1996, the District Court entered an order dismissing plaintiffs' complaint. In
the order, the court dismissed with prejudice certain of plaintiffs' claims that
warnings and disclosures in Firefox's Form 10-Qs were false and misleading,
while granting plaintiffs permission to amend their complaint as it concerned
certain of plaintiffs' claims that Firefox was responsible for false and
misleading analysts reports, Firefox statements and financial statements.
In July 1996, plaintiffs filed their amended complaint. The amended
complaint alleged that defendants misrepresented or failed to disclose material
facts about Firefox's operations and financial results which the plaintiffs
contended resulted in an artificial inflation of the price of Firefox's common
stock. The amended complaint was purportedly brought on behalf of a class of
purchasers of Firefox's common stock during the period from July 20, 1995 to
January 2, 1996. The amended complaint again alleged claims for violations of
Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder and
sought relief in the form described above. Specifically, the amended complaint
alleged that defendants knew allegedly material adverse non-public information
about Firefox's financial results and business conditions which allegedly was
not disclosed, that they improperly directed that certain sales and revenues be
recognized and failed to keep adequate reserves and that they participated in
drafting, reviewing and/or approving allegedly misleading statements, releases,
analysts reports and other public representations, including disclaimers and
warnings of and about Firefox. The amended complaint also alleged that John A.
Kimberley, then an officer and director of Firefox, and Frank Richardson, a
former officer and director of Firefox, were liable as "controlling persons" of
Firefox. In September 1996, Firefox filed a motion to dismiss the amended
complaint on the grounds that the plaintiffs had not met the pleading
requirements of the Private Securities Litigation Reform Act of 1995. On May 8,
1997, the court dismissed the amended complaint on such grounds, without leave
to amend. Plaintiffs have appealed the dismissal 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of its security
holders during the fourth quarter of 1997 through the solicitation of proxies or
otherwise.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following is a list of the Company's executive officers as of March
27, 1998:
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NAME AGE POSITION
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Glenn C. Hazard 45 President and Chief Executive Officer and a Director
James A. Tholen 38 Senior Vice President and Chief Financial and
Operating Officer
Douglas F. Flood 40 Senior Vice President of Business Development and
Planning, General Counsel and Clerk
Dennis Leibl 54 Senior Vice President/General Manager
</TABLE>
Glenn C. Hazard has served as President and a director of FTP since
April 1996 and as Chief Executive Officer since October 1996. From April to
October 1996, he also served as Chief Operating Officer. Mr. Hazard was elected
Chairman of the Board in April 1997. From March to November 1995, Mr. Hazard
served as Senior Vice President of Business Transformation of Legent
Corporation, a systems management software company acquired by Computer
Associates in August 1995. Before that, Mr. Hazard held various management
positions with AT&T Corp. and its subsidiaries from 1983 to 1995, including
Senior Vice President of Business Transformation of AT&T Corp. from June 1994 to
March 1995, Vice President of Business Process Reengineering of AT&T Global
Information Systems from September 1993 to June 1994 and Vice President of
Process Reengineering of AT&T Global Business Communications Systems from August
1992 to September 1993.
James A. Tholen has served as Senior Vice President and Chief Financial
Officer of FTP since April 1997 and as Chief Operating Officer since August
1997. Before joining FTP, Mr. Tholen served from September 1995 to January 1997
as Senior Vice President and Chief Financial Officer of Compucare Corporation, a
healthcare software applications company, from August 1993 to August 1995 first
as Vice President, Corporate Development then as Vice President of Strategy and
Corporate Development of Legent Corporation, systems management software company
acquired by Computer Associates in August 1995, and from 1991 to July 1993 as
Vice President of Finance and Planning for Systems Center, Inc., a systems
management software company acquired by Sterling Software in July 1993.
Douglas F. Flood joined FTP as General Counsel in June 1993. In June
1994, he was elected Clerk of FTP, in January 1995 he became Vice President, in
August 1995 he was promoted to Senior Vice President of Administration and in
February 1996 he became Senior Vice President of Business Development and
Planning. From 1991 to June 1993, he practiced law at Fish & Richardson,
concentrating in the areas of licensing and copyright.
Dennis Leibl joined FTP in June 1997 as Senior Vice President/General
Manager of FTP's former VIP Network Applications Business Unit and has served as
Senior Vice President/General Manager since the Company combined its business
units in December 1997. Before joining FTP, Mr. Leibl served as Vice President
of Sales, Service and Support of Vignette Corporation, a developer of web site
software tools, from December 1996 to April 1997, as Vice President of Sales for
Ampex Corporation, a data storage company, from January 1995 to July 1996, and
as Worldwide Vice President of Sales of Legato Systems, Inc., a data storage
software company, from October 1989 to January 1995.
-9-
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock, $.01 par value ("Common Stock"), is traded
on the Nasdaq National Market under the symbol "FTPS". The following table shows
the high and low sales price per share for the Common Stock, as quoted on the
Nasdaq National Market, for each quarter since January 1, 1996:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996:
First Quarter ..................................................... $ 29.375 $ 10.375
Second Quarter .................................................... 14.375 7.625
Third Quarter ..................................................... 9.50 5.875
Fourth Quarter .................................................... 8.625 4.875
1997:
First Quarter ..................................................... $ 8.375 $ 5.4375
Second Quarter .................................................... 6.375 4.25
Third Quarter ..................................................... 5.00 3.50
Fourth Quarter .................................................... 4.1875 1.50
1998:
First Quarter (through March 20, 1998) ............................ $ 3.125 $ 1.625
</TABLE>
The last sales price of the Common Stock as reported on the Nasdaq
National Market on March 20, 1998 was $3.0625 per share. As of March 20, 1998,
there were approximately 420 record holders of the Common Stock and
approximately 16,000 beneficial holders of the Common Stock.
The Company has not paid any cash dividends on its Common Stock since
1992 and does not intend to pay any cash dividends on its Common Stock in the
foreseeable future.
The Company did not issue any securities during 1997 that were not
registered under the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is certain selected financial data of the Company for
each of the five years in the period ended December 31, 1997 and as of December
31, 1997, 1996, 1995, 1994 and 1993 (in thousands, except per share data). The
following statement of operations data for the years ended December 31, 1997,
1996 and 1995 and balance sheet data as of December 31, 1997 and 1996 were
derived from the financial statements of the Company for and as of such dates
included under Item 8 of this Report. The following statement of operations data
for the years ended December 31, 1994 and 1993 and balance sheet data as of
December 31, 1995, 1994 and 1993 were derived from the consolidated financial
statements of the Company for and as of such dates that are not included in this
Report. The following data should be read in conjunction with "Management's
Discussion and Analysis
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<PAGE> 13
of Financial Condition and Results of Operations" below and the Company's
consolidated financial statements and the notes related thereto included under
Item 8 of this Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- -------- ------- -------
STATEMENT OF OPERATIONS DATA(1):
<S> <C> <C> <C> <C> <C>
Total revenue $ 67,734 $ 101,091 $128,815 $92,180 $57,616
Income (loss) from continuing (57,816) (43,778) 29,942 24,898 15,653
operations(2)
Net income (loss) (56,599) (77,577) 24,634 22,975 16,324
Income (loss) per share from continuing
operations:
Basic $ (1.71) $ (1.46) $ 1.19 $ 1.11 $ .85
Diluted (1.71) (1.46) 1.06 .87 .57
Net income (loss) per share:
Basic $ (1.67) $ (2.59) $ .98 $ 1.03 $ .89
Diluted (1.67) (2.59) .87 .80 .62
Weighted average common and common
equivalent shares outstanding:
Basic 33,842 29,896 25,158 22,417 18,432
Diluted 33,842 29,896 28,245 28,665 26,314
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital $43,874 $ 54,780 $ 88,785 $ 53,053 $69,242
Total assets(1) 97,475 158,908 189,629 127,368 83,711
Total liabilities 21,956 27,631 24,821 14,684 7,633
Stockholders' equity 75,519 131,277 164,808 112,684 76,078
</TABLE>
- --------------
(1) During September 1996, the Company announced a formal plan to spin off,
through the sale to third parties, certain lines of business and to
discontinue selected product lines. Accordingly, the Company's consolidated
financial statements, and all prior periods presented, have been restated
to report separately the net assets and operating results of the
discontinued operations. See Note D of the Notes to Consolidated Financial
Statements included under Item 8 of this Report.
(2) Product development expenses for 1996 included a charge of approximately
$37.9 million for certain acquired in-process technology related to the
acquisition of Firefox. See Note D of the Notes to Consolidated Financial
Statements included under Item 8 of this Report.
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<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis provides information that
management of FTP 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 audited consolidated financial statements and the
related notes included below under Item 8 of this Report.
FORWARD-LOOKING STATEMENTS IN THIS SECTION AND ELSEWHERE IN THIS REPORT
ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT FOR A VARIETY OF
REASONS. THESE REASONS INCLUDE, BUT ARE NOT LIMITED TO, COMPETITION, COMPETITIVE
PRICING PRESSURES, TECHNOLOGICAL AND OTHER MARKET CHANGES, THE EFFECTS OF THE
COMPANY'S 1997 RESTRUCTURINGS DESCRIBED BELOW, DEPENDENCE ON NEW PRODUCTS,
DISTRIBUTION RISKS, CHANGES IN PERSONNEL AND OTHER RISKS THAT ARE OUTLINED BELOW
AND IN APPENDIX A, "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 $.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 charge included costs similar to
those incurred in connection with the third quarter restructuring.
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<PAGE> 15
The following summarizes the charges, the related write-offs and cash
paid in connection with the July and December 1997 restructurings.
<TABLE>
<CAPTION>
Severance Excess Excess
Payments Facilities Fixed Assets Other Total
-------- ---------- ------------ ----- -----
<S> <C> <C> <C> <C> <C>
1997 restructuring charges $ 7,391 $ 3,087 $ 6,871 $ 981 $ 18,330
Noncash write-offs -- -- (7,779) -- (7,779)
Cash paid (6,168) (1,553) -- (86) (7,807)
Reclassifications (457) 176 908 (627) 0
------- ------- ------- ----- --------
Accrued restructuring charge
at December 31, 1997 $ 766 $ 1,710 $ 0 $ 268 $ 2,744
======= ======= ======= ===== ========
</TABLE>
In May 1996, FTP effected a reorganization and took certain
cost-cutting measures that included a reduction of approximately 10% in the
number of FTP's full-time employees at that time.
In 1995 and 1996, the Company explored technology opportunities in the
then-emerging collaborative and Internet software markets. During 1996, FTP
acquired the following for an aggregate net cash purchase price of approximately
$28.7 million: the Mariner Internet software product line of Network Computing
Devices, Inc.; substantially all of the assets of HyperDesk Corporation,
including its collaborative GroupWorks software product; and all of the
outstanding stock of Campbell Services, Inc., the developer of OnTime, a
scheduling software product. The Company also acquired a line of document viewer
and conversion products from Keyword Office Technologies Ltd. in early 1995 for
a net cash purchase price of approximately $2.4 million. The majority of the
purchase price for these acquisitions was attributable to incomplete technology
and charged to product development expense at the time of the respective
acquisitions, which charges are reported in discontinued operations as discussed
below.
In September 1996, the Company announced a formal plan to spin off,
through the sale to third parties, its collaborative lines of business and to
discontinue other selected product lines, including those described in the
preceding paragraph. Accordingly, these operations are treated as discontinued
operations in the Company's consolidated financial statements included under
Item 8 of this Report, and the Company recorded a $4.8 million charge in the
third quarter of 1996 to write down the related assets to estimated net
realizable values. The Company completed the dispositions of its discontinued
operations during 1997; the actual aggregate net loss from such dispositions was
approximately $3.6 million (this actual loss being approximately $1.2 million
lower than originally estimated).
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.
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<PAGE> 16
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 $67.7 million for 1997 from
approximately $101.1 million for 1996 and approximately $128.8 million for 1995.
Product revenue decreased to approximately $50.6 million for 1997 from
approximately $84.6 million for 1996 and $115.7 million for 1995. Service
revenue increased to approximately $17.1 million for 1997 from approximately
$16.5 million for 1996 and $13.1 million for 1995. As a percentage of total
revenue, product revenue decreased to approximately 75% for 1997 from
approximately 84% for 1996 and 90% for 1995, while service revenue increased to
approximately 25% for 1997 from approximately 16% for 1996 and 10% for 1995.
PRODUCT REVENUE. Product revenue decreased in 1997 compared to 1996 and
in 1996 compared to 1995 primarily as a result of decreases in sales volumes
over such periods, a decrease in sales prices for certain of the Company's
products during the latter half of 1996 and early 1997, and longer product sales
cycles during 1996, all of which factors the Company believes 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 products during 1996 and 16-bit Windows-based products during 1996 and
1997. The Company also believes that disruption of the business activities of
the Company resulting from its July 1997 reorganization, 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,
contributed to the decrease in sales for 1997. See also "-- Factors Affecting
Revenue" below. Product revenue for 1997 was lower than expected by the Company
due in significant part to lower than expected sales (i) in the Asia Pacific
region for the reasons described under "-- International Revenue" below, (ii) to
the U.S. government, primarily as a result of the increase in competition in the
networking applications business and turnover in the Company's government sales
force, and (iii) from the Company's gateway and server products, attributable in
significant part to the factors described above as well as difficulties in the
integration of the organizations of the Company and Firefox Communications Inc.
("Firefox"), which the Company acquired in July 1996.
SERVICE REVENUE. The dollar increase in service revenue in 1997
compared to 1996 is primarily attributable to growth during 1996 in FTP's
installed product base from which such revenues are obtained. The dollar
increase in service revenue in 1996 compared to 1995 was primarily due to growth
in FTP's installed product base over these periods. While service revenue
increased by $.6 million in 1997 compared to 1996, service revenue for 1997 was
lower than expected by the Company primarily as a result of adverse customer
reaction to a new support program offered by the Company during the second
quarter of 1997, the disruption in the business activities of the Company
resulting from the Company's July 1997 reorganization, a decrease in the
Company's installed 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
-14-
<PAGE> 17
Company on such sales) beginning in the third quarter of 1997. The Company
expects that service revenue will continue to decrease in 1998 compared to 1997
dollar amounts as a result of some or all of these factors. See "-- Factors
Affecting Revenue" below.
INTERNATIONAL REVENUE. International sales consist of export sales,
primarily to customers in Europe, Asia Pacific, Latin America and Canada.
International sales of approximately $27.9 million, $42.6 million and $59.2
million accounted for approximately 41%, 42% and 46% of the Company's total
revenue for 1997, 1996 and 1995, respectively. The dollar decrease in 1997 is
attributable to the same factors that results in the decrease in total product
revenue described above under "-- Product Revenue," which particularly affected
sales to customers in Europe during the second half of 1997 and sales to
customers in the Asia Pacific region throughout 1997. Also contributing to the
decrease in Asia Pacific sales were a delay in the localization of certain of
the Company's products and a period of adverse foreign currency exchange rate
changes which resulted in a relative increase in the price of the Company's
products. The dollar decrease in 1996 compared to 1995 was primarily due to the
same factors that resulted in the decrease in product revenue over such periods
described above under "--Product Revenue." International sales as a percentage
of total revenue decreased by 4% in 1996 compared to 1995 primarily as a result
of the same factors that resulted in the decrease in product revenue over such
periods as 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. The
Company intends to begin selling certain of its products in Europe directly from
the U.K. commencing in mid-1998; however, the Company anticipates that
substantially all of such sales will continue to be paid in U.S. dollars. See
"Quantitative and Qualitative Disclosure About Market Risk" below.
FACTORS AFFECTING REVENUE. As indicated above, the Company has
experienced a decrease in sales volumes since 1995 and a decrease in sales
prices for certain of the Company's products during 1996 and early 1997, all of
which the Company believes are primarily attributable to increased competition,
particularly the increase during 1997 in competition in the networking
applications software market, as well as to technological changes in the market.
Looking forward, the Company anticipates that some or all of these trends will
continue, and believes that the Company's future is substantially dependent on
the 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, such as the Company's agreement
with IBM described above under "Business -- Sales and Marketing." 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.
-15-
<PAGE> 18
The July 1997 restructuring of the Company described above required the
dedication of management and other resources that temporarily detracted from
attention to the daily business of the Company, which caused a disruption of the
business activities and a loss of momentum in the business of the Company and,
as a result, had an adverse effect on the Company's results of operations for
1997.
The number of the Company's employees decreased significantly during
1997, both prior to and as a result of the Company's July 1997 restructuring.
The Company believes this decrease, which resulted in significant turnover in
the Company's U.S. sales force, may also have contributed to the decline in the
Company's operating results for 1997. The Company experienced a substantial loss
of personnel during 1996 and the first quarter of 1997, which the Company
believes was attributable to increased competition for qualified personnel in
the industry, the decline in the Company's financial results and the market
prices of its common stock during 1996 and, to a lesser extent, the integration
of Firefox. In connection with the 1997 restructurings, the Company reduced its
workforce by approximately 311 employees in total. The Company has experienced
additional attrition during late 1997 and the first quarter of 1998. The
Company's ability to maintain or increase revenue will depend in part on its
ability to hire, train and retain qualified personnel.
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 1997 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 Appendix A, "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 77%, 92% and 94% in 1997, 1996 and 1995, respectively. The
decrease in 1997 compared to 1996 resulted primarily from the decrease in
product revenue described under "-- Product Revenue" above as well as an
increase in costs associated with the amortization of technologies licensed or
purchased in 1995 and 1996 and an increase in costs associated with the
localization of certain of the Company's products. The decrease in 1996 compared
to 1995 resulted primarily from an increase in costs associated with the
amortization of technologies licensed or purchased in 1995 and 1996 and the
decrease in revenues during 1996.
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<PAGE> 19
Amortization expense was approximately $5.2 million, $2.7 million and $2.2
million in 1997, 1996 and 1995, respectively. The increase in amortization
expense in 1997 compared to 1996 was primarily due to the increase in purchased
technology resulting from FTP's acquisition of Firefox in July 1996.
Service gross margin as a percentage of service revenue increased to
approximately 44% in 1997 from approximately 41% in 1996 and approximately 30%
in 1995. The increase in 1997 compared to 1996 was primarily due to a decrease
in technical support personnel resulting from the Company's July 1997
restructuring and workforce reduction. The increase in 1996 compared to 1995 was
primarily due to a higher rate of increase over such periods in FTP's installed
product base compared to the rate of increase over such periods in the cost of
providing such services.
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 $45.2 million, $46.9
million and $36.6 million in 1997, 1996 and 1995, respectively. Such expenses as
a percentage of total revenue were approximately 67%, 46% and 28% in 1997, 1996
and 1995, respectively. The $1.7 million decrease in 1997 compared to 1996
reflects the reduction in expense resulting from the Company's July 1997
reorganization and workforce reduction, as well as a decrease in the levels of
the Company's advertising, tradeshow and other marketing activities. The
percentage increase over such periods was primarily due to the decrease in total
revenue over such periods described above under "--Total Revenue."
The $10.3 million increase in sales and marketing expenses in 1996
compared to 1995 was primarily the result of (i) an increase in compensation
expenses associated with an increase in the number of sales and marketing
employees and an increase in the compensation levels of sales and marketing
employees over such periods and (ii) increases in the levels of advertising,
trade show and international marketing activities over such periods. The
percentage increase over such periods was primarily due to such factors as well
as to the decrease in revenue over such periods described above under "-- Total
Revenue."
FTP expects that sales and marketing expenses will decrease in 1998
from 1997 dollar amounts as a result of the Company's 1997 restructurings.
PRODUCT DEVELOPMENT
Product development expenses were approximately $27.0 million, $64.7
million and $22.3 million in 1997, 1996 and 1995, respectively, representing
approximately 40%, 64% and 17% of total revenue for each period, respectively.
The decrease in product development expenses of approximately $37.7
million in 1997 compared to 1996 is attributable to the charge in the third
quarter of 1996 of approximately $37.9 million for acquired in-process
technology related to the July 1996 acquisition of Firefox. Excluding such
charge, product development expenses increased to approximately $27.0 million
for 1997 from approximately $26.8 million for 1996, representing approximately
40% and 26% of total revenue for each period, respectively. The $.2 million
increase in 1997 primarily reflects an increase in
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<PAGE> 20
compensation expense related to an increase in development personnel over the
first six months of 1997 (resulting primarily from the Firefox acquisition), net
of the effect of the workforce reduction effected in connection with the
Company's July 1997 reorganization. The percentage increase over such periods
was primarily due to the decrease in total revenue over such periods described
above under "-- Total Revenue."
The increase in product development expenses of approximately $42.4
million in 1996 compared to 1995 was primarily due to the $37.9 million charge
for acquired in-process technology described above. An increase in compensation
expenses related to an increase in development personnel during 1996 (resulting
in part from the Firefox acquisition), as well as an increase in the use of
outside contractors in connection with new product releases in 1996, in each
case compared to 1995, also contributed to the 1996 increase in product
development expenses. The percentage increase in 1996 compared to 1995
(excluding the charge described above) was primarily due to the decrease in
revenue over such periods and the increase in compensation expenses and the use
of outside contractors described above.
FTP expects that product development expenses will decrease in 1998
from 1997 dollar amounts as a result of the Company's 1997 restructurings.
The Company allocates the purchase price of acquired technologies to
completed technology and in-process technology based upon their respective fair
values. Completed technology that has reached technological feasibility is
valued using a risk adjusted cash flow model under which future cash flows are
discounted, taking into account risks related to existing and future markets and
assessments of the life expectancy of the completed technology. In-process
technology that has not reached technological feasibility and that has no
alternative future use is valued using the same method. Expected future cash
flows associated with in-process technology are discounted considering risks and
uncertainties related to the viability of and to the potential changes in future
target markets and to the completion of the products expected to ultimately be
marketed by the Company. Amounts charged to product development expense for
in-process technology either are not fully deductible in the same period or are
not deductible for tax purposes.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were approximately $16.3 million,
$19.8 million and $12.7 million in 1997, 1996 and 1995, respectively,
representing approximately 24%, 20% and 10% of total revenue for each period,
respectively. The $3.5 million decrease in 1997 was primarily the result of the
reduction in expenses resulting from the Company's July 1997 reorganization and
workforce reduction, partially offset by an increase in administrative expenses
incurred in 1997 resulting primarily from an increase in general and
administrative personnel over such periods (due primarily to the Firefox
acquisition), and the incurrence in the second quarter of 1996 of approximately
$1.0 million in severance-related expenses related to the Company's May 1996
workforce reduction. The percentage increase over such periods was primarily due
to the decrease in total revenue over such periods described above under
"-- Total Revenue."
The dollar increase in general and administrative expenses in 1996
compared to 1995 was primarily due to expenses relating to an increase in
personnel during 1996 (including the hiring of several senior executive
officers), costs incurred in connection with the defense of the legal
proceedings described under "-- Liquidity and Capital Resources" below and
increased general and administrative
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<PAGE> 21
expenses resulting from the Firefox acquisition. The percentage increase in 1996
compared to 1995 was also due to such factors as well as to the decrease in
revenue over such periods.
FTP expects that general and administrative expenses will decrease in
1998 from 1997 dollar amounts as a result of the Company's 1997 restructurings.
OPERATING INCOME (LOSS)
The Company experienced losses from continuing operations of
approximately $60.3 million and $47.0 million in 1997 and 1996, respectively,
representing approximately 89% and 47% of total revenue for each period,
respectively. Excluding the restructuring charges of $18.3 million in 1997 and
the $37.9 million charge for acquired in-process technology in 1996, the Company
experienced losses from continuing operations of approximately $42.0 million and
$9.1 million in 1997 and 1996, respectively, representing approximately 62% and
9% of total revenue for each period, respectively. The Company had income from
continuing operations of approximately $41.4 million in 1995, representing
approximately 32% of total revenue for such year. These incremental losses were
primarily due to the decrease in total revenue over such periods described under
above "-- Total Revenue."
INVESTMENT AND OTHER INCOME, NET
Investment and other income, net, was approximately $3.6 million, $4.3
million and $6.2 million for 1997, 1996 and 1995, respectively. The decreases in
investment income over these periods was primarily due to a reduction in the
Company's cash and investment balances over such periods resulting from
operating losses in 1997 and the investment of cash in the 1996 acquisitions
described above under "-- Recent Developments." 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 $1.2 million, $1.0
million and $17.6 million for 1997, 1996 and 1995, respectively. The Company's
effective tax rate for 1997, 1996 and 1995 was 2.1%, 2.4% and 37.0%,
respectively. Due to the uncertainty as to when the deferred tax assets may be
realized, the Company has recorded a valuation allowance for all tax assets in
excess of amounts available to be recovered pursuant to tax loss carrybacks for
the years ended December 31, 1997 and 1996. The difference between the statutory
rate and the effective rate for 1995 resulted primarily from the benefits
received from the Company's foreign sales corporation and research and
experimentation credits.
DISCONTINUED OPERATIONS
In September 1996, the Company announced a formal plan to spin off,
through the sale to third parties, its collaborative lines of business and to
discontinue other selected product lines. Accordingly, these operations are
treated as discontinued operations in the accompanying financial statements.
Such financial statements have been restated to report separately in all periods
presented the net assets and operating results of the discontinued operations.
Net assets of discontinued operations consist primarily of cash, receivables,
purchased software and fixed assets less accounts payable and accrued expenses.
As a result, the Company recorded a $4.8 million charge to write down the
related assets to estimated net realizable value at September 30, 1996. The
Company completed the dispositions of its discontinued
-19-
<PAGE> 22
operations during 1997; the aggregate net loss from such dispositions was
approximately $3.6 million (this actual loss being approximately $1.2 million
lower than originally estimated).
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had an aggregate of approximately
$71.6 million in cash and cash equivalents, short-term investments and long-term
investments. Of this amount, approximately $37.6 million was invested primarily
in highly liquid investments with original maturities of three months or less,
approximately $14.2 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 $19.8 million was invested in U.S. government
obligations, commercial paper and municipal obligations with maturities of
greater than one year. Cash and investments reflect approximately $44.8 million
of the net proceeds from FTP's 1993 and 1994 public offerings, and approximately
$7.5 million from the dispositions of discontinued operations during 1997.
The Company used approximately $30.9 million of cash for continuing
operations in 1997 and generated funds from continuing operations of
approximately $23.5 million and $35.1 million in 1996 and 1995, respectively. Of
the $30.9 million of cash used during 1997, approximately $7.8 million was used
in connection with the Company's July 1997 restructuring. See Note C of the
Notes to Consolidated Financial Statements included below. The Company made
capital expenditures of approximately $3.5 million, $9.1 million and $11.9
million in 1997, 1996 and 1995, respectively. Included in the capital
expenditures for 1997, 1996 and 1995 were payments for acquired technologies and
related assets in the amounts of approximately $.8 million, $5.6 million and
$2.0 million, respectively.
Accounts receivable, net, decreased to approximately $8.3 million at
December 31, 1997 from approximately $16.6 million at December 31, 1996. This
decrease is primarily attributable to the decrease in total revenue during 1997
described above under "-- Total Revenue."
With respect to Year 2000 compliance by the software products used in
the Company's internal software systems, the vendor of the Company's financial
and accounting systems has advised the Company that the current version of such
vendor's product is Year 2000 compliant and that the Company will receive such
version at no additional cost under such vendor's maintenance program. The
Company currently intends to install such version during the third quarter of
1998. The Company believes that its technical support system, being the
Company's other primary internal software system, is Year 2000 compliant.
Accordingly, the Company does not anticipate that it will incur any material
costs in connection with addressing Year 2000 compliance of its internal
systems.
With respect to Year 2000 compliance by the software products sold by
the Company, certain of such products are currently Year 2000 compliant, and the
Company is testing its other products for Year 2000 compliance and believes such
testing will be substantially complete by mid-summer of 1998. The Company does
not anticipate that it will incur any material costs in connection therewith.
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
-20-
<PAGE> 23
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 "Legal Proceedings"
above and Note J to the Company's consolidated financial statements included
below under Item 8. 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.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about
Segments of an Enterprise." 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. The Company will
adopt the provisions of SFAS No. 130 for its fiscal year ending December 31,
1998; however, management has not yet evaluated the effects of this change on
its reporting of comprehensive income. 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 will adopt SOP 97-2 for its fiscal year ending
December 31, 1998 and does not expect such adoption to have any material impact
on its revenue recognition policies.
-21-
<PAGE> 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
In January 1997, the Securities and Exchange Commission issued
Financial Reporting Release No. 48, which expands disclosure requirements for
certain derivative and other financial instruments. The Company adopted the
sensitivity analysis approach effective in the fourth quarter of 1997. The
sensitivity approach presents the hypothetical change in fair value resulting
from hypothetical changes in market rates.
As a result of the Company's worldwide operations, the Company faces
exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse effect on the Company's financial results in the future.
Historically, the Company's primary exposures have been related to local
currency operating expenses in Europe and Asia Pacific, where the Company sells
primarily in U.S. dollars. The Company generally does not hedge anticipated
foreign currency cash flows.
The carrying amounts reflected in the accompanying consolidated balance
sheets for cash and cash equivalents, accounts receivable and accounts payable
approximate fair value due to the short maturities of these instruments. The
fair values represent estimates of possible value that may not be realized in
the future.
The Company maintains investment portfolio holdings of various issuers,
types and maturities. These securities are generally classified as available for
sale, and consequently are recorded on the balance sheet of the Company at fair
value, with unrealized gains or losses reported as a separate component of
stockholders' equity. The sensitivity analysis assumes an instantaneous 10% move
in interest rates from their levels at December 31, 1997, with all other
variables (including equity prices and foreign exchange rates) held constant. A
10% increase in market interest rates would result in a $3.4 million decrease in
the fair value of the Company's investment portfolio. Management does not
anticipate that an increase in interest rates would have a material adverse
effect on the Company's income. As a result, the Company does not currently
hedge these interest rate exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FTP Software, Inc.:
We have audited the accompanying consolidated balance sheets of FTP
Software, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FTP
Software, Inc. as of December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 27, 1998
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<PAGE> 26
FTP SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37,569 $ 22,036
Short-term investments 14,234 29,026
Accounts receivable, net of allowance for doubtful accounts
of $1,100 and $1,300 for 1997 and 1996, respectively 8,282 16,586
Prepaid expenses and other current assets 2,580 4,430
Refundable income taxes 3,165 3,826
Deferred income taxes -- 1,244
Net assets of discontinued operations -- 5,263
--------- ---------
Total current assets 65,830 82,411
Property and equipment, net 8,301 20,734
Purchased software, net 2,621 6,962
Investments 19,767 47,971
Other assets 956 830
--------- ---------
Total assets $ 97,475 $ 158,908
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 10,976 $ 12,700
Income taxes payable 1,613 873
Accrued employee compensation and benefits 3,652 4,000
Deferred revenue 5,715 10,058
--------- ---------
Total current liabilities 21,956 27,631
--------- ---------
Commitments and contingencies (Note J)
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued and outstanding -- --
Common stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
33,973,140 and 33,646,203 shares in 1997
and 1996, respectively 339 336
Additional paid-in capital 136,792 136,151
Accumulated deficit (62,046) (5,447)
Equity adjustments 434 237
--------- ---------
Total stockholders' equity 75,519 131,277
--------- ---------
Total liabilities and stockholders' equity $ 97,475 $ 158,908
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-24-
<PAGE> 27
FTP SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
Product revenue $ 50,639 $ 84,579 $ 115,715
Service revenue 17,095 16,512 13,100
--------- --------- ---------
Total revenue 67,734 101,091 128,815
--------- --------- ---------
Cost of revenue:
Product cost 11,624 6,995 6,725
Service cost 9,505 9,801 9,127
--------- --------- ---------
Total cost of revenue 21,129 16,796 15,852
--------- --------- ---------
Gross margin 46,605 84,295 112,963
--------- --------- ---------
Operating expenses:
Sales and marketing 45,196 46,896 36,593
Product development 27,044 64,652 22,298
General and administrative 16,289 19,782 12,699
Restructuring charges 18,330 -- --
--------- --------- ---------
Total operating expenses 106,859 131,330 71,590
--------- --------- ---------
Operating income (loss) (60,254) (47,035) 41,373
Investment income 3,646 4,284 6,156
--------- --------- ---------
Income (loss) from continuing operations before
income taxes (56,608) (42,751) 47,529
Provision for income taxes 1,208 1,027 17,587
--------- --------- ---------
Income (loss) from continuing operations (57,816) (43,778) 29,942
Discontinued operations, net of income tax benefits:
Operating loss -- (29,039) (5,308)
Gain on (provision for) disposition 1,217 (4,760) --
--------- --------- ---------
Net income (loss) $ (56,599) $ (77,577) $ 24,634
========= ========= =========
Basic income (loss) per share:
Continuing operations $ (1.71) $ (1.46) $ 1.19
Discontinued operations .04 (1.13) (.21)
========= ========= =========
$ (1.67) $ (2.59) $ .98
========= ========= =========
Weighted average number of basic common and common
equivalent shares outstanding 33,842 29,896 25,158
========= ========= =========
Diluted income (loss) per share:
Continuing operations $ (1.71) $ (1.46) $ 1.06
Discontinued operations .04 (1.13) (.19)
========= ========= =========
$ (1.67) $ (2.59) $ .87
========= ========= =========
Weighted average number of diluted common and
common equivalent shares outstanding 33,842 29,896 28,245
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-25-
<PAGE> 28
FTP SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED FOREIGN NET
ADDITIONAL EARNINGS EXCHANGE UNREALIZED TOTAL
COMMON STOCK PAID-IN (ACCUMULATED TRANSLATION INVESTMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENTS GAINS (LOSSES) EQUITY
------ ------ ------- -------- ----------- -------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 23,344,122 $233 $ 64,955 $ 47,496 -- -- $ 112,684
Issuance of common stock 3,162,607 32 8,852 -- -- -- 8,884
Tax benefit of stock option
activity -- -- 18,800 -- -- -- 18,800
Net income -- -- -- 24,634 -- -- 24,634
Foreign exchange translation
adjustments -- -- -- -- $ 14 -- 14
Net unrealized investment
losses -- -- -- -- -- $(208) (208)
---------- ---- -------- -------- ----- ----- ---------
Balance at December 31, 1995 26,506,729 265 92,607 72,130 14 (208) 164,808
Issuance of common stock 7,139,474 71 43,544 -- -- -- 43,615
Net loss -- -- -- (77,577) -- -- (77,577)
Foreign exchange translation
adjustments -- -- -- -- (425) -- (425)
Net unrealized investment
gains -- -- -- -- -- 856 856
---------- ---- -------- -------- ----- ----- ---------
Balance at December 31, 1996 33,646,203 336 136,151 (5,447) (411) 648 131,277
Issuance of common stock 326,937 3 641 -- -- -- 644
Net loss -- -- -- (56,599) -- -- (56,599)
Foreign exchange translation
adjustments -- -- -- -- 814 -- 814
Net unrealized investment
losses -- -- -- -- -- (617) (617)
---------- ---- -------- -------- ----- ----- ---------
Balance at December 31, 1997 33,973,140 $339 $136,792 $(62,046) $ 403 $ 31 $ 75,519
========== ==== ======== ======== ===== ===== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-26-
<PAGE> 29
FTP SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $(57,816) $(43,778) $ 29,942
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by (used for) operating activities:
Depreciation and amortization 12,064 9,260 6,137
Loss on disposition of property and equipment 693 422 255
Non-cash writeoffs in restructuring charge 7,772 -- --
Provision for doubtful accounts 200 (300) 600
Purchase of in-process technology -- 37,852 --
Amortization of discounts and premiums on investments 66 29 (1,407)
Deferred income taxes 1,244 1,221 (1,324)
Tax benefit of stock option activity -- -- 18,800
Changes in operating assets and liabilities, net of effects
from acquisition of business:
Accounts receivable 8,105 17,184 (14,741)
Prepaid expenses and other current assets 1,850 895 (2,405)
Refundable income taxes 661 1,521 (7,775)
Other assets (126) (376) --
Accounts payable and accrued expenses (1,728) (84) 4,688
Income taxes payable 740 873 (2,044)
Accrued employee compensation and benefits (348) (1,989) 568
Deferred revenue (4,343) 740 3,837
-------- -------- --------
Net cash provided by (used for) continuing operations (30,966) 23,470 35,131
Net cash provided by (used for) discontinued operations 6,382 (4,920) (1,834)
-------- -------- --------
Net cash provided by (used for) operating activities (24,584) 18,550 33,297
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (3,530) (9,072) (11,905)
Maturities (purchase) of investments 42,930 18,900 (7,454)
Acquisition of business, net of cash acquired -- (3,776) --
Other investing activities, net -- (97) 15
-------- -------- --------
Net cash provided by (used for) continuing operations 39,400 5,955 (19,344)
Net cash used for discontinued operations -- (32,809) (2,365)
-------- -------- --------
Net cash provided by (used for) investing activities 39,400 (26,854) (21,709)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 644 1,536 8,884
Principal payments on long-term obligations -- (1,589) (1,142)
-------- -------- --------
Net cash provided by (used for) financing activities 644 (53) 7,742
-------- -------- --------
Effect of exchange rate changes on cash 73 156 11
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 15,533 (8,201) 19,341
Cash and cash equivalents, beginning of year 22,036 30,237 10,896
-------- -------- --------
Cash and cash equivalents, end of year $ 37,569 $ 22,036 $ 30,237
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 527 -- $ 1,952
======== ======== ========
Non-cash financing activities:
Acquisition of business for stock -- $ 42,079 --
Financed purchased software -- -- $ 1,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-27-
<PAGE> 30
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS:
FTP Software, Inc. (the "Company") is engaged in the design,
development, marketing and support of 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.
B. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Revenue Recognition
Revenue is generally recognized from the license of software upon
shipment when collection of the resulting receivable is deemed probable. At the
time the Company recognizes revenue from licensed software products, no
significant vendor or post-contract support obligations remain. Service revenue
includes revenue from support, training and consulting. Payments received in
advance for support contracts are initially recorded as deferred revenue and are
recognized ratably over the term of the contract, typically one year. Revenue
from training and consulting is recognized as the services are performed.
Cash Equivalents
Cash equivalents consist of money market funds, commercial paper and
government obligations with original maturities of three months or less and are
carried at amortized cost, which approximates market value. The Company places
its temporary cash investments in money market investments with high credit
quality financial institutions.
Investments
The Company has established guidelines for credit ratings,
diversification and maturities for its investment portfolio that are intended to
maintain safety and liquidity. The Company's investments are widely diversified,
consisting primarily of investment grade debt securities classified as
available-for-sale. Accordingly, investments are reported at market value with
unrealized holding gains and losses reflected net as a separate component of
stockholders' equity until realized. The cost of short-term investments and
long-term investments is determined on the specific identification method and
the market value is based on quoted market prices.
-28-
<PAGE> 31
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives, ranging from three to
seven years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining term of the lease. Expenditures for
maintenance and repairs are expensed as incurred. Upon retirement or other
disposition of assets, the cost and related accumulated depreciation are
eliminated from the accounts and the resulting gain or loss is included in net
income (loss).
Purchased Software
Purchased software includes acquired technology being amortized, using
the straight-line method, over the assets' estimated remaining useful lives. The
Company evaluates the possible impairment of such long-lived assets whenever
events or circumstances indicate that the carrying value of the assets may not
be recoverable.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the
local currency. Accordingly, assets and liabilities of these operations are
translated at exchange rates in effect at year-end. Income and expense items are
translated at average rates of exchange for the period. Resulting translation
adjustments are accumulated in a separate component of stockholders' equity.
Gains and losses from foreign currency transactions, which are not material, are
included in net income (loss).
Product Development Costs
Costs related to research, design and development of computer software
are charged to product development expense as incurred. The Company capitalizes
eligible software costs incurred after technological feasibility of the product
has been established, which is generally demonstrated by the initial beta
release. The capitalizable costs of internally developed software to date have
not been material. Purchased software of approximately $.8 million, $5.6 million
and $2.0 million was acquired in 1997, 1996 and 1995, respectively. These assets
are being amortized over a one- to four-year period based on the expected useful
lives of the products. Related amortization charges, reflected in cost of
revenue, were approximately $5.2 million, $2.7 million and $2.2 million in 1997,
1996 and 1995, respectively. Accumulated amortization related to these assets
amounted to $9,996 and $4,890 in 1997 and 1996, respectively.
Income Taxes
Deferred income tax assets and liabilities arise from temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that are expected to result in taxable or
deductible amounts in future years. The Company periodically evaluates the
realizability of its deferred tax assets. A valuation allowance against net
deferred tax assets is established if, based on the available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized.
-29-
<PAGE> 32
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Net Income (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," for the year ended December 31, 1997.
This statement requires the presentation of basic and diluted net income per
share. Basic net income per common share is computed using the weighted average
number of common shares outstanding during the period. The Company has restated
all prior period per share presented as required by SFAS No. 128. Diluted net
income per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of stock options. During periods that the Company has
recorded a net loss, dilutive common shares are not included in the computation
as the effect would be anti-dilutive.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
The Company's future results of operations involve a number of risks
and uncertainties. Factors that could affect the Company's future operating
results and cause actual results to vary materially from expectations include,
but are not limited to, competition, competitive pricing pressures,
technological and other market changes, the effects of the Company's 1997
restructurings, dependence on new products, distribution risks and changes in
personnel.
The Company sells its products outside the United States primarily
through a network of resellers in North and South America, Europe, the Middle
East, Canada, Russia and Asia Pacific. In the United States, the Company
distributes its products through multiple channels, including direct sales,
value-added resellers, systems integrators, OEMs and distributors. The Company
performs ongoing credit evaluations of its customers and maintains reserves for
potential credit risk as determined by management. The Company generally
requires no collateral. Accounts receivable are from customers that are
geographically and industry dispersed. No one customer accounted for more than
10% of consolidated revenue for any period presented.
Accounting for Stock-Based Compensation
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," during 1996. This Statement defines a fair value based method of
accounting for stock-based employee compensation and requires that companies
either recognize compensation expense for grants of stock, stock options and
other equity instruments or provide pro forma disclosure of net income (loss)
and net income (loss) per share in the notes to the financial statements as if
such expense had been recognized. The Company has elected to continue measuring
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations and has disclosed
pro forma net loss and net loss per share for 1997 and 1996 as if the fair value
based method of accounting had been
-30-
<PAGE> 33
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
applied. As such, adoption of this Statement had no effect on the Company's
results of operations for 1997 and 1996.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about
Segments of an Enterprise." 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. The Company will
adopt the provisions of SFAS No. 130 for its fiscal year ending December 31,
1998; however, management has not yet evaluated the effects of this change on
its reporting of comprehensive income. 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 will adopt SOP 97-2 for its fiscal year ending
December 31, 1998 and does not expect such adoption to have any material impact
on its revenue recognition policies.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
C. 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
$17.1 million ($.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 all 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 $1.3
million ($.04 per share) in the fourth quarter of 1997. This charge included
costs similar to those
-31-
<PAGE> 34
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
incurred in connection with the third quarter restructuring; management expects
these costs to be 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 (dollars in
thousands):
<TABLE>
<CAPTION>
Severance Excess Excess
Payments Facilities Fixed Assets Other Total
-------- ---------- ------------ ----- -----
<S> <C> <C> <C> <C> <C>
1997 restructuring charges $ 7,391 $ 3,087 $ 6,871 $ 981 $ 18,330
Noncash write-offs -- -- (7,779) -- (7,779)
Cash paid (6,168) (1,553) -- (86) (7,807)
Reclassifications (457) 176 908 (627) 0
------- ------- ------- ----- --------
Accrued restructuring charge
at December 31, 1997 $ 766 $ 1,710 $ 0 $ 268 $ 2,744
======= ======= ======= ===== ========
</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 the excess space arising primarily from the
consolidation of the Company's Massachusetts headquarters and manufacturing
facilities into the Company's North Andover, Massachusetts development offices.
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.
D. ACQUISITIONS AND DISCONTINUED OPERATIONS
During 1997, the Company completed the disposition of its collaborative
lines of business and selected product lines which were identified in 1996 as
not specifically related to the Company's continuing network connectivity
business. The accompanying consolidated financial statements have been restated
to report separately in all periods presented the net assets and operating
results of the discontinued operations. Prior year operating results and all
footnote disclosures have been restated to reflect continuing operations. Net
assets of discontinued operations consisted primarily of purchased software and
fixed assets less accounts payable and accrued expenses. In 1996, the Company
recorded a charge of approximately $4.8 million to write down the related assets
to estimated net realizable values.
In the third quarter of 1997, the Company recorded an additional $2.0
million charge in connection with the termination of a long-term agreement
associated with one of the discontinued lines of business. In the fourth quarter
of 1997, the Company recorded a gain of approximately $3.2 million upon the
completion of the disposition of all related assets.
-32-
<PAGE> 35
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Summary operating results for the discontinued operations (which
include charges of approximately $21.8 million and $1.1 million in 1996 and
1995, respectively, for certain acquired in-process technology) are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
-------- -------
<S> <C> <C>
Revenue $ 9,907 $ 7,561
Gross margin 5,255 5,569
Operating loss before income taxes (31,441) (8,427)
Net loss (33,799) (5,308)
</TABLE>
During 1995 and 1996, the Company made the following acquisitions: in
1995, the Company acquired substantially all of the assets of Keyword Office
Technologies Ltd., a developer of document viewer and conversion software
products, for approximately $2.4 million; and in 1996, the Company acquired the
following for a net cash purchase price of approximately $28.7 million: the
Mariner Internet software product line of Networking Computing Devices, Inc.;
substantially all of the assets of HyperDesk Corporation, including its
collaborative GroupWorks product; and all of the outstanding stock of Campbell
Services, Inc., the developer of OnTime, a scheduling software product. All of
these acquisitions were accounted for as purchases, with the majority of the
purchase price recorded as in-process technology, and are reflected in
discontinued operations.
In July 1996, the Company acquired Firefox Communications Inc.
("Firefox"), a supplier of server-centric departmental and LAN-based IP
solutions and services, for a net purchase price of approximately $61.0 million,
through the merger of a wholly-owned subsidiary of the Company into Firefox (the
"Firefox Merger"). Pursuant to the Firefox Merger, all of the outstanding shares
of the common stock of Firefox were converted into a total of approximately 6.4
million shares of the Company's common stock ("Common Stock") valued at
approximately $40.6 million and approximately $9.1 million in cash. In addition,
outstanding employee stock options to purchase Firefox common stock were
converted into options to purchase approximately 336,000 shares of the Company's
Common Stock, $.01 par value per share ("Common Stock"), valued at approximately
$1.5 million. The Company also incurred acquisition-related costs of
approximately $3.7 million and liabilities treated as assumed totaling
approximately $6.1 million which are included in the net purchase price. The
transaction was accounted for as a purchase. Based upon a valuation of the
assets acquired, approximately $2.6 million was allocated to completed
technology, which was included in purchased software and was fully amortized as
of December 31, 1997; approximately $37.9 million was allocated to in-process
technology and charged to product development expense in 1996; and approximately
$20.5 million was allocated to the remaining assets of Firefox, primarily
short-term investments and accounts receivable. Results of operations include
activity from Firefox since the date of the acquisition.
The unaudited pro forma consolidated results of continuing operations
would have been as follows if the Firefox Merger had occurred on January 1, 1995
(in thousands, except per share amounts):
-33-
<PAGE> 36
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenue $ 109,396 $ 148,583
Net income (loss) (9,243) 29,787
Basic net income (loss) per share $ (.31) $ 1.18
Diluted net income (loss) per share (.31) 1.05
</TABLE>
These unaudited pro forma results are presented for informational
purposes only and include certain adjustments such as additional amortization
expense as a result of purchased software. They do not include the approximately
$37.9 million charge to product development expense for acquired in-process
technology and do not purport to be indicative of the Company's actual results
of operations had the Firefox Merger occurred on January 1, 1995, nor are they
indicative of the Company's results of operations for any future period.
The Company allocates the purchase price of acquired technologies to
completed technology and in-process technology based upon their respective fair
values. Completed technology that has reached technological feasibility is
valued using a risk adjusted cash flow model under which future cash flows are
discounted, taking into account risks related to existing and future markets and
assessments of the life expectancy of completed technology. In-process
technology that has not reached technological feasibility and that has no
alternative future use is valued using the same method. Expected future cash
flows associated with in-process technology are discounted considering risks and
uncertainties related to the viability of and to potential changes in the future
target markets and to the completion of the products expected to be ultimately
marketed by the Company. Amounts charged to product development expense for
in-process technology are either not fully deductible in the same period or are
non-deductible for tax purposes.
E. INVESTMENTS:
Investments consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
MARKET AMORTIZED MARKET AMORTIZED
VALUE COST VALUE COST
--------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
U.S. government obligations $19,502 $19,453 $42,127 $42,707
Corporate obligations 14,499 14,517 18,727 18,822
Municipal obligations -- -- 9,171 9,153
Equity securities -- -- 6,972 5,224
------- ------- ------- -------
$34,001 $33,970 $76,997 $75,906
======= ======= ======= =======
</TABLE>
At December 31, 1997 and 1996, gross unrealized investment gains
amounted to approximately $.1 million and $1.9 million, respectively, and gross
unrealized investment losses amounted to approximately $.1 million and $.8
million, respectively. Proceeds from dispositions of available for sale
securities were approximately $28.1 million and approximately $3.0 million in
1997 and 1996, respectively. These dispositions resulted in gross gains of
approximately $.1 million and gross losses of approximately $.3 million in 1997.
Gross gains and gross losses from such dispositions were not significant in
1996.
-34-
<PAGE> 37
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's investments, at market value based on quoted market
prices, mature as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
YEARS TO MATURITY 1997 1996
---------- ----------
<S> <C> <C>
0-1 $14,234 $29,026
1-5 19,767 41,258
5-10 -- 258
Over 10 -- 6,455
---------- ----------
$34,001 $76,997
========== ==========
</TABLE>
Included in the above table as having 0-1 years to maturity are equity
securities of approximately $7.0 million at December 31, 1996.
F. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Development equipment $ 4,453 $ 7,266
Equipment 9,259 21,164
Furniture and leasehold improvements 4,756 8,784
--------- --------
18,468 37,214
Less accumulated depreciation and amortization (10,167) (16,480)
--------- --------
$ 8,301 $ 20,734
========= ========
</TABLE>
G. PROFIT SHARING RETIREMENT PLAN:
The Company sponsors a profit sharing retirement plan for eligible
employees established under the provisions of Section 401(k) of the Internal
Revenue Code (the "401(k) Plan"), under which participants may defer a portion
of their annual compensation on a pre-tax basis. Contributions by the Company to
the 401(k) Plan are at the discretion of the Company's Board of Directors (the
"Board of Directors") and amounted to approximately $1.0 million, $1.2 million
and $1.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
While the Company expects to continue the 401(k) Plan indefinitely, it
has reserved the right to modify, amend or terminate the plan. In the event of
termination, the entire amount contributed under the 401(k) Plan, at the time of
termination, must be applied to the payment of benefits to the participants or
their beneficiaries.
The Company does not currently offer post-retirement or post-employment
benefits.
-35-
<PAGE> 38
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
H. INCOME TAXES:
The loss from continuing operations before income taxes for the years
ended December 31, 1997 and 1996 for domestic operations was approximately $55.9
million and $40.2 million, respectively, and for foreign operations was
approximately $.7 million and $2.6 million, respectively. The income from
continuing operations before income taxes for the year ended December 31, 1995
for domestic operations was approximately $46.6 million and for foreign
operations was approximately $1.0 million.
The provision for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Current (benefit) provision:
Federal $(1,210) $ (3,252) $ 15,657
State 650 210 2,859
Foreign 523 2,848 395
------- -------- --------
(37) (194) 18,911
------- -------- --------
Deferred (benefit) provision:
Federal 1,210 982 (1,024)
State 35 239 (300)
------- -------- --------
1,245 1,221 (1,324)
------- -------- --------
$ 1,208 $ 1,027 $ 17,587
======= ======== ========
</TABLE>
The losses from discontinued operations resulted in tax benefits of
approximately $2.5 million and $3.1 million in 1996 and 1995, respectively.
There was no tax benefit from discontinued operations in 1997.
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income (loss) from continuing
operations before income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Tax (benefit) at U.S. statutory rate (35.0)% (35.0)% 35.0%
Non-deductible merger-related costs 1.0 31.1 --
Foreign tax -- 4.7 --
Operating loss with no current tax benefit 34.2 1.7 --
State income taxes net of federal tax benefit .7 .6 4.3
Other 1.2 (0.7) (2.3)
------ ------ ------
2.1% 2.4% 37.0%
====== ====== ======
</TABLE>
The current federal and state provisions for income taxes do not
reflect tax savings resulting from deductions associated with the Company's
various stock plans of approximately $18.8 million in 1995, which was credited
to stockholders' equity. There were no tax savings resulting from deductions
associated with these stock plans in 1997 or 1996.
-36-
<PAGE> 39
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of deferred income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Federal tax benefit of net operating loss
carryforward and credits $ 19,456 $ --
State tax benefit of net operating loss
carryforward and credits 5,499 1,616
Depreciation and amortization expense 5,041 1,551
Accounts receivable reserve 1,092 1,259
Employee compensation and benefits accruals 1,607 1,063
Foreign tax benefit of net operating loss carryforward
608 513
Other 634 283
-------- --------
33,937 6,285
Valuation allowance for deferred tax assets (33,483) (2,676)
-------- --------
454 3,609
-------- --------
Deferred tax liabilities:
Depreciation and amortization expense (454) (1,085)
Purchased technology -- (1,008)
Other reserves and liabilities -- (272)
-------- --------
(454) (2,365)
-------- --------
Current deferred income tax assets $ -- $ 1,244
======== ========
</TABLE>
The realization of these deferred tax assets is dependent upon future
earnings in specific tax jurisdictions. Due to the uncertainty as to when the
deferred tax assets may be realized, the Company has recorded a valuation
allowance for all tax assets in excess of amounts available to be recovered
pursuant to tax loss carrybacks for the year ended December 31, 1997. The
Company periodically reviews the need for the valuation allowance and if the
valuation allowance is reduced, the tax benefit will be recorded as a reduction
of the Company's income tax expense except for approximately $1.3 million which
is attributable to stock options and will be credited to additional paid-in
capital when realized.
At December 31, 1997, the Company had a net operating loss carryforward
for federal income tax purposes of approximately $46.3 million expiring at
various dates beginning in 2008 through 2012 and tax credit carryforwards of
approximately $3.7 million which expire in various years beginning in 1998
through 2011. At December 31, 1997, the Company had net operating loss
carryforwards of approximately $53.0 million available to offset future taxable
income in several state jurisdictions expiring at various dates beginning in
2000 through 2012. Similarly, research and experimentation credit carryforwards
for state tax purposes of approximately $.6 million and investment tax credits
of approximately $.1 million were available at December 31, 1997, expiring in
2010. In addition, the Company had a net operating loss of approximately $1.8
million available to offset future taxable income in a foreign jurisdiction with
no expiration.
-37-
<PAGE> 40
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
I. STOCKHOLDERS' EQUITY:
Preferred Stock
The Board of Directors is authorized, subject to any limitations
prescribed by law, to issue up to an aggregate of 5,000,000 shares of the
Company's preferred stock, $.01 par value per share ("Preferred Stock"), with
such powers, designations, preferences and relative, participating, optional or
other special rights and such qualifications, limitations or restrictions
thereof, as shall be determined by the Board of Directors in a resolution or
resolutions providing for the issuance of such Preferred Stock.
On December 1, 1995, pursuant to the shareholder rights plan described
below, the Board of Directors designated 500,000 shares of Preferred Stock as
Junior Preferred Stock, $.01 par value per share ("Junior Preferred Stock").
Dividends accrue on the Junior Preferred Stock at a quarterly rate equal to the
greater of $1.00 or, subject to adjustment, 100 times the aggregate per share
amount of all dividends paid during the quarter on the Common Stock. The Junior
Preferred Stock carries a liquidation preference of $100 per share, is
redeemable, and entitles the holder to 100 votes per share on all matters
submitted to a vote of the Company's stockholders. The Company has not issued
any shares of Junior Preferred Stock.
Shareholder Rights Plan
On December 1, 1995, the Company adopted a shareholder rights plan (the
"Rights Plan") whereby each share of Common Stock issued after December 8, 1995
will have an attached right which, when exercisable, will entitle the holder to
purchase 1/100th of a share of Junior Preferred Stock at a price of $150 (the
"Rights"). Additionally, the Board of Directors declared a dividend of one Right
for each share of Common Stock outstanding on December 8, 1995.
The Rights become exercisable if a person acquires or announces a
tender or exchange offer for 15% or more of the outstanding Common Stock. The
Rights Plan also provides that if a person (an "Acquiring Person") acquires or
obtains the right to acquire 15% or more of the outstanding Common Stock (other
than pursuant to certain approved offers), each of the Rights (other than the
Rights held by the Acquiring Person) will entitle the holder to purchase shares
of Common Stock having a market value of twice the exercise price of the Rights.
In addition, if the Company is involved in a merger or other business
combination with another person in which it is not the surviving corporation or
in connection with which the Common Stock is changed or converted into
securities of any other person or other property, or if the Company sells or
transfers 25% or more of its assets or earning power to another person, each
Right that has not previously been exercised will entitle its holder to purchase
shares of the common stock of such other person having a market value of twice
the exercise price of the Right.
In November 1996, the Company amended the Rights Plan to permit Kopp
Investment Advisors, Inc. and certain of its affiliates (but not any of their
transferees) to acquire up to 6,722,400 shares of Common Stock (approximately
19.9% of the outstanding shares of Common Stock as of the date of such
amendment) without triggering the exercisability of the Rights.
The Board of Directors may redeem the Rights at any time prior to their
expiration on December 1, 2005 at a redemption price of $.01 for each of the
Rights. The Company has reserved 500,000 shares of Junior Preferred Stock for
issuance upon exercise of the Rights.
-38-
<PAGE> 41
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock Option Plans
In January 1987, the Company adopted the FTP Software, Inc. Stock
Option Plan (the "1987 Option Plan"). Under the 1987 Option Plan, as amended,
the Company had the right to grant to certain employees either incentive or
non-qualified stock options to purchase up to 26,400,000 shares of Common Stock
vesting over four years. The exercise price of each option could not be less
than the fair market value of Common Stock on the date of grant, as determined
by the Board of Directors, and the term of each option could not exceed 10
years. This plan terminated in January 1997; as a result, no additional grants
may be made under this plan.
In January 1997, the Company adopted the FTP Software, Inc. 1997
Employee Equity Incentive Plan. Under this plan, the Company has the right to
grant to certain employees non-qualified stock options, stock appreciation
rights, restricted stock and unrestricted stock. The aggregate maximum number of
shares of Common Stock that may be delivered under this plan is 2,780,000 plus
the number of shares subject to options granted under the 1987 Option Plan that
terminate unexercised after January 20, 1997. As of December 31, 1997, the
maximum number of shares of Common Stock deliverable under this plan was
5,812,740. The exercise price of the options may not be less than the fair
market value of the Common Stock on the date of grant, as determined by the
Board of Directors, and the term of each option may not exceed 10 years. Options
are exercisable to the extent vested. Vesting generally occurs within three
years from the date of the grant.
In August 1996, the Company adopted the FTP Software, Inc. 1996
Executive Equity Incentive Plan, which enables the Company to grant either
incentive or non-qualified stock options, stock appreciation rights, restricted
stock and unrestricted stock to its executive officers. The aggregate maximum
number of shares of Common Stock that may be delivered under this plan is
1,500,000. The exercise price of the options may not be less than the fair
market value of the Common Stock on the date of the grant, as determined by the
Board of Directors, and the term of each option may not exceed 10 years. The
options vest over various dates within three to four years from the date of the
grant.
During 1996, the Company offered its employees (other than executive
officers) the opportunity to exchange each stock option granted during 1994,
1995 and 1996 for a new option covering 50% of the number of shares of Common
Stock covered by the original option, having a new exercise price fixed at the
date of exchange and otherwise having the same or similar terms as the original
option. During the option exchange offer period, options to purchase
approximately 2,130,000 shares of Common Stock at exercise prices ranging from
$9.50 to $31.75 per share were exchanged for options to purchase approximately
1,065,000 shares of Common Stock at exercise prices ranging from $7.25 to $9.063
per share.
In September 1993, the Company adopted the 1993 Non-Employee Directors'
Stock Option Plan, which provides for the automatic grant of options upon the
election or re-election of each non- employee director and for discretionary
option grants to such directors. A maximum of 500,000 shares of Common Stock may
be issued under this plan. The exercise price of each option may not be less
than the fair market value of Common Stock on the date of the grant, as
determined by the Board of Directors, and the term of each option may not exceed
10 years. The original automatic grant provisions generally provided for the
grant of an option to purchase 30,000 shares of Common Stock upon the election
or re-
-39-
<PAGE> 42
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
election of such a director, vesting over three years. As amended in December
1997, this plan now generally provides for the automatic grant of an option to
purchase 20,000 shares upon the election or re-election of a non-employee
director, vesting over three years, and the automatic grant of an additional
option to purchase 10,000 shares of Common Stock on each of the first and second
anniversaries of such election or re-election, provided such director is still
serving as such, vesting in full upon grant.
Prior to the Company's acquisition of Firefox, Firefox granted options
to certain of its employees under the Firefox 1994 Share Option Scheme, prior to
Firefox's initial public offering. Options granted under that plan were
generally scheduled to vest over three years and were required to be exercised
no later than seven years from the date of grant. Pursuant to the Firefox
Merger, each option outstanding under this plan was converted into an option to
purchase shares of Common Stock at a new exercise price determined in accordance
with the merger agreement. In addition, each optionholder had the right to have
the Company assume the holder's converted options, in which case the converted
options would otherwise continue on the same terms and conditions that applied
prior to the conversion of the options. If a holder chose not to have the
Company assume a converted option, the converted option became exercisable in
full for a period of six months beginning on July 22, 1996 (the closing date of
the Firefox Merger) and ending on January 22, 1997.
Prior to the Company's acquisition of Firefox, Firefox also maintained
the Firefox 1995 Stock Option Plan. This plan provided for the grant of
incentive stock options and non-qualified stock options at an exercise price not
less than 100% and 85%, respectively, of the fair market value of Firefox's
common stock at the date of grant. Options granted under this plan were
generally scheduled to vest over four years and were required to be exercised no
later than 10 years from the date of grant. Pursuant to the Firefox Merger, each
option outstanding under this plan was automatically assumed by the Company and
converted into an option to purchase shares of Common Stock at a new exercise
price determined in accordance with the merger agreement, but otherwise
continued on the same terms and conditions that applied prior to the conversion
of the options. Holders of options granted under this plan had the opportunity
to participate in the option exchange offer described above.
Stock option activity under the Company's various stock option plans is
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding, January 1, 1995 7,445,029 $ 7.21
Granted 1,754,286 30.59
Exercised (3,137,635) 2.71
Canceled (1,795,361) 6.25
----------
Outstanding, December 31, 1995 4,266,319 20.54
Granted 5,414,978 9.60
Converted Firefox options 336,424 5.44
Exercised (703,332) 1.80
Canceled (3,759,520) 22.29
----------
Outstanding, December 31, 1996 5,554,869 10.16
Granted 5,328,003 4.06
Exercised (297,270) 1.76
Canceled (3,933,873) 10.13
----------
Outstanding, December 31, 1997 6,651,729 $ 5.67
==========
</TABLE>
-40-
<PAGE> 43
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Information about stock options outstanding at December 31, 1997 is
summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
- ---------------------------------------------------------------------- --------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED-
CONTRACTUAL WEIGHTED- AVERAGE
RANGE OF EXERCISE LIFE AVERAGE EXERCISE EXERCISE
PRICES SHARES (IN YEARS) PRICE SHARES PRICE
- ----------------- --------- ------------- ------------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 0.14 $ 0.14 977 3.54 $ 0.14 977 $ 0.14
1.74 1.97 589,500 9.19 1.82 55,500 1.74
2.81 4.13 2,939,700 9.25 3.79 20,000 3.00
4.42 6.50 1,037,340 9.00 5.43 73,500 6.25
6.88 9.88 1,759,436 7.99 8.20 546,451 8.33
12.50 13.63 237,068 8.12 12.55 84,021 12.53
25.75 31.75 87,708 6.84 28.16 83,599 28.02
--------- --------
$ 0.14 $ 31.75 6,651,729 8.80 $ 5.67 864,048 $ 9.91
========= ========
</TABLE>
The weighted-average grant-date fair value of options granted during
1997, 1996 and 1995 was $3.55, $6.34 and $17.80 per share, respectively.
Employee Stock Purchase Plans
Effective January 1, 1994, the Company adopted the FTP Software, Inc.
Employee Stock Purchase Plan. This plan provides a maximum of 1,000,000 shares
of Common Stock for purchase by eligible employees at 85% of the fair market
value of Common Stock on the first or last trading day of each six-month
purchase period under the plan, whichever is lower. During 1997, 1996 and 1995,
24,897, 31,301 and 12,580 shares of Common Stock, respectively, were issued
under this plan at a weighted-average purchase price of $3.41, $6.11 and $25.07
per share, respectively, and a fair value of $4.01, $7.18 and $29.49 per share,
respectively.
In October 1995, the Company adopted the FTP Software, Inc.
Non-Qualified Stock Purchase Plan for Employees of Certain Subsidiaries. This
plan is for the benefit of non-U.S. employees employed outside of the United
States by subsidiaries of the Company approved for participation in the plan by
the Compensation Committee of the Board of Directors. This plan provides a
maximum of 100,000 shares of Common Stock for purchase by eligible employees at
85% of the fair market value of the Common Stock on the first or last trading
day of each six-month purchase period under the plan, whichever is lower. The
first purchase period under the plan began on January 1, 1996. Accordingly, no
shares of Common Stock were issued under this plan during 1995. During 1997 and
1996, 2,423 and 3,564 shares of Common Stock were issued under this plan at a
weighted-average purchase price of $4.15 and $6.20 per share, respectively, and
a fair value of $4.88 and $7.30 per share, respectively.
-41-
<PAGE> 44
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," issued in October
1995. In accordance with SFAS No. 123, the Company applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its option
plans, and accordingly does not record compensation costs. If compensation cost
for the Company's stock-based compensation plans had been determined based on
the fair value at the grant dates as calculated in accordance with SFAS No. 123,
the cost would have amounted to $3,538, $6,655 and $5,326 for the years ended
December 31, 1997, 1996 and 1995, respectively. The Company's net loss and net
loss per share for the years ended December 31, 1997 and 1996 would have been
reported as the pro forma amounts indicated below (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net loss as reported $ (56,599) $ (77,577) $ 24,634
Pro forma net loss (60,137) (84,232) 19,308
Basic net loss per share as reported $ (1.67) $ (2.59) $ .98
Pro forma basic net loss per share (1.78) (2.81) .77
Diluted net loss per share as reported $ (1.67) $ (2.59) $ .87
Pro forma diluted net loss per share (1.78) (2.81) .68
</TABLE>
The pro forma amounts include the effects of all activity under the
Company's stock-based compensation plans since January 1, 1996. The Company
anticipates that it will have additional activity under these plans in the
future.
For the purpose of providing pro forma disclosures, the fair value of
each stock option granted was estimated using the Black-Scholes option-pricing
model with the following weighted-average assumptions: an expected life of 5.0
as of 1997 and 4.8 years as of 1996 and 1995; expected volatility of 80%, 83.4%
and 64.4% in 1997, 1996 and 1995, respectively; no expected dividends; and a
risk-free interest rate of 6.13%, 6.1% and 5.5% in 1997, 1996 and 1995,
respectively.
At December 31, 1996 and 1995, the number of shares of Common Stock for
which options were exercisable totaled 864,048 and 1,159,729, respectively, at a
weighted-average exercise price of $9.91 and $9.87 per share, respectively. At
December 31, 1997, the number of shares of Common Stock available for future
stock option grants amounted to 2,934,309.
Earnings Per Share
The earnings per share ("EPS") amounts have been computed in accordance
with SFAS No. 128, "Earnings per Share." A reconciliation of the income (loss)
and share information used in the basic and diluted per share computation for
1997, 1996 and 1995 is as follows (in thousands, except per share amounts):
-42-
<PAGE> 45
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- ------------ ----------
BASIC EPS
<S> <C> <C> <C>
Loss from continuing operations $(57,816) 33,842 $ 1.71
========
Effect of dilutive securities -- --
-------- --------
DILUTED EPS
Loss from continuing operations $(57,816) 33,842 $ 1.71
======== ======== ========
</TABLE>
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- -----------
BASIC EPS
<S> <C> <C> <C>
Loss from continuing operations $(43,778) 29,896 $ 1.46
========
Effect of dilutive securities -- --
-------- ------
DILUTED EPS
Loss from continuing operations $(43,778) 29,896 $ 1.46
======== ====== ========
</TABLE>
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------ ---------
<S> <C> <C> <C>
BASIC EPS
Income from continuing operations $29,942 25,158 $ 1.19
=======
Effect of dilutive securities
Options -- 3,087
------- -------
DILUTED EPS
Income from continuing operations $29,942 28,245 $ 1.06
======= ======= =======
</TABLE>
For 1997 and 1996, the diluted EPS computations did not include
approximately 6,652 and 5,555 additional shares at a weighted-average exercise
price of $5.67 and $10.16, respectively, because these shares are attributable
to outstanding options where the effect would have been anti-dilutive.
J. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases its corporate and administrative office facilities
under long-term non-cancelable operating lease agreements expiring at various
dates through 2011. The agreements generally require the payment of utilities,
real estate taxes, insurance and repairs. Total rent expense for the years ended
December 31, 1997, 1996 and 1995 amounted to approximately $4.4 million, $4.8
million and $3.0 million, respectively.
-43-
<PAGE> 46
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1997, future minimum annual rental payments, net of
sublease rental payments of approximately $10.4 million, required under the
operating lease agreements are as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 3,884
1999 3,703
2000 3,586
2001 3,004
2002 1,782
Thereafter 3,091
-------
$19,050
=======
</TABLE>
Litigation
In March 1996, a class action lawsuit was filed in the United States
District Court for the District of Massachusetts, naming the Company and certain
of its current and former officers as defendants. The lawsuit, captioned
Lawrence M. Greebel v. FTP Software, Inc., et al., Civil Action No. 96-10544,
alleges that the defendants publicly issued false and misleading statements and
omitted to disclose material facts necessary to make such statements not false
and misleading, which the plaintiffs contend caused an artificial inflation in
the price of the Company's common stock. Specifically, the original complaint
alleged that the defendants knowingly concealed adverse facts and made false or
misleading forward and non-forward looking statements concerning the operating
results and financial condition of the Company, the effects of the Company's
July 1995 corporate restructuring and changing competitive factors in the
Company's industry. The lawsuit, which is purportedly brought on behalf of a
class of purchasers of the Company's common stock during the period from July
14, 1995 to January 3, 1996, alleges violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule
10b-5 thereunder and seeks relief in the form of unspecified compensatory
damages, costs and expenses and such other relief as the court deems proper and
just. In August 1996, plaintiffs filed an amended complaint adding allegations
concerning what plaintiffs claim were wrongful sales and accounting practices by
the Company during the class period, but asserting the same causes of action as
the original complaint. In October 1996, the Company filed a motion to dismiss
the complaint on the grounds that the plaintiffs had not met the pleading
requirements of the Private Securities Litigation Reform Act of 1995. The motion
was denied by the court on February 13, 1997. 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. FTP intends to request the court to
permit it to file a reply memorandum in further support of such motion. If
permitted to do so, FTP will file its reply memorandum by April 10, 1998, after
which time the motion will be before the court for resolution.
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
-44-
<PAGE> 47
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
pay a substantial judgment, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
In February 1996, a class action lawsuit, captioned Richard Zeid and
Siom Misrah, et al. v. John Kimberley, Frank M. Richardson, Mark A. Rowlinson
and Firefox Communications, Inc., Case No. C96 20136, was filed in the United
States District Court for the Northern District of California, San Francisco
Division (transferred to the San Jose Division), naming Firefox and certain of
its current and former officers and former directors as defendants. The original
complaint alleged that the defendants misrepresented or failed to disclose
material facts about Firefox's operations and financial results, which the
plaintiffs contended resulted in an artificial inflation in the price of
Firefox's common stock. The suit was purportedly brought on behalf of a class of
purchasers of Firefox's common stock during the period from August 3, 1995 to
January 2, 1996. The complaint alleged claims for violations of Sections 10(b)
and 20(a) of the Exchange Act and Rule 10b-5 thereunder and sought relief in the
form of unspecified compensatory damages, pre- and post-judgment interest,
attorneys' and expert witness fees and such extraordinary, equitable and/or
injunctive relief as permitted by law, equity and the federal statutory
provisions under which the suit was brought. In June 1996, the District Court
entered an order dismissing plaintiffs' complaint. In the order, the court
dismissed with prejudice certain of plaintiffs' claims that warnings and
disclosures in Firefox's Form 10-Qs were false and misleading, while granting
plaintiffs permission to amend their complaint as it concerned certain of
plaintiffs' claims that Firefox was responsible for false and misleading
analysts reports, Firefox statements and financial statements.
In July 1996, plaintiffs filed their amended complaint. The amended
complaint alleged that defendants misrepresented or failed to disclose material
facts about Firefox's operations and financial results which the plaintiffs
contended resulted in an artificial inflation of the price of Firefox's common
stock. The amended complaint was purportedly brought on behalf of a class of
purchasers of Firefox's common stock during the period from July 20, 1995 to
January 2, 1996. The amended complaint again alleged claims for violations of
Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder and
sought relief in the form described above. Specifically, the amended complaint
alleged that defendants knew allegedly material adverse non-public information
about Firefox's financial results and business conditions which allegedly was
not disclosed, that they improperly directed that certain sales and revenues be
recognized and failed to keep adequate reserves and that they participated in
drafting, reviewing and/or approving allegedly misleading statements, releases,
analysts reports and other public representations, including disclaimers and
warnings of and about Firefox. The amended complaint also alleged that John A.
Kimberley, then an officer and director of Firefox, and Frank Richardson, a
former officer and director of Firefox, were liable as "controlling persons" of
Firefox. In September 1996, Firefox filed a motion to dismiss the amended
complaint on the grounds that the plaintiffs had not met the pleading
requirements of the Private Securities Litigation Reform Act of 1995. On May 8,
1997, the court dismissed the amended complaint on such grounds, without leave
to amend. Plaintiffs have appealed the dismissal 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
-45-
<PAGE> 48
FTP SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
K. SEGMENT INFORMATION:
The Company is active in only one business segment: designing,
developing, marketing and supporting PC connectivity and other software
products.
The Company's export sales can be grouped into the following geographic
areas (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Geographic area:
North and South America
(other than U.S.) $ 1,852 $ 6,142 $ 9,789
Asia Pacific 3,792 8,965 9,601
Europe 21,861 27,282 38,075
Other 354 170 1,693
------- ------- -------
Total $27,859 $42,559 $59,158
======= ======= =======
</TABLE>
Sales, marketing and development operations outside the United States
are conducted through subsidiaries and branches located principally in Europe.
For the year ended December 31, 1997, the Company's foreign operations reported
management fee income of approximately $22.0 million, of which approximately
$17.5 million is attributable to the United Kingdom. The management fee income
is primarily based upon revenue generated from the geographic area. In addition,
the loss from foreign operations amounted to approximately $.7 million and
identifiable assets associated with foreign operations amounted to approximately
$3.1 million. The Company's United States operations accounted for greater than
90% of the Company's revenue, income (loss) from operations and identifiable
assets for each of the years ended December 31, 1996 and 1995.
-46-
<PAGE> 49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the executive officers of the Company is
included in Item 4A of Part I of this Report.
Information relating to the directors of the Company is incorporated in
this Report by reference to the information set forth under "Election of
Director" in the Company's definitive proxy statement to be filed with the
Securities and Exchange Commission in connection with the 1998 Annual Meeting of
Stockholders (the "Proxy Statement").
Information relating to compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated herein by reference to the
information included under "Executive Compensation --Compliance with Section
16(a) of the Exchange Act" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under "Executive Compensation" in the Proxy
Statement is incorporated in this Report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under "Security Ownership" in the Proxy
Statement is incorporated in this Report by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under "Certain Transactions" in the Proxy
Statement is incorporated in this Report by reference.
-47-
<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as part of this Report:
FINANCIAL STATEMENTS:
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Operations For the Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity For the Years Ended December 31,
1995, 1996 and 1997
Consolidated Statements of Cash Flows For the Years Ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- -----
<S> <C>
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)
</TABLE>
-48-
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- -----
<S> <C>
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)
10.10 Amended and Restated Employment Agreement between the Company and Glenn C. Hazard dated as of December 12,
1997*
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*
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*
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*
10.23 FTP Software, Inc. Stock Option Plan(1)
10.24 FTP Software, Inc. 1996 Executive Equity Incentive Plan(2)
</TABLE>
-49-
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- -----
<S> <C>
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*
10.27 Indenture of Lease between the Company and Andover Mills Realty Limited Partnership dated as of October 1,
1993(1)
10.28 Amendment No. 1 to Indenture of Lease between the Company and Andover Mills Realty Limited Partnership
dated as of February 10, 1994(1)
10.29 Amendment No. 2 to Indenture of Lease between the Company and Andover Mills Realty Limited Partnership
dated as of June 7, 1995(1)
10.30 Amended and Restated Agreement and Plan of Merger by and among the Company, Firefox Acquisition Corp. and
Firefox Communications Inc. dated as of May 21, 1996(6)
21 List of Subsidiaries*
23 Consent of Coopers & Lybrand L.L.P.*
27 Financial Data Schedule*
99 Cautionary Factors(7)
</TABLE>
- ---------------------
*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 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.
(7) Included as, and incorporated by reference to, Appendix A to this
Report.
REPORTS ON FORM 8-K:
None.
-50-
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 27th day of
March, 1998.
FTP SOFTWARE, INC.
By: /s/ Glenn C. Hazard
-------------------------------------
Glenn C. Hazard,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Glenn C. Hazard President and Chief Executive Officer March 27, 1998
- ----------------------------------- and a Director
Glenn C. Hazard (principal executive officer)
/s/ James A. Tholen Senior Vice President and Chief March 27, 1998
- ----------------------------------- Financial and Operating Officer
James A. Tholen (principal financial and accounting officer)
/s/ Kevin J. Burns Director March 27, 1998
- -----------------------------------
Kevin J. Burns
/s/ Vinton G. Cerf Director March 27, 1998
- -----------------------------------
Vinton G. Cerf
/s/ David D. Clark Director March 27, 1998
- -----------------------------------
David D. Clark
/s/ Louise M. Cromwell Director March 27, 1998
- -----------------------------------
Louise M. Cromwell
/s/ F. David Fowler Director March 27, 1998
- -----------------------------------
F. David Fowler
</TABLE>
-51-
<PAGE> 54
APPENDIX A
CAUTIONARY FACTORS
FROM TIME TO TIME MANAGEMENT OF FTP SOFTWARE, INC. ("FTP" OR THE
"COMPANY") HAS MADE, AND MAY IN THE FUTURE MAKE, FORWARD-LOOKING STATEMENTS,
BASED ON MANAGEMENT'S THEN-CURRENT EXPECTATIONS, INCLUDING STATEMENTS MADE IN
SECURITIES AND EXCHANGE COMMISSION FILINGS, STATEMENTS MADE IN PRESS RELEASES
AND ORAL STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING
STATEMENTS FOR A VARIETY OF REASONS. THESE REASONS INCLUDE, BUT ARE NOT LIMITED
TO, COMPETITION, TECHNOLOGICAL AND OTHER MARKET CHANGES AND OTHER FACTORS
OUTLINED BELOW AND IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" OF THE COMPANY'S REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1997 (THE "FORM 10-K") TO WHICH THIS APPENDIX IS
ATTACHED.
As used in this Appendix, the term the "Company" generally refers to
FTP and its subsidiaries, including Firefox Communications Inc. ("Firefox"),
which the Company acquired in July 1996.
Competition. The software industry is extremely competitive, and is
characterized by evolving industry standards, frequent introduction of new
products and product enhancements, and continuous improvement in product
reliability, compatibility, functionality, memory requirements, ease of use,
performance and customer support. The Company's networking software products
compete with major computer and communications systems vendors, including
Microsoft Corporation ("Microsoft"), Novell, Inc. ("Novell") and Sun
Microsystems, Inc. ("Sun"), as well as smaller networking software companies,
such as Hummingbird Communications Ltd. and NetManage, Inc. Many of the
Company's competitors have substantially greater financial, technical, sales,
marketing and other resources than the Company, as well as greater name
recognition and a larger installed customer base. In addition, the Company's
core product lines are based upon the Transmission Control Protocol/Internet
Protocol ("TCP/IP"), an open non-proprietary data communications protocol suite.
Several of the Company's competitors have developed proprietary networking
applications and certain of such vendors, including Novell, provide a TCP/IP
protocol suite in their products at little or no additional cost. Microsoft has
embedded a TCP/IP protocol suite in its Windows 95 and Windows NT operating
systems. The introduction of such protocol suites has resulted in a decrease in
sales volumes of, and sales prices for, certain of the Company's products,
which, together with a general increase in competition in the networking
software industry during 1997, materially adversely affected the Company's
results of operations in 1996 and 1997 and is expected to continue to have a
material adverse effect on the Company's results of operations during 1998. The
Company is also facing competition from makers of terminal emulation software,
such as Attachmate Corporation and Wall Data, Inc. In addition, existing
competitors could devote additional resources to the development of TCP/IP or
expand their existing TCP/IP product lines. Increased competition from existing
or new products could adversely affect demand for the Company's products and has
led, and could continue to lead, to increased price competition and other
concessions, adversely affecting the Company's gross margins and operating
results.
There can be no assurance that the Company will be able to compete
successfully against current or future competitors. Competitive pressures faced
by the Company had a material adverse effect on its business, financial
condition and results of operations during 1996 and 1997 and are expected to
continue to have such an effect during 1998. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Total Revenue -- Factors Affecting Revenue" of the Form 10-K.
A-1
<PAGE> 55
Rapid Technological and Other Market Changes; Dependence on New
Products. The market for networking software products and technologies is
subject to rapid changes in technology and customer preferences, such as the
decrease in customer demand for DOS-based products during 1996 and 16-bit
Windows-based products during 1996 and 1997, the embedding of competing products
into new PCs, and the emergence of the web-based networking applications market.
The Company's growth and future financial performance will depend in part upon
its ability to successfully and timely implement new product strategies as
described under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the Form 10-K and to develop and
introduce new products and enhancements of existing products that accommodate
the latest technological advances and customer requirements, and also on its
ability to increase unit volume sales of its connectivity and other products and
to generate significant product revenues from products currently under
development. Any failure to increase revenues from connectivity products or to
generate significant revenues from such other products could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that new products or product enhancements
will be developed or marketed successfully by the Company on a timely basis or
at all, that any new product or product enhancements will achieve market
acceptance, that other software vendors will not develop and market solutions or
products which are superior to the Company's products or that any such other
solutions or products will not achieve greater market acceptance. In addition,
the ability of the Company to develop and market new products and product
enhancements is dependent in part on its ability to enter into and implement
certain strategic alliances as described below under "Reliance on Strategic
Alliances and OEM Relationships" and its ability to hire and retain qualified
employees as described below under "Impact of Restructuring; Changes in
Personnel." Any failure by the Company to anticipate or respond adequately to
changes in technology and customer preferences, to develop and introduce new
products or product enhancements in a timely fashion, or to hire and retain
qualified employees, could have a material adverse effect on its business,
financial condition and results of operations.
Software products as complex as those offered by the Company may
contain undetected errors or failures when first introduced or as new versions
are released. There can be no assurance that, despite testing by the Company and
current and potential customers, errors will not be found in new products and
product enhancements after commencement of commercial shipments, resulting in
loss of or delay in market acceptance. Such loss or delay could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Impact of Restructuring; Changes in Personnel. As described in the Form
10-K, the Company's July 1997 restructuring required the dedication of
management and other resources that temporarily detracted from attention to the
daily business of the Company, which caused a disruption of the business
activities and a loss of momentum in the business of the Company and, as a
result, had an adverse effect on the Company's results of operations for 1997.
As also described in the Form 10-K, the number of the Company's
employees decreased significantly during 1997, both prior to and as a result of
the Company's July 1997 restructuring. The Company believes that this decrease,
which resulted in significant turnover in the Company's U.S. sales force, may
also have contributed to the decline in the Company's operating results for
1997. The Company experienced a substantial loss of personnel during the latter
half of 1996 and the first quarter of 1997, which the Company believes was
attributable to increased competition for qualified personnel in the industry,
the decline in the Company's financial results and the market prices of its
common stock during 1996 and, to a lesser extent, the integration of Firefox. In
connection with its July and December 1997 restructurings, the Company reduced
its workforce by a total of approximately 311 employees.
The success of the Company depends to a significant degree upon its
ability to hire and retain qualified personnel and the continued contributions
of its key management, marketing, sales, product
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<PAGE> 56
development and operational personnel. The Company has experienced additional
attrition during late 1997 and early 1998. If the Company is unable to hire,
retain and train key technical, sales and other personnel, the Company's
business, financial condition and results of operations could be materially
adversely affected.
Interoperability with Third Party Products and Technologies. Because
certain of the Company's products incorporate software and other technologies
developed and maintained by third parties, the Company is to a certain extent
dependent upon such third parties' ability to enhance their current products, to
develop new products that will meet changing customer needs on a timely and
cost-effective basis, and to respond to emerging industry standards and other
technological changes. There can be no assurance that the Company would be able
to replace the functionality provided by the third party technologies currently
offered in conjunction with the Company's products if those technologies become
unavailable to the Company or obsolete or incompatible with future versions of
the Company's products or market standards. The absence of or any significant
delay in the replacement of that functionality could have a material adverse
effect on the Company's business, financial condition and results of operations.
As described below under "Reliance on Strategic Alliances and OEM
Relationships," the Company may from time to time enter into strategic alliances
providing for the joint development of certain future products, and therefore
expects that its products could increasingly include technologies of third
parties.
In connection with the development and enhancement of certain of its
products, the Company from time to time receives pre-release access to products
of some of the major software companies. There can be no assurance that such
third parties will continue to make such pre-release access available on a
timely basis or at all, and any discontinuance of or delay in such access could
have a material adverse effect on the Company's ability to provide timely
enhancements to its products, which could have a material adverse effect on the
business, financial condition and results of operations of the Company.
Similarly, the Company's ability to provide timely enhancements to its products
and, as a consequence, its business, financial condition and results of
operations could be materially adversely affected by market developments adverse
to such other software companies or their products.
Distribution Risks. Historically, the Company has relied significantly
on its independent distributors, systems integrators and value-added resellers
for certain elements of the marketing and distribution of its products. The
agreements in place with these organizations are generally non-exclusive. These
organizations are not within the control of the Company, may represent other
product lines in addition to those of the Company and are not obligated to
purchase products from the Company. There can be no assurance that such
organizations will give a high priority to the marketing of the Company's
products, and such organizations may give a higher priority to other products,
which may include the products of the Company's competitors. Actions of this
nature by such organizations could result in a lower sales effort applied to the
Company's products and a consequent reduction in the Company's operating
results. The Company's results of operations can also be materially adversely
affected by changes in the inventory strategies of its resellers, which can
occur rapidly and in many cases may not be related to end user demand.
During the third quarter of 1997, the Company implemented its plans to
increase sales in the U.S. through distributors, value-added resellers, systems
integrators and OEMs rather than direct sales, 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 under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" of the
Form 10-K, the Company believes that the transition to a more indirect sales
model resulted in a disruption in U.S. sales during the second half of 1997.
While the third party arrangement
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<PAGE> 57
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, and the Company believes that service revenue was lower than expected
for 1997 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.
The Company may grant its distributors limited rights to exchange
unsold products for other products and provide inventory price protection in the
event of price reductions by the Company. While the Company provides allowances
for projected returns and price protection in certain instances, there can be no
assurance that allowances will be sufficient to offset product returns and price
protection in the future. Substantial returns of products or a decrease in the
price of the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations.
Declining Sales Prices. Until 1995, the market for the Company's
products was not characterized by significant price competition; however, as
noted above, the Company is facing increasing pricing pressures from
competitors. These pressures are likely to continue to increase, led to a
decrease in sales prices for certain of the Company's products during 1996 and
the first quarter of 1997, could continue to have this effect on sales prices
for the Company's products, and have had and could continue to have a material
adverse effect on the Company's results of operations and financial condition.
International Sales. Sales outside the United States accounted for
approximately 41%, 42% and 46% of the Company's total revenues in 1997, 1996 and
1995, respectively. The Company expects that sales outside the United States
will continue to account for a substantial portion of revenue for the
foreseeable future. Growth in international sales is expected to be a
significant factor in the future success of the Company. The Company's
international sales decreased in 1996 and 1997 primarily as a result of
increased competition over such periods, lower sales prices during 1996 and
early 1997 and, beginning in the second half of 1996, decreased sales volumes as
described above. There can be no assurance that the Company will be able to
maintain or increase international sales of its products or that its
international distribution channels will be able to service and support its
products adequately. See also "Government Regulation and Legal Uncertainties"
below.
There are certain general risks inherent in conducting international
business, including exposure to currency exchange rate fluctuations, changes in
markets caused by various political, social and economic factors, unexpected
changes in regulatory requirements, tariffs and other trade barriers, costs and
risks of localizing products for foreign countries, longer payment terms,
potentially adverse tax consequences, repatriation of earnings, the burdens of
complying with a wide variety of foreign laws and the difficulties of managing
international operations. In addition, revenue of the Company earned in various
countries where the Company does business may be subject to taxation by more
than one jurisdiction, thereby adversely affecting the Company's earnings. There
can be no assurance that such factors will not have a material adverse effect on
the revenue from the Company's future international sales and, consequently, the
Company's business, financial condition and results of operations.
Reliance on Strategic Alliances and OEM Relationships. In addition to
internal development of new products and technologies, the future success of the
Company depends to a certain extent on the ability of the Company to enter into
and implement strategic alliances and OEM relationships to develop
A-4
<PAGE> 58
necessary products or technologies, to expand the Company's distribution
channels or to jointly market or gain market awareness for the Company's
products. There can be no assurance that the Company will be successful in
identifying or developing such alliances and relationships or that such
alliances and relationships will achieve their intended purposes.
Potential Fluctuations in Operating Results. The Company's operating
results have in the past and may in the future fluctuate from period to period
as a result of a variety of factors, including, among other things: the
purchasing patterns of its customers; the lengthening of sales cycles;
competitive pricing pressures; the mix of products sold; customer order
deferrals in anticipation of new products or product enhancements; market
acceptance and timing of the introductions of new products and product
enhancements by the Company and its competitors; variations in sales by product
and distribution channel; changes in resellers' inventory practices; the
exercise of stock rotation or inventory price protection practices by
distributors; the accuracy of resellers' forecasts of customer demands;
fluctuations in domestic and foreign economic conditions; and the Company's
sales compensation programs, which are based on both quarterly and annual sales
levels. In addition, substantially all of the Company's product revenue and
profit in each quarter result from orders received in that quarter, and an
increasingly large portion of orders are received during the last month of such
quarter. If revenue does not meet expectations in any given quarter, operating
results may be materially adversely affected. There can be no assurance that the
Company will not experience significant fluctuations in operating results in the
future. Quarterly sales and operating results generally depend on the volume and
timing of and ability to fulfill orders received within the quarter, which are
difficult to forecast. The Company may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall of demand for the Company's products and services in
relation to the Company's expectations would have an immediate adverse impact on
the Company's business, financial condition and results of operations. To the
extent that expenses precede or are not subsequently followed by increased
revenue, the Company's business, financial condition and results of operations
will be materially adversely affected. Based on the foregoing, the Company
believes that period to period comparisons of results of operations are not
necessarily meaningful and should not be relied upon as an indicator of future
performance.
Proprietary Rights. The Company considers its implementations of the
TCP/IP protocol, its OnNet Kernel software and PC/TCP Kernel software, to be
proprietary and relies primarily on a combination of copyrights, trademarks,
trade secret law and contracts to protect such proprietary implementations.
However, the basic TCP/IP protocols are non-proprietary and other parties have
developed their own versions. See "Competition" above.
The Company generally enters into confidentiality and/or license
agreements with its employees, consultants, distributors, customers and
potential customers and limits access to and distribution of its source code and
other proprietary information. Despite these precautions, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and, while the Company is unable to
determine the extent to which piracy of software exists, software piracy can be
expected to be a persistent problem, particularly in some international markets.
The laws and enforcement authorities of some foreign countries do not protect
the Company's proprietary rights to as great an extent as the laws of the United
States, and because of the Company's significant international presence, there
can be no assurance that the Company will be able to protect its proprietary
rights abroad. Although the Company's implementation of TCP/IP is proprietary,
the basic TCP/IP protocols are non-proprietary. Anyone who wishes to use them
may do so, without having to pay for the right.
Although the Company currently has no issued patents, the number of
patents granted on software inventions is increasing. Consequently, there is a
growing risk of third parties asserting patent
A-5
<PAGE> 59
claims against the Company. As of March 18, 1998, the Company had not received
any notice from a third party alleging any material patent infringement.
However, in the future, the Company may receive communications from third
parties asserting that the Company's products infringe, or may infringe, the
patents or other proprietary rights of such third parties, or seeking
indemnification against such infringement, or asserting that the Company must
obtain a license from such third parties. Such communications, and any resulting
litigation, could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. If any claims or actions were to be
asserted against the Company and the Company were required to seek a license of
a third party's intellectual property, there can be no assurance that the
Company would be able to acquire such a license on reasonable terms or at all,
and no prediction can be made about the effect that such license might have on
the Company's business, financial condition or results of operations. Should
litigation with respect to any such claim commence, such litigation could be
extremely expensive and time consuming and could materially adversely affect the
Company's business, financial condition and results of operations regardless of
the outcome of the litigation.
Government Regulation and Legal Uncertainties. The Company is not
currently subject to direct regulation by any government agency, other than
regulations applicable to business generally, and (with the exception of
regulations controlling the export and import of encryption and other technology
referred to below) there are currently few laws or regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that various laws
and regulations may be adopted with respect to the Internet, covering issues
such as user privacy, pricing and characteristics and quality of products and
services. The adoption of any such laws or regulations may decrease the growth
of the Internet, which could in turn decrease the demand for certain of the
Company's products and increase the Company's cost of doing business or
otherwise have an adverse effect on the Company's business, financial condition
and results of operations. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, libel and personal
privacy is uncertain.
Due to the encryption and other technology contained in certain of the
Company's products, such products are subject to U.S. export controls. There can
be no assurance that such export controls, either in their current form or as
may be subsequently enacted, will not limit the Company's ability to distribute
products outside of the United States or electronically or that international
customers will accept the products that the Company is allowed to export within
the limits of those controls. While the Company takes precautions against
unlawful exportation, the global nature of the Internet makes it virtually
impossible to effectively control the distribution of the Company's products. In
addition, federal or state legislation or regulation may further limit levels of
encryption or authentication technology. Any such export restrictions, new
legislation or regulation or unlawful exportation could have a material adverse
effect on the Company's business, financial condition and results of operations.
Legal Proceedings Against FTP and Firefox. See Note J of the notes to
the Company's consolidated financial statements included in the Form 10-K for a
description of certain legal proceedings against FTP and Firefox which could
materially adversely affect the Company's future business, operations and
financial condition.
A-6
<PAGE> 60
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FTP Software, Inc.:
Our report on the consolidated financial statements of FTP Software, Inc. has
been included in this Annual Report on Form 10-K for the year ended December 31,
1997. In connection with our audits of such financial statements, we have also
audited the related financial statement schedule listed in Item 14 of this Form
10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 27, 1998
II-1
<PAGE> 61
FTP SOFTWARE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------------------------------- ------------ -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997 $1,300,000 $ (76,183) $ -- $ (123,817) $1,100,000
Allowance for doubtful accounts
Year ended December 31, 1996 $1,600,000 $ 702,708 $ -- $(1,002,708) $1,300,000
Allowance for doubtful accounts
Year ended December 31, 1995 $1,000,000 $ 666,182 $ -- $ (66,182) $1,600,000
Allowance for doubtful accounts
</TABLE>
II-2
<PAGE> 62
EXHIBIT INDEX
EXHIBIT NO. TITLE
3.1 Restated Articles of Organization of the Company(1)
3.2 Certificate of Designation, Preferences and Rights of Junior
Preferred Stock of the Company(1)
3.3 Articles of Amendment to Restated Articles of Organization of
the Company(3)
3.4 Amended and Restated Bylaws of the Company(1)
4.1 Specimen common stock certificate(1)
4.2 Rights Agreement dated as of December 1, 1995 between the
Company and State Street Bank and Trust Company, as Rights
Agent (including form of Rights Certificate)(1)
4.3 Amendment to Rights Agreement dated as of November 7, 1996
between the Company and State Street Bank and Trust Company, as
Rights Agent(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)
10.10 Amended and Restated Employment Agreement between the Company
and Glenn C. Hazard dated as of December 12, 1997*
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)
i
<PAGE> 63
EXHIBIT NO. TITLE
10.14 Amended and Restated Employment Agreement between the Company
and Douglas F. Flood dated as of December 12, 1997*
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*
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*
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*
10.27 Indenture of Lease between the Company and Andover Mills Realty
Limited Partnership dated as of October 1, 1993(1)
10.28 Amendment No. 1 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of February
10, 1994(1)
10.29 Amendment No. 2 to Indenture of Lease between the Company and
Andover Mills Realty Limited Partnership dated as of June 7,
1995(1)
10.30 Amended and Restated Agreement and Plan of Merger by and among
the Company, Firefox Acquisition Corp. and Firefox
Communications Inc. dated as of May 21, 1996(6)
21 List of Subsidiaries*
23 Consent of Coopers and Lybrand L.L.P.*
27 Financial Data Schedule*
ii
<PAGE> 64
99 Cautionary Factors(7)
- ---------------------
*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 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.
(7) Included as, and incorporated by reference to, Appendix A to this
Report.
iii
<PAGE> 1
EXHIBIT 10.10
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (this "Agreement") is made and
entered into by and between FTP Software, Inc., a Massachusetts corporation (the
"Company"), and Glenn C. Hazard ("Employee"), effective as of the 12th day of
December, 1997 (the "Effective Date").
WHEREAS, the Company and Employee are parties to an Employment Agreement dated
as of July 29, 1996, as amended by Amendments No. 1 and 2 thereto (the "Original
Employment Agreement"); and
WHEREAS, the Company and Employee desire to effectuate certain additional
amendments to such agreement;
NOW, THEREFORE, in consideration of the mutual promises, terms and conditions
set forth in this Agreement, the parties hereby agree that the Original
Employment Agreement has hereby amended and restated in its entirety as follows:
1. EMPLOYMENT. Subject to the terms and conditions set forth in this
Agreement, the Company hereby offers and Employee hereby accepts employment.
2. TERM. Subject to earlier termination pursuant to Section 5, the term of
Employee's employment hereunder shall be one year, commencing on the Effective
Date; PROVIDED, that unless written notice pursuant to Sections 5.c, d, e, f or
g to the contrary is given by either party hereto to the other at least thirty
(30) days prior to the expiration of the original or any renewal term (in which
case this Agreement shall terminate as of the last day of such term or, if
earlier, the date such notice becomes effective in accordance with such Section,
in each case with the effect provided in such Section), the term of Employee's
employment hereunder shall automatically renew for successive terms of one year
each; PROVIDED, FURTHER, that if a Change of Control (as defined in Section 5)
occurs, the then-current term shall be automatically extended so that the
remainder of the term is not less than twelve (12) full calendar months from the
date of the Change of Control. The term of this Agreement, as from time to time
renewed or extended, is referred to herein as the "Term."
3. DUTIES; CONFLICTING INTERESTS. During the Term, Employee agrees to serve
the Company as its President and Chief Executive Officer or in such other
executive position as the Board of Directors of the Company (the "Board") may
designate from time to time with Employee's consent. In addition, and without
further compensation, Employee shall serve as a director and/or officer of one
or more of the Company's Affiliates (as hereafter defined) if so elected or
appointed from time to time. Employee shall, on a full-time basis, perform such
duties and responsibilities for the Company and its Affiliates as are intrinsic
to Employee's position and status with the Company or as may otherwise
reasonably be designated from time to time by the Board or by the Chairman of
the Company (the "Chairman") or any designees of the Chairman. Employee shall
devote his best efforts, business judgment, skill and knowledge exclusively to
the advancement of the business and interests of the Company and its Affiliates.
Employee shall not engage in any other business activity (whether or not such
business activity is pursued for gain, profit or other pecuniary advantage) or
serve on any other board of directors or in any industry, trade, professional,
governmental or academic position during the term of this Agreement, except as
may be expressly approved in advance in writing by the Board or the Chairman,
which approval shall not be unreasonably withheld, delayed or conditioned.
For the purposes of this Agreement, the term "Affiliates" shall mean all
persons and entities directly or indirectly controlling, controlled by or under
common control with the Company, where control may be by either management
authority or equity interest.
4. COMPENSATION AND BENEFITS.
a. BASE SALARY. During the Term, the Company shall pay Employee a base
salary at the rate of Two Hundred and Seventy-Five Thousand Dollars ($275,000)
per annum, payable in accordance with the payroll
<PAGE> 2
practices of the Company and subject to adjustment from time to time by the
Board in its sole discretion. Such base salary, as adjusted from time to time,
is referred to as the "Base Salary."
b. CASH INCENTIVE AND BONUS COMPENSATION. If a cash incentive or bonus
compensation plan is made available to executives of the Company generally and
Employee is not then covered by any other cash incentive or bonus compensation
plan, Employee shall be entitled during the Term to participate in such plan (if
any) in accordance with the plan's then current terms. Any compensation paid to
Employee under any incentive or bonus compensation plan (hereafter, "Bonus")
shall be in addition to the Base Salary. The targeted percentage of Employee's
Base Salary payable as a Bonus under such plans (such targeted percentage
multiplied by Employee's Base Salary is hereinafter referred to as the "Target
Bonus") shall be as set forth or referred to in resolutions adopted from time to
time by the Board or the Compensation Committee of the Board. Except as
otherwise provided under the terms of such incentive or bonus compensation plan
or this Agreement, any Bonus payable to Employee shall be pro-rated during
Employee's first and last year of service as an executive officer of the
Company, provided, in each case, that Employee has been employed for at least
three (3) months of the twelve (12) month period on which the cash incentive or
bonus compensation plan is based.
c. STOCK OPTIONS. Upon a "Change of Control," as hereafter defined, any
and all stock options granted to Employee by the Company and not yet exercised,
expired, surrendered or canceled shall automatically vest and become exercisable
in full, but shall remain exercisable only in accordance with the terms of any
applicable stock option plan, certificate or agreement.
d. OTHER BENEFITS. During the Term, Employee shall be entitled to
participate in any and all employee benefit plans from time to time in effect
for employees of the Company generally, except to the extent such plans are in a
category of benefit otherwise provided to Employee. Such participation shall be
subject to the terms of the applicable plan documents and generally applicable
Company policies.
5. TERMINATION OF EMPLOYMENT AND SEVERANCE BENEFITS. Notwithstanding the
provisions of Section 2, Employee's employment hereunder shall terminate under
the following circumstances.
a. DEATH. In the event of Employee's death, Employee's employment
hereunder shall immediately and automatically terminate and the Company shall
pay to Employee's designated beneficiary or, if none, to Employee's estate, a
sum equal to three (3) months' Base Salary plus any Bonus due Employee,
pro-rated through the date of Employee's death.
b. DISABILITY.
i. The Company may terminate Employee's employment hereunder, upon
written notice to Employee, if Employee becomes disabled (whether physically or
mentally) and, as a result, is unable to perform substantially all of his duties
and responsibilities hereunder for any 180 (whether or not consecutive) days
during any period of 365 consecutive calendar days.
ii. Notwithstanding that someone else may be performing Employee's
tasks while Employee is disabled, Employee shall continue to receive the Base
Salary in accordance with Section 4.a and benefits in accordance with Section
4.d to the extent permitted by the then-current terms of the applicable benefit
plans, until Employee becomes eligible for disability income benefits under the
Company's disability income plan or until the termination of Employee's
employment, whichever occurs first. While receiving disability income payments
under the Company's disability income plan, Employee shall not be entitled to
receive any Base Salary under Section 4.a, but shall continue to participate in
Company benefit plans in accordance with Section 4.d (to the extent permitted by
the then-current terms of such plans) until the termination of Employee's
employment.
iii. If any question arises as to whether during any period
Employee is disabled so as to be unable to perform substantially all of his
duties and responsibilities hereunder, Employee, at the request of the Company,
shall submit to a medical examination by a physician reasonably selected by the
Company to determine whether Employee is so disabled and such determination
shall for the purposes of this Agreement be conclusive of
2
<PAGE> 3
the issue. If such question arises and Employee fails to submit to such medical
examination, the Company's determination of the issue shall be binding on
Employee.
c. BY THE COMPANY FOR CAUSE. The Company may terminate Employee's
employment hereunder for Cause at any time upon written notice to Employee
setting forth in reasonable detail the nature of such Cause. The following, as
determined by the Board, shall constitute Cause for termination by the Company:
i. Employee's willful failure to perform (other than by reason
of disability), or gross negligence in the performance of, Employee's duties and
responsibilities to the Company or any of its Affiliates; or
ii. Material breach by Employee of any provision of this
Agreement or the Employee Confidentiality and Inventions Agreement dated as of
May 9, 1996 between the Company and Employee (the "Confidentiality and
Inventions Agreement"); or
iii. Fraud, embezzlement or other material dishonesty on the part
of Employee with respect to the Company or any of its Affiliates or conviction
of or plea of nolo contendere by Employee to a felony or any crime involving
moral turpitude.
Upon the giving of notice of termination of Employee's employment hereunder for
Cause, the Company shall have no further obligation or liability to Employee,
other than for Base Salary earned and unpaid at the date of termination.
For purposes of this Agreement, no act, or failure to act, on Employee's
part shall be considered "willful" unless such act, or failure to act, was not
in good faith and was without reasonable belief that Employee's action or
omission was in the best interest of the Company.
d. BY THE COMPANY OTHER THAN FOR CAUSE. The Company may terminate
Employee's employment hereunder other than for Cause at any time upon written
notice to Employee. If such termination occurs either before or after a Change
of Control Period (as defined in Section 5.g) and provided that Employee
executes a release of claims in the form attached hereto and marked "A" (the
"Employee Release") and does not revoke the same within the period stated in
Employee Release, then the Company shall (i) pay Employee, within ten (10)
business days after such termination, a lump sum payment equal to twelve (12)
months' Base Salary at the rate in effect on the date of termination and (ii)
shall pay the full cost of Employee's continued participation in the Company's
group health and dental insurance plans for so long as Employee remains entitled
to continue such participation under the federal law known as "COBRA" or any
successor law and the applicable plan terms.
e. BY EMPLOYEE FOR GOOD REASON. Employee may terminate employment
hereunder for Good Reason at any time upon written notice to the Company setting
forth in reasonable detail the nature of such Good Reason. The following shall
constitute Good Reason for termination by Employee:
i. Failure of the Company to continue Employee in the position of
President and Chief Executive Officer of the Company or in such other position
to which Employee may subsequently be assigned with Employee's consent; or
ii. Material diminution in the nature or scope of Employee's
responsibilities, duties or authority; provided, however, that the Company's
failure to continue Employee in the position of director or officer of any of
its Affiliates and any diminution of the business of the Company or any of its
Affiliates, including without limitation the sale or transfer of any or all of
the assets of the Company or any of its Affiliates, shall not constitute "Good
Reason"; or
iii. Permanent transfer of Employee, without Employee's consent,
to a work site located such that Employee's commute to and from work is more
than fifty (50) miles each way; or
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<PAGE> 4
iv. A decrease in the Base Salary of more than fifteen percent
(15%) or the material failure of the Company to provide Employee benefits in
accordance with the terms of Section 4.b or 4.d hereof.
In the event of termination in accordance with this Section 5.e, the Company
shall provide Employee pay and benefits in accordance with Section 5.d, provided
that Employee executes the Employee Release and does not revoke the same within
the period stated in the Employee Release.
f. BY EMPLOYEE OTHER THAN FOR GOOD REASON. Employee may terminate
employment hereunder at any time upon thirty (30) days' prior written notice to
the Company.
g. UPON A CHANGE OF CONTROL.
i. If a Change of Control occurs and if on the date of, or
within one year following, such Change of Control (a "Change of Control
Period"), the Company terminates Employee's employment with the Company other
than for Cause or Employee terminates his employment with the Company for any
reason and, in either event, Employee executes the Employee Release and does not
revoke the same within the period stated in the Employee Release, then the
Company: (A) shall pay Employee an amount (the "Change of Control Payment")
equal to two times the greater of (1) the sum of the Base Salary and the amount
of any Target Bonus paid or payable during the twelve (12) months following the
date on which such termination occurs or (2) the sum of the Base Salary and the
amount of any Target Bonus paid or payable to Employee during the twelve (12)
months preceding the date on which such termination occurs, payable as provided
below; and (B) shall pay the full cost of Employee's continued participation in
the Company's group health and dental insurance plans for so long as Employee
remains entitled to continue such participation under COBRA or any successor law
and the applicable plan terms. Any decrease in Employee's Target Bonus that is
approved by the Board or the Compensation Committee of the Board after the date
a Change of Control occurs (the "Change of Control Date") and any decrease in
Employee's Base Salary that occurs after the Change of Control Date shall be
disregarded for purposes of the calculation set forth in the preceding clause
(A). The Change of Control Payment shall be in lieu of any payments to or on
behalf of Employee that may otherwise be required pursuant to Sections 5.d or
5.e.
Unless the Company and Employee agree otherwise in writing (in which
case the Company shall pay the Change of Control Payment, net of all applicable
federal and state taxes (including any Section 4999 Tax, as defined in Section
5.g.iii), to Employee within thirty (30) days following date of the applicable
notice of termination of Employee's employment), the Company shall continue to
pay Employee his Base Salary, at the rate in effect on the date of such written
notice or, if greater, the rate in effect immediately prior to the Change of
Control Date, for a period of not less than ninety (90) days nor more than nine
(9) months following the date of such written notice, as mutually agreed to by
the Company and Employee (the "Continuation Period"), PROVIDED, that (i) in the
absence of agreement between the Company and Employee as to the length of the
Continuation Period, such period shall be nine (9) months and (ii) in any event,
Employee may, at his option, terminate the Continuation Period after the
ninetieth (90th) day thereof upon thirty (30) days' prior written notice to the
Company. Within thirty (30) days following the last day of the Continuation
Period, the Company shall pay to Employee an amount equal to the Change of
Control Payment minus all payments of Base Salary paid to Employee for the
Continuation Period, net of all applicable federal and state taxes (including
any Section 4999 Tax). During the Continuation Period, Employee shall continue
to be considered an "employee" of the Company for purposes of participation in
the Company's employee benefit plans pursuant to Section 1.d, subject to the
terms of such plans, and for purposes of the Company's stock option plans and
the stock option certificates covering the options then held by Employee. The
Company hereby agrees to waive the provisions of Section 3 hereof during the
Continuation Period, provided that Employee does not violate the provisions of
Section 7 hereof during such period.
ii. A Change of Control shall be deemed to take place if after the
Effective Date: (A) within twenty-four (24) months after the commencement of a
tender offer or exchange offer for voting securities of the Company (other than
by the Company or any of its Affiliates), the individuals who were directors of
the Company immediately prior to the commencement of such offer shall cease to
constitute a majority of the Board; or (B) the stockholders of the Company
approve a merger or consolidation of the Company with any Person, other than a
4
<PAGE> 5
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than seventy-five percent (75%) of the combined voting
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; or (C) there occurs
a closing of a sale or other disposition by the Company of all or substantially
all of the assets of the Company other than to any of its Affiliates or any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any of its Affiliates.
iii. Payments and benefits under Section 5.g.i shall be provided
without regard to whether the deductibility of such payments or benefits (or any
other payments in the nature of compensation to or for the benefit of Employee)
would be limited or precluded by Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), and without regard to whether such payments or
benefits (or any other payments or benefits) would subject Employee to the
federal excise tax (the "Section 4999 Tax") applicable to certain "excess
parachute payments" under Section 4999 of the Code, subject to the following
special rules:
(A) If the aggregate amount of the "parachute payments" (as that
term is defined in Section 280G(b)(2) of the Code, taking into account
the special rules of Section 280G(b)(4)(A) and Section 280G(b)(6) of
the Code) to or for the benefit of Employee, whether provided under
this Agreement or otherwise, does not exceed three hundred and five
percent (305%) of Employee's "base amount" (as that term is defined in
Section 280G(b)(3) of the Code), cash benefits to or for the benefit
of Employee under this Agreement shall be automatically reduced to the
extent (and only to the extent), if any, necessary so that no payment
or benefit to or for the benefit of Employee, whether provided under
this Agreement or otherwise, is subject to the Section 4999 Tax; and
(B) If the aggregate amount of the "parachute payments" to or
for the benefit of Employee, as determined above, exceeds three
hundred and five percent (305%) of Employee's "base amount" as
determined above, the Company shall pay to Employee (or, in the event
of his death, to his designated beneficiary or, if none, to his
estate) an additional cash payment (the "gross-up payment") that is
equal, after reduction for all federal and state income taxes
(including the Section 4999 Tax) applicable to such gross-up payment,
to the total Section 4999 Tax applicable to Employee's "excess
parachute payments" (as that term is defined in Section 280G(b)(1) of
the Code) determined without regard to the gross-up payment. For
purposes of the preceding sentence, the gross-up payment shall be
deemed subject to federal income tax at the maximum marginal rate and
to state income tax at the maximum rate applicable to compensation
income in the state in which Employee is resident at the time of
payment. The Company shall pay Employee the gross-up payment together
with the payment of the Change of Control Payment pursuant to Section
5.g.i or, if later, promptly following the receipt by the Company of
the written determination referred to in the following paragraph.
The calculation of the amount of the "parachute payments" to or for the benefit
of Employee for purposes of clauses (A) and (B) this Section 5.g.iii and of the
gross-up payment shall be made by an independent accounting firm of national
reputation (other than the firm then serving as the Company's independent
accountants) mutually selected by the Company and Employee. All information
pertaining to such calculations shall be submitted to such independent
accounting firm promptly following the termination of Employee's employment
pursuant to Section 5.g.i. Such calculations shall be determined by such
independent accounting firm and submitted in writing to the Company and Employee
as promptly as practicable and shall be binding on both the Company and
Employee.
iv. The Company shall promptly reimburse Employee for the
amount of all reasonable attorneys' fees and expenses incurred by Employee in
seeking to obtain or enforce any right or benefit provided Employee under this
Section 5.g.
5
<PAGE> 6
6. EFFECT OF TERMINATION OF EMPLOYMENT. The provisions of this Section 6 shall
apply to any termination of employment hereunder:
a. Payment by the Company of any Base Salary, pro-rated Bonus or
contributions to the cost of Employee's continued participation in the Company's
group health and dental plans or other amounts that may be due Employee in each
case as expressly provided for under the applicable termination provision of
Section 5 hereof shall constitute the entire obligation of the Company to
Employee. Employee shall promptly give the Company notice of all facts necessary
for the Company to determine the amount and duration of its obligations in
connection with any termination pursuant to Section 5.d, 5.e or 5.g.
b. Except for medical and dental plan coverage continued pursuant to
Section 5.d, 5.e or 5.g, benefits shall terminate pursuant to the term of the
applicable benefit plans based on the date of termination of Employee's
employment without regard to any continuation of Base Salary or other payment to
Employee following such date of termination, except as otherwise provided in
Section 5.g.
c. The obligations of Employee set forth in Sections 7 and 10 and in
the Confidentiality and Inventions Agreement shall survive the termination of
Employee's employment hereunder. Employee recognizes that, except as expressly
provided in Section 5.d, 5.e or 5.g, as applicable, no compensation is earned
after termination of employment.
7. RESTRICTED ACTIVITIES. In consideration of the terms of this Agreement,
Employee agrees that some restrictions on Employee's activities during and after
employment are necessary to protect the goodwill, confidential information and
other legitimate interests of the Company and its Affiliates:
a. Employee hereby acknowledges that the activities carried on by the
Company and its Affiliates have worldwide business and commercial implications
for the Company and its Affiliates, without geographic limit. In consideration
of the payments set forth herein, Employee agrees not to engage, directly or
indirectly, for a period of six (6) months following the termination of his
employment for any reason whatsoever (the "Non-Competition Period"), in any line
of business which competes in the United States with a line of business carried
on by the Company or any of its Affiliates on the date of such termination, or
any line of business in which the Company or any of its Affiliates, as of the
date of such termination, has made definite plans to become engaged in the
United States. Employee will be deemed to have engaged in such line of business
if he participates therein as an employee, consultant, partner, proprietor or
investor (provided that Employee shall not be deemed to have engaged in such
line of business solely by reason of any passive equity investment in any entity
that does not exceed 5% of the outstanding capital stock of such entity).
b. Employee agrees that he shall not, during the Non-Competition
Period, engage in any activity for the purpose of (i) inducing, diverting or
taking away any employee of the Company or any of its Affiliates or (ii)
inducing, diverting or taking away any consultant of the Company in a manner
which would deprive the Company or any of its Affiliates of the consultant's
services.
8. ENFORCEMENT OF COVENANTS. Employee acknowledges and agrees that, were
Employee to breach any of the covenants contained in Section 7 or in the
Confidentiality and Inventions Agreement, the damage to the Company and its
Affiliates would be irreparable, that the damage would be extremely difficult to
ascertain, and that money damages alone would not be an adequate remedy.
Accordingly, Employee agrees that the Company and its Affiliates and their
successors and assigns, in addition to any other remedies available to them,
shall be entitled to preliminary and permanent injunctive relief against any
breach or threatened breach by Employee of any of said covenants, without having
to post bond. The parties further agree that, if any provision of Section 7 or
of the Confidentiality and Inventions Agreement shall be determined by any court
of competent jurisdiction to be unenforceable by reason of its being extended
over too great a time, too large a geographic area or too great a range of
activities, such provision shall be deemed to be modified to permit its
enforcement to the maximum extent permitted by applicable law.
6
<PAGE> 7
9. CONFLICTING AGREEMENTS. Employee hereby represents and warrants that the
execution of this Agreement and the performance of Employee's obligations
hereunder will not breach or be in conflict with any other agreement to which
Employee is a party or is bound and that Employee is not now subject to any
covenants against competition, covenants of confidentiality or similar covenants
with any person or entity other than the Company that would affect the
performance of Employee's obligations hereunder. Employee shall not disclose to
or use on behalf of the Company any proprietary information of any third party
without such party's consent.
10. LITIGATION ASSISTANCE. Employee covenants and agrees that he shall, upon
reasonable notice, during the Term and for three (3) full years after the
termination of this Agreement, furnish such information and assistance to the
Company as may be reasonably required by the Company in connection with any
litigation in which it or any of its Affiliates is, or may become, a party. The
Company shall reimburse Employee for all reasonable out-of-pocket expenses
incurred by Employee in furnishing such information and assistance.
11. INDEMNIFICATION. The Company shall indemnify and hold Employee harmless to
the extent provided in its then-current Articles of Organization or By Laws.
Employee agrees to promptly notify the Company of any actual or threatened claim
arising out of or as a result of Employee's employment with the Company.
12. WITHHOLDING. All payments made by the Company under this Agreement shall be
reduced by any tax or other amounts required to be withheld by the Company under
applicable law.
13. ASSIGNMENT. Neither the Company nor Employee may make any assignment of
this Agreement or any interest herein, by operation of law or otherwise, without
the prior written consent of the other; provided, however, that the Company may
assign its rights and obligations under this Agreement without the consent of
Employee if the Company shall hereafter effect a reorganization, consolidate
with or merge into any entity or transfer all or substantially all of its
properties or assets to any entity. This Agreement shall inure to the benefit of
and be binding upon the Company and Employee, their respective successors,
executors, administrators, heirs and permitted assigns.
14. SEVERABILITY. The terms of this Agreement are severable. If any portion or
provision of this Agreement shall to any extent be declared illegal or
unenforceable by a court of competent jurisdiction, then the remainder of this
Agreement, or the application of such portion or provision in circumstances
other than those as to which it is so declared illegal or unenforceable, shall
not be affected thereby, and each portion and provision of this Agreement shall
be valid and enforceable to the fullest extent permitted by law.
15. NOTICES. Any and all notices, requests, demands and other communications
provided for by this Agreement shall be in writing and shall be effective when
delivered in person or deposited in the United States mail, postage prepaid,
registered or certified, or by recognized overnight courier and addressed to
Employee at Employee's last known address on the books of the Company or, in the
case of the Company, at its principal place of business, attention of the
Chairman, or to such other address as either party may specify by written notice
to the other actually received.
16. ENTIRE AGREEMENT; AMENDMENT AND WAIVER. This Agreement and the
Confidentiality and Inventions Agreement, which is incorporated herein by
reference, constitute the entire agreement between the parties and supersede all
prior communications, agreements and understandings, written or oral, with
respect to the terms and conditions of Employee's employment, including the
Original Employment Agreement. This Agreement may be amended or modified only by
a written instrument signed by Employee and by an expressly authorized
representative of the Company. Employee and the Company agree that their
respective rights and remedies against the other are cumulative and that they
may be exercised singularly or collectively, successively or concurrently. A
waiver of any violation or failure to enforce any provision of this Agreement
shall not constitute a waiver of any rights under this Agreement with respect to
any other or continued violation of any provision of this Agreement. Any waiver
shall be enforceable only if in writing and signed by an expressly authorized
representative of the Company and by Employee.
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<PAGE> 8
17. SERVICE AS A DIRECTOR. Each of the Company and Employee acknowledges that
each of the election or appointment of Employee as a member of the Board of
Directors, Employee's status as a member of the Board of Directors and
Employee's resignation or removal as a member of the Board of Directors is
governed by the articles of organization and bylaws of the Company and by
Massachusetts law, and shall not in any way affect, or be affected by, the terms
of this Agreement.
18. HEADINGS, REFERENCES AND COUNTERPARTS. The headings and captions in this
Agreement are for convenience only and in no way define or describe the scope or
content of any provision of this Agreement. References in this Agreement to
Sections are references to the specified Sections of this Agreement. This
Agreement may be executed in two or more counterparts, each of which shall be an
original and all of which together shall constitute one and the same instrument.
19. GOVERNING LAW. This is a Massachusetts contract and shall be construed and
enforced under and be governed in all respects by the laws of the Commonwealth
of Massachusetts, USA, without regard to the conflict of laws principles
thereof. Employee and the Company consent to the exclusive jurisdiction of the
state and federal courts of the Commonwealth of Massachusetts, USA.
EMPLOYEE ACKNOWLEDGES THAT HE HAS CAREFULLY READ AND CONSIDERED ALL THE TERMS
AND CONDITIONS OF THIS AGREEMENT, INCLUDING THE RESTRAINTS IMPOSED UPON EMPLOYEE
PURSUANT TO SECTION 7 AND PURSUANT TO THE CONFIDENTIALITY AND INVENTIONS
AGREEMENT. EMPLOYEE AGREES THAT SAID RESTRAINTS ARE NECESSARY FOR THE REASONABLE
AND PROPER PROTECTION OF THE COMPANY AND ITS AFFILIATES AND THAT EACH AND EVERY
ONE OF THE RESTRAINTS IS REASONABLE IN RESPECT TO SUBJECT MATTER, LENGTH OF TIME
AND GEOGRAPHIC AREA.
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by
the Company, by its duly authorized representative, and by Employee, effective
as of the Effective Date.
EMPLOYEE: FTP SOFTWARE, INC.
/s/ Glenn C. Hazard By: /s/ James A. Tholen
----------------------- ----------------------------------------
Glenn C. Hazard Title: Chief Financial and Operating
Officer
8
<PAGE> 1
EXHIBIT 10.14
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (this "Agreement") is made and
entered into by and between FTP Software, Inc., a Massachusetts corporation (the
"Company"), and Douglas F. Flood ("Employee"), effective as of the 12th day of
December, 1997 (the "Effective Date").
WHEREAS, the Company and Employee are parties to an Employment Agreement dated
as of July 23, 1996, as amended by Amendments No. 1 and 2 thereto (the "Original
Employment Agreement"); and
WHEREAS, the Company and Employee desire to effectuate certain additional
amendments to such agreement;
NOW, THEREFORE, in consideration of the mutual promises, terms and conditions
set forth in this Agreement, the parties hereby agree that the Original
Employment Agreement has hereby amended and restated in its entirety as follows:
1. EMPLOYMENT. Subject to the terms and conditions set forth in this
Agreement, the Company hereby offers and Employee hereby accepts employment.
2. TERM. Subject to earlier termination pursuant to Section 5, the term of
Employee's employment hereunder shall be one year, commencing on the Effective
Date; PROVIDED, that unless written notice pursuant to Sections 5.c, d, e, f or
g to the contrary is given by either party hereto to the other at least thirty
(30) days prior to the expiration of the original or any renewal term (in which
case this Agreement shall terminate as of the last day of such term or, if
earlier, the date such notice becomes effective in accordance with such Section,
in each case with the effect provided in such Section), the term of Employee's
employment hereunder shall automatically renew for successive terms of one year
each; PROVIDED, FURTHER, that if a Change of Control (as defined in Section 5)
occurs, the then-current term shall be automatically extended so that the
remainder of the term is not less than twelve (12) full calendar months from the
date of the Change of Control. The term of this Agreement, as from time to time
renewed or extended, is referred to herein as the "Term."
3. DUTIES; CONFLICTING INTERESTS. During the Term, Employee agrees to serve
the Company as its Senior Vice President of Business Development and Planning
and General Counsel or in such other executive position as the Board of
Directors of the Company (the "Board") or the President of the Company (the
"President") may designate from time to time with Employee's consent. In
addition, and without further compensation, Employee shall serve as a director
and/or officer of one or more of the Company's Affiliates (as hereafter defined)
if so elected or appointed from time to time. Employee shall, on a full-time
basis, perform such duties and responsibilities for the Company and its
Affiliates as are intrinsic to Employee's position and status with the Company
or as may otherwise reasonably be designated from time to time by the Board or
by the President or any designees of the President. Employee shall devote his
best efforts, business judgment, skill and knowledge exclusively to the
advancement of the business and interests of the Company and its Affiliates.
Employee shall not engage in any other business activity (whether or not such
business activity is pursued for gain, profit or other pecuniary advantage) or
serve on any other board of directors or in any industry, trade, professional,
governmental or academic position during the term of this Agreement, except as
may be expressly approved in advance in writing by the Board or the President,
which approval shall not be unreasonably withheld, delayed or conditioned.
For the purposes of this Agreement, the term "Affiliates" shall mean all
persons and entities directly or indirectly controlling, controlled by or under
common control with the Company, where control may be by either management
authority or equity interest.
4. COMPENSATION AND BENEFITS.
a. BASE SALARY. During the Term, the Company shall pay Employee a base
salary at the rate of Two Hundred Thousand Dollars ($200,000) per annum, payable
in accordance with the payroll practices of the
<PAGE> 2
Company and subject to adjustment from time to time by the Board in its sole
discretion. Such base salary, as adjusted from time to time, is referred to as
the "Base Salary."
b. CASH INCENTIVE AND BONUS COMPENSATION. If a cash incentive or bonus
compensation plan is made available to executives of the Company generally and
Employee is not then covered by any other cash incentive or bonus compensation
plan, Employee shall be entitled during the Term to participate in such plan (if
any) in accordance with the plan's then current terms. Any compensation paid to
Employee under any incentive or bonus compensation plan (hereafter, "Bonus")
shall be in addition to the Base Salary. Except as otherwise provided under the
terms of such incentive or bonus compensation plan or this Agreement, any Bonus
payable to Employee shall be pro-rated during Employee's first and last year of
service as an executive officer of the Company, provided, in each case, that
Employee has been employed for at least three (3) months of the twelve (12)
month period on which the cash incentive or bonus compensation plan is based.
c. STOCK OPTIONS. Upon a "Change of Control," as hereafter defined, any
and all stock options granted to Employee by the Company and not yet exercised,
expired, surrendered or canceled shall automatically vest and become exercisable
in full, but shall remain exercisable only in accordance with the terms of any
applicable stock option plan, certificate or agreement.
d. OTHER BENEFITS. During the Term, Employee shall be entitled to
participate in any and all employee benefit plans from time to time in effect
for employees of the Company generally, except to the extent such plans are in a
category of benefit otherwise provided to Employee. Such participation shall be
subject to the terms of the applicable plan documents and generally applicable
Company policies.
5. TERMINATION OF EMPLOYMENT AND SEVERANCE BENEFITS. Notwithstanding the
provisions of Section 2, Employee's employment hereunder shall terminate under
the following circumstances.
a. DEATH. In the event of Employee's death, Employee's employment hereunder
shall immediately and automatically terminate and the Company shall pay to
Employee's designated beneficiary or, if none, to Employee's estate, a sum equal
to three (3) months' Base Salary plus any Bonus due Employee, pro-rated through
the date of Employee's death.
b. DISABILITY.
i. The Company may terminate Employee's employment hereunder,
upon written notice to Employee, if Employee becomes disabled (whether
physically or mentally) and, as a result, is unable to perform substantially all
of his duties and responsibilities hereunder for any 180 (whether or not
consecutive) days during any period of 365 consecutive calendar days.
ii. Notwithstanding that someone else may be performing Employee's tasks
while Employee is disabled, Employee shall continue to receive the Base Salary
in accordance with Section 4.a and benefits in accordance with Section 4.d to
the extent permitted by the then-current terms of the applicable benefit plans,
until Employee becomes eligible for disability income benefits under the
Company's disability income plan or until the termination of Employee's
employment, whichever occurs first. While receiving disability income payments
under the Company's disability income plan, Employee shall not be entitled to
receive any Base Salary under Section 4.a, but shall continue to participate in
Company benefit plans in accordance with Section 4.d (to the extent permitted by
the then-current terms of such plans) until the termination of Employee's
employment.
iii. If any question arises as to whether during any period Employee is
disabled so as to be unable to perform substantially all of his duties and
responsibilities hereunder, Employee, at the request of the Company, shall
submit to a medical examination by a physician reasonably selected by the
Company to determine whether Employee is so disabled and such determination
shall for the purposes of this Agreement be conclusive of the issue. If such
question arises and Employee fails to submit to such medical examination, the
Company's determination of the issue shall be binding on Employee.
2
<PAGE> 3
c. BY THE COMPANY FOR CAUSE. The Company may terminate Employee's
employment hereunder for Cause at any time upon written notice to Employee
setting forth in reasonable detail the nature of such Cause. The following, as
determined by the Board, shall constitute Cause for termination by the Company:
i. Employee's willful failure to perform (other than by reason of
disability), or gross negligence in the performance of, Employee's duties and
responsibilities to the Company or any of its Affiliates; or
ii. Material breach by Employee of any provision of this Agreement or
the Employee Confidentiality and Inventions Agreement dated as of October 1,
1993 between the Company and Employee (the "Confidentiality and Inventions
Agreement"); or
iii. Fraud, embezzlement or other material dishonesty on the part of
Employee with respect to the Company or any of its Affiliates or conviction of
or plea of nolo contendere by Employee to a felony or any crime involving moral
turpitude.
Upon the giving of notice of termination of Employee's employment hereunder for
Cause, the Company shall have no further obligation or liability to Employee,
other than for Base Salary earned and unpaid at the date of termination.
For purposes of this Agreement, no act, or failure to act, on Employee's
part shall be considered "willful" unless such act, or failure to act, was not
in good faith and was without reasonable belief that Employee's action or
omission was in the best interest of the Company.
d. BY THE COMPANY OTHER THAN FOR CAUSE. The Company may terminate
Employee's employment hereunder other than for Cause at any time upon written
notice to Employee. If such termination occurs either before or after a Change
of Control Period (as defined in Section 5.g) and provided that Employee
executes a release of claims in the form attached hereto and marked "A" (the
"Employee Release") and does not revoke the same within the period stated in
Employee Release, then the Company shall (i) pay Employee, within ten (10)
business days after such termination, a lump sum payment equal to twelve (12)
months' Base Salary at the rate in effect on the date of termination and (ii)
shall pay the full cost of Employee's continued participation in the Company's
group health and dental insurance plans for so long as Employee remains entitled
to continue such participation under the federal law known as "COBRA" or any
successor law and the applicable plan terms.
e. BY EMPLOYEE FOR GOOD REASON. Employee may terminate employment
hereunder for Good Reason at any time upon written notice to the Company setting
forth in reasonable detail the nature of such Good Reason. The following shall
constitute Good Reason for termination by Employee:
i. Failure of the Company to continue Employee in the position of
Senior Vice President of Business Development and Planning and General Counsel
of the Company or in such other position to which Employee may subsequently be
assigned with Employee's consent; or
ii. Material diminution in the nature or scope of Employee's
responsibilities, duties or authority; provided, however, that the Company's
failure to continue Employee in the position of director or officer of any of
its Affiliates and any diminution of the business of the Company or any of its
Affiliates, including without limitation the sale or transfer of any or all of
the assets of the Company or any of its Affiliates, shall not constitute "Good
Reason"; or
iii. Permanent transfer of Employee, without Employee's consent, to a
work site located such that Employee's commute to and from work is more than
fifty (50) miles each way; or
iv. A decrease in the Base Salary of more than fifteen percent (15%)
or the material failure of the Company to provide Employee benefits in
accordance with the terms of Section 4.b or 4.d hereof.
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In the event of termination in accordance with this Section 5.e, the Company
shall provide Employee pay and benefits in accordance with Section 5.d, provided
that Employee executes the Employee Release and does not revoke the same within
the period stated in the Employee Release.
f. BY EMPLOYEE OTHER THAN FOR GOOD REASON. Employee may terminate
employment hereunder at any time upon thirty (30) days' prior written notice to
the Company.
g. UPON A CHANGE OF CONTROL.
i. If a Change of Control occurs and if on the date of, or
within one year following, such Change of Control (a "Change of Control
Period"), the Company terminates Employee's employment with the Company other
than for Cause or Employee terminates his employment with the Company for Good
Reason and, in either event, Employee executes the Employee Release and does not
revoke the same within the period stated in the Employee Release, then the
Company: (A) shall pay Employee an amount (the "Change of Control Payment")
equal to two times the greater of (1) the sum of the Base Salary and the amount
of any Bonus paid or payable during the twelve (12) months following the date on
which such termination occurs or (2) the sum of the Base Salary and the amount
of any Bonus paid or payable to Employee during the twelve (12) months preceding
the date on which such termination occurs, payable as provided below; and (B)
shall pay the full cost of Employee's continued participation in the Company's
group health and dental insurance plans for so long as Employee remains entitled
to continue such participation under COBRA or any successor law and the
applicable plan terms. Any decrease in Employee's Bonus and any decrease in
Employee's Base Salary that occur after the date a Change of Control occurs (the
"Change of Control Date") shall be disregarded for purposes of the calculation
set forth in the preceding clause (A). The Change of Control Payment shall be in
lieu of any payments to or on behalf of Employee that may otherwise be required
pursuant to Sections 5.d or 5.e.
Unless the Company and Employee agree otherwise in writing (in
which case the Company shall pay the Change of Control Payment, net of all
applicable federal and state taxes (including any excise tax), to Employee
within thirty (30) days following date of the applicable notice of termination
of Employee's employment), the Company shall continue to pay Employee his Base
Salary, at the rate in effect on the date of such written notice or, if greater,
the rate in effect immediately prior to the Change of Control Date, for a period
of not less than ninety (90) days nor more than nine (9) months following the
date of such written notice, as mutually agreed to by the Company and Employee
(the "Continuation Period"), PROVIDED, that (i) in the absence of agreement
between the Company and Employee as to the length of the Continuation Period,
such period shall be nine (9) months and (ii) in any event, Employee may, at his
option, terminate the Continuation Period after the ninetieth (90th) day thereof
upon thirty (30) days' prior written notice to the Company. Within thirty (30)
days following the last day of the Continuation Period, the Company shall pay to
Employee an amount equal to the Change of Control Payment minus all payments of
Base Salary paid to Employee for the Continuation Period, net of all applicable
federal and state taxes (including any excise tax). During the Continuation
Period, Employee shall continue to be considered an "employee" of the Company
for purposes of participation in the Company's employee benefit plans pursuant
to Section 1.d, subject to the terms of such plans, and for purposes of the
Company's stock option plans and the stock option certificates covering the
options then held by Employee. The Company hereby agrees to waive the provisions
of Section 3 hereof during the Continuation Period, provided that Employee does
not violate the provisions of Section 7 hereof during such period.
ii. Notwithstanding the foregoing, the payments and benefits to
which Employee would be entitled pursuant to Section 5.g.i as a result of a
Change of Control shall be reduced to the maximum amount for which the Company
will not be limited in its deduction pursuant to Section 280G of the Internal
Revenue Code or any successor provision. Any such reduction shall be applied to
the amounts due under Section 5.g.i as Employee may reasonably determine or, if
Employee fails to make such determination promptly following notice from the
Company, as the Company may reasonably determine.
The limitations of the immediately preceding paragraph shall not
apply if (A) the present value, net of all federal, state and other income and
excise taxes, of all payments and benefits to which Employee is entitled
hereunder without such limitations exceeds (B) the present value, net of all
federal, state and other income
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<PAGE> 5
and excise taxes, of all payments and benefits to which Employee would be
entitled hereunder if such limitations applied.
iii. A Change of Control shall be deemed to take place if after
the Effective Date: (A) within twenty-four (24) months after the commencement of
a tender offer or exchange offer for voting securities of the Company (other
than by the Company or any of its Affiliates), the individuals who were
directors of the Company immediately prior to the commencement of such offer
shall cease to constitute a majority of the Board; or (B) the stockholders of
the Company approve a merger or consolidation of the Company with any Person,
other than a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than seventy-five percent (75%) of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; or (C) there occurs
a closing of a sale or other disposition by the Company of all or substantially
all of the assets of the Company other than to any of its Affiliates or any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any of its Affiliates.
iv. The Company shall promptly reimburse Employee for the amount
of all reasonable attorneys' fees and expenses incurred by Employee in seeking
to obtain or enforce any right or benefit provided Employee under this Section
5.g.
6. EFFECT OF TERMINATION OF EMPLOYMENT. The provisions of this Section 6
shall apply to any termination of employment hereunder.
a. Payment by the Company of any Base Salary, pro-rated Bonus or
contributions to the cost of Employee's continued participation in the Company's
group health and dental plans or other amounts that may be due Employee in each
case as expressly provided for under the applicable termination provision of
Section 5 hereof shall constitute the entire obligation of the Company to
Employee. Employee shall promptly give the Company notice of all facts necessary
for the Company to determine the amount and duration of its obligations in
connection with any termination pursuant to Section 5.d, 5.e or 5.g.
b. Except for medical and dental plan coverage continued pursuant to
Section 5.d, 5.e or 5.g, benefits shall terminate pursuant to the term of the
applicable benefit plans based on the date of termination of Employee's
employment without regard to any continuation of Base Salary or other payment to
Employee following such date of termination, except as otherwise provided in
Section 5.g.
c. The obligations of Employee set forth in Sections 7 and 10 and in the
Confidentiality and Inventions Agreement shall survive the termination of
Employee's employment hereunder. Employee recognizes that, except as expressly
provided in Section 5.d, 5.e or 5.g, as applicable, no compensation is earned
after termination of employment.
7. RESTRICTED ACTIVITIES. In consideration of the terms of this Agreement,
Employee agrees that some restrictions on Employee's activities during and after
employment are necessary to protect the goodwill, confidential information and
other legitimate interests of the Company and its Affiliates:
a. Employee hereby acknowledges that the activities carried on by the
Company and its Affiliates have worldwide business and commercial implications
for the Company and its Affiliates, without geographic limit. In consideration
of the payments set forth herein, Employee agrees not to engage, directly or
indirectly, for a period of six (6) months following the termination of his
employment for any reason whatsoever (the "Non-Competition Period"), in any line
of business which competes in the United States with a line of business carried
on by the Company or any of its Affiliates on the date of such termination, or
any line of business in which the Company or any of its Affiliates, as of the
date of such termination, has made definite plans to become engaged in the
United States. Employee will be deemed to have engaged in such line of business
if he participates therein as an employee, consultant, partner, proprietor or
investor (provided that Employee shall not be deemed to have
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<PAGE> 6
engaged in such line of business solely by reason of any passive equity
investment in any entity that does not exceed 5% of the outstanding capital
stock of such entity).
b. Employee agrees that he shall not, during the Non-Competition Period,
engage in any activity for the purpose of (i) inducing, diverting or taking away
any employee of the Company or any of its Affiliates or (ii) inducing, diverting
or taking away any consultant of the Company in a manner which would deprive the
Company or any of its Affiliates of the consultant's services.
8. ENFORCEMENT OF COVENANTS. Employee acknowledges and agrees that, were
Employee to breach any of the covenants contained in Section 7 or in the
Confidentiality and Inventions Agreement, the damage to the Company and its
Affiliates would be irreparable, that the damage would be extremely difficult to
ascertain, and that money damages alone would not be an adequate remedy.
Accordingly, Employee agrees that the Company and its Affiliates and their
successors and assigns, in addition to any other remedies available to them,
shall be entitled to preliminary and permanent injunctive relief against any
breach or threatened breach by Employee of any of said covenants, without having
to post bond. The parties further agree that, if any provision of Section 7 or
of the Confidentiality and Inventions Agreement shall be determined by any court
of competent jurisdiction to be unenforceable by reason of its being extended
over too great a time, too large a geographic area or too great a range of
activities, such provision shall be deemed to be modified to permit its
enforcement to the maximum extent permitted by applicable law.
9. CONFLICTING AGREEMENTS. Employee hereby represents and warrants that the
execution of this Agreement and the performance of Employee's obligations
hereunder will not breach or be in conflict with any other agreement to which
Employee is a party or is bound and that Employee is not now subject to any
covenants against competition, covenants of confidentiality or similar covenants
with any person or entity other than the Company that would affect the
performance of Employee's obligations hereunder. Employee shall not disclose to
or use on behalf of the Company any proprietary information of any third party
without such party's consent.
10. LITIGATION ASSISTANCE. Employee covenants and agrees that he shall, upon
reasonable notice, during the Term and for three (3) full years after the
termination of this Agreement, furnish such information and assistance to the
Company as may be reasonably required by the Company in connection with any
litigation in which it or any of its Affiliates is, or may become, a party. The
Company shall reimburse Employee for all reasonable out-of-pocket expenses
incurred by Employee in furnishing such information and assistance.
11. INDEMNIFICATION. The Company shall indemnify and hold Employee harmless to
the extent provided in its then-current Articles of Organization or By Laws.
Employee agrees to promptly notify the Company of any actual or threatened claim
arising out of or as a result of Employee's employment with the Company.
12. WITHHOLDING. All payments made by the Company under this Agreement shall be
reduced by any tax or other amounts required to be withheld by the Company under
applicable law.
13. ASSIGNMENT. Neither the Company nor Employee may make any assignment of
this Agreement or any interest herein, by operation of law or otherwise, without
the prior written consent of the other; provided, however, that the Company may
assign its rights and obligations under this Agreement without the consent of
Employee if the Company shall hereafter effect a reorganization, consolidate
with or merge into any entity or transfer all or substantially all of its
properties or assets to any entity. This Agreement shall inure to the benefit of
and be binding upon the Company and Employee, their respective successors,
executors, administrators, heirs and permitted assigns.
14. SEVERABILITY. The terms of this Agreement are severable. If any portion or
provision of this Agreement shall to any extent be declared illegal or
unenforceable by a court of competent jurisdiction, then the remainder of this
Agreement, or the application of such portion or provision in circumstances
other than those as to which it is so declared illegal or unenforceable, shall
not be affected thereby, and each portion and provision of this Agreement shall
be valid and enforceable to the fullest extent permitted by law.
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<PAGE> 7
15. NOTICES. Any and all notices, requests, demands and other communications
provided for by this Agreement shall be in writing and shall be effective when
delivered in person or deposited in the United States mail, postage prepaid,
registered or certified, or by recognized overnight courier and addressed to
Employee at Employee's last known address on the books of the Company or, in the
case of the Company, at its principal place of business, attention of the
President, or to such other address as either party may specify by written
notice to the other actually received.
16. ENTIRE AGREEMENT; AMENDMENT AND WAIVER. This Agreement and the
Confidentiality and Inventions Agreement, which is incorporated herein by
reference, constitute the entire agreement between the parties and supersede all
prior communications, agreements and understandings, written or oral, with
respect to the terms and conditions of Employee's employment, including the
Original Employment Agreement. This Agreement may be amended or modified only by
a written instrument signed by Employee and by an expressly authorized
representative of the Company. Employee and the Company agree that their
respective rights and remedies against the other are cumulative and that they
may be exercised singularly or collectively, successively or concurrently. A
waiver of any violation or failure to enforce any provision of this Agreement
shall not constitute a waiver of any rights under this Agreement with respect to
any other or continued violation of any provision of this Agreement. Any waiver
shall be enforceable only if in writing and signed by an expressly authorized
representative of the Company and by Employee.
17. SERVICE AS A DIRECTOR. Each of the Company and Employee acknowledges that
each of the election or appointment of Employee as a member of the Board of
Directors, Employee's status as a member of the Board of Directors and
Employee's resignation or removal as a member of the Board of Directors is
governed by the articles of organization and bylaws of the Company and by
Massachusetts law, and shall not in any way affect, or be affected by, the terms
of this Agreement.
18. HEADINGS, REFERENCES AND COUNTERPARTS. The headings and captions in this
Agreement are for convenience only and in no way define or describe the scope or
content of any provision of this Agreement. References in this Agreement to
Sections are references to the specified Sections of this Agreement. This
Agreement may be executed in two or more counterparts, each of which shall be an
original and all of which together shall constitute one and the same instrument.
19. GOVERNING LAW. This is a Massachusetts contract and shall be construed and
enforced under and be governed in all respects by the laws of the Commonwealth
of Massachusetts, USA, without regard to the conflict of laws principles
thereof. Employee and the Company consent to the exclusive jurisdiction of the
state and federal courts of the Commonwealth of Massachusetts, USA.
EMPLOYEE ACKNOWLEDGES THAT HE HAS CAREFULLY READ AND CONSIDERED ALL THE TERMS
AND CONDITIONS OF THIS AGREEMENT, INCLUDING THE RESTRAINTS IMPOSED UPON EMPLOYEE
PURSUANT TO SECTION 7 AND PURSUANT TO THE CONFIDENTIALITY AND INVENTIONS
AGREEMENT. EMPLOYEE AGREES THAT SAID RESTRAINTS ARE NECESSARY FOR THE REASONABLE
AND PROPER PROTECTION OF THE COMPANY AND ITS AFFILIATES AND THAT EACH AND EVERY
ONE OF THE RESTRAINTS IS REASONABLE IN RESPECT TO SUBJECT MATTER, LENGTH OF TIME
AND GEOGRAPHIC AREA.
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by
the Company, by its duly authorized representative, and by Employee, effective
as of the Effective Date.
EMPLOYEE: FTP SOFTWARE, INC.
/s/ Douglas F. Flood By: /s/ Glenn C. Hazard
------------------------------ -----------------------------
Douglas F. Flood Title: President
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<PAGE> 1
Exhibit 10.17
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into by and
between FTP Software, Inc., a Massachusetts corporation (the "Company"), and
Dennis Leibl ("Employee"), effective as of the 12th day of December, 1997 (the
"Effective Date").
In consideration of the mutual promises, terms and conditions set forth in this
Agreement, the parties hereby agree as follows:
1. EMPLOYMENT. Subject to the terms and conditions set forth in this
Agreement, the Company hereby offers and Employee hereby accepts employment.
2. TERM. Subject to earlier termination pursuant to Section 5, the term of
Employee's employment hereunder shall be one year, commencing on the Effective
Date; PROVIDED, that unless written notice pursuant to Sections 5.c, d, e, f or
g to the contrary is given by either party hereto to the other at least thirty
(30) days prior to the expiration of the original or any renewal term (in which
case this Agreement shall terminate as of the last day of such term or, if
earlier, the date such notice becomes effective in accordance with such Section,
in each case with the effect provided in such Section), the term of Employee's
employment hereunder shall automatically renew for successive terms of one year
each; PROVIDED, FURTHER, that if a Change of Control (as defined in Section 5)
occurs, the then-current term shall be automatically extended so that the
remainder of the term is not less than twelve (12) full calendar months from the
date of the Change of Control. The term of this Agreement, as from time to time
renewed or extended, is referred to herein as the "Term."
3. DUTIES; CONFLICTING INTERESTS. During the Term, Employee agrees to
serve the Company as its Senior Vice President/General Manager, VIP Network
Applications Business Unit, or in such other executive position as the Board of
Directors of the Company (the "Board") or the President of the Company (the
"President") may designate from time to time with Employee's consent. In
addition, and without further compensation, Employee shall serve as a director
and/or officer of one or more of the Company's Affiliates (as hereafter defined)
if so elected or appointed from time to time. Employee shall, on a full-time
basis, perform such duties and responsibilities for the Company and its
Affiliates as are intrinsic to Employee's position and status with the Company
or as may otherwise reasonably be designated from time to time by the Board or
by the President or any designees of the President. Employee shall devote his
best efforts, business judgment, skill and knowledge exclusively to the
advancement of the business and interests of the Company and its Affiliates.
Employee shall not engage in any other business activity (whether or not such
business activity is pursued for gain, profit or other pecuniary advantage) or
serve on any other board of directors or in any industry, trade, professional,
governmental or academic position during the term of this Agreement, except as
may be expressly approved in advance in writing by the Board or the President,
which approval shall not be unreasonably withheld, delayed or conditioned.
For the purposes of this Agreement, the term "Affiliates" shall mean
all persons and entities directly or indirectly controlling, controlled by or
under common control with the Company, where control may be by either management
authority or equity interest.
4. COMPENSATION AND BENEFITS.
a. BASE SALARY. During the Term, the Company shall pay Employee a
base salary at the rate of Two Hundred and Twenty-Five Thousand Dollars
($225,000) per annum, payable in accordance with the payroll practices of the
Company and subject to adjustment from time to time by the Board in its sole
discretion. Such base salary, as adjusted from time to time, is referred to as
the "Base Salary."
b. CASH INCENTIVE AND BONUS COMPENSATION. If a cash incentive or
bonus compensation plan is made available to executives of the Company generally
and Employee is not then covered by any other cash incentive or bonus
compensation plan, Employee shall be entitled during the Term to participate in
such plan (if any) in
<PAGE> 2
accordance with the plan's then current terms. Any compensation paid to Employee
under any incentive or bonus compensation plan (hereafter, "Bonus") shall be in
addition to the Base Salary. Except as otherwise provided under the terms of
such incentive or bonus compensation plan or this Agreement, any Bonus payable
to Employee shall be pro-rated during Employee's first and last year of service
as an executive officer of the Company, provided, in each case, that Employee
has been employed for at least three (3) months of the twelve (12) month period
on which the cash incentive or bonus compensation plan is based.
c. STOCK OPTIONS. Upon a "Change of Control," as hereafter
defined, any and all stock options granted to Employee by the Company and not
yet exercised, expired, surrendered or canceled shall automatically vest and
become exercisable in full, but shall remain exercisable only in accordance with
the terms of any applicable stock option plan, certificate or agreement.
d. OTHER BENEFITS. During the Term, Employee shall be entitled to
participate in any and all employee benefit plans from time to time in effect
for employees of the Company generally, except to the extent such plans are in a
category of benefit otherwise provided to Employee. Such participation shall be
subject to the terms of the applicable plan documents and generally applicable
Company policies.
5. TERMINATION OF EMPLOYMENT AND SEVERANCE BENEFITS. Notwithstanding the
provisions of Section 2, Employee's employment hereunder shall terminate under
the following circumstances.
a. DEATH. In the event of Employee's death, Employee's employment
hereunder shall immediately and automatically terminate and the Company shall
pay to Employee's designated beneficiary or, if none, to Employee's estate, a
sum equal to three (3) months' Base Salary plus any Bonus due Employee,
pro-rated through the date of Employee's death.
b. DISABILITY.
i. The Company may terminate Employee's employment
hereunder, upon written notice to Employee, if Employee becomes disabled
(whether physically or mentally) and, as a result, is unable to perform
substantially all of his duties and responsibilities hereunder for any 180
(whether or not consecutive) days during any period of 365 consecutive calendar
days.
ii. Notwithstanding that someone else may be performing
Employee's tasks while Employee is disabled, Employee shall continue to receive
the Base Salary in accordance with Section 4.a and benefits in accordance with
Section 4.d to the extent permitted by the then-current terms of the applicable
benefit plans, until Employee becomes eligible for disability income benefits
under the Company's disability income plan or until the termination of
Employee's employment, whichever occurs first. While receiving disability income
payments under the Company's disability income plan, Employee shall not be
entitled to receive any Base Salary under Section 4.a, but shall continue to
participate in Company benefit plans in accordance with Section 4.d (to the
extent permitted by the then-current terms of such plans) until the termination
of Employee's employment.
iii. If any question arises as to whether during any
period Employee is disabled so as to be unable to perform substantially all of
his duties and responsibilities hereunder, Employee, at the request of the
Company, shall submit to a medical examination by a physician reasonably
selected by the Company to determine whether Employee is so disabled and such
determination shall for the purposes of this Agreement be conclusive of the
issue. If such question arises and Employee fails to submit to such medical
examination, the Company's determination of the issue shall be binding on
Employee.
c. BY THE COMPANY FOR CAUSE. The Company may terminate Employee's
employment hereunder for Cause at any time upon written notice to Employee
setting forth in reasonable detail the nature of such Cause. The following, as
determined by the Board, shall constitute Cause for termination by the Company:
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<PAGE> 3
i. Employee's willful failure to perform (other than by
reason of disability), or gross negligence in the performance of, Employee's
duties and responsibilities to the Company or any of its Affiliates; or
ii. Material breach by Employee of any provision of this
Agreement or the Employee Confidentiality and Inventions Agreement dated as of
June 17, 1997 between the Company and Employee (the "Confidentiality and
Inventions Agreement"); or
iii. Fraud, embezzlement or other material dishonesty on
the part of Employee with respect to the Company or any of its Affiliates or
conviction of or plea of nolo contendere by Employee to a felony or any crime
involving moral turpitude.
Upon the giving of notice of termination of Employee's employment hereunder for
Cause, the Company shall have no further obligation or liability to Employee,
other than for Base Salary earned and unpaid at the date of termination.
For purposes of this Agreement, no act, or failure to act, on
Employee's part shall be considered "willful" unless such act, or failure to
act, was not in good faith and was without reasonable belief that Employee's
action or omission was in the best interest of the Company.
d. BY THE COMPANY OTHER THAN FOR CAUSE. The Company may terminate
Employee's employment hereunder other than for Cause at any time upon written
notice to Employee. If such termination occurs either before or after a Change
of Control Period (as defined in Section 5.g) and provided that Employee
executes a release of claims in the form attached hereto and marked "A" (the
"Employee Release") and does not revoke the same within the period stated in
Employee Release, then the Company shall (i) pay Employee, within ten (10)
business days after such termination, a lump sum payment equal to twelve (12)
months' Base Salary at the rate in effect on the date of termination and (ii)
shall pay the full cost of Employee's continued participation in the Company's
group health and dental insurance plans for so long as Employee remains entitled
to continue such participation under the federal law known as "COBRA" or any
successor law and the applicable plan terms.
e. BY EMPLOYEE FOR GOOD REASON. Employee may terminate employment
hereunder for Good Reason at any time upon written notice to the Company setting
forth in reasonable detail the nature of such Good Reason. The following shall
constitute Good Reason for termination by Employee:
i. Failure of the Company to continue Employee in the
position of Senior Vice President/General Manager, VIP Network Applications
Business Unit, of the Company or in such other position to which Employee may
subsequently be assigned with Employee's consent; or
ii. Material diminution in the nature or scope of
Employee's responsibilities, duties or authority; provided, however, that the
Company's failure to continue Employee in the position of director or officer of
any of its Affiliates and any diminution of the business of the Company or any
of its Affiliates, including without limitation the sale or transfer of any or
all of the assets of the Company or any of its Affiliates, shall not constitute
"Good Reason"; or
iii. Permanent transfer of Employee, without Employee's
consent, to a work site located such that Employee's commute to and from work is
more than fifty (50) miles each way; or
iv. A decrease in the Base Salary of more than fifteen
percent (15%) or the material failure of the Company to provide Employee
benefits in accordance with the terms of Section 4.b or 4.d hereof.
In the event of termination in accordance with this Section 5.e, the Company
shall provide Employee pay and benefits in accordance with Section 5.d, provided
that Employee executes the Employee Release and does not revoke the same within
the period stated in the Employee Release.
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<PAGE> 4
f. BY EMPLOYEE OTHER THAN FOR GOOD REASON. Employee may terminate
employment hereunder at any time upon thirty (30) days' prior written notice to
the Company.
g. UPON A CHANGE OF CONTROL.
i. If a Change of Control occurs and if on the date of, or within
one year following, such Change of Control (a "Change of Control Period"), the
Company terminates Employee's employment with the Company other than for Cause
or Employee terminates his employment with the Company for Good Reason and, in
either event, Employee executes the Employee Release and does not revoke the
same within the period stated in the Employee Release, then the Company: (A)
shall pay Employee an amount (the "Change of Control Payment") equal to two
times the greater of (1) the sum of the Base Salary and the amount of any Bonus
paid or payable during the twelve (12) months following the date on which such
termination occurs or (2) the sum of the Base Salary and the amount of any Bonus
paid or payable to Employee during the twelve (12) months preceding the date on
which such termination occurs, payable as provided below; and (B) shall pay the
full cost of Employee's continued participation in the Company's group health
and dental insurance plans for so long as Employee remains entitled to continue
such participation under COBRA or any successor law and the applicable plan
terms. Any decrease in Employee's Bonus and any decrease in Employee's Base
Salary that occur after the date a Change of Control occurs (the "Change of
Control Date") shall be disregarded for purposes of the calculation set forth in
the preceding clause (A). The Change of Control Payment shall be in lieu of any
payments to or on behalf of Employee that may otherwise be required pursuant to
Sections 5.d or 5.e.
Unless the Company and Employee agree otherwise in writing (in
which case the Company shall pay the Change of Control Payment, net of all
applicable federal and state taxes (including any excise tax), to Employee
within thirty (30) days following date of the applicable notice of termination
of Employee's employment), the Company shall continue to pay Employee his Base
Salary, at the rate in effect on the date of such written notice or, if greater,
the rate in effect immediately prior to the Change of Control Date, for a period
of not less than ninety (90) days nor more than nine (9) months following the
date of such written notice, as mutually agreed to by the Company and Employee
(the "Continuation Period"), PROVIDED, that (i) in the absence of agreement
between the Company and Employee as to the length of the Continuation Period,
such period shall be nine (9) months and (ii) in any event, Employee may, at his
option, terminate the Continuation Period after the ninetieth (90th) day thereof
upon thirty (30) days' prior written notice to the Company. Within thirty (30)
days following the last day of the Continuation Period, the Company shall pay to
Employee an amount equal to the Change of Control Payment minus all payments of
Base Salary paid to Employee for the Continuation Period, net of all applicable
federal and state taxes (including any excise tax). During the Continuation
Period, Employee shall continue to be considered an "employee" of the Company
for purposes of participation in the Company's employee benefit plans pursuant
to Section 1.d, subject to the terms of such plans, and for purposes of the
Company's stock option plans and the stock option certificates covering the
options then held by Employee. The Company hereby agrees to waive the provisions
of Section 3 hereof during the Continuation Period, provided that Employee does
not violate the provisions of Section 7 hereof during such period.
ii. Notwithstanding the foregoing, the payments and
benefits to which Employee would be entitled pursuant to Section 5.g.i as a
result of a Change of Control shall be reduced to the maximum amount for which
the Company will not be limited in its deduction pursuant to Section 280G of the
Internal Revenue Code or any successor provision. Any such reduction shall be
applied to the amounts due under Section 5.g.i as Employee may reasonably
determine or, if Employee fails to make such determination promptly following
notice from the Company, as the Company may reasonably determine.
The limitations of the immediately preceding paragraph shall
not apply if (A) the present value, net of all federal, state and other income
and excise taxes, of all payments and benefits to which Employee is entitled
hereunder without such limitations exceeds (B) the present value, net of all
federal, state and other income and excise taxes, of all payments and benefits
to which Employee would be entitled hereunder if such limitations applied.
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<PAGE> 5
iii. A Change of Control shall be deemed to take place if
after the Effective Date: (A) within twenty-four (24) months after the
commencement of a tender offer or exchange offer for voting securities of the
Company (other than by the Company or any of its Affiliates), the individuals
who were directors of the Company immediately prior to the commencement of such
offer shall cease to constitute a majority of the Board; or (B) the stockholders
of the Company approve a merger or consolidation of the Company with any Person,
other than a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than seventy-five percent (75%) of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; or (C) there occurs
a closing of a sale or other disposition by the Company of all or substantially
all of the assets of the Company other than to any of its Affiliates or any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any of its Affiliates.
iv. The Company shall promptly reimburse Employee for the
amount of all reasonable attorneys' fees and expenses incurred by Employee in
seeking to obtain or enforce any right or benefit provided Employee under this
Section 5.g.
6. EFFECT OF TERMINATION OF EMPLOYMENT. The provisions of this Section 6
shall apply to any termination of employment hereunder.
a. Payment by the Company of any Base Salary, pro-rated Bonus or
contributions to the cost of Employee's continued participation in the Company's
group health and dental plans or other amounts that may be due Employee in each
case as expressly provided for under the applicable termination provision of
Section 5 hereof shall constitute the entire obligation of the Company to
Employee. Employee shall promptly give the Company notice of all facts necessary
for the Company to determine the amount and duration of its obligations in
connection with any termination pursuant to Section 5.d, 5.e or 5.g.
b. Except for medical and dental plan coverage continued pursuant
to Section 5.d, 5.e or 5.g, benefits shall terminate pursuant to the term of the
applicable benefit plans based on the date of termination of Employee's
employment without regard to any continuation of Base Salary or other payment to
Employee following such date of termination, except as otherwise provided in
Section 5.g.
c. The obligations of Employee set forth in Sections 7 and 10 and
in the Confidentiality and Inventions Agreement shall survive the termination of
Employee's employment hereunder. Employee recognizes that, except as expressly
provided in Section 5.d, 5.e or 5.g, as applicable, no compensation is earned
after termination of employment.
7. RESTRICTED ACTIVITIES. In consideration of the terms of this Agreement,
Employee agrees that some restrictions on Employee's activities during and after
employment are necessary to protect the goodwill, confidential information and
other legitimate interests of the Company and its Affiliates:
a. Employee hereby acknowledges that the activities carried on by
the Company and its Affiliates have worldwide business and commercial
implications for the Company and its Affiliates, without geographic limit. In
consideration of the payments set forth herein, Employee agrees not to engage,
directly or indirectly, for a period of six (6) months following the termination
of his employment for any reason whatsoever (the "Non-Competition Period"), in
any line of business which competes in the United States with a line of business
carried on by the Company or any of its Affiliates on the date of such
termination, or any line of business in which the Company or any of its
Affiliates, as of the date of such termination, has made definite plans to
become engaged in the United States. Employee will be deemed to have engaged in
such line of business if he participates therein as an employee, consultant,
partner, proprietor or investor (provided that Employee shall not be deemed to
have engaged in such line of business solely by reason of any passive equity
investment in any entity that does not exceed 5% of the outstanding capital
stock of such entity).
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b. Employee agrees that he shall not, during the Non-Competition
Period, engage in any activity for the purpose of (i) inducing, diverting or
taking away any employee of the Company or any of its Affiliates or (ii)
inducing, diverting or taking away any consultant of the Company in a manner
which would deprive the Company or any of its Affiliates of the consultant's
services.
8. ENFORCEMENT OF COVENANTS. Employee acknowledges and agrees that, were
Employee to breach any of the covenants contained in Section 7 or in the
Confidentiality and Inventions Agreement, the damage to the Company and its
Affiliates would be irreparable, that the damage would be extremely difficult to
ascertain, and that money damages alone would not be an adequate remedy.
Accordingly, Employee agrees that the Company and its Affiliates and their
successors and assigns, in addition to any other remedies available to them,
shall be entitled to preliminary and permanent injunctive relief against any
breach or threatened breach by Employee of any of said covenants, without having
to post bond. The parties further agree that, if any provision of Section 7 or
of the Confidentiality and Inventions Agreement shall be determined by any court
of competent jurisdiction to be unenforceable by reason of its being extended
over too great a time, too large a geographic area or too great a range of
activities, such provision shall be deemed to be modified to permit its
enforcement to the maximum extent permitted by applicable law.
9. CONFLICTING AGREEMENTS. Employee hereby represents and warrants that
the execution of this Agreement and the performance of Employee's obligations
hereunder will not breach or be in conflict with any other agreement to which
Employee is a party or is bound and that Employee is not now subject to any
covenants against competition, covenants of confidentiality or similar covenants
with any person or entity other than the Company that would affect the
performance of Employee's obligations hereunder. Employee shall not disclose to
or use on behalf of the Company any proprietary information of any third party
without such party's consent.
10. LITIGATION ASSISTANCE. Employee covenants and agrees that he shall,
upon reasonable notice, during the Term and for three (3) full years after the
termination of this Agreement, furnish such information and assistance to the
Company as may be reasonably required by the Company in connection with any
litigation in which it or any of its Affiliates is, or may become, a party. The
Company shall reimburse Employee for all reasonable out-of-pocket expenses
incurred by Employee in furnishing such information and assistance.
11. INDEMNIFICATION. The Company shall indemnify and hold Employee harmless
to the extent provided in its then-current Articles of Organization or By Laws.
Employee agrees to promptly notify the Company of any actual or threatened claim
arising out of or as a result of Employee's employment with the Company.
12. WITHHOLDING. All payments made by the Company under this Agreement
shall be reduced by any tax or other amounts required to be withheld by the
Company under applicable law.
13. ASSIGNMENT. Neither the Company nor Employee may make any assignment of
this Agreement or any interest herein, by operation of law or otherwise, without
the prior written consent of the other; provided, however, that the Company may
assign its rights and obligations under this Agreement without the consent of
Employee if the Company shall hereafter effect a reorganization, consolidate
with or merge into any entity or transfer all or substantially all of its
properties or assets to any entity. This Agreement shall inure to the benefit of
and be binding upon the Company and Employee, their respective successors,
executors, administrators, heirs and permitted assigns.
14. SEVERABILITY. The terms of this Agreement are severable. If any portion
or provision of this Agreement shall to any extent be declared illegal or
unenforceable by a court of competent jurisdiction, then the remainder of this
Agreement, or the application of such portion or provision in circumstances
other than those as to which it is so declared illegal or unenforceable, shall
not be affected thereby, and each portion and provision of this Agreement shall
be valid and enforceable to the fullest extent permitted by law.
15. NOTICES. Any and all notices, requests, demands and other
communications provided for by this Agreement shall be in writing and shall be
effective when delivered in person or deposited in the United States mail,
postage prepaid, registered or certified, or by recognized overnight courier and
addressed to Employee at
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Employee's last known address on the books of the Company or, in the case of the
Company, at its principal place of business, attention of the President, or to
such other address as either party may specify by written notice to the other
actually received.
16. ENTIRE AGREEMENT; AMENDMENT AND WAIVER. This Agreement and the
Confidentiality and Inventions Agreement, which is incorporated herein
by reference, constitute the entire agreement between the parties and supersede
all prior communications, agreements and understandings, written or oral, with
respect to the terms and conditions of Employee's employment. This Agreement may
be amended or modified only by a written instrument signed by Employee and by an
expressly authorized representative of the Company. Employee and the Company
agree that their respective rights and remedies against the other are cumulative
and that they may be exercised singularly or collectively, successively or
concurrently. A waiver of any violation or failure to enforce any provision of
this Agreement shall not constitute a waiver of any rights under this Agreement
with respect to any other or continued violation of any provision of this
Agreement. Any waiver shall be enforceable only if in writing and signed by an
expressly authorized representative of the Company and by Employee.
17. HEADINGS, REFERENCES AND COUNTERPARTS. The headings and captions in
this Agreement are for convenience only and in no way define or describe the
scope or content of any provision of this Agreement. References in this
Agreement to Sections are references to the specified Sections of this
Agreement. This Agreement may be executed in two or more counterparts, each of
which shall be an original and all of which together shall constitute one and
the same instrument.
18. GOVERNING LAW. This is a Massachusetts contract and shall be construed
and enforced under and be governed in all respects by the laws of the
Commonwealth of Massachusetts, USA, without regard to the conflict of laws
principles thereof. Employee and the Company consent to the exclusive
jurisdiction of the state and federal courts of the Commonwealth of
Massachusetts, USA.
EMPLOYEE ACKNOWLEDGES THAT HE HAS CAREFULLY READ AND CONSIDERED ALL THE TERMS
AND CONDITIONS OF THIS AGREEMENT, INCLUDING THE RESTRAINTS IMPOSED UPON EMPLOYEE
PURSUANT TO SECTION 7 AND PURSUANT TO THE CONFIDENTIALITY AND INVENTIONS
AGREEMENT. EMPLOYEE AGREES THAT SAID RESTRAINTS ARE NECESSARY FOR THE REASONABLE
AND PROPER PROTECTION OF THE COMPANY AND ITS AFFILIATES AND THAT EACH AND EVERY
ONE OF THE RESTRAINTS IS REASONABLE IN RESPECT TO SUBJECT MATTER, LENGTH OF TIME
AND GEOGRAPHIC AREA.
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by
the Company, by its duly authorized representative, and by Employee, effective
as of the Effective Date.
EMPLOYEE: FTP SOFTWARE, INC.
/s/ Dennis Leibl By: /s/ Glenn C. Hazard
- ---------------- -----------------------
Dennis Leibl Title: President
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<PAGE> 1
EXHIBIT 10.22
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (this "Agreement") is made and
entered into by and between FTP Software, Inc., a Massachusetts corporation (the
"Company"), and James A. Tholen ("Employee"), effective as of the 12th day of
December, 1997 (the "Effective Date").
WHEREAS, the Company and Employee are parties to an Employment Agreement dated
as of April 1, 1997 (the "Original Employment Agreement"); and
WHEREAS, the Company and Employee desire to effectuate certain amendments to
such agreement;
NOW, THEREFORE, in consideration of the mutual promises, terms and conditions
set forth in this Agreement, the parties hereby agree that the Original
Employment Agreement has hereby amended and restated in its entirety as follows:
1. EMPLOYMENT. Subject to the terms and conditions set forth in this
Agreement, the Company hereby offers and Employee hereby accepts employment.
2. TERM. Subject to earlier termination pursuant to Section 5, the term
of Employee's employment hereunder shall be one year, commencing on the
Effective Date; PROVIDED, that unless written notice pursuant to Sections 5.c,
d, e, f or g to the contrary is given by either party hereto to the other at
least thirty (30) days prior to the expiration of the original or any renewal
term (in which case this Agreement shall terminate as of the last day of such
term or, if earlier, the date such notice becomes effective in accordance with
such Section, in each case with the effect provided in such Section), the term
of Employee's employment hereunder shall automatically renew for successive
terms of one year each; PROVIDED, FURTHER, that if a Change of Control (as
defined in Section 5) occurs, the then-current term shall be automatically
extended so that the remainder of the term is not less than twelve (12) full
calendar months from the date of the Change of Control. The term of this
Agreement, as from time to time renewed or extended, is referred to herein as
the "Term."
3. DUTIES; CONFLICTING INTERESTS. During the Term, Employee agrees to
serve the Company as its Senior Vice President and Chief Financial and Operating
Officer or in such other executive position as the Board of Directors of the
Company (the "Board") or the President of the Company (the "President") may
designate from time to time with Employee's consent. In addition, and without
further compensation, Employee shall serve as a director and/or officer of one
or more of the Company's Affiliates (as hereafter defined) if so elected or
appointed from time to time. Employee shall, on a full-time basis, perform such
duties and responsibilities for the Company and its Affiliates as are intrinsic
to Employee's position and status with the Company or as may otherwise
reasonably be designated from time to time by the Board or by the President or
any designees of the President. Employee shall devote his best efforts, business
judgment, skill and knowledge exclusively to the advancement of the business and
interests of the Company and its Affiliates. Employee shall not engage in any
other business activity (whether or not such business activity is pursued for
gain, profit or other pecuniary advantage) or serve on any other board of
directors or in any industry, trade, professional, governmental or academic
position during the term of this Agreement, except as may be expressly approved
in advance in writing by the Board or the President, which approval shall not be
unreasonably withheld, delayed or conditioned.
For the purposes of this Agreement, the term "Affiliates" shall mean
all persons and entities directly or indirectly controlling, controlled by or
under common control with the Company, where control may be by either management
authority or equity interest.
4. COMPENSATION AND BENEFITS.
a. BASE SALARY. During the Term, the Company shall pay Employee a
base salary at the rate of Two Hundred and Thirty-Five Thousand Dollars
($235,000) per annum, payable in accordance with the payroll
<PAGE> 2
practices of the Company and subject to adjustment from time to time by the
Board in its sole discretion. Such base salary, as adjusted from time to time,
is referred to as the "Base Salary."
b. CASH INCENTIVE AND BONUS COMPENSATION. If a cash incentive or
bonus compensation plan is made available to executives of the Company generally
and Employee is not then covered by any other cash incentive or bonus
compensation plan, Employee shall be entitled during the Term to participate in
such plan (if any) in accordance with the plan's then current terms. Any
compensation paid to Employee under any incentive or bonus compensation plan
(hereafter, "Bonus") shall be in addition to the Base Salary. The targeted
percentage of Employee's Base Salary payable as a Bonus under such plans (such
targeted percentage multiplied by Employee's Base Salary is hereinafter referred
to as the "Target Bonus") shall be as set forth or referred to in resolutions
adopted from time to time by the Board or the Compensation Committee of the
Board. Except as otherwise provided under the terms of such incentive or bonus
compensation plan or this Agreement, any Bonus payable to Employee shall be
pro-rated during Employee's first and last year of service as an executive
officer of the Company, provided, in each case, that Employee has been employed
for at least three (3) months of the twelve (12) month period on which the cash
incentive or bonus compensation plan is based.
c. STOCK OPTIONS. Upon a "Change of Control," as hereafter
defined, any and all stock options granted to Employee by the Company and not
yet exercised, expired, surrendered or canceled shall automatically vest and
become exercisable in full, but shall remain exercisable only in accordance with
the terms of any applicable stock option plan, certificate or agreement.
d. OTHER BENEFITS. During the Term, Employee shall be entitled to
participate in any and all employee benefit plans from time to time in effect
for employees of the Company generally, except to the extent such plans are in a
category of benefit otherwise provided to Employee. Such participation shall be
subject to the terms of the applicable plan documents and generally applicable
Company policies.
5. TERMINATION OF EMPLOYMENT AND SEVERANCE BENEFITS. Notwithstanding the
provisions of Section 2, Employee's employment hereunder shall terminate under
the following circumstances.
a. DEATH. In the event of Employee's death, Employee's employment
hereunder shall immediately and automatically terminate and the Company shall
pay to Employee's designated beneficiary or, if none, to Employee's estate, a
sum equal to three (3) months' Base Salary plus any Bonus due Employee,
pro-rated through the date of Employee's death.
b. DISABILITY.
i. The Company may terminate Employee's employment
hereunder, upon written notice to Employee, if Employee becomes disabled
(whether physically or mentally) and, as a result, is unable to perform
substantially all of his duties and responsibilities hereunder for any 180
(whether or not consecutive) days during any period of 365 consecutive calendar
days.
ii. Notwithstanding that someone else may be performing
Employee's tasks while Employee is disabled, Employee shall continue to receive
the Base Salary in accordance with Section 4.a and benefits in accordance with
Section 4.d to the extent permitted by the then-current terms of the applicable
benefit plans, until Employee becomes eligible for disability income benefits
under the Company's disability income plan or until the termination of
Employee's employment, whichever occurs first. While receiving disability income
payments under the Company's disability income plan, Employee shall not be
entitled to receive any Base Salary under Section 4.a, but shall continue to
participate in Company benefit plans in accordance with Section 4.d (to the
extent permitted by the then-current terms of such plans) until the termination
of Employee's employment.
iii. If any question arises as to whether during any
period Employee is disabled so as to be unable to perform substantially all of
his duties and responsibilities hereunder, Employee, at the request of the
Company, shall submit to a medical examination by a physician reasonably
selected by the Company to determine whether Employee is so disabled and such
determination shall for the purposes of this Agreement be conclusive of
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<PAGE> 3
the issue. If such question arises and Employee fails to submit to such medical
examination, the Company's determination of the issue shall be binding on
Employee.
c. BY THE COMPANY FOR CAUSE. The Company may terminate Employee's
employment hereunder for Cause at any time upon written notice to Employee
setting forth in reasonable detail the nature of such Cause. The following, as
determined by the Board, shall constitute Cause for termination by the Company:
i. Employee's willful failure to perform (other than by reason
of disability), or gross negligence in the performance of, Employee's duties and
responsibilities to the Company or any of its Affiliates; or
ii. Material breach by Employee of any provision of this
Agreement or the Employee Confidentiality and Inventions Agreement dated as of
April 1, 1997 between the Company and Employee (the "Confidentiality and
Inventions Agreement"); or
iii. Fraud, embezzlement or other material dishonesty on the
part of Employee with respect to the Company or any of its Affiliates or
conviction of or plea of nolo contendere by Employee to a felony or any crime
involving moral turpitude.
Upon the giving of notice of termination of Employee's employment hereunder for
Cause, the Company shall have no further obligation or liability to Employee,
other than for Base Salary earned and unpaid at the date of termination.
For purposes of this Agreement, no act, or failure to act, on
Employee's part shall be considered "willful" unless such act, or failure to
act, was not in good faith and was without reasonable belief that Employee's
action or omission was in the best interest of the Company.
d. BY THE COMPANY OTHER THAN FOR CAUSE. The Company may terminate
Employee's employment hereunder other than for Cause at any time upon written
notice to Employee. If such termination occurs either before or after a Change
of Control Period (as defined in Section 5.g) and provided that Employee
executes a release of claims in the form attached hereto and marked "A" (the
"Employee Release") and does not revoke the same within the period stated in
Employee Release, then the Company shall (i) pay Employee, within ten (10)
business days after such termination, a lump sum payment equal to twelve (12)
months' Base Salary at the rate in effect on the date of termination and (ii)
shall pay the full cost of Employee's continued participation in the Company's
group health and dental insurance plans for so long as Employee remains entitled
to continue such participation under the federal law known as "COBRA" or any
successor law and the applicable plan terms.
e. BY EMPLOYEE FOR GOOD REASON. Employee may terminate employment
hereunder for Good Reason at any time upon written notice to the Company setting
forth in reasonable detail the nature of such Good Reason. The following shall
constitute Good Reason for termination by Employee:
i. Failure of the Company to continue Employee in the
position of Senior Vice President and Chief Financial and Operating Officer of
the Company or in such other position to which Employee may subsequently be
assigned with Employee's consent; or
ii. Material diminution in the nature or scope of
Employee's responsibilities, duties or authority; provided, however, that the
Company's failure to continue Employee in the position of director or officer of
any of its Affiliates and any diminution of the business of the Company or any
of its Affiliates, including without limitation the sale or transfer of any or
all of the assets of the Company or any of its Affiliates, shall not constitute
"Good Reason"; or
iii. Permanent transfer of Employee, without Employee's
consent, to a work site located such that Employee's commute to and from work is
more than fifty (50) miles each way; or
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<PAGE> 4
iv. A decrease in the Base Salary of more than fifteen
percent (15%) or the material failure of the Company to provide Employee
benefits in accordance with the terms of Section 4.b or 4.d hereof.
In the event of termination in accordance with this Section 5.e, the Company
shall provide Employee pay and benefits in accordance with Section 5.d, provided
that Employee executes the Employee Release and does not revoke the same within
the period stated in the Employee Release.
f. BY EMPLOYEE OTHER THAN FOR GOOD REASON. Employee may terminate
employment hereunder at any time upon thirty (30) days' prior written notice to
the Company.
g. UPON A CHANGE OF CONTROL.
i. If a Change of Control occurs and if on the date of,
or within one year following, such Change of Control (a "Change of Control
Period"), the Company terminates Employee's employment with the Company other
than for Cause or Employee terminates his employment with the Company for any
reason and, in either event, Employee executes the Employee Release and does not
revoke the same within the period stated in the Employee Release, then the
Company: (A) shall pay Employee an amount (the "Change of Control Payment")
equal to two times the greater of (1) the sum of the Base Salary and the amount
of any Target Bonus paid or payable during the twelve (12) months following the
date on which such termination occurs or (2) the sum of the Base Salary and the
amount of any Target Bonus paid or payable to Employee during the twelve (12)
months preceding the date on which such termination occurs, payable as provided
below; and (B) shall pay the full cost of Employee's continued participation in
the Company's group health and dental insurance plans for so long as Employee
remains entitled to continue such participation under COBRA or any successor law
and the applicable plan terms. Any decrease in Employee's Target Bonus that is
approved by the Board or the Compensation Committee of the Board after the date
a Change of Control occurs (the "Change of Control Date") and any decrease in
Employee's Base Salary that occurs after the Change of Control Date shall be
disregarded for purposes of the calculation set forth in the preceding clause
(A). The Change of Control Payment shall be in lieu of any payments to or on
behalf of Employee that may otherwise be required pursuant to Sections 5.d or
5.e.
Unless the Company and Employee agree otherwise in writing (in
which case the Company shall pay the Change of Control Payment, net of all
applicable federal and state taxes (including any Section 4999 Tax, as defined
in Section 5.g.iii), to Employee within thirty (30) days following date of the
applicable notice of termination of Employee's employment), the Company shall
continue to pay Employee his Base Salary, at the rate in effect on the date of
such written notice or, if greater, the rate in effect immediately prior to the
Change of Control Date, for a period of not less than ninety (90) days nor more
than nine (9) months following the date of such written notice, as mutually
agreed to by the Company and Employee (the "Continuation Period"), PROVIDED,
that (i) in the absence of agreement between the Company and Employee as to the
length of the Continuation Period, such period shall be nine (9) months and (ii)
in any event, Employee may, at his option, terminate the Continuation Period
after the ninetieth (90th) day thereof upon thirty (30) days' prior written
notice to the Company. Within thirty (30) days following the last day of the
Continuation Period, the Company shall pay to Employee an amount equal to the
Change of Control Payment minus all payments of Base Salary paid to Employee for
the Continuation Period, net of all applicable federal and state taxes
(including any Section 4999 Tax). During the Continuation Period, Employee shall
continue to be considered an "employee" of the Company for purposes of
participation in the Company's employee benefit plans pursuant to Section 1.d,
subject to the terms of such plans, and for purposes of the Company's stock
option plans and the stock option certificates covering the options then held by
Employee. The Company hereby agrees to waive the provisions of Section 3 hereof
during the Continuation Period, provided that Employee does not violate the
provisions of Section 7 hereof during such period.
ii. A Change of Control shall be deemed to take place if
after the Effective Date: (A) within twenty-four (24) months after the
commencement of a tender offer or exchange offer for voting securities of the
Company (other than by the Company or any of its Affiliates), the individuals
who were directors of the Company immediately prior to the commencement of such
offer shall cease to constitute a majority of the Board; or (B) the stockholders
of the Company approve a merger or consolidation of the Company with any Person,
other than a
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<PAGE> 5
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than seventy-five percent (75%) of the combined voting
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; or (C) there occurs
a closing of a sale or other disposition by the Company of all or substantially
all of the assets of the Company other than to any of its Affiliates or any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any of its Affiliates.
iii. Payments and benefits under Section 5.g.i shall be
provided without regard to whether the deductibility of such payments or
benefits (or any other payments in the nature of compensation to or for the
benefit of Employee) would be limited or precluded by Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), and without regard to
whether such payments or benefits (or any other payments or benefits) would
subject Employee to the federal excise tax (the "Section 4999 Tax") applicable
to certain "excess parachute payments" under Section 4999 of the Code, subject
to the following special rules:
(A) If the aggregate amount of the "parachute
payments" (as that term is defined in Section 280G(b)(2) of the Code,
taking into account the special rules of Section 280G(b)(4)(A) and
Section 280G(b)(6) of the Code) to or for the benefit of Employee,
whether provided under this Agreement or otherwise, does not exceed
three hundred and five percent (305%) of Employee's "base amount" (as
that term is defined in Section 280G(b)(3) of the Code), cash benefits
to or for the benefit of Employee under this Agreement shall be
automatically reduced to the extent (and only to the extent), if any,
necessary so that no payment or benefit to or for the benefit of
Employee, whether provided under this Agreement or otherwise, is
subject to the Section 4999 Tax; and
(B) If the aggregate amount of the "parachute
payments" to or for the benefit of Employee, as determined above,
exceeds three hundred and five percent (305%) of Employee's "base
amount" as determined above, the Company shall pay to Employee (or, in
the event of his death, to his designated beneficiary or, if none, to
his estate) an additional cash payment (the "gross-up payment") that is
equal, after reduction for all federal and state income taxes
(including the Section 4999 Tax) applicable to such gross-up payment,
to the total Section 4999 Tax applicable to Employee's "excess
parachute payments" (as that term is defined in Section 280G(b)(1) of
the Code) determined without regard to the gross-up payment. For
purposes of the preceding sentence, the gross-up payment shall be
deemed subject to federal income tax at the maximum marginal rate and
to state income tax at the maximum rate applicable to compensation
income in the state in which Employee is resident at the time of
payment. The Company shall pay Employee the gross-up payment together
with the payment of the Change of Control Payment pursuant to Section
5.g.i or, if later, promptly following the receipt by the Company of
the written determination referred to in the following paragraph.
The calculation of the amount of the "parachute payments" to or for the benefit
of Employee for purposes of clauses (A) and (B) this Section 5.g.iii and of the
gross-up payment shall be made by an independent accounting firm of national
reputation (other than the firm then serving as the Company's independent
accountants) mutually selected by the Company and Employee. All information
pertaining to such calculations shall be submitted to such independent
accounting firm promptly following the termination of Employee's employment
pursuant to Section 5.g.i. Such calculations shall be determined by such
independent accounting firm and submitted in writing to the Company and Employee
as promptly as practicable and shall be binding on both the Company and
Employee.
iv. The Company shall promptly reimburse Employee for the
amount of all reasonable attorneys' fees and expenses incurred by Employee in
seeking to obtain or enforce any right or benefit provided Employee under this
Section 5.g.
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<PAGE> 6
6. EFFECT OF TERMINATION OF EMPLOYMENT. The provisions of this Section 6
shall apply to any termination of employment hereunder.
a. Payment by the Company of any Base Salary, pro-rated Bonus or
contributions to the cost of Employee's continued participation in the Company's
group health and dental plans or other amounts that may be due Employee in each
case as expressly provided for under the applicable termination provision of
Section 5 hereof shall constitute the entire obligation of the Company to
Employee. Employee shall promptly give the Company notice of all facts necessary
for the Company to determine the amount and duration of its obligations in
connection with any termination pursuant to Section 5.d, 5.e or 5.g.
b. Except for medical and dental plan coverage continued pursuant
to Section 5.d, 5.e or 5.g, benefits shall terminate pursuant to the term of the
applicable benefit plans based on the date of termination of Employee's
employment without regard to any continuation of Base Salary or other payment to
Employee following such date of termination, except as otherwise provided in
Section 5.g.
c. The obligations of Employee set forth in Sections 7 and 10 and
in the Confidentiality and Inventions Agreement shall survive the termination of
Employee's employment hereunder. Employee recognizes that, except as expressly
provided in Section 5.d, 5.e or 5.g, as applicable, no compensation is earned
after termination of employment.
7. RESTRICTED ACTIVITIES. In consideration of the terms of this Agreement,
Employee agrees that some restrictions on Employee's activities during and after
employment are necessary to protect the goodwill, confidential information and
other legitimate interests of the Company and its Affiliates:
a. Employee hereby acknowledges that the activities carried on by
the Company and its Affiliates have worldwide business and commercial
implications for the Company and its Affiliates, without geographic limit. In
consideration of the payments set forth herein, Employee agrees not to engage,
directly or indirectly, for a period of six (6) months following the termination
of his employment for any reason whatsoever (the "Non-Competition Period"), in
any line of business which competes in the United States with a line of business
carried on by the Company or any of its Affiliates on the date of such
termination, or any line of business in which the Company or any of its
Affiliates, as of the date of such termination, has made definite plans to
become engaged in the United States. Employee will be deemed to have engaged in
such line of business if he participates therein as an employee, consultant,
partner, proprietor or investor (provided that Employee shall not be deemed to
have engaged in such line of business solely by reason of any passive equity
investment in any entity that does not exceed 5% of the outstanding capital
stock of such entity).
b. Employee agrees that he shall not, during the Non-Competition
Period, engage in any activity for the purpose of (i) inducing, diverting or
taking away any employee of the Company or any of its Affiliates or (ii)
inducing, diverting or taking away any consultant of the Company in a manner
which would deprive the Company or any of its Affiliates of the consultant's
services.
8. ENFORCEMENT OF COVENANTS. Employee acknowledges and agrees that, were
Employee to breach any of the covenants contained in Section 7 or in the
Confidentiality and Inventions Agreement, the damage to the Company and its
Affiliates would be irreparable, that the damage would be extremely difficult to
ascertain, and that money damages alone would not be an adequate remedy.
Accordingly, Employee agrees that the Company and its Affiliates and their
successors and assigns, in addition to any other remedies available to them,
shall be entitled to preliminary and permanent injunctive relief against any
breach or threatened breach by Employee of any of said covenants, without having
to post bond. The parties further agree that, if any provision of Section 7 or
of the Confidentiality and Inventions Agreement shall be determined by any court
of competent jurisdiction to be unenforceable by reason of its being extended
over too great a time, too large a geographic area or too great a range of
activities, such provision shall be deemed to be modified to permit its
enforcement to the maximum extent permitted by applicable law.
6
<PAGE> 7
9. CONFLICTING AGREEMENTS. Employee hereby represents and warrants that
the execution of this Agreement and the performance of Employee's obligations
hereunder will not breach or be in conflict with any other agreement to which
Employee is a party or is bound and that Employee is not now subject to any
covenants against competition, covenants of confidentiality or similar covenants
with any person or entity other than the Company that would affect the
performance of Employee's obligations hereunder. Employee shall not disclose to
or use on behalf of the Company any proprietary information of any third party
without such party's consent.
10. LITIGATION ASSISTANCE. Employee covenants and agrees that he shall,
upon reasonable notice, during the Term and for three (3) full years after the
termination of this Agreement, furnish such information and assistance to the
Company as may be reasonably required by the Company in connection with any
litigation in which it or any of its Affiliates is, or may become, a party. The
Company shall reimburse Employee for all reasonable out-of-pocket expenses
incurred by Employee in furnishing such information and assistance.
11. INDEMNIFICATION. The Company shall indemnify and hold Employee harmless
to the extent provided in its then-current Articles of Organization or By Laws.
Employee agrees to promptly notify the Company of any actual or threatened claim
arising out of or as a result of Employee's employment with the Company.
12. WITHHOLDING. All payments made by the Company under this Agreement
shall be reduced by any tax or other amounts required to be withheld by the
Company under applicable law.
13. ASSIGNMENT. Neither the Company nor Employee may make any assignment of
this Agreement or any interest herein, by operation of law or otherwise, without
the prior written consent of the other; provided, however, that the Company may
assign its rights and obligations under this Agreement without the consent of
Employee if the Company shall hereafter effect a reorganization, consolidate
with or merge into any entity or transfer all or substantially all of its
properties or assets to any entity. This Agreement shall inure to the benefit of
and be binding upon the Company and Employee, their respective successors,
executors, administrators, heirs and permitted assigns.
14. SEVERABILITY. The terms of this Agreement are severable. If any portion
or provision of this Agreement shall to any extent be declared illegal or
unenforceable by a court of competent jurisdiction, then the remainder of this
Agreement, or the application of such portion or provision in circumstances
other than those as to which it is so declared illegal or unenforceable, shall
not be affected thereby, and each portion and provision of this Agreement shall
be valid and enforceable to the fullest extent permitted by law.
15. NOTICES. Any and all notices, requests, demands and other
communications provided for by this Agreement shall be in writing and shall be
effective when delivered in person or deposited in the United States mail,
postage prepaid, registered or certified, or by recognized overnight courier and
addressed to Employee at Employee's last known address on the books of the
Company or, in the case of the Company, at its principal place of business,
attention of the President, or to such other address as either party may specify
by written notice to the other actually received.
16. ENTIRE AGREEMENT; AMENDMENT AND WAIVER. This Agreement and the
Confidentiality and Inventions Agreement, which is incorporated herein by
reference, constitute the entire agreement between the parties and supersede all
prior communications, agreements and understandings, written or oral, with
respect to the terms and conditions of Employee's employment, including the
Original Employment Agreement. This Agreement may be amended or modified only by
a written instrument signed by Employee and by an expressly authorized
representative of the Company. Employee and the Company agree that their
respective rights and remedies against the other are cumulative and that they
may be exercised singularly or collectively, successively or concurrently. A
waiver of any violation or failure to enforce any provision of this Agreement
shall not constitute a waiver of any rights under this Agreement with respect to
any other or continued violation of any provision of this Agreement. Any waiver
shall be enforceable only if in writing and signed by an expressly authorized
representative of the Company and by Employee.
7
<PAGE> 8
17. HEADINGS, REFERENCES AND COUNTERPARTS. The headings and captions in
this Agreement are for convenience only and in no way define or describe the
scope or content of any provision of this Agreement. References in this
Agreement to Sections are references to the specified Sections of this
Agreement. This Agreement may be executed in two or more counterparts, each of
which shall be an original and all of which together shall constitute one and
the same instrument.
18. GOVERNING LAW. This is a Massachusetts contract and shall be construed
and enforced under and be governed in all respects by the laws of the
Commonwealth of Massachusetts, USA, without regard to the conflict of laws
principles thereof. Employee and the Company consent to the exclusive
jurisdiction of the state and federal courts of the Commonwealth of
Massachusetts, USA.
EMPLOYEE ACKNOWLEDGES THAT HE HAS CAREFULLY READ AND CONSIDERED ALL THE TERMS
AND CONDITIONS OF THIS AGREEMENT, INCLUDING THE RESTRAINTS IMPOSED UPON EMPLOYEE
PURSUANT TO SECTION 7 AND PURSUANT TO THE CONFIDENTIALITY AND INVENTIONS
AGREEMENT. EMPLOYEE AGREES THAT SAID RESTRAINTS ARE NECESSARY FOR THE REASONABLE
AND PROPER PROTECTION OF THE COMPANY AND ITS AFFILIATES AND THAT EACH AND EVERY
ONE OF THE RESTRAINTS IS REASONABLE IN RESPECT TO SUBJECT MATTER, LENGTH OF TIME
AND GEOGRAPHIC AREA.
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by
the Company, by its duly authorized representative, and by Employee, effective
as of the Effective Date.
EMPLOYEE: FTP SOFTWARE, INC.
/s/ James A. Tholen By: /s/ Glenn C. Hazard
- ------------------- -----------------------
James A. Tholen Title: President
8
<PAGE> 1
EXHIBIT 10.26
FTP SOFTWARE, INC.
AMENDMENT NO. 3 TO
1993 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
This Amendment No. 3 to the FTP Software, Inc. 1993 Non-Employee
Directors' Stock Option Plan (as amended by Amendments No. 1 and 2 thereto, the
"Plan") is effective as of December 18, 1997. All capitalized terms used but not
defined herein shall have the meanings specified in the Plan.
1. AMENDMENTS TO THE PLAN.
a. Section 4 of the Plan is hereby amended by deleting subsection 4.a
thereof and replacing it with the following new subsection 4.a:
a. Each Eligible Director shall receive the following automatic
option grants:
i. Each Eligible Director shall, on the date he or she
is first elected or appointed as a director of the Company,
automatically be granted an Option to purchase 20,000 shares of Stock
of the Company (subject to adjustment as provided in Sections 5 and 10)
at an exercise price equal to the Fair Market Value of the Stock on the
effective date of grant; PROVIDED, HOWEVER, that if an Eligible
Director is elected to or appointed to less than a full three-year term
of office, the number of shares subject to such Option shall be reduced
to that number obtained by multiplying 20,000 by a fraction, the
numerator of which is the number of days in the term of office for
which such Eligible Director is elected or appointed and the
denominator of which is 1,096;
ii. thereafter, each Eligible Director shall, on each
of the first and second anniversaries of date he or she is first
elected or appointed as a director of the Company, and provided that
such person is then serving as a director of the Company, automatically
be granted an Option to purchase 10,000 shares of Stock of the Company
(subject to adjustment as provided in Sections 5 and 10) at an exercise
price equal to the Fair Market Value of the Stock on the effective date
of grant; PROVIDED, HOWEVER, that (A) if the term of office of such
Eligible Director is more than one year but less than two years, the
number of shares subject to the Option to be granted on such first
anniversary shall be reduced to that number obtained by multiplying
10,000 by a fraction, the numerator of which is the number of days in
the second year of the term of office of such Eligible Director and the
denominator of which is 365 and (B) and if the term of office of such
Eligible Director is more than two years but less than three
<PAGE> 2
years, the number of shares subject to the Option to be granted on such second
anniversary shall be reduced to that number obtained by multiplying 10,000 by a
fraction, the numerator of which is the number of days in the third year of the
term of office of such Eligible Director and the denominator of which is 365;
and
iii. thereafter, with respect to each Eligible Director
who is elected to a new three-year term of office, such Eligible
Director shall automatically be granted (A) on the date of such
election, an Option to purchase 20,000 shares of Stock of the Company
(subject to adjustment as provided in Sections 5 and 10) and (B) on
each of the first and second anniversaries of such re-election, an
Option to purchase 10,000 shares of Stock of the Company (in each case
subject to adjustment as provided in Sections 5 and 10), provided that
such person is then serving as a director of the Company, in each case
at an exercise price equal to the Fair Market Value of the Stock on the
effective date of grant.
b. Section 7 of the Plan is hereby amended by deleting subsection 7.a
thereof and replacing it with the following new subsection 7.a:
a. (i) All Options granted under Section 4.a.i and clause
(A) of Section 4.a.iii of the Plan shall become exercisable as to 6,667 shares
after one year from the effective date of the grant, as to an additional 6,667
shares after two years from the effective date of grant, and as to the final
6,666 shares after three years from the effective date of grant so that the
Options are 100% exercisable three years from the effective date of the grant;
PROVIDED, HOWEVER, that if an Eligible Director is granted an Option for fewer
than 20,000 shares as a result of the proviso to the first sentence of Section
4.a.i, such Option shall become exercisable as follows: at the scheduled end of
the term of office of such Eligible Director, the lesser of 6,667 shares or the
full amount of the Option; if the scheduled term of office exceeds one year, at
one year prior to the scheduled end of such term of office, the lesser of 6,667
shares or the remainder of such Option; if the scheduled term of office exceeds
two years, at two years prior to the scheduled end of such term of office, the
remainder of such Option.
(ii) All Options granted under Section 4.a.ii and
clause (B) of Section 4.a.iii of the Plan shall be exercisable in full
immediately upon grant.
2. STATUS OF PLAN.
Except as specifically amended hereby, the Plan shall continue in full
force and effect. From and after the date hereof, all references in the Plan and
in any certificates and agreements covering options granted under the Plan shall
be deemed to be references to the Plan as amended hereby.
2
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF FTP SOFTWARE, INC.
JURISDICTION OF
NAME ORGANIZATION
- ---- ------------
Campbell Services, Inc. Michigan
FTP Software Asia, Inc. Massachusetts
FTP Software (Asia Pacific) Pte Ltd Singapore
FTP Software Canada Ltd. Alberta, Canada
FTP Software Export, Inc. Bahamas
FTP Software Kabushiki Kaisha Japan
(a/k/a FTP Software K.K.)
FTP Software GmbH Germany
FTP Software Limited U.K.
FTP Software Security Corp., Inc. Massachusetts
FTP Software Sweden AB Sweden
FTP Software Worldwide, Inc. Massachusetts
Firefox Communications Inc. Delaware
Firefox (U.S.) Inc. Delaware
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of our reports dated January 27,
1998, on our audits of the consolidated financial statements and financial
statement schedule of FTP Software, Inc. as of December 31, 1997 and 1996, and
for the years ended December 31, 1997, 1996 and 1995 which reports are included
in this Annual Report on Form 10-K, into the Company's previously filed
Registration Statements on Form S-8, File Nos. 33-77506, 33-80427, 333-08585,
333-14669, and 333-43557.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 27, 1998
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<PERIOD-START> JAN-01-1997
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<SECURITIES> 14,234
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<COMMON> 339
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<TOTAL-LIABILITY-AND-EQUITY> 97,475
<SALES> 50,639
<TOTAL-REVENUES> 67,734
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<INCOME-PRETAX> (56,608)
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