UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):  April 1, 2014
 
FALCONSTOR SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
     
Delaware
000-23970
77-0216135
(State or other jurisdiction
of incorporation)
(Commission
File Number)
(IRS Employer
Identification No.)
     
2 Huntington Quadrangle, Melville, New York
11747
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: 631-777-5188
 
N/A
(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 
 
 
 
Item 5.02.
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
 
Restricted Shares
 
On April 1, 2014, the Board of Directors of FalconStor Software, Inc. (the “Company”) approved the granting of restricted stock to certain Company officers and employees, including the Company’s Executive Officers.
 
The restricted shares have terms of ten years.  The restrictions on various portions of the restricted stock lapse upon the Company’s achievement of performance criteria related to: Common Stock price; GAAP earnings per share; non-GAAP earnings per share; cash related targets; and revenue/billings related targets.
 
The Company’s Executive Officers were granted the following amounts of restricted common stock:
 
Name
 
Title
 
Restricted Shares
         
Gary Quinn
 
President & Chief Executive Officer
 
625,000
         
Seth Horowitz
 
Executive Vice President, General Counsel and Secretary
 
245,000
         
Louis J. Petrucelly
 
Executive Vice President, Chief Financial Officer and Treasurer
 
315,000

There is no partial vesting for partial achievement of goals under the restricted stock agreements.  In addition, under certain circumstances, if there is a restatement of the Company’s financial statements relating to a period covered by a performance criterion, the holder of the restricted shares may be required to forfeit a portion of their restricted shares or reimburse the Company for profits made in connection with the sale of the shares.
 
Each of Messrs Quinn, Horowitz, and Petrucelly entered into a Restricted Stock Agreement containing these and other standard terms. The Form of Restricted Stock Agreement is attached hereto as Exhibit 4.1.
 
 
 
 
 
2014 Management Incentive Plan and Stock Incentive Plan
 
On March 13, 2014, the Company’s Board of Directors approved a Management Incentive Plan (“MIP”) that will pay cash bonuses to, among other, the Company’s Executive Officers.  The MIP was amended on April 1, 2014.  As amended the MIP provides for the following:
 
Executive Officer Bonuses
 
If all of the goals are achieved, the Executive Officers set forth below would receive the following payments:
 
Name
 
Title
 
Payment at 100% Achievement
         
Seth Horowitz
 
Executive Vice President, General Counsel and Secretary
 
$50,000
         
Louis J. Petrucelly
 
Executive Vice President, Chief Financial Officer and Treasurer
 
$75,000

The goals, and the percentage of bonus available for the achievement of each goal, are as follows:
 
Goal
 
Percentage of Bonus
     
Total Product Billings
 
General Counsel:  15%
   
CFO:  12.5%
     
Maintenance Billings
 
CFO & General Counsel: 30%
     
GAAP Revenue
 
General Counsel:  15%
   
CFO:  12.5%
     
Non-GAAP Operating Income
 
CFO & General Counsel: 20%
     
Cash Flow From Operations
 
CFO & General Counsel: 20%
     
Net Working Capital
 
General Counsel:  0%
   
CFO:  5%

For each goal achieved on a quarterly basis for the first three quarters of 2014, the Executive Officer will receive 12.5% of the of the total bonus potential for that goal.  For each goal achieved for the full fiscal year 2014, the Executive Officer will receive 62.5% of the total bonus potential for that goal.
 
If there is over-achievement of the plan, the participants in the plan, including the Executive Officers, will be entitled to enhanced payments as follows:
 
Goal Achievement
 
Bonus Payout
100%
 
100%
105%
 
120%
110% and above
 
140%
 
 
 
 
 
The MIP does not contain any payments for underachievement of goals.  The Company’s Compensation Committee retains the discretion to modify the terms of the plan.
 
Amendments to 2005 Key Executive Severance Protection Plan
 
On April 1, 2014, the Company amended the terms of the 2005 FalconStor Software, Inc. Key Executive Severance Protection Plan ( the “2005 Plan” and, as so amended the “Amended and Restated 2005 Key Executive Severance Protection Plan”) .  These amendments include the following:
 
 
·
New employees of the Company designated as “Officers” by the Board of Directors pursuant to Rule 16a1-f of the Securities Exchange Act of 1934, as amended, will no longer automatically be participants in the 2005 Key Executive Severance Protection Plan.
 
 
·
The portion of severance benefits based on the participant’s bonus will be based on the bonus for the fiscal year prior to the year in which the change of control takes place, rather than the highest bonus of the three fiscal years prior to the change of control.
 
 
·
Participants will no longer be entitled to receive gross up payments if the severance benefits would be subject to an excise tax under the Internal Revenue Code.  Instead, the benefits will be reduced so that no excise tax is triggered or the benefits will be paid in full with the participant solely responsible for the excise tax.
 
A copy of the Amended and Restated 2005 Key Executive Severance Protection Plan is attached hereto as Exhibit 99.1.
 
Pursuant 2005 Plan, certain changes to the 2005 Plan are subject to a twelve month waiting period.  As consideration for the grant of the restricted shares, each of Mr. Quinn, Mr. Horowitz and Mr. Petrucelly agreed to waive this twelve month waiting period and the Amended and Restated 2005 Key Executive Severance Protection Plan now applies to them.  A Form of Waiver and Consent to the changes is attached hereto as Exhibit 99.2.
 
Item 9.01.
Financial Statements and Exhibits.
 
(d)           Exhibits.
 
Exhibit No.
 
Description
     
4.1
 
Form of Restricted Stock Agreement.
     
99.1
 
Amended and Restated 2005 FalconStor Software, Inc. Key Executive Severance Protection Plan.
     
99.2
 
Form of Waiver and Consent.
 
 
 
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
Date:  April 7, 2014
FALCONSTOR SOFTWARE, INC.
   
   
 
By:
/s/ Louis J. Petrucelly
   
Name:
Louis J. Petrucelly
   
Title:
Executive Vice President, and Chief Financial Officer
 
 
 
 
 
 
Exhibit Index
 
Exhibit No.
 
Description
     
4.1
 
Form of Restricted Stock Agreement.
     
99.1
 
Amended and Restated 2005 FalconStor Software, Inc. Key Executive Severance Protection Plan.
     
99.2
 
Form of Waiver and Consent.


 
 
 
Exhibit 4.1
 
RESTRICTED STOCK AGREEMENT
 
AGREEMENT made the 1st day of April, 2014 (the “Grant Date”), between FALCONSTOR SOFTWARE, INC., a Delaware corporation (hereinafter called the “Company”), and [______________________] (hereinafter called “Grantee”).
 
WITNESSETH:
 
WHEREAS, the Company previously adopted the Amended and Restated 2006 Incentive Stock Plan, a copy of which is annexed hereto as Exhibit “A” (hereinafter called the “Plan”), and such Plan provided for the granting of restricted shares; and
 
WHEREAS, in accordance with said Plan, the Compensation Committee of the Board of Directors (the “Committee”) has determined that Grantee is eligible for and should be granted a Restricted Stock Award pursuant to said Plan as herein below provided, and Grantee desires to have such Restricted Stock Award;
 
NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto agree as follows (defined terms in the Plan shall have the same meaning in this Agreement, except where context otherwise requires):
 
1.             Grant of Award
 
The Company hereby grants to Grantee a Restricted Stock Award of [_______] shares (the “Restricted Shares”) of the authorized and unissued Common Stock, value of $.001 per share (the “Common Stock”), upon and subject to the following terms and conditions:
 
2.             Vesting
 
The Restricted Shares shall not vest as of the Grant Date and unless terminated earlier, the unvested portion of the Restricted Shares, if any, shall terminate ten years after the date hereof.  Subject to the last paragraph of this Section 2, the Restricted Shares shall vest according to the following schedule:
 
(a)            If both (i) Grantee continues to be employed by the Company or any subsidiary of the Company for two years after the date hereof and (ii) at any time the Grantee is employed by the Company or any subsidiary of the Company the closing trading price of the Company’s Common Stock on its principal trading market is at or greater than the amount set forth in Schedule A for sixty (60) consecutive trading days (“Performance Criteria A”), then 12.5% of the Restricted Shares shall vest at the later of (i) and (ii);
 
(b)            If both (i) Grantee continues to be employed by the Company or any subsidiary of the Company for three years after the date hereof and (ii) at any time the Grantee is employed by the Company or any subsidiary of the Company the closing trading price of the Company’s Common Stock on its principal trading market is at or greater than the amount set forth in Schedule A for sixty (60) consecutive trading days (“Performance Criteria B”), then 12.5% of the Restricted Shares shall vest at the later of (i) and (ii);
 
 
 
 
 
(c)            6.25% of the Restricted Shares shall vest upon earnings per share of the Company as determined in accordance with the Generally Accepted Accounting Principles (“ GAAP ”) being at least $.0001 per share for three consecutive reporting quarters (the “Performance Criteria C”).
 
(d)            6.25% of the Restricted Shares shall vest upon earnings per share of the Company, as determined in accordance with GAAP being at least $.0001 per share for two consecutive fiscal years (“Performance Criteria D”);
 
(e)            6.25% of the Restricted Shares shall vest upon earnings per share of the Company, not determined in accordance with GAAP (such calculation to exclude stock-based compensation, one-time non-cash tax items, restructuring charges, charges related to the Company’s Series A Convertible Redeemable Preferred Stock (the “Preferred Stock”) and any other non-routine items the Company determines as “Non-GAAP” for a specific period), being at least $.0001 per share  for three consecutive quarters (“Performance Criteria E”);
 
(f)            6.25% of the Restricted Shares shall vest upon earnings per share of the Company, not determined in accordance with GAAP (such calculation to exclude stock-based compensation, one-time non-cash tax items, restructuring charges, charges related to the Preferred Stock and any other non-routine items the Company determines as “Non-GAAP” for a specific period) being at least $.0001 per share for two consecutive quarters (“Performance Criteria F”);
 
(g)            6.25% of the Restricted Shares shall vest upon the Company having cash and cash equivalents and marketable securities from the Company’s operations on a consolidated basis as determined in accordance with GAAP (“Net Cash”) at the end of fiscal year 2014 which is equal to or greater than the amount set forth in Schedule A (“Performance Criteria G”);
 
(h)            6.25% of the Restricted Shares shall vest upon the Company achieving certain cash targets to be set forth by the Committee for the fiscal year 2015 at the commencement of fiscal year 2015 (“Performance Criteria H”);
 
(i)            6.25% of the Restricted Shares shall vest upon the Company achieving certain cash targets to be set forth by the Committee for the fiscal year 2016 at the commencement of fiscal year 2016 (“Performance Criteria I”);
 
(j)            6.25% of the Restricted Shares shall vest upon the Company achieving certain cash targets to be set forth by the Committee for the fiscal year 2017 at the commencement of fiscal year 2017 (“Performance Criteria J”);
 
(k)            6.25% of the Restricted Shares shall vest upon the Company achieving the targets set forth on Schedule A for fiscal year 2014 (“Performance Criteria K”);
 
(l)            6.25% of the Restricted Shares shall vest upon the Company achieving certain revenue targets (which may include total product revenue billing and maintenance revenue billing based on Committee approval) to be set forth by the Committee for the fiscal year 2015 at the commencement of fiscal year 2015 (“Performance Criteria L”);
 
 
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(m)            6.25% of the Restricted Shares shall vest upon the Company achieving certain revenue targets (which may include total product revenue billing and maintenance revenue billing based on Committee approval) to be set forth by the Committee for the fiscal year 2016 at the commencement of fiscal year 2016 (“Performance Criteria M”);
 
(n)            6.25% of the Restricted Shares shall vest upon the Company achieving certain revenue targets (which may include total product revenue billing and maintenance revenue billing based on Committee approval) to be set forth by the Committee for the fiscal year 2017 at the commencement of fiscal year 2017 (“Performance Criteria N” together with Performance Criteria A through Performance Criteria M, the “Performance Criteria”).
 
Provided that , in the event of any acquisition or divestiture of any company, product line or business by the Company, the Committee may approve a further adjustment to the threshold amount of Net Cash (with respect to an acquisition or divestiture) or Total Revenue (with respect to a divestiture) for purposes of Performance Criteria G through N.
 
With respect to Performance Criteria C through N, the Restricted Shares shall vest in the applicable amounts identified above upon the Committee’s determination that the Company has achieved a Performance Criteria, subject to Grantee’s continuous employment through such time.  The vesting period of Restricted Shares may be adjusted by the Committee.  For any part of the Restricted Shares for which the Performance Criteria has lapsed without vesting, the Committee shall have the discretion to extend or amend the compliance period of such lapsed Performance Criteria.  In addition, under Section 3(b) below, the Committee may at its discretion provide for the immediate vesting upon a Change in Control (as defined in the Plan) (i) of any Restricted Shares for which the Performance Criteria has lapsed without vesting of the Restricted Shares or (ii) with respect to any Restricted Shares for which the Grantee may receive cash payments after a Change in Control has occurred, in which case the Grantee will not be entitled to receive any subsequent cash payment.  Notwithstanding anything to the contrary in this Paragraph 2, the Restricted Shares shall be subject to forfeiture and transfer as may be provided in this Agreement and the Plan.
 
If within three years after a Performance Criteria has been satisfied, (i) the Company restates its audited financial statements for a fiscal year which pertains to such  Performance Criteria (ii) the restatement relates to events which occurred after July [ ], 2013, and (iii) the restatement reflects a material impairment in the Company’s results of operations or liquidity and capital resources, then the Company’s Board of Directors at its sole discretion may require the Grantee to undertake the following:  To the extent vested Restricted Shares relating to such Performance Criteria have not been sold or otherwise transferred, the Grantee will forfeit to the Company such Restricted Shares.  Alternatively, if the Restricted Shares relating to such Performance Criteria have been sold or otherwise transferred, the Grantee will either pay the Company an amount equal to the consideration it received upon such sale or, if the Grantee gifted the Restricted Shares, the Grantee will forfeit any tax benefit it received on the gift.  This paragraph will not apply if subsequent to a Change in Control the Company or a successor entity to the Company restates any of the Company’s audited financial statements.
 
 
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3.             Effect of Termination of Employment; Change in Control
 
(a)             General .  In the event of Grantee’s termination of employment for any reason prior to a Change in Control, any part of the Restricted Shares that has not vested as of such date of termination shall remain unvested and shall terminate as of such date.
 
(b)             Change in Control .  In the event of a Change in Control in which the aggregate per share consideration price received by the Common Stockholders of the Company in the Change in Control exceeds $2.56 or more, (i) any part of the Restricted Shares for which the Performance Criteria has lapsed without vesting of the Restricted Shares shall terminate as of the date the Company entered into a definitive agreement relating to the Change in Control, and (ii) the restrictions on all remaining unvested Restricted Shares shall lapse and such unvested Restricted Shares shall vest immediately prior to the Change in Control.  In the event of any Change in Control in which the per share consideration received by the Common Stockholders is less than $2.56, then (i) any part of the Restricted Shares for which the Performance Criteria has lapsed without vesting of the Restricted Shares shall terminate as of the date the Company entered into a definitive agreement relating to the Change in Control and, (ii) to the extent Performance Criteria C through N are not covered by (i), the Restricted Shares with respect to such Performance Criteria will be modified so that they are deemed to vest ratably on an annual basis for the duration of this Agreement and on such vesting dates the Grantee will receive a pro rata portion of the cash payment the Grantee is entitled as calculated pursuant to the penultimate sentence of this Section 3(b).  For purposes of this Section 3(b), it is assumed this Agreement terminates on December 31, 2017.  Hence, by way of example, if a Change in Control with a  consideration of less than $2.56 per share occurs in 2015, then fifty percent of the aggregate cash payment will be received on the one year anniversary of the consummation of the Change in Control and fifty percent of the aggregate cash payment will be received on the second anniversary of the consummation of the Change in Control; provided, however in the event that on or subsequent to a Change in Control the Company terminates the Grantee other than  for “Cause” or the Grantee resigns for “Good Reason” all remaining due cash payments shall immediately vest and become due and payable to the Grantee.  The aggregate amount of such cash payments shall equal the number of Restricted Shares in which vesting was subject to the satisfaction of such Performance Criteria multiplied by the aggregate per share consideration received by Common Stockholders in connection with the Change in Control transaction; provided, however, that the Grantee shall not be entitled to receive such cash payment, if prior to a date that a cash payment is due, the Grantee has either resigned as an employee of the Company, other than for “Good Reason” or has been terminated by the Company for “Cause.”  For purposes of this Agreement, “Cause” and “Good Reason” shall have the same meaning ascribed to them under the Company’s 2005 Key Executive Severance Protection Plan as amended.
 
(c)             Payments due Subsequent to a Change in Control .  With respect to any cash payments the Grantee may be entitled to subsequent to a Change in Control, the Company, on or prior to the Change in Control, will take such actions reasonably requested by the Grantee to ensure that the Company or its successors and assigns will make any cash payments required by Section 3(b) hereof in accordance with the terms of Section 3(b).
 
 
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(d)             Non-cash Consideration in Change in Control transactions .  To the extent the Company enters into a Change in Control transaction in which some or all of the consideration consists of non-cash consideration (i.e stock in another entity), the non-cash consideration will only be accepted  as consideration under this Agreement if the Committee unanimously  deems it liquid enough to be  considered a cash equivalent.
 
4.             Restrictions on Resales of Restricted Shares
 
The Company may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by the Grantee or other subsequent transfers by the Grantee of any shares of the Restricted Shares, including without limitation (a) restrictions under an insider trading policy, (b) restrictions designed to delay and/or coordinate the timing and manner of sales by the Grantee and (c) restrictions as to the use of a specified brokerage firm for such resales or other transfers.
 
5.             Income Taxes
 
The Grantee is liable and responsible for all taxes owed by the Grantee in connection with the Restricted Shares or the disposition of Restricted Shares, regardless of any action the Company takes with respect to any tax withholding obligations that arise in connection therewith.  If any Grantee, in connection with the acquisition of Restricted Shares makes the election permitted under Section 83(b) of the Internal Revenue Code (that is, an election to include in gross income in the year of transfer the amounts specified in Section 83(b)), the Grantee shall notify the Company of the election with the Internal Revenue Service pursuant to regulations issued under the authority of Code Section 83(b).  The Company does not make any representation or undertaking regarding the treatment of any tax withholding in connection with the grant or vesting of the Restricted Shares.
 
6.             The Plan and Other Agreements
 
The terms of this Agreement are governed by the terms of the Plan, as it exists on the Grant Date and as the Plan is amended from time to time.  In the event of any conflict between the provisions of this Agreement and the provisions of the Plan, the terms of this Agreement shall control only to the extent so permitted (e.g., in discretion of Committee) pursuant to the Plan.
 
This Agreement, including the Plan constitute the entire understanding between the Grantee and the Company regarding the Restricted Shares.  Any prior agreements, commitments or negotiations concerning the Restricted Shares are superseded.
 
7.             Limitation of Interest in Shares
 
Nothing in the Plan, this Agreement, or any other instrument executed pursuant to the Plan shall confer upon the Grantee any right to continue in the Company’s or any of its subsidiaries employ or service nor limit in any way the Company’s or any of its subsidiaries right to terminate the Grantee’s employment at any time for any reason.
 
 
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8.             Limitation on Rights; No Right to Future Grants; Extraordinary Item
 
By entering into this Agreement and accepting the Restricted Shares, Grantee acknowledges that: (a) Grantee’s participation in the Plan is voluntary; (b) the value of the Restricted Shares  is an extraordinary item which is outside the scope of any employment or service contract with Grantee; (c) the Restricted Shares are not part of normal or expected compensation for any purpose, including without limitation for calculating any benefits, severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, and Grantee will not be entitled to compensation or damages as a consequence of Grantee’s forfeiture as provided for in the Plan or this Agreement of any part of the Restricted Shares as a result of Grantee’s termination of employment or services with the Company or any subsidiary of the Company for any reason; and (d) in the event that Grantee is not a direct employee of  the Company or any subsidiary of the Company, the grant of the Restricted Shares will not be interpreted to form an employment relationship with the Company or any subsidiary of the Company and will not be interpreted to form an employment contract with the Company or any subsidiary of the Company.  The Company shall be under no obligation to advise Grantee of the existence, maturity or termination of any of Grantee’s rights hereunder and Grantee shall be responsible for familiarizing himself or herself with all matters contained herein and in the Plan which may affect any of Grantee’s rights or privileges hereunder.
 
9.             Committee Authority
 
Any question concerning the interpretation of this Agreement or the Plan, any adjustments required to be made under the Plan, and any controversy that may arise under the Plan or this Agreement shall be determined by the Committee (including any Subcommittee or other person(s) to whom the Committee has delegated its authority) in its sole and absolute discretion.  Such decision by the Committee shall be final and binding.
 
10.             Restricted Activities
 
(a)            Grantee agrees that the following restrictions on Grantee’s activities during and after Grantee’s employment are necessary to protect the good will, confidential information, trade secrets and other legitimate interests of the Company:
 
(i)             Non-Compete .  During the Restricted Period (as defined below), Grantee shall not, directly or indirectly, whether as owner, partner, investor, consultant, agent, employee, co-venturer or otherwise, engage in a Restricted Activity in any geographic area in which the Company does business or undertake any planning for any such Restricted Activity.  For the purposes of this Agreement, the “Restricted Period” shall mean, in the aggregate, the period during which Grantee is employed by the Company and the one (1) year period immediately following termination of Grantee’s employment by Grantee due to (i) the resignation of the Grantee, other than for “Good Reason” or (ii) termination by the Company for “Cause.”.  For purposes of this Agreement, “Restricted Activity” means the development for sale or sale of any products that are actively sold by, or actively being developed for sale by, the Company at the time of Grantee’s termination of employment; it being understood that Grantee shall be permitted to work for or provide services to a person or entity engaged in a Restricted Activity through a separate subsidiary or affiliate so long as Grantee performs no services for such separate subsidiary or affiliate.
 
 
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(ii)             Solicitation of Customers .  While Grantee is employed by the Company and during the twelve (12) month period immediately following termination of Grantee’s employment, regardless of the reason therefor, Grantee will not directly or indirectly (a) solicit or encourage any customer of the Company to terminate or diminish its relationship with it; or (b) seek to persuade any such customer or prospective customer of the Company to conduct with anyone else any business or activity which such customer or prospective customer conducts or could conduct with the Company; provided, however, that these restrictions shall apply (y) only with respect to those persons or entities who are or have been a customer of the Company at any time within the immediately preceding two (2) year period or whose business has been solicited on behalf of the Company by any of its officers, employees or agents within such two (2) year period, other than by form letter, blanket mailing or published advertisement, and (z) only if Grantee have performed work for such person or entity during Grantee’s employment with the Company or been introduced to, or otherwise had contact with, such person or entity as a result of Grantee’s employment or other associations with the Company or have had access to Confidential Information which would assist in Grantee’s solicitation of such person or entity.
 
(iii)             Solicitation of Employees .  While Grantee is employed by the Company and during the twelve (12) month period immediately following termination of Grantee’s employment, regardless of the reason therefor, Grantee will not, and will not assist any other person or entity to, (a) hire or solicit for hiring any employee of the Company or seek to persuade any employee of the Company to discontinue employment or (b) solicit or encourage any independent contractor providing services to the Company to terminate or diminish its relationship with them.  For the purposes of this Agreement, an “employee” or an “independent contractor” of the Company is any person who was such at any time within the preceding two years.
 
(b)             Non Disparagement .  The Grantee agrees it will not make any statement or issue any communication, written or otherwise, that damages, criticizes or otherwise reflects adversely upon or encourages any adverse action against the Company, or any subsidiary of the Company, or any executive officer or director of the Company, except if testifying truthfully under oath pursuant to any lawful court order or otherwise responding to, or providing disclosures required by law, including any “whistle blower” requirements.
 
(c)             Enforcement of Covenants .  In signing this Agreement, Grantee gives the Company assurance that Grantee has carefully read and considered all the terms and conditions of this Agreement, including the restraints imposed on Grantee under this Section 10.  Grantee agrees without reservation that these restraints are necessary for the reasonable and proper protection of the Company, and that each and every one of the restraints is reasonable in respect to subject matter, length of time and geographic area.  Grantee further agrees that, were Grantee to breach any of the covenants contained in this Section 10, the damage to the Company would be irreparable.  Grantee therefore agrees that the Company, in addition to any other remedies available to it, shall be entitled to preliminary and permanent injunctive relief against any breach or threatened breach by Grantee of any of those covenants, without having to post bond.  So that the Company may enjoy the full benefit of the covenants contained in this Section 10, Grantee further agrees that the applicable period of restriction shall be tolled, and shall not run, during the period of any breach by Grantee of any of the covenants contained in this Section 10.  Grantee and the Company further agree that, in the event that any provision of this Section 10 is 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, that provision shall be deemed to be modified to permit its enforcement to the maximum extent permitted by law.  The provisions of Section 10 are not intended to limit, and should not be interpreted to limit, the rights of the Grantee to engage in activities that are protected by Section 7 of the National Labor Relations Act.  To the extent that any provision of Section 10 is held to be invalid or unenforceable, it shall be considered deleted there from and the remainder of such provision shall be considered unaffected and remain in full force and effect.  Finally, no claimed breach of this Agreement or other violation of law attributed to the Company shall operate to excuse Grantee from the performance of Grantee’s obligations under this Section 10.
 
 
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11.             General Provisions
 
(a)             Notices .  Whenever any notice is provided hereunder, such notice must be in writing and  will be deemed to have been duly given if delivered personally, or by mail, by nationally recognized overnight courier  or  electronically.  Any notice delivered in person shall be deemed to be delivered on the date on which it is personally delivered, if  notice is delivered by mail, it shall be deemed to be delivered whether actually received or not, on the third business day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address that such person has theretofore specified by written notice delivered in accordance herewith and if notice is delivered by a nationally recognized overnight courier, it shall be deemed to be delivered upon delivery or refusal of delivery.  Any notice given by the Company directed to Grantee at Grantee’s address on file with the Company shall be effective to bind Grantee and any other person who shall have acquired rights under this Agreement.  The Company or Grantee may change, by written notice to the other, the address previously specified for receiving notices.  Notices delivered to the Company in person or by mail shall be addressed to FalconStor Software, Inc. Attn: Chief Financial Officer.
 
(b)             No Waiver .  No waiver of any provision of this Agreement will be valid unless in writing and signed by the person against whom such waiver is sought to be enforced, nor will failure to enforce any right hereunder constitute a continuing waiver of the same or a waiver of any other right hereunder.
 
(c)             Undertaking .  Grantee hereby agrees to take whatever additional action and execute whatever additional documents the Company may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on Grantee pursuant to the express provisions of this Agreement.
 
(d)             Illegality .  In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of this Agreement shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision.
 
 
8
 
 
(e)             Entire Contract .  This Agreement and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof.
 
(f)             Successors and Assigns .  The provisions of this Agreement will inure to the benefit of, and be binding on, the Company and its successors and assigns and Grantee and Grantee’s legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person will have agreed in writing to join herein and be bound by the terms and conditions hereof.
 
(g)             Electronic Delivery .  The Company may, in its sole discretion, decide to deliver any documents related to any awards granted under the Plan by electronic means or to request Grantee’s consent to participate in the Plan by electronic means.  Grantee hereby consents to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company, and such consent shall remain in effect throughout Grantee’s term of employment or service with the Company and thereafter until withdrawn in writing by Grantee.
 
(h)             Governing Law .  The provisions of this Agreement shall be governed by the laws of the State of Delaware, without giving effect to principles of conflicts of law.
 
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.
 
 
FALCONSTOR SOFTWARE, INC.
   
 
By:
 
   
Name:
 
   
Title:
 


   
   
 
By:
 
   
Name:
 
   
Title:
 
 
 
9
 
Exhibit 99.2
 

 

 

 
FALCONSTOR SOFTWARE, INC.
 
AMENDED AND RESTATED
 
2005 KEY EXECUTIVE SEVERANCE
PROTECTION PLAN
 

 

 

 

 

 

 
Effective as of December 1, 2005,
 
as amended as restated April 1, 2014
 
Appendices Updated October 3, 2013
 
 
 
 

 
TABLE OF CONTENTS
 

 
SECTION 1                      ESTABLISHMENT OF PLAN
 
SECTION 2                      DEFINITIONS
 
 
2.1
Base Salary
 
2.2
Board
 
2.3
Bonus Amount
 
2.4
Cause
 
2.5
Change in Control
 
2.6
Company
 
2.7
Effective Date
 
2.8
Employer
 
2.9
Executive Officer
 
2.10
Good Reason
 
2.11
Notice of Termination
 
2.12
Other Executives
 
2.13
Operating Companies
 
2.14
Participant
 
2.15
Permanent Disability
 
2.16
Plan
 
2.17
Severance Benefit
 
SECTION 3                      ELIGIBILITY
 
 
3.1
Participation
 
3.2
Duration of Participation
 
SECTION 4                      SEVERANCE BENEFITS
 
 
4.1
Right to Severance Benefit
 
4.2
Amount of Severance Benefit
 
4.3
Options
 
4.4
Restricted Stock
 
SECTION 5                      TERMINATION OF EMPLOYMENT
 
 
5.1
Written Notice Required
 
5.2
Termination Date
 
 
 
 
 
SECTION 6                      EXCISE TAXES
 
 
6.1
Cut-Back
 
6.2
Determination By Accountant
 
SECTION 7                      SUCCESSORS TO COMPANY
 
 
7.1
Successors
 
7.2
Sale of Operating Companies
 
SECTION 8                      AMENDMENT AND PLAN TERMINATION
 
 
8.1
Amendment and Termination
 
8.2
Form of Amendment
 
SECTION 9                      MISCELLANEOUS
 
 
9.1
Indemnification
 
9.2
Employment Status
 
9.3
No Duty of Mitigation
 
9.4
No Setoff
 
9.5
Benefits Under Other Plans
 
9.6
Validity and Severability
 
9.7
Governing Law; Choice of Forum
 
9.8
409A
 
APPENDIX I
APPENDIX II
 
 
 
 
 
FALCONSTOR SOFTWARE, INC.
AMENDED AND RESTATED
2005 KEY EXECUTIVE SEVERANCE PROTECTION PLAN
 
Effective as of December 1, 2005
 
           WHEREAS, the Board of Directors of FalconStor Software, Inc., recognizes that the threat of a change in ownership or control of the Company may occur which can result in significant distractions of its key executive personnel because of the uncertainties inherent in such a situation;
 
           WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders to retain the services of its key executive personnel in the event of a threat of a Change in Control of the Company and to ensure their continued dedication and efforts in such event without undue concern for their personal financial and employment security; and
 
           WHEREAS, the Board has determined to amend and restate this Plan as provided herein.
 
           NOW, THEREFORE, in order to fulfill the above purposes, the following plan has been developed and is hereby amended and restated.
 
SECTION 1   ESTABLISHMENT OF PLAN
 
           As of the Effective Date, the Company established a severance compensation plan known as the FalconStor Software, Inc. 2005 Key Executive Severance Protection Plan as set forth in this document.  As of April 1, 2014, the Company amends and restates such severance compensation plan, hereafter known as the FalconStor Software, Inc. Amended and Restated 2005 Key Executive Severance Protection Plan.
 
SECTION 2   DEFINITIONS
 
           As used herein the following words and phrases shall have the following respective meanings unless the context clearly indicates otherwise.
 
2.1   Base Salary
 
           As to any Participant the amount that the Participant is entitled to receive as wages or salary from his or her Employer on an annualized basis, as in effect immediately prior to a Change in Control or, if greater, at any time following the Change in Control.
 
2.2    Board
 
           The Board of Directors of the Company.
 
 
 
 
 
2.3   Bonus Amount
 
           The term "Bonus Amount" shall mean for any Participant the annual bonus amount paid to the Participant for the fiscal year of the Company preceding the year in which the Change in Control occurs.
 
2.4   Cause
 
           “Cause” for termination by the Employer of the Participant’s employment shall mean (i) willful and continued failure by the Participant to substantially perform the Participant’s duties on behalf of the Employer (other than any such failure resulting from the Participant’s incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Participant) for a period of at least thirty consecutive days after a written demand for substantial performance has been delivered to the Participant by the Responsible Person, which demand specifically identifies the manner in which the Responsible Person believes that the Participant has not substantially performed the Participant’s duties, (ii) willful misconduct or gross negligence by the Participant which is demonstrably and materially injurious to the Company or any of its subsidiaries, or (iii) the Participant is convicted of, or has entered a plea of nolo contendere to, (x) a felony or (y) any crime (whether or not a felony) involving dishonesty, fraud, embezzlement or breach of trust.  For purposes of clauses (i) and (ii) of this definition, an act, or failure to act, on the Participant’s part shall not be deemed “willful” if done, or omitted to be done, by the Participant in good faith and with reasonable belief that the Participant’s act, or failure to act, was in the best interest of the Company.  In addition, as to any Participant who is an Executive Officer, the Participant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant’s counsel, to be heard before the Board), finding in good faith that the Participant has committed Cause as set forth in such clauses and specifying the circumstances constituting Cause.  For purposes of this definition, “Responsible Person” shall mean (i) for a Participant who is an Executive Officer, the Board, and (ii) for a Participant who is an Other Executive, the Executive Officer to whom the Participant ultimately reports.
 
2.5   Change in Control
 
A “Change in Control” shall mean the occurrence of any of the following after the Effective Date:
 
(a)           An acquisition (other than directly from the Company) of any voting securities of the Company (the “Voting Securities”) by any “Person” (as the term “person” is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), immediately after which such Person has “Beneficial Ownership” (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) of (1) the then-outstanding shares of common stock of the Company (or any other securities into which such shares of common stock are changed or for which such shares of common stock are exchanged) (the “Shares”) or (2) the combined voting power of the Company’s then-outstanding Voting Securities; provided , however , that in determining whether a Change in Control has occurred pursuant to this paragraph (a), the acquisition of Shares or Voting Securities in a “Non-Control Acquisition” (as hereinafter defined) shall not constitute a Change in Control.  A “Non-Control Acquisition” shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person the majority of the voting power, voting equity securities or equity interest of which is owned, directly or indirectly, by the Company (for purposes of this definition, a “Related Entity”), (ii) the Company or any Related Entity, or (iii) any Person in connection with a “Non-Control Transaction” (as hereinafter defined);
 
 
 
 
 
(b)           The individuals who, as of the Effective Date, are members of the board of directors of the Company (the “Incumbent Board”), cease for any reason to constitute at least a majority of the members of the board of directors of the Company or, following a Merger (as hereinafter defined), the board of directors of (x) the corporation resulting from such Merger (the “Surviving Corporation”), if fifty percent (50%) or more of the combined voting power of the then-outstanding voting securities of the Surviving Corporation is not Beneficially Owned, directly or indirectly, by another Person (a “Parent Corporation”) or (y) if there is one or more than one Parent Corporation, the ultimate Parent Corporation; provided , however , that, if the election, or nomination for election by the Company’s common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of the Plan, be considered a member of the Incumbent Board; and provided , further , however , that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the board of directors of the Company (a “Proxy Contest”), including by reason of any agreement intended to avoid or settle any Proxy Contest; or
 
(c)           The consummation of:
 
(i)           A merger, consolidation or reorganization (1) with or into the Company or (2) in which securities of the Company are issued (a “Merger”), unless such Merger is a “Non-Control Transaction.”  A “Non-Control Transaction” shall mean a Merger in which:
 
(A)           the stockholders of the Company immediately before such Merger own directly or indirectly immediately following such Merger at least fifty percent (50%) of the combined voting power of the outstanding voting securities of (x) the Surviving Corporation, if there is no Parent Corporation or (y) if there is one or more than one Parent Corporation, the ultimate Parent Corporation;
 
 
 
 
 
(B)           the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such Merger constitute at least a majority of the members of the board of directors of (x) the Surviving Corporation, if there is no Parent Corporation, or (y) if there is one or more than one Parent Corporation, the ultimate Parent Corporation; and
 
(C)           no Person other than (1) the Company, (2) any Related Entity, or (3) any employee benefit plan (or any trust forming a part thereof) that, immediately prior to the Merger, was maintained by the Company or any Related Entity, or (4) any Person who, immediately prior to the Merger had Beneficial Ownership of twenty percent (20%) or more of the then outstanding Shares or Voting Securities, has Beneficial Ownership, directly or indirectly, of twenty percent (20%) or more of the combined voting power of the outstanding voting securities or common stock of (x) the Surviving Corporation, if fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Surviving Corporation is not Beneficially Owned, directly or indirectly by a Parent Corporation, or (y) if there is one or more than one Parent Corporation, the ultimate Parent Corporation;
 
(ii)           A complete liquidation or dissolution of the Company; or
 
(iii)           The sale or other disposition of all or substantially all of the assets of the Company and its subsidiaries taken as a whole to any Person (other than (x) a transfer to a Related Entity, (y) a transfer under conditions that would constitute a Non-Control Transaction, with the disposition of assets being regarded as a Merger for this purpose or (z) the distribution to the Company’s stockholders of the stock of a Related Entity or any other assets).
 
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) acquired Beneficial Ownership of more than the permitted amount of the then outstanding Shares or Voting Securities as a result of the acquisition of Shares or Voting Securities by the Company which, by reducing the number of Shares or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons; provided , that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Shares or Voting Securities by the Company and, after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Shares or Voting Securities and such Beneficial Ownership increases the percentage of the then outstanding Shares or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.
 
2.6   Company
 
           “Company” shall mean FalconStor Software, Inc.
 
 
 
 
 
2.7   Effective Date
 
           The “Effective Date” of this Plan is December 1, 2005.
 
2.8   Employer
 
“Employer” shall mean, as to any Participant on any date, the Company or the affiliate (including wholly-owned subsidiaries) of the Company that employs the Participant on such date.
 
2.9   Executive Officer
 
           All employees of the Company designated as “Officers” by the Board pursuant to Rule 16a1-f of the Securities and Exchange Commission and the Company’s General Counsel.
 
2.10  Good Reason
 
           “Good Reason” shall mean, as to any Participant, the occurrence of any of the following events or conditions following a Change in Control:
 
(a)           a change in the Participant’s title, offices or responsibilities (including reporting responsibilities) which represents a substantial reduction of his or her title, offices or responsibilities as in effect immediately prior thereto; the assignment to the Participant of any duties or responsibilities which are inconsistent with such title, offices or responsibilities; or any removal of the Participant from or failure to reappoint or reelect him or her to any of such offices, except in connection with the termination of his or her employment for Cause, Permanent Disability, as a result of his or her death, or by the Participant other than for Good Reason;
 
(b)           a reduction in the Participant’s annual base salary;
 
(c)           (x) the Employer’s requiring the Participant to change the office location at which the Participant is based which results in the Participant having a commute to such location from the Participant’s residence in excess of 50 miles or in excess of 120% (in miles) of the Participant’s commute immediately prior to the date of such change of location, whichever is greater; or (y) the Employer’s requiring the Participant to engage in travel on the Employer’s business to an extent substantially greater than the Participant’s business travel obligations immediately prior to the Change in Control;
 
(d)           the failure by the Company or any of its affiliates to (i) continue in effect any material compensation or benefit plan, program or practice in which the Participant was participating immediately prior to the Change in Control, or (ii) provide the Participant with compensation and benefits at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each compensation or employee benefit plan, program and practice of the Company and its affiliates as in effect immediately prior to the Change in Control (or as in effect following the Change in Control, if greater);
 
 
 
 
 
(e)           any material breach by the Company of any provision of this Plan; or
 
                (f)           any purported termination of the Participant’s employment for Cause by the Company which does not otherwise comply with the terms of this Plan.
 
2.11  Notice of Termination
 
           “Notice of Termination” shall mean a notice which indicates the specific provisions in this Plan relied upon as the basis for any termination of employment and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant’s employment under the provision so indicated.  No purported termination of employment shall be effective without such Notice of Termination.
 
2.12  Other Executives
 
Such other employees of the Company who are so designated by a majority vote of all Independent Directors of the Company.  For purposes of this section, “Independent Directors” shall mean Directors who meet the independence requirements of the Nasdaq Stock Market Marketplace Rules at the time any action is taken.
 
2.13  Operating Companies
 
           Subsidiary companies of the Company designated by the Company on Appendix I of the Plan.
 
2.14  Participant
 
           An employee of the Company who meets the eligibility requirements of Section 3.
 
2.15  Permanent Disability
 
           A Participant shall be deemed to have become permanently disabled for purposes of this Plan if the Chief Executive Officer of the Company (or, in the case of a determination with respect to the Chief Executive Officer, the Board) finds, upon the basis of medical evidence satisfactory to him or her, that the Participant is totally disabled, whether due to physical or mental condition, so as to be prevented from engaging in further employment by the Company and that such disability will be permanent and continuous during the remainder of his or her life.
 
2.16  Plan
 
This FalconStor Software, Inc. Amended and Restated 2005 Key Executive Severance Protection Plan.
 
 
 
 
 
2.17  Severance Benefits
 
           The benefits payable in accordance with Section 4 of the Plan.
 
SECTION 3   ELIGIBILITY
 
3.1   Participation
 
           Executives shall become Participants in the Plan if they are designated by the Board or Compensation Committee thereof as Participants.  Participants shall be identified on Appendix II of the Plan.  The Company shall amend Appendix II from time to time as necessary to include new Participants in the Plan or remove Participants from the Plan who are no longer eligible to participate in the Plan, in each case in accordance with the terms and conditions of the Plan.
 
3.2   Duration of Participation
 
           A Participant shall cease to be a Participant in the Plan if he or she ceases to be an Executive Officer of Other Executive at any time prior to a Change in Control (but subject to Section 4.1(b)) or if his or her employment is terminated following a Change in Control under circumstances where he or she is not entitled to a Severance Benefit under the terms of this Plan.  A Participant whose termination of employment entitles him or her to payment of Severance Benefits shall remain a Participant in the Plan until the full amount of the Severance Benefits have been paid to him or her.
 
SECTION 4   SEVERANCE BENEFITS
 
4.1   Right to Severance Benefits
 
 (a)           A Participant shall be entitled to receive from the Company a Severance Benefit in the amount provided in Section 4.2 if (i) a Change in Control has occurred and (ii) within two years thereafter, the Participant’s employment with the Company terminates for any reason, except that notwithstanding the provisions of this Section 4.1(a), no benefits under this Plan will be payable should the Participant’s termination of employment be (A) by the Employer for Cause, (B) by reason of Permanent Disability, (C) voluntarily initiated by the Participant other than for Good Reason, or (D) by reason of the Participant’s death.
 
(b)           If (i) a Participant’s employment is terminated by the Employer without Cause prior to the date of a Change in Control or (ii) an action is taken with respect to the Participant prior to the date of a Change in Control that would constitute Good Reason if taken after a Change in Control, and the Participant reasonably demonstrates that such termination or action (A) was at the request of a third party that has indicated an intention or taken steps reasonably calculated to effect a Change in Control or (B) otherwise arose in connection with, or in anticipation of, a Change in Control that has been threatened or proposed, such termination or action shall be deemed to have occurred after such Change in Control for purposes of the Plan, so long as such Change in Control actually occurs.
 
 
 
 
 
 (c)           Notwithstanding any other provision of the Plan, the sale, divestiture or other disposition of an Operating Company (or part thereof) before the execution of an agreement providing for a transaction or transactions which, if consummated, would constitute a Change in Control or before a Change in Control shall not be deemed to be a termination of employment of Participants employed by such Operating Company, and such Participants shall not be entitled to benefits from the Company under this Plan as a result of such sale, divestiture or other disposition.  The sale, divestiture or other disposition of an Operating Company (or part thereof) after the execution of an agreement providing for a transaction or transactions which, if consummated, would constitute a Change in Control or after a Change in Control shall not be deemed to be a termination of employment of Participants employed by such Operating Company, and such Participants shall not be entitled to benefits from the Company under this Plan as a result of such sale, divestiture or other disposition, in each case so long as the provisions of Section 7.2 have been satisfied.
 
4.2   Amount of Severance Benefit
 
           If a Participant’s employment is terminated in circumstances entitling him or her to a Severance Benefit as provided in Section 4.1, such Participant shall be entitled to the following benefits:
 
                      (a)           the Company shall pay to the Participant, as severance pay and in lieu of any further salary for periods subsequent to the Termination Date (as specified in Section 5.2), in a single payment (without any discount for accelerated payment), an amount in cash equal to a formula, as described below, and based upon a multiplier, as assigned in the table below to the Participant according to the Participant’s designation on Appendix II (“Participant Designation”):

Multiplier
Participant Designation
3 X
Group III
2 X
Group II
1 X
Group I
 
(X) times the sum of (A) the Participant’s Base Salary and (B) the Bonus Amount;
 
                      (b)           for the period of months, as specified for each Participant Designation Level in the table below, subsequent to the Participant’s termination of employment, the Company shall at its expense continue on behalf of the Participant and his or her dependents and beneficiaries, the basic life insurance, flexible spending account, medical and dental benefits which were being provided to the Participant immediately prior to the Change in Control (or, if greater, at any time thereafter).  The benefits provided in this Subsection 4.2(b) shall be no less favorable to the Participant, in terms of amounts and deductibles and costs to him or her, than the coverage provided the Participant under the plans providing such benefits at the time Notice of Termination is given.  The Company’s obligation hereunder to provide the foregoing benefits shall terminate to the extent the Participant obtains replacement coverage under a subsequent employer’s benefit plans at an equal or higher level.  The amount of the foregoing benefits and reimbursements provided in a Participant’s taxable year cannot affect the amounts provided in any other taxable year.  To the extent the foregoing requires reimbursements be paid to a Participant, the reimbursement must be made on or before the last day of the Participant’s taxable year following the taxable year in which the expense was incurred.  The Company also shall pay a lump sum equal to the amount of any additional income tax payable by the Participant and attributable to the benefits provided under this subparagraph (b) at the earlier of (i) the time such tax is imposed upon the Participant and (ii) the end of the Participant’s taxable year next following the taxable year in which the Participant remits the taxes;
 
 
 
 

Number of Months of
Continued Coverage
Participant Designation
36 months
Group III
24 months
Group II
12 months
Group I
 
The amounts provided for in Section 4.2(a) shall be paid or transferred within thirty (30) days after the Participant’s termination of employment (or, if Section 4.1(b) applies to the termination, then within 30 days after the Change in Control).
 
4.3           Options

Notwithstanding any provision in the Company’s 2000 Stock Option Plan, as amended,  or any other Company Incentive or Non-Qualified Stock Option Plan, or in this Plan, in the event there is a Change of Control, the Company shall, at no cost to the Participant, replace any and all stock options granted by the Company and held by the Participant at the time of the Change of Control, whether or not vested, with an equal number of unrestricted and fully vested stock options to purchase shares of the Company's Common Stock (the "Option Replacement").  With respect to the Option Replacement, all options will become fully vested.  The Option Replacement shall satisfy the requirements of Treasury Regulation Section 1.409-1(b)(5)(v)(D).
 
Alternatively, in the event of a Change of Control, in lieu of the Option Replacement, a Participant may, subject to Board approval at the time, elect to surrender the Participant’s rights to such options, and upon such surrender, the Company shall pay to the Participant an amount in cash per stock option (whether vested or unvested) then held, which is the difference between the full exercise price of each option surrendered and the greater of (i) the average price per share paid in connection with the acquisition of control of the Company if such control was acquired by the payment of cash or the then fair market value of the consideration paid for such shares if such control was acquired for consideration other than cash, (ii) the price per share paid in connection with any tender offer for shares of the Company's Common Stock leading to control, or (iii) the mean between the high and low selling price of such stock on the Nasdaq National Market or other market on which the Company's Common Stock is then traded on the date on which the Participant entitled to a Severance Benefit.
 
 
 
 
 
4.4           Restricted Stock
 
Notwithstanding any provision in the Company’s 2006 Incentive Stock, or any other Company Incentive or Non-Qualified Stock Option Plan, or in this Plan, in the event there is a Change of Control, all restrictions on all shares of restricted Company stock previously granted to each Participant, including, without limitation, those relating to the Participant’s tenure with the Company, shall lapse and the shares shall have no further restrictions.
 
SECTION 5   TERMINATION OF EMPLOYMENT
 
5.1   Written Notice Required
 
Any purported termination of employment, either by the Company or by the Participant, shall be communicated by written Notice of Termination to the other.
 
5.2  Termination Date
 
In the case of the Participant’s death, the Participant’s Termination Date shall be his her date of death.  In all other cases, the Participant’s Termination Date shall be the date specified in the Notice of Termination subject to the following:
 
(a)           If the Participant’s employment is terminated by the Company for Cause or due to Permanent Disability, the date specified in the Notice of Termination shall be at least thirty (30) days from the date the Notice of Termination is given to the Participant, provided that in the case of Permanent Disability the Participant shall not have returned to the full-time performance of his or her duties during such period of at least thirty (30) days; and
 
(b)           If the Participant terminates his or her employment for Good Reason, the date specified in the Notice of Termination shall not be more than sixty (60) days from the date the Notice of Termination is given to the Company.
 
SECTION 6   EXCISE TAXES
 
6.1   Cut-Back
 
(a)           In the event that any payments, benefits or distributions of any type by the Company or any of its affiliates to or for the benefit of the Participant, whether paid or payable, provided or to be provided, or distributed or distributable pursuant to the terms of this Plan or otherwise (“Payments”) (i) constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code, as amended (the “Code”), and (ii) but for this Section 6.1 would be subject to the excise tax imposed by Section 4999 of the Code, or any comparable successor provisions (the “Excise Tax”), then the Payments shall be either (x) provided to the Participant in full, or (y) provided to the Participant as to such lesser extent which would result in no portion of such Payments being subject to the Excise Tax, whichever of the foregoing amounts, when taking into account applicable federal, state, local and foreign income and employment taxes, the Excise Tax, and any other applicable taxes, results in the receipt by the Participant, on an after-tax basis, of the greatest amount of Payments, notwithstanding that all or some portion of such Payments may be taxable under the Excise Tax, as determined pursuant to Section 6.2.In the event that the Payments are to be reduced pursuant to this Section 6.1, such Payments shall be reduced such that the reduction of compensation to be provided to the Participant as a result of this Section 6.1 is minimized.  In applying this principle, (A) any Payments contingent on events occurring after the Change in Control shall be reduced first, and (B) the reduction shall be made in a manner consistent with the requirements of Section 409A of the Code and the regulations thereunder, and where two economically equivalent amounts are subject to reduction but payable at different times, such amounts shall be reduced on a pro-rata basis, but not below zero.
 
 
 
 
 
6.2   Determination By Accountant
 
           All determinations required to be made under this Section 6 shall be made by the independent accounting firm retained by the Company on the date of Change in Control (the “Accounting Firm”), which shall provide detailed supporting calculations both to the Company and the Participant within 15 business days of the date of the Change in Control or termination, as applicable, or such earlier time as is requested by the Company or the Participant.  The Company and the Participant shall furnish to the Accounting Firm such information and documents as the Accounting Firm may reasonably request in order to make a determination under this Section 6.  The Accounting Firm may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code, and other applicable legal authority.  If the Accounting Firm determines that no Excise Tax is payable by the Participant, it shall furnish the Participant with an opinion that he or she has substantial authority not to report any Excise Tax on his or her federal income tax return.  Any determination by the Accounting Firm shall be binding upon the Company and the Participant.
 
SECTION 7   SUCCESSORS TO COMPANY
 
7.1   Successors
 
This Plan shall bind any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, in the same manner and to the same extent that the Company would be obligated under this Plan if no succession had taken place.  In the case of any transaction in which a successor would not by the foregoing provision or by operation of law be bound by this Plan, the Company shall require such successor expressly and unconditionally to assume and agree to perform the Company’s obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.
 
 
 
 
 
7.2   Sales of Operating Companies
 
If a Participant’s employment with his or her Employer terminates in connection with the sale, divestiture or other disposition of the stock or assets of any Operating Company (or part thereof) (a “Transaction”) after the execution of an agreement providing for a transaction or transactions which, if consummated, would constitute a Change in Control or after a Change in Control, such termination shall not be a termination of employment of the Participant for purposes of the Plan, and (notwithstanding the rights provided to the Participant by Section 4.1(a)) the Participant shall not be entitled to a Severance Benefit as a result of such termination of employment if (i) the Participant is offered continued employment, or continues in employment, with the divested Operating Company (or part thereof) or the purchaser of the stock or assets of the Operating Company (or part thereof), as the case may be, or one of their respective affiliates (the “Post-Transaction Employer”) on terms and conditions that would not constitute Good Reason and (ii) the Company obtains an agreement from the acquiror of the stock or assets of the divested Operating Company (or part thereof), enforceable by the Participant, to provide or cause the Post-Transaction Employer to provide severance pay and benefits, if the Participant accepts the offered employment or continues in employment with the Post-Transaction Employer or its affiliates following the Transaction, (A) at least equal to the Severance Benefit and (B) payable upon a termination of the Participant’s employment with the Post-Transaction Employer and its affiliates within the period described in Section 4.1(a)(ii) (or such part of it as is then remaining) for any reason other than Cause, Permanent Disability, the Participant’s death or a termination by the Participant without Good Reason.  For purposes of this Section 7.2, the terms Cause, Good Reason and Permanent Disability shall have the meanings ascribed to them in Sections 2.4, 2.10 and 2.15 respectively, but the term Employer as it is used in those Sections shall be deemed to refer to the entity employing the Participant after the Transaction, the term Company shall mean such employer or, if there is an ultimate parent corporation of such employer, such ultimate parent corporation, and the terms Board and Chief Executive Officer as used in those Sections shall be deemed to refer to the individuals or bodies serving those functions for such employer or, if applicable, such ultimate parent corporation.
 
SECTION 8   AMENDMENT AND PLAN TERMINATION
 
8.1   Amendment and Termination
 
Prior to a Change in Control, the Plan may be amended or modified in any respect, and may be terminated, in any such case, by resolution adopted by two-thirds of the Board; provided , however , that no such amendment, modification or termination which would adversely affect the benefits or protections hereunder of any individual who is a Participant as of the date such amendment, modification or termination is adopted shall be effective as it relates to such individual unless no Change in Control occurs within one year after such adoption, any such attempted amendment, modification or termination adopted within one year prior to a Change in Control being null and void ab initio as it relates to all such individuals who were Participants prior to such adoption (it being understood that the removal of Participants from participation in the Plan shall, for purposes of this proviso, constitute an adverse action for the Participants so removed); provided , further , however , that the Plan may not be amended, modified or terminated, (i) at the request of a third party who has indicated an intention or taken steps to effect a Change in Control and who effectuates a Change in Control or (ii) otherwise in connection with, or in anticipation of, a Change in Control which actually occurs, any such attempted amendment, modification or termination being null and void ab initio.  Any action taken to amend, modify or terminate the Plan which is taken after the execution of an agreement providing for a transaction or transactions which, if consummated, would constitute a Change in Control shall conclusively be presumed to have been taken in connection with a Change in Control.  From and after the occurrence of a Change in Control, the Plan may not be amended or modified in any manner that would in any way adversely affect the benefits or protections provided hereunder to any individual who is a Participant in the Plan on the date the Change in Control occurs.
 
 
 
 
 
8.2   Form of Amendment
 
           The form of any amendment or termination of the Plan shall be a written instrument signed by a duly authorized officer or officers of the Company, certifying that the amendment or termination has been approved by the Board.
 
SECTION 9   MISCELLANEOUS
 
9.1   Indemnification
 
The Company shall pay as they become due all legal fees, costs of litigation and other expenses incurred in good faith by any Participant as a result of the Company's refusal or failure to provide the Severance Benefits to which the Participant becomes entitled under this Agreement, as a result of the Company's contesting the validity, enforceability or interpretation of this Agreement or the Participant’s right to Severance Benefits hereunder.  The Participant shall be conclusively presumed to have acted in good faith unless a court makes a final determination not otherwise subject to appeal to the contrary.
 
9.2   Employment Status
 
This Plan does not constitute a contract of employment or impose on any Employer any obligation to retain the Participant as an employee, to change the status of the Participant’s employment as an Executive Officer or an Other Executive, or to change any employment policies of any Employer.  Without limiting the generality of the immediately preceding sentence, the Employer of a Participant may terminate the employment of the Participant at any time following a Change in Control, with or without Cause, subject to Section 5 hereof.
 
 
 
 
 
9.3           No Duty of Mitigation
 
The Company acknowledges that it would be very difficult and generally impracticable to determine a Participant’s ability to, or the extent to which a Participant may, mitigate any damages or injuries the Participant may incur by reason of the Change of Control. The Company has taken this into account in adopting this Plan and, accordingly, the Company acknowledges and agrees that no Participant shall have any duty to mitigate any such damages and that the Participant shall be entitled to receive all  Severance Benefits regardless of any income which the Participant may receive from other sources following any Change of Control.
 
9.4           No Setoff
 
The Company's obligation to give Severance Benefits to a Participant pursuant to this Plan and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, but not limited to, any setoff, counterclaim, recoupment, defense or other right which the Company may have against a Participant.
 
9.5           Benefits Under Other Plans
 
The benefits that a Participant may be entitled to receive pursuant to Section 4.2 of this Plan are not intended to be duplicative of any similar benefits to which the Participant may be entitled from the Company under any other severance plan, agreement, policy or program maintained by the Company or any of its Subsidiaries. Accordingly, the benefits to which a Participant is entitled under Section 4.2 shall be reduced to take account of any other similar benefits to which the Participant is entitled from the Company; provided, however, that if the amount of benefits to which the Participant is entitled under such other severance plan, agreement, policy or program is greater than the benefits to which the Participant is entitled under Section 4.2 of this Plan,  the Participant will be entitled to receive the full amount of the benefits to which the Participant is entitled under such other plan, agreement, policy or program.
 
9.6   Validity and Severability
 
           The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan, which shall remain in full force and effect, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
 
9.7   Governing Law; Choice of Forum
 
The validity, interpretation, construction and performance of the Plan shall in all respects be governed by the laws of the State of New York.  A Participant shall be entitled to enforce the provisions of this Plan in any state or federal court located in the State of New York, in addition to any other appropriate forum.
 
 
 
 
 
9.8   409A
 
If at the time a Participant’s employment is terminated the Participant is a “specified employee” within the meaning of Section 409A of the Code and the regulations thereunder, to the extent required to comply with Section 409A, payment of the Severance Benefits shall not commence until one day after the day which is six months following the Termination Date, with the first payment equaling the full amount of such Severance Benefits.
 
IN WITNESS WHEREOF, the Company has caused the Plan to be effective as of the Effective Date.
 
FALCONSTOR SOFTWARE, INC.
   
   
 
By
 
 
Title:
 

 
ATTEST:
 

 
By_____________________________
Title:   Corporate Secretary
 
 
 
 

APPENDIX I

Operating Companies under the
FalconStor Software, Inc.
Amended and Restated
2005 Key Executive Severance Protection Plan


“Operating Companies” as defined in Section 2.13 shall include the following subsidiaries.   This list shall be amended by the Board as necessary in its discretion.

FalconStor, Inc.

FalconStor Japan Co. Ltd.

FalconStor SA

FalconStor, Inc. [Taiwan]

FalconStor Software Ltd.

FalconStor GmbH

FalconStor AC, Inc.

FalconStor Software, Inc. [Korea]

FalconStor Software (H.K.) Limited

FalconStor Software Canada, Inc.

FalconStor Software (Shanghai) Co. Ltd.
 
Exhibit 99.3
 
WAIVER AND CONSENT
 
April 1, 2014
 

To:          FalconStor Software, Inc.
2 Huntington Quadrangle
Suite 2S01
Melville, NY

I acknowledge receipt of a copy of the Amended and Restated 2005 FalconStor Software, Inc., Key Executive Severance Protection Plan (the “Plan”), along with a document showing the differences between the Plan and the 2005 FalconStor Software, Inc., Key Executive Severance Protection Plan (the “Old Plan”).

I understand that, as set forth in Section 8.1 of the Old Plan, absent my consent, the changes to Sections 2.3, 4.2, and 6 of the Old Plan, as reflected in the Plan, would not take effect until April 1, 2015.

In consideration for a grant of restricted shares of FalconStor Software, Inc., the amount and terms of which are set forth in the Restrict Stock Agreement given to me, I hereby waive the one year delay for any amendment set forth in Section 8.1 of the Old Plan and I consent that the terms of the Plan shall apply to me from April 1, 2014 forward.


___________________________
Name

___________________________
Signature

___________________________
Date