-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UmlsvlM9rbvEElBQRVxzuf9t1k1QoXfWHSA39cvlkVfjlgMRSAVBTAAf9RwoGDqB pQ1wgydmNjI5t9TF6TbZtQ== 0000950135-98-002019.txt : 19980331 0000950135-98-002019.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950135-98-002019 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FTP SOFTWARE INC CENTRAL INDEX KEY: 0000912548 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042906463 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22466 FILM NUMBER: 98579023 BUSINESS ADDRESS: STREET 1: 100 BRICKSTONE SQUARE 5TH FL CITY: ANDOVER STATE: MA ZIP: 01810 BUSINESS PHONE: (978) 685-4000 MAIL ADDRESS: STREET 1: 100 BRICKSTONE SQ FIFTH FL CITY: ANDOVER STATE: MA ZIP: 01810 10-K 1 FTP SOFTWARE 1 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: Common Stock, $.01 par value 33,973,140
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. 2 FTP SOFTWARE, INC. TABLE OF CONTENTS
PART I PAGE - ------ ---- 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
(i) 3 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. 4 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 -2- 5 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, -3- 6 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, -4- 7 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." -5- 8 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). -6- 9 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 -7- 10 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. -8- 11 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. The following is a list of the Company's executive officers as of March 27, 1998:
NAME AGE POSITION - ---- --- -------- 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
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- 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:
HIGH LOW ---- --- 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
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 -10- 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.
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- --------- -------- ------- ------- STATEMENT OF OPERATIONS DATA(1): 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
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- ------- BALANCE SHEET DATA: 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
- -------------- (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. -11- 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. -12- 15 The following summarizes the charges, the related write-offs and cash paid in connection with the July and December 1997 restructurings.
Severance Excess Excess Payments Facilities Fixed Assets Other Total -------- ---------- ------------ ----- ----- 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 ======= ======= ======= ===== ========
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. -13- 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- 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- 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. -16- 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 -17- 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 -18- 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- 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- 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- 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. -22- 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 -23- 26 FTP SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------------- 1997 1996 --------- --------- 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 ========= =========
The accompanying notes are an integral part of these financial statements. -24- 27 FTP SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 --------- --------- --------- 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 ========= ========= =========
The accompanying notes are an integral part of these financial statements. -25- 28 FTP SOFTWARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
RETAINED FOREIGN NET ADDITIONAL EARNINGS EXCHANGE UNREALIZED TOTAL COMMON STOCK PAID-IN (ACCUMULATED TRANSLATION INVESTMENT STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENTS GAINS (LOSSES) EQUITY ------ ------ ------- -------- ----------- -------------- ------ 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 ========== ==== ======== ======== ===== ===== =========
The accompanying notes are an integral part of these financial statements. -26- 29 FTP SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 -------- -------- -------- 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 ======== ======== ========
The accompanying notes are an integral part of these financial statements. -27- 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- 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- 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- 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- 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):
Severance Excess Excess Payments Facilities Fixed Assets Other Total -------- ---------- ------------ ----- ----- 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 ======= ======= ======= ===== ========
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- 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):
YEARS ENDED DECEMBER 31, ------------------------- 1996 1995 -------- ------- 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)
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- 36 FTP SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 ----------- ----------- 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
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):
DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------ ------------------------ MARKET AMORTIZED MARKET AMORTIZED VALUE COST VALUE COST --------- ------------ ----------- ----------- 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 ======= ======= ======= =======
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- 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):
DECEMBER 31, ---------------------- YEARS TO MATURITY 1997 1996 ---------- ---------- 0-1 $14,234 $29,026 1-5 19,767 41,258 5-10 -- 258 Over 10 -- 6,455 ---------- ---------- $34,001 $76,997 ========== ==========
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):
DECEMBER 31, -------------------------- 1997 1996 ------------ ----------- 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 ========= ========
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- 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):
YEARS ENDED DECEMBER 31, --------------------------------------- 1997 1996 1995 ------- -------- -------- 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 ======= ======== ========
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:
YEARS ENDED DECEMBER 31, ------------------------------------ 1997 1996 1995 ------ ------ ------ 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% ====== ====== ======
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- 39 FTP SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The components of deferred income taxes are as follows (in thousands):
DECEMBER 31, ------------------------ 1997 1996 -------- -------- 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 ======== ========
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- 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- 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- 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:
WEIGHTED-AVERAGE SHARES EXERCISE PRICE ---------- ---------------- 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 ==========
-40- 43 FTP SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Information about stock options outstanding at December 31, 1997 is summarized as follows:
OUTSTANDING EXERCISABLE - ---------------------------------------------------------------------- -------------------- WEIGHTED- AVERAGE REMAINING WEIGHTED- CONTRACTUAL WEIGHTED- AVERAGE RANGE OF EXERCISE LIFE AVERAGE EXERCISE EXERCISE PRICES SHARES (IN YEARS) PRICE SHARES PRICE - ----------------- --------- ------------- ------------------ --------- ---------- $ 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 ========= ========
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- 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):
YEARS ENDED DECEMBER 31, ---------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- 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
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- 45 FTP SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) YEAR ENDED DECEMBER 31, 1997
INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ---------- ------------ ---------- BASIC EPS 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 ======== ======== ========
YEAR ENDED DECEMBER 31, 1996
INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ----------- BASIC EPS 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 ======== ====== ========
YEAR ENDED DECEMBER 31, 1995
INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------ --------- 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 ======= ======= =======
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- 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): 1998 $ 3,884 1999 3,703 2000 3,586 2001 3,004 2002 1,782 Thereafter 3,091 ------- $19,050 =======
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- 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- 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):
YEARS ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 ------- ------- ------- 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 ======= ======= =======
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- 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- 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:
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)
-48- 51
EXHIBIT NO. TITLE - ----------- ----- 10.4 Amendment No. 3 to Indenture of Lease between the Company and North Andover Mills Realty dated as of June 18, 1993(1) 10.5 Amendment No. 4 to Indenture of Lease between the Company and North Andover Mills Realty dated as of September 30, 1993(1) 10.6 Amendment No. 5 to Indenture of Lease between the Company and North Andover Mills Realty Limited Partnership dated August 12, 1995(1) 10.7 Employment Agreement between the Company and 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)
-49- 52
EXHIBIT NO. TITLE - ----------- ----- 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)
- --------------------- *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- 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:
Signature Capacity Date --------- -------- ---- /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
-51- 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 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 A-2 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 A-3 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 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 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 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 61 FTP SOFTWARE, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ----------------------------------- ------------ -------- -------- ---------- ---------- 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
II-2 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 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 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 EX-10.10 2 AMENDED AND RESTATED EPLOYMENT AGREEMENT 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 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 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 3 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 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 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 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. 7 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 EX-10.14 3 EMPLOYMENT AGREEMENT 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 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 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. 3 4 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 4 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 5 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. 6 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 7 EX-10.17 4 EMPLOYMENT AGREEMENT 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 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: 2 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. 3 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. 4 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). 5 6 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 6 7 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 7 EX-10.22 5 AMMENDED AND RESTATED EMPLOYMENT AGREEMENT 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 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 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 3 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 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 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 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 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 EX-10.26 6 AMENDMENT TO NON-EMPLOYEE STOCK OPTION PLAN 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 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 EX-21 7 SUBSIDIARIS 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 EX-23 8 CONSENT OF COOPERS AND LYBRAND 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 EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-01-1997 1 37,569 14,234 9,382 1,100 0 65,830 18,468 10,167 97,475 21,956 0 0 0 339 75,519 97,475 50,639 67,734 11,624 21,129 0 200 0 (56,608) 1,208 (57,816) 1,217 0 0 (56,599) (1.67) (1.67)
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