<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
RED HAT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7375 06-1364380
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
2600 MERIDIAN PARKWAY
DURHAM, N.C. 27713
(919) 547-0012
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
ROBERT F. YOUNG
Chairman and Chief Executive Officer
Red Hat, Inc.
2600 Meridian Parkway
Durham, NC 27713
(919) 547-0012
(Name, address including zip code, and telephone number, including area code, of
agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
WILLIAM J. SCHNOOR, JR., ESQ. MARK G. BORDEN, ESQ.
GREGG A. GRINER, ESQ. PATRICK J. RONDEAU, ESQ.
Testa, Hurwitz & Thibeault, LLP Hale and Dorr LLP
125 High Street 60 State Street
Boston, Massachusetts 02110 Boston, Massachusetts 02109
Telephone: (617) 248-7000 Telephone: (617) 526-6000
Telecopy: (617) 248-7100 Telecopy: (617) 526-5000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $.0001 par value........................................ $96,600,000 $26,855
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Subject To Completion. Dated June 4, 1999.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
Shares
[LOGO]
Common Stock
------------------
This is an initial public offering of shares of Red Hat, Inc. All of the
shares of common stock are being sold by Red Hat. It is currently
estimated that the initial public offering price per share will be between
$ and $ .
Prior to this offering, there has been no public market for the common
stock. Application has been made for quotation of the common stock on the Nasdaq
National Market under the symbol "RHAT".
SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT CERTAIN FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Share Total
-------------------- --------------------
<S> <C> <C>
Initial public offering price................... $ $
Underwriting discount........................... $ $
Proceeds, before expenses, to Red Hat........... $ $
</TABLE>
To the extent that the underwriters sell more than shares of common
stock, the underwriters have the option to purchase up to an additional
shares from Red Hat at the initial public offering price less the underwriting
discount.
------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
GOLDMAN, SACHS & CO.
THOMAS WEISEL PARTNERS LLC
E*TRADE SECURITIES, INC.
------------------------
Prospectus dated , 1999.
<PAGE>
DESCRIPTION OF INSIDE BACK COVER:
[Graphic Description]
This inside back cover contains the following:
Awards Red Hat has won in the last three years with the graphical
representations or logos of each award. The presentation of the awards is
surrounded by the words "And the Winner is... Red Hat Linux". The Red Hat
"Shadow Man" logo appears above the award presentation.
<PAGE>
DESCRIPTION OF INSIDE FRONT COVER:
[Graphic Description]
This inside front cover contains the following:
A picture of the shrink-wrapped Official Red Hat Linux 6.0 operating system
package. This picture is surrounded by the names of entities which are OEM,
distribution or marketing partners of Red Hat. The Red Hat "Shadow Man" logo
appears in the lower right corner of the page.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND OUR FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS APPEARING
ELSEWHERE IN THIS PROSPECTUS.
RED HAT
OUR BUSINESS
We are a leading developer and provider of open source software and
services, including the Red Hat Linux operating system. Our Web site,
REDHAT.COM, is a leading online source of information and news about open source
software and one of the largest online communities of open source software users
and developers. In addition to offering extensive content for the open source
community, REDHAT.COM serves as an important forum for open source software
development and offers software downloads and a shopping site. Our broad range
of professional services includes technical support, training and education,
custom development, consulting and hardware certification. We are committed to
serving the interests and needs of open source software users and developers and
to sharing all of our product developments with the open source community.
Red Hat Linux is our principal product. Since its introduction in 1994, Red
Hat Linux has emerged as the most popular Linux-based operating system in the
world. Red Hat Linux represented approximately 56% of new license shipments of
Linux-based server operating systems in 1998, according to International Data
Corporation (IDC). Our Web site had over 265,000 unique visitors and
approximately 2.5 million page views during March 1999. A unique visitor is an
individual visitor to our REDHAT.COM Web site. Page views are the total number
of complete pages retrieved and viewed by visitors to REDHAT.COM. We generated
approximately $10.8 million in revenue for the fiscal year ended February 28,
1999, primarily from the sale of Official Red Hat Linux. Our products are also
generally available via free download from REDHAT.COM and other sites across the
Internet, but do not include technical support or printed user documentation in
these instances. Companies with which we have strategic alliances or investment
relationships include Compaq, Dell, IBM, Intel, Netscape, Novell, Oracle and
SAP.
OUR MARKET OPPORTUNITY
The rapid growth of the Internet in recent years has accelerated the
development of open source software. Unlike proprietary software, open source
software has publicly available source code and can be copied, modified and
distributed with minimal restrictions. Under the open source software model,
software is created through the collaborative efforts of large communities of
independent developers. Developers work alone or in groups to write code, make
it available over the Internet, solicit feedback on it from other developers,
then modify and share it with others for general use. This continuous process
results in the rapid evolution and improvement of open source software.
We believe open source software offers many potential benefits for software
customers, users and vendors. Customers and users are able to acquire the
software at little or no cost, install the software on as many computers as they
wish, and customize the software to suit their particular needs. In addition,
customers and users can obtain software updates, improvements and support from
multiple vendors, reducing reliance on any single vendor. Vendors are able to
leverage the community of open source developers, allowing them to reduce
development costs and decrease their time to market. Vendors are also able to
distribute their products freely over the Internet, enabling them to create
large global user bases quickly.
Open source software is particularly well-suited to the Internet and
includes the
2
<PAGE>
following leading Internet software and server products:
- Apache Web Server--the most common Web server in use today;
- Perl--the de facto standard scripting language for Apache servers; and
- Sendmail--an e-mail routing tool that handles a majority of all e-mail
traffic.
Operating systems based on the Linux kernel are some of the better known
open source products. Linux-based operating systems represented 17% of new
license shipments of server operating systems in 1998, according to IDC. Despite
strong initial market acceptance, these operating systems have been slow to
penetrate large corporations at the enterprise level due in part to the lack of
viable open source industry participants to offer technical support and other
services on a long-term basis.
OUR STRATEGY
We seek to enhance our position as a leading provider of open source
software and services by:
- continuing to enhance our Web site to create the definitive online
destination for the open source community;
- expanding our professional services capabilities to capture large
corporate business on an enterprise basis;
- increasing market acceptance of open source software, particularly through
technology alliances and sharing our development efforts and resources
with third-party developers;
- continuing to invest in the development of open source technology; and
- enhancing the Red Hat brand through targeted advertising and public
relations campaigns.
OUR HISTORY
Red Hat, Inc. was incorporated in Connecticut in March 1993 as ACC Corp.,
Inc. In September 1995, ACC Corp., Inc. changed its name to Red Hat Software,
Inc. In September 1998, Red Hat Software, Inc. reincorporated in Delaware. In
June 1999, Red Hat Software, Inc. changed its name to Red Hat, Inc. Unless the
context otherwise requires, any reference to "Red Hat", "we", "our" and "us" in
this prospectus refers to Red Hat, Inc., a Delaware corporation, and its
subsidiaries and predecessors. Our principal executive offices are located at
2600 Meridian Parkway, Durham, N.C. 27713. Our telephone number is (919)
547-0012.
"Red Hat", the Red Hat "Shadow Man" logo, "RPM", and "PowerTools" are
trademarks or service marks of Red Hat, Inc. Other trademarks and tradenames in
this prospectus are the property of their respective owners.
Except as set forth in the financial statements or as otherwise specified in
this prospectus, all information in this prospectus:
- assumes no exercise of the underwriters' over-allotment option;
- reflects a 2-for-1 stock split of the common stock which will occur prior
to the closing of this offering; and
- reflects the automatic conversion of all outstanding shares of our
preferred stock at February 28, 1999 into a total of 31,890,676 shares of
common stock upon the closing of this offering.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares offered by Red Hat.................... shares
Shares to be outstanding after the shares
offering.....................................
Use of proceeds.............................. To provide working capital and for other
general corporate purposes including
geographic expansion. See "Use of Proceeds".
Proposed Nasdaq National Market symbol....... RHAT
</TABLE>
The number of shares of common stock to be outstanding after the offering is
based on the number of shares outstanding on May 31, 1999. This number does not
include 5,418,088 shares of common stock issuable upon the exercise of stock
options outstanding on May 31, 1999 with a weighted average exercise price of
$1.23 per share or 3,197,450 shares of common stock issuable upon exercise of
warrants outstanding on May 31, 1999 with an exercise price of $.0001 per share.
This number also does not include an aggregate of 9,235,160 shares reserved for
future stock option grants and purchases under Red Hat's equity compensation
plans. See "Management-- Employee Benefit Plans" and note 11 of notes to
financial statements.
4
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes the financial data of our business. You
should read this information with the discussion in "Management Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and notes to those statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-------------------------------------------------------------------------
1995 1996(1) 1997 1998 1999
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................... $ 482 $ 930 $ 2,603 $ 5,156 $ 10,790
Net income (loss)..................... (128) (155) 33 8 (91)
Net income (loss) available to common
stockholders........................ (128) (155) 33 8 (130)
Earnings (loss) per common share:
Basic............................... $ (0.0107) $ (0.0069) $ 0.0014 $ 0.0003 $ (0.0055)
Diluted............................. (0.0107) (0.0069) 0.0012 0.0002 (0.0055)
Weighted average common shares
outstanding:()
Basic............................... 12,000 22,626 23,500 23,500 23,550
Diluted............................. 12,000 22,626 27,233 34,578 23,550
Pro forma earnings (loss) per common
share:
Basic............................... $ (0.0107) $ (0.0069) $ 0.0014 $ 0.0003 $ (0.0021)
Diluted............................. (0.0107) (0.0069) 0.0012 0.0002 (0.0021)
Pro forma weighted average common
shares outstanding:
Basic............................... 12,000 22,626 23,500 30,842 43,930
Diluted............................. 12,000 22,626 27,233 34,578 43,930
</TABLE>
- ------------------------
(1) Red Hat's fiscal year ended on February 29, 1996.
The following table presents a summary of our balance sheet at February 28,
1999:
- on an actual basis;
- on a pro forma basis to reflect conversion of all outstanding shares of
our preferred stock at February 28, 1999 into a total of 31,890,676 shares
of common stock, which will occur upon closing of this offering; and
- on a pro forma as adjusted basis to reflect the sale of shares of
common stock in this offering at an assumed initial public offering price
of $ per share after deducting the estimated underwriting discount
and offering expenses.
- the pro forma and pro forma as adjusted amounts do not reflect the
conversion of 1,027,388 shares of Series C preferred stock into 2,054,776
shares of common stock. We issued these shares of Series C preferred stock
in March and April 1999 for net proceeds of approximately $3.2 million. If
these shares were reflected, our pro forma total stockholders' equity
would be $15.3 million and our pro forma, as adjusted stockholders' equity
would be $ .
5
<PAGE>
<TABLE>
<CAPTION>
FEBRUARY 28, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 10,055 $ 10,055 $
Working capital....................................... 11,100 11,100
Total assets.......................................... 15,276 15,276
Long-term liabilities................................. 420 420
Mandatorily redeemable preferred stock................ 12,107 --
Total stockholders' equity (deficit).................. (5) 12,102
</TABLE>
6
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE
DECIDING TO INVEST IN THE SHARES OF COMMON STOCK.
RISKS RELATED TO THE OPEN SOURCE BUSINESS MODEL
THE MARKET FOR LINUX-BASED OPERATING SYSTEMS IS STILL DEVELOPING, AND OPEN
SOURCE SOFTWARE BUSINESS MODELS ARE UNPROVEN
The markets for Red Hat's products and services have only recently begun to
develop. Demand and market acceptance for software products developed under the
open source development model and services relating to these products are
subject to a high level of uncertainty and risk. Few open source software
products have gained widespread commercial acceptance. This is partly due to the
lack of viable open source industry participants to offer adequate service and
support on a long term basis. In addition, open source vendors are not able to
provide industry standard warranties and indemnities for their products, since
these products have been developed largely by independent parties over whom open
source vendors exercise no control or supervision. Finally, there are currently
few widely available commercial applications built for use with open source
operating systems such as those based on the Linux kernel. If open source
software should fail to gain widespread commercial acceptance, our business,
operating results and financial condition would be materially adversely
affected.
WE RELY ON THE SUPPORT OF LINUS TORVALDS AND OTHER PROMINENT LINUX DEVELOPERS
Our ability to release major upgrades of Red Hat Linux is largely dependent
upon the release of new versions of the Linux kernel by Linus Torvalds, the
original developer of the kernel. The Linux kernel is the heart of the operating
system. Mr. Torvalds and a small group of engineers are primarily responsible
for the development and evolution of the kernel. If this group of developers
fails to further develop the Linux kernel, we will have to either develop it
ourselves or rely on another party to develop it. This development effort could
be costly and time consuming, and could delay our product release and upgrade
schedule. Furthermore, there is no guarantee that the kernel would be available
from a reliable alternative source. In addition, any failure on the part of the
kernel developers to further develop the kernel could also stifle the
development of additional Linux-based applications. Moreover, if Mr. Torvalds or
other prominent Linux developers, such as Alan Cox, David Miller or Stephen
Tweedie, were to join one of our competitors, or if they were to decide to no
longer support us and our products in particular, or Linux in general, our
business, operating results and financial condition could be materially
adversely affected.
OUR SOFTWARE CONSISTS LARGELY OF CODE DEVELOPED BY INDEPENDENT THIRD PARTIES,
WHICH MAKES IT DIFFICULT TO ASSEMBLE AND TEST
Red Hat Linux, in compressed form, consists of approximately 573 megabytes
of code. Of that total, approximately 500 megabytes have been developed by
independent third parties, including approximately 10 megabytes of code
contained in the Linux kernel. Included within the 573 megabytes of code are
approximately 645 distinct software components developed by thousands of
individual programmers which we must assemble and test before we can release a
new version of Red Hat Linux. Although we attempt to assemble only the best
available components, we cannot be sure that we will be able to identify the
best components or to successfully assemble and test them. Moreover, if these
components are no longer independently developed or are not reliable,
7
<PAGE>
our business, operating results and financial condition could be materially
adversely affected.
BECAUSE LINUX-BASED OPERATING SYSTEMS ARE STILL EMERGING AND RELATIVELY NEW,
MOST SOFTWARE COMPANIES HAVE NOT YET DEVELOPED APPLICATIONS FOR THEM
Demand and market acceptance for Linux-based operating systems in general,
and Red Hat Linux in particular, will significantly depend on the availability
of an increasing number of third party applications that operate on the Linux
platform. These applications include word processors, databases, accounting
packages, spreadsheets, e-mail programs, Internet browsers, presentation and
graphics software and personal productivity applications. We intend to encourage
the development of additional applications that operate on Linux-based operating
systems by attracting third party developers to the Linux platform and by
maintaining our existing developer relationships through marketing and technical
support for third party developers. However, third party developers are
generally under no obligation to develop applications for Linux-based operating
systems. A developer's decision to write applications for these operating
systems depends, in large part, on the developer's perception and analysis of
the relative technical, financial and other benefits of developing applications
for Linux-based operating systems as compared to writing applications for more
widely accepted operating systems such as Windows NT or UNIX. If we cannot
attract a sufficient number of application developers to write and market
successful applications for Linux-based operating systems, our business,
operating results and financial condition will be materially adversely affected.
OUR ABILITY TO GENERATE REVENUE FROM SALES MAY BE ADVERSELY AFFECTED IF USERS
CAN QUICKLY DOWNLOAD RED HAT LINUX FROM THE INTERNET
Red Hat's historical business has been based on the sale of Official Red Hat
Linux. Using a standard telephone connection, a user can download Red Hat Linux
from the Internet free of charge in approximately 36 hours. To avoid this
significant download time, users can purchase the shrink-wrapped version of
Official Red Hat Linux. If hardware and data transmission technology advances in
the future to the point where increased bandwidth allows Red Hat Linux to be
more quickly downloaded from the Internet, users may no longer choose to
purchase Official Red Hat Linux. Any resulting decrease in product revenue, if
significant, could have a material adverse effect on our business, operating
results and financial condition.
DIFFICULTIES IN DEPLOYING OUR PRODUCTS MAY LEAD TO CUSTOMER DISSATISFACTION
Deployment of our products often involves a significant commitment of
resources, financial and otherwise, by our customers. The deployment process can
be lengthy due to the size and complexity of our products and the need to
purchase and install new applications. The failure by us to attract and retain
services personnel, the failure of companies with which we have strategic
alliances to commit sufficient resources towards deploying our products, or a
delay in deployment for any other reason could result in dissatisfied customers.
This could have a material adverse effect on our reputation and the Red Hat
brand, which in turn could materially adversely affect our business, operating
results and financial condition.
THE OPEN SOURCE COMMUNITY MAY REACT NEGATIVELY TO OUR BUSINESS STRATEGY
Some members of the open source software community have criticized the
expansion of our strategic focus as encouraging the fragmentation of the Linux
community. Others have suggested that by expanding our focus, we are trying to
dominate the market for Linux-based operating systems and the open source
community in the same way that some companies have been able to dominate the
traditional software markets. This type of negative reaction, if widely shared
by our customers, developers or the rest of the open source community, could
harm our reputation, diminish the Red Hat brand and adversely affect our
business, operating results and financial condition.
8
<PAGE>
RISKS RELATED TO OUR FINANCIAL RESULTS AND CONDITION
WE HAVE A LIMITED OPERATING HISTORY AND ARE SUBJECT TO RISKS FREQUENTLY
ENCOUNTERED BY EARLY STAGE COMPANIES
Red Hat was founded in March 1993. We began offering our Red Hat Linux
operating system software for sale in October 1994. Accordingly, we have a
relatively limited operating history upon which you can evaluate our business
and prospects. You must consider our prospects in light of the risks and
difficulties frequently encountered by early stage companies in new and rapidly
evolving markets.
WE EXPECT TO INCUR SUBSTANTIAL LOSSES IN THE FUTURE
We have incurred operating losses in three of our previous five fiscal
years. We expect to substantially increase our sales and marketing, research and
development and administrative expenses in the immediate future. In addition, we
are investing considerable resources in our Web initiative. As a result, we
expect to incur significant losses for the foreseeable future and cannot be
certain when or if we will achieve profitability. Failure to become and remain
profitable within the timeframe expected by investors may adversely affect the
market price of our common stock and our ability to raise capital and continue
operations.
OUR QUARTERLY RESULTS OF OPERATIONS MAY FLUCTUATE SIGNIFICANTLY AND ARE
DIFFICULT TO FORECAST
Due to our limited operating history and the unpredictability of our
industry, our revenue and net income (loss) may fluctuate significantly from
quarter to quarter and are difficult to forecast. We base our current and
projected future expense levels in part on our estimates of future revenue. Our
expenses are to a large extent fixed in the short term. We may not be able to
adjust our spending quickly if our revenue falls short of our expectations.
Accordingly, a revenue shortfall in a particular quarter would have a
disproportionate adverse effect on our net income (loss) for that quarter.
Further, we may make pricing, purchasing, service, marketing, acquisition or
financing decisions that could adversely affect our business, operating results
and financial condition.
Our quarterly operating results will fluctuate for many reasons, including:
- our ability to retain existing customers, attract new customers and
satisfy our customers' demand;
- changes in gross margins of our current and future products and services;
- the timing of our release of upgraded versions of our products;
- introduction of new products and services by us or our competitors;
- changes in the market acceptance of Linux-based operating systems;
- changes in the usage of the Internet and online services;
- timing of upgrades and developments in the Linux kernel and other open
source software products;
- the effects of acquisitions and other business combinations, including
one-time charges, goodwill amortization and integration expenses or
difficulties; and
- technical difficulties or system downtime affecting the Internet or our
Web site.
For these reasons, you should not rely on period-to-period comparisons of
our financial results to forecast our future performance. Our future operating
results may fall below expectations of securities analysts or investors, which
would likely cause the trading price of our common stock to decline
significantly.
WE HAVE EXPERIENCED RAPID GROWTH, WHICH HAS PLACED A SIGNIFICANT STRAIN ON OUR
RESOURCES
Since March 1, 1998 we have experienced a period of rapid growth and
expansion which
9
<PAGE>
has placed, and continues to place, a significant strain on all of our
resources. Our total revenue increased significantly during the last fiscal
year, and from March 1, 1998 to May 31, 1999, the number of our employees
increased from 36 to 127. We expect our anticipated growth to further strain our
management, operational and financial resources. Our management team has had
limited experience managing a rapidly growing company on either a public or
private basis. To accommodate our anticipated growth we must:
- improve existing and implement new operational and financial systems,
procedures and controls;
- hire, train and manage additional qualified personnel, including sales and
marketing, professional services and software engineering and development
personnel; and
- effectively manage multiple relationships with our customers, suppliers
and other third parties.
We may not be able to install and implement adequate operational and
financial systems, procedures and controls in an efficient and timely manner,
and our current or planned systems, procedures and controls may not be adequate
to support our future operations. The difficulties associated with installing
and implementing these new systems, procedures and controls may place a
significant burden on our management and our internal resources. In addition, if
we grow internationally, as we intend, we will have to expand our worldwide
operations and enhance our communications infrastructure. Any delay in the
implementation of, or any disruption in the transition to, new or enhanced
systems, procedures or controls could adversely affect our ability to accurately
forecast sales demand, manage our supply chain, and record and report financial
and management information on a timely and accurate basis. Our inability to
manage growth effectively could have a material adverse effect on our business,
operating results and financial condition.
SEVERAL MEMBERS OF OUR SENIOR MANAGEMENT HAVE ONLY RECENTLY JOINED RED HAT
Several members of our senior management joined us in 1998 and 1999,
including our President and our Chief Operating Officer. We also plan to hire a
new Chief Financial Officer in the near future. These individuals have not
previously worked together and are becoming integrated as a management team. As
a result, our senior managers may not be able to work together effectively to
successfully manage our growth.
WE MAY BE ADVERSELY AFFECTED IF WE LOSE ROBERT YOUNG, MATTHEW SZULIK, TIM
BUCKLEY, MARC EWING OR OTHER KEY PERSONNEL
Our future success depends on the continued services of a number of key
officers, including our Chairman and Chief Executive Officer, Robert Young; our
President, Matthew Szulik; our Chief Operating Officer, Tim Buckley; and our
Executive Vice President and Chief Technology Officer, Marc Ewing. The loss of
the technical knowledge and industry expertise of any of these officers could
seriously impede our success. Moreover, the loss of one or a group of our key
employees, particularly to a competitor, and any resulting loss of customers to
a competitor could materially adversely affect our business, operating results
and financial condition.
WE FACE INTENSE COMPETITION FROM MICROSOFT AND OTHER ESTABLISHED OPERATING
SYSTEMS DEVELOPERS
The market for operating systems is intensely competitive and rapidly
changing. We face significant competition from larger companies with greater
financial resources and name recognition than we have. These competitors include
Microsoft, Novell, IBM, Sun Microsystems and The Santa Cruz Operation, which
offer hardware-independent multi-user operating systems for Intel platforms, as
well as OEMs such as AT&T, Compaq, Hewlett-Packard, IBM, Olivetti, Sun
Microsystems and Unisys, which offer UNIX-based operating systems. Many of these
companies bundle
10
<PAGE>
competitive operating systems with their own hardware offerings, making it more
difficult for us to penetrate their customer base. If we are not able to compete
successfully with current or future competitors, our business, operating results
and financial condition will be materially adversely affected.
WE FACE INTENSE COMPETITION FROM OTHER SUPPLIERS OF LINUX-BASED OPERATING
SYSTEMS, AND NEW COMPETITORS MAY ENTER OUR MARKETS EASILY
The market for Linux-based operating systems is new, rapidly evolving and
intensely competitive. We expect competition to persist and intensify in the
future. We estimate that there are currently over 23 suppliers of Linux-based
operating systems worldwide and expect this number to grow as Linux-based
operating systems gain increased market share from competing operating systems
such as Microsoft Windows NT and the various UNIX-based operating systems. In
addition, there are a number of companies with large customer bases and greater
financial resources and name recognition, such as Sun Microsystems, Corel and
Cygnus Solutions, that have indicated a growing interest in the market for
Linux-based operating systems. These companies may be able to undertake more
extensive promotional activities, adopt more aggressive pricing policies, and
offer more attractive terms to their customers than we can.
Furthermore, because Linux-based operating systems are open source software
(i.e., they can be downloaded from the Internet for free or purchased at a
nominal cost and modified and re-sold with few restrictions), traditional
barriers to entry are minimal. Accordingly, it is possible that new competitors
or alliances among competitors may emerge and rapidly acquire significant market
share. In addition, we may face competition for services revenue from larger and
more capable companies that service and support other operating systems,
particularly those that service and support the UNIX-based operating systems,
due to the fact that Linux- and UNIX-based operating systems share many common
features. These companies may be able to leverage their existing service
organizations and provide higher levels of support on a more cost-effective
basis than we can. If we are not able to compete successfully with current or
future competitors, our business, operating results and financial condition will
be materially adversely affected.
WE MUST ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS IN ORDER TO OFFER
PRODUCTS AND SERVICES TO A LARGER CUSTOMER BASE
Our success depends on our ability to continue to establish and maintain
strategic distribution and other collaborative relationships with
industry-leading hardware manufacturers, distributors, software vendors and
enterprise solutions providers in order to offer products and services to a
larger customer base than we could otherwise reach through our direct sales and
marketing efforts. We must develop and expand our indirect distribution channels
through relationships with original equipment manufacturers (OEMs) and
value-added resellers (VARs). Our largest distributor accounted for
approximately 26% of our total revenue for the fiscal year ended February 28,
1998. Our two largest distributors accounted for 53% of our total revenue for
the fiscal year ended February 28, 1999. If we are unable to maintain our
existing strategic relationships or enter into additional strategic
relationships, we will have to devote substantially more resources to the
distribution, sale and marketing of our products and services than we would
otherwise intend to, and our business, operating results and financial condition
would be materially adversely affected.
Our existing strategic relationships do not, and any future strategic
relationships may not, afford us any exclusive marketing or distribution rights.
The companies with which we have strategic alliances are free to pursue
alternative technologies and to develop alternative products and services in
addition to or in lieu of our products and services, either on their own or in
collaboration with others, including our competitors. We cannot guarantee that
our OEMs and distributors will
11
<PAGE>
market our products effectively or continue to devote the resources necessary to
provide us with effective sales, marketing and technical support.
In order to support and develop leads for our indirect distribution
channels, we plan to expand our field sales and support staff significantly. We
cannot guarantee that we will be able to successfully complete this internal
expansion, that the revenue generated from this expansion will exceed its cost
or that our expanded sales and support staff will be able to compete
successfully against the significantly more extensive and better-funded sales
and marketing operations of many of our current or potential competitors. Our
inability to effectively manage the expansion of our sales and support staff
would materially adversely affect our business, operating results and financial
condition.
OUR PLANNED INTERNATIONAL EXPANSION AND OPERATIONS EXPOSE US TO BUSINESS RISKS
We plan to expand our presence in foreign markets. We have little experience
in marketing and distributing products or services for these markets and may not
benefit from any first-to-market advantages. It will be costly to establish
international facilities and operations, promote our brand internationally, and
develop localized Web sites and other systems. We may not succeed in our efforts
in these countries. If revenue from international activities does not offset the
expense of establishing and maintaining foreign operations, our business,
operating results and financial condition will suffer.
As we expand our international operations, we will face a number of
additional risks associated with the conduct of business overseas, including:
- difficulties relating to the management and administration of a globally-
dispersed business;
- fluctuations in exchange rates;
- limitations on repatriation of earnings of our foreign operations;
- the burdens of complying with a wide variety of foreign laws;
- the uncertainty of laws and enforcement in certain countries relating to
the protection of intellectual property rights;
- reductions in business activity during the summer months in Europe and
certain other parts of the world;
- export controls;
- multiple and possibly overlapping tax structures;
- changes in import/export duties and quotas; and
- economic or political instability in some international markets.
WE MAY NOT REALIZE ANY BENEFIT FROM THE PLANNED EXPANSION OF OUR SERVICES
BUSINESS
We have recently begun to expand our strategic focus to place additional
emphasis on consulting, custom development, education and support services.
Historically, we have derived virtually all of our revenue from software product
sales. Although we intend to continue to develop and sell Official Red Hat
Linux, we anticipate that product sales will represent a declining percentage of
our total revenue if our strategy is successful. We cannot be certain that our
customers will engage our professional services organization to assist with
support, consulting, custom development, training and implementation of our
products. We also cannot be certain that we can attract or retain a sufficient
number of the highly qualified services personnel that the expansion of our
services business will need. In addition, this expansion has required, and will
continue to require, significant additional expenses and development, financial
and operational resources. These additional resources will place further strain
on our management, financial and operational resources and may make it more
difficult for us to achieve and maintain profitability.
WE MAY ENTER INTO BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES WHICH WILL
PRESENT US WITH ADDITIONAL CHALLENGES
We may expand our operations or market presence by entering into business
combinations, investments, joint ventures or other strategic alliances with
other companies. These transactions create risks such as:
- difficulty assimilating the operations, technology and personnel of the
combined companies;
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<PAGE>
- disruption of our ongoing business;
- problems retaining key technical and managerial personnel;
- one-time in-process research and development charges and ongoing expenses
associated with amortization of goodwill and other purchased intangible
assets;
- potential dilution to our stockholders;
- additional operating losses and expenses of acquired businesses; and
- impairment of relationships with existing employees, customers and
business partners.
Our inability to address these risks could have a material adverse effect on
our business, operating results and financial condition.
COMPETITION FOR SKILLED TECHNICAL PERSONNEL IN OUR INDUSTRY IS INTENSE
Our future performance also depends upon our ability to attract and retain
highly qualified programming, technical, sales, marketing and managerial
personnel. There is intense competition for skilled personnel, particularly in
the field of software engineering. If we do not succeed in retaining our
personnel or in attracting new employees, our business could suffer
significantly.
RISKS RELATED TO OUR INTERNET STRATEGY
IF WE FAIL TO ATTRACT VISITORS TO OUR WEB SITE, OUR BUSINESS WILL SUFFER
Enhancing the REDHAT.COM Web site is critical to our ability to increase our
revenue. In order to attract and retain Internet users, advertisers and
electronic commerce partners, we intend to substantially increase our
expenditures for enhancing and further developing our Web site. Our success in
promoting and enhancing the REDHAT.COM Web site will also depend on our success
in providing high quality content, features and functionality. If we fail to
promote our Web site successfully or if visitors to our Web site or advertisers
do not perceive our services to be useful, current or of high quality, our
ability to generate revenue from our Web site would be diminished. This could
materially adversely affect our business, operating results and financial
condition.
WE MAY NOT GENERATE THE ADVERTISING REVENUE WE EXPECT
As we execute our Internet strategy, we expect to derive an increasing
amount of our revenue from sponsorships and advertising on our Web site. Demand
and market acceptance for Internet advertising is uncertain. There are currently
no standards for the measurement of the effectiveness of Internet advertising,
and the industry may need to develop standard measurements to support and
promote Internet advertising as a significant advertising medium. If standards
do not develop, existing advertisers may not continue their levels of Internet
advertising. Furthermore, advertisers that have traditionally relied on other
advertising media may be reluctant to advertise on the Internet. Our ability to
successfully execute our Internet strategy will be adversely affected if the
market for Internet advertising fails to develop or develops more slowly than
expected.
In addition, different pricing models are used to sell advertising on the
Internet. It is difficult to predict which, if any, will emerge as the industry
standard. This makes it difficult to project our future advertising rates and
revenue. Our advertising revenue could be adversely affected if we are unable to
adapt to new forms of Internet advertising pricing models. Moreover, software
programs that limit or prevent advertisements from being delivered to an
Internet user's computer are available. Widespread adoption of this software
could adversely affect the commercial viability of Internet advertising, and
could materially adversely affect our business, operating results and financial
condition.
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<PAGE>
THE SUCCESSFUL EXECUTION OF OUR INTERNET STRATEGY DEPENDS UPON THE CONTINUED
DEVELOPMENT AND MAINTENANCE OF THE INFRASTRUCTURE OF THE INTERNET AND THE
INTEGRITY OF OUR SYSTEMS
The success of our Internet strategy will depend in large part on the
continued development and maintenance of the infrastructure of the Internet.
Because global commerce and the online exchange of information is new and
evolving, we cannot predict with any certainty that the Internet will be a
viable commercial marketplace in the long term. The Internet has experienced,
and we expect it to continue to experience, significant growth in number of
users and amount of traffic. To the extent that the Internet continues to
experience an increased number of users, frequency of use or increased bandwidth
requirements of users, it may not be able to support the demands placed upon it
by such growth, and its performance and reliability may suffer. Furthermore, the
Internet has experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure, and could face similar outages and
delays in the future. Any outage or delay could affect the level of Internet
usage, as well as the level of traffic on our Web site. In addition, the
Internet could lose its viability due to delays in the development or adoption
of new standards and protocols to handle increased levels of activity or due to
increased governmental regulation. If the necessary infrastructure, standards or
protocols or complementary products, services or facilities are not developed,
or if the Internet does not become a viable commercial marketplace, our
business, operating results and financial condition could be materially
adversely affected.
Substantially all of our communications hardware and our other computer
hardware operations related to our Web site are located in Herndon, Virginia.
Fire, floods, hurricanes, tornadoes, earthquakes, power loss, telecommunications
failures, break-ins and similar events could damage these systems. In addition,
although we have implemented network security measures, our servers are
vulnerable to computer viruses, electronic break-ins, human error and other
similar disruptive problems which could adversely affect our systems and Web
site. Although we try to prevent unauthorized access to our systems, we cannot
eliminate this risk entirely. Our business could be adversely affected if our
systems were affected by any of these occurrences. Our insurance policies may
not adequately compensate us for any losses that may occur due to failures or
interruptions in our systems. We do not presently have any secondary "off-site"
systems or a formal disaster recovery plan.
Our Web site must accommodate a high volume of traffic and deliver
frequently updated information. Our Web site has in the past experienced slower
response times or decreased traffic for a variety of reasons. These occurrences
have not had a material impact on our business. These types of occurrences in
the future, however, could materially adversely affect our reputation and brand
name and could cause users to perceive our Web site as not functioning properly.
Under these circumstances, our customers could choose another Web site or other
methods to obtain Linux-based operating systems or Linux-related information.
WE MAY BE UNABLE TO ADEQUATELY MEASURE THE DEMOGRAPHICS OF VISITORS TO OUR WEB
SITE
We expect that it will be important to our advertisers that we accurately
measure the demographics of the visitors to and the delivery of advertisements
on our Web site. We have not committed significant resources to the measurement
of demographics. We depend on third parties to provide some of these measurement
services. If these parties were unable to provide these services in the future,
we would need to perform them ourselves or obtain them from other providers.
This could cause us to incur additional costs or cause interruptions in our
Internet business during the time we were replacing these services. We are
currently implementing additional systems designed to record demographic data on
our Web site's visitors,
14
<PAGE>
which will require us to incur additional costs. If we do not implement these
systems successfully, we may not be able to accurately evaluate the demographic
characteristics of visitors to our Web site. Companies may choose not to
advertise on our Web site or may pay less for advertising if they do not
perceive our measurements or measurements made by third parties to be reliable.
RISKS RELATED TO LEGAL UNCERTAINTY
OUR PRODUCTS ARE DEVELOPED AND LICENSED UNDER THE GNU GENERAL PUBLIC LICENSE
WHICH MAY NOT BE ENFORCEABLE
The Linux kernel and the Red Hat Linux operating system have been developed
under, and licensed pursuant to, the GNU General Public License (GPL). The GPL
states that any program licensed under it may be liberally copied, modified and
distributed. We know of no circumstance under which the GPL has been challenged
or interpreted in court. Accordingly, it is possible that a court would hold the
GPL to be unenforceable in the event that someone were to file a claim asserting
proprietary rights in a program developed and distributed in accordance with the
GPL. Any ruling by a court that the GPL is not enforceable, or that Linux-based
operating systems, or significant portions of them, may not be liberally copied,
modified or distributed, would have the effect of preventing us from selling or
developing our products. This would have a material adverse effect on our
business, operating results and financial condition.
OUR PRODUCTS MAY CONTAIN DEFECTS THAT MAY HARM OUR REPUTATION, BE COSTLY TO
CORRECT, DELAY REVENUE AND EXPOSE US TO LITIGATION
Despite testing by us and our customers, errors may be found in our products
after commencement of commercial shipments. This risk is exacerbated by the fact
that most of the code in our products is developed by independent parties over
whom we exercise no supervision or control. If errors are discovered, we may not
be able to successfully correct them in a timely manner or at all. Errors and
failures in our products could result in a loss of, or delay in, market
acceptance of our products and could damage our reputation and our ability to
convince commercial users of the benefits of Linux-based operating systems and
other open source software products. In addition, we may need to make
significant expenditures of capital resources in order to eliminate errors and
failures. If our products fail, our customers' systems may fail and they may
assert warranty and other claims for substantial damages against us. Although
our license agreements with our customers typically contain provisions designed
to limit our exposure to potential product liability claims, it is possible that
these provisions may not be effective or enforceable under the laws of some
jurisdictions. In addition, our insurance policies may not adequately limit our
exposure with respect to this type of claim. A product liability claim, even if
unsuccessful, could be costly and time consuming. Claims related to the
occurrence or discovery of these types of errors or failures could have a
material adverse effect on our business, operating results and financial
condition.
OTHERS COULD CLAIM THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS
We may be subject to future litigation based on claims that our products
infringe the intellectual property rights of others. This risk is exacerbated by
the fact that most of the code in our products is developed by independent
parties over whom we exercise no supervision or control. Claims of infringement
could require us to reengineer our products or seek to obtain licenses from
third parties in order to continue offering our products. In addition, an
adverse legal decision affecting our intellectual property, or the use of
significant resources to defend against this type of claim, could materially
adversely affect our business, operating results and financial condition.
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<PAGE>
FAILURE TO PROTECT OUR TRADEMARKS COULD HARM OUR BRAND BUILDING EFFORTS AND OUR
ABILITY TO COMPETE EFFECTIVELY
Our most valuable intellectual property is our collection of trademarks. The
protective steps we have taken in the past have been, and may continue to be
inadequate to deter misappropriation of our trademark rights. We may be unable
to detect the unauthorized use of, or take appropriate steps to enforce, our
trademark rights. We have registered some of our trademarks in the United States
and Australia and have other trademark applications pending in Australia, Canada
and Europe. Effective trademark protection may not be available in every country
in which we offer or intend to offer our products and services. Failure to
adequately protect our trademark rights could harm or even destroy the Red Hat
brand and impair our ability to compete effectively. Furthermore, defending or
enforcing our trademark rights could result in the expenditure of significant
financial and managerial resources, which could materially adversely affect our
business, operating results and financial condition.
WE MAY BE SUED AS A RESULT OF INFORMATION RETRIEVED FROM OUR WEB SITE
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or other claims relating to the information we publish on
our Web site. These types of claims have been brought, sometimes successfully,
against online services in the past. We could also be subjected to claims based
on content that is accessible from our Web site through links to other Web sites
or through content and materials that may be posted by visitors to our Web site.
Our insurance, which covers commercial general liability, may not adequately
protect us against these types of claims.
WE MAY BE ADVERSELY IMPACTED BY THE YEAR 2000 PROBLEM
We have conducted a software review to identify functions that need
correction to be "Year 2000 compliant". We are taking corrective actions in an
effort to ensure that software systems used in our business or sold by us will
continue to function properly in the year 2000. However, if compliance costs
significantly exceed our estimate or if the corrective actions are unsuccessful
or not completed in time, we may encounter Year 2000 problems with our products
or business operations. Our exposure to Year 2000 problems is exacerbated by the
fact that most of the code in our products is developed by independent parties
over whom we exercise no supervision or control. Additionally, the Year 2000
problem may affect us by causing disruptions in the business operations of, or
delay technology purchases by, companies with which we do business, such as
customers and suppliers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance".
RISKS RELATED TO THIS OFFERING
WE WILL HAVE BROAD DISCRETION AS TO THE USE OF THE PROCEEDS FROM THIS OFFERING
The primary purposes of this offering are to obtain additional capital,
create a public market for our common stock and facilitate future access to
public markets. We expect to use the net proceeds from this offering for working
capital and other general corporate purposes, including geographic expansion. We
have not designated the proceeds for any particular purpose. Accordingly, we
will have broad discretion as to the application of the proceeds. Our failure to
apply the proceeds effectively could have a material adverse effect on our
business, operating results and financial condition.
THE PRICE OF OUR COMMON STOCK AFTER THIS OFFERING MAY BE LOWER THAN THE PRICE
YOU PAY
Before this offering, there was no public market for our common stock.
Together with
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<PAGE>
the underwriters, we will determine the initial public offering price of our
common stock based on an assessment of the valuation of our common stock. The
public market may not agree with or accept this valuation. After this offering,
therefore, you may not be able to resell your shares at or above the initial
public offering price.
FUTURE SALES BY EXISTING STOCKHOLDERS COULD DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK
Once a trading market develops for our common stock, many of our
stockholders will have an opportunity to sell their common stock for the first
time. Sales of a substantial number of shares of common stock in the public
market, or the threat that substantial sales might occur, could cause the market
price of the common stock to decrease. These factors could also make it
difficult for us to raise capital by selling stock. See "Shares Eligible for
Future Sale".
OUR EXISTING STOCKHOLDERS WILL EXERCISE SIGNIFICANT CONTROL OVER RED HAT
Upon completion of this offering, our directors, executive officers and
their affiliates will beneficially own approximately % of our outstanding
common stock. These stockholders could determine the outcome of actions taken by
us that require stockholder approval. For example, these stockholders could
elect all of our directors, delay or prevent a transaction in which stockholders
might receive a premium over the prevailing market price for their shares and
control changes in management. See "Management" and "Principal Stockholders".
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF OUR COMPANY
Provisions of our charter and bylaws may discourage, delay or prevent a
merger or acquisition that stockholders may consider favorable. These provisions
include:
- authorizing the issuance of "blank check" preferred stock;
- providing for a classified board of directors with staggered three-year
terms;
- requiring supermajority voting to effect certain amendments to our
certificate of incorporation and bylaws;
- limiting the ability to call special meetings of stockholders;
- prohibiting stockholder action by written consent; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Some provisions of Delaware law may also discourage, delay or prevent
someone from acquiring us or merging with us. See "Description of Capital
Stock--Delaware Law and Certain Charter and By-Law Provisions and Anti-Takeover
Effects".
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
INVESTMENT
The net tangible book value per share of the common stock immediately after
this offering will be substantially less than the initial public offering price.
Furthermore, in the event that we issue additional shares of common stock in the
future, including shares that may be issued upon exercise of warrants and
options and other rights granted under our employee benefit plans, purchasers of
common stock in this offering will experience further dilution. See "Dilution".
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<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business", and elsewhere in this prospectus constitute
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may", "will", "should", "expects", "plans",
"anticipates", "believes", "estimated", "predicts", "potential", or "continue"
or the negative of such terms or other comparable terminology. These statements
are only predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our or our industry's actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. These factors include, among other
things, those listed under "Risk Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform
forward-looking statements to actual results.
USE OF PROCEEDS
We estimate the net proceeds to us from the sale of shares of
common stock in this offering to be approximately $ , after
deducting the estimated underwriting discount and offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate net
proceeds to be $ .
The principal purposes of this offering are to increase our capitalization
and financial flexibility, to provide a public market for the common stock and
to facilitate access to public equity markets.
We expect to use the net proceeds for working capital and other general
corporate purposes, including geographic expansion. We have not allocated any
specific portion of the net proceeds to any particular purpose, and our
management will have the ability to allocate the proceeds at its discretion. A
portion of the net proceeds may be used for the acquisition of businesses,
products and technologies that are complementary to our own. Currently, we do
not have any understandings, commitments or agreements with respect to
acquisitions. The net proceeds of this offering will be invested in short-term,
interest-bearing, investment-grade securities until allocated for specific use.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends in the foreseeable future. We presently
intend to retain future earnings, if any, to finance the expansion and growth of
our business. Payment of future dividends, if any, will be at the discretion of
our Board of Directors after taking into account various factors, including our
financial condition, operating results, current and anticipated cash needs and
plans for expansion.
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CAPITALIZATION
The following table sets forth the capitalization of Red Hat as of February
28, 1999:
- on an actual basis;
- on a pro forma basis after giving effect to the conversion of our
outstanding preferred stock at February 28, 1999 into common stock which
will occur upon the closing of this offering; and
- on a pro forma as adjusted basis to reflect the sale of the shares
of common stock offered in this offering at an assumed initial public
offering price of $ per share after deducting the estimated
underwriting discount and offering expenses.
The outstanding share information excludes 4,302,570 shares of common stock
issuable upon the exercise of stock options outstanding on February 28, 1999,
3,387,450 shares of common stock issuable upon the exercise of warrants
outstanding on February 28, 1999 and 7,434,800 shares reserved for future stock
option grants and purchases under Red Hat's equity compensation plans. See
"Management--Employee Benefit Plans" and note 11 to notes to financial
statements.
You should read this information together with Red Hat's financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
FEBRUARY 28, 1999
------------------------------------
PRO FORMA
PRO AS
ACTUAL FORMA(1) ADJUSTED(1)
--------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations......................................................... $ 420 $ 420 $
Stockholders' equity (deficit):
Preferred stock:
Series A preferred stock, par value $.0001; 6,801,400 shares authorized,
issued and outstanding (actual); no shares authorized, issued or
outstanding (pro forma and pro forma as adjusted)......................... 1,992 -- --
Series B preferred stock, par value $.0001; 8,116,550 shares authorized,
issued and outstanding (actual); no shares authorized, issued or
outstanding (pro forma and pro forma as adjusted)......................... 6,920 -- --
Series C preferred stock, par value $.0001; 1,797,929 shares authorized,
1,027,388 issued and outstanding (actual); no shares authorized, issued or
outstanding (pro forma and pro forma as adjusted)......................... 3,195 -- --
Preferred stock, par value $0.0001; no shares authorized, issued or
outstanding (actual); 5,000,000 shares authorized and no shares issued or
outstanding (pro forma and pro forma as adjusted)......................... -- -- --
Common stock, par value $.0001; 225,000,000 shares authorized, 23,852,950
shares issued and outstanding (actual); 225,000,000, shares authorized,
55,743,626 shares issued and outstanding (pro forma); 225,000,000 shares
authorized, shares issued and outstanding (pro forma as adjusted).... 2 5 --
Additional paid-in capital.................................................. 428 12,532 --
Accumulated deficit......................................................... (435) (435) --
--------- -----------
Total stockholders' equity (deficit)........................................ (5) 12,102 --
--------- ----------- ------------
Total capitalization........................................................ $ 12,522 $ 12,522 $
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
- ------------------------
(1) The pro forma and pro forma as adjusted amounts do not reflect the
conversion of 1,027,388 shares of Series C preferred stock into 2,054,776
shares of common stock upon the completion of the offering. We issued these
shares of Series C preferred stock in March and April 1999 for net proceeds
of approximately $3.2 million. If such conversion were reflected, our pro
forma total capitalization would be $15.7 million and our pro forma, as
adjusted capitalization would be $ .
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DILUTION
Red Hat's net tangible book value per share immediately after this offering
will be substantially less than the assumed initial public offering price. Red
Hat's pro forma net tangible book value as of February 28, 1999 was $
million, or $ per share. Pro forma net tangible book value per share
represents the pro forma amount of total tangible assets less total liabilities,
divided by the number of pro forma shares of common stock outstanding. After
giving effect to the sale by us of shares of common stock in this
offering at an assumed initial public offering price of $ per share, after
deducting the estimated underwriting discount and offering expenses, the pro
forma as adjusted net tangible book value of Red Hat as of February 28, 1999
would have been $ million, or $ per share. This represents an
immediate increase in pro forma as adjusted net tangible book value of $
per share to existing stockholders and an immediate dilution of $ per share
to investors purchasing common stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price......................................... $
Pro forma net tangible book value per share prior to this offering.......... $
Increase per share attributable to this offering............................
---------
Adjusted pro forma net tangible book value per share after this offering......
---------
Dilution per share to new investors........................................... $
---------
---------
</TABLE>
Assuming the exercise in full of the underwriters' over-allotment option,
Red Hat's pro forma as adjusted net tangible book value at February 28, 1999
would have been approximately $ per share, representing an immediate
increase in the pro forma net tangible book value of $ per share to Red
Hat's existing stockholders and an immediate decrease in net tangible book value
of $ per share to new investors.
The following table summarizes, on a pro forma as adjusted basis, as of
February 28, 1999, the difference between the number of shares of common stock
purchased from Red Hat, the total consideration paid to Red Hat, and the average
price per share paid by existing stockholders and by new investors at an assumed
initial public offering price of $ per share, before deducting the
estimated underwriting discounts and offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------------- ---------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..................... 55,743,626 % $ 13,573,961 % $ 0.24
New investors............................. $
--------------- ----- --------------- -----
Total................................. 100.0% $ 100.0%
--------------- ----- --------------- -----
--------------- ----- --------------- -----
</TABLE>
------------------------
The discussion and the tables above assume no exercise of stock options or
warrants outstanding on February 28, 1999 and no issuance of shares reserved for
future issuance under Red Hat's equity plans. As of February 28, 1999, there
were options outstanding to purchase 4,302,570 shares of common stock at a
weighted average exercise price of $0.36 per share and warrants outstanding to
purchase 3,387,450 shares of common stock at an exercise price of $.0001 per
share. To the extent that any of these options or warrants are exercised, there
will be further dilution to new investors. In addition, the discussion and the
tables above do not reflect the conversion of 1,027,388 shares of Series C
preferred stock into 2,054,776 shares of common stock upon the completion of the
offering. We issued these shares of Series C preferred stock in March and April
1999 for net proceeds of approximately $3.2 million. See "Capitalization" and
"Management--Employee Benefit Plans".
20
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data set forth below for the fiscal years ended
February 28, 1997, February 28, 1998 and February 28, 1999, and the balance
sheet data as of February 28, 1998 and February 28, 1999, have been derived from
our financial statements which have been audited by PricewaterhouseCoopers LLP,
independent accountants, and are included elsewhere in this prospectus. The
balance sheet data as of February 28, 1997 have been derived from our audited
financial statements which are not included in this prospectus. The statement of
operations data for the fiscal years ended February 28, 1995 and February 29,
1996, and the balance sheet data as of February 28, 1995 and February 29, 1996
have been derived from our unaudited financial statements which are not included
in this prospectus. You should read the data set forth below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto appearing elsewhere
in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1996(2) 1997 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software and related products................................ $ 482 $ 930 $ 2,603 $ 5,132 $ 10,013
Services and other........................................... -- -- -- 24 777
--------- --------- --------- --------- ---------
Total revenue.............................................. 482 930 2,603 5,156 10,790
Cost of revenue:
Software and related products................................ 352 432 1,205 2,211 4,013
Services and other........................................... -- -- -- -- 28
--------- --------- --------- --------- ---------
Total cost of revenue...................................... 352 432 1,205 2,211 4,041
--------- --------- --------- --------- ---------
Gross profit................................................... 130 498 1,398 2,945 6,749
--------- --------- --------- --------- ---------
Operating expense:
Sales and marketing.......................................... 133 241 491 1,252 3,083
Research and development..................................... 80 250 325 903 2,220
General and administrative................................... 44 140 526 799 1,484
--------- --------- --------- --------- ---------
Total operating expenses................................... 257 631 1,342 2,954 6,787
--------- --------- --------- --------- ---------
Income (loss) from operations................................ (127) (133) 56 (9) (38)
Other income (expense), net.................................... (1) (22) (23) 22 162
--------- --------- --------- --------- ---------
Income (loss) before income taxes.............................. (128) (155) 33 13 124
Provision for income taxes..................................... -- -- -- 5 215
--------- --------- --------- --------- ---------
Net income (loss).............................................. (128) (155) 33 8 (91)
Accretion on mandatorily redeemable preferred stock............ -- -- -- -- (39)
--------- --------- --------- --------- ---------
Net income (loss) available to common stockholders............. $ (128) $ (155) $ 33 $ 8 $ (130)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings (loss) per common share (1):
Basic........................................................ (0.0107) (0.0069) 0.0014 0.0003 (0.0055)
Diluted...................................................... (0.0107) (0.0069) 0.0012 0.0002 (0.0055)
Weighted average common shares outstanding:
Basic........................................................ 12,000 22,626 23,500 23,500 23,550
Diluted...................................................... 12,000 22,626 27,233 34,578 23,550
Pro forma net income (loss) per common share (1):
Basic........................................................ (0.0107) (0.0069) 0.0014 0.0003 (0.0021)
Diluted...................................................... (0.0107) (0.0069) 0.0012 0.0002 (0.0021)
Shares of common stock used in computing pro forma net income
(loss) per share:
Basic........................................................ 12,000 22,626 23,500 30,842 43,930
Diluted...................................................... 12,000 22,626 27,233 34,578 43,930
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
FEBRUARY 28,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1996(2) 1997 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ -- $ -- $ -- $ 1,293 $ 10,055
Working capital (deficit)...................................... (129) (160) (324) 1,541 11,100
Total assets................................................... 106 245 670 3,131 15,276
Long term liabilities.......................................... -- 30 145 65 420
Mandatorily redeemable preferred stock......................... -- -- -- 1,983 12,107
Total stockholders' equity (deficit)........................... (42) (79) (46) (38) (5)
</TABLE>
- --------------------------
(1) See note 2 to notes to financial statements.
(2) Our fiscal year ended on February 29, 1996.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH RED
HAT'S FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS".
OVERVIEW
Red Hat, Inc. is a leading developer and provider of open source software
products and services, and has built a comprehensive Web site dedicated to the
open source software community. Red Hat, Inc. was incorporated in Connecticut in
March 1993 as ACC Corp., Inc. In September 1995, ACC Corp., Inc. changed its
name to Red Hat Software, Inc. In September 1998, Red Hat Software, Inc.
reincorporated in Delaware. In June 1999, Red Hat Software, Inc. changed its
name to Red Hat, Inc. We have financed our activities to date through proceeds
from the private sale of equity securities and cash flow from operations.
Sales of Official Red Hat Linux have represented our principal source of
revenue since its introduction in October 1994. We derive our software and
related products revenue primarily from the sale of software products:
- through distributors to enterprise and retail accounts;
- directly to individual users and enterprises through our REDHAT.COM Web
site and our call center; and
- from OEMs which license our software directly.
We recognize revenue from software product sales to distributors and OEMs at the
time our products are shipped, net of a reserve for estimated sales returns.
This reserve is recognized for the sale of software products to distributors,
who have the right of return, based on our historical experience of sell-through
to the end user by the distributor. Revenue from the sale of software products
to individual users and enterprises is recognized on the date we ship the
software products. Upon the release of Version 6.0 of Red Hat Linux in May 1999,
we began selling Official Red Hat Linux with 30 days of free telephone technical
support. An amount equal to the value of the support and maintenance services is
recorded as a support and maintenance fee and recognized, as a component of
services and other revenue, over the period the services are provided. The
remainder of the purchase price for Official Red Hat Linux is recognized as
software products revenue.
We have recently added new features to our REDHAT.COM Web site. We intend to
develop additional features for our Web site which we believe will result in
both a substantial increase in the number of visitors who access our Web site
and increased advertising revenue. Advertising revenue is derived principally
from short-term advertising contracts in which we typically guarantee a minimum
number of impressions to be delivered to users over a specified period of time
for a fixed fee. Advertising rates are typically measured on a cost per thousand
impressions basis. Advertising revenue is recognized ratably in the period in
which the advertisement is displayed, provided that we have no significant
remaining obligations, at the lesser of the ratio of impressions delivered over
total guaranteed impressions or the straight line basis over the term of the
contract. To the extent that minimum guaranteed impressions are not met, we
defer recognition of the corresponding revenue until the guaranteed impressions
are achieved. We did not generate revenue from the sale of advertising on our
Web site until the first quarter of the fiscal year ending February 29, 2000.
However, we believe that the expected increase in traffic on our Web site, along
with our focus on marketing our
23
<PAGE>
advertising services, will generate significant advertising revenue in the
future.
In March 1999, we expanded our service offerings to include comprehensive
support and maintenance, custom development, consulting and education services.
Although these services generated only an insignificant amount of revenue
through February 28, 1999, we believe that our services revenue will increase
significantly as a percentage of total revenue beginning in the fiscal year
ending February 29, 2000. Revenue from support and maintenance agreements is
deferred and recognized ratably over the term of the related agreement, which is
typically one year. Revenue from custom development, consulting and education
services, which includes offering training courses and hardware certification
services, is recognized as the services are provided.
Our software products are sold worldwide, with substantially all of our
total revenue coming from North America. We expect that total revenue derived
from sales outside of North America will increase beginning in the fiscal year
ending February 29, 2000.
We have historically experienced fluctuations in our results of operations
related to the release of major upgrades to Official Red Hat Linux. We believe
that the anticipation by our customers of the release of major upgrades to our
software products has resulted in, and will continue to result in, a decline in
sales for several months prior to the release of the major upgrade and an
increase in sales immediately following the release. In May 1999, we released
Version 6.0 of Official Red Hat Linux and experienced an immediate significant
increase in both the volume and dollar amount of software product sales. In
addition, we believe that revenue from the sale of Official Red Hat Linux and
related products will decline as a percentage of total revenue in the future as
we continue to expand our services offerings and execute our Web initiative.
Sales of software products to distributors comprised $0.7 million or 26.1%
of total software and related products revenue in the fiscal year ended February
28, 1997, $0.9 million or 17.3% of total software and related products revenue
in the fiscal year ended February 28, 1998, and $5.9 million or 58.2% of total
software and related products revenue in the fiscal year ended February 28,
1999. Sales of software products to end users through our REDHAT.COM Web site
and call center comprised $1.9 million or 73.9% of total software and related
products revenue in the fiscal year ended February 28, 1997, $3.0 million or
58.8% of total software and related products revenue in the fiscal year ended
February 28, 1998 and $3.2 million or 29.6% of total software and related
products revenue in the fiscal year ended February 28, 1999.
Sales to our largest distributor constituted approximately 16.0% of total
revenue in the fiscal year ended February 28, 1997, and 26.0% of total revenue
in the fiscal year ended February 28, 1998. Sales to our two largest
distributors comprised 54.3% of total revenue in the fiscal year ended February
28, 1999. During the fiscal year ended February 28, 1999, approximately 69.2% of
our total revenue was attributable to sales to retail channel accounts through
distributors. We plan to expand our OEM relationships in the fiscal year ending
February 29, 2000 and therefore expect that our OEM-related revenue for this
fiscal year will increase significantly as a percentage of total revenue as
compared to the fiscal year ended February 28, 1999.
We employed 127 people at May 31, 1999, compared to 36 at March 1, 1998.
This increase in headcount resulted primarily from an increase in administrative
personnel as we recruited our management team; an increase in support,
maintenance, consulting and education personnel associated with our efforts to
develop the infrastructure of our services organization; and an increase in
research and development personnel. We expect to continue to increase expenses
associated with our sales and marketing, research and development and general
and administrative groups in anticipation of continued growth and expansion.
Given the expected increase in headcount, we anticipate that we will need to
24
<PAGE>
either expand our existing offices or lease additional office space at a
separate location within the next 12 to 18 months. We believe that this
expansion will result in an increase in total facilities costs.
RESULTS OF OPERATIONS
The following table sets forth the results of operations for Red Hat
expressed as a percentage of total revenues. The historical results are not
necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-------------------------------
<S> <C> <C> <C>
1997 1998 1999
--------- --------- ---------
Revenue:
Software and related products........................................ 100.0% 99.5% 92.8%
Services and other................................................... 0.0 0.5 7.2
--------- --------- ---------
Total revenue...................................................... 100.0 100.0 100.0
Cost of revenue:
Software and related products........................................ 46.3 42.9 37.2
Services and other................................................... 0.0 0.0 0.2
--------- --------- ---------
Total cost of revenue.............................................. 46.3 42.9 37.4
Gross profit........................................................... 53.7 57.1 62.6
Operating expense:
Sales and marketing.................................................. 18.8 24.3 28.6
Research and development............................................. 12.5 17.5 20.6
General and administrative........................................... 20.2 15.5 13.7
--------- --------- ---------
Total operating expense............................................ 51.5 57.3 62.9
Income (loss) from operations.......................................... 2.2 (0.2) (0.3)
Other income (expense), net............................................ (0.9) 0.4 1.5
Income before income taxes............................................. 1.3 0.2 1.2
Provision for income taxes............................................. 0.0 0.1 2.0
--------- --------- ---------
Net income (loss)...................................................... 1.3 0.1 (0.8)
Accretion on mandatorily redeemable preferred stock.................... 0.0 0.0 (0.4)
--------- --------- ---------
Net income (loss) available to common stockholders..................... 1.3% 0.1% (1.2)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
25
<PAGE>
FISCAL YEARS ENDED FEBRUARY 28, 1999 AND 1998
TOTAL REVENUE
Total revenue increased 109.3% to $10.8 million in the fiscal year ended
February 28, 1999 from $5.2 million in the fiscal year ended February 28, 1998.
SOFTWARE AND RELATED PRODUCTS REVENUE
Software and related products revenue is comprised primarily of sales of
Official Red Hat Linux and related software products and sales of publications
about Linux-based operating systems. Software and related products revenue
increased 95.1% to $10.0 million, or 92.8% of total revenue, in the fiscal year
ended February 28, 1999 from $5.1 million, or 99.5% of total revenue, in the
fiscal year ended February 28, 1998. The decrease in software and related
products revenue as a percentage of total revenue was due to the increase in
services and other revenue.
Software products revenue increased to $9.0 million during the fiscal year
ended February 28, 1999 from $3.9 million for the fiscal year ended February 28,
1998. The increase in software products revenue was due to higher sales of
Official Red Hat Linux, which, along with other Linux-based operating systems,
continues to emerge as a viable software platform in the end user, educational
and enterprise arenas. We met the higher demand for Official Red Hat Linux by
establishing a relationship with a major distributor in November 1998 and
subsequently adding prominent national computer and software retailers.
Related products revenue, which is comprised of revenue from sales of books
and other products, decreased to $1.0 million during the fiscal year ended
February 28, 1999 compared to $1.2 million in the fiscal year ended February 28,
1998. During the fiscal year ended February 28, 1999, we reduced the number of
publications that we published and distributed to focus our efforts on our
software products.
SERVICES AND OTHER REVENUE
Services and other revenue is comprised of support and maintenance fees,
custom development fees, consulting and education fees and royalties received
from licensing our trademarks. Services and other revenue increased to $0.8
million in the fiscal year ended February 28, 1999 from $24,000 in the fiscal
year ended February 28, 1998. As a percentage of total revenue, services and
other revenue increased to 7.2% in the fiscal year ended February 28, 1999 from
0.5% in the fiscal year ended February 28, 1998.
Services and other revenue was comprised of $0.1 million in services revenue
and $0.7 million in royalties for the fiscal year ended February 28, 1999 as
compared to no services revenue and $24,000 in royalties for the fiscal year
ended February 28, 1998. The increase in services revenue resulted from the
introduction of our training and certification program during February 1999. We
expect services revenue to increase significantly in dollar amount and as a
percentage of our total revenue in the fiscal year ending February 29, 2000 as
we develop and expand our support and maintenance, custom development and
consulting and education services.
The increase in royalties resulted from the licensing of some of our
trademarks to third parties, nationally and internationally, as a way of
increasing our market share in markets or geographic locations important to our
business plan. This strategy allowed us to have a local presence without
incurring the costs associated with establishing separate operations in each of
these markets or geographic locations. During the fiscal year ended February 28,
1999, we licensed some of our trademarks to publishers, who paid us a royalty
based on their sales. We expect to discontinue some of these agreements during
the fiscal year ending February 29, 2000 due to our geographic expansion plans.
26
<PAGE>
COST OF REVENUE
COST OF SOFTWARE AND RELATED PRODUCTS
Cost of software and related products primarily consists of expenses we
incur to manufacture, package and distribute our products and related
documentation. These costs include expenses for physical media, literature,
packaging, fulfillment and shipping. Also included are royalties paid by us for
licensing third-party applications included in software products and third-party
publications. Cost of software and related products increased 81.5% to $4.0
million in the fiscal year ended February 28, 1999 from $2.2 million in the
fiscal year ended February 28, 1998. The increase in cost of software and
related products was directly related to the increase in sales of software and
related products. As a percentage of software and related products revenue, cost
of software and related products decreased to 40.1% in the fiscal year ended
February 28, 1999 from 43.1% in the fiscal year ended February 28, 1998. This
decrease was due to the decline in royalties paid to third parties because of
the reduction in the number of third-party applications included in our software
products.
COST OF SERVICES AND OTHER
Cost of services and other includes salaries of support and maintenance,
custom development, consulting and education personnel and other related costs.
Cost of services for the fiscal year ended February 28, 1999 was primarily
comprised of salaries and other related costs incurred for our training and
certification program which commenced in February 1999. We incur no direct costs
related to royalties received for licensing our trademarks to third parties.
Cost of services and other increased to $28,000 in the fiscal year ended
February 28, 1999 from zero in the fiscal year ended February 28, 1998. As a
percentage of services and other revenue, cost of services and other increased
to 3.6% in the fiscal year ended February 28, 1999 from zero percent in the
fiscal year ended February 28, 1998.
We expect cost of services and other to increase in the fiscal year ending
February 29, 2000, as we expand our service offerings, which will include the
costs associated with providing technical support and maintenance, custom
development, consulting and education. We expect these costs to be high in
dollar amount and as a percentage of services and other revenue due to costs
that we will incur in connection with developing and expanding our services
organization. Cost of services and other as a percentage of services and other
revenue is expected to vary significantly from period to period depending upon
the mix of services we provide, whether such services are provided by us or
third-party contractors, and the overall utilization rate of our services staff.
GROSS PROFIT
Gross profit increased 129.2% to $6.7 million in the fiscal year ended
February 28, 1999 from $2.9 million in the fiscal year ended February 28, 1998.
As a percentage of total revenue, gross profit increased to 62.6% in the fiscal
year ended February 28, 1999 from 57.1% in the fiscal year ended February 28,
1998. These increases were primarily due to an increase in royalties received
for licensing our trademarks to third parties of $0.7 million in the fiscal year
ended February 28, 1999 for which we incurred no direct costs.
OPERATING EXPENSE
SALES AND MARKETING
Sales and marketing expense consists primarily of salaries and other related
costs for sales and marketing personnel, sales commissions, travel, public
relations, marketing materials and tradeshows. Sales and marketing expense
increased 146.2% to $3.1 million in the fiscal year ended February 28, 1999 from
$1.3 million in the fiscal year ended February 28, 1998. As a percentage of
total revenue, sales and marketing expense increased to 28.6% in the fiscal year
ended February 28, 1999 from 24.3% in the fiscal year ended February 28, 1998.
These increases
27
<PAGE>
were due to greater costs attributable to cooperative marketing arrangements
with distributors and extensive public relations activities in the fiscal year
ended February 28, 1999 to promote our brand. We expect sales and marketing
expense to increase in the forseeable future as we promote the expansion of our
services offerings and Web site and expand our international operations.
RESEARCH AND DEVELOPMENT
Research and development expense consists primarily of personnel and related
costs for our software products and Web development efforts. Also included in
research and development expense are payments to outside consultants for
development related services and expenses. Research and development expense
increased 145.9% to $2.2 million in the fiscal year ended February 28, 1999 from
$0.9 million in the fiscal year ended February 28, 1998. As a percentage of
total revenue, research and development expense increased to 20.6% in the fiscal
year ended February 28, 1999 from 17.5% in the fiscal year ended February 28,
1998. These increases resulted from an increase in the number of research and
development personnel necessary to support both expanded functionality and ease
of use of Official Red Hat Linux, costs of personnel involved in the GNOME
graphical user interface project, and increases in quality assurance and
technical documentation projects. We expect research and development expenses to
continue to increase in the fiscal year ending February 29, 2000 as we develop
our Web site and expand features in Red Hat Linux.
GENERAL AND ADMINISTRATIVE
General and administrative expense consists primarily of personnel and
related costs for general corporate functions, including finance, accounting,
legal, human resources, facilities and information system expenses. General and
administrative expense increased 85.8% to $1.5 million in the fiscal year ended
February 28, 1999 from $0.8 million in the fiscal year ended February 28, 1998.
The increase in general and administrative expense resulted from an increase in
the number of general and administrative personnel, from legal and accounting
costs incurred in connection with establishment of new business activities and,
to a lesser extent, from costs associated with relocating our offices in January
1999. As a percentage of total revenue, general and administrative expense
decreased to 13.7% in the fiscal year ended February 28, 1999 from 15.5% in the
fiscal year ended February 28, 1998. This decrease was due primarily to revenue
increasing at a higher rate than general and administrative expense. We expect
general and administrative expense to continue to increase in the fiscal year
ending February 29, 2000 as we complete the formation of our management team and
expand our international operations.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of interest income earned on cash
deposited in money market accounts and other short-term investments and interest
expense incurred on capital leases. Other income (expense), net increased 656.6%
to income of $0.2 million in the fiscal year ended February 28, 1999 from income
of $20,000 in the fiscal year ended February 28, 1998. As a percentage of total
revenue, other income (expense), net increased to 1.5% in the fiscal year ended
February 28, 1999 from 0.4% in the fiscal year ended February 28, 1998. These
increases resulted from higher average cash and cash equivalents and short-term
investment balances in the fiscal year ended February 28, 1999 as compared to
fiscal 1998 due to receipt of proceeds from the sale of preferred stock in
September 1998 and the repayment of outstanding notes payable during the fiscal
year ended Feburary 28, 1998.
PROVISION FOR INCOME TAXES
Provision for income taxes increased to $0.2 million in the fiscal year
ended February 28, 1999 from $5,000 in the fiscal year ended February 28, 1998.
The increase resulted from the growth in our taxable income and an increase in
the valuation allowance on
28
<PAGE>
our net deferred tax assets due to uncertainty of realization.
ACCRETION OF MANDATORILY REDEEMABLE PREFERRED STOCK
Accretion of mandatorily redeemable preferred stock of $39,000 in the fiscal
year ended February 28, 1999 was a result of the issuance of mandatorily
redeemable preferred stock in September 1998. All of the outstanding preferred
stock will convert into common stock upon the closing of this offering.
FISCAL YEARS ENDED FEBRUARY 28, 1998 AND 1997
TOTAL REVENUE
Total revenue increased 98.1% to $5.1 million in the fiscal year ended
February 28, 1998 from $2.6 million in the fiscal year ended February 28, 1997.
SOFTWARE AND RELATED PRODUCTS REVENUE
Software and related products revenue increased by 97.1% to $5.1 million in
the fiscal year ended February 28, 1998 from $2.6 million in the fiscal year
ended February 28, 1997. The increase in software and related products revenue
resulted from increasing acceptance of Official Red Hat Linux by technical users
as a viable operating system.
SERVICES AND OTHER REVENUE
Services and other revenue increased to $24,000 in the fiscal year ended
February 28, 1998 from zero in the fiscal year ended February 28, 1997. This
increase resulted from royalty payments received from international publishers
of products bearing our trademarks in the fiscal year ended February 28, 1998.
COST OF REVENUE
COST OF SOFTWARE AND RELATED PRODUCTS
Cost of software and related products increased 83.5% to $2.2 million in the
fiscal year ended February 28, 1998 from $1.2 million in the fiscal year ended
February 28, 1997. The increase in cost of software and related products
resulted from increased sales of our software and related products. As a
percentage of software and related products revenue, cost of software and
related products decreased to 42.9% in the fiscal year ended February 28, 1998
from 46.3% in the fiscal year ended February 28, 1997. This decrease was due to
growing sales and declining costs on a per unit basis.
GROSS PROFIT
Gross profit increased 110.6% to $2.9 million in the fiscal year ended
February 28, 1998 from $1.4 million in the fiscal year ended February 28, 1997.
As a percentage of total revenue, gross profit increased to 57.1% in the fiscal
year ended February 28, 1998 from 53.7% in the fiscal year ended February 28,
1997.
OPERATING EXPENSES
SALES AND MARKETING EXPENSE
Sales and marketing expense increased 154.8% to $1.3 million in the fiscal
year ended February 28, 1998 from $0.5 million in the fiscal year ended February
28, 1997. As a percentage of total revenue, sales and marketing expense
increased to 24.3% in the fiscal year ended February 28, 1998 from 18.8% in the
fiscal year ended February 28, 1997. These increases resulted from additional
expense incurred due to significantly increasing the number of sales and
marketing personnel, increased costs attributable to cooperative marketing
arrangements with distributors, and higher advertising and tradeshows costs.
29
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense increased 177.6% to $0.9 million in the
year ended February 28, 1998 from $0.3 million in the year ended February 28,
1997. As a percentage of total revenue, research and development expense
increased to 17.5% in the fiscal year ended February 28, 1998 from 12.5% in the
fiscal year ended February 28, 1997. These increases in research and development
expense were primarily due to the addition of software engineering and
development personnel in the fiscal year ended February 28, 1998.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased 51.8% to $0.8 million in the
fiscal year ended February 28, 1998 from $0.5 million in the fiscal year ended
February 28, 1997. The increase in general and administrative expense resulted
from the growth in the number of general and administrative personnel. As a
percentage of total revenue, general and administrative expense decreased to
15.5% in the fiscal year ended February 28, 1998 from 20.2% in the fiscal year
ended February 28, 1997. This decrease was due to total revenue increasing at a
higher rate than general and administrative expense.
OTHER INCOME (EXPENSE), NET
Other income (expense), net increased to income of $22,000 in the fiscal
year ended February 28, 1998 from expense of $23,000 in the fiscal year ended
February 28, 1997. This increase in other income (expense), net was due to an
increase in interest income resulting from higher average balances of cash and
cash equivalents and short-term investments and lower interest expense on our
notes payable which were repaid during the fiscal year ended February 28, 1997.
PROVISION FOR INCOME TAXES
Provision for income taxes increased to a provision of $5,000 in the fiscal
year ended February 28, 1998 from zero in the fiscal year ended February 28,
1997. For fiscal years ended February 28, 1998 and 1997, a full valuation
allowance was provided against net deferred tax assets due to uncertainty of
realization.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each of the four quarters in the period ended February 28, 1999. This
information has been derived from unaudited interim financial statements that,
in the opinion of management, have been prepared on a basis consistent with the
financial statements contained elsewhere in this prospectus and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods presented. This
information should be read in conjunction with the financial statements and
notes thereto included elsewhere in this prospectus.
30
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MAY 31, AUG. 31, NOV. 30, FEB. 28,
1998 1998 1998 1999
----------- ----------- ----------- -----------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Software and related products........................................ $ 1,374 $ 2,167 $ 2,964 $ 3,508
Services and other................................................... 177 71 360 169
----------- ----------- ----------- -----------
Total revenue...................................................... 1,551 2,238 3,324 3,677
----------- ----------- ----------- -----------
Cost of revenue:
Software and related products........................................ 683 785 1,179 1,366
Services and other................................................... -- -- -- 28
----------- ----------- ----------- -----------
Total cost of revenue.............................................. 683 785 1,179 1,394
----------- ----------- ----------- -----------
Gross profit....................................................... 868 1,453 2,145 2,283
----------- ----------- ----------- -----------
Operating expense:
Sales and marketing.................................................. 382 482 781 1,438
Research and development............................................. 341 458 624 797
General and administrative........................................... 214 331 502 437
----------- ----------- ----------- -----------
Total operating expense............................................ 937 1,271 1,907 2,672
----------- ----------- ----------- -----------
Income (loss) from operations.......................................... (69) 182 238 (389)
----------- ----------- ----------- -----------
Other income (expense), net............................................ 15 13 34 100
----------- ----------- ----------- -----------
Income (loss) before income taxes...................................... (54) 195 272 (289)
Provision for income taxes............................................. -- 62 153 --
----------- ----------- ----------- -----------
Net income (loss)...................................................... (54) 133 119 (289)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Accretion on mandatorily redeemable preferred stock.................... -- -- (16) (23)
----------- ----------- ----------- -----------
Net income (loss) available to common stockholders..................... $ (54) $ 133 $ 103 $ (312)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The operating results for any quarter are not necessarily indicative of the
operating results for any future period. In particular, due to our limited
operating history and the unpredictability of our industry, our revenue and net
income may fluctuate significantly from quarter to quarter and are difficult to
forecast. We base our current and future expense levels in part on our estimates
of future revenue. Our expenses are to a large extent fixed in the short term.
We may not be able to adjust our spending quickly if our revenue falls short of
our expectations. Accordingly, a revenue shortfall in a particular quarter would
have a disproportionate adverse effect on our net income for that quarter.
Furthermore, we may make pricing, purchasing, service, marketing, acquisition or
financing decisions that could adversely affect our business, operating results
and financial condition.
Our quarterly operating results will fluctuate for many reasons, including:
- our ability to retain existing customers, attract new customers and
satisfy our customers' demand;
- changes in gross margins of our current and future products and services;
- the timing of our release of upgrade versions of our products;
- introduction of new products and services by us or our competitors;
- changes in the market acceptance of Linux-based operating systems;
- changes in the usage of the Internet and online services;
- timing of upgrades and developments in the Linux kernel and other open
source software products;
- the effects of acquisitions and other business combinations, including
one-time charges, goodwill amortization and integration expenses or
difficulties; and
- technical difficulties or system downtime affecting the Internet or our
Web site.
For these reasons, you should not rely on period-to-period comparisons of
our financial
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results to forecast our future performance. Our future operating results may
fall below expectations of securities analysts or investors, which would likely
cause the trading price of our common stock to decline significantly.
LIQUIDITY AND CAPITAL RESOURCES
We have historically derived a significant portion of our liquidity and
operating capital from sales of preferred stock and from cash flow from
operations. At February 28, 1999, cash and cash equivalents totaled $10.0
million, an increase of $8.7 million as compared to February 28, 1998. The
increase in cash and cash equivalents resulted primarily from $1.2 million in
cash generated by operations and $10.1 million of net proceeds from issuance of
preferred stock during the fiscal year ended February 28, 1999. These amounts
were partially offset by $1.9 million of cash used to purchase short-term debt
securities, net of maturities, and $0.7 million of additions to property and
equipment.
Cash generated by operations of $1.2 million for the fiscal year ended
February 28, 1999 resulted primarily from an increase in accounts payable and
accrued liabilities of $1.5 million and net noncash charges to income of $0.6
million partially offset by our net loss of $0.1 million and an increase in
accounts receivable of $0.6 million.
Cash used in investing activities of $2.5 million was used to purchase $1.8
million of short-term debt securities, net of maturities, and office and
computer equipment totaling $0.7 million.
Cash from financing activities totaled $10.1 million in the fiscal year
ended February 28, 1999 as a result of $6.9 million in
net proceeds received from sales of Series B preferred stock in September 1998
and $3.2 million in net proceeds received from sales of Series C preferred stock
in February 1999. We received an additional $3.2 million in net proceeds from
the sale of Series C preferred stock subsequent to February 28, 1999.
We have experienced a substantial increase in our operating expenses since
our inception in connection with the growth of our operations and staffing and
the expansion of our services operation and Web site. We anticipate that this
will continue for the foreseeable future. Additionally, we will continue to
evaluate possible investments in businesses, products and technologies, and plan
to expand our sales and marketing programs and conduct more aggressive brand
promotions.
We believe that the net proceeds from this offering, together with our cash
and cash equivalents and short-term investments, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for the
foreseeable future. If cash generated from operations is insufficient to satisfy
our liquidity requirements, we may seek to sell additional equity or debt
securities or to obtain a credit facility. The sale of additional equity or debt
securities; if convertible could result in additional dilution to our
stockholders. The incurrence of indebtedness would result in increased fixed
obligations and could result in operating covenants that would restrict our
operations. We cannot guarantee that financing will be available in amounts or
on terms acceptable to us, if at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. As issued, SFAS 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999, with
earlier application encouraged. In May 1999, the FASB delayed the effective date
of SFAS 133 for one year, to fiscal years beginning after June 15, 2000. We do
not currently nor do we intend in the future to use derivative instruments and
therefore do
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not expect that the adoption of SFAS 133 will have any impact on our financial
position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA"), issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP No. 98-1"), which provides guidance regarding
when software developed or obtained for internal use should be capitalized. SOP
No. 98-1 is effective for transactions entered into in fiscal years beginning
after December 15, 1998. We do not expect that the adoption of SOP No. 98-1 will
have a material impact on our financial position or results of operations.
In December 1998, the AICPA issued Statement of Position No. 98-9,
"Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to
Certain Transactions" ("SOP No. 98-9"). SOP No. 98-9 amends SOP No. 97-2 to
require recognition of revenue using the "residual method" in circumstances
outlined in the SOP. Under the residual method, revenue is recognized as
follows:
- the total fair value of undelivered elements, as indicated by vendor
specific objective evidence is deferred and subsequently recognized in
accordance with the relevant sections of SOP No. 97-2; and
- the difference between the total arrangement fee and the amount deferred
for the undelivered elements is recognized as revenue related to the
delivered elements. SOP No. 98-9 is effective for transactions entered
into in fiscal years beginning after March 15, 1999. Also, the provisions
of SOP No. 97-2 that were deferred by SOP No. 98-4 will continue to be
deferred until the date SOP No. 98-9 becomes effective. The Company does
not expect that the adoption of SOP No. 98-9 will have a significant
impact on our results of operations or financial position.
YEAR 2000 COMPLIANCE
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
and computer systems with date-sensitive functions that are not Year 2000
compliant may not be able to distinguish whether "00" means 1900 or 2000, which
may result in failures or the creation of erroneous results.
We have defined "Year 2000 compliant" as the ability to:
- correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
- function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
- where appropriate, respond to two-digit date input in a way that resolves
the ambiguity as to century in a disclosed, defined, and predetermined
manner;
- if the date elements in interfaces and data storage specify the century,
store and provide output of date information in ways that are unambiguous
as to century; and
- recognize the year 2000 as a leap year.
In November 1998, we formed a committee consisting of our Chief Financial
Officer, our controller, a financial analyst and a systems administrator, as
part of our effort to perform a coordinated audit of:
- our products;
- the software components and applications with which our products are
bundled; and
- the systems upon which we rely for our internal operations.
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PRODUCTS
The committee has tested Version 4.2 and later versions of Red Hat Linux by
accelerating the date within these software programs to December 31, 1999 and
observing which software components failed as the date changed to January 1,
2000. In addition, we recently hired an independent contractor to test Versions
5.2 and 6.0 of Red Hat Linux for Year 2000 readiness. We expect this testing to
be complete by June 30, 1999. If it is determined that older versions of Red Hat
Linux are not Year 2000 compliant, we plan to recommend that users of such
products download Version 6.0 of Red Hat Linux from our Web site for free. We
have not yet generated a contingency plan if Version 6.0 is found not to be Year
2000 compliant. We believe, however, that we have the resources, either in-house
or within the open source community, to quickly remedy any non-compliant
products. If it is necessary to remedy problems related to the Year 2000 issue,
such efforts could otherwise divert our resources from pursuing our business
strategy. In addition, known or unknown errors or defects in our products could
result in delay or loss of revenue, diversion of development resources, damage
to our reputation, or increased service and warranty costs, any of which could
materially adversely affect our business, operating results or financial
condition. Furthermore, some commentators have predicted significant litigation
regarding Year 2000 compliance issues, and we are aware of such claims and
actions against other software vendors. Because of the unprecedented nature of
this litigation, it is uncertain whether or to what extent we may be affected by
it.
THIRD-PARTY PRODUCTS
We bundle third-party applications and software components with Official Red
Hat Linux. To date, the committee has made no assessment of and has no knowledge
of third party Year 2000 readiness. We intend to contact these third parties and
remedy problems on a case-by-case basis, as we deem appropriate. Accordingly, it
is possible that some of our customers may experience difficulties related to
third-party software, which may affect the performance of our products and may
lead to adverse results such as an unusually high number of calls to our
technical support department or other unusual requests for information or
assistance. Although we do not anticipate that the costs related to responding
to any increased volume of support or other calls will be material, responding
to these calls may divert resources from pursuing our business strategy.
Moreover, failure of applications bundled with our software may reduce the value
of our products, decrease or delay revenues, tarnish our brand, give rise to
breach of warranty claims or divert resources, any of which could materially
adversely affect our business, results of operations and financial condition.
INTERNAL SYSTEMS
We are in the process of identifying and evaluating the Year 2000 compliance
of systems upon which we rely for internal operations such as our computer
hardware, software, Web server and other related equipment and systems, such as
phone systems and security systems. We are presently unable to estimate the
costs involved in making our internal systems Year 2000 compliant, although we
do not expect such costs to have a material adverse affect on our business,
results of operations and financial condition. We have recently installed new
financial application software that has been certified as Year 2000 compliant.
We use Red Hat Linux and its bundled applications for our internal operations.
Our hardware is mostly new, but if our desktop stations malfunction, we plan to
replace them. We do not expect to incur material costs to replace any such
defective hardware. The majority of non-information technology systems on which
we rely for our internal operations are owned and managed by the lessor of our
office building, who has indicated that the offices are Year 2000 compliant. In
addition, the owners of the facility in Herndon, Virginia, which houses
substantially all of our communications hardware and our other computer hardware
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operations related to our Web site, have certified to us that all of their
systems and facilities are Year 2000 compliant.
CONTINGENCY PLANS AND EXPECTED COSTS
The committee is in the process of developing further checklists of software
applications to test and systems upon which we rely and, as we deem appropriate,
we will seek certification documents from the developers and providers regarding
Year 2000 compliance of their systems and products. The committee will develop
contingency plans based on the responses regarding its critical systems that it
receives, or does not receive, from its providers and developers. We presently
expect that we will complete this effort in the fall of 1999.
To date, we have not expended a material amount of capital resources on Year
2000 compliance and do not anticipate future expenditures to be material to our
business, results of operations and financial condition. We have not hired
additional personnel or made material purchases of products to specifically
address our Year 2000 compliance issues, and presently, we do not expect to do
so. The expenditures to date relate primarily to on-going salary costs of
personnel, including committee members, participating at various levels in our
compliance efforts, as well as payments to the third-party tester of our
software which will be approximately $30,000. All costs related to achieving
Year 2000 readiness are being expensed as incurred.
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BUSINESS
RED HAT
We are a leading developer and provider of open source software and
services, including the Red Hat Linux operating system. Our Web site,
REDHAT.COM, is a leading online source of information and news about open source
software and one of the largest online communities of open source software users
and developers. In addition to offering extensive content for the open source
community, REDHAT.COM serves as an important forum for open source software
development and offers software downloads and a shopping site. Our broad range
of professional services includes custom development and consulting, technical
support, training and education and hardware certification. We are committed to
serving the interests and needs of open source software users and developers and
to sharing all of our product developments with the open source community.
INDUSTRY BACKGROUND
IMPACT OF THE INTERNET
The Internet has emerged as a global communications medium, enabling
millions of people to gather information, communicate and conduct business
electronically. International Data Corporation estimates that there were
approximately 142 million users of the Internet at the end of 1998 and that the
number of users will grow to almost 400 million by the end of 2002. In addition,
IDC estimates that worldwide Internet commerce revenue will increase from
approximately $50 billion in 1998 to more than $730 billion in 2002.
The Internet's ability to empower customers, reduce transaction costs and
product development times and accelerate the pace of business transactions has
dramatically transformed the competitive landscape of a wide range of
industries. The Internet provides customers with a broader selection, increased
purchasing power and unparalleled convenience while enabling businesses to reach
a global audience, increase economies of scale and operate with minimal
infrastructure. The Internet has facilitated the emergence of new competitors
and is increasingly affecting the methods by which incumbent competitors sell
goods and services and manage relationships with customers.
For example, in the software industry, the Internet is profoundly changing
the way that software is developed and distributed. The Internet has enabled
multiple groups of developers to collaborate on specific projects from remote
locations around the globe. Developers can write code alone or in groups, make
their code available over the Internet, give and receive comments on other
developers' code and modify it accordingly. The Internet has also provided an
avenue not only for less expensive and speedier delivery of code, but also for
support and other online services.
OPEN SOURCE SOFTWARE MOVEMENT
The Internet has accelerated the development of open source software. Open
source software has its origins in the academic and research environments and is
based on an open, collaborative approach to the development and distribution of
software. The growth of the Internet has greatly increased the scale and
efficiency of open source development through the availability of collaborative
technologies such as e-mail lists, news groups and Web sites. These technologies
have enabled increasingly large communities of independent developers to
collaborate on more complex open source projects. An early example of open
source development is the X Windows system, a graphical user interface developed
by the X Consortium. The members of the X Consortium, originally Digital,
Hewlett-Packard, IBM and Sun Microsystems, wanted a common user interface for
their own proprietary operating systems. By openly sharing development ideas and
coding efforts, these companies were able to quickly and cost-effectively
develop a superior user interface, which we estimate is currently
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installed on more than 20 million computers worldwide.
Open source software has emerged as a viable alternative to traditional
proprietary software. Under the proprietary model of software development, a
software developer generally licenses to the user only the object or binary
code. Binary code consists of the 1s and 0s that only the computer understands.
By contrast, under the open source development model, the software developer
provides to the user access to both the binary code and the source code. Source
code is the language used by the developers. The principal differentiating
points of open source software include:
- development process--open source software allows a company's in-house
development team to collaborate with a community of independent
developers;
- license terms--under open source licenses, the user has access to both
binary and source code, and the rights to copy, modify, alter and
redistribute the software; and
- shared improvements--under the open source model, the user has ongoing
access to improvements made to the software by others.
We believe open source software offers many potential benefits for software
customers, users and vendors. Customers and users are able to acquire the
software at little or no cost, install the software on as many computers as they
wish, and customize the software to suit their particular needs. In addition,
customers and users can obtain software updates, improvements and support from
multiple vendors, reducing reliance on any single vendor. Vendors are able to
leverage the community of open source developers, allowing them to reduce
development costs and decrease their time to market. Vendors are also able to
distribute their products freely over the Internet, enabling them to create
large global user bases quickly.
Just as the open source model has benefited from the success of the
Internet, it has also greatly contributed to the Internet's success. Open source
software comprises much of the Internet's infrastructure, from domain name
server software to Web servers and e-mail router software. Open source software
is particularly well-suited to the Internet. With access to the source code,
system administrators and developers can collaborate to debug, fix and optimally
configure their software on a real-time basis. This enables them to improve
performance and keep data flowing continually across the Internet, minimizing
the disruptions and downtime common with proprietary software.
The following examples demonstrate the prevalence of open source software on
the Internet:
- Apache Web server--based on code originally written at the National Center
for Supercomputing Applications at the University of Illinois at
Champaign-Urbana, is the most common Web server in use today according to
a survey conducted by Netcraft.
- Perl--the de facto standard scripting language for Apache servers.
- Sendmail--the Internet's standard e-mail routing tool, which we believe
handles a majority of the Internet's e-mail traffic.
One of the better known open source products is the Linux kernel, the engine
of Linux-based operating systems. An operating system is the software that
allows a computer and its various hardware and software components to interact.
An initial goal of the open source software movement was to develop an operating
system that was better, faster and more reliable than the proprietary operating
systems then available. Viewing UNIX as the best commercially-available
operating system, the open source community decided to incorporate the best
design ideas from UNIX. Open source developers rewrote all of the underlying
source code so that it could not be controlled by a single corporation or
individual. By the early 1990s, these efforts had resulted in a number of
significant software initiatives but had fallen short of building a
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complete operating system. Still missing from the project was the engine upon
which the new operating system was to run, known as the kernel.
In 1991, Linus Torvalds, a young Finnish developer, supplied a stable and
powerful open source kernel, known as Linux, to run the operating system.
Operating systems based on the Linux kernel are robust and dynamic. Thousands of
developers worldwide continually collaborate on improving Linux-based operating
systems and update them on a regular basis.
Since 1991, the use of Linux-based operating systems has rapidly grown.
According to IDC, Linux-based operating systems represented 17% of all new
license shipments of server operating systems in 1998. Beginning in 1998, a
number of major technology industry leaders, including IBM, Intel and
Hewlett-Packard, announced support for Linux-based operating systems. The Linux
kernel and the standards around which it is developed remain under the close
supervision of Linus Torvalds and a small group of kernel developers working
under his leadership.
Some of the benefits enjoyed by users of Linux-based operating systems
include:
- reduced licensing costs;
- flexibility resulting from access to and legal right to modify source
code;
- stability and high performance;
- comprehensive Internet support;
- compliance with standards; and
- multi-platform capability.
Despite a strong initial market acceptance of Linux-based operating systems
and other open source products, there exists a number of obstacles to widespread
adoption within the enterprise, including:
- lack of service and support;
- scarcity of applications supporting Linux-based operating systems; and
- lack of well-financed, viable open source industry participants.
The ability of a Linux-based operating system to penetrate large businesses
on an enterprise-wide basis and to gain widespread acceptance as a viable
alternative to operating systems developed under the proprietary software model,
depends, in large part, on the emergence of a proven leader in the open source
community. This open source leader must demonstrate to the business enterprise,
as well as to the community of application developers upon whom the business
enterprise relies, a successful business model and the ability to support and
service its products at a consistently high level.
THE RED HAT SOLUTION
To address the challenges facing the open source software market, our
products and services offer the following features and benefits:
SUPERIOR OPEN SOURCE PRODUCT OFFERINGS
We engineer what we believe to be the most technically advanced open source
operating system, Red Hat Linux. Our software engineers collaborate with
critical open source software development teams working across the Internet.
This involvement enables us to remain abreast of technical advances, plans for
development of new features and timing of releases, as well as other information
related to the development of the Linux kernel and other open source projects.
As a participant in these processes, we are able to react quickly to new
developments and to contribute to the future direction of the Linux kernel and
the open source development paradigm.
We compile and integrate more than 640 separate software packages into Red
Hat Linux, consisting of some of the most technically advanced software products
available, including compilers and Web, e-mail, ftp and file servers. Red Hat
Linux is:
- flexible and scalable--capable of running a single desktop machine or the
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entire network of a large business enterprise;
- functional--able to handle discrete or multiple applications being
accessed by multiple users;
- adaptable--allowing the user to modify the software to meet particular
needs and requirements; and
- reliable--constantly monitored and fine-tuned by thousands of developers
worldwide.
These benefits have led many industry analysts to identify Red Hat Linux as
a superior operating system. This recognition has accelerated the deployment of
Red Hat Linux within the business enterprise. According to IDC, Red Hat Linux
accounted for approximately 56% of new license shipments of Linux-based server
operating systems in 1998, or roughly 9% of total new server license shipments.
In addition to offering technically advanced products, we provide purchasers
of our Official Red Hat Linux with extensive written documentation and limited
installation support. Our team of technical writers works closely with our
software development engineers to prepare manuals and other documentation that
accurately and clearly describe the many features of Red Hat Linux and advise
the user on how to exploit these features. In addition, we make Red Hat Linux
available to users via free download from our Web site and other sites across
the Internet.
LEADING ONLINE DESTINATION FOR THE OPEN SOURCE COMMUNITY
We have established our Web site as a leading online destination related to
the open source movement. We are dedicated to serving the interests and needs of
open source software users and developers online. Our Web site is a
comprehensive resource for the latest information related to Linux and other
open source projects. It contains news of interest to open source users and
developers, features for the open source community, software updates and
downloads, a shopping center for our shrink-wrapped products and support
offerings, and a wealth of technical information related to open source
products, including Red Hat Linux. Visitors to our site can organize and
participate in user groups, make available bug fixes and incremental code
improvements and share knowledge regarding the use and development of open
source software.
Our Web site had more than 265,000 unique visitors and approximately 2.5
million page views during March 1999.
By acting as a clearinghouse of open source and Linux-related information,
and facilitating the interaction of developers, businesses and technology
enthusiasts, our Web site has become a community center for the open source
movement.
COMMITMENT TO THE OPEN SOURCE MODEL
Red Hat has fully embraced the open source model. Whereas others have
incorporated certain aspects of the open source software model into their
businesses while retaining various features of the proprietary model, our
product offerings are true open source offerings. We share all of our
developments on and improvements to the Linux kernel and other open source
products with the development community. In this way, we benefit independent
developers by making our products more useful for them in their own development
projects. In addition, we have aggressively promoted and distributed our
products in the marketplace by making them available free of charge by download
from our Web site and other Internet sites worldwide, by issuing thousands of
free CD-ROMs containing Red Hat Linux at trade shows and through direct mailing
campaigns, and by providing copies to academic and research institutions.
Furthermore, in addition to the open source software we develop ourselves, we
fund a broad range of open source software projects and organizations, including
the XFree86 group, the linuxconf open source software product, and the Free
Software Foundation.
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EXTENSIVE PROFESSIONAL SERVICES
We also offer a broad range of professional services relating to the
development and use of open source products. These services include technical
support, custom development, consulting, training, education and hardware
certification. By servicing Red Hat Linux, we provide our customers and the open
source community with a respected and reliable technology partner, one that is
available to help with the purchase, deployment, customization and maintenance
of open source software solutions. We believe that providing these services and
establishing ourselves as our customers' technology development partner will
allow us to facilitate the widespread adoption of Red Hat Linux as a full scale
enterprise solution.
STRATEGIC ALLIANCES
In an effort to increase the market acceptance of open source software in
general, and the Red Hat Linux operating system in particular, we have
established development, marketing or distribution relationships with leading
technology companies, including Compaq, Dell, Hewlett-Packard, IBM, Intel,
Novell, Oracle and SAP. In addition, we share our development efforts with and
commit resources to third party developers and vendors in order to expand the
number of applications available for Linux-based operating systems. By
establishing and maintaining these relationships, we are able to increase market
awareness of open source software, gather industry support for our products and
penetrate new markets.
STRATEGY
Our objective is to enhance our position as a leading worldwide developer
and provider of advanced, open source products and services, both via
traditional channels and the Internet. The key elements of our strategy are:
CONTINUE TO ENHANCE OUR WEB SITE
We are continuing to enhance our Web site in an effort to create the
definitive online destination for open source software products, software
updates, news, and other information related to Linux-based operating systems
and other open source projects, and to provide advertisers with a large and
technically sophisticated audience. At REDHAT.COM, people from around the world
will be able to obtain updates to open source software, purchase a wide array of
open source products and services, access and copy code for their own
programming efforts, read news related to topics of interest to the community
and interact with other community members. New features we anticipate adding to
our Web site include:
- software update notification;
- automatic software updating for those who want it;
- registries and hosting of open source Web sites and projects;
- open source classifieds (including products for sale and employment
listings);
- event calendars; and
- virtual trade shows.
By adding these features to our Web site, we believe that our visitors will
continue to visit on a regular basis, and that we will attract an increasing
number of new visitors. In addition, we believe that these new features and
offerings will keep visitors on our site for longer periods of time, which we
believe will be crucial to our ability to generate significant advertising
revenue.
EXPAND SERVICE CAPABILITIES TO ADDRESS THE ENTERPRISE NEEDS OF LARGE
CORPORATIONS
We believe that we must expand our services capabilities to address the
market need for quality custom engineering and development. We are currently
expanding our professional services organization to enhance our ability to
provide such services. Between March 1, 1998 and May 31, 1999 we added 22 people
to our professional services organization. We believe that as our user base
grows, more of our customers, particularly our larger customers, will look to us
to help them
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customize their operating systems to perform optimally within their particular
computing environments. We expect that many of our larger customers will also
expect us to assume the role of their technology partner, and perform on-site
consulting services such as large-scale system assessments and enterprise-wide
system enhancements. We believe that by increasing our capacity to offer such
services, we will be able to significantly increase our services revenue and
establish ourselves as the premier open source service provider.
INCREASE MARKET ACCEPTANCE OF OPEN SOURCE SOFTWARE
Although recent years have seen a substantial increase in the market
acceptance of Linux-based operating systems and other open source software, we
intend to promote further acceptance of open source software through a variety
of means, including strengthening our existing alliances with other information
technology companies and by establishing new alliances. The strength of these
alliances is crucial to the expansion of the open source community, the
technical advancement and widespread distribution of open source products and
the development of third party applications suitable for Linux-based operating
systems.
By aligning ourselves with companies widely regarded as producing high
quality and highly reliable software developed under the traditional software
development model, we expect to bridge the gap between the open source community
and those customers who are currently skeptical or unaware of the benefits of
open source software. We believe that by continuing to collaborate with
industry-leading information technology companies, we will be able to further
improve the performance and features of Red Hat Linux and other open source
software products. Although we intend to increase our own engineering and
development efforts, we believe that by entering into and maintaining strategic
relationships with other market-leading companies, we will ensure that Red Hat
Linux continues to develop technically, and that such development is compatible
with the technological innovations of other key vendors in our industry.
By entering into additional strategic distribution relationships with major
distributors, retail outlets, OEMs, and VARs worldwide, we intend to make Red
Hat Linux and other open source products more widely available. In addition, we
expect to continue to share our development efforts with and commit additional
resources to applications developers and vendors in an effort to increase the
third party applications offerings that will run on Red Hat Linux. Third party
applications currently available for Linux-based operating systems include
desktop office productivity tools from Applix, Corel and Star Division and
enterprise software applications from IBM, Oracle and SAP.
Additional means of increasing the market acceptance for Linux-based
operating systems and other open source software include expanding our
international presence, broadening our services offerings, and publicizing
success stories. While we have a significant installed base of international
users, we intend to increase our overseas presence in the near future by
establishing foreign offices or subsidiaries. In addition, we intend to expand
our services offerings, including training, consulting and related services that
customers have come to expect from information technology providers, which will
increase their confidence in open source products and providers. Finally, we
will continue to publicize, to the extent possible, success stories of customers
who have found open source products to be more valuable than restrictive,
proprietary products.
CONTINUE TO INVEST IN THE DEVELOPMENT OF OPEN SOURCE TECHNOLOGY
We intend to continue to invest significant resources in the development of
new open source technology, capitalizing on our extensive experience working
within the open source model. We expect this continued investment to take the
form of increased expenditures on internal development efforts,
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including our Red Hat Advanced Development Laboratory, as well as continued
funding of third party open source projects. We also plan to continue our
financial support of the development efforts of many of the top-tier engineers
in the open source community. In particular, we are currently exploring the
possibility of establishing a foundation to support the development of open
source software. We would fund this foundation with cash, stock or a combination
thereof. This support will be directed towards an array of projects, ranging
from the development of ease of use features, which we believe will take Red Hat
Linux from the server to the desktop, to the design of new networking and
scalability features, which are expected to make Red Hat Linux more attractive
as a server operating system. We expect that, through these efforts, we will be
able not only to foster the advancement of open source technology, but also to
enhance and maintain our relationships within the open source community.
MAINTAIN AND CONTINUE TO ENHANCE RED HAT BRAND
We believe that continuing to build the Red Hat brand is vital to the
expansion of our customer base and the maintenance of the energy of the current
open source community. We intend to continue to aggressively promote our Web
site as the definitive source for open source products, services, resources and
other information. Another component of our brand enhancement strategy is to
expand our use of aggressive public relations campaigns by continuing to work
with the media to educate the public on the benefits of open source software. In
addition, we expect to continue our pursuit of tightly-focused advertising
campaigns, both in computer related publications and in general purpose media,
in order to attract new users to Red Hat Linux and open source software.
Moreover, we also intend to continue to devote substantial engineering resources
to open source development projects and to otherwise demonstrate our commitment
to the open source philosophy. Through these measures, we intend to build the
Red Hat brand into the preeminent symbol of quality for open source software.
PRODUCTS AND SERVICES
We are a leading provider of open source software products and services. Our
product offerings include Red Hat Linux and related tools, documentation,
manuals and general merchandise. Our professional services offerings,
principally directed towards our larger corporate customers and strategic
partners, include technical support, training and education, consulting and
custom development and hardware certification.
RED HAT LINUX AND RELATED SOFTWARE
OFFICIAL RED HAT LINUX 6.0. Official Red Hat Linux is our principal product.
We first released Official Red Hat Linux in October 1994, and began shipping the
latest release, Version 6.0, in May 1999. Official Red Hat Linux is available
for the Intel, Sun SPARC and Compaq Alpha platforms. Official Red Hat Linux
provides everything the user needs to perform a wide variety of server
functions, including setting-up a Web, e-mail, file or print server as well as
using his computer as a general purpose desktop workstation to perform virtually
any computing function. Official Red Hat Linux comes with a number of third
party applications including office productivity and e-commerce applications, as
well as comprehensive user manuals and limited installation support. The
suggested retail price for Official Red Hat Linux is $79.95.
Examples of the components included within the 573 megabytes of code that
comprise Red Hat Linux 6.0 are:
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<TABLE>
<CAPTION>
COMPONENT FUNCTION
- --------------------------------------------- ---------------------------------------------
<S> <C>
Linux Kernel (Version 2.2)................... Core of the operating system
X Windows System............................. Graphical layer
Gnome........................................ Graphical desktop user interface
Gtx.......................................... Graphical development libraries
Netscape Communicator........................ Web browser
Apache....................................... Web server
Sendmail..................................... E-mail routing software
Perl......................................... High-level programming language
Efax......................................... Fax utility
Pilot Link................................... Palm Pilot-Registered Trademark-
synchronization
Gnome PIM.................................... Personal Information Manager
Howto Greek (and other languages)............ Help files translated into Greek
RPM.......................................... Manages the various software packages
All other components......................... Libraries, tools, games and other integrated
applications
</TABLE>
RED HAT POWERTOOLS: Red Hat Powertools is a collection of open source tools
and applications that run on top of Red Hat Linux. The suggested retail price
for Powertools is $39.95.
RED HAT LINUX CORE: Red Hat Linux Core, consisting of Official Red Hat
Linux 6.0 and the Official Red Hat Linux Installation Guide, is designed for
developers and experienced users of Linux-based operating systems. Red Hat Linux
Core does not include installation support or third party applications. The
suggested retail price for Red Hat Linux Core is $39.95.
EXTREME LINUX: Extreme Linux, popular among students and researchers, is
designed to run on multiple computers using parallel processing. The open source
software included in this product was developed in part by the National
Aeronautics and Space Administration (NASA). Extreme Linux does not include user
manuals or installation support. The suggested retail price for Extreme Linux is
$29.95.
RED HAT SECURE WEB SERVER: Red Hat Secure Web Server combines the Apache
open source Web server with certain cryptography software we licensed from RSA
Data Security, Inc. to create a secure Web server suitable for conducting secure
transactions via the Internet. Red Hat Secure Web Server won a "Best of Show"
award at the 1998 Networld + Interop conference. Red Hat Secure Web Server
cannot be downloaded from our Web site and is available only in the U.S. and
Canada due to export controls on encryption software. The suggested retail price
for Secure Web Server is $99.95.
Our products are generally also available for free download via the Internet
from REDHAT.COM and other Web sites worldwide. We encourage our customers to
download Red Hat Linux and our other software products. By allowing users to
download our software free of charge, we are able to strengthen the Red Hat
brand and increase our installed base of users, at no incremental cost to us.
Customers who obtain Red Hat Linux in this way receive substantially the same
operating system software as is included in our shrink-wrapped packages, but do
not receive installation support, documentation and other additional features.
REDHAT.COM
We have 20 professionals focused on the development and maintenance of our
REDHAT.COM Web site. REDHAT.COM offers users access to broad and authoritative
content on open source software including news, documentation, educational
materials and case studies. This content is directed at a wide spectrum of open
source software users, from
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system administrators to developers to academics. We also offer extensive
features for the open source community, software updates and downloads and a
shopping center for our shrink-wrapped products and support offerings.
We intend to also offer the following benefits via our Web site to our
partners and users:
- Personalization: users will be able to register on the site and select
custom presentations of information that are specifically tailored to
their needs. These presentations, which will be known as MY.REDHAT.COM,
will filter news and information (according to user-specified criteria),
promote various features of the site likely to be of interest to a
specific user and notify the user by e-mail of new content and upgrades.
- Advertising and Sponsorships: the REDHAT.COM audience is highly focused
and technically sophisticated, representing an attractive target market of
computing professionals for advertisers. We offer a number of advertising
and sponsorship programs to our partners and others wanting to reach this
market.
- Content Subscriptions: we intend to make special market reports and data
and access to real-time support available to our users on an annual
subscription basis. By subscribing to our site, our customers will also be
able to purchase additional features and services such as online training
and certification and remote software maintenance packages.
- Commerce: we intend to build the REDHAT.COM store into the most
comprehensive open source shopping resource for corporate enterprise
buyers. Offerings and upsell opportunities will be presented throughout
the site in a context-relevant manner.
- Licensing: we intend to license our content to other content providers,
thereby generating additional traffic, extending the Red Hat brand and
increasing revenue.
PROFESSIONAL SERVICES
Although we have not generated significant revenue to date from our
professional services, we have recently significantly expanded the scope of our
service offerings and expect them to generate significant revenue in the future.
SUPPORT AND MAINTENANCE. Customers who purchase our Official Red Hat Linux
Version 6.0 product are entitled to 30 days of telephone installation support or
90 days of e-mail installation support at no additional charge. Customers
seeking additional technical support may purchase telephone support agreements
from us ranging in price from $995 for up to three incidents to $60,000 for 24
hour a day unlimited support for one year. We have a highly-trained and skilled
staff of technical support engineers to provide these services to our customers.
In addition, we maintain relationships with several third party support
providers in order to enhance and expand our technical support capabilities.
TRAINING AND EDUCATION. We provide training and educational programs to
those customers who want to learn how to optimize their use of Red Hat Linux.
The most popular of these programs is the "Red Hat Certified Engineer" course
that we offer at our corporate offices. This week-long course, taught by Red Hat
instructors and priced at approximately $2,500, gives a comprehensive overview
of the use of Red Hat Linux. We also conduct on-site training for customers. We
anticipate that we will work with third party training and educational program
providers to develop and offer additional training courses on a variety of
topics related to Red Hat Linux and open source software.
CONSULTING AND CUSTOM DEVELOPMENT. We offer specific consulting and custom
development services on an individualized basis. We have performed such services
related to the optimization of Red Hat Linux when used in conjunction with
certain
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hardware products. We intend to expand our consulting and custom development
capabilities in the near future.
HARDWARE CERTIFICATION. We perform testing and certification services for
hardware vendors seeking to market their products to Red Hat Linux users.
Hardware vendors submit their products to us and, in exchange for a fee, we test
the hardware to determine whether it is compatible with Red Hat Linux. Products
meeting our performance criteria are certified as Red Hat Linux compatible.
Companies for which we have performed such services include Dell, IBM and
Toshiba.
PRODUCT AWARDS
Official Red Hat Linux has won numerous awards, including:
- Operating System Product of the Year, InfoWorld magazine, 1996, 1997 and
1998
- Product Excellence Award, SD Magazine, May 1999
- "Jolt" Productivity Award, Software Development Conference, 1997 and 1998
- Reader's Choice Award, Linux Journal, 1998
- Best Linux Distribution, Australian Personal Computing Magazine, 1998
- Environment/Desktop finalist, Ziff-Davis European Excellence awards, 1997
- Editor's Choice Award, Australian Personal Computing Magazine, 1998
PRODUCTION AND FULFILLMENT
We outsource the production, packaging and order fulfillment of our products
to third parties when it is cost effective to do so. To the extent possible, we
limit our internal production activities to such tasks as quality inspection and
testing. We currently have production arrangements with JVC Disc America Co.,
Webcom, Inc., and Brightstar Services and order fulfillment arrangements with
JVC. We believe that our existing production arrangements are sufficient to
accommodate potential increases in sales volume for the foreseeable future.
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CUSTOMERS AND APPLICATIONS
CUSTOMERS
Our customers range from individuals using our products for a wide variety
of personal and professional purposes to multinational Fortune 500 companies,
government agencies, and research and academic institutions. The following is a
partial list of our customers:
<TABLE>
<CAPTION>
CORPORATE GOVERNMENT RESEARCH / ACADEMIC
- --------------------------- ------------------------ -------------------------
<S> <C> <C>
Angelfire.com Canadian Department of Carnegie Mellon
University
Boeing Human Resources
Burlington Coat Factory Cern Laboratories
Cisco Systems City of Garden Grove, CA
Deutsche Bank Fermi National
Accelerator
Digital Domain Internal Revenue Service Laboratory
Global One
Google.com NASA Harvard-Smithsonian
GTE Astrophysical Observatory
Hewlett-Packard Waco Public Schools
Hughes Telecommunications University of North
Carolina
IKEA
Intel University of Rochester
Nationwide Insurance
New York Life
Nortel
Southwestern Bell
Suzuki
</TABLE>
The following case studies describe the manner in which some of our
customers employ our products:
- Angelfire.com provides free Web hosting services to thousands of customers
who generate millions of page views each day. Angelfire.com runs all of
its Web servers on Red Hat Linux and was the fastest growing Web site,
measured by number of unique users, during the period from December 1997
to June 1998, according to Media Metrix.
- Cisco Systems relies on Red Hat Linux to run 100 networked printer servers
which are connected to 3,000 printers and support the network's 20,000
users.
- Burlington Coat Factory runs Red Hat Linux on 1,250 customized Dell
OptiPlex PCs with Oracle databases in its 264 stores nationwide. The PCs
administer Baby Registry, Burlington's service to register baby gifts, and
facilitate back office functions, such as shipping and receiving.
- Garden Grove, California, a city with a population of 153,000, runs its
government and public services entirely on Red Hat Linux. Since 1994,
Garden Grove has not had a computer-related interruption in service for
any department, including its police department.
THIRD PARTY APPLICATIONS
Some of the third party applications that are included in Red Hat Linux are:
- Apache Web Server;
- Netscape Navigator and Communicator Internet browsers;
- ftp servers;
- e-mail routing software;
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<PAGE>
- GNU C and C++ compilers and debugger;
- editors;
- databases; and
- games.
Some of the stand-alone third party applications that are currently
available to users of Linux-based operating systems are:
- Oracle, Informix and IBM databases;
- Computer Associates UNICENTER network control software;
- Lotus Domino Notes Server;
- Corel WordPerfect;
- Applixware Office Suite;
- Star Office Suite;
- NEXS Spreadsheet; and
- MetroWerks Rapid Application Development tools.
SALES, MARKETING AND DISTRIBUTION
SOFTWARE PRODUCTS AND SERVICES
We sell our products and services worldwide through direct marketing and
telesales campaigns and our Web site, and indirectly through our distributors,
retailers, catalogs and OEMs. Our direct sales force of eight individuals as of
May 31, 1999, is dedicated to increasing worldwide sales through our retail,
distribution and OEM channels. As of May 31, 1999, our indirect distribution
channel was composed of five distributors, over 500 retailers and 11 OEMs. We
have recently begun to focus our sales efforts more aggressively on the business
enterprise market.
Our two largest distributors are Ingram Micro and Frank Kasper & Associates.
Ingram Micro, which began distributing our products during the fiscal year ended
February 28, 1999, accounted for approximately 34% of our total revenue during
that fiscal year. Frank Kasper & Associates accounted for approximately 26% of
our total revenue for the fiscal year ended February 28, 1998 and 20% for the
fiscal year ended February 28, 1999.
Our OEM agreements generally license the OEMs to include Red Hat Linux with
their own products in exchange for royalty payments to us. We currently have OEM
agreements in place with Dell, ASL Workstations, CPU Micromart and others.
Our agreements with our distributors and OEMs typically are not exclusive,
have no stated minimum purchase or license obligations and may be terminated by
either party without cause. We believe that in the event of the termination of
our relationship with one or more of our indirect channel partners, we could
enter into replacement agreements with new partners. However, the failure to
replace these partners with distributors or OEMs of equal marketing capabilities
and reputation could have a material adverse effect on our business, operating
results and financial condition.
Our marketing efforts support our sales and distribution efforts through
participation in industry trade shows, targeted advertising, channel sales
programs, public relations campaigns, retail promotions, customer surveys and
the promotion of our products through our Web site. In addition, we have entered
into joint marketing relationships with Compaq, IBM, Intel and Oracle, among
others. Furthermore, we offer our software products for free download from
REDHAT.COM and other Internet sites worldwide.
REDHAT.COM
We have a team of professionals dedicated to selling advertising on our Web
site. Though these sales have been insignificant to date, we expect to generate
significant revenue from the sale of advertising and sponsorships in the future.
COMPETITION
In the broader market for operating systems, we compete with a limited
number of large and well-established companies that have significantly greater
financial resources,
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<PAGE>
larger development staffs and more extensive marketing and distribution
capabilities. These competitors include Microsoft, Novell, IBM, Sun Microsystems
and The Santa Cruz Operation, all of which offer hardware-independent multi-user
operating systems for Intel platforms, and AT&T, Compaq, Hewlett-Packard,
Olivetti and Unisys, each of which, together with IBM and Sun Microsystems,
offers its own version of the UNIX operating system. Many of these competitors
bundle competitive operating systems with their own hardware offerings, thereby
making it more difficult for us to penetrate their customer bases.
In the newer and rapidly evolving Linux-based operating system market, we
compete with a number of well-respected vendors and development projects. These
competitors have established and stable customer bases and continue to attract
new customers. We also compete for services revenue with a number of companies
that provide technical support and other professional services to users of
Linux-based operating systems, including some of our OEMs. Many of these
companies have larger and more experienced services organizations than we do
currently. In addition, we face potential competition from several companies
with larger customer bases and greater financial resources and name recognition
than we have, such as Sun Microsystems, Corel Corp. and Cygnus Solutions, each
of which has indicated a growing interest in the Linux-based operating systems
market.
The Linux-based operating systems market is not characterized by the
traditional barriers to entry that are found in most other markets, due to the
open source nature of our products. For example, anyone can copy, modify and
redistribute Red Hat Linux themselves. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
We believe that the major factors affecting the competitive landscape for
our products include:
- name and reputation of vendor;
- product performance, functionality and price;
- strength of relationships in the open source community;
- availability of user applications;
- ease of use;
- networking capability;
- breadth of hardware compatibility;
- quality of support and customer services;
- distribution strength; and
- alliances with industry partners.
Although we believe that we compete favorably with many of our competitors in a
number of respects, including product performance, functionality and price,
networking capability, and breadth of hardware compatibility, we believe that
many of our competitors enjoy greater name recognition, have superior
distribution capabilities and offer more extensive support services than we
currently do. In addition, there are significantly more user applications
available for competing operating systems, such as Windows NT and UNIX, than
there are for Linux-based operating systems. An integral part of our strategy in
the near future, however, is to address these shortcomings by, among other
things, strengthening our existing strategic relationships and entering into new
ones in an effort to enhance our name recognition, expand our distribution
capabilities and attract more attention to the open source movement, which in
turn should create additional incentives for software developers to write more
applications for Red Hat Linux.
In the market for advertising revenue, we will compete with other online
content providers and traditional forms of media such as newspapers, magazines,
radio and television. We believe that the principal competitive factors in
attracting advertisers include the amount of traffic on REDHAT.COM, brand
recognition, customer service and support, the demographics of our users and
visitors, our ability to offer targeted audiences
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and the overall cost-effectiveness of the advertising medium that we offer.
SOFTWARE ENGINEERING AND DEVELOPMENT
We have invested, and intend to continue to invest, significant resources in
product and technology development. We focus and modify our product development
efforts based on the needs of users and changes in the marketplace. We are
currently focusing our development efforts on improving the Linux kernel, as
well as commercializing our software innovations into new products and product
enhancements that are easier to use and provide greater functionality.
Our software engineers have contributed to the development and maintenance
of some of the most important components of the Red Hat Linux operating system,
including the installation program and the package management program. The
installation program provides users with a single method to install the hundreds
of separate software programs that are included with Red Hat Linux so that from
the user's perspective, the hundreds of programs appear as one. This simplified
process sharply reduces the time and effort required to install a Linux-based
operating system, as compared to the alternative of gathering the hundreds of
programs one by one via the Internet. The installation program provides default
settings for the user depending upon whether the user wishes to use Red Hat
Linux as a server operating system or as a workstation operating system. The
installation also provides advanced users with the ability to customize the
programs that are installed, allowing for significant flexibility and control
over the operating system. The installation also automatically detects the type
of hardware that comprises the user's computer, in order to ensure that all
programs necessary for Red Hat Linux to work on the hardware are properly
installed.
Our software development engineers perform extensive testing of Red Hat
Linux to ensure that it is properly assembled and works as a coherent whole from
the user's perspective. We use industry standard methods of quality assurance
testing to ensure that Red Hat Linux is solidly engineered and ready for use by
our customers when shipped. We also operate an extensive beta testing program
for Red Hat Linux. Under this beta testing program, we post a beta or test
version of the operating system on the Internet. Developers and users around the
world then suggest improvements and identify bugs. Each suggestion is circulated
over the Internet in an attempt to encourage others to assist in the programming
of a solution. In this way, Red Hat Linux users are treated as co-developers.
Bug fixes and enhancements are tested by other users and our engineers, and when
corrected, added to the next release. When the beta version is viewed as stable
and complete, it becomes the next production version, and a new beta cycle
begins.
Our Web development team consists of engineers with considerable experience
in developing scalable Web-based applications. We continue to develop
applications on REDHAT.COM for user registration, commerce, and content
management and publication. We rigorously test these programs and have built in
the software necessary to ensure high quality visits to our Web site.
As of May 31, 1999, we employed 52 individuals in our engineering group,
consisting of 22 software engineers, including several of the top Linux kernel
developers in the world, 20 Web design and development professionals, five
quality assurance engineers and five documentation specialists.
INTELLECTUAL PROPERTY
Red Hat Linux has been developed and made available for licensing under the
GNU General Public License (GPL), pursuant to which anyone generally may copy,
modify and distribute the software, subject only to the restriction that any
resulting or derivative work is made available to the public under the same
terms. Therefore, although we retain the copyrights to the code that we develop
ourselves, due to the GPL and the open source nature of our software products,
our
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most valuable intellectual property is our collection of trademarks. We rely
primarily on a combination of trademarks and copyrights to protect our
intellectual property. We also enter into confidentiality and nondisclosure
agreements with our employees and consultants, and generally control access to
and distribution of our documentation and other proprietary information.
We pursue registration of some of our trademarks in the U.S. and in other
countries. We have registered the trademark "Red Hat" in the U.S. and have
registrations pending in the Australian, Canadian and European Union trademark
offices. We have registered the Red Hat "Shadow Man" logo in the U.S. and in
Australia and have registrations pending for it in the Canadian and European
Union trademark offices.
Despite our efforts to protect our trademark rights, unauthorized third
parties have in the past attempted and in the future may attempt to
misappropriate our trademark rights. We are currently investigating possible
infringement claims against a third party in France whom we believe has
misappropriated our tradename and trademarks. We cannot be certain that we will
succeed in preventing the continued misappropriation of our tradename and
trademarks in these circumstances or that we will be able to prevent this type
of unauthorized use in the future. The laws of some foreign countries do not
protect our trademark rights to the same extent as do the laws of the United
States. In addition, policing unauthorized use of our trademark rights is
difficult, expensive and time-consuming. The loss of any material trademark or
trade name could have a material adverse effect on our business, operating
results and financial condition.
Although we do not believe that our products infringe the rights of third
parties, there can be no assurance that third parties will not assert
infringement claims against us in the future or that any such assertion will not
result in costly litigation or require us to obtain a license to third party
intellectual rights. In addition, there can be no assurance that such licenses
will be available on reasonable terms or at all, which could have a material
adverse effect on our business, operating results and financial condition.
EMPLOYEES
As of May 31, 1999, we had a total of 127 employees. Of the total employees,
52 were in software engineering, 30 in sales and marketing, 28 in customer
service and technical support and 17 in finance and administration. Our future
success will depend in part on our ability to attract, retain and motivate
highly qualified technical and management personnel, for whom competition is
intense. From time to time we also employ independent contractors to support our
professional services, product development, sales, marketing and business
development organizations. Our employees are not represented by any labor union
and are not subject to a collective bargaining agreement, and we have never
experienced a work stoppage. We believe our relations with our employees are
good.
FACILITIES
Our headquarters are currently located in a leased facility in Durham, North
Carolina, consisting of approximately 51,800 square feet under a five year lease
that will expire on January 14, 2004. The annual rental expense under this lease
is approximately $900,000. We believe that additional space will be required as
our business expands and will be available on acceptable terms.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings. We may from time to
time become a party to various legal proceedings arising in the ordinary course
of our business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the executive officers, directors and key
employees of Red Hat, their ages and the positions held by them with Red Hat as
of May 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------- --------- ----------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Robert F. Young..................................... 45 Chief Executive Officer and Chairman of the Board of
Directors
Matthew J. Szulik................................... 42 President and Director
Marc Ewing.......................................... 30 Executive Vice President, Chief Technology Officer
and Director
Timothy J. Buckley.................................. 48 Senior Vice President and Chief Operating Officer
Manoj K. George..................................... 32 Chief Financial Officer, Director of Administration
and Treasurer
David G. Shumannfang................................ 31 Counsel and Secretary
Frank Batten, Jr. (1)(2)............................ 40 Director
William S. Kaiser (1)(2)............................ 43 Director
Eric Hahn (1)(2).................................... 39 Director
KEY EMPLOYEES
Erik W. Troan....................................... 25 Director of Engineering
Lisa F. Sullivan.................................... 26 Director of Marketing
Donald J. Barnes.................................... 26 Director of Technical Projects
Paul F. McNamara.................................... 37 Business Unit Leader--Business Development
Howard Jacobson..................................... 38 Director of Internet Business
Theresa A. Williams-Spangler........................ 41 Business Unit Leader--Sales
Dr. Charles A. Coleman, Jr.......................... 53 Director of Information Services
</TABLE>
- ------------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
ROBERT F. YOUNG co-founded Red Hat and served as its President and a
Director from its inception until November 1998. In November 1998, he was
elected to his current positions as Chief Executive Officer and Chairman of the
Board of Directors.
MATTHEW J. SZULIK has served as President of Red Hat since November 1998 and
a Director since April 1999. Mr. Szulik also served as Chief Operating Officer
of Red Hat from November 1998 to April 1999. Prior to joining Red Hat, from
September 1997 to October 1998 Mr. Szulik served as President of Relativity
Technologies, a computer software company. From February 1996 to May 1997, Mr.
Szulik served as President of Sapiens International, a computer software
company. Prior to that, from January 1993 to December 1995, he served as Senior
Vice President in charge of sales and marketing for MapInfo Corp., a computer
software company.
MARC EWING co-founded Red Hat and has served as its Executive Vice President
and Chief Technology Officer and as a Director since its inception. Mr. Ewing
participated in the design and development of Red Hat Linux and founded Red Hat
Advanced Development Laboratories to develop open source graphical desktop
applications for Linux in cooperation with the open source development
community.
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Prior to founding Red Hat, for various periods from January 1991 to August 1992,
Mr. Ewing worked as a systems programmer for IBM.
TIMOTHY J. BUCKLEY has served as Senior Vice President and Chief Operating
Officer of Red Hat since April 1999. Prior to joining Red Hat, from October 1997
until April 1999, Mr. Buckley was Senior Vice President of Worldwide Sales at
Visio Corp., a business software company. Mr. Buckley joined Visio in November
1993 and served as Visio's Vice President of Worldwide Sales until his promotion
in October 1997.
MANOJ K. GEORGE has served as Red Hat's Chief Financial Officer and
Treasurer since May 1998. From May 1997 to the present he has held the position
of Director of Administration, and from May 1997 to May 1998 he served as Red
Hat's Controller. From November 1994 to May 1997, Mr. George, a certified public
accountant, served, first as a staff accountant, then as a senior accountant
with a regional accounting firm.
DAVID G. SHUMANNFANG has served as Counsel of Red Hat since October 1996 and
Secretary of Red Hat since April 1997. From August 1993 to May 1996, Mr.
Shumannfang earned his Juris Doctor from the University of North Carolina at
Chapel Hill School of Law. Mr. Shumannfang is a member of the North Carolina
State Bar.
FRANK BATTEN, JR. has served as a Director of Red Hat since August 1997. Mr.
Batten is currently Chairman of Landmark Communications Inc., a media company,
and has served in that position since January 1998. Prior to that, Mr. Batten
served Landmark Communications as its Executive Vice President, Corporate
Development from October 1995 to January 1998. From June 1991 to October 1995,
Mr. Batten was President and Publisher of the Virginian Pilot, a newspaper
division of Landmark Communications.
WILLIAM S. KAISER has served as a Director of Red Hat since September 1998.
Mr. Kaiser has been employed by Greylock Management Corporation, a venture
capital firm, since May 1986 and has been a general partner of the Greylock
Limited Partnerships since January 1988. Mr. Kaiser is also a director of Open
Market Inc. and Clarus Corporation.
ERIC HAHN has served as a Director of Red Hat since April 1999. Mr. Hahn is
a founding partner of Inventures Group, a leading "mentor investment" venture
capital firm. He served as Executive Vice President and Chief Technology Officer
of Netscape from November 1996 until June 1998. Prior to serving as Netscape's
Chief Technology Officer, from November 1995 to November 1996, Mr. Hahn was
general manager of Netscape's Server Products Division, overseeing product
development for Netscape's enterprise, Internet and extranet servers. Mr. Hahn
joined Netscape following its acquisition of Collabra Software, Inc., which Mr.
Hahn founded in February 1993.
ERIK W. TROAN has served as Red Hat's Director of Engineering since February
1999. Prior to that, between May 1995 and February 1999, he served as Chief
Developer at Red Hat. He is the co-author of LINUX APPLICATION DEVELOPMENT, a
book covering mid-level programming on the Linux operating system and from 1995
to 1996, was a regular columnist for the X Journal Magazine, covering free
software topics.
LISA F. SULLIVAN has served as Director of Marketing for Red Hat since June
1997. Prior to that, from October 1996 to June 1997, she served as a Product and
Distribution Manager and from September 1994 to September 1996 as a Sales Office
Manager for Red Hat.
DONALD J. BARNES has served Red Hat as Director of Technical Projects since
February 1999. From November 1997 to February 1999, he served as Red Hat's
Development Manager of Quality Assurance and from May 1995 to November 1997 he
served as a System's Engineer for Red Hat. From May 1994 to May 1995, Mr. Barnes
was a Systems Engineer for Northern Telecom Limited.
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<PAGE>
PAUL F. MCNAMARA has served as Red Hat's Business Unit Leader--Business
Development since June 1999. From February 1999 to June 1999, he served as Red
Hat's Vice President of Business Development. From May 1998 to February 1999, he
served as Red Hat's Vice President of Strategic Relationships. Prior to joining
Red Hat, from September 1994 to May 1998, Mr. McNamara served as President and
Chief Operating Officer of Asset Management Technologies, Inc., a developer of
wireless communications and global positioning system software. Prior to his
tenure with Asset Management, Mr. McNamara served IBM from September 1993 to
September 1994 as Senior Manager, Product and Business Development.
HOWARD JACOBSON has served as Red Hat's Director of Internet Business since
April 1999. He served as Business Development Manager for Red Hat from January
1999 to April 1999. Prior to joining Red Hat, from August 1995 to January 1999,
Mr. Jacobson was a partner at the law firm of Moore & Van Allen, and from July
1985 to July 1998 was an associate at the law firm of Gibson Dunn & Crutcher
specializing in intellectual property law.
THERESA SPANGLER has served as Business Unit Leader--Sales for Red Hat since
February 1999. Prior to joining Red Hat, from October 1997 to February 1999, she
served as Vice President of Sales and Marketing at Technauts, Inc., a software
company. From December 1991 to March 1997, Ms. Spangler served as Senior
Territory Manager for PictureTel Corp., a video conferencing equipment
manufacturer.
CHARLES A. COLEMAN has served as Red Hat's Director of Information Services
since April 1999. From February 1999 to March 1999, Mr. Coleman acted as a
consultant to Red Hat in connection with ERP vendor evaluation and selection and
ERP implementation. From April 1998 to January 1999, Mr. Coleman served as
President and Chief Information Officer at Critical Information Technologies,
LLC, a data modeling and systems integration firm. From September 1996 to April
1998 he was employed by Ellora Software, Inc., a clinical data management
software developer, first as a consultant and then as a Vice President. From
February 1994 to September 1996, Mr. Coleman was Senior Vice President of
Inquiry Management and Database Systems for Computerworld, Inc. From August 1983
to February 1994 he served as President and Chief Information Officer of
Response Technologies, Inc., a business processing reengineering company.
ELECTION OF OFFICERS AND DIRECTORS
Red Hat's executive officers are elected by the Board of Directors on an
annual basis and serve until their successors are duly elected and qualified.
All of the current Directors were selected as Directors of Red Hat pursuant to
the First Amended and Restated Stockholder's Voting Agreement dated February 25,
1999, as amended, between Red Hat and some of its stockholders, which agreement
will automatically terminate upon the closing of this offering. There are no
family relationships among any of the executive officers or directors of Red
Hat.
Upon the closing of this offering, Red Hat's Board of Directors will be
divided into three classes, with the members of each class of directors serving
for staggered three-year terms. Messrs. Ewing and Hahn will serve in the class
the term of which expires in 2000; Messrs. Szulik and Batten will serve in the
class the term of which expires in 2001; and Messrs. Young and Kaiser will serve
in the class the term of which expires in 2002. At each annual meeting of
stockholders, a class of directors will be elected for a three-year term to
succeed the directors of the same class whose term is then expiring. Red Hat's
adoption of a classified Board of Directors could have the effect of increasing
the length of time necessary to change the composition of a majority of the
Board of Directors. See "Description of Capital Stock--Delaware Law and Certain
Charter and By-Law Provisions; Anti-Takeover Effects".
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<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has appointed a Compensation Committee consisting of
Messrs. Batten, Kaiser and Hahn. The Compensation Committee reviews and
evaluates the compensation and benefits of all of Red Hat's officers, reviews
general policy matters relating to compensation and benefits of Red Hat's
employees and makes recommendations concerning these matters to the Board of
Directors. The Compensation Committee also administers Red Hat's stock option
and stock purchase plans. See "--Employee Benefit Plans".
The Board of Directors has also appointed an Audit Committee consisting of
Messrs. Batten, Kaiser and Hahn. The Audit Committee reviews, with Red Hat's
independent auditors, the scope and timing of the auditors' services, the
auditors' report on Red Hat's financial statements following completion of the
auditors' audit, and Red Hat's policies and procedures with respect to internal
accounting and financial controls. In addition, the Audit Committee will make
annual recommendations to the Board of Directors for the appointment of
independent auditors for the ensuing year.
DIRECTOR COMPENSATION
Directors are reimbursed for reasonable out-of-pocket expenses incurred in
attending meetings of the Board of Directors and for meetings of any committees
of the Board of Directors on which they serve. Directors are also eligible to
participate in Red Hat's 1999 Stock Option and Incentive Plan. Pursuant to a
policy approved by the Board of Directors, upon initial election or appointment
to the Board of Directors, new non-employee Directors will be granted
non-qualified stock options to purchase 20,000 shares of common stock at a price
at least equal to the fair market value of Red Hat's common stock on the date of
grant. These options will vest 33 1/3% one year from grant date and 8.33% at the
end of each three-month period thereafter. Upon re-election, non-employee
directors will be granted non-qualified stock options to purchase 10,000 shares
of common stock to vest 33 1/3% one year from the date of re-election and 8.33%
each three-month period thereafter. Each year of a non-employee director's
tenure, the director will be granted non-qualified stock options to purchase
5,000 shares of common stock which will be fully vested upon grant. Upon the
effectiveness of the registration statement of which this prospectus is a part,
according to the policy established by the Board of Directors, Messrs. Batten
and Kaiser will each be granted non-qualified stock options to purchase 10,000
shares of common stock at the initial public offering price. These options will
vest as provided above. See "--Employee Benefit Plans". In addition, in April
1999, Mr. Hahn was granted a non-qualified stock option under the 1998 Stock
Option Plan to purchase 171,552 shares of common stock at an exercise price of
$1.5705 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Board of Directors or
Compensation Committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by Robert F. Young,
Red Hat's Chief Executive Officer, and Red Hat's only other executive officer
during the fiscal year ended February 28, 1999 whose salary and bonus exceeded
$100,000 for such fiscal year (together with the Chief Executive Officer, the
"Named Executive Officers") for services rendered in all capacities to Red Hat
during the fiscal year ended February 28, 1999. As of May 31, the annualized
base salaries of Red Hat's executive officers not listed in the table below who,
had they been employed by Red Hat for the full fiscal year ended February 28,
1999, would have earned in excess of $100,000, were: Matthew J. Szulik --
$185,000 and Timothy J. Buckley -- $155,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------
------------------------ SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION ($)
- --------------------------- ----------- ----------- --------------------------- -------------------
<S> <C> <C> <C> <C>
Robert F. Young
Chairman and Chief
Executive Officer........ 161,458 25,000 -- 41,141
Marc Ewing
Executive Vice President
and Chief Technology
Officer.................. 145,125 20,000 -- --
</TABLE>
Red Hat has never granted any stock options to the Named Executive Officers.
CHANGE IN CONTROL ARRANGEMENTS
Matthew Szulik, Red Hat's President, is a party to an incentive stock option
agreement and a non-qualified stock option agreement, which both provide for the
lapsing of Red Hat's repurchase right as to 33 1/3% of his option shares if he
is terminated without cause within sixteen months of his date of hire (November
13, 1998) and for the lapsing in full of Red Hat's repurchase right as to any
unvested option shares upon the termination of his employment (either by Red
Hat's successor without cause or by Mr. Szulik for good reason) following a
change in control of Red Hat.
Tim Buckley, Red Hat's Chief Operating Officer, is a party to an incentive
stock option agreement and a non-qualified stock option agreement, which both
provide for the lapsing of Red Hat's repurchase right as to 33 1/3% of his
option shares if he is terminated without cause within one year of his date of
hire (April 12, 1999) and for the lapsing in full of Red Hat's repurchase right
as to any unvested option shares upon the termination of his employment (either
by Red Hat's successor without cause or by Mr. Buckley for good reason)
following a change in control of Red Hat.
EMPLOYEE BENEFIT PLANS
1998 STOCK OPTION PLAN, AS AMENDED
Red Hat's 1998 Stock Option Plan, as amended (the "1998 Plan"), was adopted
by the Board of Directors and approved by Red Hat's stockholders in August 1998,
and was amended in November 1998, February 1999 and April 1999. The aggregate
number of shares of common stock which may be issued under the 1998 Plan is
9,235,160. Under the 1998 Plan, Red Hat is authorized to grant incentive stock
options ("ISOs") and non-qualified stock options ("NQSOs"), as well as awards of
common stock and opportunities
55
<PAGE>
to make direct purchases of common stock to employees, consultants, directors
and officers of Red Hat. The 1998 Plan is administered by the Compensation
Committee of the Board of Directors. Subject to the provisions of the 1998 Plan,
the Compensation Committee has the authority to select the participants and
determine the terms of the stock options, awards and purchase rights granted
under the 1998 Plan. Options granted under the 1998 Plan are immediately
exercisable, subject to a right of repurchase in favor of Red Hat for all
exercised but unvested shares. Red Hat's right of repurchase lapses over a
period of four years. An ISO is not transferable by the recipient except by will
or by the laws of descent and distribution. NQSOs and other awards are
transferable only to the extent set forth in the agreement relating to such
option or award or pursuant to a valid domestic relations order. Generally, no
ISO may be exercised more than three months following termination of employment,
and no stock option may be exercised following termination of employment for
cause. However, in the event that termination is due to death or disability, the
stock option is exercisable for a maximum of 180 days after such termination. In
June 1999, the Board of Directors and the stockholders voted to terminate the
1998 Plan effective on, and subject to the consummation of the offering. As of
May 31, 1999 Red Hat had outstanding under the 1998 Plan ISOs exercisable for
2,936,058 shares of common stock and NQSOs exercisable for 2,482,030 shares of
common stock.
1999 STOCK OPTION AND INCENTIVE PLAN
Red Hat's 1999 Stock Option and Incentive Plan (the "1999 Stock Plan") was
adopted by Red Hat's Board of Directors and approved by its stockholders in June
1999. The 1999 Stock Plan provides for the grant of stock-based awards to
employees, officers and directors of, and consultants or advisors to, Red Hat
and its subsidiaries, including ISOs and NQSOs and other equity-based awards.
ISOs may be granted only to employees of Red Hat. A total of 6,500,000 shares of
common stock may be issued upon the exercise of options or other awards granted
under the 1999 Stock Plan. The maximum number of shares with respect to which
awards may be granted to any employee under the 1999 Stock Plan shall not exceed
3,250,000 shares of common stock during any calendar year.
The 1999 Stock Plan is administered by the Board of Directors and the
Compensation Committee. Subject to the provisions of the 1999 Stock Plan, the
Board of Directors and the Compensation Committee each has the authority to
select the persons to whom awards are granted and determine the terms of each
award, including the number of shares of common stock subject to the award.
Payment of the exercise price of an award may be made in cash, shares of common
stock, a combination of cash or stock or by any other method approved by the
Board or Compensation Committee, consistent with Section 422 of the Internal
Revenue Code and Rule 16b-3 under the Exchange Act. Unless otherwise permitted
by Red Hat, awards are not assignable or transferable except by will or the laws
of descent and distribution.
Each of the Board of Directors or Compensation Committee may, in its sole
discretion, amend, modify or terminate any award granted or made under the 1999
Stock Plan, so long as such amendment, modification or termination would not
materially and adversely affect the participant. Each of the Board or
Compensation Committee may also, in its sole discretion, accelerate or extend
the date or dates on which all or any particular option or options granted under
the 1999 Stock Plan may be exercised.
1999 EMPLOYEE STOCK PURCHASE PLAN
The 1999 Employee Stock Purchase Plan (the "1999 Purchase Plan") was adopted
by the Board of Directors and approved by the stockholders in June 1999. The
1999 Purchase Plan provides for the issuance of a maximum of 750,000 shares of
common stock.
The 1999 Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees of Red Hat whose
56
<PAGE>
customary employment is for more than 20 hours per week and for more than three
months in any calendar year and who have completed more than 90 days of
employment with Red Hat on or before the first day of any Payment Period (as
defined below) are eligible to participate in the 1999 Purchase Plan. Outside
directors and employees who would own 5% or more of the total combined voting
power of value of Red Hat's stock immediately after the grant may not
participate in the 1999 Purchase Plan. To participate in the 1999 Purchase Plan,
an employee must authorize Red Hat to deduct an amount (not less than one
percent nor more than 10 percent of a participant's total cash compensation)
from his or her pay during six-month payment periods (each, a "Payment Period").
The first Payment Period will commence on a date to be determined by the Board
of Directors and end on February 29, 2000. Thereafter, the Payment Periods will
commence on the six-month periods beginning on the first day of April and
October, respectively, and ending on the last day of the following March and
September, respectively, of each year, but in no case shall an employee be
entitled to purchase more than 1,000 shares in any one Payment Period. The
exercise price for the option granted in each Payment Period is 85% of the
lesser of the average market price of the common stock on the first or last
business day of the Payment Period, in either event rounded up to the nearest
cent. If an employee is not a participant on the last day of the Payment Period,
such employee is not entitled to exercise his or her option, and the amount of
his or her accumulated payroll deductions will be refunded. Options granted
under the 1999 Purchase Plan may not be transferred or assigned. An employee's
rights under the 1999 Purchase Plan terminate upon his or her voluntary
withdrawal from the plan at any time or upon termination of employment. No
options have been granted to date under the 1999 Purchase Plan.
401(K) PLAN
Red Hat has a Section 401(k) Profit Sharing Plan (the "401(k) Plan"). The
401(k) Plan is a tax-qualified plan covering all full-time Red Hat employees who
are over 21 years of age and who have completed three months of service with Red
Hat. If, however, an employee was employed by Red Hat prior to February 1999,
the 401(k) Plan covered such employee regardless of age or length of service
with Red Hat. Under the 401(k) Plan, participants may elect to defer a portion
of their compensation, subject to certain limitations. In addition, at the
discretion of the Board of Directors, Red Hat may make matching contributions
into the 401(k) Plan for all eligible employees. During the fiscal year ended
February 28, 1999, Red Hat did not make any contributions to the 401(k) Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Red Hat's Third Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws provide that the directors and officers of Red Hat
shall be indemnified by Red Hat to the fullest extent permitted by Delaware law,
as it now exists or may in the future be amended, against all expenses and
liabilities reasonably incurred in connection with their service for or on
behalf of Red Hat. In addition, the Third Amended and Restated Certificate of
Incorporation provides that the directors of Red Hat will not be personally
liable for monetary damages to Red Hat for breaches of their fiduciary duty as
directors, unless they violated their duty of loyalty to Red Hat or its
stockholders, acted in bad faith, knowingly or intentionally violated the law,
authorized illegal dividends or redemptions or derived an improper personal
benefit from their action as directors. Red Hat intends to obtain insurance
which insures the directors and officers of Red Hat against certain losses and
which insures Red Hat against certain of its obligations to indemnify such
directors and officers.
57
<PAGE>
CERTAIN TRANSACTIONS
On August 15, 1997, Red Hat sold 6,801,400 shares of its Series A preferred
stock to Frank Batten, Jr., Frank Batten, Louis F. Ryan as trustees under a
trust agreement dated April 11, 1988, as amended (the "1988 Batten Trust") in a
private financing at a price of $.294057 per share. The 1988 Batten Trust is a
5% stockholder of Red Hat.
On September 29, 1998, Red Hat sold an aggregate of 8,116,550 shares of its
Series B preferred stock in a private financing at a price of $.857 per share.
Among the purchasers in this financing were the 1988 Batten Trust, Intel
Corporation, Greylock IX Limited Partnership and Benchmark Capital Partners II,
L.P., each a 5% stockholder of Red Hat.
From February 25, 1999 through April 1, 1999, Red Hat sold an aggregate of
2,054,776 shares of its Series C preferred stock in a private financing at a
price of $3.141 per share. Among the purchasers in this financing were the 1988
Batten Trust, Intel Corporation, Greylock IX Limited Partnership and Benchmark
Capital Partners II, L.P., each a 5% stockholder of Red Hat.
Red Hat believes that all transactions set forth above were made on terms no
less favorable to it than would have been obtained from unaffiliated third
parties. Red Hat has adopted a policy whereby all future transactions between
Red Hat and any of its officers, directors and affiliates will be on terms no
less favorable to Red Hat than could be obtained from unaffiliated third parties
and will be approved by a majority of the disinterested members of Red Hat's
Board of Directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to Red Hat
regarding beneficial ownership of Red Hat's common stock as May 31, 1999 and as
adjusted to reflect the sale of the shares of common stock in this offering by:
- each person known by Red Hat to be the beneficial owner of more than 5% of
Red Hat's common stock;
- each of Red Hat's directors;
- each Named Executive Officer; and
- all executive officers and directors as a group.
Unless otherwise indicated, to the knowledge of Red Hat, each stockholder
possesses sole voting and investment power with respect to the shares listed,
except to the extent an individual stockholder's shares are owned jointly with
that person's spouse.
The number of shares of common stock deemed outstanding includes shares
issuable pursuant to options and warrants held by the respective person or group
which may be exercised within 60 days after May 31, 1999. For purposes of
calculating each person's or group's percentage ownership, stock options
exercisable within 60 days after May 31, 1999 and warrants are included for that
person or group but not the stock options and warrants of any other person or
group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
------------------------
NAME AND ADDRESS OF BEFORE AFTER
BENEFICIAL OWNER (1) SHARES BENEFICIALLY OWNED OFFERING OFFERING
- ---------------------------------------- -------------------------- ----------- -----------
<S> <C> <C> <C>
5% STOCKHOLDERS
Greylock IX Limited Partnership......... 8,723,866 14.5%
One Federal Street
Boston, MA 02110
Benchmark Capital Partners II, L.P...... 5,815,910 9.7
2840 Sand Hill Road, Suite 2000
Menlo Park, CA 94025
Intel Corporation....................... 3,005,058 5.0
2200 Mission College Blvd. RN6-46
Santa Clara, CA 95052
EXECUTIVE OFFICERS AND DIRECTORS
Robert F. Young (2)..................... 9,081,826 15.1
Marc Ewing (3).......................... 9,088,476 15.1
Matthew Szulik (4)...................... 2,736,248 4.4
Frank Batten, Jr. (5)................... 15,005,888 25.0
c/o Landmark Communications
150 W. Brambleton Avenue
Norfolk, VA 23510-2075
William S. Kaiser (6)................... 8,723,866 14.5
c/o Greylock IX Limited Partnership
One Federal Street
Boston, MA. 02110
Eric Hahn............................... 171,552 *
All executive officers and directors as
a
group (9 persons) (7)................. 46,436,268 74.4%
</TABLE>
- ------------------------
* Represents beneficial ownership of less than one percent of outstanding
common stock.
59
<PAGE>
(1) Unless otherwise indicated, the address for each beneficial owner is c/o Red
Hat, Inc., 2600 Meridian Parkway, Durham, N.C. 27713.
(2) Includes 3,222,746 shares held of record by Nancy Young, Mr. Young's wife,
300,000 held by the Nancy R. Young GRAT dated April 28, 1999, 200,000 shares
held of record by the Young Family Trust dated April 28, 1999 and 1,418,160
shares held of record by trusts for the benefit of Mr. Young's children. Mr.
Young disclaims beneficial ownership of such shares. Also includes 300,000
shares held of record by the Robert F. Young GRAT dated April 28, 1999.
(3) Includes 200,000 shares held of record by the Ewing Family Trust dated April
28, 1999 and 1,412,720 shares held of record by trusts for the benefit of
Mr. Ewing's children. Mr. Ewing disclaims beneficial ownership of such
shares. Also includes 600,000 shares held of record by the Marc Ewing GRAT
dated April 28, 1999.
(4) Includes 36,000 shares held of record by trusts for the benefit of Mr.
Szulik's children. Mr. Szulik disclaims beneficial ownership of such shares.
Also includes 27,678 shares held of record by the Matthew J. Szulik GRAT
dated May 26, 1999. Also includes 1,672,570 shares of common stock issuable
pursuant to stock options.
(5) Includes 1,519,246 shares held of record by the 1988 Batten Trust and
13,486,642 shares held of record by the 1998 Frank Batten, Jr. Grantor
Annuity Trust.
(6) Includes shares held by Greylock IX Limited Partnership. Mr. Kaiser is a
general partner of Greylock IX GP Limited Partnership, the general partner
of Greylock IX Limited Partnership. Mr. Kaiser disclaims beneficial
ownership of these shares.
(7) Includes 4,582,742 shares of common stock issuable pursuant to stock
options.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Effective upon the closing of this offering and the filing of Red Hat's
Third Amended and Restated Certificate of Incorporation, the authorized capital
stock of Red Hat will consist of 225,000,000 shares of common stock, par value
$.0001 per share, and 5,000,000 shares of preferred stock, par value $.0001 per
share.
Prior to the effectiveness of the registration statement of which this
prospectus is a part, and in accordance with Red Hat's Second Amended and
Restated Certificate of Incorporation, as amended and currently in effect, Red
Hat is authorized to issue up to 70,620,652 shares of common stock, par value
$.0001 per share, of which 26,114,502 shares are issued and outstanding as of
May 31, 1999 and 16,972,726 shares of preferred stock, par value $.0001 per
share, of which as of May 31, 1999 16,972,726 shares are issued and outstanding.
Upon the closing of this offering, all shares of preferred stock will be
converted into 33,945,452 shares of common stock.
The following summary description of Red Hat's capital stock is not intended
to be complete and is qualified by reference to the provisions of applicable law
and to Red Hat's Third Amended and Restated Certificate of Incorporation (the
"Restated Certificate of Incorporation") and Amended and Restated Bylaws (the
"Restated By-laws"), filed as exhibits to the registration statement of which
this prospectus is a part.
COMMON STOCK
As of May 31, 1999, there were 26,114,502 shares of common stock outstanding
held by 41 stockholders of record. Based upon the number of shares outstanding
as of that date and giving effect to the issuance of the shares of
common stock offered by Red Hat in this offering and the conversion of the
outstanding shares of preferred stock, there will be shares of
common stock outstanding upon the closing of this offering. In addition, as of
May 31, 1999, there were outstanding stock options for the purchase of 5,418,088
shares of common stock and outstanding warrants for
60
<PAGE>
the purchase of 3,197,450 shares of common stock.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares present
in person or by proxy at the meeting and entitled to vote in such election.
Holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of outstanding preferred
stock. Upon the liquidation, dissolution or winding up of Red Hat, the holders
of common stock are entitled to receive ratably the net assets of Red Hat
available after the payment of all debts and other liabilities of Red Hat,
subject to the prior rights of any outstanding preferred stock. Holders of the
common stock have no preemptive, subscription, redemption or conversion rights,
nor are they entitled to the benefit of any sinking fund. The outstanding shares
of common stock are, and the shares offered by Red Hat in this offering will be,
when issued and paid for, validly issued, fully paid and nonassessable. The
rights, powers, preferences and privileges of holders of common stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which Red Hat may designate and issue in
the future.
PREFERRED STOCK
The Board of Directors will be authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 5,000,000 shares of preferred stock, in one or more
series. Each such series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges as shall be determined by the Board of Directors, which may
include, among others, dividend rights, voting rights, redemption and sinking
fund provisions, liquidation preferences, conversion rights and preemptive
rights.
The stockholders of Red Hat have granted the Board of Directors authority to
issue the preferred stock and to determine its rights and preferences in order
to eliminate delays associated with a stockholder vote on specific issuances.
The rights of the holders of common stock will be subject to the rights of
holders of any preferred stock issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could adversely affect the voting
power or other rights of the holders of common stock, and could make it more
difficult for a third party to acquire, or discourage a third party from
attempting to acquire, a majority of the outstanding voting stock of Red Hat.
Red Hat has not, to date, issued any shares of such preferred stock and has no
present plans to issue any shares of preferred stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS AND ANTI-TAKEOVER EFFECTS
Upon completion of this offering, Red Hat will be subject to the provisions
of Section 203 of the General Corporation Law of Delaware, Section 203 prohibits
a publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Restated Certificate of Incorporation provides for the division of the
Board of Directors into three classes as nearly equal in size as possible with
staggered three-year terms. See "Management--Election of Officers and
Directors". In addition, the Restated
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Certificate of Incorporation provides that directors may be removed only for
cause by the affirmative vote of the holders of 75% of the shares of capital
stock of Red Hat entitled to vote. Under the Restated Certificate of
Incorporation, any vacancy on the Board of Directors, however occurring,
including a vacancy resulting from an enlargement of the Board, may only be
filled by vote of a majority of the directors then in office. The likely effect
of the classification of the Board of Directors and the limitations on the
removal of directors and filling of vacancies is an increase in the time
required for the stockholders to change the composition of the Board of
Directors. For example, in general, at least two annual meetings of the
stockholders will be necessary for stockholders to effect a change in a majority
of the members of the Board of Directors.
The Restated Certificate of Incorporation also provides that after the
closing of this offering, any action required or permitted to be taken by the
stockholders of Red Hat at an annual meeting or special meeting of stockholders
may only be taken if it is properly brought before the meeting and may not be
taken by written action in lieu of a meeting. The Restated By-laws provide that
special meetings of the stockholders may only be called by the Board of
Directors, the Chairman of the Board of Directors, the Chief Executive Officer
or the President of Red Hat. The Restated By-laws further provide that in order
for any matter to be considered "properly brought" before a meeting, a
stockholder must comply with requirements regarding advance notice to Red Hat.
The foregoing provisions could have the effect of delaying until the next
stockholders meeting stockholder actions which are favored by the holders of a
majority of the outstanding voting securities of Red Hat. These provisions may
also discourage another person or entity from making a tender offer for Red
Hat's common stock, because such person or entity, even if it acquired a
majority of the outstanding voting securities of Red Hat, would be able to take
action as a stockholder (such as electing new directors or approving a merger)
only at a duly called stockholders meeting, and not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws, unless
a corporation's certificate of incorporation or by-laws, as the case may be,
requires a greater percentage. The Restated Certificate of Incorporation
requires the affirmative vote of the holders of at least 75% of the shares of
capital stock of Red Hat issued and outstanding and entitled to vote to amend or
repeal any of the foregoing provisions of the Restated Certificate of
Incorporation. The Restated By-laws also may be amended or repealed by a
majority vote of the Board of Directors subject to any limitations set forth in
the Restated By-laws and amendment by stockholders of provisions described above
requires the affirmative vote of the holders of at least 75% of the shares of
capital stock of Red Hat issued and outstanding and entitled to vote. The 75%
stockholder vote would be in addition to any separate class vote that might in
the future be required pursuant to the terms of any series of preferred stock
that might be outstanding at the time any such amendments are submitted to
stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Chase Mellon
Shareholder Services, LLC.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for Red Hat's common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices from time to time. Furthermore, since
only a limited number of shares will be available for sale shortly after this
offering because of certain contractual and legal restrictions on resale
described below, sales of substantial amounts of Red Hat's common stock in the
public market after the restrictions lapse could adversely affect the prevailing
market price and Red Hat's the ability to raise equity capital in the future.
SALES OF RESTRICTED SHARES
Based on shares outstanding at May 31, 1999 upon completion of this
offering, Red Hat will have outstanding an aggregate of shares of common
stock, assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding options or warrants. Of these shares, the shares
sold in this offering will be freely tradable without restrictions or further
registration under the Securities Act, unless such shares are purchased by an
existing affiliate of Red Hat as that term is defined in Rule 144 under the
Securities Act.
The remaining 60,059,954 shares of common stock held by existing
stockholders are restricted shares or are subject to the contractual
restrictions described below. Restricted shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Of these restricted shares, 1,990,000 shares will be available
for resale in the public market in reliance on Rule 144(k), all of which shares
are subject to lock-up agreements described below. An additional 31,773,102
shares will be available for resale in the public market in reliance on Rule
144, substantially all of which are subject to lock-up agreements. The remaining
26,296,852 shares become eligible for resale in the public market at various
dates thereafter, substantially all of which shares are subject to lock-up
agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year would be entitled to sell a certain number of
shares within any three-month period. That number of shares cannot exceed the
greater of one percent of the number of shares of common stock then outstanding,
which will equal approximately shares immediately after this offering, or
the average weekly trading volume of the common stock on the Nasdaq National
Market during the four calendar weeks preceding the filing of a notice on Form
144 with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about Red Hat. Rule 144 also provides that affiliates of Red
Hat who are selling shares of common stock that are not restricted shares must
nonetheless comply with the same restrictions applicable to restricted shares
with the exception of the holding period requirement.
Under Rule 144(k), a person who is not deemed to have been an affiliate of
Red Hat at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Accordingly,
unless otherwise restricted, these shares may therefore be sold immediately upon
the completion of this offering.
OPTIONS
Rule 701 provides that the shares of common stock acquired upon the exercise
of currently outstanding options or pursuant to other rights granted under Red
Hat's stock plans may be resold (to the extent not subject
63
<PAGE>
to the Lock-up Agreements) by persons, other than Affiliates, beginning 90 days
after the date of this prospectus, subject only to the manner of sale provisions
of Rule 144, and by affiliates under Rule 144, without compliance with its
one-year minimum holding period, subject to certain limitations. As of May 31,
1999, the Board of Directors has authorized an aggregate of up to 16,684,800
shares of common stock for issuance pursuant to Red Hat's stock option and stock
purchase plans. As of May 31, 1999, options to purchase a total of 5,418,088
shares of common stock were outstanding, all of which options are exercisable
subject to Red Hat's right to repurchase unvested shares under certain
circumstances. Of these options, 508,675 shares are no longer subject to Red
Hat's right of repurchase and will be eligible for sale (to the extent not
subject to the lock-up agreements) in the public market in accordance with Rule
701 under the Securities Act beginning 90 days after the date of this
prospectus. Of the total shares issuable pursuant to these options, 238,050
shares are subject to lock-up agreements.
Red Hat intends to file one or more registration statements on Form S-8
under the Securities Act following this offering to register all shares of
common stock which are subject to outstanding stock options or other rights
granted pursuant to Red Hat's stock plan(s) and common stock issuable pursuant
to Red Hat's stock option and stock purchase plans. These registration
statements are expected to become effective upon filing. Shares covered by these
registration statements will thereupon be eligible for sale in the public
markets, subject to the lock-up agreements, to the extent applicable.
WARRANTS
As of May 31, 1999, Red Hat had outstanding warrants exercisable for a total
of 3,197,450 shares of common stock, all of which are currently exercisable. All
of these shares are subject to lock-up agreements.
LOCK-UP AGREEMENTS
Except for sales of common stock to the underwriters pursuant to the
underwriting agreement Red Hat, the executive officers, directors, stockholders
and substantially all optionholders have agreed not to sell or otherwise dispose
of, directly or indirectly, any shares of common stock (or any security
convertible into or exchangeable or exercisable for common stock) without the
prior written consent of Goldman, Sachs & Co. for a period of 180 days from the
date of this prospectus. In addition, for a period of 180 days from the date of
this prospectus, except as required by law, Red Hat has agreed that its Board of
Directors will not consent to any offer for sale, sale or other disposition, or
any transaction which is designed or could be expected to result in the
disposition by any person, directly or indirectly, of any shares of common stock
without the prior written consent of Goldman Sachs. See "Underwriting". Goldman
Sachs in its sole discretion at any time or from time to time and without notice
may release for sale in the public market all or any portion of the shares
subject to the lock-up agreements.
REGISTRATION RIGHTS
Upon the expiration of the contractual lock-up period, certain
securityholders of Red Hat (the "Rights Holders") will be entitled to require
Red Hat to register under the Securities Act up to a total of 55,725,622 shares
of outstanding common stock (the "Registrable Shares") under the terms of an
investor rights agreement between Red Hat and the Rights Holders (the "Investor
Rights Agreement"). The Investor Rights Agreement provides that if Red Hat
proposes to register in a firm commitment underwritten offering any of its
securities under the Securities Act at any time or times, the Investor Rights
Holders, subject to certain exceptions, shall be entitled to include Registrable
Shares in such registration. However, the managing underwriter of any such
offering may exclude for marketing reasons some or all of such Registrable
Shares from such registration. Some of the Rights Holders also have, subject to
certain conditions and limitations, the right to require
64
<PAGE>
Red Hat, on no more than five occasions, to prepare and file a registration
statement under the Securities Act with respect to their Registrable Shares. Red
Hat is generally required to bear the expenses of all such registrations, except
underwriting discounts and commissions. The Investor Rights Agreement terminates
in 2002 on the third anniversary of the offering.
EFFECTS OF SALES OF SHARES
Prior to this offering, there has been no public market for the common stock
of Red Hat, and no predictions can be made as to the effect, if any, that market
sales of shares of common stock prevailing from time to time, or the
availability of shares for future sale, may have on the market price for the
common stock. Sales of substantial amounts of common stock, or the perception
that such sales could occur, could adversely effect prevailing market prices for
the common stock and could impair Red Hat's future ability to obtain capital
through an offering of equity securities.
LEGAL MATTERS
The validity of the shares of common stock to be issued in this offering
will be passed upon for Red Hat by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The financial statements as of February 28, 1998 and 1999 and for each of
the three years in the period ended February 28, 1999 included in this
prospectus have been so included in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
Red Hat has filed with the Commission a registration statement on Form S-1
(including all amendments and exhibits thereto, the "Registration Statement")
under the Securities Act with respect to the common stock to be sold in this
offering. As permitted by the rules and regulations of the Commission, this
prospectus omits certain information contained in the Registration Statement.
For further information with respect to Red Hat and the common stock to be sold
in this offering, you should refer to the Registration Statement and to the
exhibits and schedules filed as part of the Registration Statement. Statements
contained in this prospectus regarding the contents of any agreement or other
document filed as an exhibit to the Registration Statement are not necessarily
complete, and in each instance reference is made to the copy of such agreement
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules thereto, may be inspected at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices
located at Seven World Trade Center, New York, New York 10007 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of all or any
part thereof may be obtained from such offices upon payment of the prescribed
fees. You may call the Commission at 1-800-SEC-0330 for further information on
the operation of the public reference rooms and you can request copies of the
documents upon payment of a duplicating fee, by writing to the Commission. In
addition, the Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants (including
Red Hat) that file electronically with the Commission which can be accessed at
http://www.sec.gov.
65
<PAGE>
RED HAT, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.................................................... F-2
Balance Sheets at February 28, 1998 and 1999......................................... F-3
Statements of Operations for the years ended February 28, 1997, 1998 and 1999........ F-4
Statements of Stockholders' Equity (Deficit) for the years ended February 28, 1997,
1998 and 1999...................................................................... F-5
Statements of Cash Flows for the years ended February 28, 1997, 1998 and 1999........ F-6
Notes to Financial Statements........................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Red Hat, Inc.
The two-for-one stock split discussed in note 14 to the financial statements
has not been consummated at June 4, 1999. When it has been consummated, we will
be in a position to furnish the following audit report:
"In our opinion, the accompanying balance sheets and the related
statements of operations, of stockholders' equity (deficit), and of cash
flows present fairly, in all material respects, the financial position of
Red Hat, Inc. at February 28, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period
ended February 28, 1999, in conformity with generally accepted accounting
principles. 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 of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above."
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
April 30, 1999
F-2
<PAGE>
RED HAT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------------------------
PRO
FORMA
1999
1998 1999 UNAUDITED
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,292,562 $10,055,227 $10,055,227
Short-term investments............................ 100,000 2,037,992 2,037,992
Accounts receivable, net.......................... 744,551 1,127,193 1,127,193
Inventory......................................... 141,176 345,630 345,630
Prepaid expenses.................................. 383,830 173,730 173,730
Income tax receivable............................. -- 114,145 114,145
----------- ----------- -----------
Total current assets............................ 2,662,119 13,853,917 13,853,917
Property and equipment, net......................... 337,327 1,270,576 1,270,576
Other assets, net................................... 81,188 151,310 151,310
Investments......................................... 50,000 -- --
----------- ----------- -----------
Total assets.................................... $ 3,130,634 $15,275,803 $15,275,803
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 773,936 $ 2,087,305 $ 2,087,305
Royalties payable................................. 247,323 144,074 144,074
Accrued expenses.................................. 50,334 379,757 379,757
Deferred revenue.................................. 26,207 33,352 33,352
Current portion of capital lease obligations...... 22,797 108,897 108,897
----------- ----------- -----------
Total current liabilities....................... 1,120,597 2,753,385 2,753,385
Capital lease obligations........................... 65,032 419,778 419,778
Commitments and contingencies (Note 12).............
Mandatorily redeemable preferred stock:
Series A, 6,801,400 shares authorized, issued and
outstanding; none pro forma..................... 1,983,209 1,992,184 --
Series B, 8,116,550 shares authorized, issued and
outstanding; none pro forma..................... -- 6,919,644 --
Series C, 1,797,929 shares authorized, 1,027,388
issued and outstanding; none pro forma.......... -- 3,195,591 --
Stockholders' equity (deficit):
Common stock, $.0001 par value, 225,000,000 shares
authorized, 23,500,000 and 23,852,950 shares
issued and outstanding at February 28, 1998 and
1999, respectively (55,743,626 shares issued and
outstanding pro forma at February 28, 1999)..... 2,350 2,385 5,574
Additional paid-in capital........................ 263,650 427,464 12,531,694
Accumulated deficit............................... (304,204) (434,628) (434,628)
----------- ----------- -----------
Total stockholders' equity (deficit)............ (38,204) (4,779) 12,102,640
----------- ----------- -----------
Total liabilities and stockholders' equity
(deficit)..................................... $ 3,130,634 $15,275,803 $15,275,803
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
RED HAT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-----------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Revenue:
Software and related products....................... $2,603,131 $5,131,623 $10,012,923
Services and other.................................. -- 24,000 776,996
---------- ---------- -----------
Total revenue..................................... 2,603,131 5,155,623 10,789,919
---------- ---------- -----------
Cost of revenue:
Software and related products....................... 1,204,721 2,210,538 4,012,685
Services and other.................................. -- -- 28,148
---------- ---------- -----------
Total cost of revenue............................. 1,204,721 2,210,538 4,040,833
---------- ---------- -----------
Gross profit.......................................... 1,398,410 2,945,085 6,749,086
---------- ---------- -----------
Operating expense:
Sales and marketing................................. 491,473 1,252,362 3,083,162
Research and development............................ 325,244 902,826 2,220,115
General and administrative.......................... 525,978 798,592 1,483,909
---------- ---------- -----------
Total operating expense........................... 1,342,695 2,953,780 6,787,186
---------- ---------- -----------
Income (loss) from operations......................... 55,715 (8,695) (38,100)
---------- ---------- -----------
Other income (expense):
Interest income..................................... 200 34,410 171,181
Interest expense.................................... (23,304) (13,036) (9,463)
---------- ---------- -----------
Other income (expense), net....................... (23,104) 21,374 161,718
---------- ---------- -----------
Income (loss) before income taxes..................... 32,611 12,679 123,618
Provision for income taxes............................ -- 4,906 214,686
---------- ---------- -----------
Net income (loss)..................................... 32,611 7,773 (91,068)
Accretion on mandatorily redeemable preferred stock... -- -- (39,356)
---------- ---------- -----------
Net income (loss) available to common stockholders.... $ 32,611 $ 7,773 $ (130,424)
---------- ---------- -----------
---------- ---------- -----------
Net income (loss) per common share:
Basic............................................... 0.0014 0.0003 (0.0055)
Diluted............................................. 0.0012 0.0002 (0.0055)
Weighted average common shares outstanding:
Basic............................................... 23,500,000 23,500,000 23,550,050
Diluted............................................. 27,232,520 34,578,277 23,550,050
Pro forma net income (loss) per common share
(unaudited):
Basic............................................... 0.0014 0.0003 (0.0021)
Diluted............................................. 0.0012 0.0002 (0.0021)
Pro forma weighted average common shares outstanding:
Basic............................................... 23,500,000 30,841,785 43,929,824
Diluted............................................. 27,232,520 34,578,277 43,929,824
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
RED HAT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
---------- ----------- ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at February 29,
1996................... 23,500,000 $ 2,350 $ 263,650 $ (344,588) $ (78,588)
Net income............... -- -- -- 32,611 32,611
---------- ----------- ----------- ------------- --------
Balance at February 28,
1997................... 23,500,000 2,350 263,650 (311,977) (45,977)
Net income............... -- -- -- 7,773 7,773
---------- ----------- ----------- ------------- --------
Balance at February 28,
1998................... 23,500,000 2,350 263,650 (304,204) (38,204)
Exercise of common stock
warrants............... 352,950 35 (17) -- 18
Tax benefit on exercise
of common stock
warrants............... -- -- 163,831 -- 163,831
Accretion of mandatorily
redeemable preferred
stock.................. -- -- -- (39,356) (39,356)
Net loss................. -- -- -- (91,068) (91,068)
---------- ----------- ----------- ------------- --------
Balance at February 28,
1999................... 23,852,950 $ 2,385 $ 427,464 $ (434,628) $ (4,779)
---------- ----------- ----------- ------------- --------
---------- ----------- ----------- ------------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
RED HAT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
----------------------------------
1997 1998 1999
--------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ 32,611 $ 7,773 $ (91,068)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 37,134 102,876 177,656
Provision for doubtful accounts...................... 38,986 38,141 185,092
Provision for inventory obsolescence................. -- -- 182,509
Deferred revenue..................................... -- 26,207 7,145
Changes in operating assets and liabilities:
Accounts receivable................................ (251,774) (479,746) (567,734)
Inventory.......................................... (14,934) (84,507) (386,963)
Prepaid expenses................................... (12,248) (370,571) 210,100
Income tax receivable.............................. -- -- 49,686
Other assets....................................... 1,613 (15,408) (75,478)
Accounts payable................................... 282,453 290,253 1,313,369
Royalties payable.................................. 57,477 189,846 (103,249)
Accrued expenses................................... (66,044) 19,019 329,423
--------- ---------- -----------
Net cash provided by (used in) operating
activities..................................... 105,274 (276,117) 1,230,488
--------- ---------- -----------
Cash flows from investing activities:
Purchase of investment securities...................... -- (150,000) (1,966,600)
Proceeds from sale of investment securities............ -- -- 100,000
Purchase of equipment.................................. (201,322) (158,004) (654,235)
Proceeds from sale of equipment........................ -- 24,272 --
--------- ---------- -----------
Net cash used in investing activities............ (201,322) (283,732) (2,520,835)
--------- ---------- -----------
Cash flows from financing activities:
Proceeds from borrowing from stockholders.............. 50,000 -- --
Repayments of borrowings from stockholders............. -- (86,243) --
Proceeds from notes payable............................ 46,048 239,214 --
Repayments of notes payable............................ -- (279,019) --
Proceeds from issuance of mandatorily redeemable
preferred stock, net................................. -- 1,983,209 10,084,854
Proceeds from exercise of common stock warrants........ -- -- 18
Payments on capital lease obligations.................. -- (4,750) (31,860)
--------- ---------- -----------
Net cash provided by financing activities........ 96,048 1,852,411 10,053,012
--------- ---------- -----------
Net increase in cash and cash equivalents.............. -- 1,292,562 8,762,665
Cash and cash equivalents beginning of the year........ -- -- 1,292,562
--------- ---------- -----------
Cash and cash equivalents end of year.................. $ -- $1,292,562 $10,055,227
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
BUSINESS ACTIVITY
Red Hat, Inc. ("Red Hat" or the "Company") is a leading developer and global
provider of open source software products and services, and has built a
comprehensive Web site dedicated to the open source software community. Red Hat,
Inc. was incorporated in Connecticut in March 1993 as ACC Corp., Inc. In
September 1995 ACC Corp., Inc. changed its name to Red Hat Software, Inc. In
September 1998, Red Hat Software, Inc. reincorporated in Delaware. In June 1999,
Red Hat Software, Inc. changed its name to Red Hat, Inc. The Linux operating
system ("Linux") is copyrighted under the terms of the GNU General Public
License (the "GPL") which states that the source code must be freely
distributable. The Company develops and publishes software applications that are
sold as shrink-wrapped software and releases freely-redistributable software
available for unrestricted download on the Internet. In addition, the Company
publishes and sells reference books on the Linux operating system.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED PRO FORMA BALANCE SHEET
The Board of Directors has authorized the Company to file a Registration
Statement with the Securities and Exchange Commission permitting the Company to
sell shares of common stock in an initial public offering ("IPO"). If the IPO is
consummated as presently anticipated, each share of the Series A, Series B, and
Series C mandatorily redeemable preferred stock will automatically convert into
two shares of common stock. The unaudited pro forma balance sheet reflects the
subsequent conversion of Series A, Series B, and Series C preferred shares into
common stock at a 2 for 1 conversion ratio as if such conversion has occurred as
of February 28, 1999. The unaudited pro forma balance sheet does not include the
conversion of 1,027,388 shares of Series C preferred stock which were sold in
March and April 1999 for net proceeds of $3,227,026 (see Note 9) into 2,054,776
shares of common stock. Had such amount been included, total stockholders'
equity on a pro forma basis would have been $15,329,666.
USE OF ESTIMATES
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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers investments purchased with a maturity period of three
months or less at the date of purchase to be cash equivalents.
INVESTMENTS
The Company's investments are all in debt securities which are classified as
held-to-maturity and are carried at amortized cost in accordance with Statement
of Financial Accounting Standards
F-7
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
No. 115 "Accounting for Investments in Debt and Equity Securities", as the
Company has both the positive intent and ability to hold them to maturity.
INVENTORY
The costs incurred for duplicating the computer software, documentation, and
training materials from the product masters and for packaging the product for
distribution are capitalized as inventory using the weighted average method and
charged to cost of sales when revenue from the sale of units is recognized.
Management periodically evaluates the realizability of inventory based on
planned release dates of product updates and records a reserve for obsolescence
when necessary. The reserve for inventory obsolescence was $0 and $182,509 at
February 28, 1998 and 1999, respectively.
CAPITALIZED SOFTWARE COSTS
Capitalization of software development costs begins upon the establishment
of technological feasibility and ceases when the product is available for
general release. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software development costs require
considerable judgment by management with respect to certain external factors
including, but not limited to, technological feasibility, anticipated future
gross revenue, estimated economic life and changes in software and hardware
technologies. As a result of the Company's practice of releasing source code
that it has developed on a weekly basis for unrestricted download on the
Internet, there is generally no passage of time between achievement of
technological feasibility and the availability of the Company's product for
general release. Therefore, the Company has no capitalized software development
costs at February 28, 1998 and 1999.
PROPERTY AND EQUIPMENT
Property and equipment is primarily comprised of furniture and computer
equipment which are recorded at cost and depreciated over their estimated useful
lives using the straight line method. Expenditures for maintenance and repairs
are charged to operations as incurred; major expenditures for renewals and
betterments are capitalized and depreciated. Property and equipment acquired
under capital leases are being depreciated over their estimated useful lives or
the respective lease term, if shorter. Depreciation periods used for property
and equipment are as follows:
<TABLE>
<S> <C>
Computer equipment........................................... 3 years
Furniture and fixtures....................................... 7 years
4 to 25
Leasehold improvements....................................... years
</TABLE>
OTHER ASSETS
Costs incurred for acquiring trademarks, copyrights and patents are
capitalized and amortized over their estimated useful lives, which range from 5
to 15 years, using the straight line method. Other assets also includes security
deposits which are expected to be refunded to the Company upon termination of
certain leases.
F-8
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its property and equipment, and
other assets in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of"
("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the estimated future
undiscounted cash flows attributable to such assets or the business to which
such intangible assets relate. No impairments were required to be recognized
during the years ended February 28, 1997, 1998 and 1999.
REVENUE RECOGNITION
Revenues from the sale of software products are generally recognized upon
shipment of the products, net of estimated returns. A reserve for sales returns
is recognized for sales of software products to distributors, who have a right
of return based on the Company's historical experience of sell-through to the
end user by the distributor.
Revenue for maintenance and support services is deferred and recognized
ratably over the term of the agreement, which is typically twelve months. Such
revenues have been insignificant to date. In instances where the fee for support
and maintenance services is included in the fee for the software products,
revenue is allocated to each element based on their respective fair values with
these fair values determined using the price charged when that element is sold
separately. Revenue from customer training, and other services is recognized as
the service is performed.
Royalty revenue, which is included in services and other revenue, is
comprised primarily of royalties received from the sale of rights to the
Company's brand and trademark and royalties received from international
distributors of the Company's products. Royalty revenue is recognized when
received. Revenue from sale of books, which is include in software and related
products revenue, published by the Company, is recognized at the date of
shipment, net of estimated returns.
Advertising revenue is recognized ratably in the period in which the
advertisement is displayed, provided that we have no significant remaining
obligations, at the lesser of the ratio of impressions delivered over total
guaranteed impressions delivered over total guaranteed impressions or the
straight line basis over the term of the contract. To the extent that minimum
guaranteed impressions are not met, the Company defers recognition of the
corresponding revenue until the guaranteed impressions are achieved. The Company
did not generate revenue from the sale of advertising on our Web site during the
fiscal years ended February 28, 1997, 1998 and 1999.
ROYALTY COSTS
Royalties that the Company is required to pay on applications licensed from
third parties that are a component of the software products sold by the Company
are expensed as cost of sales on a per unit basis as software products are sold.
Royalties paid in advance of the sale of the Company's software products are
included in prepaid expenses and recorded as expense when the related software
products are sold.
F-9
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT CUSTOMERS AND CREDIT RISK
The Company performs ongoing credit evaluations to reduce credit risk and
requires no collateral from its customers. Management estimates the allowance
for uncollectible accounts based on their historical experience and credit
evaluation. Sales to one distributor comprised $416,501 or 16%, $1,340,462 or
26% and $2,135,733 or 20% of total revenues for the years ended February 28,
1997, 1998 and 1999, respectively. Sales to one other distributor comprised
$3,719,162 or 34% of total revenues for the year ended February 28, 1999.
All of the Company's software revenues are from sales transactions
originating in the United States. The Company has received certain royalty
payments from international sources; however, such amounts have been
insignificant to date.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation based on the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), which states that no compensation expense is recorded
for stock options or other stock-based awards to employees that are granted with
an exercise price equal to or above the estimated fair value per share of the
Company's common stock on the grant date. The Company has adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), which requires compensation expense
to be disclosed based on the fair value of the options granted at the date of
the grant.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of costs, including salaries
and sales commissions, of all personnel involved in the sales process and
related expenses. Sales and marketing expenses also include costs of advertising
and trade shows. All costs of advertising the software products, books and
related services offered by the Company are expensed as incurred. Advertising
expense totaled $69,109, $152,939 and $597,822 for the years ended February 28,
1997, 1998 and 1999, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development expenses include all direct costs, primarily
personnel and outside consultants, related to the development of new products
and significant enhancements to existing products and are charged to operations
as incurred until such time as technological feasibility is achieved.
INCOME TAXES
The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for the temporary
differences between financial reporting and tax bases of the Company's assets
and liabilities and for tax carryforwards at enacted statutory tax rates in
effect for the years in which the differences are expected to reverse. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the
F-10
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
enactment date. In addition, valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
CASH FLOWS
The Company made cash payments for interest of $23,304, $13,036, and $9,463
for the years ended February 28, 1997, 1998, and 1999, respectively. The Company
made no cash payments for income taxes during the years ended February 28, 1997
and 1998 and $163,831 during the year ended February 28, 1999.
The Company acquired property and equipment through the assumption of
capital lease obligations amounting to $22,466, $75,299 and $472,706 for the
years ended February 28, 1997, 1998, and 1999 respectively.
NET INCOME (LOSS) PER COMMON SHARE
HISTORICAL
The Company computes net income (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS 128") and SEC Staff Accounting Bulletin No. 98 ("SAB No. 98"). Under the
provisions of SFAS 128 and SAB No. 98, basic net income (loss) per common share
("Basic EPS") is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares outstanding.
Diluted net income (loss) available to common stockholders per common share
("Diluted EPS") is computed by dividing net income (loss) by the weighted
average number of common shares and dilutive potential common share equivalents
then outstanding. Potential common shares consist of shares issuable upon the
exercise of stock options and warrants and shares issuable upon conversion of
outstanding mandatorily redeemable preferred stock. The calculation of the net
loss per share available to common stockholders for the fiscal year ended
February 28, 1999 does not include 24,299,071 potential shares of common stock
equivalents, as their impact would be antidilutive.
PRO FORMA (UNAUDITED)
Pro forma net income (loss) per common share is calculated assuming
conversion of all mandatorily redeemable preferred stock which converts
automatically upon the completion of the initial public offering into 31,890,676
shares of common stock (see Note 9). Therefore, accretion of mandatorily
redeemable preferred stock of $39,356 for the year ended February 28, 1999 is
excluded from the calculation of pro forma net income (loss) per common share.
The calculation of pro forma net loss per common share for the fiscal year
ended February 28, 1999 does not include 3,919,297 potential shares of common
stock equivalents, as their impact would be anti-dilutive.
SEGMENT REPORTING
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement requires companies to report information about
operating segments in interim and annual
F-11
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial statements. It also requires segment disclosures about products and
services, geographic areas and major customers. The Company adopted SFAS 131
effective for its fiscal year ended February 28, 1998. The Company has
determined that it did not have any separately reportable operating segments as
of February 28, 1997, 1998 or 1999.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS 130 is effective for
financial statements for fiscal years beginning after December 15, 1997. Its
adoption did not impact the Company's financial position, results of operations,
or cash flows as the Company had no items of other comprehensive income during
the three year period ended February 28, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. As issued, SFAS 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999, with
earlier application encouraged. In May 1999, the FASB delayed the effective date
of SFAS 133 for one year, to fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company does not currently nor does it intend in the future
to use derivative instruments and therefore does not expect that the adoption of
SFAS 133 will have any impact on its financial position or results of
operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA"), issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP No. 98-1"), which provides guidance regarding
when software developed or obtained for internal use should be capitalized. SOP
No. 98-1 is effective for fiscal years beginning after December 15, 1998. The
Company does not expect that the adoption of SOP No. 98-1 will have a material
impact on its financial position or results of operations.
In December 1998, the AICPA issued Statement of Position No. 98-9,
"Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to
Certain Transactions" ("SOP No. 98-9"). SOP No. 98-9 amends SOP No. 97-2 to
require recognition of revenue using the "residual method" in circumstances
outlined in the SOP. Under the residual method, revenue is recognized as
follows: (1) the total fair value of undelivered elements, as indicated by
vendor specific objective evidence, is deferred and subsequently recognized in
accordance with the relevant sections of SOP No. 97-2 and (2) the difference
between the total arrangement fee and the amount deferred for the undelivered
elements is recognized as revenue related to the delivered elements. SOP No.
98-9 is effective for transactions entered into in fiscal years beginning after
March 15, 1999. Also, the provisions of SOP No. 97-2 that were deferred by SOP
No. 98-4 will continue to be deferred until
F-12
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the date SOP No. 98-9 becomes effective. The Company does not expect that the
adoption of SOP No. 98-9 will have a significant impact on the Company's results
of operations or financial position.
3. ACCOUNTS RECEIVABLE
Accounts receivable, which are primarily from product sales, are presented
net of an allowance for doubtful accounts. The activity in the Company's
allowance for doubtful accounts for the years ended February 28, 1997, 1998 and
1999 is presented in the following table:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING INCOME OR END OF
YEAR ENDED FEBRUARY 28, OF PERIOD EXPENSE DEDUCTIONS (A) PERIOD
- ------------------------------------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
1997................................. $ -- $ 38,986 $ (554) $ 38,432
1998................................. 38,432 38,141 (27,829) 48,744
1999................................. 48,744 185,092 (73,458) 160,378
</TABLE>
- ------------------------
(a) Represents amounts written-off as uncollectible accounts receivable.
4. PROPERTY AND EQUIPMENT
The Company's property and equipment consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------
<S> <C> <C>
1998 1999
--------- ----------
Computer equipment.................................. $ 420,523 $ 818,676
Furniture and fixtures.............................. 69,256 583,175
Leasehold improvements.............................. -- 214,868
--------- ----------
489,779 1,616,719
Less: accumulated depreciation...................... (152,452) (346,143)
--------- ----------
$ 337,327 $1,270,576
--------- ----------
--------- ----------
</TABLE>
5. OTHER ASSETS
Other assets were comprised of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------
<S> <C> <C>
1998 1999
--------- ---------
Security deposits....................................... $ 11,900 $ 78,130
Trademarks, patents and copyrights, net................. 69,288 73,180
--------- ---------
$ 81,188 $ 151,310
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts payable and
accounts receivable at February 28, 1998 and 1999 approximated their fair value
due to the short-term nature of these items.
The fair value of the Company's short-term and long-term investments at
February 28, 1998 and 1999 approximated their carrying values as these
investments were primarily in short-term US Government obligations and
certificates of deposit.
7. ACCRUED EXPENSES
Accrued expenses were comprised of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Payroll................................................. $ -- $ 212,608
Vacation................................................ 3,501 59,165
Taxes................................................... 5,151 14,025
Other................................................... 41,682 93,959
--------- ---------
$ 50,334 $ 379,757
--------- ---------
--------- ---------
</TABLE>
8. INCOME TAXES
The components of the Company's provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Current tax provision:
Federal....................................... $ -- $ -- $ 149,284
State......................................... -- 4,906 65,402
--------- --------- ---------
Current tax expense........................... -- 4,906 214,686
--------- --------- ---------
Deferred tax benefit:
Federal....................................... -- -- --
State......................................... -- -- --
--------- --------- ---------
Deferred tax benefit.......................... -- -- --
--------- --------- ---------
Net provision for income taxes.............. $ -- $ 4,906 $ 214,686
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-15
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
at February 28, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Domestic net operating loss carryforwards............ $ 23,697 $ --
Accounts receivable.................................. 21,818 217,777
Allowance for inventory obsolescence................. -- 70,785
Research and development credit...................... 67,629 --
Other accruals....................................... 1,376 22,947
--------- ---------
Total deferred tax assets.......................... 114,520 311,509
Valuation allowance for deferred tax assets.......... (109,040) (307,423)
--------- ---------
Deferred tax assets................................ 5,480 4,086
--------- ---------
Property and equipment............................... (5,480) (4,086)
--------- ---------
Total deferred tax liabilities..................... (5,480) (4,086)
--------- ---------
Net deferred tax assets............................ $ -- $ --
--------- ---------
--------- ---------
</TABLE>
As of February 28, 1998 and 1999, the Company provided a full valuation
allowance against its net deferred tax assets since realization of these
benefits can not be reasonably assured. An increase in the valuation allowance
was recorded during fiscal 1999 to reserve the increase in total deferred tax
assets at February 28, 1999 due to uncertainty of realizability.
As of February 28, 1998, the Company had federal and state net operating
loss carryforwards of approximately $70,000. This carryforward was fully
utilized during 1999.
Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision for income taxes as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Effective rate............................... 0% 39% 174%
--------- --------- ---------
United States Federal tax at statutory
rate....................................... $ 12,214 $ 4,311 $ 42,030
State taxes (net of Federal benefit)......... 1,897 13,392 7,619
Change in valuation reserves................. (17,040) 28,993 198,477
Research and development credit.............. -- (67,629) (43,959)
Non-deductible items......................... 2,929 25,839 10,519
--------- --------- ---------
Provision for income taxes................... $ -- $ 4,906 $ 214,686
--------- --------- ---------
--------- --------- ---------
</TABLE>
9. MANDATORILY REDEEMABLE PREFERRED STOCK
The Company has authorized 6,801,400, 8,116,550 and 2,054,776 shares of
Series A, Series B and Series C mandatorily redeemable preferred stock,
respectively. The shares of Series A, Series B and Series C mandatorily
redeemable preferred stock have a par value of $0.0001 per share.
F-16
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
On August 15, 1997, the Company entered into a purchase agreement with an
investor (the "Series A Investor"). In connection with this agreement, the
Company issued 6,801,400 shares of Series A preferred stock to the Series A
Investor for $2,000,000 or $0.2941 per share, less related issuance costs of
$16,791. The Series A preferred stock became mandatorily redeemable with the
issuance of the Series B mandatorily preferred stock in September 1998.
On September 29, 1998, the Company entered into a purchase agreement with
several investors (the "Series B Investors"). In connection with this agreement,
the Company issued 8,116,550 shares of Series B mandatorily redeemable preferred
stock to the Series B Investors for $6,955,884, or $0.857 per share, less
related issuance costs of $66,621.
On February 25, 1999, the Company entered into a purchase agreement with
several investors (the "Series C Investors"). In connection with this agreement,
the Company issued 1,027,388 shares of Series C mandatorily redeemable preferred
stock to the Series C Investors for $3,227,026, or $3.141 per share.
The Company had additional closings of the Series C mandatorily redeemable
preferred stock financing subsequent to February 28, 1999. Additional Series C
Investors purchased 1,027,388 shares of Series C mandatorily redeemable
preferred stock for $3,227,026, or $3.141 per share in March and April of 1999.
Total issuance costs related to sales of Series C mandatorily redeemable
preferred stock were $62,870.
DIVIDENDS
The Series A, Series B and Series C stockholders (the "Holders") are not
entitled to dividends unless dividends are declared on shares of common stock,
in which case the Holders shall receive a distribution on each outstanding share
of Series A, Series B and Series C mandatorily redeemable preferred stock on an
as if converted basis.
CONVERSION
Each share of Series A, Series B and Series C mandatorily redeemable
preferred stock can be converted to common stock at the option of the Holders at
a two-to-one conversion rate, subject to certain adjustments. This conversion
rate shall be adjusted upon the issuance by the Company of additional common
shares (with certain exceptions) for consideration per share less than $0.343
per share, in the case of Series A mandatorily redeemable preferred stock,
$0.996 per share, in the case of Series B mandatorily redeemable preferred stock
and $3.893 per share, in the case of Series C mandatorily redeemable preferred
stock. The conversion rate shall also be adjusted for common stock splits,
reverse common stock splits, dividends and distributions.
Each share of Series A, Series B and Series C mandatorily redeemable
preferred stock will be automatically converted into shares of common stock, at
the then effective conversion rate, upon the closing of a sale of the common
stock of the Company in a qualified public offering.
VOTING RIGHTS
Holders of Series A, Series B and Series C mandatorily redeemable preferred
stock have the right to one vote for each common share into which such shares
could then be converted, as described above.
F-17
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
LIQUIDATION
In the event of the liquidation, dissolution or winding up of the Company,
Holders shall be entitled to receive, prior to any distributions to common
stockholders, an amount in cash equal to the greater of (i) $0.343 per share, in
the case of Series A, $0.996 per share, in the case of Series B, and $3.893 per
share, in the case of Series C, plus any dividends declared but unpaid, or (ii)
such amount per share as would have been payable had each such share been
converted into common stock immediately prior to liquidation, dissolution or
winding up, as described above. In the event that assets of the Company are
insufficient to permit payment of the above mentioned amounts, the Holders shall
share ratably in any distribution of the remaining assets and funds of the
Company in proportion to the respective amounts which would otherwise be payable
pursuant to the above.
REDEMPTION
The Company could be required to redeem the Series A, Series B and Series C
mandatorily redeemable preferred stock from the Holders upon receipt of written
request from Holders of shares representing at least 66 2/3% of the aggregate
number of shares of common stock issuable upon conversion. Redemption may first
be made by the Holders on February 25, 2004 and on each of the first and second
anniversaries thereof. Redemption is limited to 33% and 50% of the Series A,
Series B and Series C shares outstanding on February 25, 2004 and the first
anniversary thereof, respectively. There is no limitation on the number of
shares on February 25, 2006. The redemption price is equal to $0.343 per share
in the case of Series A, $0.996 per share, in the case of Series B and $3.893
per share, in the case of Series C, subject to adjustment for certain events.
The carrying value of the Company's mandatorily redeemable preferred stock is
being accreted to its redemption price over the redemption period using the
effective interest rate method. In conjunction with the sale of the Series B
mandatorily redeemable preferred stock, the Series A mandatorily redeemable
preferred stock became mandatorily redeemable.
CARRYING VALUE
The Series A, Series B and Series C mandatorily redeemable preferred stock
were initially recorded at the total net proceeds received by the Company upon
issuance. The difference between the total net proceeds at issuance of
$12,068,063 and the total redemption price of $14,416,585 is charged to retained
earnings over the period from issuance until redemption first becomes available.
The amount of accretion recognized during each period is determined by using the
effective interest rate method. For the year ended February 28, 1999 the
accretion was $39,356. The Company had no outstanding mandatoriily redeemable
preferred stock prior to the fiscal year ended February 28, 1999.
10. COMMON STOCK
On September 28, 1998, the Company effected a 100 for 1 stock split for
holders of its common stock. Amounts presented for the periods prior to the
stock split have been restated to reflect the stock split on a retroactive
basis.
The Company has authorized 68,620,652 shares of common stock with a par
value of $0.0001 per share. Holders of these shares have one vote per share.
Upon the dissolution, liquidation or
F-18
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK (CONTINUED)
winding up of the Company, holders of common stock will be entitled to receive
the assets of the Company subject to the preferential rights of the outstanding
Series A, Series B and Series C mandatorily redeemable preferred stock or any
other outstanding stock ranking on liquidation senior to or on parity with the
common stock.
On September 29, 1998, in connection with the above mentioned sale of Series
B mandatorily redeemable preferred stock, certain stockholders, primarily
comprised of officers of the Company, entered into a common stock purchase
agreement with the Series B Investors. In connection with this agreement, those
stockholders sold 2,625,500 shares of common stock to the Series B Investors for
$1,125,000 or $0.429 per share.
On February 25, 1999, in connection with the above mentioned sale of Series
C mandatorily redeemable preferred stock, certain stockholders, primarily
comprised of officers of the Company, entered into a common stock purchase
agreement with the Series C Investors. In connection with this agreement, those
stockholders sold 492,184 shares of common stock to the Series C Investors for
$772,975 or $1.571 per share. Upon additional closings of the Series C
mandatorily redeemable preferred stock financing in March and April of 1999, an
additional 492,184 shares of common stock were sold by certain stockholders
primarily comprised of officers of the Company to the additional Series C
Investors for $772,975 or $1.571 per share.
11. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
During September 1998, the Company's Board of Directors approved a stock
option plan whereby 5,834,800 shares of common stock have been reserved for
issuance pursuant to grants of options to any employee, officer or director or
consultant of the Company at terms and prices to be determined by the Board of
Directors. In April 1999, the Board increased the pool to 7,434,800 shares. The
plan provides that the exercise price per share and the purchase price per share
for each non-qualified option should be set by the Board on the date of grant.
The price for each Incentive Stock Option (ISO) shall not be less than the fair
market value of the common stock on the date of grant. The maximum term for an
option granted is ten years from the date of grant. The Company believes that
all options and warrants, granted through February 28, 1999, have been granted
at their fair values on their respective grant dates. Options granted under the
plan generally vest 25% upon completion of one full year of service and 6.25% on
the first day of each subsequent three-month period. All options are immediately
exercisable upon grant into restricted shares of the Company's common stock,
subject to repurchase, with the same vesting provisions as the original option.
F-19
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
The activity for the stock option plan for the year ended February 28, 1999
and for the period from March 1, 1999 to May 31, 1999 is presented in the
following table:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
UNDERLYING EXERCISE PRICE
OPTIONS PER SHARE
----------- -----------------
<S> <C> <C>
Outstanding at February 28, 1998............................... -- $ --
Granted........................................................ 4,322,570 0.36
Forfeited...................................................... (20,000) 0.18
-----------
Outstanding at February 28, 1999............................... 4,302,570 0.36
Granted (unaudited)............................................ 3,207,070 2.17
Exercised (unaudited).......................................... (2,071,552) 0.88
Forfeited (unaudited).......................................... (20,000) 1.57
-----------
Outstanding at May 31, 1999 (unaudited)........................ 5,418,088 $ 1.23
</TABLE>
Prior to February 28, 1998, the Company had granted no stock options.
The following summarizes information about the Company's stock options at
February 28, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTURAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------- ------------ --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 0.18 1,200,000 9.58 $ 0.18 1,200,000 $ 0.18
$ 0.43 3,102,570 9.67 $ 0.43 3,102,570 $ 0.43
</TABLE>
The following summarizes certain information regarding stock option grants
during the period from March 1, 1999 to May 31, 1999 (unaudited):
<TABLE>
<CAPTION>
EXERCISE NUMBER OF
DATE OF GRANT PRICE SHARES
- ----------------------------------------------------- ----------- -----------
<S> <C> <C>
March 1999........................................... $ 1.57 212,000
April 1999........................................... $ 1.57 2,393,972
May 3, 1999.......................................... $ 1.57 40,000
May 10, 1999......................................... $ 5.00 561,098
-----------
3,207,070
</TABLE>
STOCK WARRANTS
On October 10, 1995, the Company issued warrants (which are equivalent to
nonqualified stock options) to purchase 3,740,400 shares of common stock to
three of its employees with an exercise price of $.0001 per share. The warrants
vest 25% annually on each May 1, beginning May 1, 1996
F-20
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
and ending May 1, 1999. The warrants terminate upon death, permanent disability,
termination of employment or May 1, 2006. The Company and certain founding
shareholders have a right of first refusal to purchase the warrant shares on the
same terms as a proposed purchaser and a right to purchase the shares upon the
death, disability, or termination of employment of the employee. Upon the death,
disability, or termination without cause of the employee, the purchase price
shall be 80% of the fair market value of the Company's common stock as
determined by the board of directors. If the employee is terminated for cause,
the purchase price shall be 80% of the lesser of the book value or the fair
market value of the Company's common stock.
The activity for the stock warrants is presented in the following table:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
----------------------------------------------------------------------------
1997 1998 1999
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
UNDERLYING PRICE UNDERLYING PRICE UNDERLYING PRICE
WARRANTS PER SHARE WARRANTS PER SHARE WARRANTS PER SHARE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 3,740,400 $ 0.0001 3,740,400 $ 0.0001 3,740,400 $ 0.0001
----------- ----------- ----------- ----------- ----------- -----------
Exercised................ -- -- -- -- (352,950) $ 0.0001
Outstanding at end of
year................... 3,740,400 $ 0.0001 3,740,400 $ 0.0001 3,387,450 $ 0.0001
Exercisable at end of
year................... 935,100 $ 0.0001 1,870,200 $ 0.0001 2,452,350 $ 0.0001
</TABLE>
During the three month period ended May 31, 1999, 190,000 warrants were
exercised. At May 31, 1999, 3,197,450 warrants remained outstanding. Amounts as
of May 31, 1999 are unaudited.
SFAS 123 requires the Company to disclose pro forma information regarding
option grants made and warrants issued to its employees. SFAS 123 specifies
certain valuation techniques that produce estimated compensation charges that
are included in the pro forma results below. These amounts have not been
reflected in the Company's statement of operations, because APB No. 25 specifies
that no compensation charge arises when the exercise price of employees' stock
options and warrants equal the market value of the underlying stock at the grant
date, as in the case of options and warrants granted to the Company's employees.
The fair value of options and warrants was estimated using the minimum value
method with the following assumptions:
<TABLE>
<CAPTION>
EMPLOYEE EMPLOYEE
STOCK STOCK
OPTIONS WARRANTS
------------- -------------
<S> <C> <C>
Expected dividend yield............................. 0.00% 0.00%
Risk-free interest rate............................. 4.98% 5.81%
Expected volatility................................. 0.00% 0.00%
Expected life (in years)............................ 6 6
</TABLE>
F-21
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
SFAS 123 pro forma numbers are as follows:
<TABLE>
<CAPTION>
1999
---------
<S> <C>
Net loss available to common stockholders as reported
under APB No. 25............................................... $ 130,424
Pro forma net loss available to common stockholders.............. $ 287,288
</TABLE>
The Company did not grant any stock options or warrants in fiscal 1998 or
1997 and, therefore, no pro forma disclosure for these years is provided.
The weighted average estimated fair value of employee stock options granted
during the year ended February 28, 1999 was $0.27 per share. The weighted
average estimated fair value of the warrants at the time of grant was $0.0001
per share.
12. COMMITMENTS AND CONTINGENCIES
As of February 28, 1999, the Company leased office space and certain
equipment under various noncancelable operating and capital leases. Future
minimum lease payments required under the operating and capital leases at
February 28, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ---------
<S> <C> <C>
2000................................................. $ 945,612 $ 139,698
2001................................................. 934,208 136,901
2002................................................. 931,283 120,863
2003................................................. 932,200 112,089
2004................................................. 819,266 99,687
---------- ---------
Total minimum lease payments....................... $4,562,569 609,238
----------
----------
Less amount representing interest (at rates ranging
from 8.2% to 9.6%)................................. 80,563
---------
Present value of net minimum lease payments.......... 528,675
Less current portion................................. 108,897
---------
Long-term portion.................................. $ 419,778
---------
---------
</TABLE>
Rent expense under operating leases for the years ended February 28, 1997,
1998 and 1999 was $86,313, $171,191 and $308,973 respectively.
The Company has entered into an agreement with a bank to provide a letter of
credit pertaining to its building lease. The Company is required by the bank to
maintain a compensating balance of $65,000 which is equal to the amount of the
letter of credit. This amount is included in cash and cash equivalents.
The Company has executed licensing contracts to publish, bundle and
distribute software products developed by other companies in return for royalty
payments based on a percentage of the revenues generated by the Company from the
sale of these products. Prepaid royalty payments are included in current assets
and royalty payments due are included in royalties payable.
F-22
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In April 1999, the Company also contracted with a Web support firm to
maintain its backup web site. The initial fee of $98,000 was due upon receipt
and installation of the hardware. The Company has agreed to pay a monthly
maintenance fee of $17,000 for a period of 36 months.
13. EMPLOYEE BENEFIT PLAN
The Company provides a retirement plan qualified under Section 401(k) of the
Internal Revenue Code ("IRC") of 1986, as amended. Participants may elect to
contribute a portion of their annual compensation to the plan, subject to
certain limitations set by the IRC. Employees are eligible to participate in the
plan who are over 21 years of age and have completed three months of service
with Red Hat. If, however, an employee was employed by the Company prior to
February 1999, the 401(k) Plan covers such employee regardless of age or length
of service. The Company has the option to make contributions to the plan but did
not make any contributions to the plan for the years ended February 28, 1997,
1998 and 1999.
14. SUBSEQUENT EVENTS
On June 2, 1999, the Board of Directors approved a two-for-one common stock
split to be effective upon the closing of the Company's IPO. All share and per
share information in the accompanying financial statements and notes to the
financial statements has been retroactively restated to reflect the effect of
this stock split.
In addition, the Board of Directors approved, as of the effective date of
the IPO, that the authorized capital stock will consist of 225,000,000 shares of
common stock and 5,000,000 shares of preferred stock each with a par value of
$.0001 per share.
F-23
<PAGE>
UNDERWRITING
Red Hat and the underwriters named below (the "Underwriters")will enter into
an underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter will severally agree to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co., Thomas Weisel
Partners LLC and E*TRADE Securities, Inc. are the representatives of the
underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
-----------
<S> <C>
-----------
Goldman, Sachs & Co. ...........................................
Thomas Weisel Partners LLC......................................
E*TRADE Securities, Inc.........................................
-----------
Total...................................................
-----------
-----------
</TABLE>
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional
shares from Red Hat to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the Underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
The following table shows the per share and total underwriting discounts to
be paid to the Underwriters by Red Hat. These amounts are shown assuming both no
exercise and full exercise of the Underwriters' option to purchase additional
shares.
Paid by Red Hat
<TABLE>
<CAPTION>
No Full
Exercise Exercise
----------- -----------
<S> <C> <C>
Per Share...... $ $
Total.......... $ $
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the Underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the Underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
Red Hat and its officers, directors, stockholders and optionholders have
agreed with the Underwriters not to dispose of or hedge any of its common stock
or securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus continuing through the date 180 days
after the date of this prospectus, except with the prior written consent of
Goldman Sachs. This agreement does not apply to any existing employee benefit
plan. See "Shares Eligible for Future Sale" for a discussion of certain transfer
restrictions.
At the request of Red Hat, the Underwriters have reserved up to shares
of common stock for sale, at the initial public offering price, to directors,
officers, employees and friends of Red Hat through a directed share program.
There can be no assurance that any of the reserved shares will be so purchased.
The number of shares of common stock available for sale to the general public in
the public offering will be reduced to the extent these persons purchase these
reserved shares. Any reserved shares not so purchased will be offered to the
general public on the same basis as the other shares offered hereby.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in
U-1
<PAGE>
December 1998. Since December 1998, Thomas Weisel Partners has been named as a
lead or co-manager of 37 filed public offerings of equity securities, of which
17 have been completed, and has acted as a syndicate member in an additional 10
public offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with us
pursuant to the underwriting agreement entered into in connection with this
offering.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Red Hat and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Red Hat's historical performance, estimates of the business
potential and earnings prospects of Red Hat, an assessment of Red Hat's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
Red Hat has applied to list the common stock on the Nasdaq National Market
under the symbol "RHAT".
In connection with this offering, the Underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The Underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Red Hat estimates that its share of the total expenses of the offering,
excluding underwriting commissions, will be approximately $ .
Red Hat has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
U-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 2
Risk Factors.............................................................. 7
Special Note Regarding Forward-Looking Statements......................... 18
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 23
Business.................................................................. 36
Management................................................................ 51
Certain Transactions...................................................... 58
Principal Stockholders.................................................... 59
Description of Capital Stock.............................................. 60
Shares Eligible for Future Sale........................................... 63
Legal Matters............................................................. 65
Experts................................................................... 65
Where You Can Find More Information....................................... 65
Index to Financial Statements............................................. F-1
Underwriting.............................................................. U-1
</TABLE>
------------------------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealer's obligation to deliver a prospectus when
acting as an underwriter and with respect to an unsold allotment or
subscription.
Shares
Red Hat
Common Stock
------------------
[LOGO]
------------------
GOLDMAN, SACHS & CO.
THOMAS WEISEL PARTNERS LLC
E*TRADE SECURITIES, INC.
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses payable in connection with the sale of the common stock
in this offering are as follows:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 26,855
NASD filing fee................................................... 10,160
Nasdaq National Market listing fee................................ 95,000
Printing and engraving expenses...................................
Legal fees and expenses...........................................
Accounting fees and expenses......................................
Transfer agent and registrar fees and expenses....................
Directors' and officers' insurance................................
Miscellaneous.....................................................
---------
Total....................................................... $
---------
---------
</TABLE>
The registrant will bear all of the expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law, the registrant's charter and by-laws
provide for indemnification of the registrant's directors and officers for
liabilities and expenses that they may incur in such capacities. In general,
directors and officers are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the registrant, and with respect to any criminal action or
proceeding, actions that the indemnitee had no reasonable cause to believe were
unlawful. Reference is made to the registrant's corporate charter and by-laws
filed as Exhibits 3.1 and 3.2 hereto, respectively.
The Underwriting Agreement provides that the underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the registrant against certain liabilities, including liabilities
under the Securities Act. Reference is made to the form of underwriting
agreement filed as Exhibit 1.1 hereto.
The registrant intends to apply for a directors' and officers' insurance
policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, the
registrant has sold the following securities that were not registered under the
Securities Act:
On August 15, 1997, the registrant sold an aggregate of 6,801,400 shares of
its Series A convertible preferred stock to one investor at a price of $.294057
per share.
On September 29, 1998, the registrant sold an aggregate of 8,116,550 shares
of its Series B convertible preferred stock to five investors at a price of
$.857 per share.
During the period between February 25, 1999 and April 1, 1999, the
registrant sold an aggregate of 2,054,776 shares of its Series C convertible
preferred stock to ten investors at a price of $3.141 per share.
On October 10, 1995, the registrant issued warrants to certain employees
exercisable for an aggregate of 3,740,400 shares of common stock with an
exercise price per share of $.0001.
II-1
<PAGE>
Since September 4, 1998, the registrant has granted options to purchase an
aggregate of 7,338,088 shares of common stock under the 1998 Stock Option Plan,
as amended, exercisable at a weighted average price of $1.23 per share.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon the exemption provided by Section 4(2) of the
Securities Act for transactions not involving a public offering and/or Rule 701
under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT INDEX
- ----------- -----------------------------------------------------------------------------------
<C> <S>
1.1+ Form of Underwriting Agreement
3.1 Second Amended and Restated Certificate of Incorporation, as amended, of the
registrant (currently in effect)
3.2 Form of Third Amended and Restated Certificate of Incorporation of the registrant
to be filed upon the effectiveness of the registration statement
3.3+ Form of Certificate of Amendment to the Third Amended and Restated Certificate of
Incorporation to be filed upon the closing of the offering
3.4 By-laws of the registrant
3.5 Form of Amended and Restated By-laws to take effect as of the effective date of the
registration statement
4.1+ Specimen certificate representing the common stock
5.1+ Opinion of Testa, Hurwitz & Thibeault, LLP
10.1 1998 Stock Option Plan, as amended
10.2 1999 Stock Option and Incentive Plan
10.3 1999 Employee Stock Purchase Plan
10.4 Warrant Agreement by and among the registrant, Robert F. Young, Nancy R. Young,
Marc Ewing and Erik Troan, dated as of September 29, 1998, as amended
10.5 Warrant Agreement, by and among the registrant, Robert F. Young, Nancy R. Young,
Marc Ewing and Donald Barnes, dated as of September 29, 1998, as amended
10.6 Warrant Agreement by and among the registrant, Robert F. Young, Nancy R. Young,
Marc Ewing and Lisa Sullivan, dated as of September 29, 1998, as amended
10.7 First Amended and Restated Investor Rights Agreement by and among the registrant
and the Investors and Founders listed therein, dated as of February 25, 1999, as
amended
10.8 Office Lease by and between the registrant and CMD Properties, Inc., dated November
13, 1998
10.9 Non-Qualified Stock Option Agreement by and between the registrant and Matthew
Szulik
10.10 Incentive Stock Option Agreement by and between the registrant and Matthew Szulik
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT INDEX
- ----------- -----------------------------------------------------------------------------------
<C> <S>
10.11 Non-Qualified Stock Option Agreement by and between the registrant and Timothy
Buckley
10.12 Incentive Stock Option Agreement by and between the registrant and Timothy Buckley
10.13 GNU General Public License
10.14* Distribution Agreement by and between the registrant and Ingram Micro Inc. dated as
of October 15, 1998, as amended
10.15* Red Hat Product Distribution Agreement by and between the registrant and Frank
Kasper Associates, Inc., dated as of April 30, 1999
10.16* Software Distribution Agreement between Tech Data Product Management, Inc. and the
registrant, dated as of April 29, 1999
10.17* Agreement by and between the registrant and Building Number Three, Ltd., dated as
of June 10, 1998
10.18* Independent Contractor Agreement by and between the registrant and Ingo Molnar,
dated as of August 18, 1998
10.19* Software License and Shipment Agreement by and among the registrant, Dell Products
L.P. and Dell Computer Corporation, dated as of February 25, 1999
23.1 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Confidential materials omitted and filed separately with the Securities and
Exchange Commission.
+ To be filed by amendment.
(B) FINANCIAL STATEMENTS SCHEDULES:
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, the required information is disclosed in the notes to the
financial statements or the schedules are inapplicable, and therefore have been
omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has
II-3
<PAGE>
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The registrant hereby undertakes (1) to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser; (2) that for purposes of determining
any liability under the Securities Act, the information omitted from the form of
prospectus filed as part of a registration statement in reliance upon Rule 430A
and contained in the form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective; and (3)
that for the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Durham, North Carolina on June 4,
1999.
RED HAT, INC.
BY: /S/ ROBERT F. YOUNG
-----------------------------------------
Robert F. Young
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY AND SIGNATURES
The undersigned officers and directors of Red Hat, Inc. hereby constitute
and appoint Robert F. Young and Matthew Szulik, and each of them singly, with
full power of substitution, our true and lawful attorneys-in-fact and agents to
take any actions to enable Red Hat, Inc. to comply with the Securities Act, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this registration statement, including the power
and authority to sign for us in our names in the capacities indicated below any
and all amendments to this registration statement and any other registration
statement filed pursuant to the provisions of Rule 462 under the Securities Act.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman and Chief
/s/ ROBERT F. YOUNG Executive Officer
- ------------------------------ (principal executive June 4, 1999
Robert F. Young officer)
/s/ MANOJ GEORGE Chief Financial Officer
- ------------------------------ (principal financial and June 4, 1999
Manoj George accounting officer)
/s/ MARC EWING Director
- ------------------------------ June 4, 1999
Marc Ewing
/s/ FRANK BATTEN, JR. Director
- ------------------------------ June 4, 1999
Frank Batten, Jr.
/s/ WILLIAM S. KAISER Director
- ------------------------------ June 4, 1999
William S. Kaiser
/s/ MATTHEW SZULIK Director
- ------------------------------ June 4, 1999
Matthew Szulik
/s/ ERIC HAHN Director
- ------------------------------ June 4, 1999
Eric Hahn
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT INDEX
- ----------- -----------------------------------------------------------------------------------
<C> <S>
1.1+ Form of Underwriting Agreement
3.1 Second Amended and Restated Certificate of Incorporation, as amended, of the
registrant (currently in effect)
3.2 Form of Third Amended and Restated Certificate of Incorporation of the registrant
to be filed upon the effectiveness of the registration statement
3.3+ Form of Certificate of Amendment to the Third Amended and Restated Certificate of
Incorporation to be filed upon the closing of the offering
3.4 By-laws of the registrant
3.5 Form of Amended and Restated By-laws to take effect as of the effective date of the
registration statement
4.1+ Specimen certificate representing the common stock
5.1+ Opinion of Testa, Hurwitz & Thibeault, LLP
10.1 1998 Stock Option Plan, as amended
10.2 1999 Stock Option and Incentive Plan
10.3 1999 Employee Stock Purchase Plan
10.4 Warrant Agreement by and among the registrant, Robert F. Young, Nancy R. Young,
Marc Ewing and Erik Troan, dated as of September 29, 1998, as amended
10.5 Warrant Agreement, by and among the registrant, Robert F. Young, Nancy R. Young,
Marc Ewing and Donald Barnes, dated as of September 29, 1998, as amended
10.6 Warrant Agreement by and among the registrant, Robert F. Young, Nancy R. Young,
Marc Ewing and Lisa Sullivan, dated as of September 29, 1998, as amended
10.7 First Amended and Restated Investor Rights Agreement by and among the registrant
and the Investors and Founders listed therein, dated as of February 25, 1999, as
amended
10.8 Office Lease by and between the registrant and CMD Properties, Inc., dated November
13, 1998
10.9 Non-Qualified Stock Option Agreement by and between the registrant and Matthew
Szulik
10.10 Incentive Stock Option Agreement by and between the registrant and Matthew Szulik
10.11 Non-Qualified Stock Option Agreement by and between the registrant and Timothy
Buckley
10.12 Incentive Stock Option Agreement by and between the registrant and Timothy Buckley
10.13 GNU General Public License
10.14* Distribution Agreement by and between the registrant and Ingram Micro Inc. dated as
of October 15, 1998, as amended
10.15* Red Hat Product Distribution Agreement by and between the registrant and Frank
Kasper Associates, Inc., dated as of April 30, 1999
10.16* Software Distribution Agreement between Tech Data Product Management, Inc. and the
registrant, dated as of April 29, 1999
10.17* Agreement by and between the registrant and Building Number Three, Ltd., dated as
of June 10, 1998
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT INDEX
- ----------- -----------------------------------------------------------------------------------
<C> <S>
10.18* Independent Contractor Agreement by and between the registrant and Ingo Molnar,
dated as of August 18, 1998
10.19* Software License and Shipment Agreement by and among the registrant, Dell Products
L.P. and Dell Computer Corporation, dated as of February 25, 1999
23.1 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Confidential materials omitted and filed separately with the Securities and
Exchange Commission.
+ To be filed by amendment.
<PAGE>
Exhibit 3.1
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RED HAT SOFTWARE, INC.
--------------------------------------------
Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware
--------------------------------------------
Red Hat Software, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify as follows:
1. The name of the Corporation is Red Hat Software, Inc. The Corporation was
originally incorporated under such name. The original certificate of
incorporation of the Corporation was filed with the office of the Secretary of
State of Delaware on September 17, 1998. An amended and restated certificate of
incorporation of the Corporation was filed with the office of the Secretary of
State of Delaware on September 29, 1998.
2. This Second Amended and Restated Certificate of Incorporation was recommended
to the stockholders for approval as being advisable and in the best interests of
the Corporation by written action of the Board of Directors on February 24,
1999.
3. That in lieu of a meeting and vote of stockholders, consents in writing have
been signed by holders of outstanding stock having not less than the minimum
number of votes that is necessary to consent to this amendment and restatement,
and, if required, prompt notice of such action shall be given in accordance with
the provisions of Section 228 of the General Corporation Law of the State of
Delaware.
4. This Second Amended and Restated Certificate of Incorporation restates and
integrates and further amends the certificate of incorporation of the
Corporation, as heretofore amended or supplemented.
The text of the Corporation's amended and restated certificate of
incorporation is amended and restated in its entirety as follows
FIRST. That the name of the Corporation is Red Hat Software, Inc. (the
"Corporation").
SECOND. The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, New Castle
County, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
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THIRD. The nature of the business or purposes to be conducted or
promoted by the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
FOURTH. The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is 50,769,358 shares,
consisting of 34,053,479 shares of Common Stock with a par value of $.0001 per
share (the "Common Stock"), and 16,715,879 shares of Preferred Stock with a par
value of $.0001 per share (the "Preferred Stock"), of which 6,801,400 shares are
designated as Series A Convertible Preferred Stock, 8,116,550 shares are
designated as Series B Convertible Preferred Stock and 1,797,929 shares are
designated as Series C Convertible Preferred Stock
A description of the respective classes of stock and a statement of the
designations, preferences, voting powers (or no voting powers), relative,
participating, optional or other special rights and privileges and the
qualifications, limitations and restrictions of the Preferred Stock and the
Common Stock are as follows:
COMMON STOCK
1. General. The voting, dividend and liquidation rights of the holders
of the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock (and any other class or series of capital stock of the
Corporation) at the time outstanding having prior rights as to voting, dividends
or liquidation.
2. Voting. The holders of Common Stock are entitled to one vote for
each share held at all meetings of stockholders (and written actions in lieu of
meetings) with respect to any and all matters presented to the stockholders of
the Corporation for their action or consideration. Except as provided by law,
holders of Common Stock shall vote together as a single class on all matters
with the holders of Preferred Stock (and any other class or series of voting
capital stock of the Corporation).
3. Dividends. The holders of the Common Stock shall be entitled to
receive, when and as declared by the Board of Directors, out of any assets of
the Corporation legally available therefor, such dividends as may be declared
from time to time by the Board of Directors, subject to any preferential rights
of any then outstanding Preferred Stock (and any other class or series of
capital stock of the Corporation which may have preferential rights).
4. Liquidation. Upon the dissolution, liquidation or winding up of the
Corporation, holders of Common Stock will be entitled to receive the assets of
the Corporation subject to any preferential rights of any then outstanding
Preferred Stock or other then outstanding stock ranking on liquidation senior to
or on a parity with the Common Stock.
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SERIES A, SERIES B AND SERIES C CONVERTIBLE PREFERRED STOCK
1. Dividends. The Corporation shall not declare or pay any dividends on
shares of Common Stock (except for dividends payable solely in the form of
Common Stock) until the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock then outstanding shall have first
received, or simultaneously receive, a distribution on each outstanding share of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
in an amount at least equal to the product of (i) the per share amount, if any,
of the dividends to be declared, paid or set aside for the Common Stock,
multiplied by (ii) the number of whole shares of Common Stock into which such
share of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock is then convertible. The Corporation shall not declare or pay
any dividends on any shares of Preferred Stock unless, at the same time, a
dividend in a like amount per share shall be paid upon, or declared and set
apart for, all shares of Preferred Stock then outstanding.
2. Liquidation, Dissolution or Winding Up; Certain Mergers,
Consolidations and Asset Sales.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Corporation
available for distribution to its stockholders, before any payment shall be made
to the holders of Common Stock or any other class or series of stock ranking on
liquidation junior to the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock (such Common Stock and other stock being collectively
referred to as "Junior Stock") by reason of their ownership thereof, an amount
equal to the greater of (i) $.343 per share, in the case of Series A Preferred
Stock, $.996 per share, in the case of Series B Preferred Stock, and $3.893 per
share in the case of the Series C Preferred Stock (each subject to appropriate
adjustment in the event of any stock dividend, stock split, combination or other
similar recapitalization affecting such shares), plus any dividends declared but
unpaid thereon, or (ii) such amount per share as would have been payable had
each such share been converted into Common Stock pursuant to Section 4
immediately prior to such liquidation, dissolution or winding up. If upon any
such liquidation, dissolution or winding up of the Corporation the remaining
assets of the Corporation available for distribution to its stockholders shall
be insufficient to pay the holders of shares of Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock the full amount to which they
shall be entitled, the holders of shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock and any class or series of stock
ranking on liquidation on a parity with the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall share ratably in any
distribution of the remaining assets and funds of the Corporation in proportion
to the respective amounts which would otherwise be payable pursuant to clause
(i) above in respect of the shares held by them upon such distribution. The
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
of the Corporation shall be deemed to rank on a parity with each other with
respect to the liquidation, dissolution or winding-up of the Corporation.
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(b) After the payment of all preferential amounts required to
be paid to the holders of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock and any other class or series of stock of the
Corporation ranking on liquidation on a parity with the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock, upon the
dissolution, liquidation or winding up of the Corporation, the holders of shares
of Junior Stock then outstanding shall be entitled to receive the remaining
assets and funds of the Corporation available for distribution to its
stockholders.
(c) Any (i) merger or consolidation of the Corporation or a
subsidiary of the Corporation into or with another corporation (except one in
which the holders of capital stock of the Corporation immediately prior to such
merger or consolidation continue to hold at least 50% by voting power of the
capital stock of the Corporation or the surviving or acquiring corporation),
(ii) acquisition, in one transaction or a series of related transactions by a
person or group of affiliated persons, of 50% or more of the outstanding voting
stock of the Company or (iii) sale of all or substantially all the assets of the
Corporation, shall be deemed to be a liquidation of the Corporation for purposes
of this Section 2 unless the holders of a majority of the then outstanding
Preferred Stock elect in writing not to treat such merger, consolidation or sale
as a liquidation, and any agreement or plan of merger or consolidation to which
the Company is a party shall provide that the consideration payable to the
stockholders of the Corporation (in the case of a merger or consolidation), or
consideration payable to the Corporation, together with all other available
assets of the Corporation (in the case of an asset sale), shall be distributed
to the holders of capital stock of the Corporation in accordance with
Subsections 2(a) and 2(b) above. The amount deemed distributed to the holders of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
upon any such merger, consolidation or sale shall be the cash or the value of
the property, rights or securities distributed to such holders by the
Corporation or the acquiring person, firm or other entity. The value of such
property, rights or other securities shall be determined in good faith by the
Board of Directors of the Corporation.
3. Voting.
(a) Each holder of outstanding shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall be entitled
to the number of votes equal to the number of whole shares of Common Stock into
which the shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock held by such holder are then convertible (as adjusted
from time to time pursuant to Section 4 hereof), at each meeting of stockholders
of the Corporation (and written actions of stockholders in lieu of meetings)
with respect to any and all matters presented to the stockholders of the
Corporation for their action or consideration. Except as provided by law, by the
provisions of Subsection 3(b) below or by the provisions establishing any other
series of Preferred Stock, holders of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and any other outstanding series of
Preferred Stock shall vote together with the holders of Common Stock as a single
class.
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(b) The Corporation shall not amend, alter or repeal the
preferences, special rights or other powers of the Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock so as to affect adversely
the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock, without the written consent or affirmative vote of the holders of a
majority of the then outstanding shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, as the case may be, given in
writing or by vote at a meeting, consenting or voting (as the case may be)
separately as a class. For this purpose, without limiting the generality of the
foregoing, the authorization of any shares of capital stock with preference or
priority over the Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock as to the right to receive either dividends or amounts
distributable upon liquidation, dissolution or winding up of the Corporation
shall be deemed to affect adversely the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, and the authorization of any shares
of capital stock on a parity with Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock as to the right to receive either dividends
or amounts distributable upon liquidation, dissolution or winding up of the
Corporation shall not be deemed to affect adversely the Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock.
4. Optional Conversion. The holders of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
(a) (i) Series A Right to Convert. Each share of Series A
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time and from time to time, and without the payment of additional
consideration by the holder thereof, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing $.343 by the
Series A Conversion Price (as defined below) in effect at the time of
conversion. The "Series A Conversion Price" shall initially be $.343. Such
initial Series A Conversion Price, and the rate at which shares of Series A
Preferred Stock may be converted into shares of Common Stock, shall be subject
to adjustment as provided below.
(ii) Series B Right to Convert. Each share of Series
B Preferred Stock shall be convertible, at the option of the holder thereof, at
any time and from time to time, and without the payment of additional
consideration by the holder thereof, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing $.996 by the
Series B Conversion Price (as defined below) in effect at the time of
conversion. The "Series B Conversion Price" shall initially be $.996. Such
initial Series B Conversion Price, and the rate at which shares of Series B
Preferred Stock may be converted into shares of Common Stock, shall be subject
to adjustment as provided below.
(iii) Series C Right to Convert. Each share of Series
C Preferred Stock shall be convertible, at the option of the holder
thereof, at any time and from time to time, and without the payment of
additional consideration by the holder thereof, into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing $3.893 by
the Series C Conversion Price (as defined below) in effect at the time of
conversion. The "Series C Conversion Price" shall initially be $3.893. Such
initial Series C Conversion Price, and the rate
<PAGE>
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at which shares of Series C Preferred Stock may be converted into shares of
Common Stock, shall be subject to adjustment as provided below.
(iv) In the event of a notice of redemption of any
shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock pursuant to Section 6 hereof, the Conversion Rights of the
shares designated for redemption shall terminate at the close of business on the
fifth full day preceding the date fixed for redemption, unless the redemption
price is not paid when due, in which case the Conversion Rights for such shares
shall continue until such price is paid in full. In the event of a liquidation
of the Corporation, the Conversion Rights shall terminate at the close of
business on the first full day preceding the date fixed for the payment of any
amounts distributable on liquidation to the holders of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock.
(b) Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock. In lieu of any fractional shares to
which the holder would otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the then effective Series A Conversion
Price, Series B Conversion Price or Series C Conversion Price.
(c) Mechanics of Conversion.
(i) In order for a holder of Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock to convert its
shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock into shares of Common Stock, such holder shall surrender the
certificate or certificates for such shares of Preferred Stock, at the office of
the transfer agent for the Preferred Stock (or at the principal office of the
Corporation if the Corporation serves as its own transfer agent), together with
written notice (a "Conversion Notice") that such holder elects to convert all or
any number of the shares of the Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock represented by such certificate or
certificates. The Conversion Notice shall state such holder's name or the names
of the nominees in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued. If required by the Corporation,
certificates surrendered for conversion shall be endorsed or accompanied by a
written instrument or instruments of transfer, in form satisfactory to the
Corporation, duly executed by the registered holder or his or its attorney duly
authorized in writing. The date of receipt of such certificates and Conversion
Notice by the transfer agent (or by the Corporation if the Corporation serves as
its own transfer agent) shall be the conversion date ("Conversion Date"). The
Corporation shall, as soon as practicable after the Conversion Date, issue and
deliver at such office to such holder of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, or to his or its nominees, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled, together with cash in lieu of any fraction of a
share.
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(ii) The Corporation shall at all times when the
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock shall be outstanding, reserve and keep available out of its authorized but
unissued stock, for the purpose of effecting the conversion of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, such
number of its duly authorized shares of Common Stock as shall from time to time
be sufficient to effect the conversion of all outstanding Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock. Before taking any
action which would cause an adjustment reducing the Series A Conversion Price,
Series B Conversion Price or Series C Conversion Price below the then par value
of the shares of Common Stock issuable upon conversion of the Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock, the Corporation
will take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Corporation may validly and legally issue fully paid
and nonassessable shares of Common Stock at such adjusted Series A Conversion
Price, Series B Conversion Price or Series C Conversion Price.
(iii) Upon any such conversion, no adjustment to the
Series A Conversion Price, Series B Conversion Price or Series C
Conversion Price shall be made for any declared but unpaid dividends on the
Series A Preferred Stock, Series B Preferred Stock or Series C Conversion Price,
as applicable, surrendered for conversion or on the Common Stock delivered upon
such conversion.
(iv) All shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights, if
any, to receive notices and to vote, shall immediately cease and terminate on
the Conversion Date, except only the right of the holders thereof to receive
shares of Common Stock in exchange therefor and payment of any dividends
declared but unpaid thereon. Any shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock so converted shall be retired and
cancelled and shall not be reissued, and the Corporation (without the need for
stockholder action) may from time to time take such appropriate action as may be
necessary to reduce the authorized number of shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock accordingly.
(v) The Corporation shall pay any and all issue and
other taxes that may be payable in respect of any issuance or delivery of
shares of Common Stock upon conversion of shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock pursuant to this Section 4.
The Corporation shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of
shares of Common Stock in a name other than that in which the shares of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock so
converted were registered, and no such issuance or delivery shall be made unless
and until the person or entity requesting such issuance has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid.
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(d) Adjustments to Series A Conversion Price, Series B
Conversion Price or Series C Conversion Price for Diluting Issues:
(i) Special Definitions. For purposes of this
Subsection 4(d), the following definitions shall apply:
(A) "Option" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire Common Stock or
Convertible Securities.
(B) "Series A Original Issue Date" shall
mean the date on which the first share of Series A Preferred Stock was
issued.
(C) "Series B Original Issue Date" shall
mean the date on which the first share of Series B Preferred Stock was
issued.
(D) "Series C Original Issue Date" shall
mean the date on which the first share of Series C Preferred Stock was
issued.
(E) "Convertible Securities" shall mean any
evidences of indebtedness, shares or other securities directly or
indirectly convertible into or exchangeable for Common Stock.
(F) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or, pursuant to Subsection
4(d)(iii) below, deemed to be issued) by the Corporation after the Series C
Original Issue Date, other than:
(I) shares of Common Stock issued or
issuable upon conversion of any shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock;
(II) shares of Common Stock issued
or issuable upon conversion of any Convertible Securities (other than shares of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock)
or exercise of any warrants outstanding on the Series C Original Issue Date;
(III) shares of Common Stock issued
or issuable as a dividend or distribution on Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock;
(IV) shares of Common Stock issued
or issuable by reason of a dividend, stock split, split-up or other distribution
on shares of Common Stock that is covered by Subsection 4(e) or 4(f) below;
(V) up to 3,717,400 shares of Common
Stock (including issuances prior to the Series C Original Issue Date) (subject
to appropriate adjustment in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares), plus such
additional number of shares of Common Stock as may be approved by
<PAGE>
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the Board of Directors of the Corporation and by a majority of the members of
the Board of Directors who are not employees of the Company or any of its
subsidiaries, issued or issuable to employees or directors of, or consultants
to, the Corporation pursuant to employer stock option plans;
(VI) securities issued pursuant to
any equipment leasing arrangement or debt financing from a bank or similar
financial institution approved by the Board of Directors of the Corporation and
by a majority of the members of the Board of Directors who are not employees of
the Corporation or any of its subsidiaries; or
(VII) securities issued in
connection with strategic transactions approved by the Board of Directors of the
Corporation and by a majority of the members of the Board of Directors who are
not employees of the Corporation or any of its subsidiaries involving the
Company and other entities, including (a) joint ventures, manufacturing,
marketing or distribution arrangements or (b) technology transfer or development
arrangements.
(ii) No Adjustment of Conversion Price.
(A) No adjustment in the number of shares of
Common Stock into which the Series A Preferred Stock is convertible shall be
made, by adjustment in the applicable Series A Conversion Price thereof: (a)
unless the consideration per share (determined pursuant to Subsection 4(d)(v))
for an Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the applicable Series A Conversion Price in effect
immediately prior to the issue of such Additional Shares, or (b) if prior to
such issuance, the Corporation receives written notice from the holders of at
least 66-2/3% of the then outstanding shares of Series A Preferred Stock
agreeing that no such adjustment shall be made as the result of the issuance of
Additional Shares of Common Stock.
(B) No adjustment in the number of shares of
Common Stock into which the Series B Preferred Stock is convertible shall be
made, by adjustment in the applicable Series B Conversion Price thereof: (a)
unless the consideration per share (determined pursuant to Subsection 4(d)(v))
for an Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the applicable Series B Conversion Price in effect
immediately prior to the issue of such Additional Shares, or (b) if prior to
such issuance, the Corporation receives written notice from the holders of at
least 66-2/3% of the then outstanding shares of Series B Preferred Stock
agreeing that no such adjustment shall be made as the result of the issuance of
Additional Shares of Common Stock.
(C) No adjustment in the number of shares of
Common Stock into which the Series C Preferred Stock is convertible shall be
made, by adjustment in the applicable Series C Conversion Price thereof: (a)
unless the consideration per share (determined pursuant to Subsection 4(d)(v))
for an Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the applicable Series C Conversion Price in effect
immediately prior to the issue of such Additional Shares, or (b) if prior to
such issuance, the Corporation receives written notice from the holders of at
least 66-2/3% of the then outstanding
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shares of Series C Preferred Stock agreeing that no such adjustment shall be
made as the result of the issuance of Additional Shares of Common Stock.
(iii) Issue of Securities Deemed Issue of Additional
Shares of Common Stock.
If the Corporation at any time or from time to time after the Series A
Original Issue Date, Series B Original Issue Date or Series C Original Issue
Date, as applicable, shall issue any Options (excluding Options covered by
Subsection 4(d)(i)(F)(IV) above) or Convertible Securities or shall fix a record
date for the determination of holders of any class of securities entitled to
receive any such Options or Convertible Securities, then the maximum number of
shares of Common Stock (as set forth in the instrument relating thereto without
regard to any provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
issued as of the time of such issue or, in case such a record date shall have
been fixed, as of the close of business on such record date, provided that (x)
for the purposes of adjusting the Series A Conversion Price, Additional Shares
of Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Subsection 4(d)(v) hereof) of such Additional
Shares of Common Stock would be less than the applicable Series A Conversion
Price in effect on the date of and immediately prior to such issue, or such
record date, as the case may be, (y) for the purposes of adjusting the Series B
Conversion Price, Additional Shares of Common Stock shall not be deemed to have
been issued unless the consideration per share (determined pursuant to
Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be
less than the applicable Series B Conversion Price in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
(z) for the purposes of adjusting the Series C Conversion Price, Additional
Shares of Common Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to Subsection 4(d)(v) hereof) of
such Additional Shares of Common Stock would be less than the applicable Series
C Conversion Price in effect on the date of and immediately prior to such issue,
or such record date, as the case may be, and provided further that in any such
case in which Additional Shares of Common Stock are deemed to be issued:
(A) No further adjustment in the Series A
Conversion Price, Series B Conversion Price or Series C Conversion Price shall
be made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(B) If such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase or decrease in the consideration payable to the Corporation, upon
the exercise, conversion or exchange thereof, the Series A Conversion Price,
Series B Conversion Price or Series C Conversion Price computed upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such increase
or decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities;
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(C) Upon the expiration or termination of
any such unexercised Option, the Series A Conversion Price, Series B Conversion
Price and Series C Conversion Price shall be readjusted, to the Series A
Conversion Price, Series B Conversion Price or Series C Conversion Price as
would have been in effect at the time of such expiration or termination had such
Option never been issued;
(D) In the event of any change in the number
of shares of Common Stock issuable upon the exercise, conversion or exchange of
any such Option or Convertible Security, including, but not limited to, a change
resulting from the anti-dilution provisions thereof, the Series A Conversion
Price, Series B Conversion Price and Series C Conversion Price then in effect
shall forthwith be readjusted to such Series A Conversion Price, Series B
Conversion Price or Series C Conversion Price as would have obtained had the
adjustment which was made upon the issuance of such Option or Convertible
Security not exercised or converted prior to such change been made upon the
basis of such change; and
(E) No readjustment pursuant to clauses (B)
or (D) above shall have the effect of increasing the Series A Conversion Price,
Series B Conversion Price or Series C Conversion Price to an amount which
exceeds the lower of (i) the Series A Conversion Price, Series B Conversion
Price or Series C Conversion Price on the original adjustment date, or (ii) the
Series A Conversion Price, Series B Conversion Price or Series C Conversion
Price, as the case may be, that would have resulted from any issuances of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date.
In the event the Corporation, after the Series A Original Issue Date,
the Series B Original Issue Date or the Series C Original Issue Date, amends the
terms of any such Options or Convertible Securities (whether such Options or
Convertible Securities were outstanding on such respective original issue date
or were issued after such respective original issue date), then such Options or
Convertible Securities, as so amended, shall be deemed to have been issued after
such respective original issue date and the provisions of this Subsection
4(d)(iii) shall apply.
(iv) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common Stock.
(A) In the event the Corporation shall at
any time after the Series A Original Issue Date issue Additional Shares of
Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Subsection 4(d)(iii), but excluding shares issued as a stock split
or combination as provided in Subsection 4(e) or upon a dividend or distribution
as provided in Subsection 4(f)), without consideration or for a consideration
per share less than the applicable Series A Conversion Price in effect
immediately prior to such issue, then and in such event, such Series A
Conversion Price shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying such Series A
Conversion Price by a fraction, (A) the numerator of which shall be (1) the
number of shares of Common Stock outstanding immediately prior to such issue
plus (2) the number of shares of Common Stock which the aggregate consideration
received or to be received by the Corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such
<PAGE>
-12-
Series A Conversion Price; and (B) the denominator of which shall be the number
of shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued; provided that, (i)
for the purpose of this Subsection 4(d)(iv), all shares of Common Stock issuable
upon exercise or conversion of vested Options or Convertible Securities
outstanding immediately prior to such issue shall be deemed to be outstanding,
and (ii) the number of shares of Common Stock deemed issuable upon exercise or
conversion of such outstanding vested Options and Convertible Securities shall
not give effect to any adjustments to the conversion price or conversion rate of
such Options or Convertible Securities resulting from the issuance of Additional
Shares of Common Stock that is the subject of this calculation.
(B) In the event the Corporation shall at
any time after the Series B Original Issue Date issue Additional Shares of
Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Subsection 4(d)(iii), but excluding shares issued as a stock split
or combination as provided in Subsection 4(e) or upon a dividend or distribution
as provided in Subsection 4(f)), without consideration or for a consideration
per share less than the applicable Series B Conversion Price in effect
immediately prior to such issue, then and in such event, such Series B
Conversion Price shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying such Series B
Conversion Price by a fraction, (A) the numerator of which shall be (1) the
number of shares of Common Stock outstanding immediately prior to such issue
plus (2) the number of shares of Common Stock which the aggregate consideration
received or to be received by the Corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Series B Conversion
Price; and (B) the denominator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issue plus the number of such
Additional Shares of Common Stock so issued; provided that, (i) for the purpose
of this Subsection 4(d)(iv), all shares of Common Stock issuable upon exercise
or conversion of vested Options or Convertible Securities outstanding
immediately prior to such issue shall be deemed to be outstanding, and (ii) the
number of shares of Common Stock deemed issuable upon exercise or conversion of
such outstanding vested Options and Convertible Securities shall not give effect
to any adjustments to the conversion price or conversion rate of such Options or
Convertible Securities resulting from the issuance of Additional Shares of
Common Stock that is the subject of this calculation.
(C) In the event the Corporation shall at
any time after the Series C Original Issue Date issue Additional Shares of
Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Subsection 4(d)(iii), but excluding shares issued as a stock split
or combination as provided in Subsection 4(e) or upon a dividend or distribution
as provided in Subsection 4(f)), without consideration or for a consideration
per share less than the applicable Series C Conversion Price in effect
immediately prior to such issue, then and in such event, such Series C
Conversion Price shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying such Series C
Conversion Price by a fraction, (A) the numerator of which shall be (1) the
number of shares of Common Stock outstanding immediately prior to such issue
plus (2) the number of shares of Common Stock which the aggregate consideration
received or to be received by the Corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such
<PAGE>
-13-
Series C Conversion Price; and (B) the denominator of which shall be the number
of shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued; provided that, (i)
for the purpose of this Subsection 4(d)(iv), all shares of Common Stock issuable
upon exercise or conversion of vested Options or Convertible Securities
outstanding immediately prior to such issue shall be deemed to be outstanding,
and (ii) the number of shares of Common Stock deemed issuable upon exercise or
conversion of such outstanding vested Options and Convertible Securities shall
not give effect to any adjustments to the conversion price or conversion rate of
such Options or Convertible Securities resulting from the issuance of Additional
Shares of Common Stock that is the subject of this calculation.
(v) Determination of Consideration. For purposes of
this Subsection 4(d), the consideration received by the Corporation for
the issue of any Additional Shares of Common Stock shall be computed as follows:
(A) Cash and Property: Such consideration
shall:
(I) insofar as it consists of cash,
be computed at the aggregate of cash received by the Corporation, excluding
amounts paid or payable for accrued interest;
(II) insofar as it consists of
property other than cash, be computed at the fair market value thereof at the
time of such issue, as determined in good faith by the Board of Directors; and
(III) in the event Additional Shares
of Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the proportion
of such consideration so received, computed as provided in clauses (I) and (II)
above, as determined in good faith by the Board of Directors.
(B) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional
Shares of Common Stock deemed to have been issued pursuant to Subsection
4(d)(iii), relating to Options and Convertible Securities, shall be determined
by dividing
(x) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of such
Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise of such Options
or the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein
<PAGE>
-14-
for a subsequent adjustment of such number) issuable upon the exercise of such
Options or the conversion or exchange of such Convertible Securities.
(vi) Multiple Closing Dates. In the event the
Corporation shall issue on more than one date Additional Shares of Common Stock
which are comprised of shares of the same series or class of Preferred Stock,
and such issuance dates occur within a period of no more than 120 days, then,
upon the final such issuance, the Series A Conversion Price, Series B Conversion
Price and Series C Conversion Price shall be adjusted to give effect to all such
issuances as if they occurred on the date of the final such issuance (and
without giving effect to any adjustments as a result of such prior issuances
within such period).
(e) Adjustment for Stock Splits and Combinations. If the
Corporation shall at any time or from time to time after the Series C Original
Issue Date effect a subdivision of the outstanding Common Stock, the Series A
Conversion Price, Series B Conversion Price and Series C Conversion Price then
in effect immediately before that subdivision each shall be proportionately
decreased. If the Corporation shall at any time or from time to time after the
Series C Original Issue Date combine the outstanding shares of Common Stock, the
Series A Conversion Price, Series B Conversion Price and Series C Conversion
Price then in effect immediately before the combination each shall be
proportionately increased. Any adjustment under this paragraph shall become
effective at the close of business on the date the subdivision or combination
becomes effective.
(f) Adjustment for Certain Dividends and Distributions. In the
event the Corporation at any time, or from time to time after the Series C
Original Issue Date, as the case may be, shall make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in additional shares of Common Stock,
then and in each such event the Series A Conversion Price, Series B Conversion
Price and Series C Conversion Price then in effect immediately before such event
each shall be decreased as of the time of such issuance or, in the event such a
record date shall have been fixed, as of the close of business on such record
date, by multiplying the Series A Conversion Price, Series B Conversion Price
and Series C Conversion Price, as the case may be, then in effect by a fraction:
(1) the numerator of which shall be the total number
of shares of Common Stock issued and outstanding immediately
prior to the time of such issuance or the close of business on
such record date, and
(2) the denominator of which shall be the total
number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of
Common Stock issuable in payment of such dividend or
distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Series A Conversion Price, Series B Conversion Price and Series C
Conversion Price each shall be recomputed accordingly as of the close of
business on such record date and thereafter the Series A Conversion Price,
<PAGE>
-15-
Series B Conversion Price and Series C Conversion Price, as the case may be,
shall be adjusted pursuant to this paragraph as of the time of actual payment of
such dividends or distributions; and provided further, however, that no such
adjustment shall be made if the holders of Series A Preferred Stock, the holders
of the Series B Preferred Stock and the holders of the Series C Preferred Stock
simultaneously receive (i) a dividend or other distribution of shares of Common
Stock in a number equal to the number of shares of Common Stock as they would
have received if all outstanding shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock had been converted into Common
Stock on the date of such event or (ii) a dividend or other distribution of
shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock which are convertible, as of the date of such event, into such
number of shares of Common Stock as is equal to the number of additional shares
of Common Stock being issued with respect to each share of Common Stock in such
dividend or distribution.
(g) Adjustments for Other Dividends and Distributions. In the
event the Corporation at any time or from time to time after the Series C
Original Issue Date shall make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of the Corporation other than shares of
Common Stock, then and in each such event provision shall be made so that the
holders of the Series A Preferred Stock, the holders of the Series B Preferred
Stock and the holders of Series C Preferred Stock shall receive upon conversion
thereof in addition to the number of shares of Common Stock receivable
thereupon, the amount of securities of the Corporation that they would have
received had the Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock, as the case may be, been converted into Common Stock on the
date of such event and had they thereafter, during the period from the date of
such event to and including the conversion date, retained such securities
receivable by them as aforesaid during such period, giving application to all
adjustments called for during such period under this paragraph with respect to
the rights of the holders of the Series A Preferred Stock, the rights of the
holders of the Series B Preferred Stock and the rights of the holders of the
Series C Preferred Stock, as the case may be; and provided further, however,
that no such adjustment shall be made if the holders of Series A Preferred
Stock, the holders of the Series B Preferred Stock and the holders of the Series
C Preferred Stock, as the case may be, simultaneously receive a dividend or
other distribution of such securities in an amount equal to the amount of such
securities as they would have received if all outstanding shares of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, as the
case may be, had been converted into Common Stock on the date of such event.
<PAGE>
-16-
(h) Adjustment for Reclassification, Exchange, or
Substitution. If the Common Stock issuable upon the conversion of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be
changed into the same or a different number of shares of any class or classes of
stock, whether by capital reorganization, reclassification, or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
above, or a reorganization, merger, consolidation, or sale of assets provided
for below), then and in each such event the holders of each such share of Series
A Preferred Stock, the holders of each such share of Series B Preferred Stock
and the holders of each such share of Series C Preferred Stock shall have the
right thereafter to convert such share into the kind and amount of shares of
stock and other securities and property receivable, upon such reorganization,
reclassification, or other change, by holders of the number of shares of Common
Stock into which such shares of Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock, as the case may be, might have been converted
immediately prior to such reorganization, reclassification, or change, all
subject to further adjustment as provided herein.
(i) Adjustment for Merger or Reorganization, etc. In case of
any consolidation or merger of the Corporation with or into another corporation
or the sale of all or substantially all of the assets of the Corporation to
another corporation (other than a consolidation, merger or sale which is covered
by Subsection 2(c)), each share of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock shall thereafter be convertible (or shall be
converted into a security which shall be convertible) into the kind and amount
of shares of stock or other securities or property to which a holder of the
number of shares of Common Stock of the Corporation deliverable upon conversion
of such Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock, as the case may be, would have been entitled upon such
consolidation, merger or sale; and, in such case, appropriate adjustment (as
determined in good faith by the Board of Directors) shall be made in the
application of the provisions in this Section 4 set forth with respect to the
rights and interest thereafter of the holders of the Series A Preferred Stock,
the holders of the Series B Preferred Stock and the holders of the Series C
Preferred Stock, to the end that the provisions set forth in this Section 4
(including provisions with respect to changes in and other adjustments of the
Series A Conversion Price, Series B Conversion Price and the Series C Conversion
Price) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the conversion of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock, as the case may be.
(j) No Impairment. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series A Preferred Stock, the holders of the Series B Preferred Stock and the
holders of the Series C Preferred Stock against impairment.
(k) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Series A Conversion Price, the Series B
Conversion Price or the Series C
<PAGE>
-17-
Conversion Price pursuant to this Section 4, the Corporation at its expense
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and furnish to each holder of Series A Preferred Stock, each holder
of the Series B Preferred Stock and each holder of the Series C Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
A Preferred Stock, any holder of Series B Preferred Stock or any holder of
Series C Preferred Stock, furnish or cause to be furnished to such holder a
similar certificate setting forth (i) such adjustments and readjustments, (ii)
the Series A Conversion Price, Series B Conversion Price or Series C Conversion
Price, as applicable, then in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which then would be received
upon the conversion of Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock, as the case may be.
(l) Notice of Record Date. In the event:
(i) that the Corporation declares a dividend (or
any other distribution) on its Common Stock
payable in Common Stock or other securities
of the Corporation;
(ii) that the Corporation subdivides or combines
its outstanding shares of Common Stock;
(iii) of any reclassification of the Common Stock
of the Corporation (other than a subdivision
or combination of its outstanding shares of
Common Stock or a stock dividend or stock
distribution thereon), or of any
consolidation or merger of the Corporation
into or with another corporation, or of the
sale of all or substantially all of the
assets of the Corporation; or
(iv) of the involuntary or voluntary dissolution,
liquidation or winding up of the
Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Preferred Stock, and shall use its best
efforts to cause to be mailed to the holders of the Series A Preferred Stock,
the holders of the Series B Preferred Stock and the holders of the Series C
Preferred Stock at their last addresses as shown on the records of the
Corporation or such transfer agent, prior to the dates specified in (A) and (B)
below, a notice stating
(A) the record date of such dividend,
distribution, subdivision or
combination, or, if a record is not
to be taken, the date as of which
the holders of Common Stock of
record to be entitled to such
dividend, distribution, subdivision
or combination are to be determined,
or
<PAGE>
-18-
(B) the date on which such
reclassification, consolidation,
merger, sale, dissolution,
liquidation or winding up is
expected to become effective, and
the date as of which it is expected
that holders of Common Stock of
record shall be entitled to exchange
their shares of Common Stock for
securities or other property
deliverable upon such
reclassification, consolidation,
merger, sale, dissolution or winding
up.
5. Mandatory Conversion.
(a) Upon (i) the closing of the sale of shares of Common
Stock, at a price to the public of at least $4.75 per share (subject to
appropriate adjustment for stock splits, stock dividends, combinations and other
similar recapitalizations affecting such shares), in a public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, resulting in at least $15,000,000 of net proceeds to the Corporation (a
"Qualified IPO") or (ii) the delivery to the Corporation of a Conversion Notice
or Notices covering at least 75% of the outstanding shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock (the "Mandatory
Conversion Date"), (A) all outstanding shares of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall automatically be
converted into shares of Common Stock, at the then effective applicable
conversion rate and (B) the number of authorized shares of Preferred Stock shall
be automatically reduced by the number of shares of Preferred Stock that had
been designated as Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock and all references to the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall be deleted and shall be of no
further force or effect.
(b) All holders of record of shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall be given
written notice of the Mandatory Conversion Date and the place designated for
mandatory conversion of all such shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock pursuant to this Section 5 . Such
notice need not be given in advance of the occurrence of the Mandatory
Conversion Date. Such notice shall be sent by first class or registered mail,
postage prepaid, to each record holder of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock at such holder's address last shown
on the records of the transfer agent for the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, as the case may be (or the records
of the Corporation, if it serves as its own transfer agent). Upon receipt of
such notice, each holder of shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock shall surrender his or its
certificate or certificates for all such shares to the Corporation at the place
designated in such notice, and shall thereafter receive certificates for the
number of shares of Common Stock to which such holder is entitled pursuant to
this Section 5. On the Mandatory Conversion Date, all rights with respect to the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
so converted, including the rights, if any, to receive notices and vote (other
than as a holder of Common Stock) will terminate, except only the rights of the
holders thereof, upon surrender of their certificate or certificates therefor,
to receive certificates for the number of shares of Common Stock into which such
Series A Preferred Stock, Series B
<PAGE>
-19-
Preferred Stock and Series C Preferred Stock has been converted, and payment of
any declared but unpaid dividends thereon. If so required by the Corporation,
certificates surrendered for conversion shall be endorsed or accompanied by
written instrument or instruments of transfer, in form satisfactory to the
Corporation, duly executed by the registered holder or by his or its attorney
duly authorized in writing. As soon as practicable after the Mandatory
Conversion Date and the surrender of the certificate or certificates for Series
A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, the
Corporation shall cause to be issued and delivered to such holder, or on his or
its written order, a certificate or certificates for the number of full shares
of Common Stock issuable on such conversion in accordance with the provisions
hereof and cash as provided in Subsection 4(b) in respect of any fraction of a
share of Common Stock otherwise issuable upon such conversion.
(c) All certificates evidencing shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock which are required
to be surrendered for conversion in accordance with the provisions hereof shall,
from and after the Mandatory Conversion Date, be deemed to have been retired and
cancelled and the shares of Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock represented thereby converted into Common Stock for
all purposes, notwithstanding the failure of the holder or holders thereof to
surrender such certificates on or prior to such date. Such converted Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock may not be
reissued, and the Corporation may thereafter take such appropriate action
(without the need for stockholder action) as may be necessary to reduce the
authorized number of shares of Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock, accordingly.
6. Redemption.
(a) The Corporation will, subject to the conditions set forth
below, on February 25, 2004 and on each of the first and second anniversaries
thereof (each such date being referred to hereinafter as a "Mandatory Redemption
Date"), upon receipt not less than 60 nor more than 120 days prior to the
applicable Mandatory Redemption Date of written request(s) for redemption from
holders of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock representing at least 66-2/3% of the aggregate number
of shares of Common Stock issuable upon conversion of the then outstanding
shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock (a "Redemption Request"), redeem from each holder of shares of
Series A Preferred Stock, Series B Preferred Stock and/or Series C Preferred
Stock that requests redemption pursuant to the Redemption Request or pursuant to
a subsequent election made in accordance with this Section 6(a) (a "Requesting
Holder"), at a price equal to $.343 per share, in the case of the Series A
Preferred Stock, $.996 per share, in the case of the Series B Preferred Stock,
and $3.893 in the case of the Series C Preferred Stock, plus in each case any
dividends declared but unpaid thereon, subject to appropriate adjustment in the
event of any stock dividend, stock split, combination or other similar
recapitalization affecting such shares (the "Mandatory Redemption Price"), the
number of shares of Series A Preferred Stock, Series B Preferred Stock and/or
Series C Preferred Stock requested to be redeemed by each Requesting Holder, but
not more than the following respective portions of the number of shares each
series of Preferred Stock held by such Requesting Holder on the applicable
Mandatory Redemption Date.
<PAGE>
-20-
<TABLE>
<CAPTION>
Maximum
Mandatory Portion of Shares of Series of
Redemption Date Preferred Stock To Be Redeemed
- --------------- ------------------------------
<S> <C>
February 25, 2004 33%
February 25, 2005 50%
February 25, 2006 All shares of Series
</TABLE>
The Corporation shall provide notice of its receipt of Redemption Request,
specifying the time, manner and place of redemption and the Mandatory Redemption
Price (a "Redemption Notice"), by first class or registered mail, postage
prepaid, to each holder of record of Series A Preferred Stock, to each holder of
Series B Preferred Stock and to each holder of Series C Preferred Stock at the
address for such holder last shown on the records of the transfer agent therefor
(or the records of the Corporation, if it serves as its own transfer agent), not
less than 45 days prior to the applicable Mandatory Redemption Date. Each holder
of Series A Preferred Stock, each holder of Series B Preferred Stock and each
holder of Series C Preferred Stock (other than a holder who has made the
Redemption Request) may elect to become a Requesting Holder on such Mandatory
Redemption Date by so indicating in a written notice mailed to the Company, by
first class or registered mail, postage prepaid, at least 30 days prior to the
applicable Mandatory Redemption Date. Except as provided in Section 6(b) below,
each Requesting Holder shall surrender to the Corporation on the applicable
Mandatory Redemption Date the certificate(s) representing the shares to be
redeemed on such date, in the manner and at the place designated in the
Redemption Notice. Thereupon, the Mandatory Redemption Price shall be paid to
the order of each such Requesting Holder and each certificate surrendered for
redemption shall be cancelled.
(b) If the funds of the Corporation legally available for
redemption of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock on any Mandatory Redemption Date are insufficient to redeem the
number of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock required under this Section 6 to be redeemed on such
date from Requesting Holders, those funds which are legally available will be
used to redeem the maximum possible number of each such shares ratably on the
basis of the number of each such series which would be redeemed on such date if
the funds of the Corporation legally available therefor had been sufficient to
redeem all shares required to be redeemed on such date. At any time thereafter
when additional funds of the Corporation become legally available for the
redemption of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock, such funds will be used, at the end of the next succeeding
fiscal quarter, to redeem the balance of the shares which the Corporation was
theretofore obligated to redeem, ratably on the basis set forth in the preceding
sentence.
(c) Unless there shall have been a default in payment of the
Mandatory Redemption Price, on the applicable Mandatory Redemption Date, all
rights of the holder of each share redeemed on such date as a stockholder of the
Corporation by reason of the ownership of such share will cease, except the
right to receive such Mandatory Redemption Price of such share, without
interest, upon presentation and surrender of the certificate representing such
share,
<PAGE>
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and such share will not from and after such Mandatory Redemption Date be deemed
to be outstanding.
(d) Any shares of Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock redeemed pursuant to this Section 6 will be
cancelled and will not under any circumstances be reissued, sold or transferred
and the Corporation may from time to time take such appropriate action as may be
necessary to reduce the authorized shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock accordingly.
7. Waiver. Any of the respective rights of the holders of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock set forth
herein may be waived by the affirmative vote of the holders of not less than
66-2/3% of the shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock, then outstanding, voting together as a separate class;
provided, however, that any waiver which does not affect all series of Preferred
Stock in the same manner may only be waived by the holders of not less than
66-2/3% of the shares of Preferred Stock so affected.
8. Negative Covenants. So long as at least 25% of the shares of Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
outstanding on the Series C Original Issue Date (such numbers to be
proportionately adjusted in the event of any stock splits, stock dividends,
recapitalizations or similar events) are outstanding, the Corporation shall not,
without the prior written consent of the holders of shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock representing not
less than 66-2/3% of the shares of Common Stock into which all outstanding
shares of such Preferred Stock are then convertible:
(a) merge or consolidate into or with another corporation
(except a merger or consolidation in which the holders of capital stock of the
Corporation immediately prior to such merger or consolidation continue to hold
at least 50% by voting power of the capital stock of the surviving or acquiring
corporation), or sell all or substantially all the assets of the Corporation;
(b) acquire (whether by merger, stock purchase, asset purchase
or otherwise) all or substantially all of the properties, assets or stock of any
other corporation or entity;
(c) amend the Certificate of Incorporation (including through
the filing of a Certificate of Designation) of the Corporation to authorize any
additional shares of Common Stock or Preferred Stock or to authorize or
designate any other class or series of stock in addition to Common Stock and
Preferred Stock;
(d) declare or pay any dividends or distributions on Common
Stock (other than dividends payable solely in Common Stock and repurchases of
Common Stock for a price equal to its original purchase price pursuant to
restricted stock agreements);
(e) voluntarily liquidate or dissolve;
(f) incur any indebtedness for borrowed money or purchase
money financing in excess of the greater of (i) $1.5 million or (ii) 25% of the
amount, if any, by which the
<PAGE>
-22-
Corporation's total assets exceeds its total liabilities (as reflected in the
Corporation's most recent balance sheet);
(g) guarantee directly or indirectly, any indebtedness or
obligations (except for guarantees of trade accounts of any subsidiary arising
in the ordinary course of business);
(h) make any loan or advance to any person or entity, except
advances and similar expenditures in the ordinary course of business or under
the terms of an employee stock or option plan approved by the Board of
Directors; or
(i) engage in any strategic transaction in which securities of
the Company are issued, including (a) joint ventures, manufacturing, marketing
or distribution agreements, or (b) technology transfer or development
agreements.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware:
A. The Board of Directors of the Corporation is expressly authorized to
adopt, amend or repeal the By-Laws of the Corporation.
B. Elections of directors need not be by written ballot unless the
By-Laws of the Corporation shall so provide.
C. The books of the Corporation may be kept at such place within or
without the State of Delaware as the By-Laws of the Corporation may
provide or as may be designated from time to time by the Board of
Directors of the Corporation.
SEVENTH. The Corporation eliminates the personal liability of each
member of its Board of Directors to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided, however,
that, to the extent provided by applicable law, the foregoing shall not
eliminate the liability of a director (i) for any breach of such director's duty
of loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of Title 8 of the Delaware Code or (iv) for any
transaction from which such director derived an improper personal benefit. No
amendment to or repeal of this provision shall apply to or have any effect on
the liability or alleged liability of any director for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
EIGHTH. The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon a stockholder
herein are granted subject to this reservation.
NINTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its
<PAGE>
-23-
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting
of the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-24-
IN WITNESS WHEREOF, the undersigned has executed, signed, and
acknowledged this Second Amended and Restated Certificate of Incorporation this
25th day of February, 1999.
RED HAT SOFTWARE, INC.
By: /s/ Robert F. Young
----------------------------------------
Name: Robert F. Young
Title: Chief Executive Officer
[SEAL]
Attest:
By: /s/ David Shumannfang
---------------------
David Shumannfang
Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RED HAT SOFTWARE, INC.
Red Hat Software, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
FIRST: That the Board of Directors of the Corporation, by unanimous
written consent, duly adopted resolutions setting forth a proposed amendment to
the Corporation's Second Amended and Restated Certificate of Incorporation,
declaring said amendment to be advisable and directing consideration thereof by
the stockholders of the Corporation. The resolution setting forth the proposed
amendment is as follows:
RESOLVED: That, subject to stockholder approval, the first
paragraph Article FOURTH of the Corporation's
Second Amended and Restated Certificate of
Incorporation be amended by deleting such
paragraph in its entirety and replacing it with
the following:
"FOURTH: The total number of shares of all classes
of capital stock which the Corporation shall have
authority to issue is 51,283,052 shares,
consisting of 34,310,326 shares of Common Stock
with a par value of $.0001 per share (the "Common
Stock") and 16,972,726 shares of Preferred Stock
with a par value of $.0001 per share, (the
"Preferred Stock"), of which 6,801,400 shares are
designated as Series A Convertible Preferred
Stock, 8,116,550 shares are designated as Series B
Convertible Preferred Stock and 2,054,776 shares
are designated as Series C Convertible Preferred
Stock."
SECOND: The Board of Directors of the Corporation directed that such
amendment be submitted to the stockholders of the Corporation for their consent
and approval and, in lieu of a meeting and vote of stockholders, the
stockholders have given written consent to said amendment in accordance with the
provisions of Section 228 of the DGCL.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Sections 242 and 228 of the DGCL.
<PAGE>
-2-
IN WITNESS WHEREOF, the undersigned has executed, signed and
acknowledged this Certificate of Amendment this 31st day of March, 1999.
RED HAT SOFTWARE, INC.
By: /s/ Robert F. Young
----------------------------------------
Name: Robert F. Young
Title: CEO
[SEAL]
Attest:
By: /s/ David Shumannfang
---------------------
David Shumannfang
Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RED HAT SOFTWARE, INC.
Red Hat Software, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
FIRST: That the Board of Directors of the Corporation, by unanimous
written consent, duly adopted resolutions setting forth a proposed
amendment to the Corporation's Second Amended and Restated Certificate of
Incorporation, as amended, declaring said amendment to be advisable and
directing consideration thereof by the stockholders of the Corporation. The
resolutions setting forth the proposed amendment are as follows:
RESOLVED: That, subject to stockholder approval, the Article FIRST
of the Corporation's Second Amended and Restated
Certificate of Incorporation, as amended, be amended by
deleting such paragraph in its entirety and replacing it
with the following:
"FIRST. That the name of the Corporation is Red Hat, Inc.
(the "Corporation")."
RESOLVED: That, subject to stockholder approval, the first
paragraph Article FOURTH of the Corporation's Second
Amended and Restated Certificate of Incorporation be
amended by deleting such paragraph in its entirety and
replacing it with the following:
"FOURTH: The total number of shares of all classes of
capital stock which the Corporation shall have authority
to issue is 52,283,052 shares, consisting of 35,310,326
shares of Common Stock with a par value of $.0001 per
share (the "Common Stock") and 16,972,726 shares of
Preferred Stock with par value of $.0001 per share (the
"Preferred Stock"), of which 6,801,400 shares are
designated as Series A Convertible Preferred Stock,
8,116,550 shares are designated as Series B Convertible
Preferred Stock and 2,054,776 shares are designated as
Series C Convertible Preferred Stock."
<PAGE>
-2-
SECOND: The Board of Directors of the Corporation directed that such
amendment be submitted to the stockholders of the Corporation for their
consent and approval and, in lieu of a meeting and vote of stockholders,
stockholders having not less than the minimum number of votes that is
necessary to consent to this amendment have given written consent to said
amendment in accordance with the provisions of Section 228 of the DGCL.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Sections 242 and 228 of the DGCL.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-3-
IN WITNESS WHEREOF, the undersigned has executed, signed and
acknowledged this Certificate of Amendment this 4th day of June, 1999.
RED HAT SOFTWARE, INC.
By: /s/ Robert F. Young
-----------------------
Name: Robert F. Young
Title: Chief Executive Officer
[SEAL]
Attest:
By: /s/ David Shumannfang
-------------------------
David Shumannfang
Secretary
<PAGE>
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RED HAT, INC.
--------------------------------------------
Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware
--------------------------------------------
Red Hat, Inc. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, does hereby certify
as follows:
1. The name of the Corporation is Red Hat, Inc. The Corporation was
originally incorporated under the name Red Hat Software, Inc. The original
certificate of incorporation of the Corporation was filed with the office of the
Secretary of State of Delaware on September 17, 1998. An amended and restated
certificate of incorporation of the Corporation was filed with the office of the
Secretary of State of Delaware on September 29, 1998. A Second Amended and
Restated Certificate was filed with the office of the Secretary of the State of
Delaware on February 24, 1999, and amended on March 31, 1999 and June 4, 1999.
2. This Third Amended and Restated Certificate of Incorporation was
recommended to the stockholders for approval as being advisable and in the best
interests of the Corporation by written action of the Board of Directors on June
2, 1999.
3. That in lieu of a meeting and vote of stockholders, consents in writing
have been signed by holders of outstanding stock having not less than the
minimum number of votes that is necessary to consent to this amendment and
restatement, and, if required, prompt notice of such action shall be given in
accordance with the provisions of Section 228 of the General Corporation Law of
the State of Delaware.
4. This Third Amended and Restated Certificate of Incorporation restates and
integrates and further amends the certificate of incorporation of the
Corporation, as heretofore amended or supplemented.
The text of the Corporation's second amended and restated certificate
of incorporation is amended and restated in its entirety as follows:
FIRST. The name of the Corporation is Red Hat, Inc.
SECOND. The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, Wilmington, County of New Castle,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
<PAGE>
-2-
THIRD. The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.
FOURTH. The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is 246,972,726 shares
consisting of 225,000,000 shares of Common Stock with a par value of $.0001 per
share (the "Common Stock") and 21,972,726 shares of Preferred Stock with a par
value of $.0001 per share, (the "Preferred Stock"), of which 5,000,000 are
undesignated, 6,801,400 shares are designated as Series A Convertible Preferred
Stock, 8,116,550 shares are designated as Series B Convertible Preferred Stock
and 2,054,776 shares are designated as Series C Convertible Preferred Stock.
A description of the respective classes of stock and a statement of the
designations, powers, preferences and rights, and the qualifications,
limitations and restrictions of the Preferred Stock and Common Stock are as
follows:
A. COMMON STOCK
1. GENERAL. All shares of Common Stock will be identical and will
entitle the holders thereof to the same rights, powers and privileges. The
rights, powers and privileges of the holders of the Common Stock are subject to
and qualified by the rights of holders of the Preferred Stock.
2. DIVIDENDS. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
3. DISSOLUTION, LIQUIDATION OR WINDING UP. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, each issued and outstanding share of Common
Stock shall entitle the holder thereof to receive an equal portion of the net
assets of the Corporation available for distribution to the holders of Common
Stock, subject to any preferential rights of any then outstanding Preferred
Stock.
4. VOTING RIGHTS. Except as otherwise required by law or this Third
Amended and Restated Certificate of Incorporation, each holder of Common Stock
shall have one vote in respect of each share of stock held of record by such
holder on the books of the Corporation for the election of directors and on all
matters submitted to a vote of stockholders of the Corporation. Except as
otherwise required by law or provided herein, holders of Common Stock shall vote
together with holders of the Preferred Stock as a single class, subject to any
special or preferential voting rights of any then outstanding Preferred Stock.
There shall be no cumulative voting.
<PAGE>
-3-
B. PREFERRED STOCK
The Preferred Stock may be issued in one or more series at such time or
times and for such consideration or considerations as the Board of Directors of
the Corporation may determine. Each series shall be so designated as to
distinguish the shares thereof from the shares of all other series and classes.
Except as otherwise provided in this Third Amended and Restated Certificate of
Incorporation, different series of Preferred Stock shall not be construed to
constitute different classes of shares for the purpose of voting by classes.
C. UNDESIGNATED PREFERRED STOCK
The Board of Directors is expressly authorized to provide for the
issuance of all or any shares of the undesignated Preferred Stock in one or more
series, each with such designations, preferences, voting powers (or special,
preferential or no voting powers), relative, participating, optional or other
special rights and privileges and such qualifications, limitations or
restrictions thereof as shall be stated in the resolution or resolutions adopted
by the Board of Directors to create such series, and a certificate of said
resolution or resolutions (a "Certificate of Designation") shall be filed in
accordance with the General Corporation Law of the State of Delaware. The
authority of the Board of Directors with respect to each such series shall
include, without limitation of the foregoing, the right to provide that the
shares of each such series may be: (i) subject to redemption at such time or
times and at such price or prices; (ii) entitled to receive dividends (which may
be cumulative or non-cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii) entitled to
such rights upon the dissolution of, or upon any distribution of the assets of,
the Corporation; (iv) convertible into, or exchangeable for, shares of any other
class or classes of stock, or of any other series of the same or any other class
or classes of stock of the Corporation at such price or prices or at such rates
of exchange and with such adjustments, if any; (v) entitled to the benefit of
such limitations, if any, on the issuance of additional shares of such series or
shares of any other series of Preferred Stock; or (vi) entitled to such other
preferences, powers, qualifications, rights and privileges, all as the Board of
Directors may deem advisable and as are not inconsistent with law and the
provisions of this Third Amended and Restated Certificate of Incorporation.
D. SERIES A, SERIES B AND SERIES C CONVERTIBLE PREFERRED STOCK
1. DIVIDENDS. The Corporation shall not declare or pay any dividends on
shares of Common Stock (except for dividends payable solely in the form of
Common Stock) until the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock then outstanding shall have first
received, or simultaneously receive, a distribution on each outstanding share of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
in an amount at least equal to the product of (i) the per share amount, if any,
of the dividends to be declared, paid or set aside for the Common Stock,
multiplied by (ii) the number of whole shares of Common Stock into which such
share of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock is then convertible. The Corporation shall not declare or pay
any dividends on any shares of Preferred Stock unless, at the same
<PAGE>
-4-
time, a dividend in a like amount per share shall be paid upon, or declared and
set apart for, all shares of Preferred Stock then outstanding.
2. LIQUIDATION, DISSOLUTION OR WINDING UP; CERTAIN MERGERS,
CONSOLIDATIONS AND ASSET SALES.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Corporation
available for distribution to its stockholders, before any payment shall be made
to the holders of Common Stock or any other class or series of stock ranking on
liquidation junior to the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock (such Common Stock and other stock being collectively
referred to as "Junior Stock") by reason of their ownership thereof, an amount
equal to the greater of (i) $.343 per share, in the case of Series A Preferred
Stock, $.996 per share, in the case of Series B Preferred Stock, and $3.893 per
share in the case of the Series C Preferred Stock (each subject to appropriate
adjustment in the event of any stock dividend, stock split, combination or other
similar recapitalization affecting such shares), plus any dividends declared but
unpaid thereon, or (ii) such amount per share as would have been payable had
each such share been converted into Common Stock pursuant to Section 4
immediately prior to such liquidation, dissolution or winding up. If upon any
such liquidation, dissolution or winding up of the Corporation the remaining
assets of the Corporation available for distribution to its stockholders shall
be insufficient to pay the holders of shares of Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock the full amount to which they
shall be entitled, the holders of shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock and any class or series of stock
ranking on liquidation on a parity with the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall share ratably in any
distribution of the remaining assets and funds of the Corporation in proportion
to the respective amounts which would otherwise be payable pursuant to clause
(i) above in respect of the shares held by them upon such distribution. The
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
of the Corporation shall be deemed to rank on a parity with each other with
respect to the liquidation, dissolution or winding-up of the Corporation.
(b) After the payment of all preferential amounts required to
be paid to the holders of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock and any other class or series of stock of the
Corporation ranking on liquidation on a parity with the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock, upon the
dissolution, liquidation or winding up of the Corporation, the holders of shares
of Junior Stock then outstanding shall be entitled to receive the remaining
assets and funds of the Corporation available for distribution to its
stockholders.
(c) Any (i) merger or consolidation of the Corporation or a
subsidiary of the Corporation into or with another corporation (except one in
which the holders of capital stock of the Corporation immediately prior to such
merger or consolidation continue to hold at least
<PAGE>
-5-
50% by voting power of the capital stock of the Corporation or the surviving or
acquiring corporation), (ii) acquisition, in one transaction or a series of
related transactions by a person or group of affiliated persons, of 50% or more
of the outstanding voting stock of the Company or (iii) sale of all or
substantially all the assets of the Corporation, shall be deemed to be a
liquidation of the Corporation for purposes of this Section 2 unless the holders
of a majority of the then outstanding Preferred Stock elect in writing not to
treat such merger, consolidation or sale as a liquidation, and any agreement or
plan of merger or consolidation to which the Company is a party shall provide
that the consideration payable to the stockholders of the Corporation (in the
case of a merger or consolidation), or consideration payable to the Corporation,
together with all other available assets of the Corporation (in the case of an
asset sale), shall be distributed to the holders of capital stock of the
Corporation in accordance with Subsections 2(a) and 2(b) above. The amount
deemed distributed to the holders of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock upon any such merger, consolidation
or sale shall be the cash or the value of the property, rights or securities
distributed to such holders by the Corporation or the acquiring person, firm or
other entity. The value of such property, rights or other securities shall be
determined in good faith by the Board of Directors of the Corporation.
3. VOTING.
(a) Each holder of outstanding shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall be entitled
to the number of votes equal to the number of whole shares of Common Stock into
which the shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock held by such holder are then convertible (as adjusted
from time to time pursuant to Section 4 hereof), at each meeting of stockholders
of the Corporation (and written actions of stockholders in lieu of meetings)
with respect to any and all matters presented to the stockholders of the
Corporation for their action or consideration. Except as provided by law, by the
provisions of Subsection 3(b) below or by the provisions establishing any other
series of Preferred Stock, holders of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and any other outstanding series of
Preferred Stock shall vote together with the holders of Common Stock as a single
class.
(b) The Corporation shall not amend, alter or repeal the
preferences, special rights or other powers of the Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock so as to affect adversely
the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock, without the written consent or affirmative vote of the holders of a
majority of the then outstanding shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, as the case may be, given in
writing or by vote at a meeting, consenting or voting (as the case may be)
separately as a class. For this purpose, without limiting the generality of the
foregoing, the authorization of any shares of capital stock with preference or
priority over the Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock as to the right to receive either dividends or amounts
distributable upon liquidation, dissolution or winding up of the Corporation
shall be deemed to affect adversely the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, and the authorization of any shares
of capital stock on a parity with Series A Preferred Stock,
<PAGE>
-6-
Series B Preferred Stock and Series C Preferred Stock as to the right to receive
either dividends or amounts distributable upon liquidation, dissolution or
winding up of the Corporation shall not be deemed to affect adversely the Series
A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock.
4. OPTIONAL CONVERSION. The holders of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
(a) (i) SERIES A RIGHT TO CONVERT. Each share of Series A
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time and from time to time, and without the payment of additional
consideration by the holder thereof, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing $.343 by the
Series A Conversion Price (as defined below) in effect at the time of
conversion. The "Series A Conversion Price" shall initially be $.343. Such
initial Series A Conversion Price, and the rate at which shares of Series A
Preferred Stock may be converted into shares of Common Stock, shall be subject
to adjustment as provided below.
(ii) SERIES B RIGHT TO CONVERT. Each share of Series B
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time and from time to time, and without the payment of additional
consideration by the holder thereof, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing $.996 by the
Series B Conversion Price (as defined below) in effect at the time of
conversion. The "Series B Conversion Price" shall initially be $.996. Such
initial Series B Conversion Price, and the rate at which shares of Series B
Preferred Stock may be converted into shares of Common Stock, shall be subject
to adjustment as provided below.
(iii) SERIES C RIGHT TO CONVERT. Each share of Series C
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time and from time to time, and without the payment of additional
consideration by the holder thereof, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing $3.893 by the
Series C Conversion Price (as defined below) in effect at the time of
conversion. The "Series C Conversion Price" shall initially be $3.893. Such
initial Series C Conversion Price, and the rate at which shares of Series C
Preferred Stock may be converted into shares of Common Stock, shall be subject
to adjustment as provided below.
(iv) In the event of a notice of redemption of any shares
of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock pursuant to Section 6 hereof, the Conversion Rights of the shares
designated for redemption shall terminate at the close of business on the fifth
full day preceding the date fixed for redemption, unless the redemption price is
not paid when due, in which case the Conversion Rights for such shares shall
continue until such price is paid in full. In the event of a liquidation of the
Corporation, the Conversion Rights shall terminate at the close of business on
the first full day preceding the date fixed for the payment of any amounts
distributable on liquidation to the holders of Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock.
<PAGE>
-7-
(b) FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon conversion of the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock. In lieu of any fractional shares to
which the holder would otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the then effective Series A Conversion
Price, Series B Conversion Price or Series C Conversion Price.
(c) MECHANICS OF CONVERSION.
(i) In order for a holder of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock to convert its shares of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock
into shares of Common Stock, such holder shall surrender the certificate or
certificates for such shares of Preferred Stock, at the office of the transfer
agent for the Preferred Stock (or at the principal office of the Corporation if
the Corporation serves as its own transfer agent), together with written notice
(a "Conversion Notice") that such holder elects to convert all or any number of
the shares of the Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock represented by such certificate or certificates. The Conversion
Notice shall state such holder's name or the names of the nominees in which such
holder wishes the certificate or certificates for shares of Common Stock to be
issued. If required by the Corporation, certificates surrendered for conversion
shall be endorsed or accompanied by a written instrument or instruments of
transfer, in form satisfactory to the Corporation, duly executed by the
registered holder or his or its attorney duly authorized in writing. The date of
receipt of such certificates and Conversion Notice by the transfer agent (or by
the Corporation if the Corporation serves as its own transfer agent) shall be
the conversion date ("Conversion Date"). The Corporation shall, as soon as
practicable after the Conversion Date, issue and deliver at such office to such
holder of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock, or to his or its nominees, a certificate or certificates for
the number of shares of Common Stock to which such holder shall be entitled,
together with cash in lieu of any fraction of a share.
(ii) The Corporation shall at all times when the Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be
outstanding, reserve and keep available out of its authorized but unissued
stock, for the purpose of effecting the conversion of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock, such number of its
duly authorized shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock. Before taking any action which
would cause an adjustment reducing the Series A Conversion Price, Series B
Conversion Price or Series C Conversion Price below the then par value of the
shares of Common Stock issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock, the Corporation will take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Corporation may validly and legally issue fully paid and
nonassessable shares of Common Stock at such adjusted Series A Conversion Price,
Series B Conversion Price or Series C Conversion Price.
<PAGE>
-8-
(iii) Upon any such conversion, no adjustment to the
Series A Conversion Price, Series B Conversion Price or Series C Conversion
Price shall be made for any declared but unpaid dividends on the Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, as
applicable, surrendered for conversion or on the Common Stock delivered upon
such conversion.
(iv) All shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock which shall have been surrendered
for conversion as herein provided shall no longer be deemed to be outstanding
and all rights with respect to such shares, including the rights, if any, to
receive notices and to vote, shall immediately cease and terminate on the
Conversion Date, except only the right of the holders thereof to receive shares
of Common Stock in exchange therefor and payment of any dividends declared but
unpaid thereon. Any shares of Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock so converted shall be retired and cancelled and
shall not be reissued, and the Corporation (without the need for stockholder
action) may from time to time take such appropriate action as may be necessary
to reduce the authorized number of shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock accordingly.
(v) The Corporation shall pay any and all issue and other
taxes that may be payable in respect of any issuance or delivery of shares of
Common Stock upon conversion of shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock pursuant to this Section 4. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of shares of
Common Stock in a name other than that in which the shares of Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock so converted were
registered, and no such issuance or delivery shall be made unless and until the
person or entity requesting such issuance has paid to the Corporation the amount
of any such tax or has established, to the satisfaction of the Corporation, that
such tax has been paid.
(d) ADJUSTMENTS TO SERIES A CONVERSION PRICE, SERIES B
CONVERSION PRICE OR SERIES C CONVERSION PRICE FOR DILUTING
ISSUES:
(i) SPECIAL DEFINITIONS. For purposes of this Subsection
4(d), the following definitions shall apply:
(A) "OPTION" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire Common Stock or Convertible
Securities.
(B) "SERIES A ORIGINAL ISSUE DATE" shall mean the date
on which the first share of Series A Preferred Stock was issued.
(C) "SERIES B ORIGINAL ISSUE DATE" shall mean the date
on which the first share of Series B Preferred Stock was issued.
<PAGE>
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(D) "SERIES C ORIGINAL ISSUE DATE" shall mean the date
on which the first share of Series C Preferred Stock was issued.
(E) "CONVERTIBLE SECURITIES" shall mean any evidences
of indebtedness, shares or other securities directly or indirectly convertible
into or exchangeable for Common Stock.
(F) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all
shares of Common Stock issued (or, pursuant to Subsection 4(d)(iii) below,
deemed to be issued) by the Corporation after the Series C Original Issue Date,
other than:
(I) shares of Common Stock issued or issuable upon
conversion of any shares of Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock;
(II) shares of Common Stock issued or issuable
upon conversion of any Convertible Securities (other than shares of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock) or
exercise of any warrants outstanding on the Series C Original Issue Date;
(III) shares of Common Stock issued or issuable as
a dividend or distribution on Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock;
(IV) shares of Common Stock issued or issuable by
reason of a dividend, stock split, split-up or other distribution on shares of
Common Stock that is covered by Subsection 4(e) or 4(f) below;
(V) up to 3,717,400 shares of Common Stock
(including issuances prior to the Series C Original Issue Date) (subject to
appropriate adjustment in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares), plus such
additional number of shares of Common Stock as may be approved by the Board of
Directors of the Corporation and by a majority of the members of the Board of
Directors who are not employees of the Company or any of its subsidiaries,
issued or issuable to employees or directors of, or consultants to, the
Corporation pursuant to employer stock option plans;
(VI) securities issued pursuant to any equipment
leasing arrangement or debt financing from a bank or similar financial
institution approved by the Board of Directors of the Corporation and by a
majority of the members of the Board of Directors who are not employees of the
Corporation or any of its subsidiaries; or
(VII) securities issued in connection with
strategic transactions approved by the Board of Directors of the Corporation and
by a majority of the members of the Board of Directors who are not employees of
the Corporation or any of its subsidiaries involving the Company and other
entities, including (a) joint ventures,
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manufacturing, marketing or distribution arrangements or (b) technology transfer
or development arrangements.
(ii) NO ADJUSTMENT OF CONVERSION PRICE.
(A) No adjustment in the number of shares of Common
Stock into which the Series A Preferred Stock is convertible shall be made, by
adjustment in the applicable Series A Conversion Price thereof: (a) unless the
consideration per share (determined pursuant to Subsection 4(d)(v)) for an
Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the applicable Series A Conversion Price in effect
immediately prior to the issue of such Additional Shares, or (b) if prior to
such issuance, the Corporation receives written notice from the holders of at
least 66-2/3% of the then outstanding shares of Series A Preferred Stock
agreeing that no such adjustment shall be made as the result of the issuance of
Additional Shares of Common Stock.
(B) No adjustment in the number of shares of Common
Stock into which the Series B Preferred Stock is convertible shall be made, by
adjustment in the applicable Series B Conversion Price thereof: (a) unless the
consideration per share (determined pursuant to Subsection 4(d)(v)) for an
Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the applicable Series B Conversion Price in effect
immediately prior to the issue of such Additional Shares, or (b) if prior to
such issuance, the Corporation receives written notice from the holders of at
least 66-2/3% of the then outstanding shares of Series B Preferred Stock
agreeing that no such adjustment shall be made as the result of the issuance of
Additional Shares of Common Stock.
(C) No adjustment in the number of shares of Common
Stock into which the Series C Preferred Stock is convertible shall be made, by
adjustment in the applicable Series C Conversion Price thereof: (a) unless the
consideration per share (determined pursuant to Subsection 4(d)(v)) for an
Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the applicable Series C Conversion Price in effect
immediately prior to the issue of such Additional Shares, or (b) if prior to
such issuance, the Corporation receives written notice from the holders of at
least 66-2/3% of the then outstanding shares of Series C Preferred Stock
agreeing that no such adjustment shall be made as the result of the issuance of
Additional Shares of Common Stock.
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(iii) ISSUE OF SECURITIES DEEMED ISSUE OF ADDITIONAL
SHARES OF COMMON STOCK.
If the Corporation at any time or from time to time after the Series A
Original Issue Date, Series B Original Issue Date or Series C Original Issue
Date, as applicable, shall issue any Options (excluding Options covered by
Subsection 4(d)(i)(F)(IV) above) or Convertible Securities or shall fix a record
date for the determination of holders of any class of securities entitled to
receive any such Options or Convertible Securities, then the maximum number of
shares of Common Stock (as set forth in the instrument relating thereto without
regard to any provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
issued as of the time of such issue or, in case such a record date shall have
been fixed, as of the close of business on such record date, provided that (x)
for the purposes of adjusting the Series A Conversion Price, Additional Shares
of Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Subsection 4(d)(v) hereof) of such Additional
Shares of Common Stock would be less than the applicable Series A Conversion
Price in effect on the date of and immediately prior to such issue, or such
record date, as the case may be, (y) for the purposes of adjusting the Series B
Conversion Price, Additional Shares of Common Stock shall not be deemed to have
been issued unless the consideration per share (determined pursuant to
Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be
less than the applicable Series B Conversion Price in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
(z) for the purposes of adjusting the Series C Conversion Price, Additional
Shares of Common Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to Subsection 4(d)(v) hereof) of
such Additional Shares of Common Stock would be less than the applicable Series
C Conversion Price in effect on the date of and immediately prior to such issue,
or such record date, as the case may be, and provided further that in any such
case in which Additional Shares of Common Stock are deemed to be issued:
(A) No further adjustment in the Series A Conversion
Price, Series B Conversion Price or Series C Conversion Price shall be made upon
the subsequent issue of Convertible Securities or shares of Common Stock upon
the exercise of such Options or conversion or exchange of such Convertible
Securities;
(B) If such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Corporation, upon the exercise,
conversion or exchange thereof, the Series A Conversion Price, Series B
Conversion Price or Series C Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities;
<PAGE>
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(C) Upon the expiration or termination of any such
unexercised Option, the Series A Conversion Price, Series B Conversion Price and
Series C Conversion Price shall be readjusted, to the Series A Conversion Price,
Series B Conversion Price or Series C Conversion Price as would have been in
effect at the time of such expiration or termination had such Option never been
issued;
(D) In the event of any change in the number of
shares of Common Stock issuable upon the exercise, conversion or exchange of any
such Option or Convertible Security, including, but not limited to, a change
resulting from the anti-dilution provisions thereof, the Series A Conversion
Price, Series B Conversion Price and Series C Conversion Price then in effect
shall forthwith be readjusted to such Series A Conversion Price, Series B
Conversion Price or Series C Conversion Price as would have obtained had the
adjustment which was made upon the issuance of such Option or Convertible
Security not exercised or converted prior to such change been made upon the
basis of such change; and
(E) No readjustment pursuant to clauses (B) or (D)
above shall have the effect of increasing the Series A Conversion Price, Series
B Conversion Price or Series C Conversion Price to an amount which exceeds the
lower of (i) the Series A Conversion Price, Series B Conversion Price or Series
C Conversion Price on the original adjustment date, or (ii) the Series A
Conversion Price, Series B Conversion Price or Series C Conversion Price, as the
case may be, that would have resulted from any issuances of Additional Shares of
Common Stock between the original adjustment date and such readjustment date.
In the event the Corporation, after the Series A Original Issue Date,
the Series B Original Issue Date or the Series C Original Issue Date, amends the
terms of any such Options or Convertible Securities (whether such Options or
Convertible Securities were outstanding on such respective original issue date
or were issued after such respective original issue date), then such Options or
Convertible Securities, as so amended, shall be deemed to have been issued after
such respective original issue date and the provisions of this Subsection
4(d)(iii) shall apply.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK.
(A) In the event the Corporation shall at any time
after the Series A Original Issue Date issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
Subsection 4(d)(iii), but excluding shares issued as a stock split or
combination as provided in Subsection 4(e) or upon a dividend or distribution as
provided in Subsection 4(f)), without consideration or for a consideration per
share less than the applicable Series A Conversion Price in effect immediately
prior to such issue, then and in such event, such Series A Conversion Price
shall be reduced, concurrently with such issue, to a price (calculated to the
nearest cent) determined by multiplying such Series A Conversion Price by a
fraction, (A) the numerator of which shall be (1) the number of shares of Common
Stock outstanding immediately prior to such issue plus (2) the number of
<PAGE>
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shares of Common Stock which the aggregate consideration received or to be
received by the Corporation for the total number of Additional Shares of Common
Stock so issued would purchase at such Series A Conversion Price; and (B) the
denominator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of such Additional Shares of
Common Stock so issued; PROVIDED THAT, (i) for the purpose of this Subsection
4(d)(iv), all shares of Common Stock issuable upon exercise or conversion of
vested Options or Convertible Securities outstanding immediately prior to such
issue shall be deemed to be outstanding, and (ii) the number of shares of Common
Stock deemed issuable upon exercise or conversion of such outstanding vested
Options and Convertible Securities shall not give effect to any adjustments to
the conversion price or conversion rate of such Options or Convertible
Securities resulting from the issuance of Additional Shares of Common Stock that
is the subject of this calculation.
(B) In the event the Corporation shall at any time
after the Series B Original Issue Date issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
Subsection 4(d)(iii), but excluding shares issued as a stock split or
combination as provided in Subsection 4(e) or upon a dividend or distribution as
provided in Subsection 4(f)), without consideration or for a consideration per
share less than the applicable Series B Conversion Price in effect immediately
prior to such issue, then and in such event, such Series B Conversion Price
shall be reduced, concurrently with such issue, to a price (calculated to the
nearest cent) determined by multiplying such Series B Conversion Price by a
fraction, (A) the numerator of which shall be (1) the number of shares of Common
Stock outstanding immediately prior to such issue plus (2) the number of shares
of Common Stock which the aggregate consideration received or to be received by
the Corporation for the total number of Additional Shares of Common Stock so
issued would purchase at such Series B Conversion Price; and (B) the denominator
of which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of such Additional Shares of Common Stock so
issued; PROVIDED THAT, (i) for the purpose of this Subsection 4(d)(iv), all
shares of Common Stock issuable upon exercise or conversion of vested Options or
Convertible Securities outstanding immediately prior to such issue shall be
deemed to be outstanding, and (ii) the number of shares of Common Stock deemed
issuable upon exercise or conversion of such outstanding vested Options and
Convertible Securities shall not give effect to any adjustments to the
conversion price or conversion rate of such Options or Convertible Securities
resulting from the issuance of Additional Shares of Common Stock that is the
subject of this calculation.
(C) In the event the Corporation shall at any time
after the Series C Original Issue Date issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
Subsection 4(d)(iii), but excluding shares issued as a stock split or
combination as provided in Subsection 4(e) or upon a dividend or distribution as
provided in Subsection 4(f)), without consideration or for a consideration per
share less than the applicable Series C Conversion Price in effect immediately
prior to such issue, then and in such event, such Series C Conversion Price
shall be reduced, concurrently with such issue, to a price (calculated to the
nearest cent) determined by multiplying such Series C Conversion Price by a
fraction, (A) the numerator of which shall be (1) the number of
<PAGE>
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shares of Common Stock outstanding immediately prior to such issue plus (2) the
number of shares of Common Stock which the aggregate consideration received or
to be received by the Corporation for the total number of Additional Shares of
Common Stock so issued would purchase at such Series C Conversion Price; and (B)
the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of such Additional
Shares of Common Stock so issued; PROVIDED THAT, (i) for the purpose of this
Subsection 4(d)(iv), all shares of Common Stock issuable upon exercise or
conversion of vested Options or Convertible Securities outstanding immediately
prior to such issue shall be deemed to be outstanding, and (ii) the number of
shares of Common Stock deemed issuable upon exercise or conversion of such
outstanding vested Options and Convertible Securities shall not give effect to
any adjustments to the conversion price or conversion rate of such Options or
Convertible Securities resulting from the issuance of Additional Shares of
Common Stock that is the subject of this calculation.
(V) DETERMINATION OF CONSIDERATION. For purposes of this
Subsection 4(d), the consideration received by the Corporation for the issue of
any Additional Shares of Common Stock shall be computed as follows:
(A) CASH AND PROPERTY: Such consideration shall:
(I) insofar as it consists of cash, be computed
at the aggregate of cash received by the Corporation, excluding amounts paid or
payable for accrued interest;
(II) insofar as it consists of property other
than cash, be computed at the fair market value thereof at the time of such
issue, as determined in good faith by the Board of Directors; and
(III) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (I) and (II) above,
as determined in good faith by the Board of Directors.
(B) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Subsection 4(d)(iii),
relating to Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in the case of
Options for
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Convertible Securities, the exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(vi) MULTIPLE CLOSING DATES. In the event the Corporation
shall issue on more than one date Additional Shares of Common Stock which are
comprised of shares of the same series or class of Preferred Stock, and such
issuance dates occur within a period of no more than 120 days, then, upon the
final such issuance, the Series A Conversion Price, Series B Conversion Price
and Series C Conversion Price shall be adjusted to give effect to all such
issuances as if they occurred on the date of the final such issuance (and
without giving effect to any adjustments as a result of such prior issuances
within such period).
(e) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If
the Corporation shall at any time or from time to time after the Series C
Original Issue Date effect a subdivision of the outstanding Common Stock, the
Series A Conversion Price, Series B Conversion Price and Series C Conversion
Price then in effect immediately before that subdivision each shall be
proportionately decreased. If the Corporation shall at any time or from time to
time after the Series C Original Issue Date combine the outstanding shares of
Common Stock, the Series A Conversion Price, Series B Conversion Price and
Series C Conversion Price then in effect immediately before the combination each
shall be proportionately increased. Any adjustment under this paragraph shall
become effective at the close of business on the date the subdivision or
combination becomes effective.
(f) ADJUSTMENT FOR CERTAIN DIVIDENDS AND
DISTRIBUTIONS. In the event the Corporation at any time, or from time to time
after the Series C Original Issue Date, as the case may be, shall make or issue,
or fix a record date for the determination of holders of Common Stock entitled
to receive, a dividend or other distribution payable in additional shares of
Common Stock, then and in each such event the Series A Conversion Price, Series
B Conversion Price and Series C Conversion Price then in effect immediately
before such event each shall be decreased as of the time of such issuance or, in
the event such a record date shall have been fixed, as of the close of business
on such record date, by multiplying the Series A Conversion Price, Series B
Conversion Price and Series C Conversion Price, as the case may be, then in
effect by a fraction:
(1) the numerator of which shall be the total
number of shares of Common Stock issued and
outstanding immediately prior to the time of such
issuance or the close of business on such record
date, and
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(2) the denominator of which shall be the total
number of shares of Common Stock issued and
outstanding immediately prior to the time of such
issuance or the close of business on such record date
plus the number of shares of Common Stock issuable in
payment of such dividend or distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Series A Conversion Price, Series B Conversion Price and Series C
Conversion Price each shall be recomputed accordingly as of the close of
business on such record date and thereafter the Series A Conversion Price,
Series B Conversion Price and Series C Conversion Price, as the case may be,
shall be adjusted pursuant to this paragraph as of the time of actual payment of
such dividends or distributions; and provided further, however, that no such
adjustment shall be made if the holders of Series A Preferred Stock, the holders
of the Series B Preferred Stock and the holders of the Series C Preferred Stock
simultaneously receive (i) a dividend or other distribution of shares of Common
Stock in a number equal to the number of shares of Common Stock as they would
have received if all outstanding shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock had been converted into Common
Stock on the date of such event or (ii) a dividend or other distribution of
shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock which are convertible, as of the date of such event, into such
number of shares of Common Stock as is equal to the number of additional shares
of Common Stock being issued with respect to each share of Common Stock in such
dividend or distribution.
(g) ADJUSTMENTS FOR OTHER DIVIDENDS AND
DISTRIBUTIONS. In the event the Corporation at any time or from time to time
after the Series C Original Issue Date shall make or issue, or fix a record date
for the determination of holders of Common Stock entitled to receive, a dividend
or other distribution payable in securities of the Corporation other than shares
of Common Stock, then and in each such event provision shall be made so that the
holders of the Series A Preferred Stock, the holders of the Series B Preferred
Stock and the holders of Series C Preferred Stock shall receive upon conversion
thereof in addition to the number of shares of Common Stock receivable
thereupon, the amount of securities of the Corporation that they would have
received had the Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock, as the case may be, been converted into Common Stock on the
date of such event and had they thereafter, during the period from the date of
such event to and including the conversion date, retained such securities
receivable by them as aforesaid during such period, giving application to all
adjustments called for during such period under this paragraph with respect to
the rights of the holders of the Series A Preferred Stock, the rights of the
holders of the Series B Preferred Stock and the rights of the holders of the
Series C Preferred Stock, as the case may be; and provided further, however,
that no such adjustment shall be made if the holders of Series A Preferred
Stock, the holders of the Series B Preferred Stock and the holders of the Series
C Preferred Stock, as the case may be, simultaneously receive a dividend or
other distribution of such securities in an amount equal to the amount of such
securities as they would have received if all outstanding shares of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, as the
case may be, had been converted into Common Stock on the date of such event.
<PAGE>
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(h) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE, OR
SUBSTITUTION. If the Common Stock issuable upon the conversion of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be
changed into the same or a different number of shares of any class or classes of
stock, whether by capital reorganization, reclassification, or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
above, or a reorganization, merger, consolidation, or sale of assets provided
for below), then and in each such event the holders of each such share of Series
A Preferred Stock, the holders of each such share of Series B Preferred Stock
and the holders of each such share of Series C Preferred Stock shall have the
right thereafter to convert such share into the kind and amount of shares of
stock and other securities and property receivable, upon such reorganization,
reclassification, or other change, by holders of the number of shares of Common
Stock into which such shares of Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock, as the case may be, might have been converted
immediately prior to such reorganization, reclassification, or change, all
subject to further adjustment as provided herein.
(i) ADJUSTMENT FOR MERGER OR REORGANIZATION, ETC. In
case of any consolidation or merger of the Corporation with or into another
corporation or the sale of all or substantially all of the assets of the
Corporation to another corporation (other than a consolidation, merger or sale
which is covered by Subsection 2(c)), each share of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall thereafter be
convertible (or shall be converted into a security which shall be convertible)
into the kind and amount of shares of stock or other securities or property to
which a holder of the number of shares of Common Stock of the Corporation
deliverable upon conversion of such Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, as the case may be, would have been entitled
upon such consolidation, merger or sale; and, in such case, appropriate
adjustment (as determined in good faith by the Board of Directors) shall be made
in the application of the provisions in this Section 4 set forth with respect to
the rights and interest thereafter of the holders of the Series A Preferred
Stock, the holders of the Series B Preferred Stock and the holders of the Series
C Preferred Stock, to the end that the provisions set forth in this Section 4
(including provisions with respect to changes in and other adjustments of the
Series A Conversion Price, Series B Conversion Price and the Series C Conversion
Price) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the conversion of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock, as the case may be.
(j) NO IMPAIRMENT. The Corporation will not, by
amendment of its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series A Preferred
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Stock, the holders of the Series B Preferred Stock and the holders of the Series
C Preferred Stock against impairment.
(k) CERTIFICATE AS TO ADJUSTMENTS. Upon the
occurrence of each adjustment or readjustment of the Series A Conversion Price,
the Series B Conversion Price or the Series C Conversion Price pursuant to this
Section 4, the Corporation at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and furnish to each holder
of Series A Preferred Stock, each holder of the Series B Preferred Stock and
each holder of the Series C Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series A Preferred Stock, any holder of
Series B Preferred Stock or any holder of Series C Preferred Stock, furnish or
cause to be furnished to such holder a similar certificate setting forth (i)
such adjustments and readjustments, (ii) the Series A Conversion Price, Series B
Conversion Price or Series C Conversion Price, as applicable, then in effect,
and (iii) the number of shares of Common Stock and the amount, if any, of other
property which then would be received upon the conversion of Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock, as the case may be.
(l) NOTICE OF RECORD DATE. In the event:
(i) that the Corporation declares a dividend
(or any other distribution) on its Common
Stock payable in Common Stock or other
securities of the Corporation;
(ii) that the Corporation subdivides or combines
its outstanding shares of Common Stock;
(iii) of any reclassification of the Common Stock
of the Corporation (other than a
subdivision or combination of its
outstanding shares of Common Stock or a
stock dividend or stock distribution
thereon), or of any consolidation or merger
of the Corporation into or with another
corporation, or of the sale of all or
substantially all of the assets of the
Corporation; or
(iv) of the involuntary or voluntary
dissolution, liquidation or winding up of
the Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Preferred Stock, and shall use its best
efforts to cause to be mailed to the holders of the Series A Preferred Stock,
the holders of the Series B Preferred Stock and the holders of the Series C
Preferred Stock at their last addresses as shown on the records of the
Corporation or such transfer agent, prior to the dates specified in (A) and (B)
below, a notice stating
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(A) the record date of such dividend, distribution,
subdivision or combination, or, if a record is
not to be taken, the date as of which the holders
of Common Stock of record to be entitled to such
dividend, distribution, subdivision or
combination are to be determined, or
(B) the date on which such reclassification,
consolidation, merger, sale, dissolution,
liquidation or winding up is expected to become
effective, and the date as of which it is
expected that holders of Common Stock of record
shall be entitled to exchange their shares of
Common Stock for securities or other property
deliverable upon such reclassification,
consolidation, merger, sale, dissolution or
winding up.
5. MANDATORY CONVERSION.
(a) Upon (i) the closing of the sale of shares of Common
Stock, at a price to the public of at least $4.75 per share (subject to
appropriate adjustment for stock splits, stock dividends, combinations and other
similar recapitalizations affecting such shares), in a public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, resulting in at least $15,000,000 of net proceeds to the Corporation (a
"Qualified IPO") or (ii) the delivery to the Corporation of a Conversion Notice
or Notices covering at least 75% of the outstanding shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock (the "Mandatory
Conversion Date"), (A) all outstanding shares of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall automatically be
converted into shares of Common Stock, at the then effective applicable
conversion rate and (B) the number of authorized shares of Preferred Stock shall
be automatically reduced by the number of shares of Preferred Stock that had
been designated as Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock and all references to the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall be deleted and shall be of no
further force or effect.
(b) All holders of record of shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall be given
written notice of the Mandatory Conversion Date and the place designated for
mandatory conversion of all such shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock pursuant to this Section 5 . Such
notice need not be given in advance of the occurrence of the Mandatory
Conversion Date. Such notice shall be sent by first class or registered mail,
postage prepaid, to each record holder of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock at such holder's address last shown
on the records of the transfer agent for the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, as the case may be (or the records
of the Corporation, if it serves as its own transfer agent). Upon receipt of
such notice, each holder of shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock shall surrender his or its
certificate or certificates for all such shares
<PAGE>
-20-
to the Corporation at the place designated in such notice, and shall thereafter
receive certificates for the number of shares of Common Stock to which such
holder is entitled pursuant to this Section 5. On the Mandatory Conversion Date,
all rights with respect to the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock so converted, including the rights, if any,
to receive notices and vote (other than as a holder of Common Stock) will
terminate, except only the rights of the holders thereof, upon surrender of
their certificate or certificates therefor, to receive certificates for the
number of shares of Common Stock into which such Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock has been converted, and
payment of any declared but unpaid dividends thereon. If so required by the
Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or by
his or its attorney duly authorized in writing. As soon as practicable after the
Mandatory Conversion Date and the surrender of the certificate or certificates
for Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock, the Corporation shall cause to be issued and delivered to such holder, or
on his or its written order, a certificate or certificates for the number of
full shares of Common Stock issuable on such conversion in accordance with the
provisions hereof and cash as provided in Subsection 4(b) in respect of any
fraction of a share of Common Stock otherwise issuable upon such conversion.
(c) All certificates evidencing shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock which are required
to be surrendered for conversion in accordance with the provisions hereof shall,
from and after the Mandatory Conversion Date, be deemed to have been retired and
cancelled and the shares of Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock represented thereby converted into Common Stock for
all purposes, notwithstanding the failure of the holder or holders thereof to
surrender such certificates on or prior to such date. Such converted Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock may not be
reissued, and the Corporation may thereafter take such appropriate action
(without the need for stockholder action) as may be necessary to reduce the
authorized number of shares of Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock, accordingly.
6. REDEMPTION.
(a) The Corporation will, subject to the conditions set forth
below, on February 25, 2004 and on each of the first and second anniversaries
thereof (each such date being referred to hereinafter as a "Mandatory Redemption
Date"), upon receipt not less than 60 nor more than 120 days prior to the
applicable Mandatory Redemption Date of written request(s) for redemption from
holders of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock representing at least 66-2/3% of the aggregate number
of shares of Common Stock issuable upon conversion of the then outstanding
shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock (a "Redemption Request"), redeem from each holder of shares of
Series A Preferred Stock, Series B Preferred Stock and/or Series C Preferred
Stock that requests redemption pursuant to the Redemption Request or pursuant to
a subsequent election made in accordance with this Section
<PAGE>
-21-
6(a) (a "Requesting Holder"), at a price equal to $.343 per share, in the case
of the Series A Preferred Stock, $.996 per share, in the case of the Series B
Preferred Stock, and $3.893 in the case of the Series C Preferred Stock, plus in
each case any dividends declared but unpaid thereon, subject to appropriate
adjustment in the event of any stock dividend, stock split, combination or other
similar recapitalization affecting such shares (the "Mandatory Redemption
Price"), the number of shares of Series A Preferred Stock, Series B Preferred
Stock and/or Series C Preferred Stock requested to be redeemed by each
Requesting Holder, but not more than the following respective portions of the
number of shares each series of Preferred Stock held by such Requesting Holder
on the applicable Mandatory Redemption Date.
Maximum
Mandatory Portion of Shares of Series of
REDEMPTION DATE PREFERRED STOCK TO BE REDEEMED
- --------------- ------------------------------
February 25, 2004 33%
February 25, 2005 50%
February 25, 2006 All shares of Series
The Corporation shall provide notice of its receipt of Redemption Request,
specifying the time, manner and place of redemption and the Mandatory Redemption
Price (a "Redemption Notice"), by first class or registered mail, postage
prepaid, to each holder of record of Series A Preferred Stock, to each holder of
Series B Preferred Stock and to each holder of Series C Preferred Stock at the
address for such holder last shown on the records of the transfer agent therefor
(or the records of the Corporation, if it serves as its own transfer agent), not
less than 45 days prior to the applicable Mandatory Redemption Date. Each holder
of Series A Preferred Stock, each holder of Series B Preferred Stock and each
holder of Series C Preferred Stock (other than a holder who has made the
Redemption Request) may elect to become a Requesting Holder on such Mandatory
Redemption Date by so indicating in a written notice mailed to the Company, by
first class or registered mail, postage prepaid, at least 30 days prior to the
applicable Mandatory Redemption Date. Except as provided in Section 6(b) below,
each Requesting Holder shall surrender to the Corporation on the applicable
Mandatory Redemption Date the certificate(s) representing the shares to be
redeemed on such date, in the manner and at the place designated in the
Redemption Notice. Thereupon, the Mandatory Redemption Price shall be paid to
the order of each such Requesting Holder and each certificate surrendered for
redemption shall be cancelled.
(b) If the funds of the Corporation legally available for
redemption of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock on any Mandatory Redemption Date are insufficient to redeem the
number of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock required under this Section 6 to be redeemed on such
date from Requesting Holders, those funds which are legally available will be
used to redeem the maximum possible number of each such shares ratably on the
basis of the number of each such series which would be redeemed on such date if
the funds of the Corporation legally available therefor had been sufficient to
redeem all shares required to be redeemed on such date. At any time thereafter
when additional funds of the Corporation
<PAGE>
-22-
become legally available for the redemption of Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock, such funds will be used, at the
end of the next succeeding fiscal quarter, to redeem the balance of the shares
which the Corporation was theretofore obligated to redeem, ratably on the basis
set forth in the preceding sentence.
(c) Unless there shall have been a default in payment of the
Mandatory Redemption Price, on the applicable Mandatory Redemption Date, all
rights of the holder of each share redeemed on such date as a stockholder of the
Corporation by reason of the ownership of such share will cease, except the
right to receive such Mandatory Redemption Price of such share, without
interest, upon presentation and surrender of the certificate representing such
share, and such share will not from and after such Mandatory Redemption Date be
deemed to be outstanding.
(d) Any shares of Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock redeemed pursuant to this Section 6 will be
cancelled and will not under any circumstances be reissued, sold or transferred
and the Corporation may from time to time take such appropriate action as may be
necessary to reduce the authorized shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock accordingly.
7. WAIVER. Any of the respective rights of the holders of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock set forth
herein may be waived by the affirmative vote of the holders of not less than
66-2/3% of the shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock, then outstanding, voting together as a separate class;
PROVIDED, HOWEVER, that any waiver which does not affect all series of Preferred
Stock in the same manner may only be waived by the holders of not less than
66-2/3% of the shares of Preferred Stock so affected.
8. NEGATIVE COVENANTS. So long as at least 25% of the shares of Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
outstanding on the Series C Original Issue Date (such numbers to be
proportionately adjusted in the event of any stock splits, stock dividends,
recapitalizations or similar events) are outstanding, the Corporation shall not,
without the prior written consent of the holders of shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock representing not
less than 66-2/3% of the shares of Common Stock into which all outstanding
shares of such Preferred Stock are then convertible:
(a) merge or consolidate into or with another corporation
(except a merger or consolidation in which the holders of capital stock of the
Corporation immediately prior to such merger or consolidation continue to hold
at least 50% by voting power of the capital stock of the surviving or acquiring
corporation), or sell all or substantially all the assets of the Corporation;
(b) acquire (whether by merger, stock purchase, asset purchase
or otherwise) all or substantially all of the properties, assets or stock of any
other corporation or entity;
<PAGE>
-23-
(c) amend the Certificate of Incorporation (including through
the filing of a Certificate of Designation) of the Corporation to authorize any
additional shares of Common Stock or Preferred Stock or to authorize or
designate any other class or series of stock in addition to Common Stock and
Preferred Stock;
(d) declare or pay any dividends or distributions on Common
Stock (other than dividends payable solely in Common Stock and repurchases of
Common Stock for a price equal to its original purchase price pursuant to
restricted stock agreements);
(e) voluntarily liquidate or dissolve;
(f) incur any indebtedness for borrowed money or purchase
money financing in excess of the greater of (i) $1.5 million or (ii) 25% of the
amount, if any, by which the Corporation's total assets exceeds its total
liabilities (as reflected in the Corporation's most recent balance sheet);
(g) guarantee directly or indirectly, any indebtedness or
obligations (except for guarantees of trade accounts of any subsidiary arising
in the ordinary course of business);
(h) make any loan or advance to any person or entity, except
advances and similar expenditures in the ordinary course of business or under
the terms of an employee stock or option plan approved by the Board of
Directors; or
(i) engage in any strategic transaction in which securities of
the Company are issued, including (a) joint ventures, manufacturing, marketing
or distribution agreements, or (b) technology transfer or development
agreements.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. The following provisions are included for the management of
the business and the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the
Corporation and of its Board of Directors and stockholders:
1. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors of the Corporation.
2. The Board of Directors of the Corporation is expressly
authorized to adopt, amend or repeal the by-laws of the Corporation, subject to
any limitation thereof contained in the by-laws. The stockholders shall also
have the power to adopt, amend or repeal the by-laws of the Corporation;
PROVIDED, however, that, in addition to any vote of the holders of any class or
series of stock of the Corporation required by law or by this Third Amended and
Restated Certificate of Incorporation, the affirmative vote of the holders of at
least seventy-five percent (75%) of the voting power of all of the then
outstanding shares of the capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single
<PAGE>
-24-
class, shall be required to adopt, amend or repeal any provision of the by-laws
of the Corporation.
3. Stockholders of the Corporation may not take any action by
written consent in lieu of a meeting.
4. Special meetings of stockholders may be called at any time
only by the Chief Executive Officer, the President, the Chairman of the Board of
Directors (if any) or a majority of the Board of Directors. Business transacted
at any special meeting of stockholders shall be limited to matters relating to
the purpose or purposes stated in the notice of meeting.
5. The books of the Corporation may be kept at such place
within or without the State of Delaware as the by-laws of the Corporation may
provide or as may be designated from time to time by the Board of Directors of
the Corporation.
SEVENTH.
1. NUMBER OF DIRECTORS. The number of directors which shall constitute
the whole Board of Directors shall be determined by resolution of a majority of
the Board of Directors, but in no event shall the number of directors be less
than three. The number of directors may be decreased at any time and from time
to time by a majority of the directors then in office, but only to eliminate
vacancies existing by reason of the death, resignation, removal or expiration of
the term of one or more directors. The directors shall be elected at the annual
meeting of stockholders by such stockholders as have the right to vote on such
election. Directors need not be stockholders of the Corporation.
2. CLASSES OF DIRECTORS. The Board of Directors shall be and is divided
into three classes: Class I, Class II and Class III. No one class shall have
more than one director more than any other class.
3. ELECTION OF DIRECTORS. Elections of directors need not be by written
ballot except as and to the extent provided in the by-laws of the Corporation.
4. TERMS OF OFFICE. Each director shall serve for a term ending on the
date of the third annual meeting following the annual meeting at which such
director was elected; provided, however, that each initial director in Class I
shall serve for a term ending on the date of the annual meeting next following
the end of the Corporation's fiscal year ending February 29, 2000; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting next following the end of the Corporation's fiscal year ending February
28, 2001; and each initial director in Class III shall serve for a term ending
on the date of the annual meeting next following the end of the Corporation's
fiscal year ending February 28, 2002.
5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as director of the class of which he or she is a
member until the expiration of such director's current term or his or
<PAGE>
-25-
her prior death, removal or resignation and (ii) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board of Directors among the three classes of directors so as to ensure that
no one class has more than one director more than any other class. To the extent
possible, consistent with the foregoing rule, any newly created directorships
shall be added to those classes whose terms of office are to expire at the
earliest dates following such allocation, unless otherwise provided for from
time to time by resolution adopted by a majority of the directors then in
office, though less than a quorum. No decrease in the number of directors
constituting the whole Board of Directors shall shorten the term of an incumbent
director.
6. TENURE. Notwithstanding any provisions to the contrary contained
herein, each director shall hold office until his or her successor is elected
and qualified, or until his or her earlier death, resignation or removal.
7. VACANCIES. Unless and until filled by the stockholders, any vacancy
in the Board of Directors, however occurring, including a vacancy resulting from
an enlargement of the Board of Directors, may be filled only by vote of a
majority of the directors then in office, even if less than a quorum, or by a
sole remaining director. A director elected to fill a vacancy shall be elected
for the unexpired term of his or her predecessor in office, if applicable, and a
director chosen to fill a position resulting from an increase in the number of
directors shall hold office until the next election of the class for which such
director shall have been chosen and until his or her successor is elected and
qualified, or until his or her earlier death, resignation or removal.
8. QUORUM. A majority of the total number of the whole Board of
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; provided, however, that in no case shall less than one-third
(1/3) of the number so fixed constitute a quorum. In the absence of a quorum at
any such meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice other than announcement at the meeting,
until a quorum shall be present.
9. ACTION AT MEETING. At any meeting of the Board of Directors at which
a quorum is present, the vote of a majority of those present shall be sufficient
to take any action, unless a different vote is specified by law or the
Corporation's by-laws.
10. REMOVAL. Any one or more or all of the directors may be removed
with cause only by the holders of at least seventy-five percent (75%) of the
shares then entitled to vote at an election of directors. Directors may not
be removed without cause.
11. STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS, ETC. Advance
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided in the by-laws of the Corporation.
12. RIGHTS OF PREFERRED STOCK. The provisions of this Article are
subject to the rights of the holders of any series of Preferred Stock from time
to time outstanding.
<PAGE>
-26-
EIGHTH. No director (including any advisory director) of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director notwithstanding
any provision of law imposing such liability; provided, however, that, to the
extent provided by applicable law, this provision shall not eliminate the
liability of a director (i) for any breach of the director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the General Corporation Law of the State of Delaware,
or (iv) for any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this provision shall apply to or have any
effect on the liability or alleged liability of any director for or with respect
to any acts or omissions of such director occurring prior to such amendment or
repeal.
NINTH. The Board of Directors of the Corporation, when evaluating any
offer of another party (a) to make a tender or exchange offer for any equity
security of the Corporation or (b) to effect a business combination, shall, in
connection with the exercise of its judgment in determining what is in the best
interests of the Corporation as whole, be authorized to give due consideration
to any such factors as the Board of Directors determines to be relevant,
including, without limitation:
(i) the interests of the Corporation's stockholders, including the
possibility that these interests might be best served by the continued
independence of the Corporation;
(ii) whether the proposed transaction might violate federal or state
laws;
(iii) not only the consideration being offered in the proposed
transaction, in relation to the then current market price for the
outstanding capital stock of the Corporation, but also to the market price
for the capital stock of the Corporation over a period of years, the
estimated price that might be achieved in a negotiated sale of the
Corporation as a whole or in part or through orderly liquidation, the
premiums over market price for the securities of other corporations in
similar transactions, current political, economic and other factors
bearing on securities prices and the Corporation's financial condition and
future prospects; and
(iv) the social, legal and economic effects upon employees, suppliers,
customers, creditors and others having similar relationships with the
Corporation, upon the communities in which the Corporation conducts its
business and upon the economy of the state, region and nation.
In connection with any such evaluation, the Board of Directors is authorized to
conduct such investigations and engage in such legal proceedings as the Board of
Directors may determine.
TENTH. The Corporation reserves the right to amend or repeal any
provision contained in this Third Amended and Restated Certificate of
Incorporation in the manner prescribed by the laws of the State of Delaware and
all rights conferred upon stockholders are granted subject to this reservation,
PROVIDED, HOWEVER, that in addition to any vote of the holders of any class or
series of stock of the Corporation required by law, this Third Amended and
<PAGE>
-27-
Restated Certificate of Incorporation or a Certificate of Designation with
respect to a series of Preferred Stock, the affirmative vote of the holders of
shares of voting stock of the Corporation representing at least seventy-five
percent (75%) of the voting power of all of the then outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to (i) reduce or
eliminate the number of authorized shares of Common Stock or the number of
authorized shares of Preferred Stock set forth in Article FOURTH or (ii) amend
or repeal, or adopt any provision inconsistent with, Parts A and B of Article
FOURTH and Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH and this Article TENTH
of this Third Amended and Restated Certificate of Incorporation.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
<PAGE>
-28-
IN WITNESS WHEREOF, the undersigned has hereunto signed his name and
affirms that the statements made in this Third Amended and Restated Certificate
of Incorporation are true under the penalties of perjury this ____ day of _____,
1999.
By:
-----------------------------------
Name: Robert F. Young
Title: Chief Executive Officer
[SEAL]
Attest:
By:
------------------------
David Shummanfang
Secretary
<PAGE>
Exhibit 3.4
BY-LAWS OF
RED HAT SOFTWARE, INC.
A DELAWARE CORPORATION
Dated: September 17, 1998
<PAGE>
<TABLE>
<S> <C>
ARTICLE I.........................................................................................................1
MEETINGS OF STOCKHOLDERS..........................................................................................1
Section 1. Place of Meetings...................................................................................1
Section 2. Annual Meeting......................................................................................1
Section 3. Special Meetings....................................................................................1
Section 4. Notice of Meetings..................................................................................1
Section 5. Voting List.........................................................................................1
Section 6. Quorum..............................................................................................2
Section 7. Adjournments........................................................................................2
Section 8. Action at Meetings..................................................................................2
Section 9. Voting and Proxies..................................................................................2
Section 10. Action Without Meeting.............................................................................3
ARTICLE II........................................................................................................3
DIRECTORS.........................................................................................................3
Section 1. Number, Election, Tenure and Qualification..........................................................3
Section 2. Enlargement.........................................................................................3
Section 3. Vacancies...........................................................................................3
Section 4. Resignation and Removal.............................................................................4
Section 5. General Powers......................................................................................4
Section 6. Chairman of the Board...............................................................................4
Section 7. Place of Meetings...................................................................................4
Section 8. Regular Meetings....................................................................................4
Section 9. Special Meetings....................................................................................4
Section 10. Quorum, Action at Meeting, Adjournments............................................................4
Section 11. Action by Consent..................................................................................5
Section 12. Telephonic Meetings................................................................................5
Section 13. Committees.........................................................................................5
Section 14. Compensation.......................................................................................5
ARTICLE III.......................................................................................................6
OFFICERS..........................................................................................................6
Section 1. Enumeration.........................................................................................6
Section 2. Election............................................................................................6
Section 3. Tenure..............................................................................................6
Section 4. President...........................................................................................6
Section 5. Vice-Presidents.....................................................................................7
Section 6. Secretary...........................................................................................7
Section 7. Assistant Secretaries...............................................................................7
Section 8. Treasurer...........................................................................................7
Section 9. Assistant Treasurers................................................................................8
Section 10. Bond...............................................................................................8
ARTICLE IV........................................................................................................8
NOTICES...........................................................................................................8
Section 1. Delivery............................................................................................8
Section 2. Waiver of Notice....................................................................................8
ARTICLE V.........................................................................................................9
INDEMNIFICATION...................................................................................................9
Section 1. Actions other than by or in the Right of the Corporation............................................9
Section 2. Actions by or in the Right of the Corporation.......................................................9
Section 3. Success on the Merits..............................................................................10
(i)
<PAGE>
Section 4. Specific Authorization.............................................................................10
Section 5. Advance Payment....................................................................................10
Section 6. Non-Exclusivity....................................................................................10
Section 7. Insurance..........................................................................................10
Section 8. Continuation of Indemnification and Advancement of Expenses........................................10
Section 9. Severability.......................................................................................10
Section 10. Intent of Article.................................................................................11
ARTICLE VI.......................................................................................................11
CAPITAL STOCK....................................................................................................11
Section 1. Certificates of Stock..............................................................................11
Section 2. Lost Certificates..................................................................................11
Section 3. Transfer of Stock..................................................................................11
Section 4. Record Date........................................................................................11
Section 5. Registered Stockholders............................................................................12
ARTICLE VII......................................................................................................12
CERTAIN TRANSACTIONS.............................................................................................12
Section 1. Transactions with Interested Parties...............................................................12
Section 2. Quorum.............................................................................................13
ARTICLE VIII.....................................................................................................13
GENERAL PROVISIONS...............................................................................................13
Section 1. Dividends..........................................................................................13
Section 2. Reserves...........................................................................................13
Section 3. Checks.............................................................................................13
Section 4. Fiscal Year........................................................................................13
Section 5. Seal...............................................................................................14
ARTICLE IX.......................................................................................................14
AMENDMENTS.......................................................................................................14
</TABLE>
Addendum
Register of Amendments to the By-Laws
(ii)
<PAGE>
* * * * *
BY-LAWS
* * * * *
ARTICLE I
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. All meetings of the stockholders shall be
held at such place within or without the State of Delaware as may be fixed from
time to time by the Board of Directors or the Chief Executive Officer, or if not
so designated, at the registered office of the Corporation.
Section 2. Annual Meeting. Unless directors are elected by written consent
in lieu of an annual meeting as permitted by law and these By-Laws, an annual
meeting of stockholders shall be held at such date and time as shall be
designated from time to time by the Board of Directors or the Chief Executive
Officer, at which meeting the stockholders shall elect by a plurality vote a
board of directors and shall transact such other business as may be properly
brought before the meeting. If no annual meeting is held in accordance with the
foregoing provisions, the Board of Directors shall cause the meeting to be held
as soon thereafter as convenient, which meeting shall be designated a special
meeting in lieu of annual meeting.
Section 3. Special Meetings. Special meetings of the stockholders, for any
purpose or purposes, may, unless otherwise prescribed by statute or by the
certificate of incorporation, be called by the Board of Directors or the Chief
Executive Officer and shall be called by the Chief Executive Officer or
Secretary at the request in writing of a majority of the Board of Directors, or
at the request in writing of stockholders owning a majority in amount of the
entire capital stock of the Corporation issued and outstanding and entitled to
vote. Such request shall state the purpose or purposes of the proposed meeting.
Business transacted at any special meeting shall be limited to matters relating
to the purpose or purposes stated in the notice of meeting.
Section 4. Notice of Meetings. Except as otherwise provided by law, written
notice of each meeting of stockholders, annual or special, stating the place,
date and hour of the meeting and, in the case of a special meeting, the purpose
or purposes for which the meeting is called, shall be given not less than ten
(10) or more than sixty (60) days before the date of the meeting, to each
stockholder entitled to vote at such meeting.
Section 5. Voting List. The officer who has charge of the stock ledger of
the Corporation shall prepare and make, at least ten (10) days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order,
<PAGE>
-2-
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting,
either at a place within the city or town where the meeting is to be held, which
place shall be specified in the notice of the meeting, or, if not so specified,
at the place where the meeting is to be held. The list shall also be produced
and kept at the time and place of the meeting during the whole time thereof, and
may be inspected by any stockholder who is present.
Section 6. Quorum. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by statute, the
certificate of incorporation or these By-Laws. Where a separate vote by a class
or classes is required, a majority of the outstanding shares of such class or
classes, present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter. If no quorum
shall be present or represented at any meeting of stockholders, such meeting may
be adjourned in accordance with Section 7 hereof, until a quorum shall be
present or represented.
Section 7. Adjournments. Any meeting of stockholders may be adjourned from
time to time to any other time and to any other place at which a meeting of
stockholders may be held under these By-Laws, which time and place shall be
announced at the meeting, by a majority of the stockholders present in person or
represented by proxy at the meeting and entitled to vote (whether or not a
quorum is present), or, if no stockholder is present or represented by proxy, by
any officer entitled to preside at or to act as Secretary of such meeting,
without notice other than announcement at the meeting. At such adjourned
meeting, any business may be transacted which might have been transacted at the
original meeting, provided that a quorum either was present at the original
meeting or is present at the adjourned meeting. If the adjournment is for more
than thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 8. Action at Meetings. When a quorum is present at any meeting, the
affirmative vote of the holders of a majority of the stock present in person or
represented by proxy, entitled to vote and voting on the matter (or where a
separate vote by a class or classes is required, the affirmative vote of the
majority of shares of such class or classes present in person or represented by
proxy at the meeting) shall decide any matter (other than the election of
Directors) brought before such meeting, unless the matter is one upon which by
express provision of law, the certificate of incorporation or these By-Laws, a
different vote is required, in which case such express provision shall govern
and control the decision of such matter. The stock of holders who abstain from
voting on any matter shall be deemed not to have been voted on such matter.
Directors shall be elected by a plurality of the votes of the shares present in
person or represented by proxy at the meeting, entitled to vote and voting on
the election of Directors.
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Section 9. Voting and Proxies. Unless otherwise provided in the certificate
of incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote for each share of capital stock having voting power held of
record by such stockholder. Each stockholder entitled to vote at a meeting of
stockholders, or to express consent or dissent to corporate action in writing
without a meeting, may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period.
Section 10. Action Without Meeting. Any action required to be taken at any
annual or special meeting of stockholders, or any action which may be taken at
any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be (1) signed and dated by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted and (2) delivered to
the Corporation within sixty days of the earliest dated consent by delivery to
its registered office in the State of Delaware (in which case delivery shall be
by hand or by certified or registered mail, return receipt requested), its
principal place of business, or an officer or agent of the Corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE II
DIRECTORS
Section 1. Number, Election, Tenure and Qualification. The number of
Directors which shall constitute the whole board shall be not less than one.
Within such limit, the number of Directors shall be determined by resolution of
the Board of Directors or by the stockholders at the annual meeting or at any
special meeting of stockholders. The directors shall be elected at the annual
meeting or at any special meeting of stockholders, or by written consent in lieu
of an annual or special meeting of the stockholders (provided, however, that if
such consent is less than unanimous, such action by written consent may be in
lieu of holding an annual meeting only if all of the directorships to which
directors could be elected at an annual meeting held at the effective time of
such action are vacant and are filled by such action), except as provided in
section 3 of this Article, and each director elected shall hold office until his
successor is elected and qualified, unless sooner displaced. Directors need not
be stockholders.
Section 2. Enlargement. The number of the Board of Directors may be
increased at any time by vote of a majority of the Directors then in office.
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Section 3. Vacancies. Vacancies and newly created Directorships resulting
from any increase in the authorized number of Directors may be filled by a
majority of the Directors then in office, though less than a quorum, or by a
sole remaining director, and the Directors so chosen shall hold office until the
next annual election and until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no Directors in office, then an
election of Directors may be held in the manner provided by statute. In the
event of a vacancy in the Board of Directors, the remaining Directors, except as
otherwise provided by law or these By-Laws, may exercise the powers of the full
board until the vacancy is filled.
Section 4. Resignation and Removal. Any director may resign at any time
upon written notice to the Corporation at its principal place of business or to
the Chief Executive Officer or Secretary. Such resignation shall be effective
upon receipt unless it is specified to be effective at some other time or upon
the happening of some other event. Any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of Directors, unless otherwise
specified by law or the certificate of incorporation.
Section 5. General Powers. The business and affairs of the Corporation
shall be managed by its Board of Directors, which may exercise all powers of the
Corporation and do all such lawful acts and things as are not by statute or by
the certificate of incorporation or by these By-Laws directed or required to be
exercised or done by the stockholders.
Section 6. Chairman of the Board. If the Board of Directors appoints a
chairman of the board, he shall, when present, preside at all meetings of the
stockholders and the Board of Directors. He shall perform such duties and
possess such powers as are customarily vested in the office of the chairman of
the board or as may be vested in him by the Board of Directors.
Section 7. Place of Meetings. The Board of Directors may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 8. Regular Meetings. Regular meetings of the Board of Directors may
be held without notice at such time and at such place as shall from time to time
be determined by the board; provided that any director who is absent when such a
determination is made shall be given prompt notice of such determination. A
regular meeting of the Board of Directors may be held without notice immediately
after and at the same place as the annual meeting of stockholders.
Section 9. Special Meetings. Special meetings of the board may be called by
the Chief Executive Officer, Secretary, or on the written request of two (2) or
more Directors, or by one director in the event that there is only one director
in office. Two (2) days' notice to each director, either personally or by
telegram, cable, telecopy, commercial delivery service, telex or similar means
sent to his business or home address, or three (3) days' notice by written
notice deposited in the mail, shall be given to each director by the Secretary
or by the officer or one of the Directors calling the meeting. A notice or
waiver of notice of a meeting of the Board of Directors need not specify the
purposes of the meeting.
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Section 10. Quorum, Action at Meeting, Adjournments. At all meetings of the
board a majority of Directors then in office, but in no event less than one
third of the entire board, shall constitute a quorum for the transaction of
business and the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by law or by the certificate of
incorporation. For purposes of this section, the term "entire board" shall mean
the number of Directors last fixed by the stockholders or Directors, as the case
may be, in accordance with law and these By-Laws; provided, however, that if
less than all the number so fixed of Directors were elected, the "entire board"
shall mean the greatest number of Directors so elected to hold office at any one
time pursuant to such authorization. If a quorum shall not be present at any
meeting of the Board of Directors, a majority of the Directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 11. Action by Consent. Unless otherwise restricted by the
certificate of incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the board or committee.
Section 12. Telephonic Meetings. Unless otherwise restricted by the
certificate of incorporation or these By-Laws, members of the Board of Directors
or of any committee thereof may participate in a meeting of the Board of
Directors or of any committee, as the case may be, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
Section 13. Committees. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the Directors of the
Corporation. The board may designate one or more Directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to (a) adopting, amending or repealing the
By-Laws of the Corporation or any of them or (b) approving or adopting, or
recommending to the stockholders any action or matter expressly required by law
to be submitted to stockholders for approval. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the Board of Directors. Each committee shall keep regular minutes of
its meetings and make such reports to the Board of Directors as the Board of
Directors may request. Except as the Board of Directors may otherwise determine,
any committee may make rules for the conduct of its business, but unless
otherwise provided by the Directors or in such rules, its business shall be
conducted as nearly as possible in the same manner as is provided in these
By-Laws for the conduct of its business by the Board of Directors.
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Section 14. Compensation. Unless otherwise restricted by the certificate of
incorporation or these By-Laws, the Board of Directors shall have the authority
to fix from time to time the compensation of Directors. The Directors may be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors and the performance of their responsibilities as Directors and may be
paid a fixed sum for attendance at each meeting of the Board of Directors and/or
a stated salary as director. No such payment shall preclude any director from
serving the Corporation or its parent or subsidiary corporations in any other
capacity and receiving compensation therefor. The Board of Directors may also
allow compensation for members of special or standing committees for service on
such committees.
ARTICLE III
OFFICERS
Section 1. Enumeration. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a President, a Secretary and a Treasurer and
such other officers with such titles, terms of office and duties as the Board of
Directors may from time to time determine, including a chairman of the board,
one or more Vice-Presidents, and one or more Assistant Secretaries and assistant
Treasurers. If authorized by resolution of the Board of Directors, the Chief
Executive Officer may be empowered to appoint from time to time Assistant
Secretaries and assistant Treasurers. Any number of offices may be held by the
same person, unless the certificate of incorporation or these By-Laws otherwise
provide.
Section 2. Election. The Board of Directors at its first meeting after each
annual meeting of stockholders shall choose a President, a Secretary and a
Treasurer. Other officers may be appointed by the Board of Directors at such
meeting, at any other meeting, or by written consent.
Section 3. Tenure. The officers of the Corporation shall hold office until
their successors are chosen and qualify, unless a different term is specified in
the vote choosing or appointing him, or until his earlier death, resignation or
removal. Any officer elected or appointed by the Board of Directors or by the
Chief Executive Officer may be removed at any time, with or without cause, by
the affirmative vote of a majority of the Board of Directors or a committee duly
authorized to do so, except that any officer appointed by the Chief Executive
Officer may also be removed at any time, with or without cause, by the Chief
Executive Officer. Any vacancy occurring in any office of the Corporation may be
filled by the Board of Directors, at its discretion. Any officer may resign by
delivering his written resignation to the Corporation at its principal place of
business or to the Chief Executive Officer or the Secretary. Such resignation
shall be effective upon receipt unless it is specified to be effective at some
other time or upon the happening of some other event.
Section 4. President. The President shall be the Chief Operating Officer of
the Corporation. He shall also be the Chief Executive Officer unless the Board
of Directors
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otherwise provides. If no Chief Executive Officer shall have been appointed by
the Board of Directors, all references herein to the "Chief Executive Officer"
shall be to the President. The President shall, unless the Board of Directors
provides otherwise in a specific instance or generally, preside at all meetings
of the stockholders and the Board of Directors, have general and active
management of the business of the Corporation and see that all orders and
resolutions of the Board of Directors are carried into effect. The President
shall execute bonds, mortgages, and other contracts requiring a seal, under the
seal of the Corporation, except where required or permitted by law to be
otherwise signed and executed and except where the signing and execution thereof
shall be expressly delegated by the Board of Directors to some other officer or
agent of the Corporation.
Section 5. Vice-Presidents. In the absence of the President or in the event
of his or her inability or refusal to act, the Vice-President, or if there be
more than one Vice-President, the Vice-Presidents in the order designated by the
Board of Directors or the Chief Executive Officer (or in the absence of any
designation, then in the order determined by their tenure in office) shall
perform the duties of the President, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the President. The
Vice-Presidents shall perform such other duties and have such other powers as
the Board of Directors or the Chief Executive Officer may from time to time
prescribe.
Section 6. Secretary. The Secretary shall have such powers and perform such
duties as are incident to the office of Secretary. The Secretary shall maintain
a stock ledger and prepare lists of stockholders and their addresses as required
and shall be the custodian of corporate records. The Secretary shall attend all
meetings of the Board of Directors and all meetings of the stockholders and
record all the proceedings of the meetings of the Corporation and of the Board
of Directors in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. The Secretary shall give, or cause to
be given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and shall perform such other duties as may be from time to
time prescribed by the Board of Directors or Chief Executive Officer, under
whose supervision the Secretary shall be. The Secretary shall have custody of
the corporate seal of the Corporation and the Secretary, or an assistant
Secretary, shall have authority to affix the same to any instrument requiring it
and when so affixed, it may be attested by his or her signature or by the
signature of such assistant Secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing by his or her signature.
Section 7. Assistant Secretaries. The assistant Secretary, or if there be
more than one, the assistant secretaries in the order determined by the Board of
Directors, the Chief Executive Officer or the Secretary (or if there be no such
determination, then in the order determined by their tenure in office), shall,
in the absence of the Secretary or in the event of his or her inability or
refusal to act, perform the duties and exercise the powers of the Secretary and
shall perform such other duties and have such other powers as the Board of
Directors, the Chief Executive Officer or the Secretary may from time to time
prescribe. In the absence of the Secretary or any assistant Secretary at any
meeting of stockholders or Directors, the person
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presiding at the meeting shall designate a temporary or acting Secretary to keep
a record of the meeting.
Section 8. Treasurer. The Treasurer shall perform such duties and shall
have such powers as may be assigned to him or her by the Board of Directors or
the Chief Executive Officer. In addition, the Treasurer shall perform such
duties and have such powers as are incident to the office of Treasurer. The
Treasurer shall have the custody of the corporate funds and securities and shall
keep full and accurate accounts of receipts and disbursements in books belonging
to the Corporation and shall deposit all moneys and other valuable effects in
the name and to the credit of the Corporation in such depositories as may be
designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking proper vouchers
for such disbursements, and shall render to the Chief Executive Officer and the
Board of Directors, when the Chief Executive Officer or Board of Directors so
requires, an account of all his or her transactions as Treasurer and of the
financial condition of the Corporation.
Section 9. Assistant Treasurers. The assistant Treasurer, or if there shall
be more than one, the assistant Treasurers in the order determined by the Board
of Directors, the Chief Executive Officer or the Treasurer (or if there be no
such determination, then in the order determined by their tenure in office),
shall, in the absence of the Treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the Treasurer
and shall perform such other duties and have such other powers as the Board of
Directors, the Chief Executive Officer or the Treasurer may from time to time
prescribe.
Section 10. Bond. If required by the Board of Directors, any officer shall
give the Corporation a bond in such sum and with such surety or sureties and
upon such terms and conditions as shall be satisfactory to the Board of
Directors, including without limitation a bond for the faithful performance of
the duties of his office and for the restoration to the Corporation of all
books, papers, vouchers, money and other property of whatever kind in his
possession or under his control and belonging to the Corporation.
ARTICLE IV
NOTICES
Section 1. Delivery. Whenever, under the provisions of law, or of the
certificate of incorporation or these By-Laws, written notice is required to be
given to any director or stockholder, such notice may be given by mail,
addressed to such director or stockholder, at his address as it appears on the
records of the Corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail. Unless written notice by mail is required by law, written notice
may also be given by telegram, cable, telecopy, commercial delivery service,
telex or similar means, addressed to such director or stockholder at his address
as it appears on the records of the corporation, in which case such notice shall
be deemed to be given when delivered into the control of the
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persons charged with effecting such transmission, the transmission charge to be
paid by the Corporation or the person sending such notice and not by the
addressee. Oral notice or other in-hand delivery (in person or by telephone)
shall be deemed given at the time it is actually given.
Section 2. Waiver of Notice. Whenever any notice is required to be given
under the provisions of law or of the certificate of incorporation or of these
By-Laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
INDEMNIFICATION
Section 1. Actions other than by or in the Right of the Corporation. The
corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Corporation) by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceedings, had no reasonable cause to believe such person's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that such
person's conduct was unlawful.
Section 2. Actions by or in the Right of the Corporation. The corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact that
he or she is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of
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all the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the Court of Chancery of the State of
Delaware or such other court shall deem proper.
Section 3. Success on the Merits. To the extent that any person described
in Section 1 or 2 of this Article V has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in said
Sections, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
Section 4. Specific Authorization. Any indemnification under Section 1 or 2
of this Article V (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of any person described in said Sections is proper in the
circumstances because he has met the applicable standard of conduct set forth in
said Sections. Such determination shall be made (1) by the Board of Directors by
a majority vote of Directors who were not parties to such action, suit or
proceeding (even though less than a quorum), or (2) if there are no
disinterested Directors or if a majority of disinterested Directors so directs,
by independent legal counsel (who may be regular legal counsel to the
Corporation) in a written opinion, or (3) by the stockholders of the
Corporation.
Section 5. Advance Payment. Expenses incurred in defending a pending or
threatened civil or criminal action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of any person
described in said Section to repay such amount if it shall ultimately be
determined that he or she is not entitled to indemnification by the Corporation
as authorized in this Article V.
Section 6. Non-Exclusivity. The indemnification and advancement of expenses
provided by, or granted pursuant to, the other Sections of this Article V shall
not be deemed exclusive of any other rights to which those provided
indemnification or advancement of expenses may be entitled under any By-Law,
agreement, vote of stockholders or disinterested Directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office.
Section 7. Insurance. The Board of Directors may authorize, by a vote of
the majority of the full board, the Corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Article V.
Section 8. Continuation of Indemnification and Advancement of Expenses. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article V
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shall continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 9. Severability. If any word, clause or provision of this Article V
or any award made hereunder shall for any reason be determined to be invalid,
the provisions hereof shall not otherwise be affected thereby but shall remain
in full force and effect.
Section 10. Intent of Article. The intent of this Article V is to provide
for indemnification and advancement of expenses to the fullest extent permitted
by Section 145 of the General Corporation Law of Delaware. To the extent that
such Section or any successor section may be amended or supplemented from time
to time, this Article V shall be amended automatically and construed so as to
permit indemnification and advancement of expenses to the fullest extent from
time to time permitted by law.
ARTICLE VI
CAPITAL STOCK
Section 1. Certificates of Stock. Every holder of stock in the Corporation
shall be entitled to have a certificate, signed by, or in the name of the
Corporation by, the chairman or Vice-chairman of the Board of Directors, or the
President or a Vice-President and the Treasurer or an assistant Treasurer, or
the Secretary or an assistant Secretary of the Corporation, certifying the
number of shares owned by such holder in the Corporation. Any or all of the
signatures on the certificate may be a facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer, transfer agent or registrar at
the date of issue. Certificates may be issued for partly paid shares and in such
case upon the face or back of the certificates issued to represent any such
partly paid shares, the total amount of the consideration to be paid therefor,
and the amount paid thereon shall be specified.
Section 2. Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or his legal representative, to give
reasonable evidence of such loss, theft or destruction, to advertise the same in
such manner as it shall require and/or to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed or the issuance of such new certificate.
Section 3. Transfer of Stock. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares, duly endorsed or
accompanied by proper evidence
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of succession, assignment or authority to transfer, and proper evidence of
compliance with other conditions to rightful transfer, it shall be the duty of
the Corporation to issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books.
Section 4. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix a record date, which
shall not precede the date upon which the resolution fixing the record date is
adopted by the Board of Directors, and which shall not be more than sixty days
nor less then ten days before the date of such meeting. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. In order that the Corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board of Directors, and which shall not be more than ten days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date is fixed, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is required by statute,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the Corporation as provided
in Section 10 of Article I. If no record date is fixed and prior action by the
Board of Directors is required, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be at
the close of business on the date on which the Board of Directors adopts the
resolution taking such prior action. In order that the Corporation may determine
the stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders entitled to exercise
any rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted, and which shall be not more than sixty days prior to
such action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating to such purpose.
Section 5. Registered Stockholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
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ARTICLE VII
CERTAIN TRANSACTIONS
Section 1. Transactions with Interested Parties. No contract or transaction
between the Corporation and one or more of its Directors or officers, or between
the Corporation and any other corporation, partnership, association, or other
organization in which one or more of its Directors or officers are Directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the board or committee thereof which authorizes
the contract or transaction or solely because his or their votes are counted for
such purpose, if:
(a) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the board or committee in good faith
authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested Directors, even though the disinterested
Directors be less than a quorum; or
(b) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee thereof, or the stockholders.
Section 2. Quorum. Common or interested Directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the corporation,
if any, may be declared by the Board of Directors at any regular or special
meeting or by written consent, pursuant to law. Dividends may be paid in cash,
in property, or in shares of the capital stock, subject to the provisions of the
certificate of incorporation.
Section 2. Reserves. The Directors may set apart out of any funds of the
Corporation available for dividends a reserve or reserves for any proper purpose
and may abolish any such reserve.
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Section 3. Checks. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
Section 5. Seal. The Board of Directors may, by resolution, adopt a
corporate seal. The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the word "Delaware." The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. The seal may be altered from time to time by the Board
of Directors.
ARTICLE IX
AMENDMENTS
These By-Laws may be altered, amended or repealed or new By-Laws may be
adopted by the stockholders or by the Board of Directors, when such power is
conferred upon the Board of Directors by the certificate of incorporation, at
any regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors provided,
however, that in the case of a regular or special meeting of stockholders,
notice of such alteration, amendment, repeal or adoption of new By-Laws be
contained in the notice of such meeting.
<PAGE>
Register of Amendments to the By-Laws
Date Section Affected Change
- ---- ---------------- ------
<PAGE>
Exhibit 3.5
AMENDED AND RESTATED
BY-LAWS
OF
RED HAT, INC.
<PAGE>
BY-LAWS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE 1 - STOCKHOLDERS.................................................................................1
1.1 PLACE OF MEETINGS.................................................................................1
1.2 ANNUAL MEETING....................................................................................1
1.3 SPECIAL MEETINGS..................................................................................1
1.4 NOTICE OF MEETINGS................................................................................1
1.5 VOTING LIST.......................................................................................1
1.6 QUORUM............................................................................................2
1.7 ADJOURNMENTS......................................................................................2
1.8 VOTING AND PROXIES................................................................................2
1.9 ACTION AT MEETING.................................................................................3
1.10 INTRODUCTION OF BUSINESS AT MEETINGS.............................................................3
1.11 ACTION WITHOUT MEETING...........................................................................6
ARTICLE 2 - DIRECTORS....................................................................................6
2.1 GENERAL POWERS....................................................................................6
2.2 NUMBER; ELECTION AND QUALIFICATION................................................................7
2.3 CLASSES OF DIRECTORS..............................................................................7
2.4 TERMS IN OFFICE...................................................................................7
2.5 ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR DECREASES IN THE NUMBER
OF DIRECTORS......................................................................................7
2.6 TENURE............................................................................................8
2.7 VACANCIES.........................................................................................8
2.8 RESIGNATION.......................................................................................8
2.9 REGULAR MEETINGS..................................................................................8
2.10 SPECIAL MEETINGS.................................................................................8
2.11 NOTICE OF SPECIAL MEETINGS.......................................................................8
2.12 MEETINGS BY TELEPHONE CONFERENCE CALLS...........................................................9
2.13 QUORUM...........................................................................................9
2.14 ACTION AT MEETING................................................................................9
2.15 ACTION BY WRITTEN CONSENT........................................................................9
2.16 REMOVAL..........................................................................................9
2.17 COMMITTEES.......................................................................................9
2.18 COMPENSATION OF DIRECTORS.......................................................................10
2.19 AMENDMENTS TO ARTICLE...........................................................................10
</TABLE>
<PAGE>
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<TABLE>
<S> <C>
ARTICLE 3 - OFFICERS....................................................................................10
3.1 ENUMERATION......................................................................................10
3.2 ELECTION.........................................................................................10
3.3 QUALIFICATION....................................................................................10
3.4 TENURE...........................................................................................10
3.5 RESIGNATION AND REMOVAL..........................................................................11
3.6 VACANCIES........................................................................................11
3.7 CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD.............................................11
3.8 PRESIDENT........................................................................................11
3.9 VICE PRESIDENTS..................................................................................11
3.10 SECRETARY AND ASSISTANT SECRETARIES.............................................................12
3.11 TREASURER AND ASSISTANT TREASURERS..............................................................12
3.12 SALARIES........................................................................................13
3.13 ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS.........................................13
ARTICLE 4 - CAPITAL STOCK...............................................................................13
4.1 ISSUANCE OF STOCK................................................................................13
4.2 CERTIFICATES OF STOCK............................................................................13
4.3 TRANSFERS........................................................................................13
4.4 LOST, STOLEN OR DESTROYED CERTIFICATES...........................................................14
4.5 RECORD DATE......................................................................................14
ARTICLE 5 - GENERAL PROVISIONS..........................................................................14
5.1 FISCAL YEAR......................................................................................14
5.2 CORPORATE SEAL...................................................................................14
5.3 NOTICES..........................................................................................14
5.4 WAIVER OF NOTICE.................................................................................15
5.5 EVIDENCE OF AUTHORITY............................................................................15
5.6 FACSIMILE SIGNATURES.............................................................................15
5.7 RELIANCE UPON BOOKS, REPORTS AND RECORDS.........................................................15
5.8 TIME PERIODS.....................................................................................15
5.9 CERTIFICATE OF INCORPORATION.....................................................................15
5.10 TRANSACTIONS WITH INTERESTED PARTIES............................................................15
5.11 SEVERABILITY....................................................................................16
5.12 PRONOUNS........................................................................................16
ARTICLE 6 - AMENDMENTS..................................................................................16
6.1 BY THE BOARD OF DIRECTORS........................................................................16
6.2 BY THE STOCKHOLDERS..............................................................................16
</TABLE>
<PAGE>
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<TABLE>
<S> <C>
ARTICLE 7 - INDEMNIFICATION.............................................................................17
7.1 ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION........................................17
7.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION...................................................17
7.3 SUCCESS ON THE MERITS...........................................................................18
7.4. AUTHORIZATION..................................................................................18
7.5 EXPENSE ADVANCE.................................................................................18
7.6 NONEXCLUSIVITY..................................................................................18
7.7 INSURANCE.......................................................................................18
7.8 "THE CORPORATION"...............................................................................18
7.9 OTHER INDEMNIFICATION...........................................................................19
7.10 OTHER DEFINITIONS..............................................................................19
7.11 CONTINUATION OF INDEMNIFICATION................................................................19
</TABLE>
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
RED HAT, INC. (the "Corporation")
ARTICLE 1 - STOCKHOLDERS
1.1 PLACE OF MEETINGS. All meetings of stockholders shall be held at
such place within or without the State of Delaware as may be designated from
time to time by the Chairman of the Board (if any), the board of directors of
the Corporation (the "Board of Directors") or the President or, if not so
designated, at the registered office of the Corporation.
1.2 ANNUAL MEETING. The annual meeting of stockholders for the election
of directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Chairman
of the Board (if any), Board of Directors, the Chief Executive Officer or the
President (which date shall not be a legal holiday in the place where the
meeting is to be held) at the time and place to be fixed by the Chairman of the
Board, the Board of Directors, the Chief Executive Officer or the President and
stated in the notice of the meeting.
1.3 SPECIAL MEETINGS. Special meetings of stockholders may be called at
any time by the Chairman of the Board (if any), a majority of the Board of
Directors, the Chief Executive Officer or the President and shall be held at
such place, on such date and at such time as shall be fixed by the Board of
Directors or the person calling the meeting. Business transacted at any special
meeting of stockholders shall be limited to matters relating to the purpose or
purposes stated in the notice of meeting.
1.4 NOTICE OF MEETINGS. Except as otherwise provided by law, written
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his or her address as it appears
on the records of the Corporation.
1.5 VOTING LIST. The officer who has charge of the stock ledger of the
Corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting,
<PAGE>
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either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time of the meeting, and
may be inspected by any stockholder who is present. This list shall
presumptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of them.
1.6 QUORUM. Except as otherwise provided by law, the Corporation's
Certificate of Incorporation, as such may be amended from time to time, or these
Amended and Restated By-Laws, as such may be amended from time to time (the
"Restated By-Laws"), the holders of a majority of the shares of the capital
stock of the Corporation issued and outstanding and entitled to vote at the
meeting, present in person or represented by proxy, shall constitute a quorum
for the transaction of business. Shares held by brokers which such brokers are
prohibited from voting (pursuant to their discretionary authority on behalf of
beneficial owners of such shares who have not submitted a proxy with respect to
such shares) on some or all of the matters before the stockholders, but which
shares would otherwise be entitled to vote at the meeting ("Broker Non-Votes")
shall be counted, for the purpose of determining the presence or absence of a
quorum, both (a) toward the total voting power of the shares of capital stock of
the Corporation and (b) as being represented by proxy. If a quorum has been
established for the purpose of conducting the meeting, a quorum shall be deemed
to be present for the purpose of all votes to be conducted at such meeting,
provided that where a separate vote by a class or classes, or series thereof, is
required, a majority of the voting power of the shares of such class or classes,
or series, present in person or represented by proxy shall constitute a quorum
entitled to take action with respect to that vote on that matter. If a quorum
shall fail to attend any meeting, the chairman of the meeting or the holders of
a majority of the voting power of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
1.7 ADJOURNMENTS. Any meeting of stockholders may be adjourned to any
other time and to any other place at which a meeting of stockholders may be held
under these Restated By-Laws by the stockholders present or represented at the
meeting and entitled to vote, although less than a quorum, or, if no stockholder
is present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the Corporation may transact any business which might have
been transacted at the original meeting.
1.8 VOTING AND PROXIES. At any meeting of the stockholders, each
stockholder shall have one vote for each share of stock entitled to vote at such
meeting held of record by such stockholder and a proportionate vote for each
fractional share so held, unless otherwise provided in the Certificate of
Incorporation. Each stockholder of record entitled to vote at a meeting of
stockholders, or to express consent or dissent to corporate action in writing
without a meeting (to the extent not otherwise prohibited by the Certificate of
Incorporation or these By-laws), may vote or express such consent or dissent in
person or may authorize another person or persons to vote or act for such
stockholder by written proxy executed by such stockholder or his or her
<PAGE>
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authorized agent or by a transmission permitted by law and delivered to the
Secretary of the Corporation. No such proxy shall be voted or acted upon after
three years from the date of its execution, unless the proxy expressly provides
for a longer period. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this Section 1.8
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmission could be
used, provided that such copy, facsimile telecommunication or reproduction shall
be a complete reproduction of the entire original writing or transmission.
In the election of directors, voting shall be by written ballot, and
for any other action, voting need not be by ballot.
The Corporation may, and to the extent required by law or the
Certificate of Incorporation, shall, in advance of any meeting of stockholders,
appoint one or more inspectors to act at such meeting and make a written report
thereof. The Corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting of stockholders, the person presiding at
such meeting may, and to the extent required by law or the Certificate of
Incorporation, shall, appoint one or more inspectors to act at such meeting.
Each inspector, before entering upon the discharge of his duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability.
1.9 ACTION AT MEETING. When a quorum is present at any meeting of
stockholders, the holders of a majority of the stock present or represented and
voting on a matter (or if there are two or more classes of stock entitled to
vote as separate classes, then in the case of each such class, the holders of a
majority of the stock of that class present or represented and voting on such
matter) shall decide any matter to be voted upon by the stockholders at such
meeting (other than the election of directors), except when a different vote is
required by express provision of law, the Certificate of Incorporation or these
Restated By-Laws. Any election of directors by the stockholders shall be
determined by a plurality of the votes cast by the stockholders entitled to vote
at such election, except as otherwise provided by the Certificate of
Incorporation. For the purposes of this paragraph, Broker Non-Votes represented
at the meeting but not permitted to vote on a particular matter shall not be
counted, with respect to the vote on such matter, in the number of (a) votes
cast, (b) votes cast affirmatively, or (c) votes cast negatively.
1.10 INTRODUCTION OF BUSINESS AT MEETINGS.
A. ANNUAL MEETINGS OF STOCKHOLDERS.
(1) Nominations of persons for election to the Board
of Directors and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (a)
pursuant to the Corporation's notice of meeting, (b) by or at the
direction of the Board of Directors or (c) by any stockholder of
the Corporation who was a stockholder of record at the time of
giving of notice provided for in this Section 1.10, who is
entitled to vote at the meeting and who complies with the notice
procedures set forth in this Section 1.10.
<PAGE>
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(2) For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to
clause (c) of paragraph (A)(1) of this Section 1.10, the
stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely,
a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the
close of business on the one hundred twentieth (120th) day nor
earlier than the close of business on the one hundred fiftieth
(150th) day prior to the first anniversary of the date of the
proxy statement delivered to stockholders in connection with the
preceding year's annual meeting; provided, however, that if either
(i) the date of the annual meeting is more than thirty (30) days
before or more than sixty (60) days after such an anniversary date
or (ii) no proxy statement was delivered to stockholders in
connection with the preceding year's annual meeting, notice by the
stockholder to be timely must be so delivered not earlier than the
close of business on the ninetieth (90th) day prior to such annual
meeting and not later than the close of business on the later of
the sixtieth (60th) day prior to such annual meeting or the close
of business on the tenth (10th) day following the day on which
public announcement of the date of such meeting is first made by
the Corporation. Such stockholder's notice shall set forth (a) as
to each person whom the stockholder proposes to nominate for
election or reelection as a director, all information relating to
such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (including such
person's written consent to being named in the proxy statement as
a nominee and to serving as a director if elected); (b) as to any
other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at
the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the
proposal is made; and (c) as to the stockholder giving the notice
and the beneficial owner, if any, on whose behalf the nomination
or proposal is made (i) the name and address of such stockholder,
as they appear on the Corporation's books, and of such beneficial
owner and (ii) the class and number of shares of capital stock of
the Corporation that are owned beneficially and held of record by
such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence
of paragraph (A)(2) of this Section 1.10 to the contrary, in the
event that the number of directors to be elected to the Board of
Directors of the Corporation is increased and there is no public
announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of
Directors at least seventy (70) days prior to the first
anniversary of the preceding year's annual meeting (or, if the
annual meeting is held more than thirty (30) days before or sixty
(60) days after such anniversary date, at least seventy (70) days
prior to such annual meeting), a stockholder's notice required by
this Section 1.10 shall also be considered timely, but only with
respect to nominees for any new positions created by such
increase, if it
<PAGE>
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shall be delivered to the Secretary at the principal executive
office of the Corporation not later than the close of business on
the tenth (10th) day following the day on which such public
announcement is first made by the Corporation.
B. SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall
be conducted at a special meeting of stockholders as shall have been
brought before the meeting pursuant to the Corporation's notice of
meeting. Nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the Corporation's notice of
meeting (a) by or at the direction of the Board of Directors or (b)
provided that the Board of Directors has determined that directors
shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of
notice of the special meeting, who shall be entitled to vote at the
meeting and who complies with the notice procedures set forth in
this Section 1.10. If the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to
the Board of Directors, any such stockholder may nominate a person
or persons (as the case may be), for election to such position(s) as
specified in the Corporation's notice of meeting, if the
stockholder's notice required by paragraph (A)(2) of this Section
1.10 shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the ninetieth (90th) day
prior to such special meeting nor later than the later of (x) the
close of business on the sixtieth (60th) day prior to such special
meeting or (y) the close of business on the tenth (10th) day
following the day on which public announcement is first made of the
date of such special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting.
C. GENERAL.
(1) Only such persons who are nominated in accordance
with the procedures set forth in this Section 1.10 shall be
eligible to serve as directors and only such business shall be
conducted at a meeting of stockholders as shall have been brought
before the meeting in accordance with the procedures set forth in
this Section 1.10. Except as otherwise provided by law, the
Certificate of Incorporation or these Restated By-Laws, the
chairman of the meeting shall have the power and duty to determine
whether a nomination or any business proposed to be brought before
the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 1.10 and,
if any proposed nomination or business is not in compliance
herewith, to declare that such defective proposal or nomination
shall be disregarded.
(2) For purposes of this Section 1.10, "public
announcement" shall mean disclosure in a press release reported by
the Dow Jones News Service, Associated Press or comparable
national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant
to Section 13, 14 or 15(d) of the Exchange Act.
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(3) Notwithstanding the foregoing provisions of this
Section 1.10, a stockholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth herein. Nothing
in this Section 1.10 shall be deemed to affect any rights (i) of
stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the
Exchange Act or (ii) of the holders of any series of Preferred
Stock to elect directors under specified circumstances.
1.11 ACTION WITHOUT MEETING. Stockholders of the Corporation may not
take any action by written consent in lieu of a meeting. Notwithstanding any
other provision of law, the Certificate of Incorporation or these Restated
By-Laws, and notwithstanding the fact that a lesser percentage may be specified
by law, the affirmative vote of the holders of at least seventy-five percent
(75%) of the votes which all the stockholders would be entitled to cast at any
annual election of directors or class of directors shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Section 1.11.
ARTICLE 2 - DIRECTORS
2.1 GENERAL POWERS. The business and affairs of the Corporation shall
be managed by or under the direction of a Board of Directors, who may exercise
all of the powers of the Corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law or the
Certificate of Incorporation, may exercise the powers of the full Board of
Directors until the vacancy is filled. Without limiting the foregoing, the Board
of Directors may:
(a) declare dividends from time to time in accordance with law;
(b) purchase or otherwise acquire any property, rights or privileges on
such terms as it shall determine;
(c) authorize the creation, making and issuance, in such form as it may
determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, to borrow funds and guarantee
obligations, and to do all things necessary in connection therewith;
(d) remove any officer of the Corporation with or without cause, and
from time to time to devolve the powers and duties of any officer upon any
other person for the time being;
(e) confer upon any officer of the Corporation the power to appoint,
remove and suspend subordinate officers, employees and agents;
(f) adopt from time to time such stock option, stock purchase, bonus or
other compensation plans for directors, officers, employees, consultants
and agents of the Corporation and its subsidiaries as it may determine;
<PAGE>
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(g) adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees, consultants and agents
of the Corporation and its subsidiaries as it may determine; and
(h) adopt from time to time regulations, not inconsistent herewith, for
the management of the Corporation's business and affairs.
2.2 NUMBER; ELECTION AND QUALIFICATION. The number of directors which
shall constitute the whole Board of Directors shall be determined by resolution
of the Board of Directors, but in no event shall be less than three. The number
of directors may be decreased at any time and from time to time by a majority of
the directors then in office, but only to eliminate vacancies existing by reason
of the death, resignation, removal or expiration of the term of one or more
directors. The directors shall be elected at the annual meeting of stockholders
(or, if so determined by the Board of Directors pursuant to Section 10 hereof,
at a special meeting of stockholders), by such stockholders as have the right to
vote on such election. Directors need not be stockholders of the Corporation.
2.3 CLASSES OF DIRECTORS. The Board of Directors shall be and is
divided into three classes: Class I, Class II and Class III. No one class shall
have more than one director more than any other class.
2.4 TERMS IN OFFICE. Each director shall serve for a term ending on the
date of the third annual meeting following the annual meeting at which such
director was elected; provided, however, that each initial director in Class I
shall serve for a term ending on the date of the annual meeting next following
the end of the Corporation's fiscal year ending February 29, 2000; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting next following the end of the Corporation's fiscal year ending February
28, 2001; and each initial director in Class III shall serve for a term ending
on the date of the annual meeting next following the end of the Corporation's
fiscal year ending February 28, 2002.
2.5 ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF Directors. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as a director of the class of which he or she is a
member until the expiration of such director's current term or his or her prior
death, removal or resignation and (ii) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board of Directors among the three classes of directors, subject to the
second sentence of Section 2.3. To the extent possible, consistent with the
foregoing rule, any newly created directorships shall be added to those classes
whose terms of office are to expire at the earliest dates following such
allocation, unless otherwise provided for from time to time by resolution
adopted by a majority of the directors then in office, although less than a
quorum. No decrease in the number of directors constituting the whole Board of
Directors shall shorten the term of an incumbent Director.
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2.6 TENURE. Notwithstanding any provisions to the contrary contained
herein, each director shall hold office until his or her successor is elected
and qualified, or until his or her earlier death, resignation or removal.
2.7 VACANCIES. Unless and until filled by the stockholders, any vacancy
in the Board of Directors, however occurring, including a vacancy resulting from
an enlargement thereof, may be filled by vote of a majority of the directors
then in office, although less than a quorum, or by a sole remaining director. A
director elected to fill a vacancy shall be elected for the unexpired term of
his or her predecessor in office, if any, and a director chosen to fill a
position resulting from an increase in the number of directors shall hold office
until the next election of directors of the class for which such director was
chosen and until his or her successor is elected and qualified, or until his or
her earlier death, resignation or removal.
2.8 RESIGNATION. Any director may resign by delivering his or her
written resignation to the Corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
2.9 REGULAR MEETINGS. Regular meetings of the Board of Directors may be
held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination.
2.10 SPECIAL MEETINGS. Special meetings of the Board of Directors may
be held at any time and place, within or without the State of Delaware,
designated in a call by the Chairman of the Board (if any), the Chief Executive
Officer, the President, two or more directors, or by one director in the event
that there is only a single director in office.
2.11 NOTICE OF SPECIAL MEETINGS. Notice of any special meeting of
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 48 hours in advance of the meeting, (ii) by sending a telegram or
delivering written notice by facsimile transmission or by hand, to his or her
last known business or home address at least 48 hours in advance of the meeting,
or (iii) by mailing written notice to his or her last known business or home
address at least 72 hours in advance of the meeting. A notice or waiver of
notice of a meeting of the Board of Directors need not specify the purposes of
the meeting.
2.12 MEETINGS BY TELEPHONE CONFERENCE CALLS. Directors or any members
of any committee designated by the Board of Directors may participate in a
meeting of the Board of Directors or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation by such
means shall be deemed to constitute presence in person at such meeting.
2.13 QUORUM. A majority of the total number of the whole Board of
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the
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directors shall be disqualified to vote at any meeting, then the required quorum
shall be reduced by one for each such director so disqualified; provided,
however, that in no case shall less than one-third (1/3) of the total number of
the whole Board of Directors constitute a quorum. In the absence of a quorum at
any such meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice other than announcement at the meeting,
until a quorum shall be present.
2.14 ACTION AT MEETING. At any meeting of the Board of Directors at
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these Restated By-Laws.
2.15 ACTION BY WRITTEN CONSENT. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee of the Board
of Directors may be taken without a meeting, if all members of the Board of
Directors or committee, as the case may be, consent to such action in writing,
and the written consents are filed with the minutes of proceedings of the Board
of Directors or committee.
2.16 REMOVAL. Unless otherwise provided in the Certificate of
Incorporation, any one or more or all of the directors may be removed with cause
only by the holders of at least seventy-five percent (75%) of the shares then
entitled to vote at an election of directors. Directors may not be removed
without cause.
2.17 COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
such committee. In the absence or disqualification of a member of a committee,
the member or members of such committee present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at such meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the General Corporation Law of the State of
Delaware, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation
and may authorize the seal of the Corporation to be affixed to all papers which
may require it. Each such committee shall keep minutes and make such reports as
the Board of Directors may from time to time request. Except as the Board of
Directors may otherwise determine or as provided herein, any committee may make
rules for the conduct of its business, but unless otherwise provided by the
directors or in such rules, its business shall be conducted as nearly as
possible in the same manner as is provided in these Restated By-Laws for the
Board of Directors. Adequate provisions shall be made for notice to members of
all meeting of committees. One-third (1/3) of the members of any committee shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of such committee.
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2.18 COMPENSATION OF DIRECTORS. Directors may be paid such compensation
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the Corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
2.19 AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of
law, the Certificate of Incorporation or these Restated By-Laws, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of a least seventy-five percent (75%) of the
votes which all the stockholders would be entitled to cast at any annual
election of directors or class of directors shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Article 2.
ARTICLE 3 - OFFICERS
3.1 ENUMERATION. The officers of the Corporation shall consist of a
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including, but not limited to,
a Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice
Presidents, Assistant Treasurers and Assistant Secretaries. The Board of
Directors may appoint such other officers as it may deem appropriate.
3.2 ELECTION. The President, Treasurer and Secretary shall be elected
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3 QUALIFICATION. No officer need be a stockholder. Any two or more
offices may be held by the same person.
3.4 TENURE. Except as otherwise provided by law, by the Certificate of
Incorporation or by these Restated By-Laws, each officer shall hold office until
his or her successor is elected and qualified, unless a different term is
specified in the vote choosing or appointing such officer, or until his or her
earlier death, resignation or removal.
3.5 RESIGNATION AND REMOVAL. Any officer may resign by delivering his
or her written resignation to the Chairman of the Board (if any), to the Board
of Directors at a meeting thereof, to the Corporation at its principal office or
to the President or Secretary. Such resignation shall be effective upon receipt
unless it is specified to be effective at some other time or upon the happening
of some other event.
Any officer may be removed at any time, with or without cause, by vote
of a majority of the entire number of directors then in office.
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Except as the Board of Directors may otherwise determine, no officer
who resigns or is removed shall have any right to any compensation as an officer
for any period following his or her resignation or removal, or any right to
damages on account of such removal, whether his or her compensation be by the
month or by the year or otherwise, unless such compensation is expressly
provided in a duly authorized written agreement with the Corporation.
3.6 VACANCIES. The Board of Directors may fill any vacancy occurring in
any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his or her successor is elected and qualified, or
until his or her earlier death, resignation or removal.
3.7 CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD. The Chairman
of the Board, if any, shall preside at all meetings of the Board of Directors
and stockholders at which he or she is present and shall perform such duties and
possess such powers as are designated by the Board of Directors. If the Board of
Directors appoints a Vice-Chairman of the Board, he or she shall, in the absence
or disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be designated by the Board of
Directors.
3.8 PRESIDENT. The President shall, subject to the direction of the
Board of Directors, have general charge and supervision of the business of the
Corporation. Unless otherwise provided by the Board of Directors, and provided
that there is no Chairman of the Board or that the Chairman and Vice-Chairman,
if any, are not available, the President shall preside at all meetings of the
stockholders, and, if a director, at all meetings of the Board of Directors.
Unless the Board of Directors has designated another officer as the Chief
Executive Officer, the President shall be the Chief Executive Officer of the
Corporation. The President shall perform such other duties and shall have such
other powers as the Board of Directors may from time to time prescribe. The
President shall have the power to enter into contracts and otherwise bind the
Corporation in matters arising in the ordinary course of the Corporation's
business.
3.9 VICE PRESIDENTS. Any Vice President shall perform such duties and
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and, when so performing, shall have all the powers of
and be subject to all the restrictions upon the President. The Board of
Directors may assign to any Vice President the title of Executive Vice
President, Senior Vice President or any other title selected by the Board of
Directors. Unless otherwise determined by the Board of Directors, any Vice
President shall have the power to enter into contracts and otherwise bind the
Corporation in matters arising in the ordinary course of the Corporation's
business.
3.10 SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall perform
such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of
secretary, including without limitation the duty and power to give notices
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of all meetings of stockholders and special meetings of the Board of Directors,
to attend all meetings of stockholders and the Board of Directors and keep a
record of the proceedings, to maintain a stock ledger and prepare lists of
stockholders and their addresses as required, to be custodian of corporate
records and the corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such
powers as the Board of Directors, the President or the Secretary may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Secretary, the Assistant Secretary (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any
meeting of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.11 TREASURER AND ASSISTANT TREASURERS. The Treasurer shall perform
such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Treasurer shall
perform such duties and have such powers as are incident to the office of
treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the Corporation, to deposit funds of
the Corporation in depositories selected in accordance with these Restated
By-Laws, to disburse such funds as ordered by the Board of Directors, to make
proper accounts for such funds, and to render as required by the Board of
Directors statements of all such transactions and of the financial condition of
the Corporation.
The Assistant Treasurers shall perform such duties and possess such
powers as the Board of Directors, the President or the Treasurer may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
3.12 SALARIES. Officers of the Corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
3.13 ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless
otherwise directed by the Board of Directors, the President or any officer of
the Corporation authorized by the President shall have power to vote and
otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which the Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE 4 - CAPITAL STOCK
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4.1 ISSUANCE OF STOCK. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the Corporation
or the whole or any part of any issued, authorized capital stock of the
Corporation held in its treasury may be issued, sold, transferred or otherwise
disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 CERTIFICATES OF STOCK. Every holder of stock of the Corporation
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by such stockholder in the Corporation. Each such certificate shall be
signed by, or in the name of the Corporation by, the Chairman or Vice-Chairman,
if any, of the Board of Directors, or the President or a Vice President, and the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary
of the Corporation. Any or all of the signatures on such certificate may be a
facsimile.
Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Certificate of Incorporation, the
Restated By-Laws, applicable securities laws or any agreement among any number
of shareholders or among such holders and the Corporation shall have
conspicuously noted on the face or back of such certificate either the full text
of such restriction or a statement of the existence of such restriction.
4.3 TRANSFERS. Except as otherwise established by rules and regulations
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the Corporation by the surrender to the
Corporation or its transfer agent of the certificate representing such shares,
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the Corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of Incorporation
or by these Restated By-Laws, the Corporation shall be entitled to treat the
record holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
to such stock, regardless of any transfer, pledge or other disposition of such
stock, until the shares have been transferred on the books of the Corporation in
accordance with the requirements of these Restated By-Laws.
4.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue a
new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
President may prescribe, including the presentation of reasonable evidence of
such loss, theft or destruction and the giving of such indemnity as the
President may require for the protection of the Corporation or any transfer
agent or registrar.
4.5 RECORD DATE. The Board of Directors may fix in advance a date as a
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or, to the extent permitted by the
Certificate of Incorporation and these By-laws, to express consent (or dissent)
to corporate action in writing without a meeting, or entitled to
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receive payment of any dividend or other distribution or allotment of any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action. Such record date shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to any
other action to which such record date relates.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day before the day on which notice is given,
or, if notice is waived, at the close of business on the day before the day on
which the meeting is held. The record date for determining stockholders entitled
to express consent to corporate action in writing without a meeting (to the
extent permitted by the Certificate of Incorporation and these By-laws) when no
prior action by the Board of Directors is necessary, shall be the day on which
the first written consent is expressed. The record date for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
ARTICLE 5 - GENERAL PROVISIONS
5.1 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
5.2 CORPORATE SEAL. The corporate seal shall be in such form as shall
be approved by the Board of Directors.
5.3 NOTICES. Except as otherwise specifically provided herein or
required by law or the Certificate of Incorporation, all notices required to be
given to any stockholder, director, officer, employee or agent of the
Corporation shall be in writing and may in every instance be effectively given
by hand delivery to the recipient thereof, by depositing such notice in the
mails, postage paid, or by sending such notice by prepaid telegram or facsimile
transmission. Any such notice shall be addressed to such stockholder, director,
officer, employee or agent at his or her last known address as the same appears
on the books of the Corporation. The time when such notice is received shall be
deemed to be the time of the giving of the notice.
5.4 WAIVER OF NOTICE. Whenever any notice whatsoever is required to be
given by law, by the Certificate of Incorporation or by these Restated By-Laws,
a waiver of such notice either in writing signed by the person entitled to such
notice or such person's duly authorized attorney, or by telegraph, facsimile
transmission or any other available method, whether before, at or after the time
stated in such waiver, or the appearance of such person or persons at such
meeting in person or by proxy, shall be deemed equivalent to such notice.
5.5 EVIDENCE OF AUTHORITY. A certificate by the Secretary, or an
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or
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any officer or representative of the Corporation shall, as to all persons who
rely on the certificate in good faith, be conclusive evidence of such action.
5.6 FACSIMILE SIGNATURES. In addition to the provisions for use of
facsimile signatures elsewhere specifically authorized in these Restated
By-Laws, facsimile signatures of any officer or officers of the Corporation may
be used whenever and as authorized by the Board of Directors or a committee
thereof.
5.7 RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each
member of any committee designated by the Board of Directors, and each officer
of the Corporation shall, in the performance of his or her duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation and upon such information, opinions, reports or statements
presented to the Corporation by any of its officers or employees or committees
of the Board of Directors so designated, or by any other person as to matters
which such director or committee member reasonably believes are within such
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
5.8 TIME PERIODS. In applying any provision of these Restated By-Laws
that requires that an act be done or not be done a specified number of days
prior to an event or that an act be done during a period of a specified number
of days prior to an event, calendar days shall be used, the day of the doing of
the act shall be excluded, and the day of the event shall be included.
5.9 CERTIFICATE OF INCORPORATION. All references in these Restated
By-Laws to the Certificate of Incorporation shall be deemed to refer to the
Third Amended and Restated Certificate of Incorporation of the Corporation, as
amended and in effect from time to time.
5.10 TRANSACTIONS WITH INTERESTED PARTIES. No contract or transaction
between the Corporation and one or more of the directors or officers, or between
the Corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because such director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his, her or their votes are counted for such purpose, if:
(1) The material facts as to his or her relationship or interest and as
to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative vote of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum;
(2) The material facts as to his or her relationship or interest and as
to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or
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(3) The contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
5.11 SEVERABILITY. Any determination that any provision of these
Restated By-Laws is for any reason inapplicable, illegal or ineffective shall
not affect or invalidate any other provision of these Restated By-Laws.
5.12 PRONOUNS. All pronouns used in these Restated By-Laws shall be
deemed to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the persons or persons so designated may require.
ARTICLE 6 - AMENDMENTS
6.1 BY THE BOARD OF DIRECTORS. Except as is otherwise set forth in
these Restated By-Laws, these Restated By-Laws may be altered, amended or
repealed, or new by-laws may be adopted, by the affirmative vote of a majority
of the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.
6.2 BY THE STOCKHOLDERS. Except as otherwise set forth in these
Restated By-Laws, these Restated By-Laws may be altered, amended or repealed or
new by-laws may be adopted by the affirmative vote of the holders of
seventy-five percent (75%) of the shares of the capital stock of the Corporation
issued and outstanding and entitled to vote at any regular meeting of
stockholders, or at any special meeting of stockholders, provided notice of such
alteration, amendment, repeal or adoption of new by-laws shall have been stated
in the notice of such special meeting.
ARTICLE 7 - INDEMNIFICATION
7.1 ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify and hold harmless, to the fullest extent permitted
by applicable law as it presently exists or may hereafter be amended, any person
who was or is a party or is threatened to be made a party or is otherwise
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that such person,
or a person for whom such person is the legal representative, is or was a
director, trustee, partner, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise or non-profit entity, against all liability, losses, expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by such person in
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connection with such action, suit or proceeding if such person acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interest of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that such person did not act in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interest of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his or her
conduct was unlawful.
7.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact that
he or she is or was a director, trustee, partner, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise or non-profit entity against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Corporation; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation unless and only to
the extent that the Court of Chancery of the State of Delaware or the court in
which such action or suit was brought shall determine upon application that
despite the adjudication of liability but in view of all the circumstances of
the case, such person fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery of the State of Delaware or such other
court shall deem proper.
7.3 SUCCESS ON THE MERITS. To the extent that any person referred to in
Sections 7.1 or 7.2 has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to therein, or in defense of any claim,
issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith.
7.4. AUTHORIZATION. Any indemnification under Sections 7.1, 7.2 or 7.3
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director,
trustee, partner, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in Sections 7.1
and 7.2. Such determination shall be made: (a) by the Board of Directors, by a
majority vote of directors who are not parties to such action, suit or
proceeding (whether or not a quorum), or (b) if there are no disinterested
directors or if a majority of disinterested directors so directs, by independent
legal counsel (who may be regular legal counsel to the corporation) in a written
opinion, or (c) by the stockholders.
7.5 EXPENSE ADVANCE. Expenses (including attorneys' fees) incurred by
an officer or director of the Corporation in defending any pending or threatened
civil, criminal, administrative
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or investigative action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding as
authorized by the Board of Directors in the manner provided in Section 7.4 of
this Article upon receipt of an undertaking by or on behalf of such officer or
director to repay such amount, if it shall ultimately be determined that he is
not entitled to be indemnified by the Corporation as authorized in this Article.
Such expenses (including attorneys' fees) incurred by other employees or agents
of the Corporation may be so paid upon such terms and conditions, if any, as the
Board of Directors deems appropriate.
7.6 NONEXCLUSIVITY. The indemnification and advancement of expenses
provided by, or granted pursuant to, the other Sections of this Article shall
not be deemed exclusive of any other rights to which any person seeking
indemnification or advancement of expenses may be entitled under any statute,
by-law, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his or her official capacity and as to action in another
capacity while holding such office, and shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
7.7 INSURANCE. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, trustee, partner, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise or
non-profit entity against any liability asserted against and incurred by such
person in any such capacity, or arising out of his or her status as such,
whether or not the Corporation would have the power to indemnify such person
against such liability under the provisions of this Article or Section 145 of
the Delaware General Corporation Law.
7.8 "THE CORPORATION" For the purposes of this Article, references to
"the Corporation" shall include the resulting corporation and, to the extent
that the Board of Directors of the resulting corporation so decides, all
constituent corporations (including any constituent of a constituent) absorbed
in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers and
employees or agents so that any person who is or was a director, officer,
employee or agent of such a constituent corporation or is or was serving at the
request of such constituent corporation as director, trustee, partner, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise or non-profit entity shall stand in the same position under the
provisions of this Article with respect to the resulting or surviving
corporation as he or she would have with respect to such constituent corporation
if its separate existence had continued.
7.9 OTHER INDEMNIFICATION. The Corporation's obligation, if any, to
indemnify any person who was or is serving at its request as a director,
trustee, partner, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise or non-profit entity shall
be reduced by any amount such person may collect as indemnification from such
other corporation, partnership, joint venture, trust or other enterprise or
non-profit entity or from insurance.
7.10 OTHER DEFINITIONS. For purposes of this Article, references to
"other enterprises" shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed
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on a person with respect to an employee benefit plan; and references to "serving
at the request of the Corporation" shall include any service as a director,
trustee, officer, employee or agent of the Corporation which imposes duties on,
or involves services by, such director, trustee, officer, employee, or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and a person who acted in good faith and in a manner he reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Corporation" as referred to in this Article.
7.11 CONTINUATION OF INDEMNIFICATION. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article shall,
unless otherwise provided when authorized or ratified, continue as a person who
has ceased to be a director, trustee, partner, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
<PAGE>
Exhibit 10.1
RED HAT SOFTWARE, INC.
1998 STOCK OPTION PLAN
----------------------
1. Purpose. The purpose of the Red Hat Software, Inc. 1998 Stock Option
Plan (the "Plan") is to encourage key employees of Red Hat Software, Inc., a
Delaware corporation (the "Company") and of any present or future parent or
subsidiary of the Company (collectively, "Related Corporations") and other
individuals who render services to the Company or a Related Corporation, by
providing opportunities to participate in the ownership of the Company and its
future growth through (a) the grant of options which qualify as "incentive stock
options" ("ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as
amended (the "Code"); (b) the grant of options which do not qualify as ISOs
("Non-Qualified Options"); (c) awards of stock in the Company ("Awards"); and
(d) opportunities to make direct purchases of stock in the Company
("Purchases"). Both ISOs and Non-Qualified Options are referred to hereafter
individually as an "Option" and collectively as "Options." Options, Awards and
authorizations to make Purchases are referred to hereafter collectively as
"Stock Rights." As used herein, the terms "parent" and "subsidiary" mean "parent
corporation" and "subsidiary corporation," respectively, as those terms are
defined in Section 424 of the Code.
2. Administration of the Plan.
A. Board or Committee Administration. The Plan shall be administered
by the Board of Directors of the Company (the "Board") or, subject to
paragraph 2(D) (relating to compliance with Section 162(m) of the Code), by
a committee appointed by the Board (the "Committee"). Hereinafter, all
references in this Plan to the "Committee" shall mean the Board if no
Committee has been appointed. Subject to ratification of the grant or
authorization of each Stock Right by the Board (if so required by
applicable state law), and subject to the terms of the Plan, the Committee
shall have the authority to (i) determine to whom (from among the class of
employees eligible under paragraph 3 to receive ISOs) ISOs shall be
granted, and to whom (from among the class of individuals and entities
eligible under paragraph 3 to receive Non-Qualified Options and Awards and
to make Purchases) Non-Qualified Options, Awards and authorizations to make
Purchases may be granted; (ii) determine the time or times at which Options
or Awards shall be granted or Purchases made; (iii) determine the purchase
price of shares subject to each Option or Purchase, which prices shall not
be less than the minimum price specified in paragraph 6; (iv) determine
whether each Option granted shall be an ISO or a Non-Qualified Option; (v)
determine (subject to paragraph 7) the time or times when each Option shall
become exercisable and the duration of the exercise period; (vi) extend the
period during which outstanding Options may be exercised; (vii) determine
whether restrictions such as repurchase
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options are to be imposed on shares subject to Options, Awards and
Purchases and the nature of such restrictions, if any, and (viii) interpret
the Plan and prescribe and rescind rules and regulations relating to it. If
the Committee determines to issue a Non-Qualified Option, it shall take
whatever actions it deems necessary, under Section 422 of the Code and the
regulations promulgated thereunder, to ensure that such Option is not
treated as an ISO. The interpretation and construction by the Committee of
any provisions of the Plan or of any Stock Right granted under it shall be
final unless otherwise determined by the Board. The Committee may from time
to time adopt such rules and regulations for carrying out the Plan as it
may deem advisable. No member of the Board or the Committee shall be liable
for any action or determination made in good faith with respect to the Plan
or any Stock Right granted under it.
B. Committee Actions. The Committee may select one of its members as
its chairman, and shall hold meetings at such time and places as it may
determine. A majority of the Committee shall constitute a quorum and acts
of a majority of the members of the Committee at a meeting at which a
quorum is present, or acts reduced to or approved in writing by all the
members of the Committee (if consistent with applicable state law), shall
be the valid acts of the Committee. From time to time the Board may
increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies however caused, or remove all members
of the Committee and thereafter directly administer the Plan.
C. Grant of Stock Rights to Board Members. Stock Rights may be granted
to members of the Board. All grants of Stock Rights to members of the Board
shall in all respects be made in accordance with the provisions of this
Plan applicable to other eligible persons. Members of the Board who either
(i) are eligible to receive grants of Stock Rights pursuant to the Plan or
(ii) have been granted Stock Rights may vote on any matters affecting the
administration of the Plan or the grant of any Stock Rights pursuant to the
Plan, except that no such member shall act upon the granting to himself or
herself of Stock Rights, but any such member may be counted in determining
the existence of a quorum at any meeting of the Board during which action
is taken with respect to the granting to such member of Stock Rights.
D. Performance-Based Compensation. The Board, in its discretion, may
take such action as may be necessary to ensure that Stock Rights granted
under the Plan qualify as "qualified performance-based compensation" within
the meaning of Section 162(m) of the Code and applicable regulations
promulgated thereunder ("Performance-Based Compensation"). Such action may
include, in the Board's discretion, some or all of the following (i) if the
Board determines that Stock Rights granted under the Plan generally shall
constitute Performance-Based Compensation, the Plan shall be administered,
to the extent required for such Stock Rights to constitute
Performance-Based Compensation, by a
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Committee consisting solely of two or more "outside directors" (as defined
in applicable regulations promulgated under Section 162(m) of the Code),
(ii) if any Non-Qualified Options with an exercise price less than the fair
market value per share of Common Stock are granted under the Plan and the
Board determines that such Options should constitute Performance-Based
Compensation, such options shall be made exercisable only upon the
attainment of a pre-established, objective performance goal established by
the Committee, and such grant shall be submitted for, and shall be
contingent upon shareholder approval and (iii) Stock Rights granted under
the Plan may be subject to such other terms and conditions as are necessary
for compensation recognized in connection with the exercise or disposition
of such Stock Right or the disposition of Common Stock acquired pursuant to
such Stock Right, to constitute Performance-Based Compensation.
3. Eligible Employees and Others. ISOs may be granted only to employees of
the Company or any Related Corporation. Non-Qualified Options, Awards and
authorizations to make Purchases may be granted to any employee, officer or
director (whether or not also an employee) or consultant of the Company or any
Related Corporation. The Committee may take into consideration a recipient's
individual circumstances in determining whether to grant a Stock Right. The
granting of any Stock Right to any individual or entity shall neither entitle
that individual or entity to, nor disqualify such individual or entity from,
participation in any other grant of Stock Rights.
4. Stock. The stock subject to Stock Rights shall be authorized but
unissued shares of Common Stock of the Company, $.0001 par value per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company in any
manner. The aggregate number of shares which may be issued pursuant to the Plan
is 1,000,000, subject to adjustment as provided in paragraph 13. If any Option
granted under the Plan shall expire or terminate for any reason without having
been exercised in full or shall cease for any reason to be exercisable in whole
or in part or shall be repurchased by the Company, the unpurchased shares of
Common Stock subject to such Option shall again be available for grants of Stock
Rights under the Plan. In addition, if any shares of Common Stock issued upon
the exercise of any Option shall be repurchased by the Company at cost pursuant
to the terms of the option agreement evidencing such Option, such repurchased
shares shall also again be available for grants of Stock Rights under the Plan.
No employee of the Company or any Related Corporation may be granted
Options to acquire, in the aggregate, more than 500,000 shares of Common Stock
under the Plan during any fiscal year of the Company. If any Option granted
under the Plan shall expire or terminate for any reason without having been
exercised in full or shall cease for any reason to be exercisable in whole or in
part or shall be repurchased by the Company, the shares subject to such Option
shall be included in the determination of the aggregate number of shares of
Common Stock deemed to have been granted to such employee under the Plan. In
addition, if any shares of Common Stock issued upon the exercise of any Option
shall be repurchased by the Company at cost pursuant to the terms of the option
agreement evidencing such Option, such repurchased shares shall also be included
in the determination of the aggregate number of shares of Common Stock deemed to
have been granted to such employee under the Plan.
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5. Granting of Stock Rights. Stock Rights may be granted under the Plan at
any time on or after August 31, 1998 and prior to August 31, 2008. The date of
grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant.
6. Minimum Option Price; ISO Limitations.
A. Price for Non-Qualified Options, Awards and Purchases. Subject to
paragraph 2(D) (relating to compliance with Section 162(m) of the Code),
the exercise price per share specified in the agreement relating to each
Non-Qualified Option granted, and the purchase price per share of stock
granted in any Award or authorized as a Purchase, under the Plan may be
less than the fair market value of the Common Stock of the Company on the
date of grant; provided that, in no event shall such exercise price or such
purchase price be less than the minimum legal consideration required
therefor under the laws of any jurisdiction in which the Company or its
successors in interest may be organized.
B. Price for ISOs. The exercise price per share specified in the
agreement relating to each ISO granted under the Plan shall not be less
than the fair market value per share of Common Stock on the date of such
grant. In the case of an ISO to be granted to an employee owning stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, the
price per share specified in the agreement relating to such ISO shall not
be less than one hundred ten percent (110%) of the fair market value per
share of Common Stock on the date of grant. For purposes of determining
stock ownership under this paragraph, the rules of Section 424(d) of the
Code shall apply.
C. $100,000 Annual Limitation on ISO Vesting. Each eligible employee
may be granted Options treated as ISOs only to the extent that, in the
aggregate under this Plan and all incentive stock option plans of the
Company and any Related Corporation, ISOs do not become exercisable for the
first time by such employee during any calendar year with respect to stock
having a fair market value (determined at the time the ISOs were granted)
in excess of $100,000. The Company intends to designate any Options granted
in excess of such limitation as Non-Qualified Options, and the Company
shall issue separate certificates to the optionee with respect to Options
that are Non-Qualified Options and Options that are ISOs.
D. Determination of Fair Market Value. If, at the time an Option is
granted under the Plan, the Company's Common Stock is publicly traded,
"fair market value" shall be determined as of the date of grant or, if the
prices or quotes discussed in this sentence are unavailable for such date,
the last business day for which such prices or quotes are available prior
to the date of grant and shall mean
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(i) the average (on that date) of the high and low prices of the Common
Stock on the principal national securities exchange on which the Common
Stock is traded, if the Common Stock is then traded on a national
securities exchange; or (ii) the last reported sale price (on that date) of
the Common Stock on the Nasdaq National Market, if the Common Stock is not
then traded on a national securities exchange; or (iii) the closing bid
price (or average of bid prices) last quoted (on that date) by an
established quotation service for over-the-counter securities, if the
Common Stock is not reported on the Nasdaq National Market. If the Common
Stock is not publicly traded at the time an Option is granted under the
Plan, "fair market value" shall mean the fair value of the Common Stock as
determined by the Committee after taking into consideration all factors
which it deems appropriate, including, without limitation, recent sale and
offer prices of the Common Stock in private transactions negotiated at
arm's length.
7. Option Duration. Subject to earlier termination as provided in
paragraphs 9 and 10 or in the agreement relating to such Option, each Option
shall expire on the date specified by the Committee, but not more than (i) ten
years from the date of grant in the case of Options generally and (ii) five
years from the date of grant in the case of ISOs granted to an employee owning
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, as determined
under paragraph 6(B). Subject to earlier termination as provided in paragraphs 9
and 10, the term of each ISO shall be the term set forth in the original
instrument granting such ISO, except with respect to any part of such ISO that
is converted into a Non-Qualified Option pursuant to paragraph 16.
8. Exercise of Option. Subject to the provisions of paragraphs 9 through
12, each Option granted under the Plan shall be exercisable as follows:
A. Vesting. The Option shall either be fully exercisable on the date
of grant or shall become exercisable thereafter in such installments as the
Committee may specify.
B. Full Vesting of Installments. Once an installment becomes
exercisable, it shall remain exercisable until expiration or termination of
the Option, unless otherwise specified by the Committee.
C. Partial Exercise. Each Option or installment may be exercised at
any time or from time to time, in whole or in part, for up to the total
number of shares with respect to which it is then exercisable.
D. Acceleration of Vesting. The Committee shall have the right to
accelerate the date that any installment of any Option becomes exercisable;
provided that the Committee shall not, without the consent of an optionee,
accelerate the permitted exercise date of any installment of any Option
granted to any employee as an ISO (and not previously converted into a
Non-Qualified Option pursuant to paragraph 16) if such acceleration would
violate the annual
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vesting limitation contained in Section 422(d) of the Code, as described in
paragraph 6(C).
9. Termination of Employment. Unless otherwise specified in the agreement
relating to such ISO, if an ISO optionee ceases to be employed by the Company
and all Related Corporations other than by reason of death or disability as
defined in paragraph 10, no further installments of his or her ISOs shall become
exercisable, and his or her ISOs shall terminate on the earlier of (a) three
months after the date of termination of his or her employment, or (b) their
specified expiration dates, except to the extent that such ISOs (or unexercised
installments thereof) have been converted into Non-Qualified Options pursuant to
paragraph 16. For purposes of this paragraph 9, employment shall be considered
as continuing uninterrupted during any bona fide leave of absence (such as those
attributable to illness, military obligations or governmental service) provided
that the period of such leave does not exceed 90 days or, if longer, any period
during which such optionee's right to reemployment is guaranteed by statute or
by contract. A bona fide leave of absence with the written approval of the
Committee shall not be considered an interruption of employment under this
paragraph 9, provided that such written approval contractually obligates the
Company or any Related Corporation to continue the employment of the optionee
after the approved period of absence. ISOs granted under the Plan shall not be
affected by any change of employment within or among the Company and Related
Corporations, so long as the optionee continues to be an employee of the Company
or any Related Corporation. Nothing in the Plan shall be deemed to give any
grantee of any Stock Right the right to be retained in employment or other
service by the Company or any Related Corporation for any period of time.
10. Death; Disability.
A. Death. If an ISO optionee ceases to be employed by the Company and
all Related Corporations by reason of his or her death, any ISO owned by
such optionee may be exercised, to the extent otherwise exercisable on the
date of death, by the estate, personal representative or beneficiary who
has acquired the ISO by will or by the laws of descent and distribution,
until the earlier of (i) the specified expiration date of the ISO or (ii)
180 days from the date of the optionee's death.
B. Disability. If an ISO optionee ceases to be employed by the Company
and all Related Corporations by reason of his or her disability, such
optionee shall have the right to exercise any ISO held by him or her on the
date of termination of employment, for the number of shares for which he or
she could have exercised it on that date, until the earlier of (i) the
specified expiration date of the ISO or (ii) 180 days from the date of the
termination of the optionee's employment. For the purposes of the Plan, the
term "disability" shall mean "permanent and total disability" as defined in
Section 22(e)(3) of the Code or any successor statute.
11. Assignability. No ISO shall be assignable or transferable by the
optionee except by will or by the laws of descent and distribution, and during
the lifetime of the optionee shall be
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exercisable only by such optionee. Stock Rights other than ISOs shall be
transferable to the extent set forth in the agreement relating to such Stock
Right.
12. Terms and Conditions of Options. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any
Non-Qualified Option shall be subject to the restrictions set forth herein with
respect to ISOs, or to such other termination and cancellation provisions as the
Committee may determine. The Committee may from time to time confer authority
and responsibility on one or more of its own members and/or one or more officers
of the Company to execute and deliver such instruments. The proper officers of
the Company are authorized and directed to take any and all action necessary or
advisable from time to time to carry out the terms of such instruments.
13. Adjustments. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Company relating
to such Option:
A. Stock Dividends and Stock Splits. If the shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of Options shall be appropriately
increased or decreased proportionately, and appropriate adjustments shall
be made in the purchase price per share to reflect such subdivision,
combination or stock dividend.
B. Consolidations or Mergers. If (i) the Company is a party to a
consolidation or merger (other than a merger in which the Company is the
continuing corporation), (ii) the Company sells all or substantially all of
its assets, or (iii) a person or group (as defined in Rule 13d-5(b)(1) of
the Securities Exchange Act of 1934, as amended) acquires in a transaction
or a series of related transactions of at least sixty-six and two-thirds
percent (66 2/3%) of the outstanding voting stock of the Company (an
"Organic Change"), the Committee or the board of directors of any entity
assuming the obligations of the Company hereunder (the "Successor Board"),
shall, as to outstanding Options, make appropriate provision for the
continuation of such Options by substituting on an equitable basis for the
shares then subject to such Options either (a) the consideration payable
with respect to the outstanding shares of Common Stock in connection with
the Organic Change, (b) shares of stock of a surviving or successor
corporation or (c) such other securities as the Successor Board deems
appropriate, the fair market value of which, at the time of the Organic
Change,
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shall equal the fair market value of the shares of Common Stock subject to
such Options immediately preceding the Organic Change.
C. Recapitalization or Reorganization. In the event of a
recapitalization or reorganization of the Company (other than a transaction
described in subparagraph B above) pursuant to which securities of the
Company or of another corporation are issued with respect to the
outstanding shares of Common Stock, an optionee upon exercising an Option
shall be entitled to receive for the purchase price paid upon such exercise
the securities he or she would have received if he or she had exercised
such Option prior to such recapitalization or reorganization.
D. Modification of ISOs. Notwithstanding the foregoing, any
adjustments made pursuant to subparagraphs A, B or C with respect to ISOs
shall be made only after the Committee, after consulting with counsel for
the Company, determines whether such adjustments would constitute a
"modification" of such ISOs (as that term is defined in Section 424 of the
Code) or would cause any adverse tax consequences for the holders of such
ISOs. If the Committee determines that such adjustments made with respect
to ISOs would constitute a modification of such ISOs or would cause adverse
tax consequences to the holders, it may refrain from making such
adjustments.
E. Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, then the Committee shall, as to
outstanding Options, at its discretion provide, upon written notice to the
optionees, (i) that all Options must be exercised, to the extent then
exercisable, within a specified number of days of the date of such notice,
at the end of which period the Options shall terminate or (ii) that such
Options (including those which have not yet vested) shall be exercisable
within a specified number of days of such notice, at the end of which
period the Options shall terminate.
F. Issuances of Securities. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to Options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the Company.
G. Fractional Shares. No fractional shares shall be issued under the
Plan and the optionee shall receive from the Company cash in lieu of such
fractional shares.
H. Adjustments. Upon the happening of any of the events described in
subparagraphs A, B, C above, the class and aggregate number of shares set
forth in paragraph 4 hereof that are subject to Stock Rights which
previously have been or subsequently may be granted under the Plan shall
also be appropriately
<PAGE>
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adjusted to reflect the events described in such subparagraphs. The
Committee or the Successor Board shall determine the specific adjustments
to be made under this paragraph 13 and, subject to paragraph 2, its
determination shall be conclusive.
14. Means of Exercising Options; Restriction on Issuance of Shares.
A. An Option (or any part or installment thereof) shall be exercised
by giving written notice to the Company at its principal office address, or
to such transfer agent as the Company shall designate. Such notice shall
identify the Option being exercised and specify the number of shares as to
which such Option is being exercised, accompanied by full payment of the
purchase price therefor either (a) in United States dollars in cash or by
check, (b) at the discretion of the Committee, through delivery of shares
of Common Stock having a fair market value equal as of the date of the
exercise to the cash exercise price of the Option (provided such shares of
Common Stock have been held by the optionee free of any substantial risk of
forfeiture for at least six (6) months), (c) at the discretion of the
Committee, by delivery of the grantee's personal recourse note bearing
interest payable not less than annually at no less than 100% of the lowest
applicable Federal rate, as defined in Section 1274(d) of the Code, (d) at
the discretion of the Committee and consistent with applicable law, through
the delivery of an assignment to the Company of a sufficient amount of the
proceeds from the sale of the Common Stock acquired upon exercise of the
Option and an authorization to the broker or selling agent to pay that
amount to the Company, which sale shall be at the participant's direction
at the time of exercise, or (e) at the discretion of the Committee, by any
combination of (a), (b), (c) and (d) above. If the Committee exercises its
discretion to permit payment of the exercise price of an ISO by means of
the methods set forth in clauses (b), (c), (d) or (e) of the preceding
sentence, such discretion shall be exercised in writing at the time of the
grant of the ISO in question. The holder of an Option shall not have the
rights of a shareholder with respect to the shares covered by such Option
until the date of issuance of a stock certificate to such holder for such
shares. Except as expressly provided above in paragraph 13 with respect to
changes in capitalization and stock dividends, no adjustment shall be made
for dividends or similar rights for which the record date is before the
date such stock certificate is issued.
15. Term and Amendment of Plan. This Plan was adopted by the Board on
August 31, 1998, subject, with respect to the validation of ISOs granted under
the Plan, to approval of the Plan by the stockholders of the Company at the next
Meeting of Stockholders or, in lieu thereof, by written consent. If the approval
of stockholders is not obtained prior to August 31, 1999, any grants of ISOs
under the Plan made prior to that date will be rescinded. The Plan shall expire
at the end of the day on August 31, 2008 (except as to Options outstanding on
that date). Subject to the provisions of paragraph 5 above, Options may be
granted under the Plan prior to the date of stockholder approval of the Plan.
The Board may terminate or amend the Plan in any respect at any time, except
that, without the approval of the stockholders obtained within 12 months before
or after the Board adopts a resolution authorizing any of the following
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actions: (a) the total number of shares that may be issued under the Plan may
not be increased (except by adjustment pursuant to paragraph 13); (b) the
provisions of paragraph 3 regarding eligibility for grants of ISOs may not be
modified; (c) the provisions of paragraph 6(B) regarding the exercise price at
which shares may be offered pursuant to ISOs may not be modified (except by
adjustment pursuant to paragraph 13); and (d) the expiration date of the Plan
may not be extended. Except as otherwise provided in this paragraph 15, in no
event may action of the Board or stockholders alter or impair the rights of a
grantee, without such grantee's consent, under any Stock Right previously
granted to such grantee.
16. Modifications of ISOs; Conversion of ISOs into Non-Qualified Options.
Subject to paragraph 13(D), without the prior written consent of the holder of
an ISO, the Committee shall not alter the terms of such ISO (including the means
of exercising such ISO) if such alteration would constitute a modification
(within the meaning of Section 424(h)(3) of the Code). The Committee, at the
written request or with the written consent of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period or reducing the exercise price of the appropriate installments of such
ISOs. At the time of such conversion, the Committee (with the consent of the
optionee) may impose such conditions on the exercise of the resulting
Non-Qualified Options as the Committee in its discretion may determine, provided
that such conditions shall not be inconsistent with this Plan. Nothing in the
Plan shall be deemed to give any optionee the right to have such optionee's ISOs
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Committee takes appropriate action. Upon the taking of such
action, the Company shall issue separate certificates to the optionee with
respect to Options that are Non-Qualified Options and Options that are ISOs.
17. Application Of Funds. The proceeds received by the Company from the
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.
18. Notice to Company of Disqualifying Disposition. By accepting an ISO
granted under the Plan, each optionee agrees to notify the Company in writing
immediately after such optionee makes a Disqualifying Disposition (as described
in Sections 421, 422 and 424 of the Code and regulations thereunder) of any
stock acquired pursuant to the exercise of ISOs granted under the Plan. A
Disqualifying Disposition is generally any disposition occurring on or before
the later of (a) the date two years following the date the ISO was granted or
(b) the date one year following the date the ISO was exercised.
19. Withholding of Additional Income Taxes. Upon the exercise of a
Non-Qualified Option, the transfer of a Non-Qualified Stock Option pursuant to
an arm's-length transaction, the grant of an Award, the making of a Purchase of
Common Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 18), the
<PAGE>
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vesting or transfer of restricted stock or securities acquired on the exercise
of an Option hereunder, or the making of a distribution or other payment with
respect to such stock or securities, the Company may withhold taxes in respect
of amounts that constitute compensation includible in gross income. The
Committee in its discretion may condition (i) the exercise of an Option, (ii)
the transfer of a Non-Qualified Stock Option, (iii) the grant of an Award, (iv)
the making of a Purchase of Common Stock for less than its fair market value, or
(v) the vesting or transferability of restricted stock or securities acquired by
exercising an Option, on the grantee's making satisfactory arrangement for such
withholding. Such arrangement may include payment by the grantee in cash or by
check of the amount of the withholding taxes or, at the discretion of the
Committee, by the grantee's delivery of previously held shares of Common Stock
or the withholding from the shares of Common Stock otherwise deliverable upon
exercise of a Option shares having an aggregate fair market value equal to the
amount of such withholding taxes.
20. Purchase for Investment; Rights of Holder on Subsequent Registration.
Unless the shares to be issued upon exercise of an Option granted under the Plan
have been effectively registered under the Securities Act of 1933, as now in
force or hereafter amended, the Company shall be under no obligation to issue
any shares covered by any option unless the person who exercised such Option, in
whole or in part, shall give a written representation and undertaking to the
Company which is satisfactory in form and scope to counsel for the Company and
upon which, in the opinion of such counsel, the Company may reasonably rely,
that he or she is acquiring the shares issued pursuant to such exercise of the
Option for his or her own account as an investment and not with a view to, or
for sale in connection with, the distribution of any such shares, and that he or
she will make no transfer of the same except in compliance with any rules and
regulations in force at the time of such transfer under the Securities Act of
1933, or any other applicable law, and that if shares are issued without such
registration, a legend to this effect may be endorsed upon the securities so
issued. In the event that the Company shall, nevertheless, deem it necessary or
desirable to register under the Securities Act of 1933 or other applicable
statutes any shares with respect to which an Option shall have been exercised,
or to qualify any such shares for exemption from the Securities Act of 1933 or
other applicable statutes, then the Company may take such action and may require
from each optionee such information in writing for use in any registration
statement, supplementary registration statement, prospectus, preliminary
prospectus or offering circular as is reasonably necessary for such purpose and
may require reasonable indemnity to the Company and its officers and directors
and controlling persons from such holder against all losses, claims, damages and
liabilities arising from such use of the information so furnished and caused by
any untrue statement of any material fact therein or caused by the omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made.
21. Governmental Regulation. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.
Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
send tax information statements to employees and former employees that exercise
ISOs under the Plan, and the
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Company may be required to file tax information returns reporting the income
received by grantees of Options in connection with the Plan.
22. Governing Law. The validity and construction of the Plan and the
instruments evidencing Stock Rights shall be governed by the laws of Delaware,
or the laws of any jurisdiction in which the Company or its successors in
interest may be organized.
<PAGE>
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AMENDMENT NO. 1
TO THE
RED HAT SOFTWARE, INC.
1998 STOCK OPTION PLAN
Pursuant to a Written Consent of the Board of Directors of Red Hat
Software, Inc. (the "Company") dated as of September 28, 1998 and a Written
Consent of the Stockholders of the Company dated as of September 29, 1998, the
Company's 1998 Stock Option Plan (the "Plan") is amended by increasing the
number of shares reserved for issuance under the Plan by 1,917,400 shares so
that an aggregate of 2,917,400 shares may be issued under the Plan.
<PAGE>
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AMENDMENT NO. 2
TO THE
RED HAT SOFTWARE, INC.
1998 STOCK OPTION PLAN
Pursuant to a Written Consent of the Board of Directors of Red Hat
Software, Inc. (the "Company") dated as of February 4, 1999, the Company's 1998
Stock Option Plan, as amended (the "Plan"), is further amended by increasing the
maximum number of Options that may be granted to any employee of the Company or
any Related Corporation under the Plan during any fiscal year of the Company by
1,000,000 shares to 2,000,000 shares.
<PAGE>
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AMENDMENT NO. 3
TO THE
RED HAT SOFTWARE, INC.
1998 STOCK OPTION PLAN
Pursuant to a Written Consent of the Board of Directors of Red Hat
Software, Inc. (the "Company") dated as of February 24, 1999 and a Written
Consent of the Stockholders of the Company dated as of February 24, 1999, the
Company's 1998 Stock Option Plan, as amended (the "Plan"), is further amended by
increasing the number of shares reserved for issuance under the Plan by 800,000
shares so that an aggregate of 3,717,400 shares may be issued under the Plan.
<PAGE>
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AMENDMENT NO. 4
TO THE
RED HAT SOFTWARE, INC.
1998 STOCK OPTION PLAN
Pursuant to a Written Consent of the Board of Directors of Red Hat
Software, Inc. (the "Company") dated as of June 2, 1999 and a Written Consent
of the Stockholders of the Company dated as of June 3, 1999, the Company's 1998
Stock Option Plan, as amended (the "Plan"), is further amended by increasing the
number of shares reserved for issuance under the Plan by 1,000,000 shares so
that an aggregate of 4,717,400 shares may be issued under the Plan.
<PAGE>
Exhibit 10.2
RED HAT, INC.
1999 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE AND ELIGIBILITY
The purpose of this 1999 Stock Option and Incentive Plan (the "PLAN")
of Red Hat, Inc. (the "COMPANY") is to provide stock options and other equity
interests in the Company (each an "AWARD") to employees, officers, directors,
consultants and advisors of the Company and its Subsidiaries, all of whom are
eligible to receive Awards under the Plan. Any person to whom an Award has been
granted under the Plan is called a "PARTICIPANT." Additional definitions are
contained in Section 8.
2. ADMINISTRATION
a. ADMINISTRATION BY BOARD OF DIRECTORS. The Plan will be administered
by the Board of Directors of the Company (the "BOARD"). The Board, in its sole
discretion, shall have the authority to grant and amend Awards, to adopt, amend
and repeal rules relating to the Plan and to interpret and correct the
provisions of the Plan and any Award. All decisions by the Board shall be final
and binding on all interested persons. Neither the Company nor any member of the
Board shall be liable for any action or determination relating to the Plan.
b. APPOINTMENT OF COMMITTEES. To the extent permitted by applicable
law, the Board may delegate any or all of its powers under the Plan to one or
more committees or subcommittees of the Board (a "COMMITTEE"). All references in
the Plan to the "BOARD" shall mean such Committee or the Board.
c. DELEGATION TO EXECUTIVE OFFICERS. To the extent permitted by
applicable law, the Board may delegate to one or more executive officers of the
Company the power to grant Awards and exercise such other powers under the Plan
as the Board may determine, PROVIDED THAT the Board shall fix the maximum number
of Awards to be granted and the maximum number of shares issuable to any one
Participant pursuant to Awards granted by such executive officers.
3. STOCK AVAILABLE FOR AWARDS
a. NUMBER OF SHARES. Subject to adjustment under Section 3(c), the
aggregate number of shares of Common Stock, $.0001 par value, of the Company
(the "COMMON STOCK") that may be issued pursuant to the Plan is 6,500,000
shares. If any Award expires, or is terminated, surrendered or forfeited, in
whole or in part, the unissued Common Stock covered by such Award shall again be
available for the grant of Awards under the Plan.
b. PER-PARTICIPANT LIMIT. Subject to adjustment under Section 3(c), no
Participant may be granted Awards during any one fiscal year to purchase more
than 3,250,000 shares of Common Stock.
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C. ADJUSTMENT TO COMMON STOCK. In the event of any stock split, stock
dividend, extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, combination, exchange of shares, liquidation, spin-off, split-up,
or other similar change in capitalization or event (not including the Company's
stock dividend approved by the Board of Directors on June 2, 1999), (i) the
number and class of securities available for Awards under the Plan and the
per-Participant share limit, (ii) the number and class of securities, vesting
schedule and exercise price per share subject to each outstanding Option, (iii)
the repurchase price per security subject to repurchase, and (iv) the terms of
each other outstanding stock-based Award shall be adjusted by the Company (or
substituted Awards may be made) to the extent the Board shall determine, in good
faith, that such an adjustment (or substitution) is appropriate.
4. STOCK OPTIONS
a. GENERAL. The Board may grant options to purchase Common Stock (each,
an "OPTION" and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option and the Common Stock
issued upon the exercise of each Option, including vesting provisions,
repurchase provisions and restrictions relating to applicable federal or state
securities laws, as it considers advisable.
b. INCENTIVE STOCK OPTIONS. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "INCENTIVE
STOCK OPTION") shall be granted only to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Board and the Company shall have no liability if an Option
or any part thereof that is intended to be an Incentive Stock Option does not
qualify as such. An Option or any part thereof that does not qualify as an
Incentive Stock Option is referred to herein as a "NONSTATUTORY STOCK OPTION".
c. EXERCISE PRICE. The Board shall establish the exercise price (or
determine the method by which the exercise price shall be determined) at the
time each Option is granted and specify it in the applicable option agreement.
d. DURATION OF OPTIONS. Each Option shall be exercisable at such times
and subject to such terms and conditions as the Board may specify in the
applicable option agreement.
e. EXERCISE OF OPTION. Options may be exercised only by delivery to the
Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 4(f) for the number of shares for
which the Option is exercised.
f. PAYMENT UPON EXERCISE. Common Stock purchased upon the exercise of
an Option shall be paid for by one or any combination of the following forms of
payment:
(i) by check payable to the order of the Company;
(ii) except as otherwise explicitly provided in the applicable
option agreement, and only if the Common Stock is then publicly traded, delivery
of an irrevocable and
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unconditional undertaking by a creditworthy broker to deliver promptly to the
Company sufficient funds to pay the exercise price, or delivery by the
Participant to the Company of a copy of irrevocable and unconditional
instructions to a creditworthy broker to deliver promptly to the Company cash or
a check sufficient to pay the exercise price; or
(iii) to the extent explicitly provided in the applicable
option agreement, by (x) delivery of shares of Common Stock owned by the
Participant valued at fair market value (as determined by the Board or as
determined pursuant to the applicable option agreement), (y) delivery of a
promissory note of the Participant to the Company (and delivery to the Company
by the Participant of a check in an amount equal to the par value of the shares
purchased), or (z) payment of such other lawful consideration as the Board may
determine.
5. RESTRICTED STOCK
A. GRANTS. The Board may grant Awards entitling recipients to acquire
shares of Common Stock, subject to (i) delivery to the Company by the
Participant of a check in an amount at least equal to the par value of the
shares purchased, and (ii) the right of the Company to repurchase all or part of
such shares at their issue price or other stated or formula price from the
Participant in the event that conditions specified by the Board in the
applicable Award are not satisfied prior to the end of the applicable
restriction period or periods established by the Board for such Award (each, a
"RESTRICTED STOCK AWARD").
B. TERMS AND CONDITIONS. The Board shall determine the terms and
conditions of any such Restricted Stock Award. Any stock certificates issued in
respect of a Restricted Stock Award shall be registered in the name of the
Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). After the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or, if the Participant has died, to the
beneficiary designated by a Participant, in a manner determined by the Board, to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "DESIGNATED BENEFICIARY"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
6. OTHER STOCK-BASED AWARDS
The Board shall have the right to grant other Awards based upon the
Common Stock having such terms and conditions as the Board may determine,
including, without limitation, the grant of shares based upon certain
conditions, the grant of securities convertible into Common Stock and the grant
of stock appreciation rights, phantom stock awards or stock units.
7. GENERAL PROVISIONS APPLICABLE TO AWARDS
a. TRANSFERABILITY OF AWARDS. Except as the Board may otherwise
determine or provide in an Award, Awards shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are
granted, either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the Participant, shall
<PAGE>
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be exercisable only by the Participant. References to a Participant, to the
extent relevant in the context, shall include references to authorized
transferees.
b. DOCUMENTATION. Each Award under the Plan shall be evidenced by a
written instrument in such form as the Board shall determine or as executed by
an officer of the Company pursuant to authority delegated by the Board. Each
Award may contain terms and conditions in addition to those set forth in the
Plan PROVIDED THAT such terms and conditions do not contravene the provisions of
the Plan.
c. BOARD DISCRETION. The terms of each type of Award need not be
identical, and the Board need not treat Participants uniformly.
d. TERMINATION OF STATUS. The Board shall determine the effect on an
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, or the Participant's legal
representative, conservator, guardian or Designated Beneficiary, may exercise
rights under the Award.
e. ACQUISITION OF THE COMPANY
(i) CONSEQUENCES OF AN ACQUISITION. Unless otherwise expressly
provided in the applicable Option or Award, upon the occurrence of an
Acquisition, the Board or the board of directors of the surviving or acquiring
entity (as used in this Section 7(e)(i), also the "BOARD", shall, as to
outstanding Awards (on the same basis or on different bases, as the Board shall
specify), make appropriate provision for the continuation of such Awards by the
Company or the assumption of such Awards by the surviving or acquiring entity
and by substituting on an equitable basis for the shares then subject to such
Awards either (a) the consideration payable with respect to the outstanding
shares of Common Stock in connection with the Acquisition, (b) shares of stock
of the surviving or acquiring corporation or (c) such other securities as the
Board deems appropriate, the fair market value of which (as determined by the
Board in its sole discretion) shall not materially differ from the fair market
value of the shares of Common Stock subject to such Awards immediately preceding
the Acquisition. In addition to or in lieu of the foregoing, with respect to
outstanding Options, the Board may, upon written notice to the affected
optionees, provide that one or more Options must be exercised, to the extent
then exercisable or to be exercisable as a result of the Acquisition, within a
specified number of days of the date of such notice, at the end of which period
such Options shall terminate; or terminate one or more Options in exchange for a
cash payment equal to the excess of the fair market value (as determined by the
Board in its sole discretion) of the shares subject to such Options (to the
extent then exercisable or to be exercisable as a result of the Acquisition)
over the exercise price thereof.
(ii) ACQUISITION DEFINED. An "Acquisition" shall mean: (x) any
merger or consolidation after which the voting securities of the Company
outstanding immediately prior thereto represent (either by remaining outstanding
or by being converted into voting securities of the surviving or acquiring
entity) less than 50% of the combined voting power of the voting securities of
the Company or such surviving or acquiring entity outstanding immediately after
<PAGE>
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such event; or (y) any sale of all or substantially all of the assets or capital
stock of the Company (other than in a spin-off or similar transaction) or (z)
any other acquisition of the business of the Company, as determined by the
Board.
(iii) ASSUMPTION OF OPTIONS UPON CERTAIN EVENTS. In connection
with a merger or consolidation of an entity with the Company or the acquisition
by the Company of property or stock of an entity, the Board may grant Awards
under the Plan in substitution for stock and stock-based awards issued by such
entity or an affiliate thereof. The substitute Awards shall be granted on such
terms and conditions as the Board considers appropriate in the circumstances.
(iv) POOLING-OF INTERESTS-ACCOUNTING. If the Company proposes
to engage in an Acquisition intended to be accounted for as a
pooling-of-interests, and in the event that the provisions of this Plan or of
any Award hereunder, or any actions of the Board taken in connection with such
Acquisition, are determined by the Company's or the acquiring company's
independent public accountants to cause such Acquisition to fail to be accounted
for as a pooling-of-interests, then such provisions or actions shall be amended
or rescinded by the Board, without the consent of any Participant, to be
consistent with pooling-of-interests accounting treatment for such Acquisition.
(v) PARACHUTE AWARDS. If, in connection with an
Acquisition, a tax under Section 4999 of the Code would be imposed on the
Participant (after taking into account the exceptions set forth in Sections
280G(b)(4) and 280G(b)(5) of the Code), then the number of Awards which shall
become exercisable, realizable or vested as provided in such section shall be
reduced (or delayed), to the minimum extent necessary, so that no such tax
would be imposed on the Participant (the Awards not becoming so accelerated,
realizable or vested, the "PARACHUTE AWARDS"; PROVIDED, HOWEVER, that if the
"AGGREGATE PRESENT VALUE" of the Parachute Awards would exceed the tax that,
but for this sentence, would be imposed on the Participant under Section 4999
of the Code in connection with the Acquisition, then the Awards shall become
immediately exercisable, realizable and vested without regard to the
provisions of this sentence. For purposes of the preceding sentence, the
"AGGREGATE PRESENT VALUE" of an Award shall be calculated on an after-tax
basis (other than taxes imposed by Section 4999 of the Code) and shall be
based on economic principles rather than the principles set forth under
Section 280G of the Code and the regulations promulgated thereunder. All
determinations required to be made under this Section 7(e)(v) shall be made
by the Company.
f. WITHHOLDING. Each Participant shall pay to the Company, or make
provisions satisfactory to the Company for payment of, any taxes required by law
to be withheld in connection with Awards to such Participant no later than the
date of the event creating the tax liability. The Board may allow Participants
to satisfy such tax obligations in whole or in part by transferring shares of
Common Stock, including shares retained from the Award creating the tax
obligation, valued at their fair market value (as determined by the Board or as
determined pursuant to the applicable option agreement). The Company may, to the
extent permitted by law, deduct any such tax obligations from any payment of any
kind otherwise due to a Participant.
<PAGE>
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g. AMENDMENT OF AWARDS. The Board may amend, modify or terminate any
outstanding Award including, but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, PROVIDED THAT, except as otherwise provided in Section 7(e)(iv), the
Participant's consent to such action shall be required unless the Board
determines that the action, taking into account any related action, would not
materially and adversely affect the Participant.
h. CONDITIONS ON DELIVERY OF STOCK. The Company will not be obligated
to deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
i. ACCELERATION. The Board may at any time provide that any Options
shall become immediately exercisable in full or in part, that any Restricted
Stock Awards shall be free of some or all restrictions, or that any other
stock-based Awards may become exercisable in full or in part or free of some or
all restrictions or conditions, or otherwise realizable in full or in part, as
the case may be, despite the fact that the foregoing actions may (i) cause the
application of Sections 280G and 4999 of the Code if a change in control of the
Company occurs, or (ii) disqualify all or part of the Option as an Incentive
Stock Option.
8. MISCELLANEOUS
a. DEFINITIONS.
(i) "COMPANY" for purposes of eligibility under the Plan,
shall include any present or future subsidiary corporations of Red Hat, Inc., as
defined in Section 424(f) of the Code (a "SUBSIDIARY"), and any present or
future parent corporation of Red Hat, Inc., as defined in Section 424(e) of the
Code. For purposes of Awards other than Incentive Stock Options, the term
"COMPANY" shall include any other business venture in which the Company has a
direct or indirect significant interest, as determined by the Board in its sole
discretion.
(ii) "CODE" means the Internal Revenue Code of 1986, as
amended, and any regulations promulgated thereunder.
(iii) "EMPLOYEE" for purposes of eligibility under the Plan
shall include a person to whom an offer of employment has been extended by the
Company.
b. NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall have any
claim or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company.
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The Company expressly reserves the right at any time to dismiss or otherwise
terminate its relationship with a Participant free from any liability or claim
under the Plan.
c. NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
with respect to an Award until becoming the record holder thereof.
d. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective
upon adoption by the Board. No Awards shall be granted under the Plan after
the completion of ten years from the date on which the Plan was adopted by
the Board, but Awards previously granted may extend beyond that date.
e. AMENDMENT OF PLAN. The Board may amend, suspend or terminate the
Plan or any portion thereof at any time.
f. GOVERNING LAW. The provisions of the Plan and all Awards made
hereunder shall be governed by and interpreted in accordance with the laws of
Delaware, without regard to any applicable conflicts of law.
Adopted by the Board of Directors on June 2, 1999.
Approved by the stockholders on June 3, 1999.
<PAGE>
Exhibit 10.3
RED HAT, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
ARTICLE 1 - PURPOSE.
This 1999 Employee Stock Purchase Plan (the "Plan") is intended to
encourage stock ownership by all eligible employees of Red Hat, Inc. a Delaware
corporation, (the "Company"), and its participating subsidiaries (as defined in
Article 17) so that they may share in the growth of the Company by acquiring or
increasing their proprietary interest in the Company. The Plan is designed to
encourage eligible employees to remain in the employ of the Company and its
participating subsidiaries. The Plan is intended to constitute an "employee
stock purchase plan" within the meaning of Section 423(b) of the Internal
Revenue Code of 1986, as amended (the "Code").
ARTICLE 2 - ADMINISTRATION OF THE PLAN.
The Plan may be administered by a committee appointed by the Board of
Directors of the Company (the "Committee"). The Committee shall consist of not
less than two members of the Company's Board of Directors. The Board of
Directors may from time to time remove members from, or add members to, the
Committee. Vacancies on the Committee, howsoever caused, shall be filled by the
Board of Directors. The Committee may select one of its members as Chairman, and
shall hold meetings at such times and places as it may determine. Acts by a
majority of the Committee, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee.
The interpretation and construction by the Committee of any provisions of
the Plan or of any option granted under it shall be final, unless otherwise
determined by the Board of Directors. The Committee may from time to time adopt
such rules and regulations for carrying out the Plan as it may deem best,
provided that any such rules and regulations shall be applied on a uniform basis
to all employees under the Plan. No member of the Board of Directors or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any option granted under it.
In the event the Board of Directors fails to appoint or refrains from
appointing a Committee, the Board of Directors shall have all power and
authority to administer the Plan. In such event, the word "Committee" wherever
used herein shall be deemed to mean the Board of Directors.
ARTICLE 3 - ELIGIBLE EMPLOYEES.
All employees of the Company or any of its participating subsidiaries
whose customary employment is more than 20 hours per week and for more than five
months in any calendar year and who have completed 90 days employment with the
Company shall be eligible to receive options under the Plan to purchase common
stock of the Company, and all eligible employees shall have the same rights and
privileges hereunder. Persons who are eligible employees on the first business
day of any Payment Period (as defined in Article 5) shall receive their options
as of such day. Persons who become eligible employees after any date on which
options are granted under the Plan shall be granted options on the first day of
the next succeeding Payment Period on which options are granted to eligible
employees under the
<PAGE>
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Plan. In no event, however, may an employee be granted an option if such
employee, immediately after the option was granted, would be treated as owning
stock possessing five percent or more of the total combined voting power or
value of all classes of stock of the Company or of any parent corporation or
subsidiary corporation, as the terms "parent corporation" and "subsidiary
corporation" are defined in Section 424(e) and (f) of the Code. For purposes of
determining stock ownership under this paragraph, the rules of Section 424(d) of
the Code shall apply, and stock which the employee may purchase under
outstanding options shall be treated as stock owned by the employee.
ARTICLE 4 - STOCK SUBJECT TO THE PLAN.
The stock subject to the options under the Plan shall be shares of the
Company's authorized but unissued common stock, par value $.0001 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company, including
shares purchased in the open market. The aggregate number of shares which may be
issued pursuant to the Plan is 750,000, subject to adjustment as provided in
Article 12. If any option granted under the Plan shall expire or terminate for
any reason without having been exercised in full or shall cease for any reason
to be exercisable in whole or in part, the unpurchased shares subject thereto
shall again be available under the Plan.
ARTICLE 5 - PAYMENT PERIOD AND STOCK OPTIONS.
The first Payment Period during which payroll deductions will be
accumulated under the Plan shall commence on a date determined by the Board
of Directors and shall end on March 31, 2000. For the remainder of the
duration of the Plan, Payment Periods shall consist of the six-month periods
commencing on April 1 and October 1 and ending on March 31st and on
September 30th of each calendar year.
Twice each year, on the first business day of each Payment Period, the
Company will grant to each eligible employee who is then a participant in the
Plan an option to purchase on the last day of such Payment Period, at the Option
Price hereinafter provided for, a maximum of 1,000 shares, on condition that
such employee remains eligible to participate in the Plan throughout the
remainder of such Payment Period. The participant shall be entitled to exercise
the option so granted only to the extent of the participant's accumulated
payroll deductions on the last day of such Payment Period. If the participant's
accumulated payroll deductions on the last day of the Payment Period would
enable the participant to purchase more than 1,000 shares except for the
1,000-share limitation, the excess of the amount of the accumulated payroll
deductions over the aggregate purchase price of the 1,000 shares shall be
promptly refunded to the participant by the Company, without interest. The
Option Price per share for each Payment Period shall be the lesser of (i) 85% of
the average market price of the Common Stock on the first business day of the
Payment Period and (ii) 85% of the average market price of the Common Stock on
the last business day of the Payment Period, in either event rounded up to the
nearest cent. The foregoing limitation on the number of shares subject to option
and the Option Price shall be subject to adjustment as provided in Article 12.
For purposes of the Plan, the term "average market price" on any date
means (i) the average (on that date) of the high and low prices of the Common
Stock on the principal national securities exchange on which the Common Stock is
traded, if the Common Stock is then traded on a national securities exchange; or
(ii) the last reported sale price (on that date) of the Common Stock on the
Nasdaq National Market, if the Common Stock is not then traded on a national
securities exchange; or (iii) the average of the closing bid and asked prices
last quoted (on that date) by an established quotation service for
over-
<PAGE>
-3-
the-counter securities, if the Common Stock is not reported on the Nasdaq
National Market; or (iv) if the Common Stock is not publicly traded, the fair
market value of the Common Stock as determined by the Committee after taking
into consideration all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.
For purposes of the Plan, the term "business day" means a day on which
there is trading on the Nasdaq National Market or the aforementioned national
securities exchange, whichever is applicable pursuant to the preceding
paragraph; and if neither is applicable, a day that is not a Saturday, Sunday or
legal holiday in the State of North Carolina.
No employee shall be granted an option which permits the employee's right
to purchase stock under the Plan, and under all other Section 423(b) employee
stock purchase plans of the Company and any parent or subsidiary corporations,
to accrue at a rate which exceeds $25,000 of fair market value of such stock
(determined on the date or dates that options on such stock were granted) for
each calendar year in which such option is outstanding at any time. The purpose
of the limitation in the preceding sentence is to comply with Section 423(b)(8)
of the Code. If the participant's accumulated payroll deductions on the last day
of the Payment Period would otherwise enable the participant to purchase Common
Stock in excess of the Section 423(b)(8) limitation described in this paragraph,
the excess of the amount of the accumulated payroll deductions over the
aggregate purchase price of the shares actually purchased shall be promptly
refunded to the participant by the Company, without interest.
ARTICLE 6 - EXERCISE OF OPTION.
Each eligible employee who continues to be a participant in the Plan on
the last day of a Payment Period shall be deemed to have exercised his or her
option on such date and shall be deemed to have purchased from the Company such
number of full shares of Common Stock reserved for the purpose of the Plan as
the participant's accumulated payroll deductions on such date will pay for at
the Option Price, subject to the 1,000-share limit of the option and the Section
423(b)(8) limitation described in Article 5. If the individual is not a
participant on the last day of a Payment Period, the he or she shall not be
entitled to exercise his or her option. Only full shares of Common Stock may be
purchased under the Plan. Unused payroll deductions remaining in a participant's
account at the end of a Payment Period by reason of the inability to purchase a
fractional share shall be carried forward to the next Payment Period.
ARTICLE 7 - AUTHORIZATION FOR ENTERING THE PLAN.
An employee may elect to enter the Plan by filling out, signing and
delivering to the Company an authorization:
A. Stating the percentage to be deducted regularly from the
employee's pay;
B. Authorizing the purchase of stock for the employee in each
Payment Period in accordance with the terms of the Plan; and
C. Specifying the exact name or names in which stock purchased for
the employee is to be issued as provided under Article 11 hereof.
<PAGE>
-4-
Such authorization must be received by the Company at least ten days before the
first day of the next succeeding Payment Period and shall take effect only if
the employee is an eligible employee on the first business day of such Payment
Period.
Unless a participant files a new authorization or withdraws from the Plan,
the deductions and purchases under the authorization the participant has on file
under the Plan will continue from one Payment Period to succeeding Payment
Periods as long as the Plan remains in effect.
The Company will accumulate and hold for each participant's account the
amounts deducted from his or her pay. No interest will be paid on these amounts.
ARTICLE 8 - MAXIMUM AMOUNT OF PAYROLL DEDUCTIONS.
An employee may authorize payroll deductions in an amount (expressed as a
whole percentage) not less than one percent (1%) but not more than ten percent
(10%) of the employee's total compensation, including base pay or salary and any
overtime, bonuses or commissions.
ARTICLE 9 - CHANGE IN PAYROLL DEDUCTIONS.
Deductions may not be increased or decreased during a Payment Period.
However, a participant may withdraw in full from the Plan.
ARTICLE 10 - WITHDRAWAL FROM THE PLAN.
A participant may withdraw from the Plan (in whole but not in part) at any
time prior to the last day of a Payment Period by delivering a withdrawal notice
to the Company.
To re-enter the Plan, an employee who has previously withdrawn must file a
new authorization at least ten days before the first day of the next Payment
Period in which he or she wishes to participate. The employee's re-entry into
the Plan becomes effective at the beginning of such Payment Period, provided
that he or she is an eligible employee on the first business day of the Payment
Period.
ARTICLE 11 - ISSUANCE OF STOCK.
Certificates for stock issued to participants shall be delivered as soon
as practicable after each Payment Period by the Company's transfer agent.
Stock purchased under the Plan shall be issued only in the name of the
participant, or if the participant's authorization so specifies, in the name of
the participant and another person of legal age as joint tenants with rights of
survivorship.
ARTICLE 12 - ADJUSTMENTS.
Upon the happening of any of the following described events, a
participant's rights under options granted under the Plan shall be adjusted as
hereinafter provided:
A. In the event that the shares of Common Stock shall be
subdivided or combined into a greater or smaller number of shares or if,
upon a reorganization, split-up, liquidation, recapitalization or the like
of the Company, the shares of Common Stock shall be exchanged for
<PAGE>
-5-
other securities of the Company, each participant shall be entitled,
subject to the conditions herein stated, to purchase such number of shares
of Common Stock or amount of other securities of the Company as were
exchangeable for the number of shares of Common Stock that such
participant would have been entitled to purchase except for such action,
and appropriate adjustments shall be made in the purchase price per share
to reflect such subdivision, combination or exchange; and
B. In the event the Company shall issue any of its shares as a
stock dividend upon or with respect to the shares of stock of the class
which shall at the time be subject to option hereunder, each participant
upon exercising such an option shall be entitled to receive (for the
purchase price paid upon such exercise) the shares as to which the
participant is exercising his or her option and, in addition thereto (at
no additional cost), such number of shares of the class or classes in
which such stock dividend or dividends were declared or paid, and such
amount of cash in lieu of fractional shares, as is equal to the number of
shares thereof and the amount of cash in lieu of fractional shares,
respectively, which the participant would have received if the participant
had been the holder of the shares as to which the participant is
exercising his or her option at all times between the date of the granting
of such option and the date of its exercise.
Upon the happening of any of the foregoing events, the class and aggregate
number of shares set forth in Article 4 hereof which are subject to options
which have been or may be granted under the Plan and the limitations set forth
in the second paragraph of Article 5 shall also be appropriately adjusted to
reflect the events specified in paragraphs A and B above. Notwithstanding the
foregoing, any adjustments made pursuant to paragraphs A or B shall be made only
after the Committee, based on advice of counsel for the Company, determines
whether such adjustments would constitute a "modification" (as that term is
defined in Section 424 of the Code). If the Committee determines that such
adjustments would constitute a modification, it may refrain from making such
adjustments.
If the Company is to be consolidated with or acquired by another entity in
a merger, a sale of all or substantially all of the Company's assets or
otherwise (an "Acquisition"), the Committee or the board of directors of any
entity assuming the obligations of the Company hereunder (the "Successor Board")
shall, with respect to options then outstanding under the Plan, either (i) make
appropriate provision for the continuation of such options by arranging for the
substitution on an equitable basis for the shares then subject to such options
either (a) the consideration payable with respect to the outstanding shares of
the Common Stock in connection with the Acquisition, (b) shares of stock of the
successor corporation, or a parent or subsidiary of such corporation, or (c)
such other securities as the Successor Board deems appropriate, the fair market
value of which shall not materially exceed the fair market value of the shares
of Common Stock subject to such options immediately preceding the Acquisition;
or (ii) terminate each participant's options in exchange for a cash payment
equal to the excess of (a) the fair market value on the date of the Acquisition,
of the number of shares of Common Stock that the participant's accumulated
payroll deductions as of the date of the Acquisition could purchase, at an
option price determined with reference only to the first business day of the
applicable Payment Period and subject to the 1,000-share, Code Section 423(b)(8)
and fractional-share limitations on the amount of stock a participant would be
entitled to purchase, over (b) the result of multiplying such number of shares
by such option price.
The Committee or Successor Board shall determine the adjustments to be
made under this Article 12, and its determination shall be conclusive.
<PAGE>
-6-
ARTICLE 13 - NO TRANSFER OR ASSIGNMENT OF EMPLOYEE'S RIGHTS.
An option granted under the Plan may not be transferred or assigned and
may be exercised only by the participant.
ARTICLE 14 - TERMINATION OF EMPLOYEE'S RIGHTS.
Whenever a participant ceases to be an eligible employee because of
retirement, voluntary or involuntary termination, resignation, layoff,
discharge, death or for any other reason, his or her rights under the Plan shall
immediately terminate, and the Company shall promptly refund, without interest,
the entire balance of his or her payroll deduction account under the Plan.
Notwithstanding the foregoing, eligible employment shall be treated as
continuing intact while a participant is on military leave, sick leave or other
bona fide leave of absence, for up to 90 days, or for so long as the
participant's right to re-employment is guaranteed either by statute or by
contract, if longer than 90 days.
If a participant's payroll deductions are interrupted by any legal
process, a withdrawal notice will be considered as having been received from the
participant on the day the interruption occurs.
ARTICLE 15 - TERMINATION AND AMENDMENTS TO PLAN.
Unless terminated sooner as provided below, the Plan shall terminate on
June 2, 2009. The Plan may be terminated at any time by the Company's Board of
Directors but such termination shall not affect options then outstanding under
the Plan. It will terminate in any case when all or substantially all of the
unissued shares of stock reserved for the purposes of the Plan have been
purchased. If at any time shares of stock reserved for the purpose of the Plan
remain available for purchase but not in sufficient number to satisfy all then
unfilled purchase requirements, the available shares shall be apportioned among
participants in proportion to the amount of payroll deductions accumulated on
behalf of each participant that would otherwise be used to purchase stock, and
the Plan shall terminate. Upon such termination or any other termination of the
Plan, all payroll deductions not used to purchase stock will be refunded,
without interest.
The Committee or the Board of Directors may from time to time adopt
amendments to the Plan provided that, without the approval of the stockholders
of the Company, no amendment may (i) increase the number of shares that may be
issued under the Plan; (ii) change the class of employees eligible to receive
options under the Plan, if such action would be treated as the adoption of a new
plan for purposes of Section 423(b) of the Code; or (iii) cause Rule 16b-3 under
the Securities Exchange Act of 1934 to become inapplicable to the Plan.
ARTICLE 16 - LIMITS ON SALE OF STOCK PURCHASED UNDER THE PLAN.
The Plan is intended to provide shares of Common Stock for investment and
not for resale. The Company does not, however, intend to restrict or influence
any employee in the conduct of his or her own affairs. An employee may,
therefore, sell stock purchased under the Plan at any time the employee chooses,
subject to compliance with any applicable federal or state securities laws and
subject to any restrictions imposed under Article 21 to ensure that tax
withholding obligations are satisfied. THE EMPLOYEE ASSUMES THE RISK OF ANY
MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK.
<PAGE>
-7-
ARTICLE 17 - PARTICIPATING SUBSIDIARIES.
The term "participating subsidiary" shall mean any present or future
subsidiary of the Company, as that term is defined in Section 424(f) of the
Code, which is designated from time to time by the Board of Directors to
participate in the Plan. The Board of Directors shall have the power to make
such designation before or after the Plan is approved by the stockholders.
ARTICLE 18 - OPTIONEES NOT STOCKHOLDERS.
Neither the granting of an option to an employee nor the deductions from
his or her pay shall constitute such employee a stockholder of the shares
covered by an option until such shares have been actually purchased by the
employee.
ARTICLE 19 - APPLICATION OF FUNDS.
The proceeds received by the Company from the sale of Common Stock
pursuant to options granted under the Plan will be used for general corporate
purposes.
ARTICLE 20 - NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION.
By electing to participate in the Plan, each participant agrees to notify
the Company in writing immediately after the participant transfers Common Stock
acquired under the Plan, if such transfer occurs within two years after the
first business day of the Payment Period in which such Common Stock was
acquired. Each participant further agrees to provide any information about such
a transfer as may be requested by the Company or any subsidiary corporation in
order to assist it in complying with the tax laws. Such dispositions generally
are treated as "disqualifying dispositions" under Sections 421 and 424 of the
Code, which have certain tax consequences to participants and to the Company and
its participating subsidiaries.
ARTICLE 21 - WITHHOLDING OF ADDITIONAL INCOME TAXES.
By electing to participate in the Plan, each participant acknowledges that
the Company and its participating subsidiaries are required to withhold taxes
with respect to the amounts deducted from the participant's compensation and
accumulated for the benefit of the participant under the Plan, and each
participant agrees that the Company and its participating subsidiaries may
deduct additional amounts from the participant's compensation, when amounts are
added to the participant's account, used to purchase Common Stock or refunded,
in order to satisfy such withholding obligations. Each participant further
acknowledges that when Common Stock is purchased under the Plan the Company and
its participating subsidiaries may be required to withhold taxes with respect to
all or a portion of the difference between the fair market value of the Common
Stock purchased and its purchase price, and each participant agrees that such
taxes may be withheld from compensation otherwise payable to such participant.
It is intended that tax withholding will be accomplished in such a manner that
the full amount of payroll deductions elected by the participant under Article 7
will be used to purchase Common Stock. However, if amounts sufficient to satisfy
applicable tax withholding obligations have not been withheld from compensation
otherwise payable to any participant, then, notwithstanding any other provision
of the Plan, the Company may withhold such taxes from the participant's
accumulated payroll deductions and apply the net amount to the purchase of
Common Stock, unless the participant pays to the Company, prior to the exercise
date, an amount sufficient to satisfy such withholding obligations. Each
participant further acknowledges that the Company and its participating
subsidiaries
<PAGE>
-8-
may be required to withhold taxes in connection with the disposition of stock
acquired under the Plan and agrees that the Company or any participating
subsidiary may take whatever action it considers appropriate to satisfy such
withholding requirements, including deducting from compensation otherwise
payable to such participant an amount sufficient to satisfy such withholding
requirements or conditioning any disposition of Common Stock by the participant
upon the payment to the Company or such subsidiary of an amount sufficient to
satisfy such withholding requirements.
ARTICLE 22 - GOVERNMENTAL REGULATIONS.
The Company's obligation to sell and deliver shares of Common Stock under
the Plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of such shares.
Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
identify shares of Common Stock issued under the Plan on its stock ownership
records and send tax information statements to employees and former employees
who transfer title to such shares.
ARTICLE 23 - GOVERNING LAW.
The validity and construction of the Plan shall be governed by the laws of
Delaware, without giving effect to the principles of conflicts of law thereof.
ARTICLE 24 - APPROVAL OF BOARD OF DIRECTORS AND STOCKHOLDERS OF THE COMPANY.
The Plan was adopted by the Board of Directors on June 2, 1999 and was
approved by the stockholders of the Company on June 3, 1999.
<PAGE>
Exhibit 10.4
AGREEMENT
THIS AGREEMENT, made as of the 29th day of September 1998, by and between
ROBERT F. YOUNG, NANCY R. YOUNG and MARC EWING (individually and collectively,
the "Founders"); ERIK WILLIAM TROAN ("Employee," and collectively with the
Founders, the "Individual Parties"); and RED HAT SOFTWARE, INC., a Delaware
corporation with offices in Research Park, North Carolina (the "Corporation");
W I T N E S S E T H:
WHEREAS, as of the date of this Agreement the Founders own and hold of
record shares of the Corporation's common stock as follows:
Founder Number of Shares
------- ----------------
Robert F. Young 2,030,000
Nancy R. Young 1,820,913
Marc Ewing 4,044,238
WHEREAS, as of the date of this Agreement Employee has been granted
warrants (the "Warrants") to purchase shares of the Corporation's common stock
pursuant to an Employment Agreement by and between the Corporation and Employee
commencing May 1, 1995 and executed October 10, 1995 (the "Employment
Agreement") and desires to enter into this Agreement to bind Employee and the
Corporation to its terms for the Warrants and for any and all shares of the
Corporation issued to Employee upon exercise of the Warrants (the "Warrant
Shares") in accordance with the terms hereof; and
WHEREAS, pursuant to the Warrants, the Employee, if such Employee exercises
all Warrants available pursuant to such Employee's Employment Agreement prior to
the termination of such Warrants pursuant to the terms of this Agreement, may
own and hold of record, upon exercise of all Warrants, total shares of the
Corporation's common stock as follows:
Employee Number of Warrant
-------- Option Shares
-------------
Erik William Troan 770,200; and
WHEREAS, the Employee acknowledges that there are shares of the Corporation
issued and outstanding to other shareholders and stock options for shares of the
Corporation issued and outstanding to other employees of the Corporation which
are not subject to this Agreement and that the Corporation, in its sole
discretion, will issue shares of common and preferred stock from time to time to
other shareholders and pursuant to stock options which will not be subject to
this Agreement; and
WHEREAS, the Corporation also anticipates that it may in the future issue
additional stock options to employees, directors, consultants or other service
providers of the Corporation pursuant to a plan or plans established by the
Corporation's Board of Directors (the "Plan") and that the Corporation, in its
sole discretion, may, but shall not be obligated to, subject any such stock
options authorized under the
<PAGE>
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Plan and any shares of the Corporation's stock purchased pursuant to such stock
options to terms and conditions similar to those contained in this Agreement;
and
WHEREAS, the Individual Parties and the Corporation recognize that the
Warrants are granted to the Employee as an incentive to promote the success of
the business and to encourage the Employee to remain in the Corporation's
employ; and
WHEREAS, the Individual Parties and the Corporation desire to set forth and
confirm the terms and conditions upon which the Warrants may be exercised and
terminated and the terms and conditions under which they Warrant Shares will be
held; and
WHEREAS, the Individual Parties and the Corporation agree that it is in
their best interest to agree upon the terms and conditions set forth herein and
that such terms and conditions reflect the full understanding of the Individual
Parties and the Corporation.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and conditions herein contained, the Individual Parties and the
Corporation agree, for themselves, their successors and assigns, as follows:
ARTICLE I
WARRANTS
1.1 Warrant. The Corporation and the Employee hereby agree that the
Employee's rights to purchase Warrant Shares pursuant to the Employment
Agreement, and the exercise of the Warrants, shall be governed by the terms of
this Article I. Employee agrees that the provisions in this Agreement pertaining
to the exercise and termination of Warrants and the vesting and purchase of
Warrant Shares represents the understanding of the parties and shall control and
shall supersede over any provisions to the contrary in such Employee's
Employment Agreement. Employee acknowledges that the only options or warrants to
purchase or receive shares of the Corporation's stock to which the Employee is
entitled are the Warrants described in this Article I, that no profit sharing
plan has been implemented by the Corporation, and that the Employee waives any
rights under Section 3c of the Employment Agreement to demand "warrants"
pursuant to a profit sharing plan unless a profit sharing plan expressly
granting the right to Employee to "warrants" is hereinafter implemented by the
Corporation and authorized by its Board of Directors.
1.2 Vesting. Employee has the option to purchase the following number of
Warrant Shares on the dates (the "Vesting Dates") set forth on the following
schedule:
<TABLE>
<CAPTION>
Vesting Dates
-------------
Employee 5/1/96 5/1/97 5/1/98 5/1/99
- -------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C>
183,400 183,400 183,400 220,000
</TABLE>
However, if the Employee does not purchase the full number of Warrant Shares to
which the Employee is entitled on or before the Vesting Dates, the Employee is
permitted to purchase those remaining Warrant Shares at a later period (unless
terminated) in addition to those Warrant Shares which the Employee may otherwise
be entitled to purchase. No partial exercise of such Warrant may be for less
than one hundred (100) full Warrant Shares. In no event shall the Corporation be
required to transfer fractional shares to the Employee. The Individual Parties
and the Corporation acknowledge and confirm that as of the April 22, 1999, the
Employee has exercised 101,975 of his Warrants and that, after selling 76,975
Warrant Shares, the Employee owns 25,000 Warrant Shares.
<PAGE>
-3-
1.3 Purchase Price. The purchase price for each Warrant Share shall be
$.0001 per Warrant Share.
1.4 Exercise of Warrants. The respective number of Warrants shall be
exercisable from time to time after the applicable Vesting Dates by ten (10)
days written notice to the Corporation and the payment in cash to the
Corporation of the purchase price of the Warrant Shares which the Employee may
and elects to purchase. The Corporation shall make immediate delivery of such
Warrant Shares, provided that if any law or regulation requires the Corporation
to take any action with respect to the Warrant Shares specified in such notice
before the issuance thereof, the date of delivery of such Warrant Shares shall
be extended for the period necessary to take such action.
1.5 Termination of Warrants. The Warrants, to the extent not heretofore
exercised, shall terminate on the first to occur of the following dates:
(a) If the Employee's employment with the Corporation terminates
because of his death, any Warrants held by the Employee on the date of his death
may be exercised only within thirty (30) days after his death and only to the
extent that the Warrants could have been exercised immediately before the
Employee's death;
(b) If the Employee's employment with the Corporation terminates
because of Total Disability (as hereinafter defined) after at least one (1) year
of continuous employment with the Corporation immediately following the date on
which Warrants were originally granted in the Employment Agreement, the Employee
may exercise the Warrant to the extent that it could be exercised upon such
termination of employment at any time within thirty (30) days after the
employment shall terminate;
(c) If the Employee's employment with the Corporation terminates
because of his retirement after at least one (1) year of continuous employment
with the Corporation immediately following the date on which the Warrants were
granted, the Employee may exercise the Warrant to the extent that the Warrants
can be exercised upon such termination of employment at any time within thirty
(30) days after retirement. Retirement means retirement from the Corporation
pursuant to the provisions of the Corporation's policy as may be implemented by
the Board of Directors from time to time.;
(d) If the Employee's employment with the Corporation is terminated by
the Corporation without cause, the Employee may exercise the Warrants to the
extent that the Warrants can be exercised upon such termination of employment at
any time within thirty (30) days after such termination; provided, however, that
any Option Shares so acquired shall be subject to the rights of the Corporation
or the Founders to purchase such shares in accordance with the provisions of
Section 2.6 of this Agreement;
(e) Termination of the Employee's employment with the Corporation for
any reason other than death, disability, retirement, or without cause;
(f) The happening of any event resulting in the termination of this
Agreement pursuant to Section 3.14 hereof;
(g) May 1, 2006.
1.6 Rights Prior to Exercise of Warrant. The Warrants granted to the
Employee are nontransferable by the Employee and are exercisable only by the
Employee. The Employee shall have no
<PAGE>
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right as a shareholder with respect to the Warrant Shares until payment of the
warrrantprice and delivery to the Employee of such Warrant Shares as herein
provided.
1.7 Restrictions. All Warrant Shares acquired by Employee pursuant to the
Warrants shall be subject to the restrictions on sale, encumbrance, and other
dispositions contained in Article II of this Agreement.
1.8 Time is of the Essence. Time is of the essence in exercising the
Warrants under this Agreement.
ARTICLE II
RESTRICTIONS ON WARRANT SHARES
2.1 Restriction on Share Transfer. Employee shall not sell, assign,
transfer, pledge, or otherwise dispose of or in any way alienate any of his
respective Warrant Shares in the Corporation by operation of law or otherwise
except as provided in this Agreement.
2.2 Offer to Purchase All Warrant Shares. If any one or more of the
Founders receives a third party offer to purchase fifty percent (50%) or more of
all of the shares of the Corporation owned collectively by the Founders plus all
of the Warrant Shares and Warrants and the Founders desire to accept the third
party offer, then the Founders have the right to deliver a notice (the "Bring
Along Notice") with respect to such third party offer to the Corporation and the
Employee stating that the Founders propose to effect such transaction, the name
and address of the third party offeror, and the purchase price under the third
party offer, together with a copy of all writings, if any, between the Founders
and the third party offeror or such other person necessary to establish the
terms of such third party offer. Employee agrees that upon receipt of the Bring
Along Notice, Employee shall be obligated to sell all Warrants and Warrant
Shares held by him to the third party offeror upon the terms and conditions
(including, without limitation, purchase price) of the third party offeror (and
otherwise take all necessary action to cause the Corporation to consummate the
proposed transaction). The rights of first refusal in Section 2.3 of this
Agreement shall not apply to this Section 2.2. Notwithstanding anything in this
Section 2.2 to the contrary, Employee acknowledges and agrees that the rights
and obligations hereunder are subject to (and, where applicable, subordinate to
the rights of the Investor, as hereinafter defined) the terms and conditions of
a Co-Sale Agreement between the Founding Shareholders, the Corporation and the
Frank Batten, Jr. Trust, a copy of which is attached hereto as Exhibit A (the
"Co-Sale Agreement"), and that the number of Warrants and Warrant Shares sold by
the Employee to the third party offeror may be reduced by the participation
rights of the Investor as defined and provided in the Co-Sale Agreement. For
purposes of this Section 2.2, the term "Investor" shall have the same meaning as
set forth in the Co-Sale Agreement.
2.3 Transfers During Employee's Lifetime. Except as otherwise set forth in
this Agreement, no Warrant Shares owned by Employee shall be transferred, sold,
assigned, pledged or otherwise disposed of during Employee's lifetime except in
accordance with the following provisions:
(a) Offer to Corporation. Employee (hereinafter referred to as
"Offeror") intending to transfer any Warrant Shares (the "Offered Shares") shall
first submit to the Corporation a written offer to sell the Offered Shares to
the Corporation at the price offered by the proposed purchaser, on the terms of
such offer. Every written offer submitted to the Corporation in accordance with
the provisions of this Section 2.3(a) shall continue to be a binding offer to
sell until expressly rejected by an officer or director of the Corporation
acting pursuant to a resolution adopted in accordance with Section 2.7 of this
Agreement or until the expiration of a period of sixty (60) days after the
delivery of such offer to the Corporation, whichever time is earlier. Upon
delivery to the Corporation of any written offer submitted
<PAGE>
-5-
in accordance with the provisions of this Section 6(a), any officer or director
of the Corporation, acting before the termination of the offer and pursuant to a
resolution adopted in accordance with Section 2.7 of this Agreement may bind the
Corporation to purchase all or any part of the Offered Shares.
(b) Offer to Founders. Upon termination of the offer referred to in
subparagraph (a) above, the Offeror shall then submit to the Founders a written
offer to sell, at the price offered by the proposed purchaser, on the terms of
such offer, any of the Offered Shares not previously purchased by the
Corporation under the aforesaid offer to it (the "Excess Offered Shares"). Each
Founder shall then have the right to purchase up to his Founder Percentage of
the Excess Offered Shares. Each Founder's right to purchase the Excess Offered
Shares shall be exercisable by written notices to the Offeror, the Corporation
and the other Founders given within thirty (30) days of the Offeror's written
offer to the Founders. Each Founder has the right and may indicate in such
notice, his election to purchase the balance of such Excess Offered Shares if
any other Founder or Founders fail to exercise this right to purchase up to the
full amount of their Founder Percentage of the Excess Offered Shares. The
failure of a Founder to exercise his right to purchase Excess Offered Shares
within the thirty (30) day notice period shall be regarded as a waiver of his
right to participate in the purchase of the Excess Offered Shares. For purposes
of this Section, Founder Percentage for each Founder shall be determined by
dividing the total number of shares of the Corporation owned by the Founders
into the total number of shares owned by each Founder at the time of the
Offeror's written offer to the Founders.
(c) Contents of Offer and Subsequent Transfer. Every written offer
submitted in accordance with this Section 2.3 shall specifically name the person
or persons to whom the Offeror intends to transfer the shares, the number of
shares that he intends to so transfer to each person, and the price per share
and other terms upon which each intended transfer is to be made, and shall
include copies of the written offer and pertinent documentation. Upon the
termination of the written offer to the Founders, the Offeror shall, for a
period of thirty (30) days thereafter, be free to transfer any unpurchased
shares to the person or persons so named at the price per share and upon the
other terms so named as stated in the Offeror's written offer to the
Corporation; provided that any such transferee of those shares shall thereafter
be bound by and subject to all of the provisions and restrictions of this
Agreement and shall agree in writing to be so bound. However, if the Offeror
fails to make such transfer within such thirty (30) days, such shares shall
again be subject to all the restrictions and provisions of this Agreement.
(d) Consideration for Shares. If any consideration to be received by
the Offeror for the Warrant Shares offered is property other than cash, then the
price per share shall be measured to that extent by the fair market value of
such noncash consideration. Fair market value for the purposes of this Section
6(d) shall mean the sum of (i) the fair market value of any noncash
consideration offered for the shares as determined by the Board of Directors of
the Corporation (the "Board"), plus (ii) the value of any special benefits to
the Offeror of such noncash consideration to the extent they can be reasonably
identified and valued, plus (iii) the amount of any additional expense or cost
(including additional taxes) incurred by the Offeror in accepting cash instead
of such noncash consideration, in each case based upon a realistic appraisal of
such noncash consideration, special benefits, expense or cost agreed upon by the
Offeror and the Corporation or by two independent qualified appraisers, one
being selected and paid for by the Offeror and the other by the Corporation. If
the two appraisers are unable to agree, they shall select a third, and the
determination of the third appraiser shall be final and conclusive. The cost of
the third appraiser shall be divided equally between the Offeror and the
Corporation.
(e) Closing. The closing of the sale of the Warrant Shares shall be
sixty (60) days following the last timely delivery of notice of election to
purchase any of the shares.
(f) Involuntary Transfer. The provisions of this Section 2.3 shall
also be applicable to Involuntary Transfers of Warrant Shares. "Involuntary
Transfer" means any transfer, proceeding or
<PAGE>
-6-
action by or in which Employee shall be deprived or divested of any right, title
or interest in or to any of his Warrant Shares, including, without limitation,
any seizure under levy of attachment or execution, any transfer in connection
with bankruptcy or other court proceeding to a debtor-in-possession, trustee or
receiver or other officer or agency, or any transfer pursuant to a separation
agreement or entry of a final court order in a divorce proceeding. In such
event, the Corporation and the Founders shall have the right to purchase from
either the Employee or the transferee on the Stipulated Terms (as hereinafter
defined) all of the Warrant Shares of the Corporation owned by the Employee at
the lesser of (i) 80% of the book value of the Warrant Shares as determined by
the Board, (ii) 80% of the fair market value of the Warrant Shares based on the
Corporation as a going concern as determined by the Board, or (iii) the amount
of the indebtedness which resulted in the involuntary transfer of Warrant
Shares. Notice to the Corporation by any person or in any manner of an
Involuntary Transfer shall be deemed a written offer to sell the Warrant Shares
and the Corporation and the Founders shall have the right to purchase the
Warrant Shares in accordance with the procedures as set forth in this Section
2.2.
2.4 Option to Purchase Upon Permanent Disability. If Employee becomes
totally disabled for a period of three (3) months (the "Disabled Employee"), the
Corporation and the Founders shall each have the option to purchase all or any
of the Disabled Employee's Warrant Shares upon the following terms:
(a) Exercise of Option. Such option of the Corporation shall commence
on the date three (3) months after such disability commences and shall be
exercised by written notice by the Corporation within ninety (90) days after
such right commences. The purchase price of the Warrant Shares shall be the
Stipulated Price and shall be payable upon the Stipulated Term (as hereinafter
defined), which shall be paid in cash to the extent of proceeds of insurance
received by the Corporation as the result of such permanent disability, if any,
with the balance of the purchase price payable pursuant to the Stipulated Terms
(as hereinafter defined).
(b) Exercise of Option by Founders. In the event the Corporation does
not elect to exercise its option to purchase all or any of the Warrant Shares
under Section 2.4(a) above (the "Excess Warrant Shares"), then each Founder
shall have the option to purchase up to his Founder Percentage of the Excess
Warrant Shares. Each Founder's right to purchase the Excess Warrant Shares shall
be exercisable by written notice to the Disabled Employee, the Corporation and
the other Founders given within thirty (30) days of the termination of the
Corporation's option. Each Founder has the right and may indicate in such notice
his election to purchase the balance of such Excess Warrant Shares if any other
Founder or Founders fail to exercise this right to purchase up to the full
amount of their Founder Percentage of the Excess Warrant Shares. The failure of
a Founder to exercise his right to purchase Excess Warrant Shares within the
thirty (30) day notice period, shall be regarded as a waiver of his right to
participate in the purchase of the Excess Warrant Shares. For purposes of this
Section, Founder Percentage for each Founder shall be determined by dividing the
total number of shares of the Corporation owned by the Founders into the total
number of shares owned by each Founder at the time of the Disabled Employee's
Total Disability.
(c) Determination of Disability. "Totally Disabled" shall mean the
inability by reason of a physical or mental condition, or both, of the Disabled
Employee to perform satisfactorily his usual duties for the Corporation, as
determined by the Board. The Total Disability shall be deemed to have commenced
on the date of the determination by the Board.
(d) Closing. The closing of the sale of the Warrant Shares shall be
sixty (60) days after delivery of the Corporation's or the Founder's, as the
case may be, notice of election to purchase the Warrant Shares.
<PAGE>
-7-
2.5 Option to Purchase Upon Death. Upon the death of Employee (the
"Decedent"), all of the Warrant Shares of the Corporation which had been owned
by the Decedent and all Warrant Shares owned by the Decedent's representative if
Warrants are exercised within thirty (30) days after the Decedent's death and to
which he or his personal representatives shall be entitled shall be sold and
purchased as herein provided at the option of the Corporation.
(a) Option of the Corporation to Purchase. The Corporation has the
option to purchase from Decedent's estate, and, if the option is exercised,
Decedent's estate shall sell to the Corporation, all the Warrant Shares of the
Corporation owned by Decedent at the Stipulated Price and upon the Stipulated
Terms (as hereinafter defined). The Corporation shall exercise its option by
giving written notice to the Decedent's personal representative within one
hundred twenty (120) days after the Decedent's death.
(b) Option of the Founders to Purchase. In the event the Corporation
does not elect to exercise its option to purchase all or any of the Warrant
Shares under Section 2.5(a) above (the "Excess Warrant Shares"), then each
Founder shall have the option to purchase up to his Founder Percentage of the
Excess Warrant Shares at the Stipulated Price and upon the Stipulated Terms (as
hereinafter defined). Each Founder's right to purchase the Excess Warrant Shares
shall be exercisable by written notice to the Decedent's Estate, the Corporation
and the other Founders given within thirty (30) days of the termination of the
Corporation's option. Each Founder has the right and may indicate in such notice
his election to purchase the balance of such Excess Warrant Shares if nay other
Founder or Founders fail to exercise this right to purchase up to the full
amount of their Founder Percentage of the Excess Warrant Shares. The failure of
a Founder to exercise his right to purchase Excess Warrant Shares within the
thirty (30) day notice period, shall be regarded as a waiver of his right to
participate in the purchase of the Excess Warrant Shares. For purposes of this
Section, Founder Percentage for each Founder shall be determined by dividing the
total number of shares of the Corporation owned by the Founders into the total
number of shares owned by each Founder at the time of the Decedent's death.
(c) Insurance. The Corporation may, but is not obligated to, obtain
insurance on the life of Employee for a sum determined by the Corporation,
naming itself as beneficiary of the policies The Corporation shall pay all
premiums on the insurance policies. The Corporation shall be the sole owner of
the insurance policies and may apply to the payment of premiums any dividends
declared and paid on the policies.
(d) Closing. The Closing of the purchase of the Warrant Shares shall
be ninety (90) days after the Corporation or the Founders, as the case may be,
exercises their option to purchase the Warrant Shares.
2.6 Purchase Upon Termination of Employment. In the event that Employee's
employment with the Corporation is terminated by the Corporation or such
Employee for any reason whatsoever, with or without cause, or at any time (the
"Terminated Employee"), the Corporation and the Founders shall each have the
option to purchase all or any of the Warrant Shares owned by the Terminated
Employee upon the following terms:
(a) Option to Purchase by Corporation. The Corporation shall have the
option to purchase from the Terminated Employee all of the Warrant Shares owned
by the Terminated Employee at the Stipulated Price and upon the Stipulated Terms
(as hereinafter defined), which option the corporation may exercise by notice in
writing to the Terminated Employee within (90) days of the effective date of
termination; provided, however, in the event the Employee's terminated for
cause, then the option to purchase under this Section 2.6(a) and 2.6(b) shall be
at the lesser of eighty percent (80%) of book value of the Warrant Shares as
determined by the Board or eighty percent (80%) of the value of the Warrant
<PAGE>
-8-
Shares based on the Corporation as a going concern as determined by the Board,
and on the Stipulated Terms.
(b) Option to Purchase by Founders. In the event the Corporation does
not elect to exercise its option to purchase all or any of the Warrant Shares
under 2.6(a) above (the "Excess Warrant Shares"), then each Founder shall have
the option to purchase up to his Founder Percentage of the Excess Warrant Shares
at the price and under the terms provided in Section 2.6(a) above. Each
Founder's right to purchase the Excess Warrant Shares shall be exercisable by
written notice to the Terminated Employee, the corporation and the other
Founders given within thirty (30) days of the termination of the Corporation's
option. Each Founder has the right and may indicate in such notice his election
to purchase the balance of such Excess Warrant Shares if any other founder or
Founders fail to exercise this right to purchase up to the full amount of their
Founder Percentage of the Excess Warrant Shares. The failure of a Founder to
exercise his right to purchase Excess Warrant Shares within the thirty (30) day
notice period, shall be regarded as a waiver of his right to participate in the
purchase of the Excess Warrant Shares. For purpose of this Section, Founder
Percentage for each Founder shall be determined by dividing the total number of
shares of the Corporation owned by the Founders into the total number of shares
owned by each Founder at the time of the Employee's termination of employment.
(c) Closing. The closing of the purchase of the Warrant Shares shall
be ninety (90) days after the Corporation or the Founders, as the case may be,
exercise their option to purchase the Warrant Shares.
2.7 Vote on Option to Purchase. Whenever, under the terms of this
Agreement, the Corporation has an option to purchase Warrant Shares, action on
such option may be taken by the holders of a majority of the voting shares of
the Corporation (or such other percentage as may be required by the
Corporation's Articles of Incorporation as may be amended and/or restated from
time to time if such redemption of stock under this Agreement is not excluded
from such greater percentage), exclusive of the Warrant Shares held by the
Offeror, the Decedent, the Disabled Employee or the Terminated Employee, as the
case may be.
2.8 Non-Exercise of Option. Whenever, under the terms of this Agreement,
the Corporation and Founders have an option to purchase Warrant Shares and
elects not to exercise the option, said Warrant Shares shall nevertheless remain
subject to all of the terms of this Agreement.
2.9 Dates for Determination of Purchase Price. This Section sets the
various dates from which the purchase price for Warrant Shares purchased
pursuant to this Agreement shall be determined. The price shall be determined in
each case as of the following valuation dates: (a) upon the death of Employee,
as of the date of death; (b) upon the Total Disability of Employee, as of the
date of determination of Total Disability by the Board; (c) upon a termination
of employment of Employee, upon the effective date of the termination; and (d)
upon an Involuntary Transfer, upon the effective date of the Involuntary
Transfer.
2.10 Payment of Purchase Price. The manner of payment of the purchase price
for any Warrant Shares pursuant to this Agreement, with the exception of a
purchase upon the terms offered by a proposed third-party purchaser or as
otherwise provided in this Agreement, shall be determined by this Section.
(a) Stipulated Price. The "Stipulated Price" shall be that price per
share of the Corporation as a going concern equal to eighty percent (80%) of the
fair market value for such shares as determined by the Board.
<PAGE>
-9-
(b) Stipulated Terms. The purchase price for any Warrant Shares
purchased pursuant to this Agreement shall be paid either in cash or by a cash
down payment and the delivery of a secured promissory note, at the option of the
purchaser. If the purchase is made for any reason other than the death of the
Employee, the down payment shall equal at least twenty percent (20%) of the
purchase price. If the purchase is made because of the death of Employee, the
down payment shall equal not less than the greater of twenty percent (20%) of
the purchase price or the full amount of the net proceeds from any insurance
policies maintained by the Corporation on the life of the Employee. Any
promissory note shall provide for equal quarterly installments of principal over
a term not to exceed five (5) years, and shall bear interest at the rate of
seven (7%) percent. Accrued interest shall be payable quarterly commencing with
the first installment of principal. The note shall be subject to prepayment in
whole or in part at any time and without penalty. In the event of default in
payment of any installment when due, the whole sum of the principal and interest
shall become immediately due and payable at the option of the holder.
Notwithstanding anything herein to the contrary, if the purchase price is less
than $10,000.00 the entire purchase price shall be paid in cash at closing.
(c) Delivery of Warrant Shares. At such time as the cash and
promissory note, if applicable, have been delivered to the Employee or his
estate, the Warrant Shares of the Employee shall be transferred to the purchaser
or purchasers.
(d) Security. If part of the purchase price is paid by delivery of the
purchaser's promissory note, then, as security for payments due under the terms
of the note, the purchaser shall grant to the Employee a security interest in
the Shares by executing a pledge and escrow agreement and whatever additional
documents may be reasonably necessary to perfect the security interest of the
Employee or his estate. The security documents shall provide that the
Corporation or other purchaser shall deposit the shares it is purchasing with an
escrow agent and that, if the purchaser defaults under the terms of the
promissory note or the security documents, the Employee or his estate shall have
the right to receive possession of the shares and to exercise all other rights
of a secured party under the North Carolina Uniform Commercial Code.
(e) Insufficient Corporate Surplus. If, at the time the Corporation is
required to make payment of the purchase price for shares pursuant to this
Agreement and/or to issue its promissory notes therefor, its surplus is
insufficient for such purposes under applicable law, then the Corporation shall
promptly take all action necessary and proper under applicable law to increase,
to the extent possible, the surplus of the Corporation to permit such payment
and/or the issuance of such promissory note. Employee or his personal
representative shall perform such acts, execute such instruments, and vote the
respective shares in such a manner as may be required to increase the available
surplus to an amount sufficient to authorize the purchase of the shares,
including, but not limited to, a recapitalization to reduce the capital of the
Corporation and increase its surplus or a reappraisal of the assets of the
Corporation for the purpose of reflecting the market value.
ARTICLE III
GENERAL PROVISIONS
3.1 Corporate Action and Articles of Incorporation. The Corporation and the
Individual Parties shall take all action required pursuant to this Agreement to
effectuate the provisions herein. The Corporation shall become a party to this
Agreement.
3.2 Share Certificates. Every certificate representing Warrant Shares of
the Corporation shall bear the following legend prominently displayed:
<PAGE>
-10-
"The shares represented by this certificate, and the transfer thereof, are
subject to the provisions of that certain Agreement, dated as of September
29, 1998, among ROBERT F. YOUNG, NANCY R. YOUNG, MARC EWING, ERIK WILLIAM
TROAN and RED HAT SOFTWARE, INC., a Delaware corporation, a copy of which
is on file in, and may be examined at, the principal office of the
Corporation."
3.3 Warrant Shares. All references to Warrant Shares owned by Employee
shall mean any outstanding shares of the Corporation hereafter owned by Employee
and any shares distributed with respect to any such shares in a stock split,
stock dividend, recapitalization, reorganization or otherwise.
3.4 Necessary Acts. Each party hereto agrees that they will do any act or
thing and will execute any and all instruments necessary and/or proper to make
effective the provisions of this Agreement.
3.5 Severability. Should any provision of this Agreement be declared to be
invalid for any reason or to have ceased to be binding on the parties hereto,
such provision shall be severed, and all other provisions herein shall continue
to be effective and binding.
3.6 Governing Law. This Agreement shall be subject to and governed by the
laws of the State of Delaware.
3.7 Entire Agreement. This Agreement contains the entire agreement between
the parties hereto with respect to the subject matter hereof, and no change,
amendment or modification of this Agreement shall be valid unless the same be in
writing and signed by all the parties hereto. No waiver of any of the terms of
this Agreement shall be valid unless signed by the party against whom such
waiver is asserted. This Agreement supersedes and nullifies the terms of any
other agreement setting forth the rights of the Employee previously entered into
by Employee with respect to the subject matter hereof. The Employee acknowledges
that his ownership of Warrants and Warrant Shares in the Corporation gives him
no rights or expectations except those embodied in this Agreement.
3.8 Specific Performance. The parties acknowledge that the actual damage
which would be sustained upon the breach of this Agreement by any of the parties
or to a personal representative of a Decedent aggrieved by the breach or
threatened breach of any of its provisions shall be entitled to seek from any
court of competent jurisdiction an order for specific performance of all of the
terms and conditions of this agreement. This provision does not limit the
parties from seeking any other available remedies at law or equity.
3.9 Prohibited Transfers Void. Any purported transfer in violation of this
Agreement shall be void and shall not transfer any interest or title to the
purported transferee. The Corporation shall not be required to transfer on its
books any Warrant Shares sold or transferred in violation of any of the
provisions set forth in this Agreement or to treat as owner of those Warrant
Shares or to pay dividends to any transferee to whom any of those Warrant Shares
shall have been so sold or transferred.
3.10 Representation as to Attorney. The Individual Parties (and the
Corporation) acknowledge that a conflict may exist among their respective
interests, and that the Individual Parties should seek the advice of independent
counsel. The parties hereby waive any claim they may have as to any conflict
which may exist in connection with the preparation of this Agreement.
3.11 New Parties. The Corporation shall not record a transfer of Warrant
Shares from Employee to any person not a party hereto unless said person shall
execute an acknowledgment of the
<PAGE>
-11-
terms hereof and agreement to be bound hereby, except for a transfer of Warrant
Shares to a third party pursuant to Section 2.2 of this Agreement.
3.12 Agreement Binding. This Agreement shall insure to the benefit of and
be binding upon the parties hereto and their respective next-of-kin, legatees,
administrators, executors, legal representatives, successors and permitted
assigns (including remote, as well as immediate, successors to and assignees of
said parties), except this Agreement shall not be binding on a third-party
purchaser in the event of a transfer of Warrant Shares to such third party
pursuant to Section 2.2 of this Agreement.
3.13 Pronouns and Headings. In this Agreement the masculine shall include
the feminine and the singular shall include the plural as the context of this
Agreement shall clearly require. The article and section headings in this
Agreement are inserted for convenience only and are not part of the Agreement.
3.14. Termination. This Agreement shall commence as of the date hereof and
shall continue in full force and effect until terminated (i) by the mutual
agreement of the parties hereto, (ii) by the dissolution or bankruptcy of the
Corporation, (iii) upon the effectiveness of a merger, consolidation or other
acquisition of substantially all of the Corporation's assets, if the Corporation
is not the surviving corporation, except that a merger or consolidation with a
subsidiary which effects a mere change in the form or domicile of the
Corporation without changing the respective shareholdings of the Individual
Parties shall not terminate the agreement, even if the Corporation is not the
surviving corporation, (iv) upon the issuance of any of the Corporation's shares
sold by means of a public offering that is required to be registered under the
federal securities laws, or (v) upon the sale of all of the issued and
outstanding shares of the Corporation.
3.15 Transferability. Any rights or interests of the parties set forth in
this Agreement are personal and nontransferable.
3.16 Notices. Any notice or offer required hereunder shall be deemed to
have been validly given if delivered by certified mail, return receipt
requested, postage prepaid, addressed, or by federal express overnight delivery
(or other nationally recognized service) with receipt confirmed, in the case of
the Corporation, to its principal office, and in the case of the Individual
Parties, to their address appearing on the stock records of the Corporation or
to such other address as he may designate. Notices hereunder shall be deemed
given seven (7) business days after deposit in the United States Mail or the
next business day, if delivered by Federal Express overnight delivery (or other
nationally recognized service).
3.17 Jurisdiction and Venue. The parties agree that any action brought in
any court whether federal or state shall be brought within the State of North
Carolina in the judicial district of Durham, Durham County and do hereby waive
all questions of personal jurisdiction or venue for the purpose of carrying out
this provision.
3.18 Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreements.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-12-
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be signed
by its duly authorized officers and its corporate seal to be affixed hereto, and
the Individual Parties have hereunto set their hands, all as of the day and year
first above written.
RED HAT SOFTWARE, INC.
By: /s/ Robert F. Young
----------------------
Title: CEO
ATTEST:
/s/ David Schumannfang
- ------------------------
Secretary
[CORPORATE SEAL]
/s/ Robert F. Young
--------------------------
Robert F. Young
/s/ Nancy R. Young
--------------------------
Nancy R. Young
/s/ Marc Ewing
--------------------------
Marc Ewing
EMPLOYEE
/s/ Erik Troan
--------------------------
Erik Troan
<PAGE>
-13-
SPOUSAL CONSENT
The undersigned, being the spouse of Employee who has signed this
Agreement, hereby acknowledges that she has read and is familiar with its
provisions and agrees to be bound thereby and to join therein to the extent, if
any, that her joinder may be necessary. The undersigned hereby agrees that her
spouse may join in the future amendment or modification of this Agreement
without any further signature, acknowledgment, agreement or consent on her part;
and further agrees that any interest which she may have in the Warrants and
Warrant Shares (as defined in this Agreement) owned directly or beneficially by
her spouse shall be subject to the provisions of this Agreement.
/s/ [Illegible]
--------------------------
Name:
<PAGE>
-14-
AMENDMENT
AMENDMENT, made as of May 24, 1999, by and among Red Hat Software, Inc.
(the "Company"), Robert F. Young, Nancy R. Young and Marc Ewing (collectively,
the "Founders") and Erik Troan (the "Warrantholder").
WHEREAS, the Company, the Founders and the Warrantholder are parties to
that certain Warrant, dated as of August 12, 1997 (the "Warrant"), which by its
terms, terminates on the issuance of any of the Company's shares sold by means
of a public offering that is required to be registered under the federal
securities laws; and
WHEREAS, the Company, the Founders and the Warrantholder wish to amend the
Warrant to prevent it from terminating under such circumstances and to remove
certain restrictions on exercised Warrant Shares upon the closing of the
Company's initial public offering.
NOW THEREFORE, the parties hereto agree as follows:
1. Capitalized terms not defined herein shall have the meaning set forth in the
Warrant.
2. Section 3.14 of the Warrant shall be amended and restated as follows:
"3.14. Termination. This Agreement shall commence as of the date hereof and
shall continue in full force and effect until terminated (i) by the mutual
agreement of the parties hereto, (ii) by the dissolution or bankruptcy of
the Corporation, (iii) upon the effectiveness of a merger, consolidation or
other acquisition of substantially all of the Corporation's assets, if the
Corporation is not the surviving corporation, except that a merger or
consolidation with a subsidiary which effects a mere change in the form or
domicile of the Corporation without changing the respective shareholdings
of the Individual Parties shall not terminate the agreement, even if the
Corporation is not the surviving corporation, or (iv) upon the sale of all
of the issued and outstanding shares of the Corporation. Notwithstanding
the foregoing, the provisions of Article II hereof shall cease and have no
further force or effect with respect to any Warrant Shares upon the
issuance of any of the Corporation's shares sold by means of a public
offering that is required to be registered under the federal securities
laws."
3. Continuing Effect. Except as otherwise set forth herein, all terms and
conditions of the Warrant shall remain in full force and effect, and this
Amendment shall not constitute a modification, acceptance or waiver of any other
provision of the Warrant.
4. Counterparts. This Amendment may be executed in two or more counterparts,
each of which shall constitute an original, but all of which, when taken
together, shall constitute but one instrument.
<PAGE>
-15-
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
RED HAT SOFTWARE, INC.
By: /s/ Robert F. Young
- --------------------------
Title: COE
/s/ Marc Ewing
- --------------------------
Marc Ewing
/s/ Robert F. Young
- --------------------------
Robert F. Young
/s/ Nancy R. Young
- --------------------------
Nancy R. Young
/s/ Erik Troan
- --------------------------
Erik Troan
<PAGE>
Exhibit 10.5
AGREEMENT
THIS AGREEMENT, made as of the 29th day of September 1998, by and between
ROBERT F. YOUNG, NANCY R. YOUNG and MARC EWING (individually and collectively,
the "Founders"); DONALD J. BARNES ("Employee," and collectively with the
Founders, the "Individual Parties"); and RED HAT SOFTWARE, INC., a Delaware
corporation with offices in Research Park, North Carolina (the "Corporation");
W I T N E S S E T H:
WHEREAS, as of the date of this Agreement the Founders own and hold of
record shares of the Corporation's common stock as follows:
Founder Number of Shares
------- ----------------
Robert F. Young 2,030,000
Nancy R. Young 1,820,913
Marc Ewing 4,044,238
WHEREAS, as of the date of this Agreement Employee has been granted
warrants (the "Warrants") to purchase shares of the Corporation's common stock
pursuant to an Employment Agreement by and between the Corporation and Employee
commencing May 1, 1995 and executed October 10, 1995 (the "Employment
Agreement") and desires to enter into this Agreement to bind Employee and the
Corporation to its terms for the Warrants and for any and all shares of the
Corporation issued to Employee upon exercise of the Warrants (the "Warrant
Shares") in accordance with the terms hereof; and
WHEREAS, pursuant to the Warrants, the Employee, if such Employee exercises
all Warrants available pursuant to such Employee's Employment Agreement prior to
the termination of such Warrants pursuant to the terms of this Agreement, may
own and hold of record, upon exercise of all Warrants, total shares of the
Corporation's common stock as follows:
Employee Number of Warrant
-------- Option Shares
-------------
Donald J. Barnes 550,000; and
WHEREAS, the Employee acknowledges that there are shares of the Corporation
issued and outstanding to other shareholders and stock options for shares of the
Corporation issued and outstanding to other employees of the Corporation which
are not subject to this Agreement and that the Corporation, in its sole
discretion, will issue shares of common and preferred stock from time to time to
other shareholders and pursuant to stock options which will not be subject to
this Agreement; and
WHEREAS, the Corporation also anticipates that it may in the future issue
additional stock options to employees, directors, consultants or other service
providers of the Corporation pursuant to a plan or plans established by the
Corporation's Board of Directors (the "Plan") and that the Corporation, in its
sole discretion, may, but shall not be obligated to, subject any such stock
options authorized under the Plan and any shares of the Corporation's stock
purchased pursuant to such stock options to terms and conditions similar to
those contained in this Agreement; and
<PAGE>
-2-
WHEREAS, the Individual Parties and the Corporation recognize that the
Warrants are granted to the Employee as an incentive to promote the success of
the business and to encourage the Employee to remain in the Corporation's
employ; and
WHEREAS, the Individual Parties and the Corporation desire to set forth and
confirm the terms and conditions upon which the Warrants may be exercised and
terminated and the terms and conditions under which they Warrant Shares will be
held; and
WHEREAS, the Individual Parties and the Corporation agree that it is in
their best interest to agree upon the terms and conditions set forth herein and
that such terms and conditions reflect the full understanding of the Individual
Parties and the Corporation.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and conditions herein contained, the Individual Parties and the
Corporation agree, for themselves, their successors and assigns, as follows:
ARTICLE I
WARRANTS
1.1 Warrant. The Corporation and the Employee hereby agree that the
Employee's rights to purchase Warrant Shares pursuant to the Employment
Agreement, and the exercise of the Warrants, shall be governed by the terms of
this Article I. Employee agrees that the provisions in this Agreement pertaining
to the exercise and termination of Warrants and the vesting and purchase of
Warrant Shares represents the understanding of the parties and shall control and
shall supersede over any provisions to the contrary in such Employee's
Employment Agreement. Employee acknowledges that the only options or warrants to
purchase or receive shares of the Corporation's stock to which the Employee is
entitled are the Warrants described in this Article I, that no profit sharing
plan has been implemented by the Corporation, and that the Employee waives any
rights under Section 3c of the Employment Agreement to demand "warrants"
pursuant to a profit sharing plan unless a profit sharing plan expressly
granting the right to Employee to "warrants" is hereinafter implemented by the
Corporation and authorized by its Board of Directors.
1.2 Vesting. Employee has the option to purchase the following number of
Warrant Shares on the dates (the "Vesting Dates") set forth on the following
schedule:
<TABLE>
<CAPTION>
Vesting Dates
-------------
Employee 5/1/96 5/1/97 5/1/98 5/1/99
- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
137,500 137,500 137,500 137,500
</TABLE>
However, if the Employee does not purchase the full number of Warrant Shares to
which the Employee is entitled on or before the Vesting Dates, the Employee is
permitted to purchase those remaining Warrant Shares at a later period (unless
terminated) in addition to those Warrant Shares which the Employee may otherwise
be entitled to purchase. No partial exercise of such Warrant may be for less
than one hundred (100) full Warrant Shares. In no event shall the Corporation be
required to transfer fractional shares to the Employee. The Individual Parties
and the Corporation acknowledge and confirm that as of April 22, 1999, the
Employee has exercised 75,000 of his Warrants and that, after selling 50,000
Warrant Shares, the Employee owns 25,000 Warrant Shares.
<PAGE>
-3-
1.3 Purchase Price. The purchase price for each Warrant Share shall be
$.0001 per Warrant Share.
1.4 Exercise of Warrants. The respective number of Warrants shall be
exercisable from time to time after the applicable Vesting Dates by ten (10)
days written notice to the Corporation and the payment in cash to the
Corporation of the purchase price of the Warrant Shares which the Employee may
and elects to purchase. The Corporation shall make immediate delivery of such
Warrant Shares, provided that if any law or regulation requires the Corporation
to take any action with respect to the Warrant Shares specified in such notice
before the issuance thereof, the date of delivery of such Warrant Shares shall
be extended for the period necessary to take such action.
1.5 Termination of Warrants. The Warrants, to the extent not heretofore
exercised, shall terminate on the first to occur of the following dates:
(a) If the Employee's employment with the Corporation terminates
because of his death, any Warrants held by the Employee on the date of his death
may be exercised only within thirty (30) days after his death and only to the
extent that the Warrants could have been exercised immediately before the
Employee's death;
(b) If the Employee's employment with the Corporation terminates
because of Total Disability (as hereinafter defined) after at least one (1) year
of continuous employment with the Corporation immediately following the date on
which Warrants were originally granted in the Employment Agreement, the Employee
may exercise the Warrant to the extent that it could be exercised upon such
termination of employment at any time within thirty (30) days after the
employment shall terminate;
(c) If the Employee's employment with the Corporation terminates
because of his retirement after at least one (1) year of continuous employment
with the Corporation immediately following the date on which the Warrants were
granted, the Employee may exercise the Warrant to the extent that the Warrants
can be exercised upon such termination of employment at any time within thirty
(30) days after retirement. Retirement means retirement from the Corporation
pursuant to the provisions of the Corporation's policy as may be implemented by
the Board of Directors from time to time.;
(d) If the Employee's employment with the Corporation is terminated by
the Corporation without cause, the Employee may exercise the Warrants to the
extent that the Warrants can be exercised upon such termination of employment at
any time within thirty (30) days after such termination; provided, however, that
any Option Shares so acquired shall be subject to the rights of the Corporation
or the Founders to purchase such shares in accordance with the provisions of
Section 2.6 of this Agreement;
(e) Termination of the Employee's employment with the Corporation for
any reason other than death, disability, retirement, or without cause;
(f) The happening of any event resulting in the termination of this
Agreement pursuant to Section 3.14 hereof;
(g) May 1, 2006.
1.6 Rights Prior to Exercise of Warrant. The Warrants granted to the
Employee are nontransferable by the Employee and are exercisable only by the
Employee. The Employee shall have no
<PAGE>
-4-
right as a shareholder with respect to the Warrant Shares until payment of the
warrrantprice and delivery to the Employee of such Warrant Shares as herein
provided.
1.7 Restrictions. All Warrant Shares acquired by Employee pursuant to the
Warrants shall be subject to the restrictions on sale, encumbrance, and other
dispositions contained in Article II of this Agreement.
1.8 Time is of the Essence. Time is of the essence in exercising the
Warrants under this Agreement.
ARTICLE II
RESTRICTIONS ON WARRANT SHARES
2.1 Restriction on Share Transfer. Employee shall not sell, assign,
transfer, pledge, or otherwise dispose of or in any way alienate any of his
respective Warrant Shares in the Corporation by operation of law or otherwise
except as provided in this Agreement.
2.2 Offer to Purchase All Warrant Shares. If any one or more of the
Founders receives a third party offer to purchase fifty percent (50%) or more of
all of the shares of the Corporation owned collectively by the Founders plus all
of the Warrant Shares and Warrants and the Founders desire to accept the third
party offer, then the Founders have the right to deliver a notice (the "Bring
Along Notice") with respect to such third party offer to the Corporation and the
Employee stating that the Founders propose to effect such transaction, the name
and address of the third party offeror, and the purchase price under the third
party offer, together with a copy of all writings, if any, between the Founders
and the third party offeror or such other person necessary to establish the
terms of such third party offer. Employee agrees that upon receipt of the Bring
Along Notice, Employee shall be obligated to sell all Warrants and Warrant
Shares held by him to the third party offeror upon the terms and conditions
(including, without limitation, purchase price) of the third party offeror (and
otherwise take all necessary action to cause the Corporation to consummate the
proposed transaction). The rights of first refusal in Section 2.3 of this
Agreement shall not apply to this Section 2.2. Notwithstanding anything in this
Section 2.2 to the contrary, Employee acknowledges and agrees that the rights
and obligations hereunder are subject to (and, where applicable, subordinate to
the rights of the Investor, as hereinafter defined) the terms and conditions of
a Co-Sale Agreement between the Founding Shareholders, the Corporation and the
Frank Batten, Jr. Trust, a copy of which is attached hereto as Exhibit A (the
"Co-Sale Agreement"), and that the number of Warrants and Warrant Shares sold by
the Employee to the third party offeror may be reduced by the participation
rights of the Investor as defined and provided in the Co-Sale Agreement. For
purposes of this Section 2.2, the term "Investor" shall have the same meaning as
set forth in the Co-Sale Agreement.
2.3 Transfers During Employee's Lifetime. Except as otherwise set forth in
this Agreement, no Warrant Shares owned by Employee shall be transferred, sold,
assigned, pledged or otherwise disposed of during Employee's lifetime except in
accordance with the following provisions:
(a) Offer to Corporation. Employee (hereinafter referred to as
"Offeror") intending to transfer any Warrant Shares (the "Offered Shares") shall
first submit to the Corporation a written offer to sell the Offered Shares to
the Corporation at the price offered by the proposed purchaser, on the terms of
such offer. Every written offer submitted to the Corporation in accordance with
the provisions of this Section 2.3(a) shall continue to be a binding offer to
sell until expressly rejected by an officer or director of the Corporation
acting pursuant to a resolution adopted in accordance with Section 2.7 of this
Agreement or until the expiration of a period of sixty (60) days after the
delivery of such offer to the Corporation, whichever time is earlier. Upon
delivery to the Corporation of any written offer submitted
<PAGE>
-5-
in accordance with the provisions of this Section 6(a), any officer or director
of the Corporation, acting before the termination of the offer and pursuant to a
resolution adopted in accordance with Section 2.7 of this Agreement may bind the
Corporation to purchase all or any part of the Offered Shares.
(b) Offer to Founders. Upon termination of the offer referred to in
subparagraph (a) above, the Offeror shall then submit to the Founders a written
offer to sell, at the price offered by the proposed purchaser, on the terms of
such offer, any of the Offered Shares not previously purchased by the
Corporation under the aforesaid offer to it (the "Excess Offered Shares"). Each
Founder shall then have the right to purchase up to his Founder Percentage of
the Excess Offered Shares. Each Founder's right to purchase the Excess Offered
Shares shall be exercisable by written notices to the Offeror, the Corporation
and the other Founders given within thirty (30) days of the Offeror's written
offer to the Founders. Each Founder has the right and may indicate in such
notice, his election to purchase the balance of such Excess Offered Shares if
any other Founder or Founders fail to exercise this right to purchase up to the
full amount of their Founder Percentage of the Excess Offered Shares. The
failure of a Founder to exercise his right to purchase Excess Offered Shares
within the thirty (30) day notice period shall be regarded as a waiver of his
right to participate in the purchase of the Excess Offered Shares. For purposes
of this Section, Founder Percentage for each Founder shall be determined by
dividing the total number of shares of the Corporation owned by the Founders
into the total number of shares owned by each Founder at the time of the
Offeror's written offer to the Founders.
(c) Contents of Offer and Subsequent Transfer. Every written offer
submitted in accordance with this Section 2.3 shall specifically name the person
or persons to whom the Offeror intends to transfer the shares, the number of
shares that he intends to so transfer to each person, and the price per share
and other terms upon which each intended transfer is to be made, and shall
include copies of the written offer and pertinent documentation. Upon the
termination of the written offer to the Founders, the Offeror shall, for a
period of thirty (30) days thereafter, be free to transfer any unpurchased
shares to the person or persons so named at the price per share and upon the
other terms so named as stated in the Offeror's written offer to the
Corporation; provided that any such transferee of those shares shall thereafter
be bound by and subject to all of the provisions and restrictions of this
Agreement and shall agree in writing to be so bound. However, if the Offeror
fails to make such transfer within such thirty (30) days, such shares shall
again be subject to all the restrictions and provisions of this Agreement.
(d) Consideration for Shares. If any consideration to be received by
the Offeror for the Warrant Shares offered is property other than cash, then the
price per share shall be measured to that extent by the fair market value of
such noncash consideration. Fair market value for the purposes of this Section
6(d) shall mean the sum of (i) the fair market value of any noncash
consideration offered for the shares as determined by the Board of Directors of
the Corporation (the "Board"), plus (ii) the value of any special benefits to
the Offeror of such noncash consideration to the extent they can be reasonably
identified and valued, plus (iii) the amount of any additional expense or cost
(including additional taxes) incurred by the Offeror in accepting cash instead
of such noncash consideration, in each case based upon a realistic appraisal of
such noncash consideration, special benefits, expense or cost agreed upon by the
Offeror and the Corporation or by two independent qualified appraisers, one
being selected and paid for by the Offeror and the other by the Corporation. If
the two appraisers are unable to agree, they shall select a third, and the
determination of the third appraiser shall be final and conclusive. The cost of
the third appraiser shall be divided equally between the Offeror and the
Corporation.
(e) Closing. The closing of the sale of the Warrant Shares shall be
sixty (60) days following the last timely delivery of notice of election to
purchase any of the shares.
(f) Involuntary Transfer. The provisions of this Section 2.3 shall
also be applicable to Involuntary Transfers of Warrant Shares. "Involuntary
Transfer" means any transfer, proceeding or
<PAGE>
-6-
action by or in which Employee shall be deprived or divested of any right, title
or interest in or to any of his Warrant Shares, including, without limitation,
any seizure under levy of attachment or execution, any transfer in connection
with bankruptcy or other court proceeding to a debtor-in-possession, trustee or
receiver or other officer or agency, or any transfer pursuant to a separation
agreement or entry of a final court order in a divorce proceeding. In such
event, the Corporation and the Founders shall have the right to purchase from
either the Employee or the transferee on the Stipulated Terms (as hereinafter
defined) all of the Warrant Shares of the Corporation owned by the Employee at
the lesser of (i) 80% of the book value of the Warrant Shares as determined by
the Board, (ii) 80% of the fair market value of the Warrant Shares based on the
Corporation as a going concern as determined by the Board, or (iii) the amount
of the indebtedness which resulted in the involuntary transfer of Warrant
Shares. Notice to the Corporation by any person or in any manner of an
Involuntary Transfer shall be deemed a written offer to sell the Warrant Shares
and the Corporation and the Founders shall have the right to purchase the
Warrant Shares in accordance with the procedures as set forth in this Section
2.2.
2.4 Option to Purchase Upon Permanent Disability. If Employee becomes
totally disabled for a period of three (3) months (the "Disabled Employee"), the
Corporation and the Founders shall each have the option to purchase all or any
of the Disabled Employee's Warrant Shares upon the following terms:
(a) Exercise of Option. Such option of the Corporation shall commence
on the date three (3) months after such disability commences and shall be
exercised by written notice by the Corporation within ninety (90) days after
such right commences. The purchase price of the Warrant Shares shall be the
Stipulated Price and shall be payable upon the Stipulated Term (as hereinafter
defined), which shall be paid in cash to the extent of proceeds of insurance
received by the Corporation as the result of such permanent disability, if any,
with the balance of the purchase price payable pursuant to the Stipulated Terms
(as hereinafter defined).
(b) Exercise of Option by Founders. In the event the Corporation does
not elect to exercise its option to purchase all or any of the Warrant Shares
under Section 2.4(a) above (the "Excess Warrant Shares"), then each Founder
shall have the option to purchase up to his Founder Percentage of the Excess
Warrant Shares. Each Founder's right to purchase the Excess Warrant Shares shall
be exercisable by written notice to the Disabled Employee, the Corporation and
the other Founders given within thirty (30) days of the termination of the
Corporation's option. Each Founder has the right and may indicate in such notice
his election to purchase the balance of such Excess Warrant Shares if any other
Founder or Founders fail to exercise this right to purchase up to the full
amount of their Founder Percentage of the Excess Warrant Shares. The failure of
a Founder to exercise his right to purchase Excess Warrant Shares within the
thirty (30) day notice period, shall be regarded as a waiver of his right to
participate in the purchase of the Excess Warrant Shares. For purposes of this
Section, Founder Percentage for each Founder shall be determined by dividing the
total number of shares of the Corporation owned by the Founders into the total
number of shares owned by each Founder at the time of the Disabled Employee's
Total Disability.
(c) Determination of Disability. "Totally Disabled" shall mean the
inability by reason of a physical or mental condition, or both, of the Disabled
Employee to perform satisfactorily his usual duties for the Corporation, as
determined by the Board. The Total Disability shall be deemed to have commenced
on the date of the determination by the Board.
(d) Closing. The closing of the sale of the Warrant Shares shall be
sixty (60) days after delivery of the Corporation's or the Founder's, as the
case may be, notice of election to purchase the Warrant Shares.
<PAGE>
-7-
2.5 Option to Purchase Upon Death. Upon the death of Employee (the
"Decedent"), all of the Warrant Shares of the Corporation which had been owned
by the Decedent and all Warrant Shares owned by the Decedent's representative if
Warrants are exercised within thirty (30) days after the Decedent's death and to
which he or his personal representatives shall be entitled shall be sold and
purchased as herein provided at the option of the Corporation.
(a) Option of the Corporation to Purchase. The Corporation has the
option to purchase from Decedent's estate, and, if the option is exercised,
Decedent's estate shall sell to the Corporation, all the Warrant Shares of the
Corporation owned by Decedent at the Stipulated Price and upon the Stipulated
Terms (as hereinafter defined). The Corporation shall exercise its option by
giving written notice to the Decedent's personal representative within one
hundred twenty (120) days after the Decedent's death.
(b) Option of the Founders to Purchase. In the event the Corporation
does not elect to exercise its option to purchase all or any of the Warrant
Shares under Section 2.5(a) above (the "Excess Warrant Shares"), then each
Founder shall have the option to purchase up to his Founder Percentage of the
Excess Warrant Shares at the Stipulated Price and upon the Stipulated Terms (as
hereinafter defined). Each Founder's right to purchase the Excess Warrant Shares
shall be exercisable by written notice to the Decedent's Estate, the Corporation
and the other Founders given within thirty (30) days of the termination of the
Corporation's option. Each Founder has the right and may indicate in such notice
his election to purchase the balance of such Excess Warrant Shares if nay other
Founder or Founders fail to exercise this right to purchase up to the full
amount of their Founder Percentage of the Excess Warrant Shares. The failure of
a Founder to exercise his right to purchase Excess Warrant Shares within the
thirty (30) day notice period, shall be regarded as a waiver of his right to
participate in the purchase of the Excess Warrant Shares. For purposes of this
Section, Founder Percentage for each Founder shall be determined by dividing the
total number of shares of the Corporation owned by the Founders into the total
number of shares owned by each Founder at the time of the Decedent's death.
(c) Insurance. The Corporation may, but is not obligated to, obtain
insurance on the life of Employee for a sum determined by the Corporation,
naming itself as beneficiary of the policies The Corporation shall pay all
premiums on the insurance policies. The Corporation shall be the sole owner of
the insurance policies and may apply to the payment of premiums any dividends
declared and paid on the policies.
(d) Closing. The Closing of the purchase of the Warrant Shares shall
be ninety (90) days after the Corporation or the Founders, as the case may be,
exercises their option to purchase the Warrant Shares.
2.6 Purchase Upon Termination of Employment. In the event that Employee's
employment with the Corporation is terminated by the Corporation or such
Employee for any reason whatsoever, with or without cause, or at any time (the
"Terminated Employee"), the Corporation and the Founders shall each have the
option to purchase all or any of the Warrant Shares owned by the Terminated
Employee upon the following terms:
(a) Option to Purchase by Corporation. The Corporation shall have the
option to purchase from the Terminated Employee all of the Warrant Shares owned
by the Terminated Employee at the Stipulated Price and upon the Stipulated Terms
(as hereinafter defined), which option the corporation may exercise by notice in
writing to the Terminated Employee within (90) days of the effective date of
termination; provided, however, in the event the Employee's terminated for
cause, then the option to purchase under this Section 2.6(a) and 2.6(b) shall be
at the lesser of eighty percent (80%) of book value of the Warrant Shares as
determined by the Board or eighty percent (80%) of the value of the Warrant
<PAGE>
-8-
Shares based on the Corporation as a going concern as determined by the Board,
and on the Stipulated Terms.
(b) Option to Purchase by Founders. In the event the Corporation does
not elect to exercise its option to purchase all or any of the Warrant Shares
under 2.6(a) above (the "Excess Warrant Shares"), then each Founder shall have
the option to purchase up to his Founder Percentage of the Excess Warrant Shares
at the price and under the terms provided in Section 2.6(a) above. Each
Founder's right to purchase the Excess Warrant Shares shall be exercisable by
written notice to the Terminated Employee, the corporation and the other
Founders given within thirty (30) days of the termination of the Corporation's
option. Each Founder has the right and may indicate in such notice his election
to purchase the balance of such Excess Warrant Shares if any other founder or
Founders fail to exercise this right to purchase up to the full amount of their
Founder Percentage of the Excess Warrant Shares. The failure of a Founder to
exercise his right to purchase Excess Warrant Shares within the thirty (30) day
notice period, shall be regarded as a waiver of his right to participate in the
purchase of the Excess Warrant Shares. For purpose of this Section, Founder
Percentage for each Founder shall be determined by dividing the total number of
shares of the Corporation owned by the Founders into the total number of shares
owned by each Founder at the time of the Employee's termination of employment.
(c) Closing. The closing of the purchase of the Warrant Shares shall
be ninety (90) days after the Corporation or the Founders, as the case may be,
exercise their option to purchase the Warrant Shares.
2.7 Vote on Option to Purchase. Whenever, under the terms of this
Agreement, the Corporation has an option to purchase Warrant Shares, action on
such option may be taken by the holders of a majority of the voting shares of
the Corporation (or such other percentage as may be required by the
Corporation's Articles of Incorporation as may be amended and/or restated from
time to time if such redemption of stock under this Agreement is not excluded
from such greater percentage), exclusive of the Warrant Shares held by the
Offeror, the Decedent, the Disabled Employee or the Terminated Employee, as the
case may be.
2.8 Non-Exercise of Option. Whenever, under the terms of this Agreement,
the Corporation and Founders have an option to purchase Warrant Shares and
elects not to exercise the option, said Warrant Shares shall nevertheless remain
subject to all of the terms of this Agreement.
2.9 Dates for Determination of Purchase Price. This Section sets the
various dates from which the purchase price for Warrant Shares purchased
pursuant to this Agreement shall be determined. The price shall be determined in
each case as of the following valuation dates: (a) upon the death of Employee,
as of the date of death; (b) upon the Total Disability of Employee, as of the
date of determination of Total Disability by the Board; (c) upon a termination
of employment of Employee, upon the effective date of the termination; and (d)
upon an Involuntary Transfer, upon the effective date of the Involuntary
Transfer.
2.10 Payment of Purchase Price. The manner of payment of the purchase price
for any Warrant Shares pursuant to this Agreement, with the exception of a
purchase upon the terms offered by a proposed third-party purchaser or as
otherwise provided in this Agreement, shall be determined by this Section.
(a) Stipulated Price. The "Stipulated Price" shall be that price per
share of the Corporation as a going concern equal to eighty percent (80%) of the
fair market value for such shares as determined by the Board.
<PAGE>
-9-
(b) Stipulated Terms. The purchase price for any Warrant Shares
purchased pursuant to this Agreement shall be paid either in cash or by a cash
down payment and the delivery of a secured promissory note, at the option of the
purchaser. If the purchase is made for any reason other than the death of the
Employee, the down payment shall equal at least twenty percent (20%) of the
purchase price. If the purchase is made because of the death of Employee, the
down payment shall equal not less than the greater of twenty percent (20%) of
the purchase price or the full amount of the net proceeds from any insurance
policies maintained by the Corporation on the life of the Employee. Any
promissory note shall provide for equal quarterly installments of principal over
a term not to exceed five (5) years, and shall bear interest at the rate of
seven (7%) percent. Accrued interest shall be payable quarterly commencing with
the first installment of principal. The note shall be subject to prepayment in
whole or in part at any time and without penalty. In the event of default in
payment of any installment when due, the whole sum of the principal and interest
shall become immediately due and payable at the option of the holder.
Notwithstanding anything herein to the contrary, if the purchase price is less
than $10,000.00 the entire purchase price shall be paid in cash at closing.
(c) Delivery of Warrant Shares. At such time as the cash and
promissory note, if applicable, have been delivered to the Employee or his
estate, the Warrant Shares of the Employee shall be transferred to the purchaser
or purchasers.
(d) Security. If part of the purchase price is paid by delivery of the
purchaser's promissory note, then, as security for payments due under the terms
of the note, the purchaser shall grant to the Employee a security interest in
the Shares by executing a pledge and escrow agreement and whatever additional
documents may be reasonably necessary to perfect the security interest of the
Employee or his estate. The security documents shall provide that the
Corporation or other purchaser shall deposit the shares it is purchasing with an
escrow agent and that, if the purchaser defaults under the terms of the
promissory note or the security documents, the Employee or his estate shall have
the right to receive possession of the shares and to exercise all other rights
of a secured party under the North Carolina Uniform Commercial Code.
(e) Insufficient Corporate Surplus. If, at the time the Corporation is
required to make payment of the purchase price for shares pursuant to this
Agreement and/or to issue its promissory notes therefor, its surplus is
insufficient for such purposes under applicable law, then the Corporation shall
promptly take all action necessary and proper under applicable law to increase,
to the extent possible, the surplus of the Corporation to permit such payment
and/or the issuance of such promissory note. Employee or his personal
representative shall perform such acts, execute such instruments, and vote the
respective shares in such a manner as may be required to increase the available
surplus to an amount sufficient to authorize the purchase of the shares,
including, but not limited to, a recapitalization to reduce the capital of the
Corporation and increase its surplus or a reappraisal of the assets of the
Corporation for the purpose of reflecting the market value.
ARTICLE III
GENERAL PROVISIONS
3.1 Corporate Action and Articles of Incorporation. The Corporation and the
Individual Parties shall take all action required pursuant to this Agreement to
effectuate the provisions herein. The Corporation shall become a party to this
Agreement.
3.2 Share Certificates. Every certificate representing Warrant Shares of
the Corporation shall bear the following legend prominently displayed:
<PAGE>
-10-
"The shares represented by this certificate, and the transfer thereof, are
subject to the provisions of that certain Agreement, dated as of September
29, 1998, among ROBERT F. YOUNG, NANCY R. YOUNG, MARC EWING, DONALD J.
BARNES and RED HAT SOFTWARE, INC., a Delaware corporation, a copy of which
is on file in, and may be examined at, the principal office of the
Corporation."
3.3 Warrant Shares. All references to Warrant Shares owned by Employee
shall mean any outstanding shares of the Corporation hereafter owned by Employee
and any shares distributed with respect to any such shares in a stock split,
stock dividend, recapitalization, reorganization or otherwise.
3.4 Necessary Acts. Each party hereto agrees that they will do any act or
thing and will execute any and all instruments necessary and/or proper to make
effective the provisions of this Agreement.
3.5 Severability. Should any provision of this Agreement be declared to be
invalid for any reason or to have ceased to be binding on the parties hereto,
such provision shall be severed, and all other provisions herein shall continue
to be effective and binding.
3.6 Governing Law. This Agreement shall be subject to and governed by the
laws of the State of Delaware.
3.7 Entire Agreement. This Agreement contains the entire agreement between
the parties hereto with respect to the subject matter hereof, and no change,
amendment or modification of this Agreement shall be valid unless the same be in
writing and signed by all the parties hereto. No waiver of any of the terms of
this Agreement shall be valid unless signed by the party against whom such
waiver is asserted. This Agreement supersedes and nullifies the terms of any
other agreement setting forth the rights of the Employee previously entered into
by Employee with respect to the subject matter hereof. The Employee acknowledges
that his ownership of Warrants and Warrant Shares in the Corporation gives him
no rights or expectations except those embodied in this Agreement.
3.8 Specific Performance. The parties acknowledge that the actual damage
which would be sustained upon the breach of this Agreement by any of the parties
or to a personal representative of a Decedent aggrieved by the breach or
threatened breach of any of its provisions shall be entitled to seek from any
court of competent jurisdiction an order for specific performance of all of the
terms and conditions of this agreement. This provision does not limit the
parties from seeking any other available remedies at law or equity.
3.9 Prohibited Transfers Void. Any purported transfer in violation of this
Agreement shall be void and shall not transfer any interest or title to the
purported transferee. The Corporation shall not be required to transfer on its
books any Warrant Shares sold or transferred in violation of any of the
provisions set forth in this Agreement or to treat as owner of those Warrant
Shares or to pay dividends to any transferee to whom any of those Warrant Shares
shall have been so sold or transferred.
3.10 Representation as to Attorney. The Individual Parties (and the
Corporation) acknowledge that a conflict may exist among their respective
interests, and that the Individual Parties should seek the advice of independent
counsel. The parties hereby waive any claim they may have as to any conflict
which may exist in connection with the preparation of this Agreement.
3.11 New Parties. The Corporation shall not record a transfer of Warrant
Shares from Employee to any person not a party hereto unless said person shall
execute an acknowledgment of the
<PAGE>
-11-
terms hereof and agreement to be bound hereby, except for a transfer of Warrant
Shares to a third party pursuant to Section 2.2 of this Agreement.
3.12 Agreement Binding. This Agreement shall insure to the benefit of and
be binding upon the parties hereto and their respective next-of-kin, legatees,
administrators, executors, legal representatives, successors and permitted
assigns (including remote, as well as immediate, successors to and assignees of
said parties), except this Agreement shall not be binding on a third-party
purchaser in the event of a transfer of Warrant Shares to such third party
pursuant to Section 2.2 of this Agreement.
3.13 Pronouns and Headings. In this Agreement the masculine shall include
the feminine and the singular shall include the plural as the context of this
Agreement shall clearly require. The article and section headings in this
Agreement are inserted for convenience only and are not part of the Agreement.
3.14. Termination. This Agreement shall commence as of the date hereof and
shall continue in full force and effect until terminated (i) by the mutual
agreement of the parties hereto, (ii) by the dissolution or bankruptcy of the
Corporation, (iii) upon the effectiveness of a merger, consolidation or other
acquisition of substantially all of the Corporation's assets, if the Corporation
is not the surviving corporation, except that a merger or consolidation with a
subsidiary which effects a mere change in the form or domicile of the
Corporation without changing the respective shareholdings of the Individual
Parties shall not terminate the agreement, even if the Corporation is not the
surviving corporation, (iv) upon the issuance of any of the Corporation's shares
sold by means of a public offering that is required to be registered under the
federal securities laws, or (v) upon the sale of all of the issued and
outstanding shares of the Corporation.
3.15 Transferability. Any rights or interests of the parties set forth in
this Agreement are personal and nontransferable.
3.16 Notices. Any notice or offer required hereunder shall be deemed to
have been validly given if delivered by certified mail, return receipt
requested, postage prepaid, addressed, or by federal express overnight delivery
(or other nationally recognized service) with receipt confirmed, in the case of
the Corporation, to its principal office, and in the case of the Individual
Parties, to their address appearing on the stock records of the Corporation or
to such other address as he may designate. Notices hereunder shall be deemed
given seven (7) business days after deposit in the United States Mail or the
next business day, if delivered by Federal Express overnight delivery (or other
nationally recognized service).
3.17 Jurisdiction and Venue. The parties agree that any action brought in
any court whether federal or state shall be brought within the State of North
Carolina in the judicial district of Durham, Durham County and do hereby waive
all questions of personal jurisdiction or venue for the purpose of carrying out
this provision.
3.18 Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreements.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-12-
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be signed
by its duly authorized officers and its corporate seal to be affixed hereto, and
the Individual Parties have hereunto set their hands, all as of the day and year
first above written.
RED HAT SOFTWARE, INC.
By: /s/ Robert F. Young
----------------------
Title: CEO
ATTEST:
/s/ David Schumannfang
- ------------------------
Secretary
[CORPORATE SEAL]
/s/ Robert F. Young
--------------------------
Robert F. Young
/s/ Nancy R. Young
--------------------------
Nancy R. Young
/s/ Marc Ewing
--------------------------
Marc Ewing
EMPLOYEE
/s/ Donald J. Barnes
--------------------------
Donald J. Barnes
<PAGE>
-13-
SPOUSAL CONSENT
The undersigned, being the spouse of Employee who has signed this
Agreement, hereby acknowledges that she has read and is familiar with its
provisions and agrees to be bound thereby and to join therein to the extent, if
any, that her joinder may be necessary. The undersigned hereby agrees that her
spouse may join in the future amendment or modification of this Agreement
without any further signature, acknowledgment, agreement or consent on her part;
and further agrees that any interest which she may have in the Warrants and
Warrant Shares (as defined in this Agreement) owned directly or beneficially by
her spouse shall be subject to the provisions of this Agreement.
/s/ Ashley S. Barnes
--------------------------
Name:
<PAGE>
AMENDMENT
AMENDMENT, made as of May 24, 1999, by and among Red Hat Software, Inc.
(the "Company"), Robert F. Young, Nancy R. Young and Marc Ewing (collectively,
the "Founders") and Donald Barnes (the "Warrantholder").
WHEREAS, the Company, the Founders and the Warrantholder are parties to
that certain Warrant, dated as of August 12, 1997 (the "Warrant"), which by its
terms, terminates on the issuance of any of the Company's shares sold by means
of a public offering that is required to be registered under the federal
securities laws; and
WHEREAS, the Company, the Founders and the Warrantholder wish to amend the
Warrant to prevent it from terminating under such circumstances and to remove
certain restrictions on exercised Warrant Shares upon the closing of the
Company's initial public offering.
NOW THEREFORE, the parties hereto agree as follows:
1. Capitalized terms not defined herein shall have the meaning set forth in the
Warrant.
2. Section 3.14 of the Warrant shall be amended and restated as follows:
"3.14. Termination. This Agreement shall commence as of the date hereof and
shall continue in full force and effect until terminated (i) by the mutual
agreement of the parties hereto, (ii) by the dissolution or bankruptcy of
the Corporation, (iii) upon the effectiveness of a merger, consolidation or
other acquisition of substantially all of the Corporation's assets, if the
Corporation is not the surviving corporation, except that a merger or
consolidation with a subsidiary which effects a mere change in the form or
domicile of the Corporation without changing the respective shareholdings
of the Individual Parties shall not terminate the agreement, even if the
Corporation is not the surviving corporation, or (iv) upon the sale of all
of the issued and outstanding shares of the Corporation. Notwithstanding
the foregoing, the provisions of Article II hereof shall cease and have no
further force or effect with respect to any Warrant Shares upon the
issuance of any of the Corporation's shares sold by means of a public
offering that is required to be registered under the federal securities
laws."
3. Continuing Effect. Except as otherwise set forth herein, all terms and
conditions of the Warrant shall remain in full force and effect, and this
Amendment shall not constitute a modification, acceptance or waiver of any other
provision of the Warrant.
4. Counterparts. This Amendment may be executed in two or more counterparts,
each of which shall constitute an original, but all of which, when taken
together, shall constitute but one instrument.
<PAGE>
-2-
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
RED HAT SOFTWARE, INC.
By: /s/ Robert F. Young
----------------------
Title: CEO
/s/ Marc Young
- --------------------------
Marc Ewing
/s/ Robert F. Young
- --------------------------
Robert F. Young
/s/ Nancy R. Young
- --------------------------
Nancy R. Young
/s/ Donald Barnes
- --------------------------
Donald Barnes
<PAGE>
Exhibit 10.6
AGREEMENT
THIS AGREEMENT, made as of the 29th day of September 1998, by and between
ROBERT F. YOUNG, NANCY R. YOUNG and MARC EWING (individually and collectively,
the "Founders"); LISA F. SULLIVAN ("Employee," and collectively with the
Founders, the "Individual Parties"); and RED HAT SOFTWARE, INC., a Delaware
corporation with offices in Research Park, North Carolina (the "Corporation");
W I T N E S S E T H:
WHEREAS, as of the date of this Agreement the Founders own and hold of
record shares of the Corporation's common stock as follows:
Founder Number of Shares
------- ----------------
Robert F. Young 2,030,000
Nancy R. Young 1,820,913
Marc Ewing 4,044,238
WHEREAS, as of the date of this Agreement Employee has been granted
warrants (the "Warrants") to purchase shares of the Corporation's common stock
pursuant to an Employment Agreement by and between the Corporation and Employee
commencing May 1, 1995 and executed October 10, 1995 (the "Employment
Agreement") and desires to enter into this Agreement to bind Employee and the
Corporation to its terms for the Warrants and for any and all shares of the
Corporation issued to Employee upon exercise of the Warrants (the "Warrant
Shares") in accordance with the terms hereof; and
WHEREAS, pursuant to the Warrants, the Employee, if such Employee
exercises all Warrants available pursuant to such Employee's Employment
Agreement prior to the termination of such Warrants pursuant to the terms of
this Agreement, may own and hold of record, upon exercise of all Warrants, total
shares of the Corporation's common stock as follows:
Employee Number of Warrant
-------- Option Shares
-------------
Lisa F. Sullivan 550,000; and
WHEREAS, the Employee acknowledges that there are shares of the Corporation
issued and outstanding to other shareholders and stock options for shares of the
Corporation issued and outstanding to other employees of the Corporation which
are not subject to this Agreement and that the Corporation, in its sole
discretion, will issue shares of common and preferred stock from time to time to
other shareholders and pursuant to stock options which will not be subject to
this Agreement; and
WHEREAS, the Corporation also anticipates that it may in the future issue
additional stock options to employees, directors, consultants or other service
providers of the Corporation pursuant to a plan or plans established by the
Corporation's Board of Directors (the "Plan") and that the Corporation, in its
sole discretion, may, but shall not be obligated to, subject any such stock
options authorized under the Plan and any shares of the Corporation's stock
purchased pursuant to such stock options to terms and conditions similar to
those contained in this Agreement; and
<PAGE>
-2-
WHEREAS, the Individual Parties and the Corporation recognize that the
Warrants are granted to the Employee as an incentive to promote the success of
the business and to encourage the Employee to remain in the Corporation's
employ; and
WHEREAS, the Individual Parties and the Corporation desire to set forth and
confirm the terms and conditions upon which the Warrants may be exercised and
terminated and the terms and conditions under which they Warrant Shares will be
held; and
WHEREAS, the Individual Parties and the Corporation agree that it is in
their best interest to agree upon the terms and conditions set forth herein and
that such terms and conditions reflect the full understanding of the Individual
Parties and the Corporation.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and conditions herein contained, the Individual Parties and the
Corporation agree, for themselves, their successors and assigns, as follows:
ARTICLE I
WARRANTS
1.1 Warrant. The Corporation and the Employee hereby agree that the
Employee's rights to purchase Warrant Shares pursuant to the Employment
Agreement, and the exercise of the Warrants, shall be governed by the terms of
this Article I. Employee agrees that the provisions in this Agreement pertaining
to the exercise and termination of Warrants and the vesting and purchase of
Warrant Shares represents the understanding of the parties and shall control and
shall supersede over any provisions to the contrary in such Employee's
Employment Agreement. Employee acknowledges that the only options or warrants to
purchase or receive shares of the Corporation's stock to which the Employee is
entitled are the Warrants described in this Article I, that no profit sharing
plan has been implemented by the Corporation, and that the Employee waives any
rights under Section 3c of the Employment Agreement to demand "warrants"
pursuant to a profit sharing plan unless a profit sharing plan expressly
granting the right to Employee to "warrants" is hereinafter implemented by the
Corporation and authorized by its Board of Directors.
1.2 Vesting. Employee has the option to purchase the following number of
Warrant Shares on the dates (the "Vesting Dates") set forth on the following
schedule:
<TABLE>
<CAPTION>
Vesting Dates
-------------
Employee 5/1/96 5/1/97 5/1/98 5/1/99
- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
137,500 137,500 137,500 137,500
</TABLE>
However, if the Employee does not purchase the full number of Warrant Shares to
which the Employee is entitled on or before the Vesting Dates, the Employee is
permitted to purchase those remaining Warrant Shares at a later period (unless
terminated) in addition to those Warrant Shares which the Employee may otherwise
be entitled to purchase. No partial exercise of such Warrant may be for less
than one hundred (100) full Warrant Shares. In no event shall the Corporation be
required to transfer fractional shares to the Employee. The Individual Parties
and the Corporation acknowledge and confirm that as of April 26, 1999, the
Employee has exercised 94,500 of her Warrants and that, after selling 49,500
Warrant Shares, Employee owns 45,000 Warrant Shares.
<PAGE>
-3-
1.3 Purchase Price. The purchase price for each Warrant Share shall be
$.0001 per Warrant Share.
1.4 Exercise of Warrants. The respective number of Warrants shall be
exercisable from time to time after the applicable Vesting Dates by ten (10)
days written notice to the Corporation and the payment in cash to the
Corporation of the purchase price of the Warrant Shares which the Employee may
and elects to purchase. The Corporation shall make immediate delivery of such
Warrant Shares, provided that if any law or regulation requires the Corporation
to take any action with respect to the Warrant Shares specified in such notice
before the issuance thereof, the date of delivery of such Warrant Shares shall
be extended for the period necessary to take such action.
1.5 Termination of Warrants. The Warrants, to the extent not heretofore
exercised, shall terminate on the first to occur of the following dates:
(a) If the Employee's employment with the Corporation terminates
because of her death, any Warrants held by the Employee on the date of her death
may be exercised only within thirty (30) days after her death and only to the
extent that the Warrants could have been exercised immediately before the
Employee's death;
(b) If the Employee's employment with the Corporation terminates
because of Total Disability (as hereinafter defined) after at least one (1) year
of continuous employment with the Corporation immediately following the date on
which Warrants were originally granted in the Employment Agreement, the Employee
may exercise the Warrant to the extent that it could be exercised upon such
termination of employment at any time within thirty (30) days after the
employment shall terminate;
(c) If the Employee's employment with the Corporation terminates
because of her retirement after at least one (1) year of continuous employment
with the Corporation immediately following the date on which the Warrants were
granted, the Employee may exercise the Warrant to the extent that the Warrants
can be exercised upon such termination of employment at any time within thirty
(30) days after retirement. Retirement means retirement from the Corporation
pursuant to the provisions of the Corporation's policy as may be implemented by
the Board of Directors from time to time.;
(d) If the Employee's employment with the Corporation is terminated by
the Corporation without cause, the Employee may exercise the Warrants to the
extent that the Warrants can be exercised upon such termination of employment at
any time within thirty (30) days after such termination; provided, however, that
any Option Shares so acquired shall be subject to the rights of the Corporation
or the Founders to purchase such shares in accordance with the provisions of
Section 2.6 of this Agreement;
(e) Termination of the Employee's employment with the Corporation for
any reason other than death, disability, retirement, or without cause;
(f) The happening of any event resulting in the termination of this
Agreement pursuant to Section 3.14 hereof;
(g) May 1, 2006.
1.6 Rights Prior to Exercise of Warrant. The Warrants granted to the
Employee are nontransferable by the Employee and are exercisable only by the
Employee. The Employee shall have no
<PAGE>
-4-
right as a shareholder with respect to the Warrant Shares until payment of the
warrrantprice and delivery to the Employee of such Warrant Shares as herein
provided.
1.7 Restrictions. All Warrant Shares acquired by Employee pursuant to the
Warrants shall be subject to the restrictions on sale, encumbrance, and other
dispositions contained in Article II of this Agreement.
1.8 Time is of the Essence. Time is of the essence in exercising the
Warrants under this Agreement.
ARTICLE II
RESTRICTIONS ON WARRANT SHARES
2.1 Restriction on Share Transfer. Employee shall not sell, assign,
transfer, pledge, or otherwise dispose of or in any way alienate any of her
respective Warrant Shares in the Corporation by operation of law or otherwise
except as provided in this Agreement.
2.2 Offer to Purchase All Warrant Shares. If any one or more of the
Founders receives a third party offer to purchase fifty percent (50%) or more of
all of the shares of the Corporation owned collectively by the Founders plus all
of the Warrant Shares and Warrants and the Founders desire to accept the third
party offer, then the Founders have the right to deliver a notice (the "Bring
Along Notice") with respect to such third party offer to the Corporation and the
Employee stating that the Founders propose to effect such transaction, the name
and address of the third party offeror, and the purchase price under the third
party offer, together with a copy of all writings, if any, between the Founders
and the third party offeror or such other person necessary to establish the
terms of such third party offer. Employee agrees that upon receipt of the Bring
Along Notice, Employee shall be obligated to sell all Warrants and Warrant
Shares held by her to the third party offeror upon the terms and conditions
(including, without limitation, purchase price) of the third party offeror (and
otherwise take all necessary action to cause the Corporation to consummate the
proposed transaction). The rights of first refusal in Section 2.3 of this
Agreement shall not apply to this Section 2.2. Notwithstanding anything in this
Section 2.2 to the contrary, Employee acknowledges and agrees that the rights
and obligations hereunder are subject to (and, where applicable, subordinate to
the rights of the Investor, as hereinafter defined) the terms and conditions of
a Co-Sale Agreement between the Founding Shareholders, the Corporation and the
Frank Batten, Jr. Trust, a copy of which is attached hereto as Exhibit A (the
"Co-Sale Agreement"), and that the number of Warrants and Warrant Shares sold by
the Employee to the third party offeror may be reduced by the participation
rights of the Investor as defined and provided in the Co-Sale Agreement. For
purposes of this Section 2.2, the term "Investor" shall have the same meaning as
set forth in the Co-Sale Agreement.
2.3 Transfers During Employee's Lifetime. Except as otherwise set forth in
this Agreement, no Warrant Shares owned by Employee shall be transferred, sold,
assigned, pledged or otherwise disposed of during Employee's lifetime except in
accordance with the following provisions:
(a) Offer to Corporation. Employee (hereinafter referred to as
"Offeror") intending to transfer any Warrant Shares (the "Offered Shares") shall
first submit to the Corporation a written offer to sell the Offered Shares to
the Corporation at the price offered by the proposed purchaser, on the terms of
such offer. Every written offer submitted to the Corporation in accordance with
the provisions of this Section 2.3(a) shall continue to be a binding offer to
sell until expressly rejected by an officer or director of the Corporation
acting pursuant to a resolution adopted in accordance with Section 2.7 of this
Agreement or until the expiration of a period of sixty (60) days after the
delivery of such offer to the Corporation, whichever time is earlier. Upon
delivery to the Corporation of any written offer submitted
<PAGE>
-5-
in accordance with the provisions of this Section 6(a), any officer or director
of the Corporation, acting before the termination of the offer and pursuant to a
resolution adopted in accordance with Section 2.7 of this Agreement may bind the
Corporation to purchase all or any part of the Offered Shares.
(b) Offer to Founders. Upon termination of the offer referred to in
subparagraph (a) above, the Offeror shall then submit to the Founders a written
offer to sell, at the price offered by the proposed purchaser, on the terms of
such offer, any of the Offered Shares not previously purchased by the
Corporation under the aforesaid offer to it (the "Excess Offered Shares"). Each
Founder shall then have the right to purchase up to her Founder Percentage of
the Excess Offered Shares. Each Founder's right to purchase the Excess Offered
Shares shall be exercisable by written notices to the Offeror, the Corporation
and the other Founders given within thirty (30) days of the Offeror's written
offer to the Founders. Each Founder has the right and may indicate in such
notice, her election to purchase the balance of such Excess Offered Shares if
any other Founder or Founders fail to exercise this right to purchase up to the
full amount of their Founder Percentage of the Excess Offered Shares. The
failure of a Founder to exercise her right to purchase Excess Offered Shares
within the thirty (30) day notice period shall be regarded as a waiver of her
right to participate in the purchase of the Excess Offered Shares. For purposes
of this Section, Founder Percentage for each Founder shall be determined by
dividing the total number of shares of the Corporation owned by the Founders
into the total number of shares owned by each Founder at the time of the
Offeror's written offer to the Founders.
(c) Contents of Offer and Subsequent Transfer. Every written offer
submitted in accordance with this Section 2.3 shall specifically name the person
or persons to whom the Offeror intends to transfer the shares, the number of
shares that he intends to so transfer to each person, and the price per share
and other terms upon which each intended transfer is to be made, and shall
include copies of the written offer and pertinent documentation. Upon the
termination of the written offer to the Founders, the Offeror shall, for a
period of thirty (30) days thereafter, be free to transfer any unpurchased
shares to the person or persons so named at the price per share and upon the
other terms so named as stated in the Offeror's written offer to the
Corporation; provided that any such transferee of those shares shall thereafter
be bound by and subject to all of the provisions and restrictions of this
Agreement and shall agree in writing to be so bound. However, if the Offeror
fails to make such transfer within such thirty (30) days, such shares shall
again be subject to all the restrictions and provisions of this Agreement.
(d) Consideration for Shares. If any consideration to be received by
the Offeror for the Warrant Shares offered is property other than cash, then the
price per share shall be measured to that extent by the fair market value of
such noncash consideration. Fair market value for the purposes of this Section
6(d) shall mean the sum of (i) the fair market value of any noncash
consideration offered for the shares as determined by the Board of Directors of
the Corporation (the "Board"), plus (ii) the value of any special benefits to
the Offeror of such noncash consideration to the extent they can be reasonably
identified and valued, plus (iii) the amount of any additional expense or cost
(including additional taxes) incurred by the Offeror in accepting cash instead
of such noncash consideration, in each case based upon a realistic appraisal of
such noncash consideration, special benefits, expense or cost agreed upon by the
Offeror and the Corporation or by two independent qualified appraisers, one
being selected and paid for by the Offeror and the other by the Corporation. If
the two appraisers are unable to agree, they shall select a third, and the
determination of the third appraiser shall be final and conclusive. The cost of
the third appraiser shall be divided equally between the Offeror and the
Corporation.
(e) Closing. The closing of the sale of the Warrant Shares shall be
sixty (60) days following the last timely delivery of notice of election to
purchase any of the shares.
(f) Involuntary Transfer. The provisions of this Section 2.3 shall
also be applicable to Involuntary Transfers of Warrant Shares. "Involuntary
Transfer" means any transfer, proceeding or
<PAGE>
-6-
action by or in which Employee shall be deprived or divested of any right, title
or interest in or to any of her Warrant Shares, including, without limitation,
any seizure under levy of attachment or execution, any transfer in connection
with bankruptcy or other court proceeding to a debtor-in-possession, trustee or
receiver or other officer or agency, or any transfer pursuant to a separation
agreement or entry of a final court order in a divorce proceeding. In such
event, the Corporation and the Founders shall have the right to purchase from
either the Employee or the transferee on the Stipulated Terms (as hereinafter
defined) all of the Warrant Shares of the Corporation owned by the Employee at
the lesser of (i) 80% of the book value of the Warrant Shares as determined by
the Board, (ii) 80% of the fair market value of the Warrant Shares based on the
Corporation as a going concern as determined by the Board, or (iii) the amount
of the indebtedness which resulted in the involuntary transfer of Warrant
Shares. Notice to the Corporation by any person or in any manner of an
Involuntary Transfer shall be deemed a written offer to sell the Warrant Shares
and the Corporation and the Founders shall have the right to purchase the
Warrant Shares in accordance with the procedures as set forth in this Section
2.2.
2.4 Option to Purchase Upon Permanent Disability. If Employee becomes
totally disabled for a period of three (3) months (the "Disabled Employee"), the
Corporation and the Founders shall each have the option to purchase all or any
of the Disabled Employee's Warrant Shares upon the following terms:
(a) Exercise of Option. Such option of the Corporation shall commence
on the date three (3) months after such disability commences and shall be
exercised by written notice by the Corporation within ninety (90) days after
such right commences. The purchase price of the Warrant Shares shall be the
Stipulated Price and shall be payable upon the Stipulated Term (as hereinafter
defined), which shall be paid in cash to the extent of proceeds of insurance
received by the Corporation as the result of such permanent disability, if any,
with the balance of the purchase price payable pursuant to the Stipulated Terms
(as hereinafter defined).
(b) Exercise of Option by Founders. In the event the Corporation does
not elect to exercise its option to purchase all or any of the Warrant Shares
under Section 2.4(a) above (the "Excess Warrant Shares"), then each Founder
shall have the option to purchase up to her Founder Percentage of the Excess
Warrant Shares. Each Founder's right to purchase the Excess Warrant Shares shall
be exercisable by written notice to the Disabled Employee, the Corporation and
the other Founders given within thirty (30) days of the termination of the
Corporation's option. Each Founder has the right and may indicate in such notice
her election to purchase the balance of such Excess Warrant Shares if any other
Founder or Founders fail to exercise this right to purchase up to the full
amount of their Founder Percentage of the Excess Warrant Shares. The failure of
a Founder to exercise her right to purchase Excess Warrant Shares within the
thirty (30) day notice period, shall be regarded as a waiver of her right to
participate in the purchase of the Excess Warrant Shares. For purposes of this
Section, Founder Percentage for each Founder shall be determined by dividing the
total number of shares of the Corporation owned by the Founders into the total
number of shares owned by each Founder at the time of the Disabled Employee's
Total Disability.
(c) Determination of Disability. "Totally Disabled" shall mean the
inability by reason of a physical or mental condition, or both, of the Disabled
Employee to perform satisfactorily her usual duties for the Corporation, as
determined by the Board. The Total Disability shall be deemed to have commenced
on the date of the determination by the Board.
(d) Closing. The closing of the sale of the Warrant Shares shall be
sixty (60) days after delivery of the Corporation's or the Founder's, as the
case may be, notice of election to purchase the Warrant Shares.
<PAGE>
-7-
2.5 Option to Purchase Upon Death. Upon the death of Employee (the
"Decedent"), all of the Warrant Shares of the Corporation which had been owned
by the Decedent and all Warrant Shares owned by the Decedent's representative if
Warrants are exercised within thirty (30) days after the Decedent's death and to
which he or her personal representatives shall be entitled shall be sold and
purchased as herein provided at the option of the Corporation.
(a) Option of the Corporation to Purchase. The Corporation has the
option to purchase from Decedent's estate, and, if the option is exercised,
Decedent's estate shall sell to the Corporation, all the Warrant Shares of the
Corporation owned by Decedent at the Stipulated Price and upon the Stipulated
Terms (as hereinafter defined). The Corporation shall exercise its option by
giving written notice to the Decedent's personal representative within one
hundred twenty (120) days after the Decedent's death.
(b) Option of the Founders to Purchase. In the event the Corporation
does not elect to exercise its option to purchase all or any of the Warrant
Shares under Section 2.5(a) above (the "Excess Warrant Shares"), then each
Founder shall have the option to purchase up to her Founder Percentage of the
Excess Warrant Shares at the Stipulated Price and upon the Stipulated Terms (as
hereinafter defined). Each Founder's right to purchase the Excess Warrant Shares
shall be exercisable by written notice to the Decedent's Estate, the Corporation
and the other Founders given within thirty (30) days of the termination of the
Corporation's option. Each Founder has the right and may indicate in such notice
her election to purchase the balance of such Excess Warrant Shares if nay other
Founder or Founders fail to exercise this right to purchase up to the full
amount of their Founder Percentage of the Excess Warrant Shares. The failure of
a Founder to exercise her right to purchase Excess Warrant Shares within the
thirty (30) day notice period, shall be regarded as a waiver of her right to
participate in the purchase of the Excess Warrant Shares. For purposes of this
Section, Founder Percentage for each Founder shall be determined by dividing the
total number of shares of the Corporation owned by the Founders into the total
number of shares owned by each Founder at the time of the Decedent's death.
(c) Insurance. The Corporation may, but is not obligated to, obtain
insurance on the life of Employee for a sum determined by the Corporation,
naming itself as beneficiary of the policies The Corporation shall pay all
premiums on the insurance policies. The Corporation shall be the sole owner of
the insurance policies and may apply to the payment of premiums any dividends
declared and paid on the policies.
(d) Closing. The Closing of the purchase of the Warrant Shares shall
be ninety (90) days after the Corporation or the Founders, as the case may be,
exercises their option to purchase the Warrant Shares.
2.6 Purchase Upon Termination of Employment. In the event that Employee's
employment with the Corporation is terminated by the Corporation or such
Employee for any reason whatsoever, with or without cause, or at any time (the
"Terminated Employee"), the Corporation and the Founders shall each have the
option to purchase all or any of the Warrant Shares owned by the Terminated
Employee upon the following terms:
(a) Option to Purchase by Corporation. The Corporation shall have the
option to purchase from the Terminated Employee all of the Warrant Shares owned
by the Terminated Employee at the Stipulated Price and upon the Stipulated Terms
(as hereinafter defined), which option the corporation may exercise by notice in
writing to the Terminated Employee within (90) days of the effective date of
termination; provided, however, in the event the Employee's terminated for
cause, then the option to purchase under this Section 2.6(a) and 2.6(b) shall be
at the lesser of eighty percent (80%) of book value of the Warrant
<PAGE>
-8-
Shares as determined by the Board or eighty percent (80%) of the value of the
Warrant Shares based on the Corporation as a going concern as determined by the
Board, and on the Stipulated Terms.
(b) Option to Purchase by Founders. In the event the Corporation does
not elect to exercise its option to purchase all or any of the Warrant Shares
under 2.6(a) above (the "Excess Warrant Shares"), then each Founder shall have
the option to purchase up to her Founder Percentage of the Excess Warrant Shares
at the price and under the terms provided in Section 2.6(a) above. Each
Founder's right to purchase the Excess Warrant Shares shall be exercisable by
written notice to the Terminated Employee, the corporation and the other
Founders given within thirty (30) days of the termination of the Corporation's
option. Each Founder has the right and may indicate in such notice her election
to purchase the balance of such Excess Warrant Shares if any other founder or
Founders fail to exercise this right to purchase up to the full amount of their
Founder Percentage of the Excess Warrant Shares. The failure of a Founder to
exercise her right to purchase Excess Warrant Shares within the thirty (30) day
notice period, shall be regarded as a waiver of her right to participate in the
purchase of the Excess Warrant Shares. For purpose of this Section, Founder
Percentage for each Founder shall be determined by dividing the total number of
shares of the Corporation owned by the Founders into the total number of shares
owned by each Founder at the time of the Employee's termination of employment.
(c) Closing. The closing of the purchase of the Warrant Shares shall
be ninety (90) days after the Corporation or the Founders, as the case may be,
exercise their option to purchase the Warrant Shares.
2.7 Vote on Option to Purchase. Whenever, under the terms of this
Agreement, the Corporation has an option to purchase Warrant Shares, action on
such option may be taken by the holders of a majority of the voting shares of
the Corporation (or such other percentage as may be required by the
Corporation's Articles of Incorporation as may be amended and/or restated from
time to time if such redemption of stock under this Agreement is not excluded
from such greater percentage), exclusive of the Warrant Shares held by the
Offeror, the Decedent, the Disabled Employee or the Terminated Employee, as the
case may be.
2.8 Non-Exercise of Option. Whenever, under the terms of this Agreement,
the Corporation and Founders have an option to purchase Warrant Shares and
elects not to exercise the option, said Warrant Shares shall nevertheless remain
subject to all of the terms of this Agreement.
2.9 Dates for Determination of Purchase Price. This Section sets the
various dates from which the purchase price for Warrant Shares purchased
pursuant to this Agreement shall be determined. The price shall be determined in
each case as of the following valuation dates: (a) upon the death of Employee,
as of the date of death; (b) upon the Total Disability of Employee, as of the
date of determination of Total Disability by the Board; (c) upon a termination
of employment of Employee, upon the effective date of the termination; and (d)
upon an Involuntary Transfer, upon the effective date of the Involuntary
Transfer.
2.10 Payment of Purchase Price. The manner of payment of the purchase price
for any Warrant Shares pursuant to this Agreement, with the exception of a
purchase upon the terms offered by a proposed third-party purchaser or as
otherwise provided in this Agreement, shall be determined by this Section.
(a) Stipulated Price. The "Stipulated Price" shall be that price per
share of the Corporation as a going concern equal to eighty percent (80%) of the
fair market value for such shares as determined by the Board.
<PAGE>
-9-
(b) Stipulated Terms. The purchase price for any Warrant Shares
purchased pursuant to this Agreement shall be paid either in cash or by a cash
down payment and the delivery of a secured promissory note, at the option of the
purchaser. If the purchase is made for any reason other than the death of the
Employee, the down payment shall equal at least twenty percent (20%) of the
purchase price. If the purchase is made because of the death of Employee, the
down payment shall equal not less than the greater of twenty percent (20%) of
the purchase price or the full amount of the net proceeds from any insurance
policies maintained by the Corporation on the life of the Employee. Any
promissory note shall provide for equal quarterly installments of principal over
a term not to exceed five (5) years, and shall bear interest at the rate of
seven (7%) percent. Accrued interest shall be payable quarterly commencing with
the first installment of principal. The note shall be subject to prepayment in
whole or in part at any time and without penalty. In the event of default in
payment of any installment when due, the whole sum of the principal and interest
shall become immediately due and payable at the option of the holder.
Notwithstanding anything herein to the contrary, if the purchase price is less
than $10,000.00 the entire purchase price shall be paid in cash at closing.
(c) Delivery of Warrant Shares. At such time as the cash and
promissory note, if applicable, have been delivered to the Employee or her
estate, the Warrant Shares of the Employee shall be transferred to the purchaser
or purchasers.
(d) Security. If part of the purchase price is paid by delivery of the
purchaser's promissory note, then, as security for payments due under the terms
of the note, the purchaser shall grant to the Employee a security interest in
the Shares by executing a pledge and escrow agreement and whatever additional
documents may be reasonably necessary to perfect the security interest of the
Employee or her estate. The security documents shall provide that the
Corporation or other purchaser shall deposit the shares it is purchasing with an
escrow agent and that, if the purchaser defaults under the terms of the
promissory note or the security documents, the Employee or her estate shall have
the right to receive possession of the shares and to exercise all other rights
of a secured party under the North Carolina Uniform Commercial Code.
(e) Insufficient Corporate Surplus. If, at the time the Corporation is
required to make payment of the purchase price for shares pursuant to this
Agreement and/or to issue its promissory notes therefor, its surplus is
insufficient for such purposes under applicable law, then the Corporation shall
promptly take all action necessary and proper under applicable law to increase,
to the extent possible, the surplus of the Corporation to permit such payment
and/or the issuance of such promissory note. Employee or her personal
representative shall perform such acts, execute such instruments, and vote the
respective shares in such a manner as may be required to increase the available
surplus to an amount sufficient to authorize the purchase of the shares,
including, but not limited to, a recapitalization to reduce the capital of the
Corporation and increase its surplus or a reappraisal of the assets of the
Corporation for the purpose of reflecting the market value.
ARTICLE III
GENERAL PROVISIONS
3.1 Corporate Action and Articles of Incorporation. The Corporation and the
Individual Parties shall take all action required pursuant to this Agreement to
effectuate the provisions herein. The Corporation shall become a party to this
Agreement.
3.2 Share Certificates. Every certificate representing Warrant Shares of
the Corporation shall bear the following legend prominently displayed:
<PAGE>
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"The shares represented by this certificate, and the transfer thereof, are
subject to the provisions of that certain Agreement, dated as of September
29, 1998, among ROBERT F. YOUNG, NANCY R. YOUNG, MARC EWING, LISA F.
SULLIVAN and RED HAT SOFTWARE, INC., a Delaware corporation, a copy of
which is on file in, and may be examined at, the principal office of the
Corporation."
3.3 Warrant Shares. All references to Warrant Shares owned by Employee
shall mean any outstanding shares of the Corporation hereafter owned by Employee
and any shares distributed with respect to any such shares in a stock split,
stock dividend, recapitalization, reorganization or otherwise.
3.4 Necessary Acts. Each party hereto agrees that they will do any act or
thing and will execute any and all instruments necessary and/or proper to make
effective the provisions of this Agreement.
3.5 Severability. Should any provision of this Agreement be declared to be
invalid for any reason or to have ceased to be binding on the parties hereto,
such provision shall be severed, and all other provisions herein shall continue
to be effective and binding.
3.6 Governing Law. This Agreement shall be subject to and governed by the
laws of the State of Delaware.
3.7 Entire Agreement. This Agreement contains the entire agreement between
the parties hereto with respect to the subject matter hereof, and no change,
amendment or modification of this Agreement shall be valid unless the same be in
writing and signed by all the parties hereto. No waiver of any of the terms of
this Agreement shall be valid unless signed by the party against whom such
waiver is asserted. This Agreement supersedes and nullifies the terms of any
other agreement setting forth the rights of the Employee previously entered into
by Employee with respect to the subject matter hereof. The Employee acknowledges
that her ownership of Warrants and Warrant Shares in the Corporation gives her
no rights or expectations except those embodied in this Agreement.
3.8 Specific Performance. The parties acknowledge that the actual damage
which would be sustained upon the breach of this Agreement by any of the parties
or to a personal representative of a Decedent aggrieved by the breach or
threatened breach of any of its provisions shall be entitled to seek from any
court of competent jurisdiction an order for specific performance of all of the
terms and conditions of this agreement. This provision does not limit the
parties from seeking any other available remedies at law or equity.
3.9 Prohibited Transfers Void. Any purported transfer in violation of this
Agreement shall be void and shall not transfer any interest or title to the
purported transferee. The Corporation shall not be required to transfer on its
books any Warrant Shares sold or transferred in violation of any of the
provisions set forth in this Agreement or to treat as owner of those Warrant
Shares or to pay dividends to any transferee to whom any of those Warrant Shares
shall have been so sold or transferred.
3.10 Representation as to Attorney. The Individual Parties (and the
Corporation) acknowledge that a conflict may exist among their respective
interests, and that the Individual Parties should seek the advice of independent
counsel. The parties hereby waive any claim they may have as to any conflict
which may exist in connection with the preparation of this Agreement.
3.11 New Parties. The Corporation shall not record a transfer of Warrant
Shares from Employee to any person not a party hereto unless said person shall
execute an acknowledgment of the
<PAGE>
-11-
terms hereof and agreement to be bound hereby, except for a transfer of Warrant
Shares to a third party pursuant to Section 2.2 of this Agreement.
3.12 Agreement Binding. This Agreement shall insure to the benefit of and
be binding upon the parties hereto and their respective next-of-kin, legatees,
administrators, executors, legal representatives, successors and permitted
assigns (including remote, as well as immediate, successors to and assignees of
said parties), except this Agreement shall not be binding on a third-party
purchaser in the event of a transfer of Warrant Shares to such third party
pursuant to Section 2.2 of this Agreement.
3.13 Pronouns and Headings. In this Agreement the masculine shall include
the feminine and the singular shall include the plural as the context of this
Agreement shall clearly require. The article and section headings in this
Agreement are inserted for convenience only and are not part of the Agreement.
3.14. Termination. This Agreement shall commence as of the date hereof and
shall continue in full force and effect until terminated (i) by the mutual
agreement of the parties hereto, (ii) by the dissolution or bankruptcy of the
Corporation, (iii) upon the effectiveness of a merger, consolidation or other
acquisition of substantially all of the Corporation's assets, if the Corporation
is not the surviving corporation, except that a merger or consolidation with a
subsidiary which effects a mere change in the form or domicile of the
Corporation without changing the respective shareholdings of the Individual
Parties shall not terminate the agreement, even if the Corporation is not the
surviving corporation, (iv) upon the issuance of any of the Corporation's shares
sold by means of a public offering that is required to be registered under the
federal securities laws, or (v) upon the sale of all of the issued and
outstanding shares of the Corporation.
3.15 Transferability. Any rights or interests of the parties set forth in
this Agreement are personal and nontransferable.
3.16 Notices. Any notice or offer required hereunder shall be deemed to
have been validly given if delivered by certified mail, return receipt
requested, postage prepaid, addressed, or by federal express overnight delivery
(or other nationally recognized service) with receipt confirmed, in the case of
the Corporation, to its principal office, and in the case of the Individual
Parties, to their address appearing on the stock records of the Corporation or
to such other address as he may designate. Notices hereunder shall be deemed
given seven (7) business days after deposit in the United States Mail or the
next business day, if delivered by Federal Express overnight delivery (or other
nationally recognized service).
3.17 Jurisdiction and Venue. The parties agree that any action brought in
any court whether federal or state shall be brought within the State of North
Carolina in the judicial district of Durham, Durham County and do hereby waive
all questions of personal jurisdiction or venue for the purpose of carrying out
this provision.
3.18 Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreements.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
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IN WITNESS WHEREOF, the Corporation has caused this Agreement to be signed
by its duly authorized officers and its corporate seal to be affixed hereto, and
the Individual Parties have hereunto set their hands, all as of the day and year
first above written.
RED HAT SOFTWARE, INC.
By: /s/ Robert F. Young
----------------------
Title: CEO
ATTEST:
/s/ David Schumannfang
- ------------------------
Secretary
[CORPORATE SEAL]
/s/ Robert F. Young
--------------------------
Robert F. Young
/s/ Nancy R. Young
--------------------------
Nancy R. Young
/s/ Marc Ewing
--------------------------
Marc Ewing
EMPLOYEE
/s/ Lisa F. Sullivan
--------------------------
Lisa F. Sullivan
<PAGE>
AMENDMENT
AMENDMENT, made as of May 24, 1999, by and among Red Hat Software, Inc.
(the "Company"), Robert F. Young, Nancy R. Young and Marc Ewing (collectively,
the "Founders") and Lisa Sullivan (the "Warrantholder").
WHEREAS, the Company, the Founders and the Warrantholder are parties to
that certain Warrant, dated as of August 12, 1997 (the "Warrant"), which by its
terms, terminates on the issuance of any of the Company's shares sold by means
of a public offering that is required to be registered under the federal
securities laws; and
WHEREAS, the Company, the Founders and the Warrantholder wish to amend the
Warrant to prevent it from terminating under such circumstances and to remove
certain restrictions on exercised Warrant Shares upon the closing of the
Company's initial public offering.
NOW THEREFORE, the parties hereto agree as follows:
1. Capitalized terms not defined herein shall have the meaning set forth in the
Warrant.
2. Section 3.14 of the Warrant shall be amended and restated as follows:
"3.14. Termination. This Agreement shall commence as of the date hereof and
shall continue in full force and effect until terminated (i) by the mutual
agreement of the parties hereto, (ii) by the dissolution or bankruptcy of
the Corporation, (iii) upon the effectiveness of a merger, consolidation or
other acquisition of substantially all of the Corporation's assets, if the
Corporation is not the surviving corporation, except that a merger or
consolidation with a subsidiary which effects a mere change in the form or
domicile of the Corporation without changing the respective shareholdings
of the Individual Parties shall not terminate the agreement, even if the
Corporation is not the surviving corporation, or (iv) upon the sale of all
of the issued and outstanding shares of the Corporation. Notwithstanding
the foregoing, the provisions of Article II hereof shall cease and have no
further force or effect with respect to any Warrant Shares upon the
issuance of any of the Corporation's shares sold by means of a public
offering that is required to be registered under the federal securities
laws."
3. Continuing Effect. Except as otherwise set forth herein, all terms and
conditions of the Warrant shall remain in full force and effect, and this
Amendment shall not constitute a modification, acceptance or waiver of any other
provision of the Warrant.
4. Counterparts. This Amendment may be executed in two or more counterparts,
each of which shall constitute an original, but all of which, when taken
together, shall constitute but one instrument.
<PAGE>
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
RED HAT SOFTWARE, INC.
By: /s/ Robert F. Young
---------------------
Title: CEO
/s/ Marc Ewing
- ---------------------
Marc Ewing
/s/ Robert F. Young
- ---------------------
Robert F. Young
/s/ Nancy R. Young
- ---------------------
Nancy R. Young
/s/ Lisa Sullivan
- ---------------------
Lisa Sullivan
<PAGE>
Exhibit 10.7
RED HAT SOFTWARE, INC.
FIRST AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
This First Amended and Restated Investors Rights Agreement dated as of
February 25, 1999 (the "Agreement") is entered into by and among Red Hat
Software, Inc., a Delaware corporation (the "Company"), the entities listed on
the signature pages hereto under the heading "Existing Investor" (the "Existing
Investors"), the entities listed on the signature pages hereto under the heading
"New Investor" (the "New Investors"), the entities who execute a counterpart
signature page to this Agreement (the "Additional Investors," and together with
the Existing Investors and the New Investors, the "Investors") and the persons
listed on the signature pages hereto under the heading "Founders" (the
"Founders").
Recitals
A. The Company, the Founders and certain Investors are parties to that
certain Investor Rights Agreement dated as of September 29, 1998 (the "Investor
Rights Agreement");
B. Certain Investors are purchasing, concurrently herewith, shares of
capital stock of the Company pursuant to the Series C Convertible Preferred
Stock Purchase Agreement of even date herewith (the "Purchase Agreement");
C. The execution and delivery of this Agreement is a condition to the
execution and delivery of the Purchase Agreement; and
D. The parties to the Investor Rights Agreement desire to amend and restate
the Investor Rights Agreement on the terms and conditions set forth herein.
Agreement
In consideration of the mutual covenants contained herein and the
consummation of the sale and purchase of shares of capital stock of the Company
pursuant to the Purchase Agreement, and for other valuable consideration,
receipt of which is hereby acknowledged, the parties hereto agree as follows:
1. Certain Definitions.
As used in this Agreement, the following terms shall have the
following respective meanings:
"Batten Trust" means Frank Batten, Jr., Frank Batten, Louis F. Ryan,
trustees of the Frank Batten, Jr., Trust under a Trust Agreement dated April 11,
1988, as amended.
"Batten GRAT" means the 1998 Frank Batten, Jr. Grantor Annuity Trust.
<PAGE>
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"Batten Affiliates" means the Batten GRAT, the Batten Trust, Frank
Batten, Jr., his wife and issue, any trust of which Frank Batten, Jr. is the
trustee or which is created for the benefit of Frank Batten, Jr., his wife or
issue, or any entity or person controlled by Frank Batten, Jr.
"Commission" means the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"Common Stock" means the common stock, $.0001 par value per share, of
the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.
"Founder Shares" means all shares of Common Stock held by the
Founders, whether now owned or subsequently acquired.
"Initiating Holders" means the Stockholders initiating a request for
registration pursuant to Section 2(a) or 2(b), as the case may be.
"Initial Public Offering" means the initial firm-commitment
underwritten public offering of shares of Common Stock pursuant to an effective
Registration Statement.
"Other Holders" shall have the meaning set forth in Section 2.1(d).
"Prospectus" means the prospectus included in any Registration
Statement, as amended or supplemented by an amendment or prospectus supplement,
including post-effective amendments, and all material incorporated by reference
or deemed to be incorporated by reference in such Prospectus.
"Registration Statement" means a registration statement filed by the
Company with the Commission for a public offering and sale of securities of the
Company (other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation).
"Registration Expenses" means the expenses described in Section 2.4.
"Registrable Shares" means (i) the shares of Common Stock issued or
issuable upon conversion of the Shares, (ii) any shares of Common Stock, and any
shares of Common Stock issued or issuable upon the conversion or exercise of any
other securities acquired by the Investors, (iii) the Founder Shares, (iv) the
shares of Common Stock acquired by certain Investors pursuant to a Common Stock
Purchase Agreement dated as of September 29, 1998, (v) the shares of Common
Stock acquired by certain Investors pursuant to a Common Stock Purchase
Agreement dated as of the date hereof and (vi) any other shares of Common Stock
<PAGE>
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issued in respect of such shares (because of stock splits, stock dividends,
reclassifications, recapitalizations, or similar events); provided, however,
that shares of Common Stock which are Registrable Shares shall cease to be
Registrable Shares upon (i) any sale pursuant to a Registration Statement or
Rule 144 under the Securities Act or (ii) any sale in any manner to a person or
entity unless, by virtue of Section 4 of this Agreement, such person or entity
is entitled to the rights provided by this Agreement. Wherever reference is made
in this Agreement to a request or consent of holders of a certain percentage of
Registrable Shares, the determination of such percentage shall include shares of
Common Stock issuable upon conversion of the Shares even if such conversion has
not been effected.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
issued under such Act, as they each may, from time to time, be in effect.
"Selling Stockholder" means any Stockholder owning Registrable Shares
included in a Registration Statement.
"Shares" means (a) the 6,801,400 outstanding shares of Series A
Convertible Preferred Stock of the Company; (b) the 8,116,550 outstanding shares
of Series B Convertible Preferred Stock of the Company; and (c) the shares of
Series C Convertible Preferred Stock issued pursuant to the Purchase Agreement.
"Stockholders" means (i) the Investors (including any persons or
entities to whom the rights granted under this Agreement are transferred by the
Investors, their successors or assigns pursuant to Section 4 hereof) and (ii)
the Founders.
2. Registration Rights
2.1 Required Registrations.
(a) At any time after the earlier of (x) February 25, 2002 or (y)
six months after the closing of the Initial Public Offering, a Stockholder or
Stockholders (excluding the Founders) holding in the aggregate at least 35% of
the Registrable Shares (excluding the Registrable Shares held by the Founders)
may request, in writing, that the Company effect the registration on Form S-1 or
Form S-2 (or any successor form) of Registrable Shares owned by such Stockholder
or Stockholders having an aggregate value of at least $5,000,000 (based on the
then current market price or fair value).
(b) At any time after the Company becomes eligible to file a
Registration Statement on Form S-3 (or any successor form relating to secondary
offerings), a Stockholder or Stockholders (excluding the Founders) holding in
the aggregate at least 20% of the Registrable Shares (excluding the Registrable
Shares held by the Founders) may request, in writing, that the Company effect
the registration on Form S-3 (or such successor form), of Registrable Shares
having an aggregate value of at least $1,000,000 (based on the then current
public market price).
<PAGE>
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(c) Upon receipt of any request for registration pursuant to this
Section 2, the Company shall promptly give written notice of such proposed
registration to all other Stockholders (including the Founders). Such
Stockholders shall have the right, by giving written notice to the Company
within 30 days after the Company provides its notice, to elect to have included
in such registration such of their Registrable Shares as such Stockholders may
request in such notice of election, subject in the case of an underwritten
offering to the approval of the managing underwriter as provided in Section 2(d)
below. Thereupon, the Company shall, as expeditiously as possible, use its best
efforts to effect the registration on an appropriate registration form of all
Registrable Shares which the Company has been requested to so register
(provided, however, that in the case of a registration requested under Section
2.1(b), the Company will only be obligated to effect such registration on Form
S-3 (or any successor form)).
(d) If the Initiating Holders intend to distribute the
Registrable Shares covered by their request by means of an underwriting, they
shall so advise the Company as a part of their request made pursuant to Section
2.1(a) or (b), as the case may be, and the Company shall include such
information in its written notice referred to in Section 2.1(c). The right of
any other Stockholder to include its Registrable Shares in such registration
pursuant to Section 2.1(a) or (b), as the case may be, shall be conditioned upon
such other Stockholder's participation in such underwriting on the terms set
forth herein.
If the Company desires that any officers or directors of the
Company holding securities of the Company be included in any registration for an
underwritten offering requested pursuant to Section 2.1(d) or if other holders
of securities of the Company who are entitled, by contract with the Company, to
have securities included in such a registration (the "Other Holders") request
such inclusion, the Company may include the securities of such officers,
directors and Other Holders in such registration and underwriting on the terms
set forth herein. The Company shall (together with all Stockholders, officers,
directors and Other Holders proposing to distribute their securities through
such underwriting) enter into an underwriting agreement in customary form
(including, without limitation, customary indemnification and contribution
provisions on the part of the Company) with the managing underwriter; provided
that such underwriting agreement shall not provide for indemnification or
contribution obligations on the part of Stockholders materially greater than the
obligations of the Stockholders pursuant to Section 2.5. Notwithstanding any
other provision of this Section 2.1(d), if the managing underwriter advises the
Company that the inclusion of all shares requested to be registered would
adversely affect the offering, the securities of the Company held by officers or
directors of the Company (other than Registrable Shares) and the securities held
by Other Holders (other than Registrable Shares) shall be excluded from such
registration and underwriting to the extent deemed advisable by the managing
underwriter, and if a further limitation of the number of shares is required,
the number of shares that may be included in such registration and underwriting
shall be allocated among all holders of Registrable Shares requesting
registration in proportion, as nearly as practicable, to the respective number
of Registrable Shares held by them at the time of the request for registration
made by the Initiating Holders pursuant to Section 2.1(a) or (b), as the case
may be. If any holder of Registrable Shares, officer, director or Other Holder
who has requested inclusion in such registration as provided above disapproves
of the terms of the underwriting, such person may elect to withdraw therefrom by
written notice to the Company, and the securities so withdrawn shall also be
<PAGE>
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withdrawn from registration. If the managing underwriter has not limited the
number of Registrable Shares or other securities to be underwritten, the Company
may include securities for its own account in such registration if the managing
underwriter so agrees and if the number of Registrable Shares and other
securities which would otherwise have been included in such registration and
underwriting will not thereby be limited.
(e) The Initiating Holders shall have the right to select the
managing underwriter(s) for any underwritten offering requested pursuant to
Section 2.1(a) or (b), subject to the approval of the Company, which approval
will not be unreasonably withheld.
(f) The Company shall not be required to effect more than two
registrations pursuant to Section 2.1(a). In addition, the Company shall not be
required to effect more than three registrations pursuant to Section 2.1(b) in
any 12-month period. Moreover, the Company shall not be required to effect any
registration (other than on Form S-3 or any successor form relating to secondary
offerings) within six months after the effective date of any other Registration
Statement of the Company. For purposes of this Section 2.1(f), a Registration
Statement shall not be counted until such time as such Registration Statement
has been declared effective by the Commission (unless the Initiating Holders
withdraw their request for such registration (other than as a result of
information concerning the business or financial condition of the Company which
is made known to the Stockholders after the date on which such registration was
requested) and elect not to pay the Registration Expenses therefor pursuant to
Section 2.4).
(g) If at the time of any request to register Registrable Shares
by Initiating Holders pursuant to this Section 2.1, the Company is engaged or
has plans to engage in a registered public offering or is engaged in any other
activity which, in the good faith determination of the Company's Board of
Directors, would be adversely affected by the requested registration, then the
Company may at its option direct that such request be delayed for a period not
in excess of 90 days from the date of such request, such right to delay a
request to be exercised by the Company not more than once in any 12-month
period.
2.2 Incidental Registration.
(a) Whenever the Company proposes to file a Registration
Statement (other than a Registration Statement filed pursuant to Section 2.1) at
any time and from time to time, it will, prior to such filing, give written
notice to all Stockholders of its intention to do so; provided, that no such
notice need be given if no Registrable Shares are to be included therein as a
result of a determination of the managing underwriter pursuant to Section
2.2(b). Upon the written request of a Stockholder or Stockholders given within
20 days after the Company provides such notice (which request shall state the
intended method of disposition of such Registrable Shares), the Company shall
use its best efforts to cause all Registrable Shares which the Company has been
requested by such Stockholder or Stockholders to register to be registered under
the Securities Act to the extent necessary to permit their sale or other
disposition in accordance with the intended methods of distribution specified in
the request of such Stockholder or Stockholders; provided that the Company shall
have the right to postpone or withdraw any registration effected pursuant to
this Section 2.2 without obligation to any Stockholder.
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(b) If the registration for which the Company gives notice
pursuant to Section 2.2(a) is a registered public offering involving an
underwriting, the Company shall so advise the Stockholders as a part of the
written notice given pursuant to Section 2.2(a). In such event, the right of any
Stockholder to include its Registrable Shares in such registration pursuant to
Section 2.2 shall be conditioned upon such Stockholder's participation in such
underwriting on the terms set forth herein. All Stockholders proposing to
distribute their securities through such underwriting shall (together with the
Company, Other Holders, and any officers or directors distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for the
underwriting by the Company. Notwithstanding any other provision of this Section
2.2, if the managing underwriter determines that the inclusion of all shares
requested to be registered would adversely affect the offering, the Company may
limit the number of Registrable Shares to be included in the registration and
underwriting. The Company shall so advise all holders of Registrable Shares
requesting registration, and the number of shares that are entitled to be
included in the registration and underwriting shall be allocated in the
following manner. The securities of the Company held by officers and directors
of the Company (other than Registrable Shares) shall be excluded from such
registration and underwriting to the extent deemed advisable by the managing
underwriter; and, if a further limitation on the number of shares is required,
the Registrable Shares held by the Founders shall be excluded from such
registration and underwriting to the extent deemed advisable by the managing
underwriter; and, if a further limitation on the number of shares is required,
the number of shares that may be included in such registration and underwriting
shall be allocated among all Stockholders (other than the Founders) and Other
Holders requesting registration in proportion, as nearly as practicable, to the
respective number of shares of Common Stock (on an as-converted basis) which
they held at the time the Company gives the notice specified in Section 2.2(a).
If any Stockholder or Other Holder would thus be entitled to include more
securities than such holder requested to be registered, the excess shall be
allocated among other requesting Stockholders and Other Holders pro rata in the
manner described in the preceding sentence. If any holder of Registrable Shares
or any officer, director or Other Holder disapproves of the terms of any such
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, and any Registrable Shares or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
(c) Notwithstanding the foregoing, the Company shall not be
required, pursuant to this Section 2.2, to include any Registrable Shares in a
Registration Statement (other than in the Initial Public Offering) if such
Registrable Shares can then be sold pursuant to Rule 144(k) under the Securities
Act and represent less than 1% of the then outstanding shares of Common Stock.
2.3 Registration Procedures.
(a) If and whenever the Company is required by the provisions of
this Agreement to use its best efforts to effect the registration of any
Registrable Shares under the Securities Act, the Company shall:
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(i) file with the Commission a Registration Statement with
respect to such Registrable Shares and use its best efforts to cause that
Registration Statement to become and remain effective for 120 days from the
effective date or such lesser period until all such Registrable Shares are sold;
(ii) as expeditiously as possible prepare and file with the
Commission any amendments and supplements to the Registration Statement and the
prospectus included in the Registration Statement as may be necessary to comply
with the provisions of the Securities Act (including the anti-fraud provisions
thereof) and to keep the Registration Statement effective for 120 days from the
effective date or such lesser period until all such Registrable Shares are sold;
(iii) as expeditiously as possible furnish to each Selling
Stockholder such reasonable numbers of copies of the Prospectus, including any
preliminary Prospectus, in conformity with the requirements of the Securities
Act, and such other documents as such Selling Stockholder may reasonably request
in order to facilitate the public sale or other disposition of the Registrable
Shares owned by such Selling Stockholder;
(iv) as expeditiously as possible use its best efforts to
register or qualify the Registrable Shares covered by the Registration Statement
under the securities or Blue Sky laws of such states as the Selling Stockholders
shall reasonably request, and do any and all other acts and things that may be
necessary or desirable to enable the Selling Stockholders to consummate the
public sale or other disposition in such states of the Registrable Shares owned
by the Selling Stockholder; provided, however, that the Company shall not be
required in connection with this paragraph (iv) to qualify as a foreign
corporation or execute a general consent to service of process in any
jurisdiction;
(v) as expeditiously as possible, cause all such Registrable
Shares to be listed on each securities exchange or automated quotation system on
which similar securities issued by the Company are then listed;
(vi) promptly provide a transfer agent and registrar for all
such Registrable Shares not later than the effective date of such registration
statement;
(vii) promptly make available for inspection by the Selling
Stockholders, any managing underwriter participating in any disposition pursuant
to such Registration Statement, and any attorney or accountant or other agent
retained by any such underwriter or selected by the Selling Stockholders, all
financial and other records, pertinent corporate documents and properties of the
Company and cause the Company's officers, directors, employees and independent
accountants to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such Registration
Statement;
(viii) as expeditiously as possible, notify each Selling
Stockholder, promptly after it shall receive notice thereof, of the time when
such Registration Statement has become effective or a supplement to any
Prospectus forming a part of such
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Registration Statement has been filed; and
(ix) furnish, at the request of any Selling Stockholder, on
the date that such Registrable Shares are delivered to the underwriter(s) for
sale, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (A) an
opinion, dated as of such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering and reasonably satisfactory to a
majority in interest of the Selling Stockholders, addressed to the underwriters,
if any, and to the Selling Stockholders and (B) a "comfort" letter dated as of
such date, from the independent certified public accountants of the Company, in
form and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering and reasonably
satisfactory to a majority in interest of the Selling Stockholders, addressed to
the underwriters, if any, and to the Selling Stockholders.
(b) If the Company has delivered a Prospectus to the Selling
Stockholders and after having done so the Prospectus is amended to comply with
the requirements of the Securities Act, the Company shall promptly notify the
Selling Stockholders and, if requested, the Selling Stockholders shall
immediately cease making offers of Registrable Shares and return all
Prospectuses to the Company. The Company shall promptly provide the Selling
Stockholders with revised Prospectuses and, following receipt of the revised
Prospectuses, the Selling Stockholders shall be free to resume making offers of
the Registrable Shares.
(c) In the event that, in the judgment of the Company, it is
advisable to suspend use of a Prospectus included in a Registration Statement
due to pending material developments or other events that have not yet been
publicly disclosed and as to which the Company believes public disclosure would
be detrimental to the Company, the Company shall notify all Selling Stockholders
to such effect, and, upon receipt of such notice, each such Selling Stockholder
shall immediately discontinue any sales of Registrable Shares pursuant to such
Registration Statement until such Selling Stockholder has received copies of a
supplemented or amended Prospectus or until such Selling Stockholder is advised
in writing by the Company that the then current Prospectus may be used and has
received copies of any additional or supplemental filings that are incorporated
or deemed incorporated by reference in such Prospectus. Notwithstanding anything
to the contrary herein, the Company shall not exercise its rights under this
Section 2.3(c) to suspend sales of Registrable Shares for a period in excess of
90 days in any 365-day period.
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2.4 Allocation of Expenses. The Company will pay all Registration
Expenses for all registrations under this Agreement; provided, however, that if
a registration under Section 2.1(a) is withdrawn at the request of the
Initiating Holders (other than as a result of information concerning the
business or financial condition of the Company which is made known to the
Stockholders after the date on which such registration was requested) and if the
Initiating Holders elect not to have such registration counted as a registration
requested under Section 2.1, the requesting Stockholders shall pay the
Registration Expenses of such registration pro rata in accordance with the
number of their Registrable Shares included in such registration. For purposes
of this Section, the term "Registration Expenses" shall mean all expenses
incurred by the Company in complying with this Agreement, including, without
limitation, all registration and filing fees, exchange listing fees, printing
expenses, fees and expenses of counsel for the Company and the fees and expenses
of one counsel selected by the Selling Stockholders to represent the Selling
Stockholders (not to exceed $10,000 in the aggregate), state Blue Sky fees and
expenses, and the expense of any special audits incident to or required by any
such registration, but excluding underwriting discounts, selling commissions and
the fees and expenses of Selling Stockholders' own counsel (other than the
counsel selected to represent all Selling Stockholders).
2.5 Indemnification and Contribution.
(a) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, the Company will
indemnify and hold harmless the seller of such Registrable Shares, each
underwriter of such Registrable Shares, and each other person, if any, who
controls such seller or underwriter within the meaning of the Securities Act or
the Exchange Act against any losses, claims, damages or liabilities, joint or
several, to which such seller, underwriter or controlling person may become
subject under the Securities Act, the Exchange Act, state securities or Blue Sky
laws or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any Registration
Statement under which such Registrable Shares were registered under the
Securities Act, any preliminary prospectus or final prospectus contained in the
Registration Statement, or any amendment or supplement to such Registration
Statement, or arise out of or are based upon the omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and the Company will reimburse such seller,
underwriter and each such controlling person for any legal or any other expenses
reasonably incurred by such seller, underwriter or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or omission made in such
Registration Statement, preliminary prospectus or prospectus, or any such
amendment or supplement, in reliance upon and in conformity with information
furnished to the Company, in writing, by or on behalf of such seller,
underwriter or controlling person specifically for use in the preparation
thereof.
<PAGE>
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(b) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, each seller of
Registrable Shares, severally and not jointly, will indemnify and hold harmless
the Company, each of its directors and officers and each underwriter (if any)
and each person, if any, who controls the Company or any such underwriter within
the meaning of the Securities Act or the Exchange Act, against any losses,
claims, damages or liabilities, joint or several, to which the Company, such
directors and officers, underwriter or controlling person may become subject
under the Securities Act, Exchange Act, state securities or Blue Sky laws or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement
under which such Registrable Shares were registered under the Securities Act,
any preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to the Registration Statement, or
arise out of or are based upon any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if the statement or omission was made in reliance upon
and in conformity with information relating to such seller furnished in writing
to the Company by or on behalf of such seller specifically for use in connection
with the preparation of such Registration Statement, prospectus, amendment or
supplement; provided, however, that the obligations of a Stockholder hereunder
shall be limited to an amount equal to the net proceeds to such Stockholder of
Registrable Shares sold in connection with such registration.
(c) Each party entitled to indemnification under this Section
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section except to the extent that the Indemnifying Party
is adversely affected by such failure. The Indemnified Party may participate in
such defense at such party's expense; provided, however, that the Indemnifying
Party shall pay such expense if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate due to actual
or potential differing interests between the Indemnified Party and any other
party represented by such counsel in such proceeding; provided further that in
no event shall the Indemnifying Party be required to pay the expenses of more
than one law firm per jurisdiction as counsel for the Indemnified Party. The
Indemnifying Party also shall be responsible for the expenses of such defense if
the Indemnifying Party does not elect to assume such defense. No Indemnifying
Party, in the defense of any such claim or litigation shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect of such claim or litigation, and no Indemnified Party
shall consent to entry of any judgment or settle such claim or litigation
without the prior written consent of the Indemnifying Party, which consent shall
not be unreasonably withheld.
<PAGE>
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(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 2.5 is
due in accordance with its terms but for any reason is held to be unavailable to
an Indemnified Party in respect to any losses, claims, damages and liabilities
referred to herein, then the Indemnifying Party shall, in lieu of indemnifying
such Indemnified Party, contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities to
which such party may be subject in such proportion as is appropriate to reflect
the relative fault of the Company on the one hand and the Stockholders on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of the Company and the Stockholders shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of material fact related to information supplied by the Company
or the Stockholders and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Stockholders agree that it would not be just and equitable
if contribution pursuant to this Section 2.5 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to above. Notwithstanding the provisions
of this paragraph of Section 2.5, (i) in no case shall any one Stockholder be
liable or responsible for any amount in excess of the net proceeds received by
such Stockholder from the offering of Registrable Shares and (ii) the Company
shall be liable and responsible for any amount in excess of such proceeds;
provided, however, that no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against another
party or parties under this Section, notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
from whom contribution may be sought shall not relieve such party from any other
obligation it or they may have thereunder or otherwise under this Section. No
party shall be liable for contribution with respect to any action, suit,
proceeding or claim settled without its prior written consent, which consent
shall not be unreasonably withheld.
2.6 Other Matters with Respect to Underwritten Offerings. In the event
that Registrable Shares are sold pursuant to a Registration Statement in an
underwritten offering pursuant to Section 2.1, the Company agrees to (a) enter
into an underwriting agreement containing customary representations and
warranties with respect to the business and operations of the Company and
customary covenants and agreements to be performed by the Company, including
without limitation customary provisions with respect to indemnification by the
Company of the underwriters of such offering; (b) use its best efforts to cause
its legal counsel to render customary opinions to the underwriters with respect
to the Registration Statement; and (c) use its best efforts to cause its
independent public accounting firm to issue customary "cold comfort letters" to
the underwriters with respect to the Registration Statement.
<PAGE>
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2.7 Information by Holder. Each holder of Registrable Shares included
in any registration shall furnish to the Company such information regarding such
holder and the distribution proposed by such holder as the Company may
reasonably request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Agreement.
2.8 "Stand-Off" Agreement; Confidentiality of Notices. Each
Stockholder, except Intel, if requested by the Company and the managing
underwriter of an offering by the Company of Common Stock or other securities of
the Company, agrees not to sell or otherwise transfer or dispose of any
Registrable Shares or other securities of the Company held by such Stockholder
for a period of 180 days following the effective date of a Registration
Statement; provided, that:
(a) such agreement shall only apply to the initial public
offering of Common Stock of the Company sold in an underwritten offering; and
(b) all stockholders of the Company then holding at least 1% of
the outstanding Common Stock (on an as-converted basis) and all officers and
directors of the Company enter into similar agreements or are otherwise bound by
similar provisions.
The Company may impose stop-transfer instructions with respect to the
Registrable Shares, other than those held by Intel, or other securities subject
to the foregoing restriction until the end of such 180-day period.
Intel agrees that, if requested by the Company and the managing
underwriter of an offering by the Company of Common Stock or other securities of
the Company, it will enter into a customary market "Stand Off" agreement for a
period of 180 days following the effective date of a Registration Statement.
Any Stockholder receiving any written notice from the Company
regarding the Company's plans to file a Registration Statement shall treat such
notice confidentially and shall not disclose such information to any person
other than as necessary to exercise its rights under this Agreement.
2.9 Limitations on Subsequent Registration Rights. The Company shall
not, without the prior written consent of the Founders holding at least 66-2/3%
of the Registrable Shares then held by all Founders and Stockholders (excluding
the Founders) holding at least 66-2/3% of the Registrable Shares then held by
all Stockholders (excluding the Registrable Shares held by the Founders), enter
into any agreement (other than this Agreement) with any holder or prospective
holder of any securities of the Company which grant such holder or prospective
holder rights to include securities of the Company in any Registration
Statement, unless (a) such rights to include securities in a registration
initiated by the Company or by Stockholders are not more favorable than the
rights granted to Other Holders under Sections 2.1 and 2.2 of this Agreement,
and (b) any such rights to initiate a registration provide that Stockholders are
entitled to include Registrable Shares on a pro rata basis with such holders
based on the number of shares of Common Stock (on an as-converted basis) owned
by Stockholders and such holders.
<PAGE>
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2.10 Rule 144 Requirements. After the earliest of (i) the closing of
the sale of securities of the Company pursuant to a Registration Statement, (ii)
the registration by the Company of a class of securities under Section 12 of the
Exchange Act, or (iii) the issuance by the Company of an offering circular
pursuant to Regulation A under the Securities Act, the Company agrees to:
(a) make and keep current public information about the Company
available, as those terms are understood and defined in Rule 144;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements); and
(c) furnish to any holder of Registrable Shares upon request (i)
a written statement by the Company as to its compliance with the reporting
requirements of Rule 144 and of the Securities Act and the Exchange Act (at any
time after it has become subject to such reporting requirements), (ii) a copy of
the most recent annual or quarterly report of the Company, and (iii) such other
reports and documents of the Company as such holder may reasonably request to
avail itself of any similar rule or regulation of the Commission allowing it to
sell any such securities without registration.
2.11 Termination. All of the Company's obligations to register
Registrable Shares under Sections 2.1 and 2.2 of this Agreement shall terminate
three years after the closing of the Initial Public Offering.
3. Right Of First Refusal
3.1 Rights of Investors
(a) The Company shall not issue, sell or exchange, agree to
issue, sell or exchange, or reserve or set aside for issuance, sale or exchange,
(i) any shares of its Common Stock, (ii) any other equity securities of the
Company, including, without limitation, shares of preferred stock, (iii) any
option, warrant or other right to subscribe for, purchase or otherwise acquire
any equity securities of the Company, or (iv) any debt securities convertible
into capital stock of the Company (collectively, the "Offered Securities"),
unless in each such case the Company shall have first complied with this Section
3.1. The Company shall deliver to each Investor a written notice of any proposed
or intended issuance, sale or exchange of Offered Securities (the "Offer"),
which Offer shall (i) identify and describe the Offered Securities, (ii)
describe the price and other terms upon which they are to be issued, sold or
exchanged, and the number or amount of the Offered Securities to be issued, sold
or exchanged, (iii) identify the persons or entities (if known) to which or with
which the Offered Securities are to be offered, issued, sold or exchanged and
(iv) offer to issue and sell to or exchange with such Investor (A) a pro rata
portion of the Offered Securities determined by dividing the aggregate number of
shares of Common Stock then held by such Investor (giving effect to the
conversion of all shares of convertible preferred stock then held) by the total
number of shares of Common Stock then
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outstanding (giving effect to the conversion of all outstanding shares of
convertible preferred stock and the exercise of all vested options) (the "Basic
Amount"), and (B) any additional portion of the Offered Securities attributable
to the Basic Amounts of other Investors as such Investor shall indicate it will
purchase or acquire should the other Investors subscribe for less than their
Basic Amounts (the "Undersubscription Amount"). For purposes of the foregoing
paragraph, the number of shares of Common Stock (on an as-converted basis) held
by the Batten Trust and the Batten GRAT shall be aggregated with each other and
all shares held by the other Batten Affiliates, and the Batten Affiliates may
assign, inter se, the purchase rights provided under this section.
(b) To accept an Offer, in whole or in part, an Investor must
deliver a written notice to the Company prior to the end of the 30-day period of
the Offer, setting forth the portion of the Investor's Basic Amount that such
Investor elects to purchase and, if such Investor shall elect to purchase all of
its Basic Amount, the Undersubscription Amount (if any) that such Investor
elects to purchase (the "Notice of Acceptance"). If the Basic Amounts subscribed
for by all Investors are less than the total of all of the Basic Amounts
available for purchase, then each Investor who has set forth an
Undersubscription Amount in its Notice of Acceptance shall be entitled to
purchase, in addition to the Basic Amounts subscribed for, the Undersubscription
Amount it has subscribed for; provided, however, that if the Undersubscription
Amounts subscribed for exceed the difference between the total of all of the
Basic Amounts available for purchase and the Basic Amounts subscribed for (the
"Available Undersubscription Amount"), each Investor who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of the
Available Undersubscription Amount as the Undersubscription Amount subscribed
for by such Investor bears to the total Undersubscription Amounts subscribed for
by all Investors, subject to rounding by the Board of Directors to the extent it
deems reasonably necessary.
(c) The Company shall have 90 days from the expiration of the
period set forth in Section 3.1(b) above to issue, sell or exchange all or any
part of such Offered Securities as to which a Notice of Acceptance has not been
given by the Investors (the "Refused Securities"), but only to the offerees or
purchasers described in the Offer (if so described therein) and only upon terms
and conditions (including, without limitation, unit prices and interest rates)
which are not more favorable, in the aggregate, to the acquiring person or
persons or less favorable to the Company than those set forth in the Offer.
(d) In the event the Company shall propose to sell less than all
the Refused Securities (any such sale to be in the manner and on the terms
specified in Section 3.1(c) above), then each Investor may, at its sole option
and in its sole discretion, reduce the number or amount of the Offered
Securities specified in its Notice of Acceptance to an amount that shall be not
less than the number or amount of the Offered Securities that the Investor
elected to purchase pursuant to Section 3.1(b) above multiplied by a fraction,
(i) the numerator of which shall be the number or amount of Offered Securities
the Company actually proposes to issue, sell or exchange (including Offered
Securities to be issued or sold to Investors pursuant to Section 3.1(b) above
prior to such reduction) and (ii) the denominator of which shall be the original
amount of the Offered Securities. In the event that any Investor so elects to
reduce the number or amount of Offered Securities specified in its Notice of
Acceptance, the Company may not issue,
<PAGE>
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sell or exchange more than the reduced number or amount of the Offered
Securities unless and until such securities have again been offered to the
Investors in accordance with Section 3.1(a) above.
(e) Upon the closing of the issuance, sale or exchange of all or
less than all of the Refused Securities, the Investors shall acquire from the
Company, and the Company shall issue to the Investors, the number or amount of
Offered Securities specified in the Notices of Acceptance, as reduced pursuant
to Section 3.1(d) above if the Investors have so elected, upon the terms and
conditions specified in the Offer. The purchase by the Investors of any Offered
Securities is subject in all cases to the preparation, execution and delivery by
the Company and the Investors of a purchase agreement relating to such Offered
Securities reasonably satisfactory in form and substance to the Investors and
their respective counsel.
(f) Any Offered Securities not acquired by the Investors or other
persons in accordance with Section 3.1(c) above may not be issued, sold or
exchanged until they are again offered to the Investors under the procedures
specified in this Agreement.
(g) The rights of the Investors under this Section 3 shall not
apply to:
(i) any shares of the Company's Series C Convertible
Preferred Stock issued pursuant to the Purchase Agreement;
(ii) Common Stock issued as a stock dividend to holders of
Common Stock or upon any subdivision or combination of shares of Common Stock;
(iii) the issuance of any shares of Common Stock upon
conversion of shares of convertible preferred stock;
(iv) the issuance of up to 3,717,400 shares of Common Stock,
or such greater number as is approved by vote of not less than a majority of the
non-employee directors of the Company, or the grant of options therefor,
including shares issued upon exercise of options outstanding on the date of this
Agreement (such number to be proportionately adjusted in the event of any stock
splits, stock dividends, recapitalizations or similar events occurring on or
after the date of this Agreement) issuable to officers, directors, consultants
and employees of the Company or any subsidiary pursuant to any plan, agreement
or arrangement approved by a vote of not less than a majority of the Board of
Directors of the Company (it being understood that any shares subject to options
that expire or terminate unexercised shall not count towards the maximum number
set forth in this clause (iii));
(v) securities issued solely in consideration for the
acquisition (whether by merger or otherwise) by the Company or any of its
subsidiaries of all or substantially all of the stock or assets of any other
entity;
(vi) shares of Common Stock sold by the Company in an
underwritten public offering pursuant to an effective registration statement
under the Securities Act;
<PAGE>
-16-
(vii) securities issued pursuant to any equipment leasing
arrangement, or debt financing from a bank or similar financial institution, in
each case approved by a vote of not less than a majority of the non-employee
members of the Board of Directors of the Company; or
(viii) securities issued in connection with strategic
transactions involving the Company and other entities, including (A) joint
ventures, manufacturing, marketing or distribution arrangements or (B)
technology transfer or development arrangements, in each case approved by a vote
of not less than a majority of the non-employee members of the Board of
Directors of the Company.
3.2 Termination. This Section 3 shall terminate upon the earlier of
the following events:
(a) The sale of all or substantially all of the assets or
business of the Company, by merger, sale of assets or otherwise; or
(b) The closing of the Initial Public Offering.
4. Transfers of Rights. This Agreement, and the rights and obligations of
each Investor, may be assigned by such Investor to any person or entity to which
at least 25% of the Shares owned by such Investor as of the date hereof are
transferred, and such transferee shall be deemed an "Investor" for purposes of
this Agreement; provided that the transferee provides written notice of such
assignment to the Company and agrees in writing to be bound by the terms hereof.
No such transfer shall be permitted by any Investor pursuant to this Section 4
to any person or entity that a majority of the non-employee members of the Board
of Directors deem to be a competitor of the Company. The foregoing
notwithstanding, the rights and obligations of a Batten Affiliates hereunder may
be assigned to any Batten Affiliate without regard to the number of Shares
transferred.
5. General.
5.1 Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
5.2 Specific Performance. In addition to any and all other remedies
that may be available at law in the event of any breach of this Agreement, each
Investor shall be entitled to specific performance of the agreements and
obligations of the Company hereunder and to such other injunctive or other
equitable relief as may be granted by a court of competent jurisdiction.
<PAGE>
-17-
5.3 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the Commonwealth of Massachusetts
(without reference to the conflicts of law provisions thereof).
5.4 Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed delivered (a) two
business days after being sent by registered or certified mail, return receipt
requested, postage prepaid or (b) one business day after being sent via a
reputable nationwide overnight courier service guaranteeing next business day
delivery, in each case to the intended recipient as set forth below:
If to the Company, by mail to: P. O. Box 13588, Research Triangle
Park, NC 27709, Attention: President, or by overnight courier to: 2600 Meridian
Parkway, Durham, NC 27713, Attention: President, or at such other address or
addresses as may have been furnished in writing by the Company to the
Purchasers, with a copy to Testa, Hurwitz & Thibeault LLP, 125 High Street,
Boston, MA 02110, Attn: William J. Schnoor, Jr., Esq.;
If to an Investor, at the address set forth on the signature page
hereto, or at such other address or addresses as may have been furnished to the
Company in writing by such Investor; or
If to a Founder, at the address set forth below such Founder's
signature to this Agreement.
Any party may give any notice, request, consent or other communication under
this Agreement using any other means (including, without limitation, personal
delivery, messenger service, telecopy, first class mail or electronic mail), but
no such notice, request, consent or other communication shall be deemed to have
been duly given unless and until it is actually received by the party for whom
it is intended. Any party may change the address to which notices, requests,
consents or other communications hereunder are to be delivered by giving the
other parties notice in the manner set forth in this Section.
5.5 Complete Agreement.
(a) This Agreement constitutes the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements and understandings relating to such subject
matter.
(b) The Investor Rights Agreement dated September 29, 1998 by and
among the Company, the Founders certain Investors is hereby terminated and is
superseded in all respects by this Agreement. Each party to such terminated
agreement hereby waives any right it may have had under such agreement with
respect to the issuance and sale by the Company of the shares of Series C
Convertible Preferred Stock pursuant to the Purchase Agreement.
<PAGE>
-18-
5.6 Amendments and Waivers. Any term of this Agreement may be amended
or terminated and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the holders of at
least 66-2/3% of the Registrable Shares held by all of the Stockholders;
provided, that Section 3 hereof may be amended or waived with the written
consent of the Stockholders (excluding the Founders) holding at least 66-2/3% of
the Registrable Shares held by the Stockholders (excluding the Registrable
Shares held by the Founders); provided further that this Agreement may be
amended with the consent of the holders of less than all Registrable Shares only
in a manner which affects all such holders in the same fashion. Any such
amendment, termination or waiver effected in accordance with this Section 5.6
shall be binding on all parties hereto, even if they do not execute such
consent. No waivers of or exceptions to any term, condition or provision of this
Agreement, in any one or more instances, shall be deemed to be, or construed as,
a further or continuing waiver of any such term, condition or provision.
5.7 Pronouns. Whenever the context may require, any pronouns used in
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular form of nouns and pronouns shall include the plural, and
vice versa.
5.8 Counterparts; Facsimile Signatures. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original,
and all of which together shall constitute one and the same document. This
Agreement may be executed by facsimile signatures. Each purchaser of shares of
the Company's Series C Convertible Preferred Stock shall become a party to this
Agreement upon the closing of its purchase of such shares and its execution of a
counterpart signature page to this Agreement.
5.9 Section Headings. The section headings are for the convenience of
the parties and in no way alter, modify, amend, limit or restrict the
contractual obligations of the parties.
5.10 Board Observer.
(a) So long as Intel Corporation ("Intel"), together with its
majority owned subsidiaries, holds twenty-five percent (25%) of the Registrable
Shares purchased by Intel on September 29, 1998 (such number to be
proportionately adjusted for stock splits, stock dividends, and similar events),
the Company will permit a representative of Intel (the "Observer"), to attend
all meetings of the Company's Board of Directors and all committees thereof
(whether in person, telephonic or other) in a non-voting, observer capacity and
shall provide to Intel or the Observer, concurrently with the members of the
Board of Directors and in the same manner, notice of such meeting and a copy of
all materials provided to such members, except for Intel Restricted Information,
as defined in Section 5(j)(iii) below.
The Company acknowledges that Intel will likely have, from time
to time, information that may be of interest to the Company ("Information")
regarding a wide variety of matters including, by way of example only, (i)
Intel's technologies, plans and services, and plans
<PAGE>
-19-
and strategies relating thereto, (ii) current and future investments Intel has
made, may make, may consider or may become aware of with respect to other
companies and other technologies, products and services, including, without
limitation, technologies, products and services that may be competitive with the
Company's, and (iii) developments with respect to the technologies, products and
services, and plans and strategies relating thereto, of other companies,
including, without limitation, companies that may be competitive with the
Company. The Company recognizes that a portion of such Information may be of
interest to the Company. Such Information may or may not be known by the
Observer. The Company, as a material part of the consideration for this
Agreement, agrees that Intel and its Observer shall have no duty to disclose any
Information to the Company or permit the Company to participate in any projects
or investment based on any Information, or to otherwise take advantage of any
opportunity that may be of interest to the Company if it were aware of such
Information, and hereby waives, to the extent permitted by law, any claim based
on the corporate opportunity doctrine or otherwise that could limit Intel's
ability to pursue opportunities based on such Information or that would require
Intel or Observer to disclose any such Information to the Company or offer any
opportunity relating thereto to the Company.
(b) Notwithstanding anything to the contrary in the foregoing,
the right to attend Board of Directors meetings and receive the information
described herein shall not apply to any portion of any such meeting or
information involving: (i) the presentation or discussion at Board of Director
meetings of Intel Restricted Information and (ii) the presentation of
information or discussion at Board of Directors meetings involving material
matters which, if provided to or attended by Intel, would, in the reasonable
opinion of the Company's Board of Directors, jeopardize the attorney client
privilege that would otherwise be afforded to such information or meeting.
(c) Intel Restricted Information as used herein shall be defined
as information or analysis involving any topic with respect to which, in the
reasonable judgment of a majority of the members of the Company's Board of
Directors, present and acting throughout, the presence of the Observer or the
provision of any such information or analysis to the Observer would inhibit
deliberations by the Company's Board of Directors on a material matter or would
otherwise be materially injurious to the Company in such circumstances.
(d) Exchanges of confidential and proprietary information between
the Company and the Intel Board Observer shall be governed by the terms of the
Corporate Non-Disclosure Agreement No. 72897, dated April 27, 1998, executed by
the Company and Intel, and a blanket Confidential Information Transmittal Record
(the "CITR") in the form attached hereto as Exhibit A, which CITR need only be
executed once, and shall govern all such exchanges of confidential and
proprietary information.
5.11 Confidentiality. The parties hereto agree to be bound by the
confidentiality and non-disclosure provisions set forth in Section 7 of the
Purchase Agreement.
<PAGE>
-20-
5.12 Effectiveness. This Agreement shall become effective upon its
execution by the Company, the New Investors and the holders of 66-2/3% of the
Registrable Shares held, immediately prior to the execution of the Purchase
Agreement, by the Founders and the Existing Investors. Upon the effectiveness of
this Agreement, any Existing Investor who has not executed this Agreement shall
be entitled to all benefits conferred upon the Investors hereunder as an
intended third party beneficiary.
[The remainder of this page intentionally left blank]
<PAGE>
-First Amended and Restated Investors Rights Agreement-
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date first written above.
COMPANY:
RED HAT SOFTWARE, INC.
By: /s/ Robert F. Young
------------------------------------
Name: Robert F. Young
----------------------------------
Title: Chief Executive Officer
---------------------------------
<PAGE>
-First Amended and Restated Investors Rights Agreement-
EXISTING INVESTOR:
GREYLOCK IX LIMITED PARTNERSHIP
One Federal Street
Boston, MA 02110
By: Greylock IX GP Limited Partnership
By: /s/ William S. Kaiser
------------------------------------
Title: General Partner
with copies of notices to:
Patrick J. Rondeau, Esq.
Hale & Dorr LLP
60 State Street
Boston, MA 02109
<PAGE>
-First Amended and Restated Investors Rights Agreement-
EXISTING INVESTOR:
BENCHMARK CAPITAL PARTNERS II, L.P.
as nominee for
Benchmark Capital Partners, II, L.P.
Benchmark Founders' Fund II, L.P.
Benchmark Founders' Fund II-A, L.P.
Benchmark Members' Fund II, L.P.
2480 Sand Hill Road, Suite 2000
Menlo Park, CA 94025
By: Benchmark Capital Management
Co. II, L.L.C., its general partner
By: /s/ Kevin Harvey
------------------------------------
Title: Managing Member
with copies of notices to:
Patrick J. Rondeau, Esq.
Hale & Dorr LLP
60 State Street
Boston, MA 02109
<PAGE>
-First Amended and Restated Investors Rights Agreement-
EXISTING INVESTOR:
INTEL CORPORATION
Attn: M&A Portfolio Manager
2200 Mission College Blvd., SC4-210
Santa Clara, CA 95052
By: /s/ Arvind Sodhani
------------------------------------
Name: Arvind Sodhani
----------------------------------
Title: Vice President and Treasurer
---------------------------------
with copies of notices to:
Intel Corporation
Attn: General Counsel
2200 Mission College Blvd.
Santa Clara, CA 95052
<PAGE>
-First Amended and Restated Investors Rights Agreement-
EXISTING INVESTOR:
NETSCAPE COMMUNICATIONS
CORPORATION
501 E. Middlefield Road
Mountain View, CA 94043
By: /s/ Peter L.S. Currie
------------------------------------
Name: Peter L.S. Currie
----------------------------------
Title: EVP and CAO
---------------------------------
<PAGE>
-First Amended and Restated Investors Rights Agreement-
EXISTING INVESTOR:
THE 1998 FRANK BATTEN, JR.,
GRANTOR ANNUITY TRUST
c/o Frank Batten, Jr.
Landmark Communications
150 Brambleton Avenue
Norfolk, VA 23510-2075
By: /s/ Frank Batten, Jr.
------------------------------------
Title: Trustee
with copies of notices to:
Guy R. Friddell, III, Esq.
Willcox & Savage, P.C.
1800 Nationsbank Center
One Commercial Place
Norfolk, VA 23510-2197
FRANK BATTEN, JR., FRANK BATTEN,
LOUIS F. RYAN, TRUSTEES OF THE FRANK
BATTEN, JR. TRUST UNDER A TRUST
AGREEMENT DATED APRIL 11, 1988,
AS AMENDED
c/o Frank Batten, Jr.
Landmark Communications
150 Brambleton Avenue
Norfolk, VA 23510-2075
By: /s/ Frank Batten, Jr.
------------------------------------
Title: Trustee
with copies of notices to:
Guy R. Friddell, III, Esq.
Willcox & Savage, P.C.
1800 Nationsbank Center
One Commercial Place
Norfolk, VA 23510-2197
<PAGE>
-First Amended and Restated Investors Rights Agreement-
NEW INVESTOR:
INTERNATIONAL BUSINESS MACHINES
CORPORATION
Attn: Mr. Robert Dutton
Route 100
Somers, NY 10589
By: /s/ Alfred W. Zollar
------------------------------------
Name: Alfred W. Zollar
----------------------------------
Title: General Manager, NCSD
---------------------------------
with copies of notices to:
Neil Abrams, Esq.
Attn: IBM
Associate General Counsel
Route 100
Somers, NY 10559
<PAGE>
-First Amended and Restated Investors Rights Agreement-
FOUNDERS:
/s/ Robert F. Young
----------------------------------------
Robert F. Young
208 Veranda Court
Raleigh, NC 2615
/s/ Nancy R. Young
----------------------------------------
Nancy R. Young
208 Veranda Court
Raleigh, NC 2615
/s/ Marc Ewing
----------------------------------------
Marc Ewing
221 High Hickory Road
Chapel Hill, NC 27516
HENRY LEE EWING TRUST DATED
SEPTEMBER 11, 1998 c/o Dan
Ewing 721 SE 39th Avenue
Portland, OR 97214
By: /s/ Dan Ewing
------------------------------------
Title: Trustee
EWING CHILDREN'S TRUST
DATED SEPTEMBER 11, 1998
c/o Dan Ewing 721 SE 39th
Avenue Portland, OR 97214
By: /s/ Dan Ewing
------------------------------------
Title: Trustee
<PAGE>
-First Amended and Restated Investors Rights Agreement-
ZOE E. YOUNG TRUST
DATED SEPTEMBER 11, 1998
c/o William T. Jahnke
271 Colonial Drive
Fairfield, CT 06430
By: /s/ William Jahnke
------------------------------------
Title: Trustee
MARGAUX A. F. YOUNG TRUST
DATED SEPTEMBER 11, 1998
c/o William T. Jahnke
271 Colonial Drive
Fairfield, CT 06430
By: /s/ William Jahnke
------------------------------------
Title: Trustee
VICTORIA C. B. YOUNG TRUST
DATED SEPTEMBER 11, 1998
c/o William T. Jahnke
271 Colonial Drive
Fairfield, CT 06430
By: /s/ William Jahnke
------------------------------------
Title: Trustee
<PAGE>
-First Amended and Restated Investors Rights Agreement-
ADDITIONAL INVESTOR COUNTERPART SIGNATURE PAGE
The undersigned hereby executes this First Amended and Restated Investor
Rights Agreement, authorizes that this signature page be attached as a
counterpart to said Agreement and agrees to be bound as an Investor to said
Agreement.
NOVELL INC.
Attn: Mr. Blake Modersitzki
1555 N. Technology Way
Orem, UT 84097
By: /s/ Christopher Stone
------------------------------------
Name: Christopher Stone
----------------------------------
Title: SVP
---------------------------------
Date: March 19,1999
----------------------------------
<PAGE>
-First Amended and Restated Investors Rights Agreement-
ADDITIONAL INVESTOR COUNTERPART SIGNATURE PAGE
The undersigned hereby executes this First Amended and Restated Investor
Rights Agreement, authorizes that this signature page be attached as a
counterpart to said Agreement and agrees to be bound as an Investor to said
Agreement.
ORACLE CORPORATION
Attn: Mr. Gene Frantz
500 Oracle Parkway
Redwood Shores, CA 94065
By: /s/ Gary L. Bloom
------------------------------------
Name: Gary L. Bloom
----------------------------------
Title: EVP
---------------------------------
with copies of notices to:
Oracle Corporation
Attn: General Counsel
500 Oracle Parkway
Redwood Shores, CA 94065
<PAGE>
-First Amended and Restated Investors Rights Agreement-
ADDITIONAL INVESTOR COUNTERPART SIGNATURE PAGE
The undersigned hereby executes this First Amended and Restated Investor
Rights Agreement, authorizes that this signature page be attached as a
counterpart to said Agreement and agrees to be bound as an Investor to said
Agreement.
CPQ HOLDINGS, INC.
Attn: Office of the General Counsel
Compaq Computer Corporation
20555 State Highway 249
Houston, TX 77070
By: /s/ John T. Rose
------------------------------------
Name: John T. Rose
----------------------------------
Title: Vice President
---------------------------------
Date: 3/11/99
----------------------------------
with copies of notices to:
Compaq Computer Corporation
Attn: Mr. Tim Yeaton
110 Spit Brook Road
MS ZK03-3W20
Nashua, NH 03062
<PAGE>
-First Amended and Restated Investors Rights Agreement-
ADDITIONAL INVESTOR COUNTERPART SIGNATURE PAGE
The undersigned hereby executes this First Amended and Restated Investor
Rights Agreement, authorizes that this signature page be attached as a
counterpart to said Agreement and agrees to be bound as an Investor to said
Agreement.
SAP AMERICA, INC.
Attn: Legal Dept./Venture Investments
3999 West Chester Pike
New Town Square, PA 19073
By: /s/ Kevin S. McKay
------------------------------------
Name: Kevin S. McKay
----------------------------------
Title: President and CEO
---------------------------------
Date: 3/26/99
----------------------------------
with copies of notices to:
SAP LABS, INC.
Attention: Exec. Vice President, Venture
Fund
3475 Deer Creek Road
Palo Alto, CA
<PAGE>
-First Amended and Restated Investors Rights Agreement-
ADDITIONAL INVESTOR COUNTERPART SIGNATURE PAGE
The undersigned hereby executes this First Amended and Restated Investor
Rights Agreement, authorizes that this signature page be attached as a
counterpart to said Agreement and agrees to be bound as an Investor to said
Agreement.
DELL USA L.P.
Attn: Business Development
One Dell Way
Round Rock Texas 78682
By: /s/ Alex C. Smith
------------------------------------
Name: Alex C. Smith
----------------------------------
Title: Alex C. Smith
------------------------------------
Date: 4/1/99
----------------------------------
with copies of notices to:
Dell Computer Corporation
Attn: General Corporate Counsel
One Dell Way
Round Rock, Texas 78682
<PAGE>
AMENDMENT NO. 1 TO
FIRST AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
This Amendment No. 1 to First Amended and Restated Investor Rights
Agreement is entered into as of April 1, 1999 by and among Red Hat Software,
Inc., a Delaware corporation (the "Company"), the several investors (each an
"Investor" and collectively, the "Investors") named in that certain First
Amended and Restated Investor Rights Agreement dated as of February 25, 1999
(the "Rights Agreement") and the several founders (each a "Founder" and
collectively, the "Founders") named in the Rights Agreement. Capitalized terms
used herein, unless otherwise defined herein, shall have the meanings assigned
to them in the Rights Agreement.
Recitals
A. The Company and certain of the Investors are parties to that certain
Series C Convertible Preferred Stock Purchase Agreement dated as of February 25,
1999 (the "Purchase Agreement").
B. The Company and certain of the Investors are amending, as of the date
hereof, the Purchase Agreement in order to increase the number of shares of the
Company's Series C Convertible Preferred Stock ("Series C Preferred") that may
be sold pursuant to the Purchase Agreement.
C. The Company, the Investors and the Founders desire to amend the Rights
Agreement in order to allow the proposed purchaser of such additional Series C
Preferred to receive the benefit of the rights granted to the Investors in the
Rights Agreement.
D. Pursuant to Section 5.6 thereof, the Rights Agreement may be amended
with the written consent of the Company and the holders of at least 66-2/3% of
the Registrable Shares held by all Stockholders.
Agreement
1. Amendments. The Rights Agreement shall be amended as follows:
1.1 Recital B. shall be amended and restated in its entirety as
follows:
"B. Certain Investors are purchasing, concurrently herewith, shares of
capital stock of the Company pursuant to the Series C Convertible Preferred
Stock Purchase Agreement of even date herewith, as amended from time to time
(the "Purchase Agreement").
2. Amendment Limited. Except as provided herein, each of the provisions of
the Rights Agreement shall remain in full force and effect following the
consummation of the transactions contemplated hereby and this Amendment No. 1
shall not constitute a
<PAGE>
modification, acceptance or waiver of any other provision of the Rights
Agreement. Each of the parties hereto hereby confirms and ratifies all of its
obligations under the Rights Agreement, as amended by this Amendment No. 1. This
Amendment No. 1 shall be governed and construed in accordance with the terms of
the Rights Agreement.
3. Counterparts. This Amendment No. 1 may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
- Amendment No. 1 to First Amended and Restated Investor Rights Agreement -
IN WITNESS WHEREOF, the Company, the Investors and the Founders have
executed and delivered this Amendment No. 1 as of the date first above written.
COMPANY:
RED HAT SOFTWARE, INC.
By: /s/ Robert F. Young
------------------------------------
Name: Robert F. Young
Title: CEO
<PAGE>
- Amendment No. 1 to First Amended and Restated Investor Rights Agreement -
INVESTOR:
GREYLOCK IX LIMITED PARTNERSHIP
By: Greylock IX GP Limited Partnership
By: /s/ William Kaiser
------------------------------------
Title: General Partner
<PAGE>
- Amendment No. 1 to First Amended and Restated Investor Rights Agreement -
INVESTOR:
BENCHMARK CAPITAL PARTNERS II, L.P.
as nominee for
Benchmark Capital Partners, II, L.P.
Benchmark Founders' Fund II, L.P.
Benchmark Founders' Fund II-A, L.P.
Benchmark Members' Fund II, L.P.
By: Benchmark Capital Management
Co. II, L.L.C., its general partner
By: /s/ Kevin Harvey
------------------------------------
Title: Managing Member
<PAGE>
- Amendment No. 1 to First Amended and Restated Investor Rights Agreement -
INVESTOR:
FRANK BATTEN, JR., FRANK BATTEN,
LOUIS F. RYAN, TRUSTEES OF THE FRANK
BATTEN, JR. TRUST UNDER A TRUST
AGREEMENT DATED APRIL 11, 1988, AS
AMENDED
By: /s/ Frank Batten, Jr.
------------------------------------
Title: Trustee
INVESTOR:
1998 FRANK BATTEN, JR.
GRANTOR ANNUITY TRUST
By: /s/ Frank Batten, Jr.
------------------------------------
Title: Trustee
<PAGE>
- Amendment No. 1 to First Amended and Restated Investor Rights Agreement -
INVESTOR:
INTEL CORPORATION
By: /s/ Arvind Sodhani
------------------------------------
Name: Arvind Sodhani
----------------------------------
Title: Vice President and Treasurer
---------------------------------
<PAGE>
- Amendment No. 1 to First Amended and Restated Investor Rights Agreement -
INVESTOR:
SAP AMERICA, INC.
By: /s/ Brad Brubaker
------------------------------------
Name: Brad Brubaker
----------------------------------
Title: Vice President
---------------------------------
<PAGE>
- Amendment No. 1 to First Amended and Restated Investor Rights Agreement -
INVESTOR:
NOVELL INC.
By: /s/ Christopher Stone
------------------------------------
Name: Christopher Stone
----------------------------------
Title: SVP
---------------------------------
<PAGE>
- Amendment No. 1 to First Amended and Restated Investor Rights Agreement -
INVESTOR:
ORACLE CORPORATION
By: /s/ Daniel Cooperman
------------------------------------
Name: Daniel Cooperman
----------------------------------
Title: Senior VP, Gen. Counsel
and Secretary
---------------------------------
<PAGE>
- Amendment No. 1 to First Amended and Restated Investor Rights Agreement -
INVESTOR:
INTERNATIONAL BUSINESS MACHINES
CORPORATION
By: /s/ J.E. Newman
------------------------------------
Name: J.E. Newman
----------------------------------
Title: VP Business Development
---------------------------------
<PAGE>
- Amendment No. 1 to First Amended and Restated Investor Rights Agreement -
INVESTOR:
Dell USA L.P.
By: Dell Gen. P. Corp, General Partner
By: /s/ Alex C. Smith
------------------------------------
Name: Alex C. Smith
----------------------------------
Title: Vice Presicent
---------------------------------
<PAGE>
- Amendment No. 1 to First Amended and Restated Investor Rights Agreement -
INVESTOR:
NETSCAPE COMMUNICATIONS
CORPORATION
By: /s/ Kent Walker
------------------------------------
Name: Kent Walker
----------------------------------
Title: Assistant Secretary
---------------------------------
<PAGE>
- Amendment No. 1 to First Amended and Restated Investor Rights Agreement -
FOUNDERS:
/s/ Robert F. Young
----------------------------------------
Robert F. Young
/s/ Nancy F. Young
----------------------------------------
Nancy R. Young
/s/ Marc Ewing
----------------------------------------
Marc Ewing
HENRY LEE EWING TRUST
DATED SEPTEMBER 11, 1998
By: /s/ Dan Ewing
------------------------------------
Title: Trustee
EWING CHILDREN'S TRUST
DATED SEPTEMBER 11, 1998
By: /s/ Dan Ewing
------------------------------------
Title: Trustee
ZOE E. YOUNG TRUST
DATED SEPTEMBER 11, 1998
By: /s/ William Jahnke
------------------------------------
Title: Trustee
<PAGE>
- Amendment No. 1 to First Amended and Restated Investor Rights Agreement -
MARGAUX A. F. YOUNG TRUST
DATED SEPTEMBER 11, 1998
By: /s/ William Jahnke
------------------------------------
Title: Trustee
VICTORIA C. B. YOUNG TRUST
DATED SEPTEMBER 11, 1998
By: /s/ William Jahnke
------------------------------------
Title: Trustee
<PAGE>
Exhibit 10.8
CMD 103A (8/98)
Base Years
OFFICE LEASE
WITH
RED HAT SOFTWARE, INC.
SUITE(S): 100
BUILDING: 2600 Meridian Parkway
Durham, North Carolina 27713
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1: BASIC PROVISIONS....................................................................
ARTICLE 2: TERM AND COMMENCEMENT...............................................................
ARTICLE 3: BASE RENT AND ADDITIONAL RENT.......................................................
ARTICLE 4: CONDITION OF PREMISES...............................................................
ARTICLE 5: QUIET ENJOYMENT.....................................................................
ARTICLE 6: UTILITIES AND SERVICES..............................................................
ARTICLE 7: USE, COMPLIANCE WITH LAWS, AND RULES................................................
ARTICLE 8: MAINTENANCE AND REPAIRS.............................................................
ARTICLE 9: ALTERATIONS AND LIENS...............................................................
ARTICLE 10: INSURANCE, SUBROGATION, AND WAIVER OF CLAIMS........................................
ARTICLE 11: CASUALTY DAMAGE.....................................................................
ARTICLE 12: CONDEMNATION........................................................................
ARTICLE 13: ASSIGNMENT AND SUBLETTING...........................................................
ARTICLE 14: PERSONAL PROPERTY, RENT AND OTHER TAXES.............................................
ARTICLE 15: LANDLORD'S REMEDIES.................................................................
ARTICLE 16: SECURITY DEPOSIT....................................................................
ARTICLE 17: ATTORNEYS' FEES AND VENUE...........................................................
ARTICLE 18: SUBORDINATION, ATTORNMENT AND LENDER PROTECTION.....................................
ARTICLE 19: ESTOPPEL CERTIFICATES...............................................................
ARTICLE 20: RIGHTS RESERVED BY LANDLORD.........................................................
ARTICLE 21: RIGHT TO CURE.......................................................................
ARTICLE 22: INDEMNIFICATION.....................................................................
ARTICLE 23: RETURN OF POSSESSION................................................................
ARTICLE 24: HOLDING OVER........................................................................
ARTICLE 25: NOTICES.............................................................................
ARTICLE 26: REAL ESTATE BROKERS.................................................................
ARTICLE 27: NO WAIVER...........................................................................
ARTICLE 28: TELECOMMUNICATION LINES.............................................................
ARTICLE 29: HAZARDOUS MATERIALS.................................................................
ARTICLE 30: DEFINITIONS.........................................................................
ARTICLE 31: OFFER...............................................................................
ARTICLE 32: MISCELLANEOUS.......................................................................
ARTICLE 33: ENTIRE AGREEMENT....................................................................
EXHIBITS .................................................................Listed in Article 1.P
</TABLE>
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OFFICE LEASE
THIS OFFICE LEASE ("Lease") is made and entered into as of the 13th day
of November, 1998, by and between CMD PROPERTIES, INC. ("Landlord"), an Illinois
corporation, and RED HAT SOFTWARE, INC. ("Tenant"), a Delaware corporation.
ARTICLE 1: BASIC PROVISIONS
This Article contains the basic lease provisions between Landlord and
Tenant.
A. Building: Located at 2600 Meridian Parkway, Durham,
North Carolina (the "Property", as further
described in Article 30).
B. Premises: Those three (3) certain spaces designated as
"Space A," "Space B" and "Space C," to be
collectively known as "Suite 100,"located on
the 1st floor of the Building as outlined or
crosshatched on EXHIBIT A hereto.
C. Commencement Date: January 15, 1999, subject to Articles
2 and 4 (including later Possession bates
for Space B and Space C per Article 2.D).
D. Expiration Date: January 14, 2004, subject to Articles 2 and
4.
E. Rentable Area: The rentable area of: (i) Space A shall be
deemed to be 25,000 square feet (as further
described in Article 2D), (ii) Space B shall
be deemed to be 18,737 square feet, and
(iii) Space C shall be deemed to be 8,124
square feet, such that the rentable area of
the total Premises shall be deemed to be
51,861 square feet, and the rentable area of
the Property shall be deemed to be 65,401
square feet, for purposes of this Lease,
subject to Article 30. The preceding
measurements were made using the BOMA/ANSI
Standards as of June 7, 1996 and shall not
be subject to remeasurement except as
provided in Article 30 and in Article 2F.
F. Tenant's Share: Sixty-six and 88/100 percent (66.88%) until
the Space C Possession Date; and thereafter,
Seventy-nine and 30/100 percent (79.30%),
subject to Articles 3 and 30.
G. Base Rent: Tenant shall pay monthly Base Rent pursuant
to the following schedule and as described
in Article 3:
<TABLE>
<CAPTION>
Period Monthly Base Rent
<S> <C>
Commencement Date - 3/31/99 $39,804.08
4/l/99 - 1/14/00 $65,957.81
1/15/00 - 1/14/01 $74,922.94
1/15/01 - 1/14/02 $77,545.24
1/15/02 - 1/14/03 $80,259.32
</TABLE>
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<TABLE>
<S> <C>
1/15/03 - 1/14/04 $83,068.40
</TABLE>
H. Additional Rent: Tenant shall pay Tenant's Share of Taxes
and Expenses in excess of the amounts
respectively for 1999 ("Base Tax Year")
and 1999 ("Base Expense Year"), as further
described in Article 3.
I. Permitted Use: General office use, which shall be deemed
to include, as related uses, a telephone
call center (i.e., a computer "help desk"),
sales and service, research and development,
and a training center, which uses shall be
in connection with Tenant's business and
for its customers and employees, subject to
Article 7.
J. Security Deposit: $65,957.81, subject to Article 16 and
Exhibit 1.
K. Broker (if any): Corporate Realty Advisors and Park City
Developments, Inc., subject to Article 26.
L. Guarantor(s): N/A.
M. Landlord's Notice Address (subject to Article 25):
c/o CMD Realty Investors, Inc., Suite 135,
2500 Meridian Parkway, Durham, North
Carolina 27713, Attn.: Regional Manager;
with copies c/o CMD Realty Investors, Inc.,
227 West Monroe Street, Suite 3900, Chicago,
Illinois 60606, Attn.: General Counsel and
Attn: National Leasing Manager.
N. Tenant's Notice Address (subject to Article 25):
Until the Commencement Date: Red Hat
Software, Inc., 4201 Research Commons, Suite
100, Research Triangle Park, North Carolina
27709. Attn: Manoj George, CFO
On the Commencement Date: Red Hat
Software, Inc., 2600 Meridian Parkway, Suite
100, Durham, North Carolina 27713, Attn:
Chief Financial Officer
With a copy to: Steven 1. Reinhard, Esq.,
Ragsdale, Liggett & Foley, CrossPointe
Plaza, 2840 Plaza Place, Suite 400, Raleigh,
North Carolina 27612.
0. Rent Payments: Rent shall be paid to Landlord c/o The
First National Bank of Chicago, P.O. Box
93150, Chicago, Illinois 60673-3150, or
such other parties and addresses as to
which Landlord shall provide with thirty
(30) days' advance notice.
P. Exhibits: This Lease includes, and incorporates by
this reference:
EXHIBIT A: Premises
EXHIBIT B: Rules
EXHIBIT C: Work Letter
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<PAGE>
EXHIBIT D: Parking
EXHIBIT E: Tenant Exterior Sign
EXHIBIT F: Option to Expand
EXHIBIT G: Extension Option
EXHIBIT H: Antenna
EXHIBIT H-1: Area of Roof or Other
Structure Identified
EXHIBIT I: Letter of Credit
Requirements
EXHIBIT I-1: Form of Letter of Credit
EXHIBIT J: Cleaning Specifications
EXHIBIT K: Storage Space
EXHIBIT L: Right of First Offer
The foregoing provisions shall be interpreted and applied in accordance
with the other provisions of this Lease. The terms of this Article, and the
terms defined in Article 30 and other Articles, shall have the meanings
specified therefor when used as capitalized terms in other provisions of this
Lease or related documentation (except as expressly provided to the contrary
therein).
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<PAGE>
ARTICLE 2: TERM AND COMMENCEMENT
A. TERM. Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the Premises for the Term, subject to the other provisions of this
Lease, including the provisions of Paragraph D below respecting later possession
dates for Space B and Space C. The term ("Term") of this Lease shall commence on
the Commencement Date and end on the Expiration Date set forth in Article 1,
unless sooner terminated as provided in this Lease, subject to adjustment as
provided below and the other provisions of this Lease.
B. EARLY COMMENCEMENT. The Commencement Date, Rent and Tenant's other
obligations shall be advanced to such earlier date Tenant, with Landlord's
written permission, commences occupying the Premises for the operation and
conduct of business. If such event occurs with respect to a portion of the
Premises, the Commencement Date, Rent and Tenant's other obligations shall be so
advanced with respect to such portion (and fairly prorated based on the rentable
square footage involved). During any period that Tenant shall be permitted to
enter the Premises prior to the Commencement Date other than to occupy the same
for the operation and conduct of business (e.g., to perform alterations or
improvements), Tenant shall comply with all terms and provisions of this Lease,
except those provisions requiring the payment of Rent. Landlord shall permit
early entry, so long as the Premises are legally available, Landlord has
completed any work required to be performed by Landlord under this Lease (or can
reasonably accommodate the scheduling of minor work Tenant desires to perform,
such as cabling, without delaying any such Landlord work), and Tenant is in
compliance with the other provisions of the Lease, including the insurance
requirements.
C. COMMENCEMENT DELAYS. The Commencement Date (or the Space B
Possession Date or Space C Possession Date, as the case may be), and Rent and
Tenant's other obligations relating thereto shall be postponed to the extent
Tenant is not reasonably able to occupy Space A (or Space B or Space C, as the
case may be) for the operation and conduct of business because Landlord fails,
by the Commencement Date set forth in Article 1 (or the Space B Possession Date
or Space C Possession Date, as the case may be) to: (i) deliver possession and
(ii) substantially complete the improvements required to be performed by
Landlord under Exhibit C to this Lease with respect to the applicable space,
except to the extent that Tenant, its space planners, architects, contractors,
agents or employees in any way contribute to such failure. The substantial
completion referred to in subsection (ii) above, Section 4B of the Lease and in
Exhibit C shall be deemed to have occurred when evidenced by the city of Durham
inspector's issuance of a temporary certificate of occupancy and a certificate
of substantial completion issued by the Architect (as defined in Exhibit C). If
such failure occurs with respect to a portion of the subject space, the
Commencement Date (or the Space B Possession Date or Space C Possession Date, as
the case may be), Rent and Tenant's other obligations shall be so postponed with
respect to such portion (and fairly prorated based on the rentable square
footage involved). Any such delay in the Commencement Date shall not subject
Landlord to liability for loss or damage resulting therefrom, and Tenant's sole
recourse with respect thereto shall be the postponement of Rent and other
obligations described herein, except as follows: (1) If the Commencement Date
has not occurred by January 25, 1999 then beginning on January 25, 1999 and
continuing until the Commencement Date has occurred, the commencement of Base
Rent shall be delayed as provided above and Tenant shall also be entitled one
(1) day of Base Rent abatement for each day of delay of the Commencement Date;
and (2) If the Commencement Date has not occurred by May 17, 1999, Tenant shall
have the right to terminate this Lease by written notice to Landlord given no
later than May 27, 1999; provided, however, that the dates set forth in
subsections (1) and (2) immediately above shall
4
<PAGE>
be extended by the number of days of delay in the Commencement Date to which
Tenant or its space planners, architects, contractors, agents or employees have
in any way contributed. In the event that Tenant elects not to terminate the
Lease, then the one (1) day of Rent abatement per day of delay as set forth in
subsection (1) above shall cease as of May 17, 1999, and Tenant's only remedy
for further delays in delivery of possession of the Premises shall be the delay
in the commencement of Rent.
D. SPACE B AND SPACE C POSSESSION DATES. Notwithstanding anything to
the contrary contained in this Lease:
(i) Tenant shall not be entitled to use or occupy Space B
until April 1, 1999 ("SPACE B POSSESSION DATE"), unless (a) Tenant elects to
accelerate the Space B Possession Date by written notice to Landlord, (b)
Landlord has substantially completed the Work to Space B as defined in EXHIBIT C
attached hereto, and (c) Tenant shall pay to Landlord additional Base Rent in
the amount of $26,153.73 per month (as and when the Base Rent for Space A is due
for the applicable month provided that Base Rent for any partial month with
respect to Space B shall be paid no later that the date of Tenant's occupancy of
Space B) for the period from the date of occupancy of Space B through March 31,
1999 (prorated on a per diem basis). It is understood and agreed that Space B is
not a fixed block of space but rather, consists of 18,737 rentable square feet
within (i.e. approximately 43% of) the area designated as "Space A and B" in
Exhibit A and which Tenant has agreed not to occupy until the Space B Possession
Date. Tenant agrees to act in good faith in observing the preceding distinction
between Spaces A and B.
(ii) Tenant shall not be entitled to use or occupy Space C
until January 15, 2000 ("SPACE C POSSESSION DATE"), unless (a) Tenant elects to
accelerate the Space C Possession Date by written notice to Landlord, (b)
Landlord has substantially completed the Work to Space C as defined in EXHIBIT C
attached hereto, and (c) Tenant shall pay to Landlord additional Base Rent in
the amount of $6,431.50 per month (as and when the Base Rent for Space A is due
for the applicable month provided that Base Rent for any partial month with
respect to Space C shall be paid no later that the date of Tenant's occupancy of
Space C) for the period from the date of occupancy of Space C through January
14, 2000 (prorated on a per diem basis).
(iii) Until the Space B Possession Date and Space C Possession
Date occur, the Base Rent and Additional Rent under this Lease shall be deemed
to constitute rent with respect to Space A, and additional consideration for
Landlord's agreement not to lease Space B or Space C to any other party, and
instead to include Space B and Space C in the Premises, subject to staged
possession dates as provided herein.
E. ADJUSTMENTS TO DATES, RENTABLE AREAS AND OTHER MATTERS;
CONFIRMATION. If the Commencement Date is advanced to an earlier date as
provided above, the Expiration Date shall not be changed. If the Commencement
Date is postponed as provided above, the Expiration Date shall be extended by
the same length of time and all other specific dates within this Lease
(including Base Rent increases and dates contained within options) shall
likewise be postponed. If the Commencement Date occurs other than on the first
day of a calendar month, then the Term shall be extended so that the Expiration
Date is the last day of the calendar month in which it would otherwise occur,
and the dates for any fixed increases in the Base Rent shall be adjusted so that
they occur on the first day of the calendar month following the month in which
they would otherwise occur. Tenant shall execute a confirmation of any dates
and/or remeasurements and adjustments based on such remeasurements, as adjusted
herein, in such
5
<PAGE>
form as Landlord may reasonably request; any failure to respond within thirty
(30) days after requested shall be deemed an acceptance of the matters set forth
in Landlord's confirmation. If Tenant disagrees with Landlord's adjustment of
such dates, and/or Landlord's remeasurements and adjustments based on such
remeasurements under Paragraph F below, then Tenant shall pay Rent and perform
all other obligations, in the amounts and on the dates set forth in Article 1,
subject to retroactive and prospective adjustment between the parties promptly
after the matter is resolved.
F. REMEASUREMENT OF PREMISES. Within ten (10) business days after the
substantial completion of the Building, Landlord shall cause the Building, the
Premises and the combined Spaces A and B to be remeasured by a architect
selected by Landlord ("Landlord's Architect"). The remeasurement shall be
performed in accordance with BOMA/ANSI Standards as of June 7, 1996. Landlord
shall provide the results of such remeasurement to Tenant, together with the
architect's calculations therefor with three (3) business days after the
completion of such remeasurement. The results of the remeasurement shall be
provided to Tenant as follows:
(1) total rentable square footage of the Building,
(2) total rentable square footage of the Premises,
(3) total rentable square footage of the combined Spaces A and B,
(4) total rentable square footage of Space C, calculated by subtracting
(3) above from (2) above.
For the purposes of the Lease, the numbers for rentable square feet to
be used for the Building, the Premises and the various parts thereof shall be as
determined by Landlord's Architect.
If Tenant disputes the results of such remeasurement, Landlord and
Tenant shall select an architect (whose fees and costs shall be shared equally
by Landlord and Tenant) mutually and reasonably agreeable to both parties who
shall releaser the various areas set forth above and such architect's decision
shall be final and binding on the parties.
If square footages of the Building, Premises or Spaces A, B or C
changes as the result of remeasurement as provided herein, all relevant square
footage numbers and terms of this Lease relating to such square footage numbers
(including without limitation, Rent, Tenant's Share and Allowances) shall be
appropriately adjusted.
ARTICLE 3: BASE RENT AND ADDITIONAL RENT
A. BASE RENT. Tenant shall pay Landlord the monthly Base Rent set forth
in Article 1 in advance on or before the first day of each calendar month during
the Term; provided, Tenant shall pay Base Rent for the first full calendar month
for which Base Rent shall be due (and any initial partial month) when Tenant
executes this Lease.
B. TAXES AND EXPENSES. Tenant shall pay Landlord Tenant's Share of
Taxes and Expenses in excess of the amounts of Taxes and Expenses respectively
for the Base Tax Year and Base Expense Year in the manner described below. The
foregoing capitalized terms shall have the meanings specified therefor in
Articles 1 and 30.
6
<PAGE>
C. PAYMENTS.
(i) Landlord may reasonably estimate in advance the amounts Tenant
shall owe for Taxes and Expenses for any full or partial calendar year of the
Term; such estimate shall be made by Landlord in good faith and shall contain a
listing in reasonable detail for categories of Expenses. In such event, Tenant
shall pay such estimated amounts, on a monthly basis, on or before the first day
of each calendar month, together with Tenant's payment of Base Rent. Such
estimate may be reasonably adjusted from time to time by Landlord, but not more
than once per calendar year.
(ii) Within 120 days after the end of each calendar year, or as soon
thereafter as practicable, Landlord shall provide a statement (the "Statement")
to Tenant showing: (a) the amount of actual Taxes and Expenses for such calendar
year, with a listing in reasonable detail of amounts for categories of Expenses,
(b) any amount paid by Tenant towards Taxes and Expenses during such calendar
year on an estimated basis, and (c) any further revised estimate of Tenant's
obligations for Taxes and Expenses for the current calendar year.
(iii) If the Statement shows that Tenant's estimated payments were less
than Tenant's actual obligations for Taxes and Expenses for such year, Tenant
shall pay the difference within thirty (30) days after Landlord sends the
Statement. If the Statement shows that Tenant's estimated payments exceeded
Tenant's actual obligations for Taxes and Expenses, Landlord shall credit the
difference against the payment of Rent next due. If the Term shall have expired
or been terminated and no further Rent shall be due, Landlord shall provide a
refund of such difference at the time Landlord sends the Statement.
(iv) If the Statement shows a further increase in Tenant's estimated
payments for the current calendar year, Tenant shall: (a) thereafter pay the new
estimated amount until Landlord further revises such estimated amount, and (b)
pay the difference between the new and former estimates for the period from
January 1 of the current calendar year through the month in which the Statement
is sent within thirty (30) days after Landlord sends the Statement, provided
that Landlord has sent the Statement by April 30 of the calendar following the
calendar year to which the Statement relates. If Landlord sends the Statement
after April 30 of the calendar following the calendar year to which the
Statement relates, then Tenant's payments shall be as follows: (1) within thirty
(30) days after Landlord sends the Statement, Tenant shall pay the difference
between the new and former estimates for the months of January through April of
the current year, (2) within sixty (60) after Landlord sends the Statement,
Tenant shall pay the difference between the new and former estimates for the
month of May through the month in which Landlord sends the Statement.
(v) Intentionally omitted.
D. TAX REFUNDS, PROTEST COSTS, FISCAL YEARS AND SPECIAL ASSESSMENTS.
Landlord shall each year: (i) credit against Taxes any refunds received during
such year, whether or not for a prior year, (ii) include in Taxes any additional
amount paid during such year involving an adjustment to Taxes for a prior year
due to error by the taxing authority, supplemental assessment, or other reason,
(iii) for Taxes payable in installments over more than one year, include only
the minimum amounts payable each year and any interest thereon, and (iv)
include, in either Taxes or Expenses, any fees for attorneys, consultants and
experts, and other costs paid during such year in attempting to protest, appeal
or otherwise seek to reduce or minimize Taxes, whether or not successful.
Notwithstanding anything to the contrary contained in this Lease, if any taxing
authority, at any time, uses a fiscal year other than a current calendar
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<PAGE>
year, Landlord may elect to require payments by Tenant based on: (a) amounts
paid or payable during each calendar year without regard to such fiscal years,
or (b) amounts paid or payable for or during each fiscal tax year.
E. GROSSING UP VARIABLE EXPENSES; TAXES. In order to allocate variable
Expenses (i.e. those items that vary based on occupancy levels, such as
janitorial and utility costs) among those parties who are incurring such
Expenses when the Property is not fully occupied during all or a portion of any
calendar year, Landlord may, in accordance with sound accounting and management
practices, determine the amount of such variable Expenses that would have been
paid had the Property been fully occupied, and the amount so determined shall be
deemed to have been the amount of Expenses for such year (rather than adjusting
Tenant's Share by subtracting vacant space from the denominator); if Landlord
makes such an adjustment to Expenses for any year following the Base Expense
Year, Landlord shall also make such an adjustment to Expenses for the Base
Expense Year. If Landlord adds a new type of expense in a subsequent year that
was not included in the Base Year (e.g. an annual HVAC maintenance contract that
was not needed during the Base Expense Year because of an HVAC warranty), then
Landlord shall make an appropriate adjustment to the Base Expense Year by adding
thereto a reasonable amount to reflect the expense that would have been incurred
if such new type of expense (e.g. such annual HVAC maintenance contract) had
been incurred in the Base Expense Year. Similarly, if Landlord is not furnishing
any particular utility or service (the cost of which, if performed by Landlord,
would be included in Expenses) to a tenant during any period, Landlord may for
such period: (i) adjust Expenses to reflect the additional amount that would
reasonably have been incurred during such period had Landlord furnished such
utility or service to such tenant, or (ii) exclude the rentable area of such
tenant from the rentable area of the Property in computing Tenant's Share of the
component of Expenses for such utility or service.
Landlord shall adjust the Taxes for the Base Tax Year to the amount
that the Taxes would have been for the Base Tax Year if the Building had been
fully occupied and fully improved.
F. PRORATIONS; PAYMENTS AFTER TERM ENDS. If the Term commences on a day
other than the first day of a calendar month or ends on a day other than the
last day of a calendar month, the Base Rent and any other amounts payable on a
monthly basis shall be prorated on a per diem basis for such partial calendar
months. If the Base Rent is scheduled to increase under Article 1 other than on
the first day of a calendar month, the amount for such month shall be prorated
on a per them basis to reflect the number of days of such month at the then
current and increased rates, respectively. If the Term commences other than on
January 1, or ends other than on December 31, Tenant's obligations to pay
amounts towards Taxes and Expenses for such first or final calendar years shall
be prorated on a per diem basis to reflect the portion of such years included in
the Term. Tenant's and Landlord's obligations regarding Taxes and Expenses (or
any other amounts) accruing during, or relating to, the period prior to
expiration or earlier termination of this Lease, shall survive such expiration
or termination.
G. LANDLORD'S ACCOUNTING PRACTICES AND RECORDS. Landlord shall maintain
records respecting Taxes and Expenses and determine the same in accordance with
sound accounting and management practices consistently applied in accordance
with this Lease. Although this Lease contemplates the general computation of
Taxes and Expenses on a cash basis, Landlord shall make reasonable and
appropriate accrual adjustments to ensure that each calendar year includes
substantially the same recurring items. Landlord reserves the right to apply a
full accrual system of accounting so long as the same is consistently applied
and
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<PAGE>
Tenant's obligations are not materially adversely affected, and further provided
that Landlord shall continue to pay Expenses and Taxes on a timely basis. Tenant
or its representative (acting on a noncontingent fee basis) shall have the right
to review such records by sending notice to Landlord no later than ninety (90)
days following the furnishing of the Statement specifying such records as Tenant
reasonably desires to review. Such review shall be subject to the continuing
condition that Tenant not be in Default, and subject to reasonable scheduling by
Landlord during normal business hours at the place or places where such records
are normally kept provided that such records shall be kept within the 48
continental United States. No later than ninety (90) days after Landlord makes
such records available for review, Tenant shall send Landlord notice specifying
any exceptions that Tenant takes to matters included in such Statement, Tenant's
detailed reasons for each exception which support a conclusion that such
exception properly identifies an error in such Statement, and a complete copy of
the review report. Such Statement shall be considered final and binding on
Tenant, except as to matters to which exception is taken after review of
Landlord's records in the foregoing manner and within the foregoing times. The
foregoing times for sending Tenant's notices hereunder are critical to
Landlord's budgeting process, and are therefore of the essence of this
Paragraph. If Tenant takes timely exception as provided herein, Landlord may
seek certification from an independent certified public accountant or financial
consultant (who shall be subject to Tenant's reasonable approval) as to the
proper amount of Taxes and Expenses or the items as to which Tenant has taken
exception. In such case: (i) such certification shall be considered final and
binding on both parties (except as to additional amounts not then known or
omitted by error), and (ii) Tenant shall pay Landlord for the cost of such
certification, unless it shows that Tenant's Share of Taxes and Expenses were
overstated by a net amount of three percent (3%) or more, in which event
Landlord shall pay the reasonable cost of such certification provided that such
reasonable cost does not exceed the amount of the overstatement. Pending review
of such records and resolution of any exceptions, Tenant shall pay Tenant's
Share of Taxes and Expenses in the amounts shown on such Statement, subject to
credit, refund or additional payment after any such exceptions are resolved.
H. BASE YEAR ADJUSTMENTS. If Taxes for the Base Tax Year are reduced as
the result of protest or otherwise, Landlord may use the final reduced amount of
Taxes for the Base Tax Year to compute Tenant's obligations for increases in
Taxes during the Term. In such case, Tenant shall pay Landlord, within fifteen
(15) days after notice, any additional amount of Taxes required by such
computation for any period that has theretofore occurred during the Term
following the Base Tax Year. Landlord may exclude from Base Year Expenses any
nonrecurring items, including capital expenditures otherwise permitted under
Article 30 (and shall only include the amortization of such expenditures in
subsequent year Expenses to the extent permitted under Article 30). If Landlord
eliminates from any subsequent year Expenses a recurring category of Expenses
previously included in Base Year Expenses, Landlord may subtract such category
from Base Year Expenses commencing with such subsequent year.
I. GENERAL PAYMENT MATTERS. Base Rent, Taxes, Expenses and any other
amounts which Tenant is or becomes obligated to pay Landlord under this Lease or
other agreement entered in connection herewith are sometimes herein referred to
collectively as "Rent," and all remedies applicable to the nonpayment of rent
shall be applicable thereto. Tenant shall pay Rent in good funds and legal
tender of the United States of America, together with any applicable sales tax
or other taxes on Rent as further described in Article 14. Tenant shall pay Rent
without any deduction, recoupment, setoff or counterclaim, and without relief
from any valuation or appraisement laws, except as may be expressly provided in
this Lease. No delay by Landlord in providing the Statement shall be deemed a
default by Landlord or, unless Landlord fails to provide the Statement within
one (1) calendar year following the close of
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<PAGE>
the calendar year to which the Statement relates, a waiver of Landlord's right
to require payment of Tenant's obligations for actual or estimated Taxes or
Expenses. In no event shall a decrease in Taxes or Expenses serve to decrease
Base Rent. Landlord may apply payments received from Tenant to any obligations
of Tenant then accrued, without regard to such obligations as may be designated
by Tenant.
ARTICLE 4: CONDITION OF PREMISES
A. GENERAL CONDITION OF PREMISES. Tenant has inspected, or had an
opportunity to inspect, the Premises (and portions of the Property, Systems and
Equipment providing access to or serving the Premises), and agrees to accept the
same "as is" without any agreements, representations, understandings or
obligations on the part of Landlord to perform any alterations, repairs or
improvements, except as may be expressly provided under this Lease (which term
includes any Exhibit hereto). To the extent that Landlord has expressly agreed
to perform any improvements to the Premises under this Lease, the following
provisions shall apply.
Landlord warrants and represents that, as of the date that Landlord
delivers possession of the Premises to Tenant: (1) the Systems and Equipment
serving the Property and the systems and equipment serving the Premises (to the
extent that the same are part of the Work under Exhibit C) shall be in good
working order, (2) the Building and the Premises have been constructed in a good
and workmanlike manner, so as to be free of defects, and (3) the common areas of
the Building shall comply with all Laws, including, but not limited to, the
Americans with Disabilities Act. Landlord's sole liability for breach of any of
the foregoing warranties shall be the obligation to make such repairs or
alterations to the Property and the Premises as are necessary to cure the
violation of the warranty.
B. IMPROVEMENTS. With respect to the improvements to the Premises that
Landlord is required to perform under EXHIBIT C to this Lease: (i) Landlord
shall use diligent, good faith efforts to substantially complete any such
improvements to an extent that Tenant can reasonably occupy the Premises for the
operation and conduct of business by the Commencement Date set forth in Article
1, subject to Article 2 and the other provisions of this Lease, (ii) Tenant
shall use diligent, good faith efforts to cooperate, and to cause its space
planners, architects, contractors, agents and employees to cooperate, diligently
and in good faith with Landlord and any space planners, architects, contractors
or other parties designated by Landlord, such that any such improvements to the
Premises can be planned, permits can be obtained, and the work can be
substantially completed by the Commencement Date set forth in Article 1, and
(ii) the Commencement Date, Rent and Tenant's other obligations shall be subject
to postponement as further described in Article 2. In the event of any dispute
as to whether any such improvements have been substantially completed, Landlord
shall refer the matter to a third party mutually and reasonably agreeable to
both Landlord and Tenant whose decision shall be final and binding on the
parties.
ARTICLE 5: QUIET ENJOYMENT
Landlord agrees that, if Tenant timely pays the Rent and performs the
terms and provisions hereunder, Tenant shall hold and enjoy the Premises during
the Term free of lawful claims by any party acting by or through Landlord,
subject to all other terms and provisions of this Lease.
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ARTICLE 6: UTILITIES AND SERVICES
A. STANDARD LANDLORD UTILITIES AND SERVICES. Landlord shall provide the
following utilities and services (the cost of which shall be included in
Expenses):
(i) Heat and air-conditioning to provide a temperature required, in
Landlord's reasonable opinion and in accordance with applicable Law, for
occupancy of the Premises as offices during Building Hours (as defined in
Article 30).
(ii) Water from city mains for drinking, lavatory and toilet purposes
only, at those points of supply provided for nonexclusive general use of tenants
at the Property, or points of supply in the Premises installed by or with
Landlord's written consent for such purposes.
(iii) Cleaning and trash removal in and about the Premises
substantially in accordance with the specifications attached hereto as Exhibit
J.
(iv) Passenger elevator service at all times (if the Property has such
equipment serving the Premises, and subject to changes in the number of
elevators in service after Building Hours or at other times), and freight
elevator service (if the Property has such equipment serving the Premises, and
subject to scheduling by Landlord), in common with Landlord and other parties.
(v) Electricity for building standard overhead office lighting
fixtures, and equipment and accessories customary for offices, where: (a) Tenant
uses an amount of electricity that is generally consistent with average office
use at the Property, as reasonably determined by Landlord, (b) the Systems and
Equipment are suitable, and the safe and lawful capacity thereof is not
exceeded, and (c) sufficient capacity remains at all times for other existing
and future tenants, as reasonably determined by Landlord. Landlord shall include
in Expenses the cost of replacement of lamps, starters and ballasts for Building
standard lighting fixtures within the Premises; Tenant shall pay such costs for
non-Building standard lighting fixtures within the Premises.
(vi) Sprinklering of the Building in accordance with
applicable Laws.
(vii) Landscaping and snow removal services comparable to those
provided as standard services by landlords for office space in comparable
buildings in the vicinity.
B. ADDITIONAL UTILITIES AND SERVICES. Landlord shall seek to provide
such extra utilities. or services as Tenant may from time to time request, if
the same are reasonable and feasible for Landlord to provide and do not involve
modifications or additions to the Property or existing Systems and Equipment,
and if Landlord shall receive Tenant's request within a reasonable period prior
to the time such extra utilities or services are required. Landlord may comply
with written or oral requests by any officer or employee of Tenant, unless
Tenant shall notify Landlord of, or Landlord shall request, the names of
authorized individuals (up to 3 for each floor on which the Premises are
located) and procedures for written requests. Tenant shall pay for the actual
cost to Landlord of any extra utilities or services, including Landlord's
actual, reasonable out-of-pocket costs for architects, engineers, consultants
and other parties relating to such extra utilities or services, and a fee equal
to five percent (5%) of such costs. All payments for such extra utilities or
services shall be due at the same time as the installment of
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Base Rent with which the same are billed, or if billed separately, shall be due
within fifteen (15) days after such billing. Landlord shall not be responsible
for inadequate air-conditioning or ventilation whenever the use or occupancy of
the Premises exceeds the normal capacity or design loads of, affects the
temperature or humidity otherwise maintained by, or otherwise adversely affects
the operation of, the Systems and Equipment for the Property, whether due to
items of equipment or machinery generating heat, above normal concentrations of
personnel or equipment, or alterations to the Premises made by or through Tenant
without balancing the air or installing supplemental HVAC equipment. In any such
case, Landlord may elect to balance the air and/or install, operate, maintain
and replace such supplemental HVAC equipment during the Term, at Tenant's
expense, as an extra utility or service (or require that Tenant arrange for the
same as Work under Article 9). Notwithstanding the foregoing to the contrary, in
lieu of charging separately for additional utilities and services, Landlord may
reasonably elect from time to time to expand the amounts of services and
utilities available without separate charge, in which case the costs thereof
shall be included in Expenses, subject to the following sentence. In the event
that, in any calendar year, any increase in Expenses resulting from the
expansion of the amounts of services and utilities included in Expenses pursuant
to the preceding sentence is estimated to exceed $0.50 per rentable square foot
in the aggregate in any calendar year, then Landlord shall be required to obtain
Tenant's approval (which shall not be unreasonably withheld, conditioned or
delayed) of any amounts exceeding $0.50 per rentable square foot, provided that
this sentence shall not apply to: (1) any increase in Expenses due to a
reasonable increase in normal Building hours, and (2) any increase in Expenses
due to changes in how a service or utility already included in Expenses is
furnished.
Notwithstanding anything to the contrary contained herein, it is
understood and agreed by the parties that, due to the size and manner of design
of the Building, HVAC services shall be available at all times without
additional charge therefor (other than as part of Expenses), except that
Landlord reserves the right pursuant to Article 6A(v) above to determine in a
reasonable manner and charge Tenant for the cost of electricity used by Tenant
in excess of average office use. If Tenant disputes the excess electricity
charges as determined by Landlord, Tenant shall have the right, at Tenant's
expense, to engage a consultant to provide another determination of such charges
and Landlord agrees to reasonably and in good faith consider the merit and
accuracy of such alternative determination in making its final determination of
the excess electricity charges.
C. MONITORING. Landlord may install and operate meters, submeters or
any other reasonable system for monitoring or estimating any services or
utilities used by Tenant in excess of those required to be provided by Landlord
under this Article (including a system for Landlord's engineer to reasonably
estimate any such excess usage). If such system indicates such excess services
or utilities, Tenant shall pay Landlord's charges and fees as described in
Paragraph B above for installing and operating such system and any supplementary
air-conditioning, ventilation, heat, electrical or other systems or equipment
(or adjustments or modifications to the existing Systems and Equipment) which
Landlord may make, and Landlord's charges for such amount of excess services or
utilities used by Tenant.
D. INTERRUPTIONS AND CHANGES. Landlord shall have no liability for
interruptions, variations, shortages, failures, changes in quality, quantity,
character or availability of any utilities or services caused by repairs,
maintenance, replacements, alterations (including any freon retrofit work),
labor controversies, accidents, inability to obtain services, utilities or
supplies, governmental or utility company acts or omissions, requirements,
guidelines or requests, or other causes beyond Landlord's reasonable control (or
under any circumstances with respect to utilities or services not required to be
provided by Landlord hereunder). Under
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no circumstances whatsoever shall any of the foregoing be deemed an eviction or
disturbance of Tenant's use and possession of the Premises or any part thereof,
serve to abate Rent, or relieve Tenant from performance of Tenant's obligations
under this Lease; provided, however, after Landlord's receipt of notice,
Landlord shall act reasonably and in good faith to cure the interruption or
curtailment of services or utilities as soon as practicable thereafter.
E. ABATEMENT OF RENT. Notwithstanding Paragraph D above to the
contrary, if (a) any services or utilities required to be provided by Landlord
hereunder are interrupted or discontinued as a result of Landlord's negligence
(and not caused by Tenant or its employees, agents or contractors), and Tenant
is unable to and does not use, the Premises as a result of such interruption or
discontinuance, and (b) Tenant shall have given written notice respecting such
interruption or discontinuance to Landlord, and Landlord shall have failed to
cure such interruption or discontinuance within five (5) consecutive business
days after receiving such notice, Base Rent hereunder shall thereafter be abated
until such time as such services or utilities are restored or Tenant begins
using, the Premises again, whichever shall first occur. Notwithstanding anything
to the contrary contained herein, if Tenant, or its contractors, or their
respective officers, employees, contractors, invitees or agents, delay Landlord
in restoring the utilities or services, Landlord shall have additional time to
complete the restoration equal to such delay and Tenant shall pay Landlord all
Rent for the period of such delay.
ARTICLE 7: USE, COMPLIANCE WITH LAWS, AND RULES
A. USE OF PREMISES. Tenant shall use the Premises only for the
permitted use identified in Article 1, and no other purpose whatsoever, subject
to the other provisions of this Article and this Lease. Unless expressly
permitted in Article 1. Tenant shall not use or permit the Premises to be used
as a: (1) social welfare office, (ii) medical, dental, psychology, psychiatry,
or science office or laboratory, (iii) multiparty "executive" or "legal" suite
type offices, (iv) data processing, telecommunications or telemarketing center,
(v) school, educational or training facility, (vi) employment, placement,
recruiting or clerical support agency, (vii) computerized vehicle sales, loan or
"findee" service, (viii) governmental, quasi-governmental trade association or
union office or activities, (ix) travel agency or reservation center, (x) radio
or television studio or broadcasting or recording facility, or (xi) retail real
estate brokerage, retail stock brokerage, retail bank or other retail financial
institution, loan office, depository, check-cashing or wire transferring
service.
B. COMPLIANCE WITH LAWS. Subject to Section 4A and except to the extent
that such compliance is allocated to Landlord elsewhere under this Lease, the
Tenant shall comply with all Laws relating to the Premises and Tenant's use of
the Premises and Property, and shall promptly reimburse (within thirty (30) days
after Tenant's receipt of Landlord's invoice) Landlord for any expenses Landlord
incurs for work or other matters relating to areas outside of the Premises in
order to comply with Laws as a result of Tenant's use of the Premises or
Property; provided, Tenant shall not be required by this provision to perform
structure or capital improvements to the Premises unless required by a Law
pertaining to, (i) Tenant's particular use of the Premises (as opposed to a Law
that applies to office tenants in general), (ii) work performed by or for Tenant
or any Transferee (i.e. excluding any improvements in work that Landlord is
required to perform under this Lease), or (iii) other acts or omissions of
Tenant or any Transferee.
Landlord shall comply with all Laws affecting the structure or common
areas of the Property (the cost of which shall be included in Expenses, but only
to the extent permitted in the definition thereof in Article 30), except to the
extent that such compliance is Tenant's
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responsibility under this Lease or is the responsibility of another occupant of
the Property. To best of Landlord's actual knowledge as of the date of this
Lease and as of the Commencement Date, there are no current violations of Laws
affecting the Premises or Tenant's use of the Property.
C. RULES. Tenant shall comply with the Rules set forth in EXHIBIT B
attached hereto (the "Rules"). Landlord shall have the right, by notice to
Tenant, to reasonably amend such Rules and supplement the same with other
reasonable Rules relating to the Property, or the promotion of safety, care,
efficiency, cleanliness or good order therein provided that such amended Rules
are not contrary to this Lease. Although Landlord shall not discriminate against
Tenant in the enforcement of the Rules, nothing herein shall be construed to
give Tenant or any other Person any claim, demand or cause of action against
Landlord arising out of the violation of Laws or the Rules by any other tenant
or visitor of the Property, or out of the enforcement, modification or waiver of
the Rules by Landlord in any particular instance.
D. OTHER REQUIREMENTS. So long as Tenant receives written notification
of the applicable requirements, Tenant shall not use or permit the Premises or
Property to be used in a way that will: (i) violate the requirements of
Landlord's insurers, the American Insurance Association, or any board of
underwriters, (ii) cause a cancellation of Landlord's policies, impair the
insurability of the Property, or increase Landlord's premiums (any such increase
shall be paid by Tenant without such payment being deemed permission to continue
such activity or a waiver of any other remedies of Landlord), or (iii) violate
the requirements of any certificates of occupancy issued for the Premises or the
Property, or any other requirements, covenants, conditions or restrictions
affecting the Property at any time (provided none of the foregoing shall
prohibit or materially impair use of the Premises as set forth in Article 1 in
compliance with the other provisions of this Lease and the enjoyment of the
other rights accorded to Tenant under this Lease). Landlord hereby warrants that
the Plans for initial construction of the Property have been approved under that
certain Declaration of Covenants, Conditions, Restrictions and Easements of the
Meridian Business Campus filed with the Durham County Register of Deeds in Book
1235, pages 404 through 437 and Book 2285, pages 810-815.
E. ANTENNA. Landlord agrees that Tenant shall have the right to install
an antenna on the roof of the Building provided that the parties enter into an
amendment to the Lease substantially in the form of Exhibits H and H-1 which are
attached hereto and made a part hereof. The size, location and other matters
relating to the antenna shall be subject to Landlord's approval as further set
forth in Exhibit H.
ARTICLE 8: MAINTENANCE AND REPAIRS
Except for customary cleaning and trash removal provided by Landlord
under Article 6, casualty damage to be repaired by Landlord under Article 11 and
any other obligation of Landlord hereunder. Tenant shall keep and maintain (or
cause to be kept and maintained) the Premises in good and sanitary condition,
working order and repair, in compliance with all applicable Laws as described in
Article 7, and as required under other provisions of this Lease, including the
Rules (including any carpet and other flooring material, paint and
wall-coverings, doors, windows, ceilings, interior surfaces of walls, lighting,
plumbing and other fixtures, alterations, improvements, and systems and
equipment in or exclusively serving the Premises whether installed by Landlord
or Tenant). In the event that any repairs, maintenance or replacements are
required, Tenant shall promptly notify Landlord and arrange for the same either:
(i) through Landlord for such reasonable charges as Landlord may establish from
time to time, payable within fifteen (15) days after billing, or (ii) at
Tenant's option, by engaging such
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contractors or staff as Landlord shall first designate or approve in writing to
perform such work, all in a first class, workmanlike manner approved by Landlord
in advance in writing and otherwise in compliance with Article 9 respecting
"Work". Tenant shall promptly notify Landlord concerning the necessity for any
repairs or other work hereunder and upon completion thereof. Tenant shall pay
Landlord for any repairs, maintenance and replacements to areas of the Property
outside the Premises caused, in whole or in part, as a result of moving any
furniture, fixtures, or other property to or from the Premises, or otherwise by
Tenant or its employees, agents, contractors, or visitors (subject to Article
10C). Except as provided in the preceding sentence, or for damage covered under
Article 11, Landlord shall keep the roof, structure, Systems and Equipment, and
common areas of the Property in good and sanitary condition, working order and
repair (the cost of which shall be included in Expenses to the extent permitted
in the definition thereof in Article 30).
ARTICLE 9: ALTERATIONS AND LIENS
A. ALTERATIONS AND APPROVAL. Tenant shall not attach any fixtures,
equipment or other items to the Premises, or paint or make any other additions,
changes, alterations or improvements to the Premises or the Systems and
Equipment serving the Premises (all such work is referred to collectively herein
as the "Work"), without the prior written consent of Landlord. Landlord shall
not unreasonably withhold, condition or delay consent, except that Landlord
reserves the right to withhold consent in Landlord's sole discretion for Work
affecting the structure, safety, efficiency or security of the Property or
Premises, the Systems and Equipment, or the appearance of the Premises from any
common or public areas. Landlord may only require removal of Work installed by
or for Tenant as provided under Article 23.
Notwithstanding the foregoing to the contrary, Tenant may perform minor
Work in the Premises without Landlord's consent, and without paying Landlord's
fee described below (but subject to paying Landlord's out-of-pocket costs as
described below), provided: (i) such work shall be primarily cosmetic in nature
(i.e. shall primarily consist of paint, carpeting and/or wallcoverings), shall
not affect the Systems or Equipment, and shall not affect the structure of the
Property, (ii) Tenant shall give reasonable advance notice to, and shall
coordinate the scheduling of such work with, Landlord, (iii) such Work shall not
cost more than $100,000 in the aggregate in any twelve (12) month period, and
(iv) such Work shall be subject to all other provisions of this Lease,
including, but not limited to, the other provisions of this Article (other than
Paragraph B), and the Rules attached hereto as EXHIBIT B.
B. APPROVAL CONDITIONS. Landlord reserves the right to impose
reasonable requirements as a condition of such consent or otherwise in
connection with the Work, including requirements that Tenant: (i) use parties
contained on Landlord's approved list (if reputable and available on
commercially reasonable terms) or submit for Landlord's prior written approval
the names, addresses and background information concerning all architects,
engineers, contractors, subcontractors and suppliers Tenant proposes to use,
(ii) submit for Landlord's written approval detailed plans and specifications
prepared by licensed and competent architects and engineers, (iii) obtain and
post permits, (iv) provide additional insurance, bonds (or evidence reasonably
satisfactory to Landlord that the contractor(s) to be used by Tenant are
bondable) and/or other reasonable security and/or documentation protecting
against damages, liability and liens, (v) use union labor (if Landlord uses
union labor in the Durham area or if the use of nonunion labor would cause
strikes, picketing, boycotts or other labor disturbances, disputes or unrest at
the Property or at Landlord's other buildings in the Durham area), (vi) permit
Landlord or its representatives to inspect the Work at reasonable times, and
(vii) comply
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with such other reasonable requirements as Landlord may impose concerning the
manner and times in which such Work shall be done. Landlord may require that all
Work be performed under Landlord's supervision. If Landlord consents, inspects,
supervises, recommends or designates any architects, engineers, contractors,
subcontractors or suppliers, the same shall not be deemed a warranty as to the
adequacy of the design, workmanship or quality of materials, or compliance of
the Work with the plans and specifications or any Laws.
C. PERFORMANCE OF WORK. All Work shall be performed: (i) in a
thoroughly first class, professional and workmanlike manner, (ii) only with
materials that are new, high quality, and free of material defects, (iii) only
by parties, and strictly in accordance with plans, specifications, and other
matters, approved or designated by Landlord in advance in writing, (iv) so as
not to adversely affect the Systems and Equipment or the structural components
of the Property, (v) diligently to completion and so as to avoid any
disturbance, disruption or inconvenience to other tenants and the operation of
the Property, and (vi) in compliance with all Laws, the Rules and other
provisions of this Lease, and such other reasonable requirements as Landlord may
impose concerning the manner and times in which such Work shall be done. Any
floor, wall or ceiling coring work or penetrations or use of noisy or heavy
equipment, any of which occurs at or near a demising wall and which may
interfere with the conduct of business by other tenants at the Property shall,
at Landlord's option, be performed at times other than Building Hours (at
Tenant's sole cost). If Tenant fails to perform the Work as required herein or
the materials supplied fail to comply herewith or with the specifications
approved by Landlord, and Tenant fails to cure such failure within 48 hours
after written or oral notice by Landlord (except notice shall not be required in
emergencies), Landlord shall have the right to stop the Work until such failure
is cured (which shall not limit Landlord's other remedies and shall not serve to
abate the Rent or Tenant's other obligations under this Lease). Upon completion
of any Work hereunder, Tenant shall provide Landlord with "as built" plans,
copies of all construction contracts, and proof of payment for all labor and
materials.
D. LIENS. Tenant shall pay all costs for the Work when due. Tenant
shall keep the Property, Premises and this Lease free from any mechanic's,
materialman's, architect's, engineer's or similar liens or encumbrances, and any
claims therefor, or stop or violation notices, in connection with any Work.
Tenant shall give Landlord notice at least ten (10) days prior to the
commencement of any Work (or such additional time as may be necessary under
applicable Laws), to afford Landlord the opportunity of posting and recording
appropriate notices of nonresponsibility. Tenant shall remove any such claim,
lien or encumbrance, or stop or violation notices of record, by bond or
otherwise within thirty (30) days after notice by Landlord. If Tenant fails to
do so, Landlord may pay the amount (or any portion thereof) or take such other
action as Landlord deems necessary to remove such claim, lien or encumbrance, or
stop or violation notices, without being responsible for investigating the
validity thereof. The amount so paid and costs incurred by Landlord shall be
deemed additional Rent under this Lease payable upon demand, without limitation
as to other remedies available to Landlord. Nothing contained in this Lease
shall authorize Tenant to do any act which shall subject Landlord's title to, or
any Lender's interest in, the Property or Premises to any such claims, liens or
encumbrances, or stop or violation notices, whether claimed pursuant to statute
or other Law or express or implied contract.
E. LANDLORD'S FEES AND COSTS. Except as specifically provided to the
contrary in Exhibit C, Tenant shall pay Landlord a fee for reviewing,
scheduling, monitoring, supervising, and providing access for or in connection
with the Work, in an amount equal to five percent (5%) of the total cost of the
Work (including costs of plans and permits therefor), and Landlord's
out-of-pocket costs, including any costs for security, utilities, trash removal,
temporary barricades,
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janitorial, engineering, architectural or consulting services, and other matters
in connection with the Work, payable within fifteen (15) days after billing.
ARTICLE 10: INSURANCE, SUBROGATION, AND WAIVER OF CLAIMS
A. REQUIRED INSURANCE. Tenant shall maintain during the Term: (i)
commercial general liability ("CGL") insurance, with limits of not less than
$1,000,000 for personal injury, bodily injury or death, and property damage or
destruction (including loss of use thereof, combined single limit, for any one
occurrence, and $2,000,000 in the aggregate per policy year, with endorsements
(a) for contractual liability covering Tenant's indemnity obligations under this
Lease, and (b) adding Landlord, the management company for the Property, and
other parties reasonably designated by Landlord, as additional insureds, and
(ii) primary, noncontributory, extended coverage or "allrisk" property damage
insurance (including installation floater insurance during any alterations or
improvements that Tenant makes to the Premises after the improvements made
pursuant to Exhibit C) covering any alterations or improvements beyond any work
or allowance provided by Landlord under this Lease (provided that Tenant shall
be required to insure improvements made pursuant to Exhibit C only to the extent
that the cost of such improvements exceeds $2.00 per rentable square foot over
the Allowance given by Landlord pursuant to Exhibit C, as further set forth
below), and Tenant's personal property, business records, fixtures and
equipment, for damage or other loss caused by fire or other casualty or cause
including, but not limited to, vandalism and malicious mischief, theft, water
damage of any type, including sprinkler leakage, bursting or stoppage of pipes,
explosion, business interruption (for at least nine (9) months), and other
insurable risks in amounts not less than the full insurable replacement value of
such property and full insurable value of such other interests of Tenant
(subject to reasonable deductible amounts).
B. CERTIFICATES AND OTHER MATTERS. Tenant shall provide Landlord with
certificates evidencing the coverage required hereunder prior to the
Commencement Date, or Tenant's entry to the Premises for delivery of materials
or construction of improvements or any other purpose (whichever first occurs).
Such certificates shall state that such insurance coverage may not be reduced,
canceled or allowed to expire without at least thirty (30) days' prior written
notice to Landlord, and shall include, as attachments, originals of the
additional insured endorsements to Tenant's CGL policy required above. Tenant
shall provide renewal certificates to Landlord at least thirty (30) days prior
to expiration of such policies. Except as provided to the contrary herein, any
insurance carried by Landlord or Tenant shall be for the sole benefit of the
party carrying such insurance. Tenant's insurance policies shall be primary to
all policies of Landlord and any other additional insureds (whose policies shall
be deemed excess and noncontributory). All insurance required hereunder shall be
provided by responsible insurers licensed in the State in which the Property is
located, and shall have a general policy holders rating of at least A and a
financial rating of at least X in the then current edition of Best's Insurance
Reports. Landlord disclaims any, representation as to whether the foregoing
coverages will be adequate to protect Tenant.
C. MUTUAL WAIVER OF CLAIMS AND SUBROGATION. Notwithstanding anything to
the contrary contained in this Lease (including indemnity provisions), the
parties hereby mutually hereby waive all claims against each other for all
losses covered or required to be covered hereunder by their respective insurance
policies, and waive all rights of subrogation of their respective insurers; for
purposes hereof, any deductible amount shall be treated as though it were
recoverable under such policies. SUCH MUTUAL WAIVER OF CLAIMS SHALL APPLY
REGARDLESS OF THE NEGLIGENCE OR GROSS NEGLIGENCE OF THE OTHER PARTY
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OR ITS AFFILIATES, AGENTS OR EMPLOYEES. The parties agree that their respective
insurance policies are now, or shall be, endorsed such that said waiver of
subrogation shall not affect the right of the insured to recover thereunder.
D. LANDLORD'S INSURANCE. Landlord agrees to maintain, as part of
Expenses, during the Term, commercial general liability insurance, and property
damage insurance on the Property covering such risks and in such amounts as
Landlord shall deem commercially reasonable, and such other insurance as
Landlord shall deem commercially reasonable (subject to such deductibles,
self-insurance retention amounts, blanket and umbrella policy arrangements or
other features as Landlord deems commercially reasonable); provided, (i) such
commercial general liability insurance shall be at least One Million Dollars
($1,000,000.00) per occurrence and Two Million Dollars ($2,000,000.00) general
aggregate, and (ii) such property damage insurance shall cover the Building, and
leasehold improvements to the extent provided or paid for by Landlord (provided
that Landlord shall be required to insure improvements made pursuant to Exhibit
C to the extent that the cost of such improvements does not exceed $2.00 per
rentable square foot over the Allowance given by Landlord pursuant to Exhibit
C), and shall be in the amount of the full replacement cost, excluding
basements, footings and foundations (subject, in each case, to such deductibles,
self-insurance retention amounts, blanket and umbrella policy arrangements or
other features as Landlord deems commercially reasonable).
ARTICLE II: CASUALTY DAMAGE
A. RESTORATION. Tenant shall promptly notify Landlord of any damage to
the Premises by fire or other casualty. If the Premises or any common areas of
the Property providing access thereto shall be damaged by fire or other
casualty, Landlord shall use available insurance proceeds and diligently proceed
in good faith to restore the same. Such restoration shall be to substantially
the same condition as prior to the casualty, except for modifications required
by zoning and building codes and other Laws or by any Lender, any other
modifications to the common areas deemed desirable by Landlord (provided access
to the Premises is not materially impaired), and except that Landlord shall not
be required to repair or replace any of Tenant's furniture, furnishings,
fixtures, systems or equipment, or any alterations or improvements in excess of
the improvements made pursuant to Exhibit C which Landlord is required to insure
pursuant to Section 10D above. Tenant shall reasonably cooperate in approving
any plans for repairs to the Premises hereunder, and in vacating the Premises to
the extent reasonably required to avoid any interference or delay in Landlord's
repair work. Promptly following completion of Landlord's work, Tenant shall
repair and replace Tenant's furniture, furnishings, fixtures, systems or
equipment, and any alterations or improvements made by Tenant in excess of those
provided by Landlord, subject to and in compliance with the other provisions of
this Lease.
B. ABATEMENT OF RENT. Landlord shall not be liable for any
inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's
business resulting in any way from such damage or the repair thereof. However,
Landlord shall allow Tenant a proportionate abatement of Rent from the date of
the casualty through the date that Landlord substantially completes Landlord's
repair obligations hereunder (or the date that Landlord would have substantially
completed such repairs, but for delays by Tenant or any other occupant of the
Premises, or any of their agents, employees, invitees, Transferees and
contractors), provided such abatement: (i) shall apply only to the extent the
Premises are untenantable for the purposes permitted under this Lease and not
used by Tenant as a result thereof, based proportionately on the square footage
of the Premises so affected and not used, and (ii) shall not apply if Tenant or
any other
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occupant of the Premises, or any of their agents, employees, invitees,
Transferees or contractors were negligent in causing the damage.
C. TERMINATION OF LEASE BY LANDLORD. Notwithstanding the foregoing to
the contrary, in lieu of performing the restoration work, Landlord may elect to
terminate this Lease by notifying Tenant in writing of such termination within
sixty (60) days after the date of damage (such termination notice to specify the
basis for termination and to include a termination date providing at least
thirty (30) days for Tenant to vacate the Premises), if the Property shall be
materially damaged by the negligence or intentional misconduct of Tenant or any
other occupant of the Premises, or any of their agents, employees, invitees,
Transferees or contractors, or if the Property shall be damaged by fire or other
casualty or cause such that: (i) repairs to the Premises and access thereto
cannot reasonably be completed within 120 days after the casualty without the
payment of overtime or other premiums, (ii) more than twenty-five percent (25%)
of the Premises is affected by the damage and fewer than twenty-four (24) months
remain in the Term, or any material damage occurs to the Premises during the
last twelve (12) months of the Term, unless, in either event, Tenant elects to
irrevocably exercise the extension option set forth in Exhibit G, (iii) any
Lender shall require that the insurance proceeds or any material portion thereof
be used to retire the Mortgage debt (or shall terminate the ground lease, as the
case may be), provided, however, that Landlord shall use commercially reasonable
efforts to cause the Lender to permit such insurance proceeds to be used for
restoration of the Property, or the damage is not fully covered, except for
reasonable deductible amounts, by Landlord's insurance policies, or (iv) the
cost of the repairs, alterations, restoration or improvement work would exceed
thirty-five percent (35%) of the replacement value of the Building (whether or
not the Premises are affected by the damage). Tenant agrees that the abatement
of Rent provided herein shall be Tenant's sole recourse in the event of such
damage, and waives any other rights Tenant may have under any applicable Law to
perform repairs or terminate the Lease by reason of damage to the Premises or
Property.
D. TERMINATION OF LEASE BY TENANT. Notwithstanding Paragraph C above to
the contrary, Tenant may terminate this Lease if Tenant is unable to use all or
a substantial portion of the Premises as a result of fire or other casualty not
caused by the negligence or intentional misconduct of Tenant or its employees or
agents, and: (i) Landlord fails to commence the restoration work within sixty
(60) days after the casualty, (ii) such work is estimated (which estimate
Landlord shall provide within sixty (60) days following the casualty) to take
(without the use of overtime labor or other premiums) more than 120 days to
complete after the casualty, (iii) Landlord fails to substantially complete the
repairs to the Premises and access thereto within 180 days after the casualty,
(iv) more than 50% of the Premises is affected by the damage, and fewer than 24
months remain in the Term, or (v) more than 25% of the Premises is affected by
the damage, and fewer than 12 months remain in the Term. In order to exercise
any of the foregoing termination rights, Tenant must send Landlord at least
sixty (60) days (but not more than 120 days) advance notice specifying the basis
for termination, and such notice must be given no later than fifteen (15) days
following the occurrence of the condition serving as the basis for the
termination right invoked by Tenant. Such termination rights shall not be
available to Tenant if: (a) Landlord substantially completes the repairs to the
Premises and access thereto within thirty (30) days after Tenants notice.
Notwithstanding anything to the contrary contained herein, if Tenant, or its
officers, employees, contractors, invitees or agents delay Landlord in
performing the repairs, Landlord shall have additional time to complete the work
equal to such delay and Tenant shall pay Landlord all Rent for the period of
such delay.
E. TERM. The word "Term" as used in this Article 11, subclauses C and D
shall include any extension or renewal period duly exercised by Tenant pursuant
to any express
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option granted to Tenant under or in connection with this Lease; such option may
be exercised before or after the casualty, so long as it is duly exercised
pursuant to the terms and within the time periods specified in the provision
granting such option to extend or renew.
ARTICLE 12: CONDEMNATION
If at least fifty percent (50%) of the rentable area of the Premises
shall be taken by power of eminent domain or condemned by a competent authority
or by conveyance in lieu thereof for public or quasi-public use
("Condemnation"), including any temporary taking for a period of one year or
longer, this Lease shall terminate on the date possession for such use is so
taken. If: (i) less than fifty percent (50%) of the Premises is taken, but the
taking includes or affects a material portion of the Building or Property, or
the economical operation thereof, or (ii) the taking is temporary and will be in
effect for less than one year but more than thirty (30) days, then in either
such event, Landlord may elect to terminate this Lease upon at least thirty (30)
days' prior notice to Tenant. The parties further agree that: (a) if this Lease
is terminated, all Rent shall be apportioned as of the date of such termination
or the date of such taking, whichever shall first occur, (b) if the taking is
temporary, Rent shall not be abated for the period of the taking, but Tenant may
seek a condemnation award therefor (and the Term shall not be extended thereby),
and (c) if this Lease is not terminated but any part of the Premises is
permanently taken, the Rent shall be proportionately abated based on the square
footage of the Premises so taken. Landlord shall be entitled to receive the
entire award or payment in connection with such Condemnation and Tenant hereby
assigns to Landlord any interest therein for the value of Tenant's unexpired
leasehold estate or any other claim and waives any right to participate therein,
except that Tenant shall have the right to file any separate claim available to
Tenant for a temporary taking of the leasehold as described above, and for
moving expenses and any taking of Tenant's personal property, provided such
award is separately payable to Tenant and does not diminish the award available
to Landlord or any Lender.
ARTICLE 13: ASSIGNMENT AND SUBLETTING
A. TRANSFERS. Tenant shall not, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld, conditioned or
delayed as further described below: (i) assign, mortgage, pledge, hypothecate,
encumber, or permit any lien to attach to, or otherwise transfer, this Lease or
any interest hereunder, by operation of Law or otherwise, (ii) sublet the
Premises or any part thereof, (iii) permit the use of the Premises by any
Persons other than Tenant and its employees and Tenant Affiliates (all of the
foregoing are hereinafter sometimes referred to collectively as "Transfers" and
any Person to whom any Transfer is made or sought to be made is hereinafter
sometimes referred to as a "Transferee"), or (iv) advertise the Premises or
Lease for Transfers. If Tenant shall desire Landlord's consent to any Transfer,
Tenant shall notify Landlord in writing, which notice shall include: (a) the
proposed effective date (which shall not be less than thirty (30) nor more than
180 days after Tenant's notice), (b) the portion of the Premises to be
Transferred (herein called the "Subject Space"), (c) the terms of the proposed
Transfer and the consideration therefor, the name, address and background
information concerning the proposed Transferee, and a true and complete copy of
all proposed Transfer documentation, (d) financial statements (balance sheets
and income/expense statements for the current and prior two (2) years) of the
proposed Transferee, in form and detail reasonably satisfactory to Landlord,
certified by an officer, partner or owner of the Transferee, (e) at least two
(2) favorable financial and business character/reputation references respecting
the Transferee from independent third parties (including a current or recent
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commercial landlord), and any other reasonable information to enable Landlord to
determine the financial responsibility, character, and reputation of the
proposed Transferee, nature of such Transferee's business and proposed use of
the Subject Space, and such other information as Landlord may reasonably
require. Any Transfer made without complying with this Article shall, at
Landlord's option, be null, void and of no effect, or shall constitute a Default
under this Lease. Whether or not Landlord shall grant consent, Tenant shall pay
$500 towards Landlord's review and processing expenses, as well as any
reasonable legal fees incurred by Landlord for outside counsel within fifteen
(15) days after written request by Landlord.
B. APPROVAL. Landlord will not unreasonably withhold its consent to any
proposed Transfer of the Subject Space to the Transferee on the terms specified
in Tenant's notice. The parties hereby agree that it shall be reasonable under
this Lease and under any applicable Law for Landlord to withhold consent to any
proposed Transfer where one or more of the following applies (without limitation
as to other reasonable grounds for withholding consent): (i) the Transferee is
of a character or reputation or engaged in a business which is not consistent
with the quality or nature of the Property or other tenants of the Property,
(ii) the Transferee intends to use the Subject Space for purposes which are not
permitted under this Lease, (iii) the Subject Space is not regular in shape with
appropriate means of ingress and egress suitable for normal renting purposes,
would result in more than a reasonable number of occupants, or would require
increased services by Landlord, (iv) the Transferee is either a government (or
agency or instrumentality thereof), (v) the proposed Transferee or any affiliate
thereof is an occupant of the Property or has negotiated to lease space in the
Property from Landlord during the prior six (6) months, (vi) the proposed
Transferee does not have, in Landlord's sole but reasonable good faith
determination, satisfactory references or a reasonable financial condition in
relation to the obligations to be assumed in connection with the Transfer, (vii)
the Transfer involves a partial or collateral assignment, or a mortgage, pledge,
hypothecation, or other encumbrance or lien on this Lease, (viii) the proposed
Transfer involves conversion, merger or consolidation of Tenant into a limited
liability company or limited liability partnership which would have the legal
effect of releasing Tenant from any obligations under this Lease, unless all or
substantially all of the business and assets of Tenant are transferred from
Tenant to the surviving limited liability company or limited liability
partnership, (ix) the proposed Transfer would cause Landlord to be in violation
of any Laws or any other lease or agreement to which Landlord is a party as of
the date of this Lease, or (x) Tenant has committed and failed to cure a
Default.
C. TRANSFER PREMIUMS. If Landlord consents to a Transfer, and as a
condition thereto which the parties hereby agree is reasonable, Tenant shall
retain fifty percent (50%) of any Transfer Premium, and shall pay Landlord fifty
percent (50%) of any Transfer Premium, derived by Tenant from such Transfer.
"Transfer Premium" shall mean: (i) for a lease assignment, all consideration
paid or payable therefor, and (ii) for a sublease, all rent, additional rent or
other consideration paid by such Transferee in excess of the Rent payable by
Tenant under this Lease (on a monthly basis during the Term, and on a per
rentable square foot basis, if less than all of the Premises is transferred). In
exchange for Landlord's agreement to permit Tenant to retain fifty percent (50%)
of any Transfer Premium herein, Tenant shall be responsible for any costs
incurred by Tenant in connection with such Transfer, such as brokerage
commissions, attorneys' fees and leasehold improvements; Tenant shall have the
right to recover the aforesaid costs prior to making any payments of the
Transfer Premium to Landlord. "Transfer Premium" shall also include so-called
"key money," or other bonus amount paid by Transferee to Tenant, and any payment
in excess of fair market value for services rendered by Tenant to Transferee or
in excess of Tenant's fair market value for assets, fixtures, inventory,
equipment or furniture transferred by Tenant to Transferee; provided, however,
that this sentence shall not apply to sale by Tenant of all or substantially all
of its assets. If part of the
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consideration for such Transfer shall be payable other than in cash, Landlord's
share of such non-cash consideration shall be in such form as is reasonably
satisfactory to Landlord. Tenant shall pay the percentage of the Transfer
Premium due Landlord hereunder within fifteen (15) days after Tenant receives
any Transfer Premium from the Transferee.
D. INTENTIONALLY OMITTED.
E. TERMS OF CONSENT. If Landlord consents to a Transfer: (i) the terms
and conditions of this Lease, including Tenant's liability for the Subject
Space, shall in no way be deemed to have been waived or modified, (ii) such
consent shall not be deemed consent to any further Transfer by either Tenant or
a Transferee, (iii) intentionally omitted, (iv) Tenant shall deliver to
Landlord, promptly after execution, an original executed copy of all
documentation pertaining to the Transfer in form reasonably acceptable to
Landlord, and (v) Tenant shall furnish a complete statement, certified by an
independent certified public accountant, or Tenant's chief financial officer,
setting forth in detail the computation of any Transfer Premium that Tenant has
derived and shall derive from such Transfer. Landlord or its authorized
representatives shall have the right at all reasonable times to audit the books,
records and papers of Tenant and any Transferee relating to any Transfer (except
a Transfer in connection with a sale by Tenant of all or substantially all of
its assets), and shall have the right to make copies thereof. If the Transfer
Premium respecting any Transfer shall be found to have been understated, Tenant
shall pay the deficiency within fifteen (15) days after demand (and if
understated by more than five percent (5%), Tenant shall include with such
payment Landlord's costs of such audit). Any sublease hereunder shall be
subordinate and subject to the provisions of this Lease, and if this Lease shall
be terminated during the term of any sublease, whether based on Default or
mutual agreement, Landlord shall have the right to: (a) deem such sublease as
merged and canceled and repossess the Subject Space by any lawful means, or (b)
require that such subtenant attorn to and recognize Landlord as its landlord
under such sublease with respect to obligations arising thereafter, subject to
the terms of Landlord's standard form of attornment documentation. If Tenant
shall commit a Default under this Lease, Landlord is hereby irrevocably
authorized to direct any Transferee to make all payments under or in connection
with the Transfer directly to Landlord (which Landlord shall apply toward
Tenant's obligations under this Lease).
F. CERTAIN TRANSFERS. For purposes of this Lease, the term "Transfer"
shall also include, and all of the foregoing provisions shall apply to: (i) the
conversion, merger or consolidation of Tenant into a limited liability company
or limited liability partnership, (ii) if Tenant is a partnership or limited
liability company, the withdrawal or change, voluntary, involuntary or by
operation of law, of a majority of the partners or members, or a transfer of a
majority of partnership or membership interests, within a twelve month period,
or the dissolution of the partnership or company, and (iii) if Tenant is a
closely held corporation (i.e., whose stock is not publicly held and not traded
through an exchange or over the counter), the dissolution, merger, consolidation
or other reorganization of Tenant, or within a twelve month period: (a) the sale
or other transfer of more than an aggregate of 50% of the voting shares of
Tenant (other than to immediate family members by reason or gift or death) or
(b) the sale, mortgage, hypothecation or pledge of more than an aggregate of 50%
of Tenant's net assets.
Notwithstanding the foregoing to the contrary, a transaction described
in Section 13F above shall not be deemed to be a Transfer requiring Landlord's
consent so long as, after the transaction, Tenant or the surviving entity (as
the case may be) shall directly or indirectly own all or substantially all of
the business and assets of Tenant.
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G. TRANSFER TO TENANT AFFILIATES. Notwithstanding anything to the
contrary in this Article, Tenant may, without Landlord's consent, assign this
Lease to any party (herein referred to as a "Tenant Affiliate") which directly
or indirectly: (i) wholly owns or controls Tenant, (ii) is wholly owned or
controlled by Tenant, (iii) is under common ownership or control with Tenant, or
(iv) into which Tenant or any of the foregoing parties is merged, consolidated
or reorganized, or to which all or substantially all of Tenant's assets or any
such other party's assets are sold, so long as the resulting entity will be an
ongoing business with a net worth and financial condition at least as strong as
that of the initial named Tenant herein on the date of this Lease (and in the
event of such a sale of all or substantially all of Tenant's assets to any
party, Tenant shall include an assignment and assumption of this Lease as part
of the assets transferred thereunder); provided: (a) Landlord shall receive at
least fifteen (15) days advance notice describing the structure of the
transaction, the parties involved, and the financial information required
herein, certified by an officer of Tenant and/or the Transferee, and a copy of
the executed transfer document (in form reasonably acceptable to Landlord
consistent with the foregoing provisions) promptly after execution, (b) Tenant
shall remain liable for all of Tenant's obligations under this Lease, (c) the
Transferee shall expressly assume all of Tenant's obligations under this Lease,
and (d) this provision shall not be deemed consent to any further sublease,
assignment or other Transfer.
ARTICLE 14: PERSONAL PROPERTY, RENT AND OTHER TAXES
Tenant shall pay, prior to delinquency, all taxes, charges or other
governmental impositions assessed against or levied upon all of Tenant's
fixtures, furnishings, personal property, built-in and modular furniture, and
systems and equipment located in or exclusively serving the Premises (to the
extent that such items are not included in Taxes), notwithstanding that certain
such items may become Landlord's property under Article 23 upon termination of
the Lease. Whenever possible, Tenant shall cause all such items to be assessed
and billed separately from the other property of Landlord. In the event any such
items shall be assessed and billed with the other property of Landlord, Tenant
shall pay Landlord its share of such taxes, charges or other governmental
impositions within fifteen (15) days after Landlord delivers a statement and a
copy of the assessment or other documentation showing the amount of impositions
applicable to Tenant's property. Tenant shall pay any rent tax, sales tax,
service tax, transfer tax, value added tax, or any other applicable tax on the
Rent, utilities or services herein, the privilege of renting, using or occupying
the Premises or collecting Rent therefrom, or otherwise respecting this Lease or
any other document entered in connection herewith.
ARTICLE 15: LANDLORD'S REMEDIES
A. DEFAULT. The occurrence of any one or more of the following events
shall constitute a "Default" by Tenant and shall give rise to Landlord's
remedies set forth in Paragraph B below: (i) failure to make when due any
payment of Rent, unless such failure is cured within five (5) business days
after notice; (ii) failure to observe or perform any term or condition of this
Lease other than the payment of Rent (or the other matters expressly described
herein), unless such failure is cured within any period of time following notice
expressly provided with respect thereto in other Articles hereof, or otherwise
within thirty (30) days following notice (provided, if the nature of Tenant's
failure is such that more time is reasonably required in order to cure, Tenant
shall not be in Default if Tenant commences to cure promptly within such period,
diligently seeks, and keeps Landlord reasonably advised of efforts to cure such
failure to completion, and completes such cure within sixty (60) days following
Landlord's notice); (iii) failure to cure immediately upon notice thereof any
condition which is hazardous, materially
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interferes with another tenant or the operation or leasing of the Property, or
may cause the imposition of a fine, penalty or other remedy on Landlord or its
agents or affiliates, (iv) violating Article 13 respecting Transfers, or
abandoning, vacating or failing to occupy the Premises for more than thirty (30)
days coupled with a failure to pay Rent for such period beyond the applicable
cure period, or (v) (a) making by Tenant or any guarantor of this Lease
("Guarantor") of any general assignment for the benefit of creditors, (b) filing
by or for reorganization or arrangement under any Law relating to bankruptcy or
insolvency (unless, in the case of a petition filed against Tenant or such
Guarantor, the same is dismissed within ninety (90) days), (c) appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located in the Premises or of Tenant's interest in this Lease, where possession
is not restored to Tenant within thirty (30) days, (d) attachment, execution or
other judicial seizure of substantially all of Tenant's assets located in the
Premises or of Tenant's interest in this Lease, (e) Tenant's or any Guarantor's
convening of a meeting of its creditors or any class thereof for the purpose of
effecting a moratorium upon or composition of its debts, (o Tenant's or any
Guarantor's insolvency or failure, or admission of an inability, to pay debts as
they mature, or (g) a violation by Tenant under any other lease or agreement
with Landlord or any affiliate thereof which is not cured within the time
permitted for cure thereunder. If Tenant violates the same term or condition of
this Lease within the scope of subsections (i) or (ii) above on more than two
(2) occasions during any twelve (12) month period, and Landlord has provided
notice to Tenant thereof within thirty (30) days following each such violation,
then Landlord shall have the right to exercise all remedies for any further
violations of the same term or condition during the next twelve (12) months
without providing further notice or an opportunity to cure such violation,
except that with respect to defaults in the payment of Rent, Tenant shall have
the cure period set forth in Article 30A(i) above . The notice and cure periods
herein are intended to satisfy and run concurrently with any notice and cure
periods provided by Law, and shall not be in addition thereto; provided,
Landlord may elect to comply with such notice and cure periods provided by Law
in lieu of the notice and cure periods provided herein.
B. REMEDIES. If a Default occurs, Landlord shall have the rights and
remedies hereinafter set forth to the extent permitted by Law, which shall be
distinct, separate and cumulative with and in addition to any other right or
remedy allowed under any Law or other provision of this Lease:
(1) Landlord may terminate this Lease, reenter and repossess the
Premises by detainer suit, summary proceedings or other lawful means, and
recover from Tenant: (i) any unpaid Rent as of the termination date, (ii) the
amount by which: (a) any unpaid Rent which would have accrued after the
termination date during the balance of the Term exceeds (b) the reasonable
rental value of the Premises under a lease substantially similar to this Lease,
taking into account, among other things, the condition of the Premises, market
conditions, the period of time the Premises may reasonably remain vacant before
Landlord is able to release the same to a suitable replacement tenant, and (iii)
any other amounts necessary to compensate Landlord for all damages proximately
caused by Tenant's failure to perform its obligations under this Lease. For
purposes of computing the amount of Rent herein that would have accrued after
the termination date, Tenant's obligations for Taxes and Expenses shall be
projected based upon the average rate of increase in such items from the
Commencement Date through the termination date (or if such period shall be less
than three years, then based on Landlord's reasonable estimates). The amounts
computed in accordance with the foregoing subclauses (a) and (b) shall both be
discounted in accordance with accepted financial practice at the rate of five
percent (5%) per annum to the then present value.
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(2) Landlord may terminate Tenant's right of possession, reenter and
repossess the Premises by detainer suit, summary proceedings or other lawful
means, with or without terminating this Lease (except as required by Law), and
recover from Tenant: (i) any unpaid Rent as of the date possession is
terminated, (ii) any unpaid Rent which thereafter accrues during the Term from
the date possession is terminated through the time of judgment (or which may
have accrued from the time of any earlier judgment obtained by Landlord), less
any consideration received from replacement tenants as further described and
applied pursuant to Paragraph H, below, and (iii) any other amounts necessary to
compensate Landlord for all damages proximately caused by Tenant's failure to
perform its obligations under this Lease. Tenant shall pay any such amounts to
Landlord as the same accrue or after the same have accrued from time to time
upon demand. At any time after terminating Tenant's right to possession as
provided herein, Landlord may terminate this Lease as provided in clause (1)
above by notice to Tenant, and Landlord may pursue such other remedies as may be
available to Landlord under this Lease or applicable Law.
Notwithstanding anything in this Lease to the contrary or under law or
in equity, Landlord shall not be entitled to terminate this Lease or Tenant's
rights of possession hereunder without obtaining a judgment or order from a
court of competent jurisdiction.
C. MITIGATION OF DAMAGES. If Landlord terminates this Lease or Tenant's
right to possession, Landlord shall be obligated to mitigate Landlord's damages,
provided, however, that: (i) Landlord shall be required only to use reasonable
efforts to mitigate, which shall not exceed such efforts as Landlord generally
uses to lease other space at the Property, (ii) Landlord will not be deemed to
have failed to mitigate if Landlord or its affiliates lease any other portions
of the Property or other projects owned by Landlord or its affiliates in the
same geographic area, before reletting all or any portion of the Premises, and
(iii) any failure to mitigate as described herein with respect to any period of
time shall only reduce the Rent and other amounts to which Landlord is entitled
hereunder by the reasonable rental value of the Premises during such period,
taking into account the factors described in clause B(l) above. In recognition
that the value of the Property depends on the rental rates and terms of leases
therein, Landlord's rejection of a prospective replacement tenant based on an
offer of rentals below fair market value (as reasonably determined by Landlord)
for new leases of comparable space at the Property at the time in question, or
at Landlord's option, below the rates provided in this Lease, or containing
terms less favorable than those contained herein, shall not, in and of itself,
give rise to a claim by Tenant that Landlord failed to mitigate Landlord's
damages. If Landlord has not terminated this Lease or Tenant's right to
possession, Landlord shall have no obligation to mitigate under any
circumstances and may permit the Premises to remain vacant or abandoned; in such
case, Tenant may seek to mitigate damages by attempting to sublease the Premises
or assign this Lease pursuant to Article 13.
D. RELETTING. If this Lease or Tenant's right to possession is
terminated, or Tenant abandons the Premises, Landlord may: (i) enter and secure
the Premises, change the locks, install barricades, remove any improvements,
fixtures or other property of Tenant therein, perform any decorating,
remodelling, repairs, alterations, improvements or additions and take such other
actions as Landlord shall determine in Landlord's sole discretion to prevent
damage or deterioration to the Premises or prepare the same for reletting, and
(ii) relet all or any portion of the Premises (separately or as part of a larger
space), for any rent, use or period of time (which may extend beyond the Term
hereof, and upon any other terms as Landlord shall determine in Landlord's sole
discretion, directly or as Tenant's agent (if permitted or required by
applicable Law). The consideration received from such reletting shall be applied
pursuant to the terms of Paragraph H hereof, and if such consideration, as so
applied, is not sufficient to cover
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all Rent and damages to which Landlord may be entitled hereunder, Tenant shall
pay any deficiency to Landlord as the same accrues or after the same has accrued
from time to time upon demand, subject to the other provisions hereof.
E. SPECIFIC PERFORMANCE, COLLECTION OF RENT AND ACCELERATION. Landlord
shall at all times have the right without prior demand or notice except as
required by applicable Law to: (i) seek any declaratory, injunctive or other
equitable relief, and specifically enforce this Lease or restrain or enjoin a
violation of any provision hereof, and (ii) sue for and collect any unpaid Rent
which has accrued.
F. LATE CHARGES, INTEREST, AND RETURNED CHECKS. Beginning with the next
such occurrence within twelve (12) months after Landlord's written notice to
Tenant that Rent or any portion thereof was not received within five (5)
business days after the date that it was due, Tenant shall pay, as additional
Rent, a service charge of Two Hundred Fifty Dollars ($250.00) or three and
00/100 percent (3.0%) of the delinquent amount, whichever is greater, if any
portion of Rent is not received within five (5) business days after it is due.
In addition, any Rent not paid when due shall accrue interest from the due date
at the Default Rate until payment is received by Landlord. Such service charges
and interest payments shall not be deemed consent by Landlord to late payments,
nor a waiver of Landlord's right to insist upon timely payments at any time, nor
a waiver of any remedies to which Landlord is entitled as a result of the late
payment of Rent. If Landlord receives two (2) or more checks from Tenant which
are returned by Tenant's bank for insufficient funds, Landlord may require that
all checks thereafter be bank certified or cashier's checks (without limiting
Landlord's other remedies). All bank service charges resulting from any returned
checks shall be borne by Tenant.
G. LANDLORD'S CURE OF TENANT VIOLATIONS. If Tenant fails to perform any
obligation under this Lease for ten (10) days after notice thereof by Landlord
(except that no notice shall be required in emergencies), Landlord shall have
the right (but not the duty), to perform such obligation on behalf and for the
account of Tenant. In such event, Tenant shall reimburse Landlord upon demand,
as additional Rent, for all expenses incurred by Landlord in performing such
obligation, and interest thereon at the Default Rate from the date such expenses
were incurred. Landlord's performance of Tenant's obligations hereunder shall
not be deemed a waiver or release of Tenant therefrom.
H. OTHER MATTERS. No reentry or repossession, repairs, changes,
alterations and additions, reletting, or any other action or omission by
Landlord shall be construed as an election by Landlord to terminate this Lease
or Tenant's right to possession, nor shall the same operate to release Tenant in
whole or in part from any of Tenant's obligations hereunder, unless express
notice of such intention is sent by Landlord to Tenant (and if applicable Law
permits, and Landlord shall not have expressly terminated this Lease in writing,
then any termination shall be deemed a termination of Tenant's right of
possession only). Landlord may bring suits for amounts owed by Tenant hereunder
or any portions thereof, as the same accrue or after the same have accrued, and
no suit or recovery of any portion due hereunder shall be deemed a waiver of
Landlord's right to collect all amounts to which Landlord is entitled hereunder,
nor shall the same serve as any defense to any subsequent suit brought for any
amount not theretofore reduced to judgment. Landlord may pursue one or more
remedies against Tenant and need not make an election of remedies until findings
of fact are made by a court of competent jurisdiction. All rent and other
consideration paid by any replacement tenants shall be applied at Landlord's
option: (i) first, to the Costs of Reletting, (ii) second, to the payment of all
costs of enforcing this Lease against Tenant or any Guarantor, (iii) third, to
the payment of all interest and service charges accruing hereunder, (iv) fourth,
to the payment of Rent theretofore accrued, and (v)
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with the residue, if any, to be held by Landlord and applied to the payment of
Rent and other obligations of Tenants as the same become due (and with any
remaining residue to be retained by Landlord). "Costs of Reletting" shall
include without limitation, all costs and expenses incurred by Landlord for any
repairs or other matters described in Paragraph D above, brokerage commissions,
advertising costs, attorney's fees, any economic incentives given to enter
leases with replacement tenants, and costs of collecting rent from replacement
tenants. Landlord shall be under no obligation to observe or perform any
provision of this Lease on its part to be observed or perform any provision of
this Lease on its part to be observed or performed which involves the payment of
money by Landlord to Tenant, or the performance of alterations or improvements
to the Premises, while Tenant is in violation or Default of this Lease. The
times set forth herein for the curing of Defaults by Tenant are of the essence
of this Lease. Tenant hereby irrevocably waives any right otherwise available
under any Law to redeem or reinstate this Lease, or Tenant's right to
possession, after this Lease, or Tenant's rights to possession, is terminated
based on a Default by Tenant.
ARTICLE 16: SECURITY DEPOSIT
Tenant shall deposit with Landlord a letter of credit ("Letter of
Credit") in the amount set forth in Article 1 ("Security Deposit"), upon
Tenant's execution and submission of this Lease. The Security Deposit shall
serve as security for the prompt, full and faithful performance by Tenant of the
terms and provisions of this Lease. If Tenant commits a Default, or owes any
amounts to Landlord upon the expiration or earlier termination of this Lease,
Landlord may use or apply the whole or any part of the Security Deposit for the
payment of Tenants obligations hereunder. The use or application of the Security
Deposit or any portion thereof shall not prevent Landlord from exercising any
other right or remedy provided hereunder or under any Law and shall not be
construed as liquidated damages. In the event the Security Deposit is reduced by
such use or application. Tenant shall deposit with Landlord within ten (10) days
after notice, an amount sufficient to restore the full amount of the Security
Deposit. Unless required by applicable Law, Landlord shall not be required to
keep any cash portion of the Security Deposit separate from Landlord's general
funds or pay interest on the Security Deposit. Any remaining portion of the
Security Deposit shall be returned to Tenant (or, at Landlord's option, to the
last assignee of Tenant's interest in this Lease) within sixty (60) days after
Tenant (or such assignee) has vacated the Premises in accordance with Article
23. Tenant shall not assign, pledge or otherwise transfer any interest in the
Security Deposit except as part of an assignment of this Lease approved by
Landlord under Article 13, and any attempt to do so shall be null and void. See
Exhibit l for additional requirements regarding this Letter of Credit.
ARTICLE 17: ATTORNEYS' FEES AND VENUE
In the event of any litigation or arbitration between the parties
relating to this Lease, the Premises or Property (including pretrial, trial,
appellate, administrative, bankruptcy or insolvency proceedings), the prevailing
party shall be entitled to recover its attorney's fees and costs as part of the
judgment, award or settlement therein. In the event, of a breach of this Lease
by either party which does not result in litigation but which causes the
non-breaching party to incur attorney's fees or costs, the breaching party shall
reimburse such reasonable fees and costs to the non-breaching party upon demand.
If either party or any of its officers, directors, trustees, beneficiaries,
partners, agents, affiliates or employees shall be made a party to any
litigation or arbitration commenced by or against the other party and is not at
fault, the other party shall pay all costs, expenses and attorney's fees
incurred by such parties in connection with such litigation. Any action or
proceeding brought by either party against the other for any matter
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arising out of or in any way relating to this Lease. the Premises or the
Property, shall be heard, at Landlord's option, in the court having jurisdiction
located closest to the Property.
ARTICLE 18: SUBORDINATION, ATTORNMENT AND LENDER PROTECTION
This Lease is subject and subordinate to all Mortgages now or hereafter
placed upon the Property, and all other encumbrances and matters of public
record applicable to the Property; provided, this Lease shall only be
subordinate to Mortgages made hereafter if the holders thereof agree to enter
into their commercially reasonable standard forms of subordination, non-
disturbance and attornment agreement with Tenant. Whether before or after any
foreclosure or power of sale proceedings are initiated or completed by any
Lender or a deed in lien is granted (or any ground lease is terminated), Tenant
agrees, upon written request of any such Lender or any purchaser at such sale,
to attorn and pay Rent to such party, and recognize such party as Landlord
(provided such Lender or purchaser shall agree not to disturb Tenant's occupancy
and other rights of Tenant hereunder so long as Tenant does not Default
hereunder, on a form of agreement customarily used by, or otherwise reasonably
acceptable to, such party). However, in the event of attornment, no Lender shall
be: (i) liable for any act or omission of Landlord, or subject to any offsets or
defenses which Tenant might have against, Landlord (arising prior to such Lender
becoming Landlord under such attornment), or (ii) liable for any security
deposit or bound by any Rent prepaid more than one (1) month and not actually
received by Lender. Any Lender may elect to make this Lease prior to the lien of
its Mortgage by written notice to Tenant, and if the Lender of any prior
Mortgage shall require, this Lease shall be prior to any subordinate Mortgage,
such elections shall be effective upon written notice to Tenant, or shall be
effective as of such earlier or later date set forth in such notice. Tenant
agrees to give any Lender by certified mail, return receipt requested, a copy of
any notice of default served by Tenant upon Landlord, provided that prior to
such notice Tenant has been notified in writing (by way of service on Tenant of
a copy of an assignment of leases, or otherwise) of the address of such Lender
Tenant further agrees that if Landlord shall have failed to cure such default
within the time permitted Landlord for, cure under this Lease, any such Lender
whose address has been provided to Tenant shall have an additional period of
thirty (30) days in which to cure (or such additional time as may be required
due to causes beyond such Lender's reasonable control, including time to obtain
possession of the Property by appointment of receiver, power of sale or judicial
action). Except as expressly provided to the contrary herein, the provisions of
this Article shall be self-operative; however Tenant shall execute and deliver,
within ten (10) days after request therefor, such documentation as Landlord or
any Lender may request from time to time, whether prior to or after a
foreclosure or power of sale proceeding is initiated or completed, a deed in
lieu is delivered, or a ground lease is terminated, in order to further confirm
or effectuate the matters set forth in this Article in recordable form.
Landlord hereby represents and warrants that there is no Mortgage
encumbering the Property as of the date of this Lease.
ARTICLE 19: ESTOPPEL CERTIFICATES
Tenant shall from time to time, within fifteen (15) days after written
request from Landlord, execute, acknowledge and deliver a statement certifying,
(1) that this Lease is unmodified and in full force and effect or, if modified,
stating the nature of such modification and certifying that this Lease as so
modified, is in full force and effect (or specifying the ground for claiming
that this Lease is not in force and effect), (ii) the dates to which the Rent
has been paid, and the amount of any Security Deposit, (iii) that Tenant is in
possession of the Premises,
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and paying Rent on a current basis with, to Tenant's actual knowledge, no
offsets, defenses or claims, or specifying the same if any are claimed, (iv)
that there are not, to Tenant's actual knowledge, any uncured defaults on the
part of Landlord or Tenant, or specifying the same if any are claimed, and (v)
certifying such other factual matters as Landlord may reasonably request, or as
may be reasonably requested by Landlord's current or prospective Lenders,
insurance carriers, auditors, and prospective purchasers (and including a
comparable certification statement from any subtenant respecting its sublease).
Any such statement may be relied upon by any such parties. If Tenant shall fail
to execute and return such statement within the time required herein, Tenant
shall be in Default, and shall be deemed to have agreed with the matters set
forth therein (which shall not be in limitation of Landlord's other remedies).
ARTICLE 20: RIGHTS RESERVED BY LANDLORD
Except to the extent expressly limited herein, Landlord reserves full
rights to control the Property (which rights may be exercised without subjecting
Landlord to claims for constructive eviction, abatement of Rent, damages or
other claims of any kind), including more particularly, but without limitation,
the following rights:
A. GENERAL MATTERS. To: (i) change the name or street address of the
Property or designation of the Premises, (ii) install and maintain signs on and
about the Property, and grant any other Person the right to do so, (iii) retain
at all times, and use in appropriate instances, keys to all doors within and
into the Premises (subject to the following paragraph concerning Secure Areas),
(iv) grant to any Person the right to conduct any business or render any service
at the Property, whether or not the same are similar to the use permitted Tenant
by this Lease, (v) have access for Landlord and other tenants of the Property to
any mail chutes located on the Premises according to the rules of the United
States Postal Service (and to install or remove such chutes), and (vi) in case
of fire, invasion, insurrection, riot, civil disorder, public excitement or
other dangerous condition, or threat thereof: (a) limit or prevent access to the
Property, (b) shut down elevator service, (c) activate elevator emergency
controls, and (d) otherwise take such action or preventative measures deemed
necessary by Landlord for the safety of tenants of the Property or the
protection of the Property and other property located thereon or therein (but
this provision shall impose no duty on Landlord to take such actions, and no
liability for actions taken in good faith).
Notwithstanding anything contained in this Lease to the contrary,
Tenant shall have the right to designate certain areas within the Premises as
secure areas ("Secure Areas") which shall be locked by Tenant and to which
Landlord shall not have the key or other method of access (such as key cards or
security codes). Tenant acknowledges that Landlord's lack of access to the
Secure Areas may impair the ability of Landlord or other persons (including,
without limitation, fire and police personnel) to respond to emergency
situations in the Secure Areas. Tenant waives and releases all claims, demands,
liabilities or losses (collectively, "claims") which may arise or occur as a
result of any delay in gaining access to the Secure Areas by Landlord or other
persons (including, without limitation, fire and police personnel) in emergency
situations, and Tenant shall defend, indemnify and hold Landlord and its agents
and employees harmless from any such claims by third parties. Landlord shall
have no obligation to provide any janitorial services to the Secure Areas.
B. ACCESS TO PREMISES. Subject to the following provisions, to enter
the Premises in order to: (i) inspect the Premises during normal business hours,
(ii) supply cleaning service or other services to be provided Tenant hereunder,
(iii) show the Premises (during normal
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business hours and after at least one (1) business day prior notice) to current
and prospective Lenders, insurers, purchasers, governmental authorities, and
their representatives, and during the last twelve (12) months of Tenant's
occupancy, show the Premises (during normal business hours and after at least
one (1) business days' prior notice) to prospective tenants and leasing brokers,
and (iv) intentionally omitted, and (v) perform any work or take any other
actions under Paragraph C below, or exercise other rights of Landlord under this
Lease or applicable Laws, However, except in emergencies, or for cleaning or
other routine services to be provided Tenant under this Lease, Landlord shall:
(a) provide reasonable advance written or oral notice to Tenant's onsite manager
or other appropriate person, (b) take reasonable steps to minimize any
disruption to Tenant's business, and (c) at Tenant's option, be accompanied
during entry into the Premises by a representative of Tenant. If Tenant requests
that any such access occur before or after Building Hours, and Landlord
schedules the work accordingly, Tenant shall pay all overtime and other
additional costs in connection therewith.
C. CHANGES TO THE PROPERTY. Subject to the last sentence of this
Paragraph, to: (i) paint and decorate, (ii) perform repairs or maintenance,
(iii) add land, buildings, easements or other interests to, or sell or eliminate
the same from, the Property, grant interests and rights in the Property to other
parties, and convert common areas to rentable areas and rentable areas to common
areas, and (iv) make replacements, restorations, renovations, alterations,
additions and improvements, structural or otherwise (including freon retrofit
work), in and to the Property or any part thereof, including any adjacent
building, structure, facility, land, street or alley, or change the uses thereof
(other than Tenant's permitted use under this Lease), including changes,
reductions or additions of corridors, entrances, doors, lobbies, parking
facilities and other areas, structural support columns and shear walls,
elevators, stairs, escalators, mezzanines, solar tint windows or film, kiosks,
planters, sculptures, displays, and other amenities and features therein, and
changes relating to the connection with or entrance into or use of the Property
or any other adjoining or adjacent building or buildings, now existing or
hereafter constructed. In connection with such matters, Landlord may among other
things erect scaffolding, barricades and other structures, open ceilings, close
entry ways, restrooms, elevators, stairways, corridors, parking and other areas
and facilities, and take such other actions as Landlord deems appropriate.
However, Landlord shall: (a) maintain reasonable access to the Premises, (b) in
connection with entering the Premises, comply with Paragraph B above, and (c) to
the extent that, in Landlord's reasonable opinion, the Premises are materially
affected, give Tenant reasonable prior notice of such changes to the Property.
Notwithstanding anything to the contrary contained herein, changes which may be
made by Landlord as permitted under this Section shall not increase Tenant's
Share.
D. INTENTIONALLY OMITTED.
ARTICLE 21: RIGHT TO CURE
If Landlord shall fail to perform any obligation under this Lease
required to be performed by Landlord, Landlord shall not be deemed to be in
default hereunder nor subject to any claims for damages of any kind, unless such
failure shall have continued for a period of thirty (30) days (or, in an
emergency situation, five (5) days) after notice thereof by Tenant (provided, if
the nature of Landlord's failure is such that more time is reasonably required
in order to cure, Landlord shall not be in default if Landlord commences to cure
within such applicable period and thereafter diligently seeks to cure such
failure to completion). If Landlord shall default and fail to cure as provided
herein, Tenant shall have such rights and remedies as may be available to Tenant
under applicable Laws, subject to the other provisions of this Lease; provided,
Tenant shall have no right of self-help to perform repairs or any other
obligation of Landlord (except as
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set forth in the following paragraph), and shall have no right to withhold,
setoff, or abate Rent, except as may be expressly provided in this Lease
(including, without limitation, Section 6E), and shall have no right to
terminate this Lease without entry of an order and judgment by a court of
competent jurisdiction (provided that should Tenant prove a breach by Landlord
entitling Tenant to terminate this Lease, Tenant shall not be responsible for
performance of obligations under this Lease arising after the earlier to occur
of the following:
(a) the effective termination date as determined by the court in its
order or judgment, or
(b) the later to occur of: (i) Landlord's breach giving rise to such
termination, or (ii) any applicable period for Landlord to cure following notice
or other time period specifically set forth in this Lease, such as the time
periods set forth in Article 11.D (as determined by the court in its order or
judgment); provided, in any case, Tenant shall comply with all obligations under
this Lease until Tenant vacates the Premises in the condition required Article
23 of this Lease. Tenant hereby expressly waives the provisions of any Law to
the contrary.
Notwithstanding anything to the contrary contained herein, if Landlord
fails to make any repairs within the Premises which Landlord is obligated to
perform under this Lease, and which do not affect the Systems or Equipment, and
such failure directly and adversely affects Tenants use of the Premises, and
Tenant gives Landlord reasonable advance notice of Tenant's intent to perform
such work, describing the same in detail, and enclosing a copy of the proposed
contract (which notice shall be at least ten (10) days in advance, except to the
extent that there is an immediate threat to Tenants property or business or to
persons), then Tenant may make such repairs in a good and workmanlike manner
using a contractor which is then currently approved in writing by Landlord to
perform work in the Property provided Landlord has previously provided to Tenant
such a list (and in absence of such list, such repairs shall be made by a
contractor selected by Tenant), at a competitive and reasonable cost, and
subject to all of the other provisions of this Lease respecting work at the
Property other than those provisions requiring any additional approvals from
Landlord, and the Property rules and regulations pertaining thereto. In such
case, Landlord shall reimburse Tenant therefor within thirty (30) days after the
completion of the repairs by Tenant and Landlord's receipt of a copy of the paid
invoice and reasonable supporting documentation, including, but not limited to,
recordable lien releases and affidavits of payment in statutory form acceptable
to Landlord, but Tenant shall have no right to withhold or set off such amount
against Rent.
ARTICLE 22: INDEMNIFICATION
Subject to the provisions of Articles 10C and 11, Tenant shall defend,
indemnify and hold Landlord harmless from and against any and all claims,
demands, losses, penalties, fines, fees, charges, assessments, liabilities,
damages, judgments, orders, decrees, actions, administrative or other
proceedings, costs and expenses (including reasonable attorneys' and expert
witness fees, and court costs actually incurred), arising or alleged to arise
from: (i) any violation or breach of this Lease or applicable Law by any Tenant
Parties (as defined below), (ii) damage, loss or injury to persons, property or
business directly or indirectly arising out of any Tenant Party's use of the
Premises or negligent use of the Property, or out of any other intentional
misconduct or negligent act or omission of any Tenant Parties, and (iii) any
other damage, loss or injury to persons, property or business occurring in,
about or from the Premises, except to the extent that such other damage, loss or
injury to persons, property or business is caused by the negligence or
intentional misconduct of Landlord. For purposes of
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this provision, "Tenant Parties" shall mean Tenant, any other occupant of the
Premises and any of their respective agents, employees, invitees, Transferees
and contractors.
Subject to Articles 10C and 11 of this Lease, and excluding matters
covered by Tenant's foregoing indemnity obligations, Landlord shall defend,
indemnify and hold harmless Tenant from and against claims, demands, losses,
penalties, fines, fees, charges, assessments, liabilities, damages, judgments,
orders, decrees, actions, administrative or other proceedings, costs and
expenses (including reasonable attorneys' and expert witness fees, and court
costs) arising in the common areas of the Property from or relating to any loss
of life, damage or injury to persons, property or business to the extent caused
by or in connection with any violation of this Lease by, or any intentional
misconduct or negligent acts or omissions of, Landlord or Landlord's agents or
employees.
ARTICLE 23: RETURN OF POSSESSION
A. GENERAL PROVISIONS. At the expiration or earlier termination of this
Lease or Tenant's right of possession, Tenant shall vacate and surrender
possession of the entire Premises in the condition required under Article 8 and
the Rules, ordinary wear and tear and casualty damage excepted shall surrender
all keys and key cards, and any parking transmitters, stickers or cards, to
Landlord, and shall remove all personal property and office trade fixtures that
may be readily removed without damage to the Premises or Property (and Tenant
hereby waives any statutory notices to vacate or quit the Premises upon
expiration of this Lease), subject to the following provisions.
B. LANDLORD'S PROPERTY. All improvements, fixtures and other items,
including ceiling light fixtures; HVAC equipment (unless paid for by Tenant);
plumbing fixtures; hot water heaters; fire suppression and sprinkler systems;
Lines under Article 28; interior partitioning, built-in shelves and cabinets,
interior stairs, wall coverings, carpeting and other flooring, blinds, drapes
and window treatments (unless paid for by Tenant); in or serving the Premises,
whether installed by Tenant or Landlord, and any other items installed or
provided by Landlord or at Landlord's expense, shall be Landlord's property and
shall remain upon the Premises, all without compensation, allowance or credit to
Tenant, unless Landlord elects otherwise as provided in Paragraph C below.
C. REMOVAL OF ITEMS BY TENANT. Notwithstanding the foregoing to the
contrary, if prior to expiration or earlier termination of this Lease or within
thirty (30) days thereafter Landlord so directs by notice, Tenant shall promptly
remove such of the items described in Paragraph B above as are designated in
such notice and restore the Premises to the condition prior to the installation
of such items in a good and workmanlike manner; provided, Landlord shall not
require removal of any such items that: (i) already existed in the Premises
before this Lease and Tenant's occupancy of the Premises, or (ii) involve office
improvements that are installed by or for Tenant pursuant to the provisions of
this Lease (including any Exhibit hereto) except to the extent that Landlord
reserves the right to require such removal in connection with Landlord's
approval of the plans for such improvements.
If Tenant elects to remove any HVAC equipment and/or backup generators
that were paid for by Tenant, it is understood and agreed that Tenant's
obligation to restore the Premises shall include both the obligation to repair
any physical damage to the Premises or Property caused by such removal and to
rebalance the HVAC system within the Premises to the extent that such
rebalancing is necessary because of such removal of HVAC equipment being removed
by Tenant.
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D. TENANT'S FAILURE TO REMOVE ITEMS. If Tenant shall fail to remove any
items from the Premises as required hereunder, Landlord may do so and Tenant
shall pay Landlord's charges therefor upon demand. All such property removed
from the Premises by Landlord pursuant to any provisions of this Lease or any
Law may be handled or stored by Landlord at Tenant's expense, and Landlord shall
in no event be responsible for the value, preservation or safekeeping thereof.
All such property not removed from the Premises or retaken from storage by
Tenant within thirty (30) days after expiration or earlier termination of this
Lease or Tenant's right to possession shall, at Landlord's option, be
conclusively deemed to have been conveyed by Tenant to Landlord as if by bill of
sale without payment by Landlord. Unless prohibited by applicable Law, Landlord
shall have a lien against such property for the costs incurred in removing and
storing the same.
ARTICLE 24: HOLDING OVER
Unless Landlord expressly agrees otherwise in writing, Tenant shall pay
Landlord 150% for the first month and 200% thereafter of the amount of Rent then
applicable prorated on a per diem basis for each day that Tenant shall fail to
vacate or surrender possession of the Premises or any part thereof after
expiration or earlier termination of this Lease as required under Article 23,
together with all damages (direct and consequential) sustained by Landlord on
account thereof. Tenant shall pay such amount of Rent monthly in advance
(subject to refund of any partial month occupancy), and such other amounts on
demand. The foregoing provisions, and Landlord's acceptance of any such amounts,
shall not serve as permission for Tenant to holdover, nor serve to extend the
Term (although Tenant shall remain a tenant-at-sufferance bound to comply with
all other provisions of this Lease until Tenant properly vacates the Premises,
including Article 23). Landlord shall have the right at any time after
expiration or earlier termination of this Lease or Tenant's right to possession
to reenter and possess the Premises and remove all property and persons
therefrom, and Landlord shall have such other remedies for holdover as may be
available to Landlord under other provisions of this Lease or applicable Laws.
ARTICLE 25: NOTICES
Except as expressly provided to the contrary in this Lease, every
notice or other communication to be given by either party to the other with
respect hereto or to the Premises or Property, shall be in writing and shall not
be effective for any purpose unless the same shall be served personally or by
national air courier service providing for next business day delivery, or United
States certified mail, return receipt requested, postage prepaid, to the parties
at the addresses set forth in Article 1, or such other address or addresses as
Tenant or Landlord may from time to time designate by notice given as above
provided. Every notice or other communication hereunder shall be deemed to have
been given as of the third business day following the date of such mailing (or
as of any earlier date evidenced by a receipt from such national air courier
service or the United States Postal Service) or immediately if personally
delivered. Notices not sent in accordance with the foregoing shall be of no
force or effect until received by the foregoing parties at such addresses
required herein.
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ARTICLE 26: REAL ESTATE BROKERS
Landlord and Tenant hereby mutually: (i) represent and warrant to each
other that they have dealt only with the broker, if any, designated in Article 1
(whose commission, if any, shall be paid pursuant to separate written agreement
by the party signing such agreement) as broker, agent or finder in connection
with this Lease, and (ii) agree to defend, indemnify and hold each other
harmless from and against any and all claims, demands, losses, liabilities,
damages, judgments, costs and expenses (including reasonable attorneys' and
expert witness fees, and court costs), arising or alleged to arise from any
breach of their respective foregoing representation and warranty under this
Article.
ARTICLE 27: NO WAIVER
No provision of this Lease will be deemed waived by either party unless
expressly waived in writing and signed by the waiving party. No waiver shall be
implied by delay or any other act or omission of either party. No waiver by
either party of any provision of this Lease shall be deemed a waiver of such
provision with respect to any subsequent matter relating to such provision, and
Landlord's consent or approval respecting any action by Tenant shall not
constitute a waiver of the requirement for obtaining Landlord's consent or
approval respecting any subsequent action. Acceptance of Rent by Landlord
directly or through any agent or lockbox arrangement shall not constitute a
waiver of any breach by Tenant of any term or provision of this Lease (and
Landlord reserves the right to return or refund any untimely payments if
necessary to preserve Landlord's remedies). No acceptance of a lesser amount of
Rent shall be deemed a waiver of Landlord's right to receive the full amount
due, nor shall any endorsement or statement on any check or payment or any
letter accompanying such check or payment be deemed an accord and satisfaction,
and Landlord may accept such check or payment without prejudice to Landlord's
right to recover the full amount due. The acceptance of Rent or of the
performance of any other term or provision from, or providing directory listings
or services for, any Person other than Tenant shall not constitute a waiver of
Landlord's right to approve any Transfer. No delivery to, or acceptance by,
Landlord or its agents or employees of keys, nor any other act or omission of
Tenant or Landlord or their agents or employees, shall be deemed a surrender, or
acceptance of a surrender, of the Premises or a termination of this Lease,
unless stated expressly in writing by Landlord.
ARTICLE 28: TELECOMMUNICATION LINES
A. TELECOMMUNICATION LINES. Subject to Landlord's continuing right of
supervision and approval, which approval shall not be unreasonably withheld,
conditioned or delayed and the other provisions hereof, Tenant may: (i) install
telecommunication lines (`Lines") connecting the Premises to any Property
terminal block already serving or available to serve the Premises, or (ii) use
such Lines as may currently exist and already connect the Premises to such
terminal block. Such terminal block may comprise, or be connected through riser
or other Lines with, a main distribution frame (`MDF") for the Property.
Landlord disclaims any representations, warranties or understandings concerning
the capacity, design or suitability of any such terminal or MFD, Property riser
Lines, or related equipment. If there is, or will be, more than one tenant in
the Property, at any time, Landlord may allocate, and periodically reallocate,
connections to the terminal blocks and MFD based on the proportion of rentable
area each tenant leases, or the type of business operations or requirements of
such tenants, in Landlord's reasonable discretion. Landlord may arrange for an
independent contractor to review Tenant's requests for
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approval hereunder, monitor or supervise Tenant's installation, connection and
disconnection of Lines, and provide other such services, or Landlord may provide
the same. In each case, Tenant shall pay Landlord's fees and costs therefor as
provided in Article 9.
B. INSTALLATION. Tenant may install and use Tenant's Lines and make
connections and disconnections at the terminal blocks as described above,
provided Tenant shall: (i) obtain Landlord's prior written approval of all
aspects thereof, (ii) use an experienced and qualified contractor designated or
approved in writing in advance by Landlord (whom Landlord may require to enter
an access and indemnity agreement on Landlord's then standard form of agreement
therefor), (iii) comply with such inside wire standards as Landlord may adopt
from time to time, and all other provisions of this Lease, including Article 9
respecting Work, and the Rules respecting access to the wire closets, (iv) not
install Lines in the same sleeve, chaseway or other enclosure in close proximity
with electrical wire, and not install PVC-coated Lines under any circumstances,
(v) thoroughly test any riser Lines to which Tenant intends to connect any Lines
to ensure that such riser Lines are available and are not then connected to or
used for telephone, data transmission or any other purpose by any other party
(whether or not Landlord has previously approved such connections), and not
connect to any such unavailable or connected riser Lines, and (vi) not connect
any equipment to the Lines which may create an electromagnetic field exceeding
the normal insulation ratings of ordinary twisted pair riser cable or cause
radiation higher than normal background radiation, unless the Lines therefor
(including riser Lines) are appropriately insulated to prevent such excessive
electromagnetic fields or radiation (and such insulation shall not be provided
by the use of additional unused twisted pair Lines). As a condition to
permitting installation of new Lines, Landlord may require that Tenant remove
any existing Lines located in or serving the Premises which are not being used.
C. LIMITATION OF LIABILITY. Except to the extent due to Landlord's
intentional misconduct or grossly negligent acts, Landlord shall have no
liability for damages arising, and Landlord does not warrant that the Tenant's
use of the Lines will be free, from the following (collectively called "Line
Problems"): (i) any eavesdropping, wiretapping or theft of long distance access
codes by unauthorized parties, (ii) any failure of the Lines to satisfy Tenant's
requirements, or (iii) any capacitance, attenuation, crosstalk or other problems
with the Lines, any misdesignation of the Lines in the MDF room or wire closets,
or any shortages, failures, variations, interruptions, disconnections, loss or
damage caused by or in connection with the installation, maintenance,
replacement, use or removal of any other Lines or equipment at the Property by
or for other tenants at the Property, by any failure of the environmental
conditions at or the power supply for the Property to conform to any
requirements of the Lines or any other problems associated with any Lines or by
any other cause. Under no circumstances shall any Line Problems be deemed an
actual or constructive eviction of Tenant, render Landlord liable to Tenant for
abatement of any Rent or other charges under the Lease, or relieve Tenant from
performance of Tenant's obligations under the Lease as amended herein. Landlord
in no event shall be liable for damages by reason of loss of profits, business
interruption or other consequential damage arising from any Line Problems.
ARTICLE 29: HAZARDOUS MATERIALS
A. HAZARDOUS MATERIALS GENERALLY PROHIBITED. Except as provided herein,
Tenant shall not transport, use, store, maintain, generate, manufacture, handle,
dispose, release, discharge, spill or leak any "Hazardous Material" (as defined
in Article 30), or permit Tenant's employees, agents, contractors, or other
occupants of the Premises to engage in such activities on or about the Property.
However, the foregoing provisions shall not prohibit the transportation
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to and from, and use, storage, maintenance and handling within, the Premises of
substances customarily and lawfully used in the business which Tenant is
permitted to conduct in the Premises under this Lease, as an incidental and
minor part of such business, and provided: (i) such substances shall be properly
labeled, contained, used and stored only in small quantities reasonably
necessary for such permitted use of the Premises and the ordinary course of
Tenant's business therein, strictly in accordance with applicable Laws, highest
prevailing standards, and the manufacturers' instructions therefor, (ii) such
substances shall not be disposed of, released, discharged or permitted to spill
or leak in or about the Premises or the Property (and under no circumstances
shall any Hazardous Material be disposed of within the drains or plumbing
facilities in or serving the Premises or Property or in any other public or
private drain or sewer, regardless of quantity or concentration), (iii) if any
applicable Law or Landlord's trash removal contractor requires that any such
substances be disposed of separately from ordinary trash, Tenant shall make
arrangements at Tenant's expense for such disposal in approved containers
directly with a qualified and licensed disposal company at a lawful disposal
site, (iv) any remaining such substances shall be completely, properly and
lawfully removed from the Property upon expiration or earlier termination of
this Lease, and (v) for purposes of removal and disposal of any such substances,
Tenant shall be named as the owner, operator and generator, shall obtain a waste
generator identification number, and shall execute all permit applications,
manifests, waste characterization documents and any other required forms.
B. CLEAN UP RESPONSIBILITY. If any Hazardous Material is released,
discharged or disposed of, or permitted to spill or leak, in violation of the
foregoing provisions, Tenant shall immediately and properly clean up and remove
the Hazardous Materials from the Premises, Property and any other affected
property and clean or replace any affected personal property (whether or not
owned by Landlord) in compliance with applicable Laws and then prevailing
industry practices and standards, at Tenant's expense (without limiting
Landlord's other remedies therefor). Such clean up and removal work ("Tenant
Remedial Work") shall be considered Work under Article 9 and subject to the
provisions thereof, including Landlord's prior written approval (except in
emergencies), and any testing, investigation, feasibility and impact studies,
and the preparation and implementation of any remedial action plan required by
any court or regulatory authority having jurisdiction or reasonably required by
Landlord. In connection therewith, Tenant shall provide documentation evidencing
that all Tenant Remedial Work or other action required hereunder has been
properly and lawfully completed (including a certificate addressed to Landlord
from a environmental consultant reasonably acceptable to Landlord, in such
detail and form as Landlord may reasonably require). If any Hazardous Material
is released, discharged, disposed of, or permitted to spill or leak on or about
the Property and is not caused by Tenant or other occupants of the Premises, or
their agents, employees, Transferees, or contractors, such release, discharge,
disposal, spill or leak shall be deemed casualty damage under Article 11 to the
extent that the Premises and Tenant's use thereof is affected thereby; in such
case, Landlord and Tenant shall have the obligations and rights respecting such
casualty damage provided under this Lease.
C. MISCELLANEOUS. Tenant shall immediately upon written request from
time to time provide Landlord with copies of all material safety data sheets,
permits, approvals, memos, reports, correspondence, complaints, demands, claims,
subpoenas, requests, redemption and cleanup plans, and all papers of any kind
filed with or by any regulatory authority and any other books, records or items
pertaining to Hazardous Materials that are subject to the provisions of this
Article (collectively referred to herein as "Tenant's Hazardous Materials
Records"). Tenant shall pay, prior to delinquency, any and all fees, taxes
(including excise taxes), penalties and fines arising from or based on Tenant's
activities involving Hazardous Material on or about the
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Premises or Property, and shall not allow such obligations to become a lien or
charge against the Property or Landlord. If Tenant violates any provision of
this Article with respect to any Hazardous Materials, Landlord may: (i) require
that Tenant immediately remove all Hazardous Materials from the Premises and
discontinue using, storing and handling Hazardous Materials in the Premises,
and/or (ii) pursue such other remedies as may be available to Landlord under
this Lease or applicable Law.
ARTICLE 30: DEFINITIONS
(A) "BUILDING" shall mean the structure (or the portion thereof owned
by Landlord) identified in Article 1.
(B) "BUILDING HOURS" shall mean 8:00 A.M. to 6:00 P.M. Monday through
Friday, and 8:00 A.M. to 12:00 P.M on Saturday (if comparable buildings in the
area have standard Saturday hours), excluding Holidays. "Holidays" shall mean
New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
Christmas Day, and any other state or federal holidays observed by majority of
businesses in the Durham area.
(C) "DEFAULT RATE" shall mean the rate of interest announced from time
to time by the main Chicago office of Bank of America or its successor ("Bank")
as its published Prime Rate plus four percent (4%) per annum, unless a lesser
rate shall then be the maximum rate permissible by law, in which event the said
lesser rate shall be charged. The term "Prime Rate" means the rate of interest
announced by Bank from time to time as its "Prime Rate" Rate or "Corporate Base
Rate" (or other such designation as determined by Landlord), of interest,
changing automatically and simultaneously with each change in the Prime Rate
made by Bank from time to time. Any publication issued or published by Bank or a
certificate signed by an officer of Bank stating its Prime Rate as of a date
shall be conclusive evidence of the Prime Rate on that date. If during the Term
hereof, Bank should not issue or publish the Prime Rate, then Landlord shall
designate a similar rate published by any national banking association.
(D) "EXPENSES" shall mean all expenses, costs and amounts (other than
Taxes) of every kind and nature relating to the ownership, management, repair,
maintenance, replacement, insurance and operation of the Property, including,
without limitation (except as expressly set forth herein), any amounts paid for:
(i) Utility Costs, (ii) complying with Laws (but subject to the exclusions set
forth below), (iii) insurance, not limited to that required under this Lease,
and which may include flood, earthquake, boiler, rent loss, workers'
compensation and employers' liability, builders' risk, automobile and other
coverages, including a reasonable allocation of costs under any blanket
policies, (iv) supplies, materials, tools, equipment, uniforms, and vehicles
used in the operation, repair, maintenance, security, and other services for the
Property, including rental, installment purchase and financing agreements
therefor and interest thereunder, (v) accounting, alarm monitoring, security,
janitorial, trash removal, snow and ice removal, and other services, (vi)
customary management fees, not to exceed four percent (4%) of gross revenues of
the Property (vii) compensation and benefits for any personnel to the extent
such persons are engaged in the operation, repair, maintenance, security or
other services for the Property at or below the level of senior property
manager, and employer's FICA contributions, unemployment taxes or insurance, any
other taxes which may be levied on such compensation and benefits, and data or
payroll processing expenses relating thereto (if personnel handle other
properties, the foregoing expenses shall be allocated appropriately between the
Property and such other properties), (viii) payments under any easement, cross
or reciprocal easement, operating agreement, declaration, covenant, or other
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agreement or instrument pertaining to the sharing of costs for common areas or
other matters in a development or complex of which the Property is a part, (ix)
sales, use, value-added or other taxes on supplies or services for the Property,
(x) the costs of operating and maintaining any onsite office at the Property or
an adjoining property (such costs to be appropriately allocated between the
Property and any such adjoining property served by such office), including the
fair rental value thereof, (xi) operation, maintenance, repair, installation,
replacement, inspection, testing, painting, decorating and cleaning of the
Property, and any items located offsite but installed for the benefit of the
Property, including Property identification and pylon signs, directional signs,
traffic signals and markers, flagpoles and canopies, sidewalks, curbs,
stairways, parking structures, lots, loading and service areas and driveways,
storm and sanitary drainage systems, irrigation systems, elevators, escalators,
trash compactors, and Systems and Equipment, landscaping, and all other aspects
of the Property, including common area fixtures, equipment and other items
therein or thereon, doors, locks and hardware, windows, gutters, downspouts,
roof flashings and roofs. The foregoing provision is for definitional purposes
only and shall not be construed to impose any obligation upon Landlord to incur
such expenses, nor as a limitation as to other Expenses that Landlord may incur
with respect to the Property. Landlord may retain independent contractors (or
affiliated contractors at market rates) to provide any services or perform any
work, in which case the costs thereof shall be deemed Expenses. Expenses shall,
however, exclude:
(1) the following items: (a) interest and amortization on
Mortgages, and other debt costs or ground lease payments, if any, except as
provided herein, (b) depreciation of buildings and other improvements (except
permitted amortization of certain capital expenditures as provided below), (c)
legal fees in connection with leasing, tenant disputes or enforcement of leases,
(d) real estate brokers' commissions or marketing costs, (e) improvements or
alterations to tenant spaces, (f) the cost of providing any service directly to,
and paid directly by, any tenant, (g) costs of any items to the extent Landlord
receives reimbursement from insurance proceeds or from a warranty or other such
third party (such proceeds to be deducted from Expenses in the year in which
received); (h) items charged as Taxes under this Lease, (i) Mortgage principal,
interest or penalties or any other costs associated with the financing of the
Property, (j) leasing commissions, findees fees and all other leasing expenses
incurred in procuring tenants in the Property, including marketing, promotion
and advertising expenses in connection with leasing of space, (k) the cost of
constructing tenant improvements or installations for any tenant in the
Property, including any relocation costs, (1) expenditures for repairing and/or
replacing any defect in any tenant improvement work performed by Landlord
pursuant to the provisions of any lease for space in the Property, (m) lease
takeover or termination costs incurred by Landlord in connection with any lease
in the Property, including any tax payments required to be made in connection
therewith, (n) any amount (other than management fees) paid to any affiliate of
Landlord to the extent that such payments materially exceed competitive charges
from an equivalent quality provider that would have been paid at arms-length for
comparable services and goods, (o) expenses, fines, interest or penalties
payable by Landlord resulting from noncompliance with any Laws or late payment
of Taxes, unless caused by Tenant (in which case, Tenant shall pay the same as a
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separate obligation of Tenant and not as part of Expenses), (p) attorneys' fees
and disbursements incurred in connection with the leasing of space or
enforcement of leases in the Property (including without limitation the
enforcement of any lease or the surrender, termination or modification of any
lease of space in the Property), (q) attorneys' fees and disbursements and other
costs in connection with any judgment, settlement or arbitration award
(including arbitration fees and expenses) resulting from any tort or contract
liability on the part of Landlord and the amount of such settlement, judgment or
award, except for business related tort or contract liabilities where Tenant is
contributorily liable (in which case, Tenant shall pay its share of the same as
a separate obligation and not as part of Expenses), (r) Landlord's cost of any
utilities or services supplied to any tenant or occupant in the Property and for
which Landlord is directly reimbursed (other than through Expenses) as an
additional charge (provided Landlord may characterize payments received from a
tenant in connection with any lease surrender or cancellation as Landlord deems
appropriate without causing any such items to be excluded from Expenses), (s)
costs of acquiring, leasing or restoring any items in the nature of "fine art,"
(rather than decorative art work and seasonal decorations), (t) the cost of
repairs and replacements incurred by reason of fire or other casualty or
condemnation, to the extent Landlord is reimbursed therefor by insurance
proceeds or condemnation award, (u) rent paid under any ground lease or
underlying lease of the land beneath the Property (but including charges such as
Taxes and Expenses under this Lease), (v) any costs that duplicate costs for
which Landlord is reimbursed by Tenant under other provisions of this Lease)
expenses (including, without limitation, attorneys' fees and overtime pay)
incurred in curing a default by Landlord under this Lease or any other lease of
space in the Property, including, without limitation, a contract for services at
the Property, or under any mortgage or insurance policy affecting the Property,
but only to the extent that such expenses are greater than the expenses Landlord
would have incurred had Landlord timely performed such obligation, (x) to the
extent any costs that are otherwise permitted to be included in Expenses are
incurred with respect to both the Property and other properties (including,
without limitation, salaries, fringe benefits and other compensation of
Landlord's personnel who provide services to both the Property and such other
properties), there shall be excluded from Expenses a fair and reasonable
percentage thereof that is property allocable to such other properties, (y) the
cost of installing a cafeteria, auditorium, conference room, telecommunications
facility (such as a microwave dish or antenna) or other such facility and the
cost of operating and maintaining any such facility, if such facility is
operated by Landlord and not leased to a third party (except to the extent that
Landlord elects to credit revenues, if any, derived from such facilities against
Expenses), (z) any compensation paid to clerks, attendants or other persons in
commercial concessions operated by Landlord or any affiliate (except to the
extent that Landlord elects to credit revenues, if any, derived from such
concessions against Expenses), (aa) Landlord's general corporate overhead and
general and administrative expenses to the extent same are not specifically
incurred in connection with the ownership, management, repair, maintenance,
replacement, insurance and operation of the Property, and (bb) the costs of
curing or repairing any defects in the initial construction of the Building.
(2) capital expenditures, except those: (a) made primarily to
reduce Expenses or increases therein, or to comply with Laws or insurance
requirements (excluding capital expenditures to cure violations of Laws or
insurance requirements that existed prior to the Commencement Date or which
relate to the initial construction of the Building or the Property), or (b) for
replacements (as opposed to additions or new improvements) of roofs, parking
areas, and nonstructural items located in the common areas of the Property
required to keep such areas in good condition; provided, any such permitted
capital expenditure shall be amortized for purposes of this Lease (with interest
at the prevailing loan rate available to Landlord when the cost was incurred)
over: (x) the period during which the reasonably estimated savings in Expenses
equals the expenditure, if applicable, or (y) the useful life of the item as
reasonably determined by Landlord, but in no event less than five (5) years.
(E) "HAZARDOUS MATERIAL" shall include, but not be limited to: (i) any
flammable, explosive, toxic, radioactive, biological, corrosive or otherwise
hazardous chemical, substance, liquid, gas, device, form of energy, material or
waste or component thereof, (ii) petroleum-based products, diesel fuel, paints,
solvents, lead, radioactive materials, cyanide, biohazards, infectious or
medical waste and "sharps", printing inks, acids, DDT, pesticides, ammonia
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compounds, and any other items which now or subsequently are found to have an
adverse effect on the environment or the health and safety of persons or animals
or the presence of which require investigation or remediation under any Law or
governmental policy, and (iii) any item defined as a "hazardous substance",
"hazardous material", "hazardous waste", "regulated substance" or "toxic
substance" under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, 42 U.S.C. ss.9601, et seq., Hazardous
Materials Transportation Act, 49 U.S.C. ss.1801, et seq., Resource Conservation
and Recovery Act of 1976, 42 U.S.C. ss.6901 et seq., Clean Water Act, 33 U.S.C.
ss.1251, et seq., Safe Drinking Water Act, 14 U.S.C. ss.300f, et seq., Toxic
Substances Control Act, 15 U.S.C. ss.2601, et seq., Atomic Energy Act of 1954,
42 U.S.C. ss.2014 et seq., and any similar federal, state or local Laws, and all
regulations, guidelines, directives and other requirements thereunder, all as
may be amended or supplemented from time to time.
(F) "LANDLORD" shall mean only the landlord from time to time, except
that for purposes of any provisions defending, indemnifying and holding Landlord
harmless hereunder, "Landlord" shall include past, present and future landlords
and their respective partners, beneficiaries, trustees, officers, directors,
employees, shareholders, principals, agents, affiliates, successors and assigns.
(G) "LAW" or "LAWS" shall mean all federal, state, county and local
governmental and municipal laws, statutes, ordinances, rules, regulations,
codes, decrees, orders and other such requirements, applicable equitable
remedies and decisions by courts in cases where such decisions are considered
binding precedents in the State in which the Property is located, and decisions
of federal courts applying the Laws of such State, at the time in question. This
Lease shall be interpreted and governed by the Laws of the State in which the
Property is located.
(H) "LENDER" shall mean the holder of any Mortgage at the time in
question, and where such Mortgage is a ground lease, such term shall refer to
the ground lessor (and the term "ground lease" although not capitalized is
intended throughout this Lease to include any superior or master lease).
(I) "MORTGAGE" shall mean all mortgages, deeds of trust, ground leases
and other such encumbrances now or hereafter placed upon the Property or
Building, or any part thereof, and all renewals, modifications, consolidations,
replacements or extensions thereof, and all indebtedness now or hereafter
secured thereby and all interest thereon.
(J) "PERSON" shall mean an individual, trust, partnership, limited
liability company, joint venture, association, corporation and any other entity.
(K) "PREMISES" shall mean the area within the Building identified in
Article 1 and EXHIBIT A. Possession of areas necessary for utilities, services,
safety and operation of the Property, including the Systems and Equipment, fire
stairways, perimeter walls, space between the finished ceiling of the Premises
and the sale of the floor or roof of the Property thereabove, and the use
thereof together with the right to install, maintain, operate, repair and
replace the Systems and Equipment, including any of the same in, through, under
or above the Premises in locations that will not materially interfere with
Tenant's use of the Premises, are hereby excepted and reserved by Landlord, and
not demised to Tenant.
(L) "PROPERTY" shall mean the Building, and any common or public areas
or facilities, easements, corridors, lobbies, sidewalks, loading areas,
driveways, landscaped areas, skywalks, parking rights, garages and lots, and any
and all other rights, structures or facilities
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RED HAT SOFTWARE, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
COVER SHEET
Red Hat Software, Inc., a Delaware corporation (the "Company"), hereby
grants as of the date below (the "Grant Date") to the person named below (the
"Optionee") and the Optionee hereby accepts, an option to purchase the number of
shares (the "Option Shares") listed below of the Company's Common Stock, $.0001
par value per share ("Common Stock"), at the price per share and with a vesting
start date (the "Vesting Start Date") listed below, such option to be on the
terms and conditions specified in the attached EXHIBIT A.
Optionee Name: Matthew Szulik
---------------------------------
Grant Date: November 13, 1998
---------------------------------
Vesting Start Date: November 13, 1998
---------------------------------
Number of Option Shares: 986,227
---------------------------------
Exercise Price Per Share: $0.857
---------------------------------
IN WITNESS WHEREOF, the Company, the Escrow Agent and the Optionee have
caused this instrument to be executed as of the Grant Date set forth above.
/S/ Matthew Szulik RED HAT SOFTWARE, INC.
- ------------------------------------- 2600 Meridian Parkway
(Optionee Signature) Durham, NC 27713
- -------------------------------------
(Street Address)
By: /s/ Robert F. Young
- ------------------------------------- Name: Robert F. Young
(City/State/Zip Code) Title: Chief Executive Officer
ESCROW AGENT
RED HAT SOFTWARE, INC.
By: /s/ Robert F. Young
Name: Robert F. Young
Title: Chief Executive Officer
<PAGE>
EXHIBIT A
RED HAT SOFTWARE, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
TERMS AND CONDITIONS
1. GRANT UNDER RED HAT SOFTWARE, INC. 1998 STOCK OPTION PLAN. This
option is granted pursuant to and is governed by the Red Hat Software, Inc. 1998
Stock Option Plan (the "Plan") and, unless the context otherwise requires, terms
used herein shall have the same meaning as in the Plan. Determinations made in
connection with this option pursuant to the Plan shall be governed by the Plan
as it exists on the Grant Date.
2. GRANT AS NON-QUALIFIED OPTION; OTHER OPTIONS. This option is
intended to be a non-qualified stock option (rather than an incentive stock
option). This option is in addition to any other options heretofore or hereafter
granted to the Optionee by the Company or any Related Corporation (as defined in
the Plan), but a duplicate original of this instrument shall not effect the
grant of another option.
3. EXERCISABILITY OF OPTION; VESTING.
(a) FULL EXERCISABILITY. This option may be exercised at any time
and from time to time for all or any portion of the Option Shares, except that
this option may not be exercised for a fraction of a share. The foregoing right
(subject to Sections 4 or 5 hereof if the Optionee ceases to be employed by the
Company) may be exercised on or before the date which is ten years from the
Grant Date. Option Shares which are "Unvested Shares," as specified in paragraph
(b) below, shall, if purchased, be subject to the Company's Repurchase Option
described in Section 6 unless and until they become "Vested Shares" in
accordance with paragraph (b) below. As of any date, the Option Shares issued
upon the exercise of this option on or before such date (the "Issued Shares")
shall first be deemed to be Vested Shares up to the number of Option Shares that
are Vested Shares under Section 3(b) above as of such date and any Issued Shares
in excess of the number of Vested Shares as of such date shall be deemed to be
Unvested Shares. The term "Option Shares" used without reference to either
Unvested Shares or Vested Shares shall mean both Unvested Shares and Vested
Shares, without distinction.
(b) VESTING. All of the Option Shares initially shall be Unvested
Shares. For so long as the Optionee maintains a continuous service to the
Company or a Related Corporation as an employee, officer, director or consultant
(a "Business Relationship"), Unvested Shares (whether or not previously
purchased) shall become Vested Shares (or shall "vest") on the following dates
in an amount equal to the number of shares set opposite the applicable date:
<PAGE>
-2-
One year from the Vesting Start Date - 33.33% of the Option Shares
On the first day of each subsequent
one month period following one year
from the Vesting Start Date - 2.778% of the Option Shares
In addition, in the event the Company's Repurchase Option becomes
exercisable pursuant to Section 6 below, and the Company elects not to exercise
its option for the repurchase of any or all of the Unvested Shares, then upon
the expiration of the Repurchase Option Period (as defined in Section 6), any
and all Option Shares not repurchased by the Company shall become Vested Shares.
The Board may, in its discretion, accelerate any of the foregoing vesting dates.
(c) ACCELERATED VESTING OF UNVESTED SHARES UPON TERMINATION
WITHOUT CAUSE WITHIN FIRST YEAR OF EMPLOYMENT. If the Optionee's Business
Relationship is terminated by the Company or its successor or assign without
Cause (as defined in Section 4(c)) within sixteen months after the Vesting Start
Date, then immediately prior to such termination, a number of shares as is equal
to 33.3% of such Optionee's Option Shares shall be deemed Vested Shares for
purposes of this Agreement.
(d) ACCELERATED VESTING OF UNVESTED SHARES UPON TERMINATION
FOLLOWING CHANGE IN CONTROL. If the Optionee's Business Relationship is
terminated by the Company or its successor or assign without Cause (as defined
in Section 4(c)) or if the Optionee voluntarily terminates his Business
Relationship for Good Reason, in either case, within one year after a Change in
Control, then immediately prior to such termination all shares that are Unvested
Shares as of such termination date, shall be deemed Vested Shares for purposes
of this Agreement. Notwithstanding the foregoing, if the Change in Control that
would otherwise give rise to the acceleration of vesting under this Section 3(d)
is one which the parties intend to account for as a pooling of interests, and if
the Board of Directors, following consultation with the Company's accountants,
determines that such acceleration would cause such transaction not to qualify
for pooling of interests accounting, then the provisions of this Section 3(d)
shall not apply to such Change in Control.
(e) DEFINITIONS. For purposes of this Section 3
(i) The term "Change in Control" shall mean (i) the effective
time of a consolidation of the Company with, or merger of the Company with or
into, another corporation or other business organization in which the shares of
the stock of the Company are converted into or otherwise exchanged for less than
fifty percent (50%) of the shares of a resulting or surviving corporation, (ii)
the closing of a sale or conveyance of all or substantially all of the assets of
the Company, or (iii) an acquisition in a transaction or a series of related
transactions by a person or group (as defined in Rule 13d-5(b)(1) of the
Securities Act of 1934, as amended) of more than a majority of the outstanding
voting stock of the Company.
<PAGE>
-3-
(ii) The term "Good Reason" shall mean, without such Optionee's
express written consent, (i) any significant diminution in the Optionee's
position, duties, responsibilities, power, title or office as in effect
immediately prior to the Change in Control; (ii) any reduction in the Optionee's
annual base salary as in effect on the effective date of the Change in Control
or failure to continue coverage of such Optionee under any compensation or
benefit plan in which such Optionee participates on the effective date of the
Change in Control; or (iii) a requirement that (A) the location in which the
Optionee perform his principal duties for the Company be changed to a new
location that is outside a radius of 75 miles from such Optionee's principal
residence at the effective date of the Change in Control or (B) such Optionee
travel on an overnight basis more than 90 days in any 12-month consecutive
period.
4. TERMINATION OF BUSINESS RELATIONSHIP.
(a) TERMINATION OTHER THAN FOR CAUSE. If the Optionee's Business
Relationship with the Company or any Related Corporation terminates, other than
by reason of death or disability as defined in Section 5 or termination for
Cause as defined in Section 4(c), vesting of Unvested Shares shall immediately
cease, this option shall terminate (may no longer be exercised) immediately as
to any Unvested Shares and may be exercised only as to any Option Shares that
are Vested Shares on the date of termination of the Optionee's Business
Relationship. This option may then be exercised only as to any Option Shares
that are Vested Shares as of such termination date on or prior to the date which
is 90 days after the date of termination of the Optionee's Business Relationship
(but not later than the scheduled expiration date). In the event of termination
of the Optionee's Business Relationship, the Repurchase Option described in
Section 6 shall also be applicable. For purposes hereof, a Business Relationship
shall be considered as continuing uninterrupted during any bona fide leave of
absence (such as those attributable to illness, military obligations or
governmental service); PROVIDED that the period of such leave does not exceed 90
days or, if longer, any period during which the Optionee's right to reemployment
is guaranteed by statute or by contract. A bona fide leave of absence with the
written approval of the Company shall not be considered an interruption of the
Business Relationship for purposes hereof; PROVIDED that such written approval
contractually obligates the Company to continue the Business Relationship of the
Optionee after the approved period of absence. This option shall not be affected
by any change of Business Relationship within or among the Company or any
Related Corporation so long as the Optionee continuously maintains its Business
Relationship with the Company or any Related Corporation.
(b) TERMINATION FOR CAUSE. If the Business Relationship of the
Optionee is terminated for Cause (as defined in Section 4(c)), this option shall
terminate (may no longer be exercised) as to any Vested Shares and Unvested
Shares upon the Optionee's receipt of written notice of such termination. In the
event of termination of the Optionee's Business Relationship, the Repurchase
Option described in Section 6 shall also be applicable.
<PAGE>
-4-
(c) DEFINITION OF CAUSE. "Cause" shall mean conduct involving one or
more of the following: (i) the substantial and continuing failure of the
Optionee, after notice thereof, to render services to the Company or any Related
Corporation in accordance with the terms or requirements of his or her Business
Relationship; (ii) disloyalty, gross negligence, willful misconduct, dishonesty,
fraud or breach of fiduciary duty to the Company or any Related Corporation;
(iii) deliberate disregard of the rules or policies of the Company or any
Related Corporation, or breach of an employment or other agreement with the
Company or any Related Corporation, which results in direct or indirect loss,
damage or injury to the Company or any Related Corporation; (iv) the
unauthorized disclosure of any trade secret or confidential information of the
Company or any Related Corporation; or (v) the commission of an act which
constitutes unfair competition with the Company or any Related Corporation or
which induces any customer or supplier to breach a contract with the Company or
any Related Corporation.
5. DEATH; DISABILITY.
(a) DEATH. If the Optionee dies while in a Business Relationship
with the Company or any Related Corporation, vesting of Unvested Shares shall
immediately cease. In such event, this option may be exercised only as to any
Option Shares that are Vested Shares on the date of the Optionee's death, by the
Optionee's estate, personal representative or beneficiary to whom this option
has been assigned pursuant to Section 10, and this option may be exercised only
on or prior to the date which is 180 days after the date of death (but not later
than the scheduled expiration date). In the event of death, the Repurchase
Option described in Section 6 shall also be applicable.
(b) DISABILITY. If the Optionee ceases its Business Relationship
with the Company or any Related Corporation by reason of his or her disability,
vesting of Option Shares shall immediately cease; this option may be exercised
only as to any Option Shares that are Vested Shares on the date of termination
of the Optionee's Business Relationship; and this option may be exercised only
on or prior to the date which is 180 days after the date of termination of the
Optionee's Business Relationship (but not later than the scheduled expiration
date). In the event of such termination of Business Relationship, the Repurchase
Option described in Section 6 shall also be applicable. For purposes hereof,
"disability" means "permanent and total disability" as defined in Section
22(e)(3) of the Code.
6. REPURCHASE OPTION. In the event of any voluntary or involuntary
termination of the Optionee's Business Relationship with the Company or any
Related Corporation for any or no reason, including by reason of death or
disability, the Company shall, upon and from the date of such termination (as
reasonably fixed and determined by the Company) have an irrevocable, exclusive,
assignable option (the "Repurchase Option") for a period of ninety (90) days
following the termination of such Business Relationship (the "Repurchase Option
Period") to repurchase all or any portion of the Unvested Shares held by the
Optionee at the original purchase price per share paid by the Optionee. Such
option may be exercised by the Company by sending written notice to the
Optionee, which notice shall specify the number of Unvested Shares being so
repurchased and which notice shall be accompanied by the Company's check for the
purchase price of those shares. Upon the sending of such notice and check, the
Company
<PAGE>
-5-
shall become the legal and beneficial owner of the Unvested Shares being
repurchased and all rights and interests therein or relating thereto, and the
Company shall have the right to retain and transfer to its own name the number
of Unvested Shares being repurchased by the Company.
7. PAYMENT OF EXERCISE PRICE.
(a) PAYMENT OPTIONS. The exercise price shall be paid by one or any
combination of the following forms of payment:
(i) in cash, or by check payable to the order of the Company;
(ii) subject to Section 7(b) below, if the Common Stock is then
traded on a national securities exchange or on the Nasdaq National Market (or
successor trading system), by delivery of shares of Common Stock having a fair
market value equal as of the date of exercise to the option price; or
(iii) delivery of an irrevocable and unconditional undertaking,
satisfactory in form and substance to the Company, by a creditworthy broker to
deliver promptly to the Company sufficient funds to pay the exercise price, or
delivery by the Optionee to the Company of a copy of irrevocable and
unconditional instructions, satisfactory in form and substance to the Company,
to a creditworthy broker to deliver promptly to the Company cash or a check
sufficient to pay the exercise price.
In the case of (ii) above, fair market value shall be determined as of
the last business day for which such prices or quotes are available prior to the
date of exercise and shall mean (i) the average (on that date) of the high and
low prices of the Common Stock on the principal national securities exchange on
which the Common Stock is traded, if the Common Stock is then traded on a
national securities exchange; or (ii) the last reported sale price (on that
date) of the Common Stock on the Nasdaq National Market (or successor trading
system), if the Common Stock is not then traded on a national securities
exchange.
(b) LIMITATIONS ON PAYMENT BY DELIVERY OF COMMON STOCK. If the
Optionee delivers Common Stock held by the Optionee ("Old Stock") to the Company
in full or partial payment of the exercise price, and the Old Stock so delivered
is subject to restrictions or limitations imposed by agreement between the
Optionee and the Company, an equivalent number of Option Shares shall be subject
to all restrictions and limitations applicable to the Old Stock to the extent
that the Optionee paid for the Option Shares by delivery of Old Stock, in
addition to any restrictions or limitations imposed by this Agreement.
Notwithstanding the foregoing, the Optionee may not pay any part of the exercise
price hereof by transferring Common Stock to the Company unless such Common
Stock has been owned by the Optionee free of any substantial risk of forfeiture
for at least six months.
<PAGE>
-6-
8. RESTRICTIONS ON RESALE; LEGEND.
(a) TRANSFER RESTRICTIONS.
(i) UNVESTED SHARES. The Optionee agrees not to sell, assign,
transfer, pledge, hypothecate, gift, mortgage or otherwise encumber or dispose
of (except to the Company or any successor to the Company) all or any Unvested
Shares or any interest therein, and any Unvested Shares purchased upon exercise
of this option shall be held in escrow by the Company in accordance with the
terms of Section 18 below unless and until they become Vested Shares.
(ii) VESTED SHARES. Option Shares that are Vested Shares may
not be transferred without the Company's written consent except by will, by the
laws of descent and distribution and in accordance with the provisions of
Section 16, if applicable.
(iii) SECURITIES ACT RESTRICTIONS. Option Shares will be of an
illiquid nature and will be deemed to be "restricted securities" for purposes of
the Securities Act of 1933, as amended (the "Securities Act"). Accordingly, such
shares must be sold in compliance with the registration requirements of the
Securities Act or an exemption therefrom. Each certificate evidencing any of the
Option Shares shall bear a legend substantially as follows:
"The shares represented by this certificate are subject to restrictions
on transfer and may not be sold, exchanged, transferred, pledged,
hypothecated or otherwise disposed of except in accordance with and
subject to all the terms and conditions of a certain Non-Qualified
Stock Option Agreement, a copy of which the Company will furnish to the
holder of this certificate upon request and without charge."
(b) TERMINATION OF RESTRICTIONS. The restrictions on transfer
contained in Section 8(a)(ii) (including without limitation the provisions of
Section 16) shall expire as to Option Shares on the earliest to occur of (i) a
distribution to the public of shares of common stock of the Company pursuant to
an effective registration statement filed under the Securities Act or any
successor statute (a "Public Offering"), or (ii) an Organic Change (as defined
in the Plan).
9. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of
this Agreement, this option may be exercised by written notice to the Company at
its principal executive office, or to such transfer agent as the Company shall
designate. Such notice shall state the election to exercise this option and the
number of Option Shares for which it is being exercised and shall be signed by
the person or persons so exercising this option. Such notice shall be
accompanied by payment of the full purchase price of such shares, and the
Company shall deliver a certificate or certificates representing such shares as
soon as practicable after the notice shall be received. Such certificate or
certificates shall be registered in the name of the person or persons so
exercising this option (or, if this option shall be exercised by the Optionee
and if the Optionee shall so request in the notice exercising this option, shall
be registered in the
<PAGE>
-7-
name of the Optionee and another person jointly, with right of survivorship). In
the event this option shall be exercised, pursuant to Section 5 hereof, by any
person or persons other than the Optionee, such notice shall be accompanied by
appropriate proof of the right of such person or persons to exercise this
option.
10. OPTION NOT TRANSFERABLE. This option is not transferable or
assignable except by will or by the laws of descent and distribution. During the
Optionee's lifetime only the Optionee can exercise this option.
11. NO OBLIGATION TO EXERCISE OPTION. The grant and acceptance of this
option imposes no obligation on the Optionee to exercise it.
12. NO OBLIGATION TO CONTINUE BUSINESS RELATIONSHIP. Neither the Plan,
this Agreement, nor the grant of this option imposes any obligation on the
Company to continue the Optionee in the Business Relationship.
13. ADJUSTMENTS. Except as is expressly provided in the Plan with
respect to certain changes in the capitalization of the Company, no adjustment
shall be made for dividends or similar rights for which the record date is prior
to such date of exercise.
14. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. The Plan contains
provisions covering the treatment of options in a number of contingencies such
as stock splits and mergers. Provisions in the Plan for adjustment with respect
to stock subject to options and the related provisions with respect to
successors to the business of the Company are hereby made applicable hereunder
and are incorporated herein by reference.
15. WITHHOLDING TAXES; SECTION 83(b) ELECTION.
(a) WITHHOLDING TAXES. If the Company in its discretion determines
that it is obligated to withhold any tax in connection with the exercise of this
option, or in connection with the transfer of, or the lapse of restrictions on,
any Common Stock or other property acquired pursuant to this option, the
Optionee hereby agrees that the Company may withhold from the Optionee's wages
or other remuneration the appropriate amount of tax. At the discretion of the
Company, the amount required to be withheld may be withheld in cash from such
wages or other remuneration or in kind from the Common Stock or other property
otherwise deliverable to the Optionee on exercise of this option. The Optionee
further agrees that, if the Company does not withhold an amount from the
Optionee's wages or other remuneration sufficient to satisfy the withholding
obligation of the Company, the Optionee will make reimbursement on demand, in
cash, for the amount underwithheld.
(b) SECTION 83(b) ELECTION. The Optionee acknowledges that if this
option is exercised as to any Unvested Shares, such Unvested Shares may be
treated as subject to a substantial risk of forfeiture under Section 83(b) of
the Code. In such event, the Optionee may make an election under Section 83(b)
to include in income currently the difference between the fair market value of
such Unvested Shares and the exercise price. If the Optionee does not make
<PAGE>
-8-
such an election, the Optionee understands that he or she will recognize income
at the time such Unvested Shares become Vested Shares. The Optionee agrees to
consult with his or her own tax advisor prior to the exercise of this option for
Unvested Shares.
16. COMPANY'S RIGHT OF FIRST REFUSAL.
(a) EXERCISE OF RIGHT. If the Optionee desires to transfer all or
any part of the Vested Shares to any person other than the Company (an
"Offeror"), the Optionee shall: (i) obtain in writing an irrevocable and
unconditional bona fide offer (the "Offer") for the purchase thereof from the
Offeror; and (ii) give written notice (the "Option Notice") to the Company
setting forth the Optionee's desire to transfer such shares, which Option Notice
shall be accompanied by a photocopy of the Offer and shall set forth at least
the name and address of the Offeror and the price and terms of the Offer. Upon
receipt of the Option Notice, the Company shall have an assignable option to
purchase any or all of such Vested Shares (the "Company Option Shares")
specified in the Option Notice, such option to be exercisable by giving, within
30 days after receipt of the Option Notice, a written counter-notice to the
Optionee. If the Company elects to purchase any or all of such Company Option
Shares, it shall be obligated to purchase, and the Optionee shall be obligated
to sell to the Company, such Company Option Shares at the price and terms
indicated in the Offer within 30 days from the date of delivery by the Company
of such counter-notice.
(b) SALE OF OPTION SHARES TO OFFEROR. The Optionee may, for 60 days
after the expiration of the 30-day option period as set forth in Section 16(a),
sell to the Offeror, pursuant to the terms of the Offer, any or all of such
Company Option Shares not purchased or agreed to be purchased by the Company or
its assignee; PROVIDED, HOWEVER, that the Optionee shall not sell such Option
Shares to such Offeror if such Offeror is a competitor of the Company and the
Company gives written notice to the Optionee, within 30 days of its receipt of
the Option Notice, stating that the Optionee shall not sell his or her Option
Shares to such Offeror; and PROVIDED, FURTHER, that prior to the sale of such
Option Shares to an Offeror, such Offeror shall execute an agreement with the
Company pursuant to which such Offeror agrees to be subject to the restrictions
set forth in this Section 16. If any or all of such Option Shares are not sold
pursuant to an Offer within the time permitted above, the unsold Option Shares
shall remain subject to the terms of this Section 16.
(c) FAILURE TO DELIVER OPTION SHARES. If the Optionee fails or
refuses to deliver on a timely basis duly endorsed certificates representing
Company Option Shares to be sold to the Company or its assignee pursuant to this
Section 16, the Company shall have the right to deposit the purchase price for
such Company Option Shares in a special account with any bank or trust company,
giving notice of such deposit to the Optionee, whereupon such Company Option
Shares shall be deemed to have been purchased by the Company. All such monies
shall be held by the bank or trust company for the benefit of the Optionee. All
monies deposited with the bank or trust company but remaining unclaimed for two
years after the date of deposit shall be repaid by the bank or trust company to
the Company on demand, and the Optionee shall thereafter look only to the
Company for payment.
<PAGE>
-9-
(d) EXPIRATION OF COMPANY'S RIGHT OF FIRST REFUSAL AND
TRANSFER RESTRICTIONS. The first refusal rights of the Company (or any of its
assignees) and the transfer restrictions set forth in Section 16(a)-(c) above
shall remain in effect until the earlier to occur of a Public Offering or an
Organic Change.
17. LOCK-UP AGREEMENT. The Optionee agrees that in connection with any
underwritten public offering of Common Stock, upon the request of the Company or
the principal underwriter managing such public offering, the Option Shares may
not be sold, offered for sale or otherwise disposed of without the prior written
consent of the Company or such underwriter, as the case may be, for at least 180
days after the execution of an underwriting agreement in connection with such
offering, or such longer period of time as the Board of Directors may determine
if all of the Company's directors and executive officers agree to be similarly
bound. The obligations under this Section 17 shall remain effective for all
underwritten public offerings with respect to which the Company has filed a
registration statement on or before the date two (2) years after the closing of
the Company's initial public offering; PROVIDED, HOWEVER, that this Section 17
shall cease to apply to any Option Shares sold to the public pursuant to an
effective registration statement or an exemption from the registration
requirements of the Securities Act in a transaction that complied with the terms
of this Agreement.
18. ESCROW OF UNVESTED SHARES.
(a) If this option is exercised as to any Unvested Shares, such
Unvested Shares shall be issued in the name of the Optionee, but shall be held
in escrow by the Company, acting in the capacity of escrow agent, together with
a stock assignment executed by the Optionee with respect to such Unvested
Shares.
(b) With respect to any Unvested Shares held in escrow that become
Vested Shares, the Company shall promptly issue a new certificate for the number
of shares that have become Vested Shares and shall deliver such certificate to
the Optionee and shall retain in escrow a new certificate for any remaining
Unvested Shares in exchange for the all or the relevant portion of the
applicable certificate then being held by the Company as escrow agent.
(c) Subject to the terms hereof, the Optionee shall have all the
rights of a shareholder with respect to the Unvested Shares while they are held
in escrow, including without limitation, the right to vote the Unvested Shares
and receive any cash dividends declared thereon.
(d) The Company may terminate this escrow at any time. The Company
may also appoint another entity to serve as escrow agent hereunder, in which
event the Optionee agrees to execute all documents requested by the Company in
connection therewith.
19. PROVISION OF DOCUMENTATION TO OPTIONEE. By signing this Agreement
on the cover page hereto the Optionee acknowledges receipt of a copy of this
Agreement and a copy of the Plan.
<PAGE>
-10-
20. MISCELLANEOUS.
(a) NOTICES. All notices hereunder shall be in writing and shall be
deemed given when sent by certified or registered mail, postage prepaid, return
receipt requested, if to the Optionee, to the address set forth below or at the
address shown on the records of the Company, and if to the Company, to the
Company's principal executive offices, attention of the Corporate Secretary.
(b) ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the
entire agreement between the parties relative to the subject matter hereof, and
supersedes all proposals, written or oral, and all other communications between
the parties relating to the subject matter of this Agreement. This Agreement may
be modified, amended or rescinded only by a written agreement executed by both
parties.
(c) FRACTIONAL SHARES. If this option becomes exercisable for a
fraction of a share because of the adjustment provisions contained in the Plan,
such fraction shall be rounded down.
(d) ISSUANCES OF SECURITIES. Except as expressly provided herein or
in the Plan, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares subject to this option.
(e) ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. If there shall be
any change in the Common Stock of the Company through merger, consolidation,
reorganization, recapitalization, stock dividend, stock split, combination or
exchange of shares, spin-off, split-up or other similar change in capitalization
or event, the restrictions and other provisions contained in Section 3, Section
6, Section 8, Section 16, Section 17 and Section 18 shall apply with equal force
to additional and/or substitute securities, if any, received by the Optionee in
exchange for, or by virtue of his or her ownership of, Option Shares, except as
otherwise determined by the Board.
(f) SEVERABILITY. The invalidity, illegality or unenforceability of
any provision of this Agreement shall in no way affect the validity, legality or
enforceability of any other provision.
(g) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, subject to the limitations set forth in Section 10 hereof.
(h) GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of Delaware, without giving effect to
the principles of the conflicts of laws thereof.
<PAGE>
RED HAT SOFTWARE, INC.
INCENTIVE STOCK OPTION AGREEMENT
COVER SHEET
Red Hat Software, Inc., a Delaware corporation (the "Company"), hereby
grants as of the date below (the "Grant Date") to the person named below (the
"Employee") and the Employee hereby accepts, an option to purchase the number of
shares (the "Option Shares") listed below of the Company's Common Stock, $.0001
par value per share ("Common Stock"), at the price per share and with a vesting
start date (the "Vesting Start Date") listed below, such option to be on the
terms and conditions specified in the attached EXHIBIT A.
Employee Name: Matthew Szulik
---------------------------------
Grant Date: November 13, 1998
---------------------------------
Vesting Start Date: November 13, 1998
---------------------------------
Number of Option Shares: 350,058
---------------------------------
Exercise Price Per Share: $0.857
---------------------------------
IN WITNESS WHEREOF, the Company, the Escrow Agent and the Employee have
caused this instrument to be executed as of the Grant Date set forth above.
/S/ Matthew Szulik RED HAT SOFTWARE, INC.
- ---------------------------------------- 2600 Meridian Parkway
(Employee Signature) Durham, NC 27713
- ----------------------------------------
(Street Address)
By: /S/ Robert F. Young
- ---------------------------------------- --------------------------
(City/State/Zip Code) Name: Robert F. Young
Title: Chief Executive Officer
ESCROW AGENT
RED HAT SOFTWARE, INC.
By: /S/ Robert F. Young
--------------------------
Name: Robert F. Young
Title: Chief Executive Officer
<PAGE>
EXHIBIT A
RED HAT SOFTWARE, INC.
INCENTIVE STOCK OPTION AGREEMENT
TERMS AND CONDITIONS
1. GRANT UNDER RED HAT SOFTWARE, INC. 1998 STOCK OPTION PLAN. This
option is granted pursuant to and is governed by the Red Hat Software, Inc. 1998
Stock Option Plan (the "Plan") and, unless the context otherwise requires, terms
used herein shall have the same meaning as in the Plan. Determinations made in
connection with this option pursuant to the Plan shall be governed by the Plan
as it exists on the Grant Date.
2. GRANT AS INCENTIVE STOCK OPTION; OTHER OPTIONS. This option is
intended to qualify as an incentive stock option under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). This option is in
addition to any other options heretofore or hereafter granted to the Employee by
the Company or any Related Corporation (as defined in the Plan), but a duplicate
original of this instrument shall not effect the grant of another option.
3. EXERCISABILITY OF OPTION; VESTING.
(a) FULL EXERCISABILITY. This option may be exercised at any time
and from time to time for all or any portion of the Option Shares, except that
this option may not be exercised for a fraction of a share. The foregoing right
(subject to Sections 4 or 5 hereof if the Employee ceases to be employed by the
Company) may be exercised on or before the date which is ten years from the
Grant Date. Option Shares which are "Unvested Shares," as specified in paragraph
(b) below, shall, if purchased, be subject to the Company's Repurchase Option
described in Section 6 unless and until they become "Vested Shares" in
accordance with paragraph (b) below. As of any date, the Option Shares issued
upon the exercise of this option on or before such date (the "Issued Shares")
shall first be deemed to be Vested Shares up to the number of Option Shares that
are Vested Shares under Section 3(b) above as of such date and any Issued Shares
in excess of the number of Vested Shares as of such date shall be deemed to be
Unvested Shares. The term "Option Shares" used without reference to either
Unvested Shares or Vested Shares shall mean both Unvested Shares and Vested
Shares, without distinction.
(b) VESTING. All of the Option Shares initially shall be Unvested
Shares. For so long as the Employee remains continuously employed by the Company
or any Related Corporation, Unvested Shares (whether or not previously
purchased) shall become Vested Shares (or shall "vest") on the following dates
in an amount equal to the number of shares set opposite the applicable date:
<PAGE>
One year from the Vesting Start Date - 33.33% of the Option Shares
On the first day of each subsequent
one month period following one year
from the Vesting Start Date - 2.778% of the Option Shares
In addition, in the event the Company's Repurchase Option becomes
exercisable pursuant to Section 6 below, and the Company elects not to exercise
its option for the repurchase of any or all of the Unvested Shares, then upon
the expiration of the Repurchase Option Period (as defined in Section 6), any
and all Option Shares not repurchased by the Company shall become Vested Shares.
The Board may, in its discretion, accelerate any of the foregoing vesting dates.
(c) ACCELERATED VESTING OF UNVESTED SHARES UPON TERMINATION WITHOUT
CAUSE WITHIN FIRST YEAR OF EMPLOYMENT. If the Employee is terminated by the
Company or its successor or assign without Cause (as defined in Section 4(c))
within sixteen months after the Vesting Start Date, then immediately prior to
such termination, a number of shares as is equal to 33.3% of such Employee's
Option Shares shall be deemed Vested Shares for purposes of this Agreement.
(d) ACCELERATED VESTING OF UNVESTED SHARES UPON TERMINATION
FOLLOWING CHANGE IN CONTROL. If the Employee is terminated by the Company or its
successor or assign without Cause (as defined in Section 4(c)) or if the
Employee voluntarily terminates his employment for Good Reason, in either case,
within one year after a Change in Control, then immediately prior to such
termination all shares that are Unvested Shares as of such termination date,
shall be deemed Vested Shares for purposes of this Agreement. Notwithstanding
the foregoing, if the Change in Control that would otherwise give rise to the
acceleration of vesting under this Section 3(d) is one which the parties intend
to account for as a pooling of interests, and if the Board of Directors,
following consultation with the Company's accountants, determines that such
acceleration would cause such transaction not to qualify for pooling of
interests accounting, then the provisions of this Section 3(d) shall not apply
to such Change in Control.
(e) DEFINITIONS. For purposes of this Section 3
(i) The term "Change in Control" shall mean (i) the effective
time of a consolidation of the Company with, or merger of the Company with or
into, another corporation or other business organization in which the shares of
the stock of the Company are converted into or otherwise exchanged for less than
fifty percent (50%) of the shares of a resulting or surviving corporation, (ii)
the closing of a sale or conveyance of all or substantially all of the assets of
the Company, or (iii) an acquisition in a transaction or a series of related
transactions by a person or group (as defined in Rule
<PAGE>
13d-5(b)(1) of the Securities Act of 1934, as amended) of more than a majority
of the outstanding voting stock of the Company.
(ii) The term "Good Reason" shall mean, without such Employee's
express written consent, (i) any significant diminution in the Employee's
position, duties, responsibilities, power, title or office as in effect
immediately prior to the Change in Control; (ii) any reduction in the Employee's
annual base salary as in effect on the effective date of the Change in Control
or failure to continue coverage of such Employee under any compensation or
benefit plan in which such Employee participates on the effective date of the
Change in Control; or (iii) a requirement that (A) the location in which the
Employee perform his principal duties for the Company be changed to a new
location that is outside a radius of 75 miles from such Employee's principal
residence at the effective date of the Change in Control or (B) such Employee
travel on an overnight basis more than 90 days in any 12-month consecutive
period.
4. TERMINATION OF EMPLOYMENT.
(a) TERMINATION OTHER THAN FOR CAUSE. If the Employee ceases to be
employed by the Company or any Related Corporation, other than by reason of
death or disability as defined in Section 5 or termination for Cause as defined
in Section 4(c), vesting of Unvested Shares shall immediately cease, this option
shall terminate (may no longer be exercised) immediately as to any Unvested
Shares and may be exercised only as to any Option Shares that are Vested Shares
on the date of termination of the Employee's employment. This option may then be
exercised only as to any Option Shares that are Vested Shares as of such
termination date or prior to the date which is 90 days after the date of
termination of the Employee's employment (but not later than the scheduled
expiration date). In the event of termination of employment, the Repurchase
Option described in Section 6 shall also be applicable. For purposes hereof,
employment shall be considered as continuing uninterrupted during any bona fide
leave of absence (such as those attributable to illness, military obligations or
governmental service); PROVIDED that the period of such leave does not exceed 90
days or, if longer, any period during which the Employee's right to reemployment
is guaranteed by statute or by contract. A bona fide leave of absence with the
written approval of the Company shall not be considered an interruption of
employment for purposes hereof; PROVIDED that such written approval
contractually obligates the Company to continue the employment of the Employee
after the approved period of absence. This option shall not be affected by any
change of employment within or among the Company and any Related Corporation so
long as the Employee continuously remains an employee of the Company or any
Related Corporation.
(b) TERMINATION FOR CAUSE. If the employment of the Employee is
terminated for Cause (as defined in Section 4(c)), this option shall terminate
(may no longer be exercised) as to any Vested Shares and Unvested Shares upon
the Employee's receipt of written notice of such termination. In the event of
termination of the
<PAGE>
Employee's employment, the Repurchase Option described in Section 6 shall also
be applicable.
(c) DEFINITION OF CAUSE. "Cause" shall mean conduct involving one or
more of the following: (i) the substantial and continuing failure of the
Employee, after notice thereof, to render services to the Company or any Related
Corporation in accordance with the terms or requirements of his or her
employment; (ii) disloyalty, gross negligence, willful misconduct, dishonesty,
fraud or breach of fiduciary duty to the Company or any Related Corporation;
(iii) deliberate disregard of the rules or policies of the Company or any
Related Corporation, or breach of an employment or other agreement with the
Company or any Related Corporation, which results in direct or indirect loss,
damage or injury to the Company or any Related Corporation; (iv) the
unauthorized disclosure of any trade secret or confidential information of the
Company or any Related Corporation; or (v) the commission of an act which
constitutes unfair competition with the Company or any Related Corporation or
which induces any customer or supplier to breach a contract with the Company or
any Related Corporation.
5. DEATH; DISABILITY.
(a) DEATH. If the Employee dies while in the employ of the Company
or any Related Corporation, vesting of Unvested Shares shall immediately cease.
In such event, this option may be exercised only as to any Option Shares that
are Vested Shares on the date of the Employee's death, by the Employee's estate,
personal representative or beneficiary to whom this option has been assigned
pursuant to Section 10, and this option may be exercised only on or prior to the
date which is 180 days after the date of death (but not later than the scheduled
expiration date). In the event of death, the Repurchase Option described in
Section 6 shall also be applicable.
(b) DISABILITY. If the Employee ceases to be employed by the Company
or any Related Corporation by reason of his or her disability, vesting of Option
Shares shall immediately cease; this option may be exercised only as to any
Option Shares that are Vested Shares on the date of termination of the
Employee's employment; and this option may be exercised only on or prior to the
date which is 180 days after the date of termination of the Employee's
employment (but not later than the scheduled expiration date). In the event of
such termination of employment, the Repurchase Option described in Section 6
shall also be applicable. For purposes hereof, "disability" means "permanent and
total disability" as defined in Section 22(e)(3) of the Code.
6. REPURCHASE OPTION. In the event of any voluntary or involuntary
termination of the Employee's employment by the Company or any Related
Corporation for any or no reason, including by reason of death or disability,
the Company shall, upon and from the date of such termination (as reasonably
fixed and determined by the Company) have an irrevocable, exclusive, assignable
option (the "Repurchase Option") for a period of ninety (90) days following the
termination of such Employee's employment (the "Repurchase Option Period") to
repurchase all or any portion of the
<PAGE>
Unvested Shares held by the Employee at the original purchase price per share
paid by the Employee. Such option may be exercised by the Company by sending
written notice to the Employee, which notice shall specify the number of
Unvested Shares being so repurchased and which notice shall be accompanied by
the Company's check for the purchase price of those shares. Upon the sending of
such notice and check, the Company shall become the legal and beneficial owner
of the Unvested Shares being repurchased and all rights and interests therein or
relating thereto, and the Company shall have the right to retain and transfer to
its own name the number of Unvested Shares being repurchased by the Company.
7. PAYMENT OF EXERCISE PRICE.
(a) PAYMENT OPTIONS. The exercise price shall be paid by one or any
combination of the following forms of payment:
(i) in cash, or by check payable to the order of the Company;
(ii) subject to Section 7(b) below, if the Common Stock is then
traded on a national securities exchange or on the Nasdaq National Market (or
successor trading system), by delivery of shares of Common Stock having a fair
market value equal as of the date of exercise to the option price; or
(iii) delivery of an irrevocable and unconditional undertaking,
satisfactory in form and substance to the Company, by a creditworthy broker to
deliver promptly to the Company sufficient funds to pay the exercise price, or
delivery by the Employee to the Company of a copy of irrevocable and
unconditional instructions, satisfactory in form and substance to the Company,
to a creditworthy broker to deliver promptly to the Company cash or a check
sufficient to pay the exercise price.
In the case of (ii) above, fair market value shall be determined as of
the last business day for which such prices or quotes are available prior to the
date of exercise and shall mean (i) the average (on that date) of the high and
low prices of the Common Stock on the principal national securities exchange on
which the Common Stock is traded, if the Common Stock is then traded on a
national securities exchange; or (ii) the last reported sale price (on that
date) of the Common Stock on the Nasdaq National Market (or successor trading
system), if the Common Stock is not then traded on a national securities
exchange.
(b) LIMITATIONS ON PAYMENT BY DELIVERY OF COMMON STOCK. If the
Employee delivers Common Stock held by the Employee ("Old Stock") to the Company
in full or partial payment of the exercise price, and the Old Stock so delivered
is subject to restrictions or limitations imposed by agreement between the
Employee and the Company, an equivalent number of Option Shares shall be subject
to all restrictions and limitations applicable to the Old Stock to the extent
that the Employee paid for the Option Shares by delivery of Old Stock, in
addition to any restrictions or limitations
<PAGE>
imposed by this Agreement. Notwithstanding the foregoing, the Employee may not
pay any part of the exercise price hereof by transferring Common Stock to the
Company unless such Common Stock has been owned by the Employee free of any
substantial risk of forfeiture for at least six months.
8. RESTRICTIONS ON RESALE; LEGEND.
(a) TRANSFER RESTRICTIONS.
(i) UNVESTED SHARES. The Employee agrees not to sell, assign,
transfer, pledge, hypothecate, gift, mortgage or otherwise encumber or dispose
of (except to the Company or any successor to the Company) all or any Unvested
Shares or any interest therein, and any Unvested Shares purchased upon exercise
of this option shall be held in escrow by the Company in accordance with the
terms of Section 19 below unless and until they become Vested Shares.
(ii) VESTED SHARES. Option Shares that are Vested Shares may
not be transferred without the Company's written consent except by will, by the
laws of descent and distribution and in accordance with the provisions of
Section 17, if applicable.
(iii) SECURITIES ACT RESTRICTIONS. Option Shares will be of an
illiquid nature and will be deemed to be "restricted securities" for purposes of
the Securities Act of 1933, as amended (the "Securities Act"). Accordingly, such
shares must be sold in compliance with the registration requirements of the
Securities Act or an exemption therefrom. Each certificate evidencing any of the
Option Shares shall bear a legend substantially as follows:
"The shares represented by this certificate are subject to restrictions
on transfer and may not be sold, exchanged, transferred, pledged,
hypothecated or other?wise disposed of except in accordance with and
subject to all the terms and conditions of a certain Incentive Stock
Option Agreement, a copy of which the Company will furnish to the
holder of this certificate upon request and without charge."
(b) TERMINATION OF RESTRICTIONS. The restrictions on transfer
contained in Section 8(a)(ii) (including without limitation the provisions of
Section 17) shall expire as to Option Shares on the earliest to occur of (i) a
distribution to the public of shares of common stock of the Company pursuant to
an effective registration statement filed under the Securities Act or any
successor statute (a "Public Offering"), or (ii) an Organic Change (as defined
in the Plan).
9. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of
this Agreement, this option may be exercised by written notice to the Company at
its principal executive office, or to such transfer agent as the Company shall
designate. Such
<PAGE>
notice shall state the election to exercise this option and the number of Option
Shares for which it is being exercised and shall be signed by the person or
persons so exercising this option. Such notice shall be accompanied by payment
of the full purchase price of such shares, and the Company shall deliver a
certificate or certificates representing such shares as soon as practicable
after the notice shall be received. Such certificate or certificates shall be
registered in the name of the person or persons so exercising this option (or,
if this option shall be exercised by the Employee and if the Employee shall so
request in the notice exercising this option, shall be registered in the name of
the Employee and another person jointly, with right of survivorship). In the
event this option shall be exercised, pursuant to Section 5 hereof, by any
person or persons other than the Employee, such notice shall be accompanied by
appropriate proof of the right of such person or persons to exercise this
option.
10. OPTION NOT TRANSFERABLE. This option is not transferable or
assignable except by will or by the laws of descent and distribution. During the
Employee's lifetime only the Employee can exercise this option.
11. NO OBLIGATION TO EXERCISE OPTION. The grant and acceptance of this
option imposes no obligation on the Employee to exercise it.
12. NO OBLIGATION TO CONTINUE EMPLOYMENT. Neither the Plan, this
Agreement, nor the grant of this option imposes any obligation on the Company to
continue the Employee in employment.
13. ADJUSTMENTS. Except as is expressly provided in the Plan with
respect to certain changes in the capitalization of the Company, no adjustment
shall be made for dividends or similar rights for which the record date is prior
to such date of exercise.
14. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. The Plan contains
provisions covering the treatment of options in a number of contingencies such
as stock splits and mergers. Provisions in the Plan for adjustment with respect
to stock subject to options and the related provisions with respect to
successors to the business of the Company are hereby made applicable hereunder
and are incorporated herein by reference.
15. EARLY DISPOSITION. The Employee agrees to notify the Company in
writing immediately after the Employee transfers any Option Shares, if such
transfer occurs on or before the later of (a) the date two years after the date
of this Agreement or (b) the date one year after the date the Employee acquired
such Option Shares. The Employee also agrees to provide the Company with any
information concerning any such transfer required by the Company for tax
purposes.
<PAGE>
16. WITHHOLDING TAXES; SECTION 83(b) ELECTION.
(a) WITHHOLDING TAXES. If the Company in its discretion determines
that it is obligated to withhold any tax in connection with the exercise of this
option, or in connection with the transfer of, or the lapse of restrictions on,
any Common Stock or other property acquired pursuant to this option, the
Employee hereby agrees that the Company may withhold from the Employee's wages
or other remuneration the appropriate amount of tax. At the discretion of the
Company, the amount required to be withheld may be withheld in cash from such
wages or other remuneration or in kind from the Common Stock or other property
otherwise deliverable to the Employee on exercise of this option. The Employee
further agrees that, if the Company does not withhold an amount from the
Employee's wages or other remuneration sufficient to satisfy the withholding
obligation of the Company, the Employee will make reimbursement on demand, in
cash, for the amount underwithheld.
(b) SECTION 83(b) ELECTION. The Employee acknowledges that if this
option is exercised as to any Unvested Shares, such Unvested Shares may be
treated as subject to a substantial risk of forfeiture under Section 83(b) of
the Code. In such event, the Employee may make an election under Section 83(b)
to include in income currently the difference between the fair market value of
such Unvested Shares and the exercise price. If the Employee does not make such
an election, the Employee understands that he or she will recognize income at
the time such Unvested Shares become Vested Shares. The Employee agrees to
consult with his or her own tax advisor prior to the exercise of this option for
Unvested Shares.
17. COMPANY'S RIGHT OF FIRST REFUSAL.
(a) EXERCISE OF RIGHT. If the Employee desires to transfer all
or any part of the Vested Shares to any person other than the Company (an
"Offeror"), the Employee shall: (i) obtain in writing an irrevocable and
unconditional bona fide offer (the "Offer") for the purchase thereof from the
Offeror; and (ii) give written notice (the "Option Notice") to the Company
setting forth the Employee's desire to transfer such shares, which Option Notice
shall be accompanied by a photocopy of the Offer and shall set forth at least
the name and address of the Offeror and the price and terms of the Offer. Upon
receipt of the Option Notice, the Company shall have an assignable option to
purchase any or all of such Vested Shares (the "Company Option Shares")
specified in the Option Notice, such option to be exercisable by giving, within
30 days after receipt of the Option Notice, a written counter-notice to the
Employee. If the Company elects to purchase any or all of such Company Option
Shares, it shall be obligated to purchase, and the Employee shall be obligated
to sell to the Company, such Company Option Shares at the price and terms
indicated in the Offer within 30 days from the date of delivery by the Company
of such counter-notice.
(b) SALE OF OPTION SHARES TO OFFEROR. The Employee may, for 60
days after the expiration of the 30-day option period as set forth in Section
17(a), sell to
<PAGE>
the Offeror, pursuant to the terms of the Offer, any or all of such Company
Option Shares not purchased or agreed to be purchased by the Company or its
assignee; PROVIDED, HOWEVER, that the Employee shall not sell such Option Shares
to such Offeror if such Offeror is a competitor of the Company and the Company
gives written notice to the Employee, within 30 days of its receipt of the
Option Notice, stating that the Employee shall not sell his or her Option Shares
to such Offeror; and PROVIDED, FURTHER, that prior to the sale of such Option
Shares to an Offeror, such Offeror shall execute an agreement with the Company
pursuant to which such Offeror agrees to be subject to the restrictions set
forth in this Section 17. If any or all of such Option Shares are not sold
pursuant to an Offer within the time permitted above, the unsold Option Shares
shall remain subject to the terms of this Section 17.
(c) FAILURE TO DELIVER OPTION SHARES. If the Employee fails or
refuses to deliver on a timely basis duly endorsed certificates representing
Company Option Shares to be sold to the Company or its assignee pursuant to this
Section 17, the Company shall have the right to deposit the purchase price for
such Company Option Shares in a special account with any bank or trust company,
giving notice of such deposit to the Employee, whereupon such Company Option
Shares shall be deemed to have been purchased by the Company. All such monies
shall be held by the bank or trust company for the benefit of the Employee. All
monies deposited with the bank or trust company but remaining unclaimed for two
years after the date of deposit shall be repaid by the bank or trust company to
the Company on demand, and the Employee shall thereafter look only to the
Company for payment.
(d) EXPIRATION OF COMPANY'S RIGHT OF FIRST REFUSAL AND TRANSFER
RESTRICTIONS. The first refusal rights of the Company (or any of its assignees)
and the transfer restrictions set forth in Section 17(a)-(c) above shall remain
in effect until the earlier to occur of a Public Offering or an Organic Change.
18. LOCK-UP AGREEMENT. The Employee agrees that in connection with an
underwritten public offering of Common Stock, upon the request of the Company or
the principal underwriter managing such public offering, the Option Shares may
not be sold, offered for sale or otherwise disposed of without the prior written
consent of the Company or such underwriter, as the case may be, for at least 180
days after the execution of an underwriting agreement in connection with such
offering, or such longer period of time as the Board of Directors may determine
if all of the Company's directors and executive officers agree to be similarly
bound. The obligations under this Section 18 shall remain effective for all
underwritten public offerings with respect to which the Company has filed a
registration statement on or before the date two (2) years after the closing of
the Company's initial public offering; PROVIDED, HOWEVER, that this Section 18
shall cease to apply to any Option Shares sold to the public pursuant to an
effective registration statement or an exemption from the registration
requirements of the Securities Act in a transaction that complied with the terms
of this Agreement.
19. ESCROW OF UNVESTED SHARES.
<PAGE>
(a) If this option is exercised as to any Unvested Shares, such
Unvested Shares shall be issued in the name of the Employee, but shall be held
in escrow by the Company, acting in the capacity of escrow agent, together with
a stock assignment executed by the Employee with respect to such Unvested
Shares.
(b) With respect to any Unvested Shares held in escrow that become
Vested Shares, the Company shall promptly issue a new certificate for the number
of shares that have become Vested Shares and shall deliver such certificate to
the Employee and shall retain in escrow a new certificate for any remaining
Unvested Shares in exchange for the all or the relevant portion of the
applicable certificate then being held by the Company as escrow agent.
(c) Subject to the terms hereof, the Employee shall have all the
rights of a shareholder with respect to the Unvested Shares while they are held
in escrow, including without limitation, the right to vote the Unvested Shares
and receive any cash dividends declared thereon.
(d) The Company may terminate this escrow at any time. The Company
may also appoint another entity to serve as escrow agent hereunder, in which
event the Employee agrees to execute all documents requested by the Company in
connection therewith.
20. PROVISION OF DOCUMENTATION TO EMPLOYEE. By signing this Agreement
on the cover page hereto the Employee acknowledges receipt of a copy of this
Agreement and a copy of the Plan.
21. MISCELLANEOUS.
(a) NOTICES. All notices hereunder shall be in writing and shall be
deemed given when sent by certified or registered mail, postage prepaid, return
receipt requested, if to the Employee, to the address set forth below or at the
address shown on the records of the Company, and if to the Company, to the
Company's principal executive offices, attention of the Corporate Secretary.
(b) ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the
entire agreement between the parties relative to the subject matter hereof, and
supersedes all proposals, written or oral, and all other communications between
the parties relating to the subject matter of this Agreement. This Agreement may
be modified, amended or rescinded only by a written agreement executed by both
parties.
(c) FRACTIONAL SHARES. If this option becomes exercisable for a
fraction of a share because of the adjustment provisions contained in the Plan,
such fraction shall be rounded down.
<PAGE>
(d) ISSUANCES OF SECURITIES. Except as expressly provided herein or
in the Plan, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares subject to this option.
(e) ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. If there shall be
any change in the Common Stock of the Company through merger, consolidation,
reorganization, recapitalization, stock dividend, stock split, combination or
exchange of shares, spin-off, split-up or other similar change in capitalization
or event, the restrictions and other provisions contained in Section 3, Section
6, Section 8, Section 17, Section 18 and Section 19 shall apply with equal force
to additional and/or substitute securities, if any, received by the Employee in
exchange for, or by virtue of his or her ownership of, Option Shares, except as
otherwise determined by the Board.
(f) SEVERABILITY. The invalidity, illegality or unenforceability of
any provision of this Agreement shall in no way affect the validity, legality or
enforceability of any other provision.
(g) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, subject to the limitations set forth in Section 10 hereof.
(h) GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of Delaware, without giving effect to
the principles of the conflicts of laws thereof.
<PAGE>
RED HAT SOFTWARE, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
COVER SHEET
Red Hat Software, Inc., a Delaware corporation (the "Company"), hereby
grants as of the date below (the "Grant Date") to the person named below (the
"Optionee") and the Optionee hereby accepts, an option to purchase the number of
shares (the "Option Shares") listed below of the Company's Common Stock, $.0001
par value per share ("Common Stock"), at the price per share and with a vesting
start date (the "Vesting Start Date") listed below, such option to be on the
terms and conditions specified in the attached EXHIBIT A.
Optionee Name: Tim Buckley
------------------------------------
Grant Date: April 12, 1999
------------------------------------
Vesting Start Date: April 12, 1999
------------------------------------
Number of Option Shares: 901,966
------------------------------------
Exercise Price Per Share: $3.141
------------------------------------
IN WITNESS WHEREOF, the Company, the Escrow Agent and the Optionee have
caused this instrument to be executed as of the Grant Date set forth above.
/S/ Timothy Buckley RED HAT SOFTWARE, INC.
- ------------------------------ 2600 Meridian Parkway
(Optionee Signature) Durham, NC 27713
- ------------------------------
(Street Address)
By: /S/ Matthew Szulik
- ------------------------------ ---------------------------
(City/State/Zip Code) Name: Matthew Szulik
Title: President
ESCROW AGENT
RED HAT SOFTWARE, INC.
By: /S/ Matthew Szulik
---------------------------
Name: Matthew Szulik
Title: President
<PAGE>
EXHIBIT A
RED HAT SOFTWARE, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
TERMS AND CONDITIONS
1. GRANT UNDER RED HAT SOFTWARE, INC. 1998 STOCK OPTION PLAN. This
option is granted pursuant to and is governed by the Red Hat Software, Inc. 1998
Stock Option Plan (the "Plan") and, unless the context otherwise requires, terms
used herein shall have the same meaning as in the Plan. Determinations made in
connection with this option pursuant to the Plan shall be governed by the Plan
as it exists on the Grant Date.
2. GRANT AS NON-QUALIFIED OPTION; OTHER OPTIONS. This option is
intended to be a non-qualified stock option (rather than an incentive stock
option). This option is in addition to any other options heretofore or hereafter
granted to the Optionee by the Company or any Related Corporation (as defined in
the Plan), but a duplicate original of this instrument shall not effect the
grant of another option.
3. EXERCISABILITY OF OPTION; VESTING.
(a) FULL EXERCISABILITY. This option may be exercised at any time
and from time to time for all or any portion of the Option Shares, except that
this option may not be exercised for a fraction of a share. The foregoing right
(subject to Sections 4 or 5 hereof if the Optionee ceases to be employed by the
Company) may be exercised on or before the date which is ten years from the
Grant Date. Option Shares which are "Unvested Shares," as specified in paragraph
(b) below, shall, if purchased, be subject to the Company's Repurchase Option
described in Section 6 unless and until they become "Vested Shares" in
accordance with paragraph (b) below. As of any date, the Option Shares issued
upon the exercise of this option on or before such date (the "Issued Shares")
shall first be deemed to be Vested Shares up to the number of Option Shares that
are Vested Shares under Section 3(b) above as of such date and any Issued Shares
in excess of the number of Vested Shares as of such date shall be deemed to be
Unvested Shares. The term "Option Shares" used without reference to either
Unvested Shares or Vested Shares shall mean both Unvested Shares and Vested
Shares, without distinction.
(b) VESTING. All of the Option Shares initially shall be Unvested
Shares. For so long as the Optionee maintains a continuous service to the
Company or a Related Corporation as an employee, officer, director or consultant
(a "Business Relationship"), Unvested Shares (whether or not previously
purchased) shall become Vested Shares (or shall "vest") on the following dates
in an amount equal to the number of shares set opposite the applicable date:
<PAGE>
-2-
One year from the Vesting Start Date - 25% of the Option Shares
On the first day of each subsequent
three month period following one year
from the Vesting Start Date - 6.25% of the Option Shares
In addition, in the event the Company's Repurchase Option becomes
exercisable pursuant to Section 6 below, and the Company elects not to exercise
its option for the repurchase of any or all of the Unvested Shares, then upon
the expiration of the Repurchase Option Period (as defined in Section 6), any
and all Option Shares not repurchased by the Company shall become Vested Shares.
The Board may, in its discretion, accelerate any of the foregoing vesting dates.
(c) ACCELERATED VESTING OF UNVESTED SHARES UPON TERMINATION
WITHOUT CAUSE WITHIN FIRST YEAR OF EMPLOYMENT. If the Optionee's Business
Relationship is terminated by the Company or its successor or assign without
Cause (as defined in Section 4(c)) within sixteen months after the Vesting Start
Date, then immediately prior to such termination, a number of shares as is equal
to 33.3% of such Optionee's Option Shares shall be deemed Vested Shares for
purposes of this Agreement.
(d) ACCELERATED VESTING OF UNVESTED SHARES UPON TERMINATION
FOLLOWING CHANGE IN CONTROL. If the Optionee's Business Relationship is
terminated by the Company or its successor or assign without Cause (as defined
in Section 4(c)) or if the Optionee voluntarily terminates his Business
Relationship for Good Reason, in either case, within one year after a Change in
Control, then immediately prior to such termination all shares that are Unvested
Shares as of such termination date, shall be deemed Vested Shares for purposes
of this Agreement. Notwithstanding the foregoing, if the Change in Control that
would otherwise give rise to the acceleration of vesting under this Section 3(d)
is one which the parties intend to account for as a pooling of interests, and if
the Board of Directors, following consultation with the Company's accountants,
determines that such acceleration would cause such transaction not to qualify
for pooling of interests accounting, then the provisions of this Section 3(d)
shall not apply to such Change in Control.
(e) DEFINITIONS. For purposes of this Section 3
(i) The term "Change in Control" shall mean (i) the
effective time of a consolidation of the Company with, or merger of the Company
with or into, another corporation or other business organization in which the
shares of the stock of the Company are converted into or otherwise exchanged for
less than fifty percent (50%) of the shares of a resulting or surviving
corporation, (ii) the closing of a sale or conveyance of all or substantially
all of the assets of the Company, or (iii) an acquisition in a transaction or a
series of related transactions by a person or group (as defined in Rule
13d-5(b)(1) of the Securities Act of 1934, as amended) of more than a majority
of the outstanding voting stock of the Company.
<PAGE>
-3-
(ii) The term "Good Reason" shall mean, without such
Optionee's express written consent, (i) any significant diminution in the
Optionee's position, duties, responsibilities, power, title or office as in
effect immediately prior to the Change in Control; (ii) any reduction in the
Optionee's annual base salary as in effect on the effective date of the Change
in Control or failure to continue coverage of such Optionee under any
compensation or benefit plan in which such Optionee participates on the
effective date of the Change in Control; or (iii) a requirement that (A) the
location in which the Optionee perform his principal duties for the Company be
changed to a new location that is outside a radius of 75 miles from such
Optionee's principal residence at the effective date of the Change in Control or
(B) such Optionee travel on an overnight basis more than 90 days in any 12-month
consecutive period.
4. TERMINATION OF BUSINESS RELATIONSHIP.
(a) TERMINATION OTHER THAN FOR CAUSE. If the Optionee's Business
Relationship with the Company or any Related Corporation terminates, other than
by reason of death or disability as defined in Section 5 or termination for
Cause as defined in Section 4(c), vesting of Unvested Shares shall immediately
cease, this option shall terminate (may no longer be exercised) immediately as
to any Unvested Shares and may be exercised only as to any Option Shares that
are Vested Shares on the date of termination of the Optionee's Business
Relationship. This option may then be exercised only as to any Option Shares
that are Vested Shares as of such termination date on or prior to the date which
is 90 days after the date of termination of the Optionee's Business Relationship
(but not later than the scheduled expiration date). In the event of termination
of the Optionee's Business Relationship, the Repurchase Option described in
Section 6 shall also be applicable. For purposes hereof, a Business Relationship
shall be considered as continuing uninterrupted during any bona fide leave of
absence (such as those attributable to illness, military obligations or
governmental service); PROVIDED that the period of such leave does not exceed 90
days or, if longer, any period during which the Optionee's right to reemployment
is guaranteed by statute or by contract. A bona fide leave of absence with the
written approval of the Company shall not be considered an interruption of the
Business Relationship for purposes hereof; PROVIDED that such written approval
contractually obligates the Company to continue the Business Relationship of the
Optionee after the approved period of absence. This option shall not be affected
by any change of Business Relationship within or among the Company or any
Related Corporation so long as the Optionee continuously maintains its Business
Relationship with the Company or any Related Corporation.
(b) TERMINATION FOR CAUSE. If the Business Relationship of the
Optionee is terminated for Cause (as defined in Section 4(c)), this option shall
terminate (may no longer be exercised) as to any Vested Shares and Unvested
Shares upon the Optionee's receipt of written notice of such termination. In the
event of termination of the Optionee's Business Relationship, the Repurchase
Option described in Section 6 shall also be applicable.
<PAGE>
-4-
(c) DEFINITION OF CAUSE. "Cause" shall mean conduct involving
one or more of the following: (i) the substantial and continuing failure of the
Optionee, after notice thereof, to render services to the Company or any Related
Corporation in accordance with the terms or requirements of his or her Business
Relationship; (ii) disloyalty, gross negligence, willful misconduct, dishonesty,
fraud or breach of fiduciary duty to the Company or any Related Corporation;
(iii) deliberate disregard of the rules or policies of the Company or any
Related Corporation, or breach of an employment or other agreement with the
Company or any Related Corporation, which results in direct or indirect loss,
damage or injury to the Company or any Related Corporation; (iv) the
unauthorized disclosure of any trade secret or confidential information of the
Company or any Related Corporation; or (v) the commission of an act which
constitutes unfair competition with the Company or any Related Corporation or
which induces any customer or supplier to breach a contract with the Company or
any Related Corporation.
5. DEATH; DISABILITY.
(a) DEATH. If the Optionee dies while in a Business Relationship
with the Company or any Related Corporation, vesting of Unvested Shares shall
immediately cease. In such event, this option may be exercised only as to any
Option Shares that are Vested Shares on the date of the Optionee's death, by the
Optionee's estate, personal representative or beneficiary to whom this option
has been assigned pursuant to Section 10, and this option may be exercised only
on or prior to the date which is 180 days after the date of death (but not later
than the scheduled expiration date). In the event of death, the Repurchase
Option described in Section 6 shall also be applicable.
(b) DISABILITY. If the Optionee ceases its Business Relationship
with the Company or any Related Corporation by reason of his or her disability,
vesting of Option Shares shall immediately cease; this option may be exercised
only as to any Option Shares that are Vested Shares on the date of termination
of the Optionee's Business Relationship; and this option may be exercised only
on or prior to the date which is 180 days after the date of termination of the
Optionee's Business Relationship (but not later than the scheduled expiration
date). In the event of such termination of Business Relationship, the Repurchase
Option described in Section 6 shall also be applicable. For purposes hereof,
"disability" means "permanent and total disability" as defined in Section
22(e)(3) of the Code.
6. REPURCHASE OPTION. In the event of any voluntary or involuntary
termination of the Optionee's Business Relationship with the Company or any
Related Corporation for any or no reason, including by reason of death or
disability, the Company shall, upon and from the date of such termination (as
reasonably fixed and determined by the Company) have an irrevocable, exclusive,
assignable option (the "Repurchase Option") for a period of ninety (90) days
following the termination of such Business Relationship (the "Repurchase Option
Period") to repurchase all or any portion of the Unvested Shares held by the
Optionee at the original purchase price per share paid by the Optionee. Such
option may be exercised by the Company by sending written notice to the
Optionee, which notice shall specify the number of Unvested Shares being so
repurchased and which notice shall be accompanied by the Company's check for the
purchase price of those shares. Upon the sending of such notice and check, the
Company
<PAGE>
-5-
shall become the legal and beneficial owner of the Unvested Shares being
repurchased and all rights and interests therein or relating thereto, and the
Company shall have the right to retain and transfer to its own name the number
of Unvested Shares being repurchased by the Company.
7. PAYMENT OF EXERCISE PRICE.
(a) PAYMENT OPTIONS. The exercise price shall be paid by one or any
combination of the following forms of payment:
(i) in cash, or by check payable to the order of the Company;
(ii) subject to Section 7(b) below, if the Common Stock is then
traded on a national securities exchange or on the Nasdaq National Market (or
successor trading system), by delivery of shares of Common Stock having a fair
market value equal as of the date of exercise to the option price; or
(iii) delivery of an irrevocable and unconditional undertaking,
satisfactory in form and substance to the Company, by a creditworthy broker to
deliver promptly to the Company sufficient funds to pay the exercise price, or
delivery by the Optionee to the Company of a copy of irrevocable and
unconditional instructions, satisfactory in form and substance to the Company,
to a creditworthy broker to deliver promptly to the Company cash or a check
sufficient to pay the exercise price.
In the case of (ii) above, fair market value shall be determined as of
the last business day for which such prices or quotes are available prior to the
date of exercise and shall mean (i) the average (on that date) of the high and
low prices of the Common Stock on the principal national securities exchange on
which the Common Stock is traded, if the Common Stock is then traded on a
national securities exchange; or (ii) the last reported sale price (on that
date) of the Common Stock on the Nasdaq National Market (or successor trading
system), if the Common Stock is not then traded on a national securities
exchange.
(b) LIMITATIONS ON PAYMENT BY DELIVERY OF COMMON STOCK. If the
Optionee delivers Common Stock held by the Optionee ("Old Stock") to the Company
in full or partial payment of the exercise price, and the Old Stock so delivered
is subject to restrictions or limitations imposed by agreement between the
Optionee and the Company, an equivalent number of Option Shares shall be subject
to all restrictions and limitations applicable to the Old Stock to the extent
that the Optionee paid for the Option Shares by delivery of Old Stock, in
addition to any restrictions or limitations imposed by this Agreement.
Notwithstanding the foregoing, the Optionee may not pay any part of the exercise
price hereof by transferring Common Stock to the Company unless such Common
Stock has been owned by the Optionee free of any substantial risk of forfeiture
for at least six months.
<PAGE>
-6-
8. RESTRICTIONS ON RESALE; LEGEND.
(a) TRANSFER RESTRICTIONS.
(i) UNVESTED SHARES. The Optionee agrees not to sell, assign,
transfer, pledge, hypothecate, gift, mortgage or otherwise encumber or dispose
of (except to the Company or any successor to the Company) all or any Unvested
Shares or any interest therein, and any Unvested Shares purchased upon exercise
of this option shall be held in escrow by the Company in accordance with the
terms of Section 18 below unless and until they become Vested Shares.
(ii) VESTED SHARES. Option Shares that are Vested Shares may
not be transferred without the Company's written consent except by will, by the
laws of descent and distribution and in accordance with the provisions of
Section 16, if applicable.
(iii) SECURITIES ACT RESTRICTIONS. Option Shares will be of an
illiquid nature and will be deemed to be "restricted securities" for purposes of
the Securities Act of 1933, as amended (the "Securities Act"). Accordingly, such
shares must be sold in compliance with the registration requirements of the
Securities Act or an exemption therefrom. Each certificate evidencing any of the
Option Shares shall bear a legend substantially as follows:
"The shares represented by this certificate are subject to restrictions
on transfer and may not be sold, exchanged, transferred, pledged,
hypothecated or other?wise disposed of except in accordance with and
subject to all the terms and conditions of a certain Non-Qualified
Stock Option Agreement, a copy of which the Company will furnish to the
holder of this certificate upon request and without charge."
(b) TERMINATION OF RESTRICTIONS. The restrictions on transfer
contained in Section 8(a)(ii) (including without limitation the provisions of
Section 16) shall expire as to Option Shares on the earliest to occur of (i) a
distribution to the public of shares of common stock of the Company pursuant to
an effective registration statement filed under the Securities Act or any
successor statute (a "Public Offering"), or (ii) an Organic Change (as defined
in the Plan).
9. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of
this Agreement, this option may be exercised by written notice to the Company at
its principal executive office, or to such transfer agent as the Company shall
designate. Such notice shall state the election to exercise this option and the
number of Option Shares for which it is being exercised and shall be signed by
the person or persons so exercising this option. Such notice shall be
accompanied by payment of the full purchase price of such shares, and the
Company shall deliver a certificate or certificates representing such shares as
soon as practicable after the notice shall be received. Such certificate or
certificates shall be registered in the name of the person or persons so
exercising this option (or, if this option shall be exercised by the Optionee
and if the Optionee shall so request in the notice exercising this option, shall
be registered in the
<PAGE>
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name of the Optionee and another person jointly, with right of survivorship). In
the event this option shall be exercised, pursuant to Section 5 hereof, by any
person or persons other than the Optionee, such notice shall be accompanied by
appropriate proof of the right of such person or persons to exercise this
option.
10. OPTION NOT TRANSFERABLE. This option is not transferable or
assignable except by will or by the laws of descent and distribution. During the
Optionee's lifetime only the Optionee can exercise this option.
11. NO OBLIGATION TO EXERCISE OPTION. The grant and acceptance of this
option imposes no obligation on the Optionee to exercise it.
12. NO OBLIGATION TO CONTINUE BUSINESS RELATIONSHIP. Neither the Plan,
this Agreement, nor the grant of this option imposes any obligation on the
Company to continue the Optionee in the Business Relationship.
13. ADJUSTMENTS. Except as is expressly provided in the Plan with
respect to certain changes in the capitalization of the Company, no adjustment
shall be made for dividends or similar rights for which the record date is prior
to such date of exercise.
14. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. The Plan contains
provisions covering the treatment of options in a number of contingencies such
as stock splits and mergers. Provisions in the Plan for adjustment with respect
to stock subject to options and the related provisions with respect to
successors to the business of the Company are hereby made applicable hereunder
and are incorporated herein by reference.
15. WITHHOLDING TAXES; SECTION 83(b) ELECTION.
(a) WITHHOLDING TAXES. If the Company in its discretion determines
that it is obligated to withhold any tax in connection with the exercise of this
option, or in connection with the transfer of, or the lapse of restrictions on,
any Common Stock or other property acquired pursuant to this option, the
Optionee hereby agrees that the Company may withhold from the Optionee's wages
or other remuneration the appropriate amount of tax. At the discretion of the
Company, the amount required to be withheld may be withheld in cash from such
wages or other remuneration or in kind from the Common Stock or other property
otherwise deliverable to the Optionee on exercise of this option. The Optionee
further agrees that, if the Company does not withhold an amount from the
Optionee's wages or other remuneration sufficient to satisfy the withholding
obligation of the Company, the Optionee will make reimbursement on demand, in
cash, for the amount underwithheld.
(b) SECTION 83(b) ELECTION. The Optionee acknowledges that if this
option is exercised as to any Unvested Shares, such Unvested Shares may be
treated as subject to a substantial risk of forfeiture under Section 83(b) of
the Code. In such event, the Optionee may make an election under Section 83(b)
to include in income currently the difference between the fair market value of
such Unvested Shares and the exercise price. If the Optionee does not make
<PAGE>
-8-
such an election, the Optionee understands that he or she will recognize income
at the time such Unvested Shares become Vested Shares. The Optionee agrees to
consult with his or her own tax advisor prior to the exercise of this option for
Unvested Shares.
16. COMPANY'S RIGHT OF FIRST REFUSAL.
(a) EXERCISE OF RIGHT. If the Optionee desires to transfer all or
any part of the Vested Shares to any person other than the Company (an
"Offeror"), the Optionee shall: (i) obtain in writing an irrevocable and
unconditional bona fide offer (the "Offer") for the purchase thereof from the
Offeror; and (ii) give written notice (the "Option Notice") to the Company
setting forth the Optionee's desire to transfer such shares, which Option Notice
shall be accompanied by a photocopy of the Offer and shall set forth at least
the name and address of the Offeror and the price and terms of the Offer. Upon
receipt of the Option Notice, the Company shall have an assignable option to
purchase any or all of such Vested Shares (the "Company Option Shares")
specified in the Option Notice, such option to be exercisable by giving, within
30 days after receipt of the Option Notice, a written counter-notice to the
Optionee. If the Company elects to purchase any or all of such Company Option
Shares, it shall be obligated to purchase, and the Optionee shall be obligated
to sell to the Company, such Company Option Shares at the price and terms
indicated in the Offer within 30 days from the date of delivery by the Company
of such counter-notice.
(b) SALE OF OPTION SHARES TO OFFEROR. The Optionee may, for 60 days
after the expiration of the 30-day option period as set forth in Section 16(a),2
sell to the Offeror, pursuant to the terms of the Offer, any or all of such
Company Option Shares not purchased or agreed to be purchased by the Company or
its assignee; PROVIDED, HOWEVER, that the Optionee shall not sell such Option
Shares to such Offeror if such Offeror is a competitor of the Company and the
Company gives written notice to the Optionee, within 30 days of its receipt of
the Option Notice, stating that the Optionee shall not sell his or her Option
Shares to such Offeror; and PROVIDED, FURTHER, that prior to the sale of such
Option Shares to an Offeror, such Offeror shall execute an agreement with the
Company pursuant to which such Offeror agrees to be subject to the restrictions
set forth in this Section 16. If any or all of such Option Shares are not sold
pursuant to an Offer within the time permitted above, the unsold Option Shares
shall remain subject to the terms of this Section 16.
(c) FAILURE TO DELIVER OPTION SHARES. If the Optionee fails or
refuses to deliver on a timely basis duly endorsed certificates representing
Company Option Shares to be sold to the Company or its assignee pursuant to this
Section 16, the Company shall have the right to deposit the purchase price for
such Company Option Shares in a special account with any bank or trust company,
giving notice of such deposit to the Optionee, whereupon such Company Option
Shares shall be deemed to have been purchased by the Company. All such monies
shall be held by the bank or trust company for the benefit of the Optionee. All
monies deposited with the bank or trust company but remaining unclaimed for two
years after the date of deposit shall be repaid by the bank or trust company to
the Company on demand, and the Optionee shall thereafter look only to the
Company for payment.
<PAGE>
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(d) EXPIRATION OF COMPANY'S RIGHT OF FIRST REFUSAL AND TRANSFER
RESTRICTIONS. The first refusal rights of the Company (or any of its assignees)
and the transfer restrictions set forth in Section 16(a)-(c) above shall remain
in effect until the earlier to occur of a Public Offering or an Organic Change.
17. LOCK-UP AGREEMENT. The Optionee agrees that in connection with any
underwritten public offering of Common Stock, upon the request of the Company or
the principal underwriter managing such public offering, the Option Shares may
not be sold, offered for sale or otherwise disposed of without the prior written
consent of the Company or such underwriter, as the case may be, for at least 180
days after the execution of an underwriting agreement in connection with such
offering, or such longer period of time as the Board of Directors may determine
if all of the Company's directors and executive officers agree to be similarly
bound. The obligations under this Section 17 shall remain effective for all
underwritten public offerings with respect to which the Company has filed a
registration statement on or before the date two (2) years after the closing of
the Company's initial public offering; PROVIDED, HOWEVER, that this Section 17
shall cease to apply to any Option Shares sold to the public pursuant to an
effective registration statement or an exemption from the registration
requirements of the Securities Act in a transaction that complied with the terms
of this Agreement.
18. ESCROW OF UNVESTED SHARES.
(a) If this option is exercised as to any Unvested Shares, such
Unvested Shares shall be issued in the name of the Optionee, but shall be held
in escrow by the Company, acting in the capacity of escrow agent, together with
a stock assignment executed by the Optionee with respect to such Unvested
Shares.
(b) With respect to any Unvested Shares held in escrow that become
Vested Shares, the Company shall promptly issue a new certificate for the number
of shares that have become Vested Shares and shall deliver such certificate to
the Optionee and shall retain in escrow a new certificate for any remaining
Unvested Shares in exchange for the all or the relevant portion of the
applicable certificate then being held by the Company as escrow agent.
(c) Subject to the terms hereof, the Optionee shall have all the
rights of a shareholder with respect to the Unvested Shares while they are held
in escrow, including without limitation, the right to vote the Unvested Shares
and receive any cash dividends declared thereon.
(d) The Company may terminate this escrow at any time. The Company
may also appoint another entity to serve as escrow agent hereunder, in which
event the Optionee agrees to execute all documents requested by the Company in
connection therewith.
19. PROVISION OF DOCUMENTATION TO OPTIONEE. By signing this Agreement
on the cover page hereto the Optionee acknowledges receipt of a copy of this
Agreement and a copy of the Plan.
<PAGE>
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20. MISCELLANEOUS.
(a) NOTICES. All notices hereunder shall be in writing and shall be
deemed given when sent by certified or registered mail, postage prepaid, return
receipt requested, if to the Optionee, to the address set forth below or at the
address shown on the records of the Company, and if to the Company, to the
Company's principal executive offices, attention of the Corporate Secretary.
(b) ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the
entire agreement between the parties relative to the subject matter hereof, and
supersedes all proposals, written or oral, and all other communications between
the parties relating to the subject matter of this Agreement. This Agreement may
be modified, amended or rescinded only by a written agreement executed by both
parties.
(c) FRACTIONAL SHARES. If this option becomes exercisable for a
fraction of a share because of the adjustment provisions contained in the Plan,
such fraction shall be rounded down.
(d) ISSUANCES OF SECURITIES. Except as expressly provided herein or
in the Plan, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares subject to this option.
(e) ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. If there shall be
any change in the Common Stock of the Company through merger, consolidation,
reorganization, recapitalization, stock dividend, stock split, combination or
exchange of shares, spin-off, split-up or other similar change in capitalization
or event, the restrictions and other provisions contained in Section 3, Section
6, Section 8, Section 16, Section 17 and Section 18 shall apply with equal force
to additional and/or substitute securities, if any, received by the Optionee in
exchange for, or by virtue of his or her ownership of, Option Shares, except as
otherwise determined by the Board.
(f) SEVERABILITY. The invalidity, illegality or unenforceability of
any provision of this Agreement shall in no way affect the validity, legality or
enforceability of any other provision.
(g) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns, subject to the limitations set forth in Section 10 hereof.
(h) GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of Delaware, without giving effect to
the principles of the conflicts of laws thereof.
<PAGE>
RED HAT SOFTWARE, INC.
INCENTIVE STOCK OPTION AGREEMENT
COVER SHEET
Red Hat Software, Inc., a Delaware corporation (the "Company"), hereby
grants as of the date below (the "Grant Date") to the person named below (the
"Employee") and the Employee hereby accepts, an option to purchase the number of
shares (the "Option Shares") listed below of the Company's Common Stock, $.0001
par value per share ("Common Stock"), at the price per share and with a vesting
start date (the "Vesting Start Date") listed below, such option to be on the
terms and conditions specified in the attached EXHIBIT A.
Employee Name: Tim Buckley
----------------------------------
Grant Date: April 12, 1999
----------------------------------
Vesting Start Date: April 12, 1999
----------------------------------
Number of Option Shares: 127,344
----------------------------------
Exercise Price Per Share: $3.141
----------------------------------
IN WITNESS WHEREOF, the Company, the Escrow Agent and the Employee have
caused this instrument to be executed as of the Grant Date set forth above.
/S/ Timothy Buckley RED HAT SOFTWARE, INC.
- ----------------------------------------- 2600 Meridian Parkway
(Employee Signature) Durham, NC 27713
- -----------------------------------------
(Street Address)
By: /S/ Matthew Szulik
- ----------------------------------------- Name: Matthew Szulik
(City/State/Zip Code) Title: President
ESCROW AGENT
RED HAT SOFTWARE, INC.
By: /S/ Matthew Szulik
Name: Matthew Szulik
Title: President
<PAGE>
EXHIBIT A
RED HAT SOFTWARE, INC.
INCENTIVE STOCK OPTION AGREEMENT
TERMS AND CONDITIONS
1. GRANT UNDER RED HAT SOFTWARE, INC. 1998 STOCK OPTION PLAN. This
option is granted pursuant to and is governed by the Red Hat Software, Inc. 1998
Stock Option Plan (the "Plan") and, unless the context otherwise requires, terms
used herein shall have the same meaning as in the Plan. Determinations made in
connection with this option pursuant to the Plan shall be governed by the Plan
as it exists on the Grant Date.
2. GRANT AS INCENTIVE STOCK OPTION; OTHER OPTIONS. This option is
intended to qualify as an incentive stock option under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). This option is in
addition to any other options heretofore or hereafter granted to the Employee by
the Company or any Related Corporation (as defined in the Plan), but a duplicate
original of this instrument shall not effect the grant of another option.
3. EXERCISABILITY OF OPTION; VESTING.
(a) FULL EXERCISABILITY. This option may be exercised at any
time and from time to time for all or any portion of the Option Shares, except
that this option may not be exercised for a fraction of a share. The foregoing
right (subject to Sections 4 or 5 hereof if the Employee ceases to be employed
by the Company) may be exercised on or before the date which is ten years from
the Grant Date. Option Shares which are "Unvested Shares," as specified in
paragraph (b) below, shall, if purchased, be subject to the Company's Repurchase
Option described in Section 6 unless and until they become "Vested Shares" in
accordance with paragraph (b) below. As of any date, the Option Shares issued
upon the exercise of this option on or before such date (the "Issued Shares")
shall first be deemed to be Vested Shares up to the number of Option Shares that
are Vested Shares under Section 3(b) above as of such date and any Issued Shares
in excess of the number of Vested Shares as of such date shall be deemed to be
Unvested Shares. The term "Option Shares" used without reference to either
Unvested Shares or Vested Shares shall mean both Unvested Shares and Vested
Shares, without distinction.
(b) VESTING. All of the Option Shares initially shall be Unvested
Shares. For so long as the Employee remains continuously employed by the Company
or any Related Corporation, Unvested Shares (whether or not previously
purchased) shall become Vested Shares (or shall "vest") on the following dates
in an amount equal to the number of shares set opposite the applicable date:
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One year from the Vesting Start Date - 25% of the Option Shares
On the first day of each subsequent
three month period following one
year from the Vesting Start Date - 6.25% of the Option Shares
In addition, in the event the Company's Repurchase Option becomes
exercisable pursuant to Section 6 below, and the Company elects not to exercise
its option for the repurchase of any or all of the Unvested Shares, then upon
the expiration of the Repurchase Option Period (as defined in Section 6), any
and all Option Shares not repurchased by the Company shall become Vested Shares.
The Board may, in its discretion, accelerate any of the foregoing vesting dates.
(c) ACCELERATED VESTING OF UNVESTED SHARES UPON TERMINATION
WITHOUT CAUSE WITHIN FIRST YEAR OF EMPLOYMENT. If the Employee is terminated by
the Company or its successor or assign without Cause (as defined in Section
4(c)) within sixteen months after the Vesting Start Date, then immediately prior
to such termination, a number of shares as is equal to 33.3% of such Employee's
Option Shares shall be deemed Vested Shares for purposes of this Agreement.
(d) ACCELERATED VESTING OF UNVESTED SHARES UPON TERMINATION
FOLLOWING CHANGE IN CONTROL. If the Employee is terminated by the Company or its
successor or assign without Cause (as defined in Section 4(c)) or if the
Employee voluntarily terminates his employment for Good Reason, in either case,
within one year after a Change in Control, then immediately prior to such
termination all shares that are Unvested Shares as of such termination date,
shall be deemed Vested Shares for purposes of this Agreement. Notwithstanding
the foregoing, if the Change in Control that would otherwise give rise to the
acceleration of vesting under this Section 3(d) is one which the parties intend
to account for as a pooling of interests, and if the Board of Directors,
following consultation with the Company's accountants, determines that such
acceleration would cause such transaction not to qualify for pooling of
interests accounting, then the provisions of this Section 3(d) shall not apply
to such Change in Control.
(e) DEFINITIONS. For purposes of this Section 3
(i) The term "Change in Control" shall mean (i) the
effective time of a consolidation of the Company with, or merger of the Company
with or into, another corporation or other business organization in which the
shares of the stock of the Company are converted into or otherwise exchanged for
less than fifty percent (50%) of the shares of a resulting or surviving
corporation, (ii) the closing of a sale or conveyance of all or substantially
all of the assets of the Company, or (iii) an acquisition in a transaction or a
series of related transactions by a person or group (as defined in Rule
<PAGE>
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13d-5(b)(1) of the Securities Act of 1934, as amended) of more than a majority
of the outstanding voting stock of the Company.
(ii) The term "Good Reason" shall mean, without such
Employee's express written consent, (i) any significant diminution in the
Employee's position, duties, responsibilities, power, title or office as in
effect immediately prior to the Change in Control; (ii) any reduction in the
Employee's annual base salary as in effect on the effective date of the Change
in Control or failure to continue coverage of such Employee under any
compensation or benefit plan in which such Employee participates on the
effective date of the Change in Control; or (iii) a requirement that (A) the
location in which the Employee perform his principal duties for the Company be
changed to a new location that is outside a radius of 75 miles from such
Employee's principal residence at the effective date of the Change in Control or
(B) such Employee travel on an overnight basis more than 90 days in any 12-month
consecutive period.
4. TERMINATION OF EMPLOYMENT.
(a) TERMINATION OTHER THAN FOR CAUSE. If the Employee ceases
to be employed by the Company or any Related Corporation, other than by reason
of death or disability as defined in Section 5 or termination for Cause as
defined in Section 4(c), vesting of Unvested Shares shall immediately cease,
this option shall terminate (may no longer be exercised) immediately as to any
Unvested Shares and may be exercised only as to any Option Shares that are
Vested Shares on the date of termination of the Employee's employment. This
option may then be exercised only as to any Option Shares that are Vested Shares
as of such termination date or prior to the date which is 90 days after the date
of termination of the Employee's employment (but not later than the scheduled
expiration date). In the event of termination of employment, the Repurchase
Option described in Section 6 shall also be applicable. For purposes hereof,
employment shall be considered as continuing uninterrupted during any bona fide
leave of absence (such as those attributable to illness, military obligations or
governmental service); PROVIDED that the period of such leave does not exceed 90
days or, if longer, any period during which the Employee's right to reemployment
is guaranteed by statute or by contract. A bona fide leave of absence with the
written approval of the Company shall not be considered an interruption of
employment for purposes hereof; PROVIDED that such written approval
contractually obligates the Company to continue the employment of the Employee
after the approved period of absence. This option shall not be affected by any
change of employment within or among the Company and any Related Corporation so
long as the Employee continuously remains an employee of the Company or any
Related Corporation.
(b) TERMINATION FOR CAUSE. If the employment of the Employee
is terminated for Cause (as defined in Section 4(c)), this option shall
terminate (may no longer be exercised) as to any Vested Shares and Unvested
Shares upon the Employee's receipt of written notice of such termination. In the
event of termination of the
<PAGE>
-4-
Employee's employment, the Repurchase Option described in Section 6 shall also
be applicable.
(c) DEFINITION OF CAUSE. "Cause" shall mean conduct involving
one or more of the following: (i) the substantial and continuing failure of the
Employee, after notice thereof, to render services to the Company or any Related
Corporation in accordance with the terms or requirements of his or her
employment; (ii) disloyalty, gross negligence, willful misconduct, dishonesty,
fraud or breach of fiduciary duty to the Company or any Related Corporation;
(iii) deliberate disregard of the rules or policies of the Company or any
Related Corporation, or breach of an employment or other agreement with the
Company or any Related Corporation, which results in direct or indirect loss,
damage or injury to the Company or any Related Corporation; (iv) the
unauthorized disclosure of any trade secret or confidential information of the
Company or any Related Corporation; or (v) the commission of an act which
constitutes unfair competition with the Company or any Related Corporation or
which induces any customer or supplier to breach a contract with the Company or
any Related Corporation.
5. DEATH; DISABILITY.
(a) DEATH. If the Employee dies while in the employ of the
Company or any Related Corporation, vesting of Unvested Shares shall immediately
cease. In such event, this option may be exercised only as to any Option Shares
that are Vested Shares on the date of the Employee's death, by the Employee's
estate, personal representative or beneficiary to whom this option has been
assigned pursuant to Section 10, and this option may be exercised only on or
prior to the date which is 180 days after the date of death (but not later than
the scheduled expiration date). In the event of death, the Repurchase Option
described in Section 6 shall also be applicable.
(b) DISABILITY. If the Employee ceases to be employed by the
Company or any Related Corporation by reason of his or her disability, vesting
of Option Shares shall immediately cease; this option may be exercised only as
to any Option Shares that are Vested Shares on the date of termination of the
Employee's employment; and this option may be exercised only on or prior to the
date which is 180 days after the date of termination of the Employee's
employment (but not later than the scheduled expiration date). In the event of
such termination of employment, the Repurchase Option described in Section 6
shall also be applicable. For purposes hereof, "disability" means "permanent and
total disability" as defined in Section 22(e)(3) of the Code.
6. REPURCHASE OPTION. In the event of any voluntary or involuntary
termination of the Employee's employment by the Company or any Related
Corporation for any or no reason, including by reason of death or disability,
the Company shall, upon and from the date of such termination (as reasonably
fixed and determined by the Company) have an irrevocable, exclusive, assignable
option (the "Repurchase Option") for a period of ninety (90) days following the
termination of such Employee's employment (the "Repurchase Option Period") to
repurchase all or any portion of the
<PAGE>
-5-
Unvested Shares held by the Employee at the original purchase price per share
paid by the Employee. Such option may be exercised by the Company by sending
written notice to the Employee, which notice shall specify the number of
Unvested Shares being so repurchased and which notice shall be accompanied by
the Company's check for the purchase price of those shares. Upon the sending of
such notice and check, the Company shall become the legal and beneficial owner
of the Unvested Shares being repurchased and all rights and interests therein or
relating thereto, and the Company shall have the right to retain and transfer to
its own name the number of Unvested Shares being repurchased by the Company.
7. PAYMENT OF EXERCISE PRICE.
(a) PAYMENT OPTIONS. The exercise price shall be paid by one
or any combination of the following forms of payment:
(i) in cash, or by check payable to the order of
the Company;
(ii) subject to Section 7(b) below, if the Common
Stock is then traded on a national securities exchange or on the Nasdaq National
Market (or successor trading system), by delivery of shares of Common Stock
having a fair market value equal as of the date of exercise to the option price;
or
(iii) delivery of an irrevocable and unconditional
undertaking, satisfactory in form and substance to the Company, by a
creditworthy broker to deliver promptly to the Company sufficient funds to pay
the exercise price, or delivery by the Employee to the Company of a copy of
irrevocable and unconditional instructions, satisfactory in form and substance
to the Company, to a creditworthy broker to deliver promptly to the Company cash
or a check sufficient to pay the exercise price.
In the case of (ii) above, fair market value shall be determined as of
the last business day for which such prices or quotes are available prior to the
date of exercise and shall mean (i) the average (on that date) of the high and
low prices of the Common Stock on the principal national securities exchange on
which the Common Stock is traded, if the Common Stock is then traded on a
national securities exchange; or (ii) the last reported sale price (on that
date) of the Common Stock on the Nasdaq National Market (or successor trading
system), if the Common Stock is not then traded on a national securities
exchange.
(b) LIMITATIONS ON PAYMENT BY DELIVERY OF COMMON STOCK. If the
Employee delivers Common Stock held by the Employee ("Old Stock") to the Company
in full or partial payment of the exercise price, and the Old Stock so delivered
is subject to restrictions or limitations imposed by agreement between the
Employee and the Company, an equivalent number of Option Shares shall be subject
to all restrictions and limitations applicable to the Old Stock to the extent
that the Employee paid for the Option Shares by delivery of Old Stock, in
addition to any restrictions or limitations
<PAGE>
-6-
imposed by this Agreement. Notwithstanding the foregoing, the Employee may not
pay any part of the exercise price hereof by transferring Common Stock to the
Company unless such Common Stock has been owned by the Employee free of any
substantial risk of forfeiture for at least six months.
8. RESTRICTIONS ON RESALE; LEGEND.
(a) TRANSFER RESTRICTIONS.
(i) UNVESTED SHARES. The Employee agrees not to
sell, assign, transfer, pledge, hypothecate, gift, mortgage or otherwise
encumber or dispose of (except to the Company or any successor to the Company)
all or any Unvested Shares or any interest therein, and any Unvested Shares
purchased upon exercise of this option shall be held in escrow by the Company in
accordance with the terms of Section 19 below unless and until they become
Vested Shares.
(ii) VESTED SHARES. Option Shares that are Vested
Shares may not be transferred without the Company's written consent except by
will, by the laws of descent and distribution and in accordance with the
provisions of Section 17, if applicable.
(iii) SECURITIES ACT RESTRICTIONS. Option Shares
will be of an illiquid nature and will be deemed to be "restricted securities"
for purposes of the Securities Act of 1933, as amended (the "Securities Act").
Accordingly, such shares must be sold in compliance with the registration
requirements of the Securities Act or an exemption therefrom. Each certificate
evidencing any of the Option Shares shall bear a legend substantially as
follows:
"The shares represented by this certificate are subject to restrictions
on transfer and may not be sold, exchanged, transferred, pledged,
hypothecated or other?wise disposed of except in accordance with and
subject to all the terms and conditions of a certain Incentive Stock
Option Agreement, a copy of which the Company will furnish to the
holder of this certificate upon request and without charge."
(b) TERMINATION OF RESTRICTIONS. The restrictions on transfer
contained in Section 8(a)(ii) (including without limitation the provisions of
Section 17) shall expire as to Option Shares on the earliest to occur of (i) a
distribution to the public of shares of common stock of the Company pursuant to
an effective registration statement filed under the Securities Act or any
successor statute (a "Public Offering"), or (ii) an Organic Change (as defined
in the Plan).
9. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of
this Agreement, this option may be exercised by written notice to the Company at
its principal executive office, or to such transfer agent as the Company shall
designate. Such
<PAGE>
-7-
notice shall state the election to exercise this option and the number of Option
Shares for which it is being exercised and shall be signed by the person or
persons so exercising this option. Such notice shall be accompanied by payment
of the full purchase price of such shares, and the Company shall deliver a
certificate or certificates representing such shares as soon as practicable
after the notice shall be received. Such certificate or certificates shall be
registered in the name of the person or persons so exercising this option (or,
if this option shall be exercised by the Employee and if the Employee shall so
request in the notice exercising this option, shall be registered in the name of
the Employee and another person jointly, with right of survivorship). In the
event this option shall be exercised, pursuant to Section 5 hereof, by any
person or persons other than the Employee, such notice shall be accompanied by
appropriate proof of the right of such person or persons to exercise this
option.
10. OPTION NOT TRANSFERABLE. This option is not transferable or
assignable except by will or by the laws of descent and distribution. During the
Employee's lifetime only the Employee can exercise this option.
11. NO OBLIGATION TO EXERCISE OPTION. The grant and acceptance of this
option imposes no obligation on the Employee to exercise it.
12. NO OBLIGATION TO CONTINUE EMPLOYMENT. Neither the Plan, this
Agreement, nor the grant of this option imposes any obligation on the Company to
continue the Employee in employment.
13. ADJUSTMENTS. Except as is expressly provided in the Plan with
respect to certain changes in the capitalization of the Company, no adjustment
shall be made for dividends or similar rights for which the record date is prior
to such date of exercise.
14. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. The Plan contains
provisions covering the treatment of options in a number of contingencies such
as stock splits and mergers. Provisions in the Plan for adjustment with respect
to stock subject to options and the related provisions with respect to
successors to the business of the Company are hereby made applicable hereunder
and are incorporated herein by reference.
15. EARLY DISPOSITION. The Employee agrees to notify the Company in
writing immediately after the Employee transfers any Option Shares, if such
transfer occurs on or before the later of (a) the date two years after the date
of this Agreement or (b) the date one year after the date the Employee acquired
such Option Shares. The Employee also agrees to provide the Company with any
information concerning any such transfer required by the Company for tax
purposes.
<PAGE>
-8-
16. WITHHOLDING TAXES; SECTION 83(b) ELECTION.
(a) WITHHOLDING TAXES. If the Company in its discretion
determines that it is obligated to withhold any tax in connection with the
exercise of this option, or in connection with the transfer of, or the lapse of
restrictions on, any Common Stock or other property acquired pursuant to this
option, the Employee hereby agrees that the Company may withhold from the
Employee's wages or other remuneration the appropriate amount of tax. At the
discretion of the Company, the amount required to be withheld may be withheld in
cash from such wages or other remuneration or in kind from the Common Stock or
other property otherwise deliverable to the Employee on exercise of this option.
The Employee further agrees that, if the Company does not withhold an amount
from the Employee's wages or other remuneration sufficient to satisfy the
withholding obligation of the Company, the Employee will make reimbursement on
demand, in cash, for the amount underwithheld.
(b) SECTION 83(b) ELECTION. The Employee acknowledges that if
this option is exercised as to any Unvested Shares, such Unvested Shares may be
treated as subject to a substantial risk of forfeiture under Section 83(b) of
the Code. In such event, the Employee may make an election under Section 83(b)
to include in income currently the difference between the fair market value of
such Unvested Shares and the exercise price. If the Employee does not make such
an election, the Employee understands that he or she will recognize income at
the time such Unvested Shares become Vested Shares. The Employee agrees to
consult with his or her own tax advisor prior to the exercise of this option for
Unvested Shares.
17. COMPANY'S RIGHT OF FIRST REFUSAL.
(a) EXERCISE OF RIGHT. If the Employee desires to transfer all
or any part of the Vested Shares to any person other than the Company (an
"Offeror"), the Employee shall: (i) obtain in writing an irrevocable and
unconditional bona fide offer (the "Offer") for the purchase thereof from the
Offeror; and (ii) give written notice (the "Option Notice") to the Company
setting forth the Employee's desire to transfer such shares, which Option Notice
shall be accompanied by a photocopy of the Offer and shall set forth at least
the name and address of the Offeror and the price and terms of the Offer. Upon
receipt of the Option Notice, the Company shall have an assignable option to
purchase any or all of such Vested Shares (the "Company Option Shares")
specified in the Option Notice, such option to be exercisable by giving, within
30 days after receipt of the Option Notice, a written counter-notice to the
Employee. If the Company elects to purchase any or all of such Company Option
Shares, it shall be obligated to purchase, and the Employee shall be obligated
to sell to the Company, such Company Option Shares at the price and terms
indicated in the Offer within 30 days from the date of delivery by the Company
of such counter-notice.
(b) SALE OF OPTION SHARES TO OFFEROR. The Employee may, for 60
days after the expiration of the 30-day option period as set forth in Section
17(a), sell to
<PAGE>
-9-
the Offeror, pursuant to the terms of the Offer, any or all of such Company
Option Shares not purchased or agreed to be purchased by the Company or its
assignee; PROVIDED, HOWEVER, that the Employee shall not sell such Option Shares
to such Offeror if such Offeror is a competitor of the Company and the Company
gives written notice to the Employee, within 30 days of its receipt of the
Option Notice, stating that the Employee shall not sell his or her Option Shares
to such Offeror; and PROVIDED, FURTHER, that prior to the sale of such Option
Shares to an Offeror, such Offeror shall execute an agreement with the Company
pursuant to which such Offeror agrees to be subject to the restrictions set
forth in this Section 17. If any or all of such Option Shares are not sold
pursuant to an Offer within the time permitted above, the unsold Option Shares
shall remain subject to the terms of this Section 17.
(c) FAILURE TO DELIVER OPTION SHARES. If the Employee fails or
refuses to deliver on a timely basis duly endorsed certificates representing
Company Option Shares to be sold to the Company or its assignee pursuant to this
Section 17, the Company shall have the right to deposit the purchase price for
such Company Option Shares in a special account with any bank or trust company,
giving notice of such deposit to the Employee, whereupon such Company Option
Shares shall be deemed to have been purchased by the Company. All such monies
shall be held by the bank or trust company for the benefit of the Employee. All
monies deposited with the bank or trust company but remaining unclaimed for two
years after the date of deposit shall be repaid by the bank or trust company to
the Company on demand, and the Employee shall thereafter look only to the
Company for payment.
(d) EXPIRATION OF COMPANY'S RIGHT OF FIRST REFUSAL AND
TRANSFER RESTRICTIONS. The first refusal rights of the Company (or any of its
assignees) and the transfer restrictions set forth in Section 17(a)-(c) above
shall remain in effect until the earlier to occur of a Public Offering or an
Organic Change.
18. LOCK-UP AGREEMENT. The Employee agrees that in connection with an
underwritten public offering of Common Stock, upon the request of the Company or
the principal underwriter managing such public offering, the Option Shares may
not be sold, offered for sale or otherwise disposed of without the prior written
consent of the Company or such underwriter, as the case may be, for at least 180
days after the execution of an underwriting agreement in connection with such
offering, or such longer period of time as the Board of Directors may determine
if all of the Company's directors and executive officers agree to be similarly
bound. The obligations under this Section 18 shall remain effective for all
underwritten public offerings with respect to which the Company has filed a
registration statement on or before the date two (2) years after the closing of
the Company's initial public offering; PROVIDED, HOWEVER, that this Section 18
shall cease to apply to any Option Shares sold to the public pursuant to an
effective registration statement or an exemption from the registration
requirements of the Securities Act in a transaction that complied with the terms
of this Agreement.
19. ESCROW OF UNVESTED SHARES.
<PAGE>
-10-
(a) If this option is exercised as to any Unvested Shares,
such Unvested Shares shall be issued in the name of the Employee, but shall be
held in escrow by the Company, acting in the capacity of escrow agent, together
with a stock assignment executed by the Employee with respect to such Unvested
Shares.
(b) With respect to any Unvested Shares held in escrow that
become Vested Shares, the Company shall promptly issue a new certificate for the
number of shares that have become Vested Shares and shall deliver such
certificate to the Employee and shall retain in escrow a new certificate for any
remaining Unvested Shares in exchange for the all or the relevant portion of the
applicable certificate then being held by the Company as escrow agent.
(c) Subject to the terms hereof, the Employee shall have all
the rights of a shareholder with respect to the Unvested Shares while they are
held in escrow, including without limitation, the right to vote the Unvested
Shares and receive any cash dividends declared thereon.
(d) The Company may terminate this escrow at any time. The
Company may also appoint another entity to serve as escrow agent hereunder, in
which event the Employee agrees to execute all documents requested by the
Company in connection therewith.
20. PROVISION OF DOCUMENTATION TO EMPLOYEE. By signing this Agreement
on the cover page hereto the Employee acknowledges receipt of a copy of this
Agreement and a copy of the Plan.
21. MISCELLANEOUS.
(a) NOTICES. All notices hereunder shall be in writing and
shall be deemed given when sent by certified or registered mail, postage
prepaid, return receipt requested, if to the Employee, to the address set forth
below or at the address shown on the records of the Company, and if to the
Company, to the Company's principal executive offices, attention of the
Corporate Secretary.
(b) ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes
the entire agreement between the parties relative to the subject matter hereof,
and supersedes all proposals, written or oral, and all other communications
between the parties relating to the subject matter of this Agreement. This
Agreement may be modified, amended or rescinded only by a written agreement
executed by both parties.
(c) FRACTIONAL SHARES. If this option becomes exercisable for
a fraction of a share because of the adjustment provisions contained in the
Plan, such fraction shall be rounded down.
<PAGE>
-11-
(d) ISSUANCES OF SECURITIES. Except as expressly provided
herein or in the Plan, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares subject to this option.
(e) ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. If there
shall be any change in the Common Stock of the Company through merger,
consolidation, reorganization, recapitalization, stock dividend, stock split,
combination or exchange of shares, spin-off, split-up or other similar change in
capitalization or event, the restrictions and other provisions contained in
Section 3, Section 6, Section 8, Section 17, Section 18 and Section 19 shall
apply with equal force to additional and/or substitute securities, if any,
received by the Employee in exchange for, or by virtue of his or her ownership
of, Option Shares, except as otherwise determined by the Board.
(f) SEVERABILITY. The invalidity, illegality or
unenforceability of any provision of this Agreement shall in no way affect the
validity, legality or enforceability of any other provision.
(g) SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns, subject to the limitations set forth in Section 10
hereof.
(h) GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of Delaware, without giving effect to
the principles of the conflicts of laws thereof.
<PAGE>
Exhibit 10.13
GNU GENERAL PUBLIC LICENSE
Version 2, June 1991
Copyright (C) 1989, 1991 Free Software Foundation, Inc.
59 Temple Place, Suite 330, Boston, MA 02111-1307 USA
Everyone is permitted to copy and distribute verbatim copies of this
license document,
but changing it is not allowed.
Preamble
The licenses for most software are designed to take away your freedom to
share and change it. By contrast, the GNU General Public License is intended to
guarantee your freedom to share and change free software--to make sure the
software is free for all its users. This General Public License applies to most
of the Free Software Foundation's software and to any other program whose
authors commit to using it. (Some other Free Software Foundation software is
covered by the GNU Library General Public License instead.) You can apply it to
your programs, too.
When we speak of free software, we are referring to freedom, not price.
Our General Public Licenses are designed to make sure that you have the freedom
to distribute copies of free software (and charge for this service if you wish),
that you receive source code or can get it if you want it, that you can change
the software or use pieces of it in new free programs; and that you know you can
do these things.
To protect your rights, we need to make restrictions that forbid anyone to
deny you these rights or to ask you to surrender the rights. These restrictions
translate to certain responsibilities for you if you distribute copies of the
software, or if you modify it.
For example, if you distribute copies of such a program, whether gratis or
for a fee, you must give the recipients all the rights that you have. You must
make sure that they, too, receive or can get the source code. And you must show
them these terms so they know their rights.
We protect your rights with two steps: (1) copyright the software, and (2)
offer you this license which gives you legal permission to copy, distribute
and/or modify the software.
Also, for each author's protection and ours, we want to make certain that
everyone understands that there is no warranty for this free software. If the
software is modified by someone else and passed on, we want its recipients to
know that what they have is not the original, so that any problems introduced by
others will not reflect on the original authors' reputations.
Finally, any free program is threatened constantly by software patents. We
wish to avoid the danger that redistributors of a free program will individually
obtain patent licenses, in effect making the program proprietary. To prevent
this, we have made it clear that any patent must be licensed for everyone's free
use or not licensed at all.
The precise terms and conditions for copying, distribution and
modification follow.
<PAGE>
GNU GENERAL PUBLIC LICENSE
TERMS AND CONDITIONS FOR COPYING, DISTRIBUTION AND MODIFICATION
0. This License applies to any program or other work which contains a notice
placed by the copyright holder saying it may be distributed under the terms of
this General Public License. The "Program", below, refers to any such program or
work, and a "work based on the Program" means either the Program or any
derivative work under copyright law: that is to say, a work containing the
Program or a portion of it, either verbatim or with modifications and/or
translated into another language. (Hereinafter, translation is included without
limitation in the term "modification".) Each licensee is addressed as "you".
Activities other than copying, distribution and modification are not
covered by this License; they are outside its scope. The act of running the
Program is not restricted, and the output from the Program is covered only if
its contents constitute a work based on the Program (independent of having been
made by running the Program). Whether that is true depends on what the Program
does.
1. You may copy and distribute verbatim copies of the Program's source code as
you receive it, in any medium, provided that you conspicuously and appropriately
publish on each copy an appropriate copyright notice and disclaimer of warranty;
keep intact all the notices that refer to this License and to the absence of any
warranty; and give any other recipients of the Program a copy of this License
along with the Program.
You may charge a fee for the physical act of transferring a copy, and you
may at your option offer warranty protection in exchange for a fee.
2. You may modify your copy or copies of the Program or any portion of it,
thus forming a work based on the Program, and copy and distribute such
modifications or work under the terms of Section 1 above, provided that you also
meet all of these conditions:
a) You must cause the modified files to carry prominent notices stating
that you changed the files and the date of any change.
b) You must cause any work that you distribute or publish, that in whole
or in part contains or is derived from the Program or any part thereof, to be
licensed as a whole at no charge to all third parties under the terms of this
License.
c) If the modified program normally reads commands interactively when
run, you must cause it, when started running for such interactive use in the
most ordinary way, to print or display an announcement including an appropriate
copyright notice and a notice that there is no warranty (or else, saying that
you provide a warranty) and that users may redistribute the program under these
conditions, and telling the user how to view a copy of this License. (Exception:
if the Program itself is interactive but does not normally print such an
announcement, your work based on the Program is not required to print an
announcement.)
These requirements apply to the modified work as a whole. If identifiable
sections of that work are not derived from the Program, and can be reasonably
considered independent and separate works in themselves, then this License, and
its terms, do not apply to those sections when you distribute them as separate
works. But when you distribute the same sections as part of a whole which is a
work based on the Program, the distribution of the whole must be on the terms of
this License, whose permissions for other licensees extend to the entire whole,
and thus to each and every part regardless of who wrote it.
Thus, it is not the intent of this section to claim rights or contest your
rights to work written entirely by you; rather, the intent is to exercise the
right to control the distribution of derivative or collective works based on the
Program.
In addition, mere aggregation of another work not based on the Program
with the Program (or with a work based on the Program) on a volume of a storage
or distribution medium does not bring the other work under the scope of this
License.
<PAGE>
3. You may copy and distribute the Program (or a work based on it, under
Section 2) in object code or executable form under the terms of Sections 1 and 2
above provided that you also do one of the following:
a) Accompany it with the complete corresponding machine-readable source
code, which must be distributed under the terms of Sections 1 and 2 above on a
medium customarily used for software interchange; or,
b) Accompany it with a written offer, valid for at least three years, to
give any third party, for a charge no more than your cost of physically
performing source distribution, a complete machine-readable copy of the
corresponding source code, to be distributed under the terms of Sections 1 and 2
above on a medium customarily used for software interchange; or,
c) Accompany it with the information you received as to the offer to
distribute corresponding source code. (This alternative is allowed only for
noncommercial distribution and only if you received the program in object code
or executable form with such an offer, in accord with Subsection b above.)
The source code for a work means the preferred form of the work for making
modifications to it. For an executable work, complete source code means all the
source code for all modules it contains, plus any associated interface
definition files, plus the scripts used to control compilation and installation
of the executable. However, as a special exception, the source code distributed
need not include anything that is normally distributed (in either source or
binary form) with the major components (compiler, kernel, and so on) of the
operating system on which the executable runs, unless that component itself
accompanies the executable.
If distribution of executable or object code is made by offering access to
copy from a designated place, then offering equivalent access to copy the source
code from the same place counts as distribution of the source code, even though
third parties are not compelled to copy the source along with the object code.
4. You may not copy, modify, sublicense, or distribute the Program except as
expressly provided under this License. Any attempt otherwise to copy, modify,
sublicense or distribute the Program is void, and will automatically terminate
your rights under this License. However, parties who have received copies, or
rights, from you under this License will not have their licenses terminated so
long as such parties remain in full compliance.
5. You are not required to accept this License, since you have not signed it.
However, nothing else grants you permission to modify or distribute the Program
or its derivative works. These actions are prohibited by law if you do not
accept this License. Therefore, by modifying or distributing the Program (or any
work based on the Program), you indicate your acceptance of this License to do
so, and all its terms and conditions for copying, distributing or modifying the
Program or works based on it.
6. Each time you redistribute the Program (or any work based on the Program),
the recipient automatically receives a license from the original licensor to
copy, distribute or modify the Program subject to these terms and conditions.
You may not impose any further restrictions on the recipients' exercise of the
rights granted herein. You are not responsible for enforcing compliance by third
parties to this License.
7. If, as a consequence of a court judgment or allegation of patent
infringement or for any other reason (not limited to patent issues), conditions
are imposed on you (whether by court order, agreement or otherwise) that
contradict the conditions of this License, they do not excuse you from the
conditions of this License. If you cannot distribute so as to satisfy
simultaneously your obligations under this License and any other pertinent
obligations, then as a consequence you may not distribute the Program at all.
For example, if a patent license would not permit royalty free redistribution of
the Program by all those who receive copies directly or indirectly through you,
then the only way you could satisfy both it and this License would be to refrain
entirely from distribution of the Program.
If any portion of this section is held invalid or unenforceable under any
particular circumstance, the balance of the section is intended to apply and the
section as a whole is intended to apply in other circumstances.
It is not the purpose of this section to induce you to infringe any
patents or other property right claims or to contest validity of any such
claims; this section has the sole purpose of protecting the integrity of the
free software
<PAGE>
distribution system, which is implemented by public license practices. Many
people have made generous contributions to the wide range of software
distributed through that system in reliance on consistent application of that
system; it is up to the author/donor to decide if he or she is willing to
distribute software through any other system and a licensee cannot impose that
choice.
This section is intended to make thoroughly clear what is believed to be a
consequence of the rest of this License.
8. If the distribution and/or use of the Program is restricted in certain
countries either by patents or by copyrighted interfaces, the original copyright
holder who places the Program under this License may add an explicit
geographical distribution limitation excluding those countries, so that
distribution is permitted only in or among countries not thus excluded. In such
case, this License incorporates the limitation as if written in the body of this
License.
9. The Free Software Foundation may publish revised and/or new versions of the
General Public License from time to time. Such new versions will be similar in
spirit to the present version, but may differ in detail to address new problems
or concerns.
Each version is given a distinguishing version number. If the Program
specifies a version number of this License which applies to it and "any later
version", you have the option of following the terms and conditions either of
that version or of any later version published by the Free Software Foundation.
If the Program does not specify a version number of this License, you may choose
any version ever published by the Free Software Foundation.
10. If you wish to incorporate parts of the Program into other free programs
whose distribution conditions are different, write to the author to ask for
permission. For software which is copyrighted by the Free Software Foundation,
write to the Free Software Foundation; we sometimes make exceptions for this.
Our decision will be guided by the two goals of preserving the free status of
all derivatives of our free software and of promoting the sharing and reuse of
software generally.
NO WARRANTY
11. BECAUSE THE PROGRAM IS LICENSED FREE OF CHARGE, THERE IS NO WARRANTY FOR
THE PROGRAM, TO THE EXTENT PERMITTED BY APPLICABLE LAW. EXCEPT WHEN OTHERWISE
STATED IN WRITING THE COPYRIGHT HOLDERS AND/OR OTHER PARTIES PROVIDE THE PROGRAM
"AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING,
BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE
PROGRAM IS WITH YOU. SHOULD THE PROGRAM PROVE DEFECTIVE, YOU ASSUME THE COST OF
ALL NECESSARY SERVICING, REPAIR OR CORRECTION.
12. IN NO EVENT UNLESS REQUIRED BY APPLICABLE LAW OR AGREED TO IN WRITING WILL
ANY COPYRIGHT HOLDER, OR ANY OTHER PARTY WHO MAY MODIFY AND/OR REDISTRIBUTE THE
PROGRAM AS PERMITTED ABOVE, BE LIABLE TO YOU FOR DAMAGES, INCLUDING ANY GENERAL,
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE USE OR INABILITY
TO USE THE PROGRAM (INCLUDING BUT NOT LIMITED TO LOSS OF DATA OR DATA BEING
RENDERED INACCURATE OR LOSSES SUSTAINED BY YOU OR THIRD PARTIES OR A FAILURE OF
THE PROGRAM TO OPERATE WITH ANY OTHER PROGRAMS), EVEN IF SUCH HOLDER OR OTHER
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
END OF TERMS AND CONDITIONS
<PAGE>
How to Apply These Terms to Your New Programs
If you develop a new program, and you want it to be of the greatest
possible use to the public, the best way to achieve this is to make it free
software which everyone can redistribute and change under these terms.
To do so, attach the following notices to the program. It is safest to
attach them to the start of each source file to most effectively convey the
exclusion of warranty; and each file should have at least the "copyright" line
and a pointer to where the full notice is found.
(one line to give the program's name and a brief idea of what it does.)
Copyright (C) 19yy (name of author)
This program is free software; you can redistribute it and/or modify it
under the terms of the GNU General Public License as published by the Free
Software Foundation; either version 2 of the License, or (at your option)
any later version.
This program is distributed in the hope that it will be useful, but WITHOUT
ANY WARRANTY; without even the implied warranty of MERCHANTABILITY or
FITNESS FOR A PARTICULAR PURPOSE. See the GNU General Public License for
more details.
You should have received a copy of the GNU General Public License along with
this program; if not, write to the Free Software Foundation, Inc., 59 Temple
Place, Suite 330, Boston, MA 02111-1307 USA
Also add information on how to contact you by electronic and paper mail.
If the program is interactive, make it output a short notice like this
when it starts in an interactive mode:
Gnomovision version 69, Copyright (C) 19yy name of author
Gnomovision comes with ABSOLUTELY NO WARRANTY; for details type `show w'.
This is free software, and you are welcome to redistribute it under certain
conditions; type `show c' for details.
The hypothetical commands `show w' and `show c' should show the
appropriate parts of the General Public License. Of course, the commands you use
may be called something other than `show w' and `show c'; they could even be
mouse-clicks or menu items--whatever suits your program.
You should also get your employer (if you work as a programmer) or your
school, if any, to sign a "copyright disclaimer" for the program, if necessary.
Here is a sample; alter the names:
Yoyodyne, Inc., hereby disclaims all copyright interest in the program
`Gnomovision' (which makes passes at compilers) written by James
Hacker.
(signature of Ty Coon), 1 April 1989
Ty Coon, President of Vice
This General Public License does not permit incorporating your program
into proprietary programs. If your program is a subroutine library, you may
consider it more useful to permit linking proprietary applications with the
library. If this is what you want to do, use the GNU Library General Public
License instead of this License.
<PAGE>
Exhibit 10.14
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT ("Agreement"), is entered into this 15th day
of October, 1998, by and between INGRAM MICRO INC. ("Ingram"), a Delaware
corporation, having its principal place of business at 1600 E. St. Andrew Place,
Santa Ana, California 92705, and RED HAT SOFTWARE ("Vendor"), a DELAWARE
corporation, having, its principal place of business at 4201 RESEARCH COMMONS,
SUITE 100, RESEARCH TRIANGLE PARK, NORTH CAROLINA 27709. The parties desire to
and hereby do, enter into a distributor/supplier relationship, the governing
terms and mutual promises of which are set out in this Agreement.
1. DISTRIBUTION RIGHTS
1.1 TERRITORY. Vendor grants to Ingram, including its affiliates for
resale, and Ingram accepts, a [CONFIDENTIAL TREATMENT REQUESTED]**. All computer
Products produced and/or offered by Vendor ("Product") during the term of this
Agreement shall be distributed worldwide. Ingram shall have the right to
purchase, sell and ship to any reseller within the territory or to Ingram's
affiliate, or at Vendor's option Ingram's affiliate may purchase direct from
Vendor.
1.2 PRODUCT Vendor agrees to make available and to sell to Ingram such
Product as Ingram shall order from Vendor at the prices and subject to the terms
set forth in this Agreement. Ingram shall not be required to purchase any
minimum amount or quantity of the Product.
2. TERM AND TERMINATION
2.1 TERM The initial term of this Agreement is one (1) year. Thereafter the
Agreement will automatically renew for successive one (1) year terms, unless it
is earlier terminated.
2.2 TERMINATION
(a) Either party may terminate this Agreement, with or without cause by
giving thirty (30) days written notice to the other party.
(b) Either party may immediately terminate this Agreement with written
notice if the other party.
(i) materially breaches any term of this Agreement and such
breach continues for thirty (30) business days after
written notification thereof; or
(ii) ceases to conduct business in the normal course, becomes
insolvent, makes a general assignment for the benefit of
creditors, suffers or permits the appointment of a
receiver for its business or assets, or avails itself of
or becomes subject to any proceeding, under any Bankruptcy
Act or any other federal or state statute relating to
insolvency or the protection of rights of creditors, or
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
(iii) attempts to assign or otherwise transfer its rights
hereunder IN VIOLATION OF THE TERMS AND CONDITIONS OF THIS
AGREEMENT.
3. INGRAM OBLIGATIONS
PRODUCT AVAILABILITY Ingram will list Product in its catalog(s) as
appropriate and endeavor to mark such Product available to customers.
3.2 ADVERTISING Ingram will advertise and/or promote Product in a
commercially reasonable manner and will transmit as reasonably necessary Product
information and promotional materials to its customers.
3.3 SUPPORT Ingram will make its facilities reasonably available for Vendor
and will assist in Product training and support. Ingram will provide reasonable,
general Product technical assistance to its customers, and will direct all other
technical issues directly to Vendor.
3.4 ADMINISTRATION
(a) Upon request, Ingram will furnish Vendor with a valid tax exemption
certificate.
(b) Ingram will provide Vendor standard sales-out and inventory reports
via its electronic Bulletin Board System. NON-STANDARD "SALES OUT" INFORMATION
SHALL BE PROVIDED BY INGRAM SUBJECT TO A SEPARATE POINT OF SALE REPORT LICENSE
AGREEMENT, A COPY OF WHICH IS ATTACHED HERETO AS EXHIBIT G.
(c) [CONFIDENTIAL TREATMENT REQUESTED]**.
4. VENDOR OBLIGATIONS
4.1 SHIPPING/EXPORT
(a) Vendor shall ship Product pursuant to Ingram purchase order(s)
("P.O."). Product shall be shipped F.O.B. Ingram's designated warehouse with
risk of loss or damage to pass to Ingram upon delivery to the warehouse
specified in Ingram's P.O.
(b) Ingram requires concurrent with the execution of this Agreement
Export Administration Regulations product classification and supporting
documentation: Certificate of Origin (General Use and/or NAFTA), Export
Commodity Control Number's; (ECCN's), General License and/or Individual
Validated License information and Schedule "B"/Harmonized Numbers. This applies
when distribution rights granted under Section 1.1 are outside the United States
for the initial Product/s and when additions or changes to these Products
occurs.
4.2 INVOICING For each Product shipment to Ingram, Vendor shall issue to
Ingram an invoice showing Ingram's order number, the Product part number,
description, price and any discount. [CONFIDENTIAL TREATMENT REQUESTED]**,
Vendor shall provide Ingram with a current statement of account,
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
listing all invoices outstanding and any payments made and credits given since
the date of the previous statement.
4.3 PRODUCT AVAILABILITY Vendor agrees to USE COMMERCIALLY REASONABLE
EFFORTS TO maintain sufficient Product inventory to fill Ingram's orders. If a
shortage of any Product exists, Vendor agrees to allocate its available
inventory of such Product to Ingram in proportion to Ingram's percentage
of all of Vendor's customer orders for such product during the previous
[CONFIDENTIAL TREATMENT REQUESTED]**.
4.4 PRODUCT MARKING Vendor will clearly mark each unit of Product with the
Product name and computer compatibility. Such packaging will also bear a
machine-readable bar code identifier scannable in standard Uniform Product Code
(UPC) format. The bar code must identify the Product as specified by the Uniform
Code Council (UCC). The bar code shall fully comply with all conditions
regarding standard product labeling set forth in Exhibit B in the then-current
Ingram GUIDE TO BAR CODE: THE PRODUCT LABEL. [CONFIDENTIAL TREATMENT
REQUESTED]**
4.5 TECHNOTES Vendor will within thirty (30) days of execution of this
Agreement sign the CIS/ Manufacture Product Information Library - TechNotes and
Content Distribution Agreements as shown in Exhibit C and provide the required
product information in the designated template format.
4.6 SUPPORT [CONFIDENTIAL TREATMENT REQUESTED]**. Vendor shall also provide
to Ingram, its employees, and its customers reasonable amounts of sales
literature, advertising materials, and training and support in Product sales
WHEN REASONABLY REQUESTED BY INGRAM.
4.7 NEW PRODUCT Vendor shall endeavor to notify Ingram at least
[CONFIDENTIAL TREATMENT REQUESTED]** before the date any new Product is
introduced. Vendor shall make such Product available for distribution by Ingram
no later than the date it is first offered for sale in the marketplace.
4.8 INSURANCE Vendor shall carry insurance coverage for product
liability/completed operations [CONFIDENTIAL TREATMENT REQUESTED]**.
[CONFIDENTIAL TREATMENT REQUESTED]**
4.9 WARRANTIES/CERTIFICATION
(a)[CONFIDENTIAL TREATMENT REQUESTED]
(b) WARRANTY Vendor hereby represents and warrants that
[CONFIDENTIAL TREATMENT REQUESTED]**, any Product offered for distribution
does not contain any obscene, defamatory or libelous matter or violate any
right of publicity or privacy
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
(c) END-USER WARRANTY Vendor shall provide a warranty statement with
Product for end user benefit. This warranty shall commence upon Product delivery
to end-user.
(d) MILLENNIUM COMPLIANCE WARRANTY INTENTIONALLY DELETED.
(e) EU WARRANTY Vendor further warrants TO THE
BEST OF VENDOR'S KNOWLEDGE, and represents for Products distributed to the
European Union ("EU") that the Products will be accepted under all EU
directives, regulations and EU country's legislation.
(f) MADE IN AMERICA CERTIFICATION Vendor by the execution of this
Agreement certifies that it will not label any of its products as being "Made in
America," "Made in U.S.A.," or with similar wording unless all components or
elements of such Product is in fact made in the United States of America. Vendor
further agrees to defend, indemnify and hold harmless from and against any and
all claims, demands, liabilities, penalties, damages, judgments or expenses
(including attorney's fees and court costs) arising out of or resulting in any
way from Product that does not conform to the Certification.
5. PRICING
5.1 INGRAM PRICING The suggested retail price and any Ingram discount for
Product is set out in Exhibit D. Vendor may modify Exhibit D with a minimum of
[CONFIDENTIAL TREATMENT REQUESTED]** advance written notice to Ingram. All
Ingram orders for Product will be billed at the price in effect when the order
is placed. Ingram shall have sole discretion as to selling price of Product to
its customers.
5.2 [CONFIDENTIAL TREATMENT REQUESTED]**.
5.3 [CONFIDENTIAL TREATMENT REQUESTED]**.
5.4 [CONFIDENTIAL TREATMENT REQUESTED]**.
5.5 PAYMENT TERMS Ingram's payment terms shall be [CONFIDENTIAL TREATMENT
REQUESTED]**. Payment shall be deemed made on the payment postmark date.
5.6 [CONFIDENTIAL TREATMENT REQUESTED]**.
6. MARKETING
6.1 TRADEMARKS Ingram may advertise and promote the Product and/or Vendor,
and may thereby use VENDOR'S trademarks, service marks and trade names. INGRAM'S
USE OF VENDOR'S TRADEMARKS, SERVICE MARKS AND TRADE NAMES SHALL BE PERFORMED IN
ACCORDANCE WITH THE REASONABLE USE GUIDELINES OF VENDOR, A COPY OF WHICH WILL BE
PROVIDED HERETO AS EXHIBIT F. Neither party shall acquire any rights in the
trademarks, service marks or trade names of the other.
6.2 ADVERTISING Vendor agrees to cooperate in Ingram's or Ingram's
customers' and promotion of Product and hereby grants Ingram a cooperative
advertising allowance of [CONFIDENTIAL
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
TREATMENT REQUESTED]** of Product invoice amount for such advertising featuring
Product and/or Vendor. Ingram shall submit advertising to Vendor for review and
approval prior to any initial release, and Vendor shall not unreasonably
withhold or delay such approval. [CONFIDENTIAL TREATMENT REQUESTED]**.
6.3 PROGRAMS
(a) Ingram may offer marketing programs to Vendor including but not
limited to launch programs and reseller pass through opportunities. If Vendor
elects to participate, Vendor agrees to pay such funds as may be required for
this purpose.
(b) Vendor may be asked or prepay all marketing activities
until a mutually agrees upon sell through rate is achieved.
6.4 SUPPORT PRODUCT Vendor shall consign a reasonable amount of
demonstration Product to aid Ingram in its support and promotion of Product.
All such consigned Product will be returned to Vendor upon request.
7. RETURNS
7.1 STOCK BALANCING Notwithstanding anything herein to the contrary, Ingram
may return throughout the term any Products PURCHASED WITHIN [CONFIDENTIAL
TREATMENT REQUESTED]** OF SALE which are in their original packaging to Vendor
for full credit of the Products' purchase price. [CONFIDENTIAL TREATMENT
REQUESTED]**.
7.2 POST-TERM/TERMINATION For [CONFIDENTIAL TREATMENT REQUESTED]** after
the expiration or earlier termination of this Agreement, Ingram may return to
Vendor any Product for credit against outstanding invoices, or if there are no
outstanding invoices for a cash refund. Any credit or refund due Ingram for
returned Product shall be equal to [CONFIDENTIAL TREATMENT REQUESTED]**.
7.3 PRODUCT DISCONTINUATION Vendor shall give Ingram [CONFIDENTIAL
TREATMENT REQUESTED]** advance written notice of Product discontinuation. Ingram
may return all such Product to Vendor for full credit of Product purchase price
[CONFIDENTIAL TREATMENT REQUESTED]**.
7.4 DEFECTIVE PRODUCT
(a) Ingram may return any Product to Vendor that Ingram or its customer
finds defective. [CONFIDENTIAL TREATMENT REQUESTED]**.
(b) If any Product is recalled by Vendor because of defects, revisions
or upgrades, Ingram will, at Vendor's request, provide reasonable assistance
with the recall. Vendor will pay Ingram's REASONABLE expenses in connection with
such recall.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
8. [CONFIDENTIAL TREATMENT REQUESTED]**
8.1 [CONFIDENTIAL TREATMENT REQUESTED]**
8.2 [CONFDIENTIAL TREATMENT REQUESTED]**
8.3 [CONFIDENTIAL TREATMENT REQUESTED]**
8.4 [CONFIDENTIAL TREATMENT REQUESTED]**.
8.5 [CONFIDENTIAL TREATMENT REQUESTED]**
8.6 [CONFIDENTIAL TREATMENT REQUESTED]**
8.7 [CONFIDENTIAL TREATMENT REQUESTED]**
8.8 LIMITATION OF LIABILITY NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR
LOST PROFITS OF BUSINESS, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES, WHETHER
BASED IN CONTRACT OR TORT (INCLUDING NEGLIGENCE, STRICT LIABILITY OR OTHERWISE),
AND WHETHER OR NOT ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
THIS LIMITATION IS IN NO WAY MEANT TO LIMIT VENDORS LIABILITY FOR PERSONAL
INJURY OR DEATH AS A RESULT OF A DEFECT IN ANY PRODUCT IN THOSE JURISDICTIONS
WHERE THE LAW DOES NOT ALLOW THIS LIMITATION.
9. COMPLIANCE WITH FEDERAL LAWS AND REGULATIONS
9.1 Vendor shall comply with all State, Federal and Local laws, rules and
regulations
10. GOVERNMENT PROGRAM
10.1 PARTNERSHIP AMERICA Vendor may, at its sole option, participate in
Ingram's government reseller program in which case the provisions of Exhibit E,
Partnership America, shall apply. A draft copy is provided solely for your
information and review.
11. GENERAL PROVISIONS
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
11.1 NOTICES Any notice which either party may desire to give the other
party must be in writing and may be given by (i) personal delivery to an officer
of the party, (ii) by mailing the same by registered or certified mail, return
receipt requested, OR BY NATIONALLY RECOGNIZED EXPRESS COURIER service to the
party to whom the party is directed at the address of such party as set forth at
the beginning of this Agreement, or such other address as the parties may
hereinafter designate, and (iii) by facsimile or telex communication
subsequently to be confirmed in writing, pursuant to item (ii) herein.
11.2 GOVERNING LAW This Agreement shall be construed and enforced in
accordance with the laws of the State of [CONFIDENTIAL TREATMENT REQUESTED]**,
except that body of law concerning conflicts of law. The United Nations
Convention on Contracts for the International Sale of Goods shall not apply to
this Agreement.
11.3 COOPERATION Each party agrees to execute and deliver such further
documents and to cooperate as may be necessary to implement and give effect to
the provisions contained herein.
11.4 FORCE MAJEURE Neither party shall be liable to the other for any delay
or failure to perform which results from causes outside its reasonable control.
11.5 ATTORNEYS FEES In the event there is any dispute concerning the terms
of this Agreement or the performance of any party hereto pursuant to the terms
of this Agreement, and any party hereto retains counsel for the purpose of
enforcing any of the provisions of this Agreement or asserting the terms of this
Agreement in defense of any suit filed a-against said party, each party shall be
solely responsible for its own costs and attorney's fees incurred in connection
with the dispute irrespective of whether or not a lawsuit is actually commenced
or prosecuted to conclusion.
11.6 EXPORT REGULATIONS Ingram agrees by the purchase of Products to conform
to, and abide by, the export laws and regulations of the United States,
including but not limited to, the Export Administration Act of 1979 as amended
and its implementing regulations. Ingram shall include a statement in it's
standard sales terms and conditions that any shipment of Product outside the
United States will require a valid export license. Ingram further agrees to
distribute Product in accordance with the territory as defined in Section1.1.
Whenever a EU country is specified as Territory under Section 1. 1, Territory
shall include all EU countries.
12. AGREEMENT
12.1 COUNTERPARTS This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.2 SECTION HEADINGS Section headings in this Agreement are for convenience
only, and shall not be used in construing the Agreement.
12.3 INCORPORATION OF ALL EXHIBITS Each and every exhibit referred to
hereinabove and attached -hereto is hereby incorporated herein by reference as
if set forth herein in full.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
12.4 SEVERABILITY A judicial determination that any provision of this
Agreement is invalid in whole or in part shall not affect the enforceability of
those provisions found to be valid.
12.5 NO IMPLIED WAIVERS If either party fails to require performance of any
duty hereunder by the other party, such failure shall not affect its right
to-require performance of that or any other duty thereafter. The waiver by
either party of a breach of any provision of this Agreement shall not be a
waiver of the provision itself or a waiver of any breach thereafter, or a waiver
of any other provision herein.
12.6 BINDING EFFECT/ASSIGNMENT This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto, and their respective
representatives, successors and permitted assigns. This Agreement shall not be
assignable by Vendor, without the express written consent of Ingram, which
consent shall not be unreasonably withheld, including to a Person in which it
has merged or which has otherwise succeeded to all or substantially all of such
party's business and assets to which this Agreement pertains and which has
assumed in writing or by operation of law its obligations under this Agreement.
Any attempted assignment in violation of this provision will be void.
NOTWITHSTANDING THE OTHER PROVISIONS OF THIS SECTION, IN THE EVENT THAT EITHER
PARTY IS MERGED WITH OR CONSOLIDATED INTO ANY OTHER ENTITY, OR IN THE EVENT THAT
SUBSTANTIALLY ALL OF THE ASSETS OF EITHER PARTY ARE SOLD OR OTHERWISE
TRANSFERRED TO ANY OTHER ENTITY, THE PROVISIONS OF THIS AGREEMENT WILL BE
BINDING UPON, AND INURE TO THE BENEFIT OF, SUCH OTHER ENTITY.
12.7 SURVIVAL Sections 5.5 (Payment Terms), [CONFIDENTIAL TREATMENT
REQUESTED]** 7.2 (Post-Term Termination) and [CONFIDENTIAL TREATMENT
REQUESTED]** shall survive the expiration or earlier termination of this
Agreement.
12.8 ENTIRETY This Agreement constitutes the entire agreement between the
parties regarding its subject matter. This Agreement supersedes any and all
previous proposals, representations or statements, oral or written. Any previous
agreements between the parties pertaining to the subject matter of this
Agreement are expressly terminated. The terms and conditions of each party's
purchase orders, invoices, acknowledgments/confirmations or similar documents
shall not apply to any order under this Agreement, and any such terms and
conditions on any such document are objected to without need of further notice
or objection. Any modifications to this Agreement must be in writing and signed
by authorized representatives of both parties.
12.9 AUTHORIZED REPRESENTATIVES Either party's authorized representative for
execution of this Agreement or any amendment hereto shall be president, a
partner, or a duly authorized vice president of their respective party. The
parties executing this Agreement warrant that they have the requisite authority
to do so.
IN WITNESS WHEREOF, the parties hereunto have executed this
Agreement.
"Ingram" "Vendor"
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Ingram Micro Inc. Red Hat Software
1600 E. St. Andrew Place 4201 Research Commons, Suite 100
Santa Ana, California 92705 Research Triangle Park, North Carolina 27709
By: /s/ Michael Terrell By: /s/ Paul Mcnamara
---------------------------- ---------------------------------------
Name: Michael Terrell Name: Paul Mcnamara
---------------------------- ---------------------------------------
Title: Vice President Purchasing Title: Vice President
---------------------------- ---------------------------------------
Date: November 11, 1998 Date: November 5, 1998
---------------------------- ---------------------------------------
*AGREEMENT MUST BE SIGNED BY PRESIDENT OR BY A DULY AUTHORIZED VICE PRESIDENT OR
PARTNER.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
EXHIBITS:
A - Vendor Routing Guide (if applicable)
B - Guide to Bar Code: The Product Label
C - TechNotes
D - Product Price List
E - Partnership America
F - Vendor Trademark Guidelines
G - Point of Sale Report License Agreement
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
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EXHIBIT A
VENDOR ROUTING GUIDE
Not Applicable
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Attached
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
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EXHIBIT B
INGRAM MICRO'S GUIDE TO BAR CODES:
THE PRODUCT LABEL
CONTENTS:
Statement of Bar Code Policy............... 1
Where Bar Codes Are Listed................. 2
Product Label Specifications............... 3
Case Pack Label Specifications............. 4
Shipping Label Specifications.............. 5
How to Get the Codes You Need.............. 6
List of Bar Code Contacts.................. 7
List of Top Bar Coding Vendors............. 8
Bar Code Checklist......................... 10
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
STATEMENT OF BAR CODE POLICY
Increasingly, computer companies are taking cue from the retail and distribution
community and implementing bar code programs, thus realizing the benefits of
improved productivity, better control over inventory and ease of product and
information exchange with their trading partners. The most important reason for
this trend is the growth of sales within consumer marketing channels. Another
reason is that more and more resellers are investing in inventory and
point-of-sale systems which utilize bar-coded information. As a result of these
trends, bar coding concerns have become much more prevalent within the computer
industry.
With over ten years of experience, most resellers who use bar codes have adopted
the Universal Product Code (UPC) as their standard data format. As a supplier to
several of these resellers, Ingram Micro is increasingly called upon to provide
UPCs on all products sold through these channels. But as a distributor, Ingram
Micro cannot assign UPCs to products; that task can only be performed by the
original manufacturer. Due to the sporadic use of UPCs within the microcomputer
industry, however, Ingram Micro is often required to invent codes and create
labels for products sold to these resellers.
These requirements have led Ingram Micro to adopt UPC as its coding standard.
This standard dictates that a unique code be assigned for each product and for
every version of that product. Non-unique codes for different product versions
create havoc among consumer market resellers, many of whom have little
experience with computer products. With a correct UPC, inventory can be handled
efficiently within Ingram Micro's warehouses as well as those of our reseller
partners.
On these pages, you will find the Ingram Micro bar code requirements which
reflect the needs of our customers. Additionally, we have provided lists and
explanations to help with your own bar code programs, as well as information for
working with the Uniform Code Council, the agency responsible for UPC bar codes.
At the end of this document, please find the Bar Code Checklist for use in
informing Ingram Micro of your company's bar coding efforts. All Ingram Micro
requirements conform with ABCD guidelines.
PLEASE NOTE SOME RECENT ADDITIONS TO OUR BAR CODE POLICY. First, we have
experienced a growing demand from our customers to capture serial number
information on products we ship to them. This information is mandatory in order
for our customers to apply for rebates, warranties, upgrades, marketing funds
and support from the manufacturer. Accurate serial number capture is, therefore,
imperative. IF SERIAL NUMBERS ARE CARRIED ON YOUR PRODUCTS, WE REQUIRE THIS
INFORMATION TO BE BAR CODED IN CODE 39 FORMAT WITH THE (S) DATA IDENTIFIER
PRESENT IN BOTH THE HUMAN-READABLE TEXT AND MACHINE READABLE BAR CODE. With this
consistent, uniform format, we can capture serial numbers quickly and accurately
while increasing customer satisfaction.
Second, we have included guidelines on CASE PACK AND SHIPPING LABEL
SPECIFICATIONS. These guidelines are designed to reduce receiving and potential
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<PAGE>
shipping errors to customers. Again, a consistent, uniform format helps us
capture this important information about your product accurately and without
delay.
We appreciate your investment of time and energy in implementing these bar code
programs. Through our joint efforts and consistent bar code labeling, Ingram
Micro and our vendor partners will be able to increase customer satisfaction,
improve inventory control and reduce the cost of sales through microcomputer
channels. Ingram Micro stands ready to assist with your bar code program. Please
use the Bar Code Contact List when bar code questions arise.
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
[Figure entitled "Where Bar Codes Are Used", Part I]
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- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] Indicates material that has been omitted
and for which confidential treatment has been requested. All such omitted
material has been filed with the Securities and Exchange Commission pursuant to
Rule 406 promulgated under the Securities Act of 1933, as amended.
<PAGE>
[Figure entitled "Where Bar Codes Are Used", Part II]
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
PRODUCT LABEL SPECIFICATION
[Figure]
- Each unit of a product that will be resold by Ingram Micro must display
a product label in UPC or EAN (International Article Numbering) format,
although EAN may not be recognized by all of Ingram Micro's customers.
- Ingram Micro is not concerned with the specific layout of the product
label, as long as the necessary information is included in a legible
format. A serial number may be printed on a separate label as long as it is
placed legibly on the exterior of the product package.
- Serial numbers must be printed in Code 39(S) format: (1) if Ingram Micro's
customer is required to record serial numbers of your product prior to
shipping or,(2) if Ingram Micro's customer is required to confirm serial
numbers as a pre-condition of returning defective product or,(3) if Ingram
Micro or its customers are required to provide serial number information
for inventory reporting purposes. Serial numbers are optional if Ingram
Micro reports no serial number data to your company.
- Bar code labels should include human-readable text in addition to the bar
code itself. The nominal UPC symbol size is 1.469 inches wide by 1.020
inches high (including the human-readable characters). Size may vary from
.8 to 2.0 times the nominal dimensions in accordance with UCC guidelines.
Code 39 symbols should have a minimum bar code height of .5 inches and a
minimum height for human-readable text of .125 inches. For product that is
SHRINK WRAPPED, THE LABEL IS BEST PLACED ON THE TOP OR BOTTOM NEAR THE
EDGE. Use caution, avoid the middle section. Shrink wrap seams obstruct the
scanner's ability to read the bar code.
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Case Pack Label Specifications
The UPC Shipping Container Symbol
[Figure]
WHERE:
Pos. #1: Packaging Indicator
(5)
Pos. #2-3: Number System
(00)
Pos. #4-8: Mfg. ID No.
(66321)
Pos. #9-13: Item or Product
Number (12345)
Pos. #14: Modulo 10
Check Digit (8)
[Figure]
The case pack label must identify the specific case pack quantity through the
use of the UPC SHIPPING CONTAINER CODE. This code assigns a unique identity to
each shipping container, intermediate package and standard pallet. Similar to
the UPC, it employs the use of a packaging indicator along with the item number
in order to get its uniqueness. The packaging indicator can be any digit from 0
through 7, as assigned by the manufacturer. The following are guidelines
manufacturers should use when assigning packaging indicators.
PACKAGING INDICATOR FOR USE WHEN
0 the item numbers are unique, or when
the product must retain its UPC Ver.
A bar code and a UPC shipping
container symbol on the same carton
(i.e., products whose shipping
container also acts as the consumer
package).
identifying different levels of
1-7 packaging (i.e., inner sleeve, inner
carton or standard pallet) with the
same item number.
In the U.S., our number system character always begins with zero (0). The
manufacturer I.D. number is the same as assigned in the UPC number. The item
number is the same as assigned by the manufacturer in the UPC number. The check
digit is modulo 10, calculated from left to right, starting with the packaging
indicator.
Each unique serial number of product within the case pack must be printed in
Code 39 format with the (S) data identifier in human-readable text and encoded
within the bar code symbol. The symbols must be a minimum of .5 inches in height
and the human-readable text must be a minimum of .125 inches in height.
-7-
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
[Figure]
The guidelines for our shipping label have been adopted from the ANSI MH10.8M
shipping label standard. Upon receipt of your shipment, it enables us to locate
and scan important information quickly.
The first two segments identify where the product shipped from and which Ingram
warehouse will receive the product. The purchase order, in both human readable
text and bar code format, must employ the use of the FACT data identifier (K).
The fourth segment contains the invoice number in both human-readable text and
bar code format. The invoice number must be printed in Code 39 symbology and
utilize the FACT data identifier (10K) in both the text and bar code symbol. By
bar coding the purchase order and invoice number, Ingram Micro's accounting
department will be able to quickly match your invoice to the Ingram Micro
purchase order to ensure prompt payment. The last segment contains the
serialized shipping container code in both human-readable and bar code format.
Ingram Micro uses the information contained in this code to tie together the
physical contents of the carton to the shipment information given to us by a
supplier via Electronic Data Interchange (E.D.I.). The serialized shipping
container code is printed in UCC/EAN-128 bar code symbology. It employs the use
of application identifiers, which serve the same purpose as data identifiers,
only in numeric form. It gets its uniqueness by coupling the seven digit UCC/EAN
manufacturer number with a nine digit shipping container number assigned by the
supplier. This bar code is only required if you provide EDI advanced ship
notification.
THE SHIPPING LABEL
Ingram Micro
Purchase Order:
10-12345
Ingram Micro Sequential
Location P.O. Number
Br. 10 1600 E. St. Andrew
Santa Ana, CA 92075
Br. 17 8530 NW 23rd St.
Bldg. #18
Miami, FL 33122
Br. 20 1443 Wainwright
#155
Carrollton, TX 75007
Br. 25 1600 E. St. Andrew
Santa Ana, CA 92705
Br. 30 3500 Air Center Dr.
Memphis Int'l
Airport
Memphis, TN 38118
Br.40 151 Hastings Drive
Buffalo Grove, IL 60089
Br. 50 41490 Boyce Rd.
#A
Fremont, CA 94538
Br. 52 48949 Warm Springs
Fremont, CA 94538
Br. 70 696 Park N. Blvd.
#150
Clarkston, GA 30021
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Br. 80 5455 Allentown
Harrisburg, PA 17112
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
HOW TO GET THE CODES YOU NEED
WORKING WITH THE UNIFORM CODE COUNCIL The Uniform Code Council is a
not-for-profit membership corporation created in 1972 to administer the
Universal Product Code (UPC). Although membership in the Uniform Council Code is
voluntary, it is required in order to obtain the manufacturer's number
assignment necessary for a UPC. The fee for membership is based on the latest
annual U.S. domestic sales volume of the applying company and ranges from $300,
for start-up companies and those under $2 million in annual sales, to $10,000 if
you have over $500 million in sales. This sales figure should include all
products, not just the products which are chosen for coding at the time of
application.
Some manufacturers have previously applied for membership with the Uniform Code
Council, but for a Uniform Industrial Code (UIC) rather than a UPC. Within the
past few years these two program have merged, and both now operate under the
auspices of Uniform Code Council. Manufacturer's numbers assigned under the UIC
program are now applicable for UPCs as well.
Contact the Uniform Code Council at 8163 Old Yankee Rd., Ste. J, Dayton, OH
45458 or call (513) 435-3870. After receipt of your application, the Uniform
Code Council will assign a UPC manufacturer's number unique to your company.
This six-digit number will be for use on all of your products.
ASSIGNING UPC ITEM CODES
Each manufacturer, according to their own internal numbering system, assigns
a five-digit item number to each product. In combination with the six-digits
manufacturer number, this will form the 11-digit UPC number for each product.
A calculated check-digit in the twelfth position completes the UPC code.
Currently used part numbering systems cannot always be represented, as assigning
any degree of internal intelligence of significance to the positions of the
digits ramatically reduces possible permutations and flexibility. UPCs created
from each manufacturer's number are limited to 100,000 (00000 through 99999).
If, for example, a company produces systems, components and software products,
and begins each group's with "1," "2," and "3" respectively, then the 100,000
possible number are suddenly reduced to 30,000. Manufacturers who feel uneasy
about starting their numbering system with 00001 may choose another starting
point, such as 25000. Item numbers, then, should be chosen either sequentially
or randomly without duplication. The best place to start is usually the product
with the highest unit volume.
A different number must be assigned for each product as well different versions
of each product, including different disk sizes or media. Additionally, a
separate code should be created for education or international versions,
promotional packages and specially priced or bundled items. The general rule is
to follow is that a separate number should be created when a product is
physically or functionally different from previous products, the product is
handled differently in the channel, different package graphics dimensions make
the product appear different from earlier versions, or the retail price changes
from one configuration to another. Minor changes that are transparent to the
user, e.g., not identified on the package or in promotional media, should not
have a new UPC assigned as this will cause the item to be treated as a different
product. Many retailers rely on unique UPCs to differentiate between product
versions, media, etc.
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
BAR CODE CONTACT LIST
INGRAM MICRO
ANGELA COULON, OPERATIONS ADMINISTRATOR (714) 566-1000 EXT. 2213
Contact Angela with any questions concerning bar codes, CTIA (formerly ABCD)
standards and other policies outlined in this guide.
Ingram Micro Corporate Operations Fax Number (714) 566-7800
YOUR BUYER (714) 566-1000
Continue to contact your buyer with questions and information concerning product
changes, new products, packaging changes (including dimensions and weight),
package quantity changes and version changes.
OTHER CONTACT:
Bob Furtado, Sr. Vice President of Operations (714) 566-1000 ext. 2215
COMPTIA
The Microcomputer Industry Assoc.
450 E. 22nd Street
Ste. 230
Lombard, IL 60148
(708) 268-1818
UNIFORM CODE COUNCIL
8163 Old Yankee Rd.
Uniform Code Council Ste. J
Dayton, OH 45458
(513) 435-3870
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
LIST OF TOP BAR CODING VENDORS
CONGRATULATIONS TO THESE COMPANIES LEADING THE
WAY IN PRODUCT BAR CODES!
The number of products Ingram Micro has received with UPCs has increased
dramatically since 1992. We acknowledge the efforts of our vendors who have
adopted the UPC as their bar coding standard.
[Figure]
CONGRATULATIONS TO THESE COMPANIES LEADING THE WAY IN PRODUCT BAR CODES!
3M Data Storage Products Crystal Graphics IBM Software
7th Level Curtis Manufacturing IMC Networks
Access Software CTX IMSI Software Publishing
Acculogic D-Link Individual Software
ACI US Daceasy Inse: Systems
Activision Dantz Software Insignia Solutions
Adaptive Software Datadesk International Intel
Adobe Systems Datastorm Intellicom
Aitech Datatech Intellimedia Sports
Alpha Software Dataviz Interex
Amdek David Systems, Inc. Interplay
Amjet Dayna Communications, Inc. Intersolv
Antec Daystar Digital Iomega Corp.
Apple Computer Software DCA (Crosstalk Commun.) Jetform Corp.
Appoint Delrina Technology Kensington Microware
Asante Delta Point Key Tronic
Asymetrix Deneba Kingston Technology
ATI Tech Diamond Multimedia, inc. Kodak
Autodesk retail Digi International Labetc
Avantos Digital Systems Research Landmark research
Aztech Labs, Inc. Discis Knowledge Research Lantronix
Banner Blue DK Multimedia Laser Go
Belkin Components DPT Lexmark
Berkeley Systems DSP Technology Lind Electronic Design
Broderbund Edmark Logitech
Brother EFI (Electronics for Lotus
Imaging)
Campbell Services, Inc. Electronic Arts Macromedia
Canon (Still Video Emerald systems Madge Networks
Division)
Canon Computer Epson Magnavox
CD Technology Exide Electronics Mananita Software
CE Software Expert Software Mass Micro
Central Point Farallon Maxa
International
Century Software Fauve Software Maxis
Cheyenne Software Focus Enhancement McAfee
Chinon America, Inc. Foresight Resources MECC
Chipsoft Frame Technology Medio Multimedia
Cirque Corp. Frye Computer Systems Megahertz
Citizen America Corp. Funk Software Memorex
Claris Future Domain Microsoft
Cliff's Notes Future Soft Engineering Microtek
CNET, Inc. Future Vision Multimedia Microtest
Compaq Computer GCC Technologies Midisoft
Compton's New Media Globalink Milan
Computer Associates Gold Disk Mindscape
Comtrol Grolier Mitac
Concentric Data Systems Hayes Mitsubishi (Peripherals)
Conner Storage Hewlett Packard Mountain Network Sol.
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Corel Hi-Tech Musicware
Costar Hitachi (Home Electronics) Mysoftware
Creative Labs HSC Software National Advantages
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
LIST OF TOP BAR CODING VENDORS
CONGRATULATIONS TO THESE COMPANIES LEADING THE WAY IN PRODUCT BAR CODES!
Nebs Software, Inc. Toshiba America Info
Networth Touchstone S/W Corp.
New Media Trio Information Systems
Newer Technology Tripp Lite
Newgen System Turtle Beach Systems
Norton-Lambert Tut Systems
Orchid Technology Ulead Systems
Novell/Wordperfect Umax
Palindrome Corp. Velocity
Panamax Ventana Media
Panasonic - CPD Verbatim Corp.
Paradise Villa Crespo
Paramount Interactive Visioneer
Passport Wacom
Perfect Data Wangtek/Wangdat
Persoft Wearnes Technology
Phoenix Technologies White Pine Software
Photonics Wizard Works
Plextor Wizard Works
PLI Xaos Tools
Polaroid Z-Ram (Camintonn Corp.)
Practical Peripherals Zoom Telephonics
Primax Electronic, Inc. Zyxel
Proxima
Psygnosis
Q-Logic
Quark
Quarterdeck Office Systems
Radius
Rand McNally
Rubbermaid Office Products
Saber Software
Samsung Information
Systems
Samtron Displays, Inc.
Shapeware
Shiva Corp.
Sierra On-Line
Sigma Designs
SL Waber
Smith Micro Software
Softkey Academic
Software Publishing Corp.
Software Venture
Solectek Corp.
Sonic Systems
Specular International
Spry
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Stac Electronics
Supra Corp.
Swfte
Symantec
Syquest International
- 15 -
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
BAR CODE CHECKLIST
PLEASE DETACH AND MAIL THIS COMPLETED CHECKLIST TO THE ADDRESS ON THE BACK, OR
FAX TO (714) 566-7800. FOR FURTHER ASSISTANCE, CONTACT ANGELA COULON AT (714)
566-1000 EXT. 2213.
1. Who should Ingram Micro contact regarding bar codes on your products?
Company Name:
-----------------------------------------
Contact Name:
-----------------------------------------
Phone Number and Extension:
---------------------------
Fax Number:
-------------------------------------------
Your Address:
-----------------------------------------
2. Does your company utilize UPC bar codes to identify your product?
(Circle one.)
a. Currently utilize c. Undecided
b. Plan to utilize d. Do not plan to utilize
3. Please indicate the percentage of your PRODUCT PACKAGES which display
the following bar code formats:
UPC EAN
-------------------------------------- ------------------------
Product Serial No. (Code 39 with "S" Data Identifier)
-----------------
Part Number (Code 39 with "IP" Data Identifier)
-----------------------
Supplier Identification (Code 39 with "2V" Data Identifier
------------
Case Code:
------------------------------------------------------------
Other:
----------------------------------------------------------------
4. If you are not utilizing UPC bar codes, when do you plan for all of
your product to display UP?
a. Currently d. Within 2 years
b. Within 6 months e. Within 5 years
c. Within 1 years
5. Will your current or planned systems be required to capture and track
product serial numbers?
a. Yes c. Undetermined
b. Planned for future d. Not part of system
enhancement design
6. What implementation issues do you face in putting UPCs on all of your
products?
7. What could Ingram Micro do to help with these issues?
8. How else, beside product labels, are bar codes used within your
company? (master carton labels, shipping labels, etc.)?
9. Would you mind if one of the advertisers included in this publication
contacted you? _____ Yes _____ No
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
EXHIBIT C
CIS Manufacturer Product Information Library
TechNotes Agreement
This agreement ("Agreement") is made and entered into as of the _____ day of
_________________, 1997 between _______________________("Manufacturer Name"),
with its principle place of business at ------------------------------------
_______________________________________________________(Manufacturer Address)
and Ingram Micro, Inc. ("Ingram") with its principal place of business at 1600
E. St. Andrew Place, Santa Ana, California 92705. By Manufacturer's signature
below. Manufacturer agrees to participate in Ingram's TechNotes program,
according to an bound by the terms and conditions of this Agreement, including
those printed on the reverse side of this page.
PARTICIPATION DETAILS AND REQUIREMENTS:
1. Ingram will distribute all information authored by the Manufacturer
under the terms and conditions of this Agreement.
2. Ingram will provide the Manufacturer with authoring screens for product
templates via the World Wide Web. (Manufacturer must have Internet
access and a frame compatible browser such as Netscape(R) 2.0. or later
or Internet Explorer 3.0.)
3. Manufacturer must maintain the content in the Electronic Catalog by
either maintaining product templates via the authoring tools OR provide
Ingram with product information necessary for Ingram to complete the
TechNotes Templates.
4. Manufacturer agrees to identify a contact person
----------------------------------------------------------------------.
(PERSON WHO WILL BE PROVIDING THE CONTENT TO INGRAM AND CAN AUTHORIZE
ITS DISTRIBUTION)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TITLE: TELEPHONE #: FAX #:
------------------ -------------------- ----------------
ADDRESS: E-MAIL:
--------------------------------------------------------- --------------
5. 1997 SIGN UP/PARTICIPATION FEE STANDARD BASE PRICE OPTIONAL TEMPLATE ENTRY SERVICE
------------------------------ ------------------- -------------------------------
FREE IF YOU SIGN UP IN 1997 $1,000 VALUE $50 PER SKU (1-100 SKUS)
$35 PER SKU (101-150 SKUS)
$25 PER SKU (150+ SKUS)
</TABLE>
AND
VENDOR MAINTAINS 80% TECHNOTES COMPLETION RATE WITHIN 60 DAYS OF
SIGNING UP FOR PROGRAM. SEE DETAILS BELOW.
TEMPLATES WILL BE FILLED AND UPDATED BY (check one). / / MANUFACTURER
/ / INGRAM (MUST INDICATE $ AMOUNT BELOW)
MANUFACTURER WILL INCUR NO SIGN UP FEES IN 1997 IN MANUFACTURER AGREES
TO THE PROGRAM PRIOR TO DECEMBER 30, 1997. FEE WILL BE COMPLETELY WAIVED IN 1997
IF MANUFACTURER COMPLETES 80% OF ELIGIBLE TECHNOTES WITHIN 60 DAYS OF SIGNING
CONTRACT, AND MAINTAINS AN AVERAGE COMPLETION RATE OF 80%. MANUFACTURER WILL BE
NOTIFIED IN THE EVENT PARTICIPATION LEVEL DROPS BELOW 80% AND WILL BE GIVEN A
GRACE PERIOD IN WHICH TO COMPLETE NECESSARY TECHNOTES.
IF MANUFACTURER SELECTS THE "INGRAM" BOX ABOVE, MANUFACTURER AGREES TO
HAVE INGRAM'S TECHNICAL SUPPORT DEPARTMENT FILL OUT TECHNOTES ON MANUFACTURER'S
BEHALF AND AGREES TO PAY THE SERVICE FEES INDICATED ABOVE AND BELOW. BILLING
WILL BE DONE ON A QUARTERLY BASIS FOR TECHNOTES AUTHORED DURING THE PREVIOUS
QUARTER. FEES FOR THE FIRST 100 TECHNOTES WILL BE $50 EACH. THE NEXT 50
TECHNOTES WILL BE $35 EACH. ADDITIONAL TECHNOTES WILL BE $25 EACH.
$ THERE ARE TWO TYPES OF AUTHORING FEES AVAILABLE TO MANUFACTURERS WHO
HAVE SELECTED TO HAVE INGRAM COMPLETE TECHNOTES: A ONE-TIME START-UP FEE AND A
QUARTERLY MAINTENANCE FEE. START-UP FEES SHOULD BE USED TO FUND INITIAL TECHNOTE
COMPLETION FOR EXISTING PRODUCTS. QUARTERLY MAINTENANCE FEES ARE TO BE USED FOR
COMPLETION OF TECHNOTES FOR NEW PRODUCTS AS THEY ARE RELEASED EACH QUARTER.
PLEASE INDICATE THE AMOUNT MANUFACTURER AGREES TO PAY FOR EACH OF THE FOLLOWING:
START-UP: $____ OR/AND QUARTERLY MAINTENANCE $____. MANUFACTURER WILL ONLY BE
COMPLETED TECHNOTES UP TO THE MAXIMUM AMOUNT INDICATED. PAYMENT IS DUE WITHIN
THIRTY (30) DAYS OF THE INVOICE BILLING DATE. IF PAYMENT IS NOT RECEIVED WITHIN
30 DAYS, INGRAM HAS THE RIGHT TO DEDUCT MONIES FROM MANUFACTURER'S INVOICES.
<TABLE>
<CAPTION>
<S> <C> <C>
METHOD OF PAYMENT (CHECK ONE) SOURCE OF FUNDS (CHECK ONE) ONLY FILL IN THIS SECTION IF INGRAM WILL
- ---------------------------- --------------------------
FILL TECHNOTES.
___ CHECK PAYABLE TO INGRAM MICRO ___ MDF ___ CO-OP
___ CREDIT MEMO (REQUIRES BUYER ___ IN-HOUSE MDF ___ OTHER (MVP, ETC.) _____ (Please
APPROVAL) specify)
</TABLE>
AGREEMENT WILL CONTINUE ONE YEAR FROM THE DATE ABOVE. THEREAFTER, THE
AGREEMENT WILL BE AUTOMATICALLY RENEWED FOR ADDITIONAL ONE YEAR PERIODS, SUBJECT
TO THE RIGHT OF EITHER PARTY TO TERMINATE AT THE END OF THE TERM BY DELIVERING
WRITTEN NOTICE TO THE PARTY AT LEAST THIRTY (30) DAYS PRIOR TO THE END OF THE
PERIOD. MANUFACTURER MAY TERMINATE THIS AGREEMENT, WITH OR WITHOUT CAUSE.
- 1 -
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
INGRAM RESERVES THE RIGHT, AT ANY TIME, TO REVIEW AND/OR EDIT
INFORMATION ADDED TO THE MANUFACTURER PRODUCT INFORMATION LIBRARY'S ELECTRONIC
CATALOG WITHOUT NOTICE, AND TO REFUSE OR CANCEL PARTICIPATION FOR NAY REASON AT
ANY TIME.
->->-> THE FOLLOWING INFORMATION IS VERY CRITICAL. PLEASE COMPLETE!
->-> PLEASE INDICATE ALL VENDOR NUMBERS ASSOCIATED WITH THIS
MANUFACTURER:_________________
-> WHO IS THE BUYER ________________ EXT. ________ AND MARKETING
MANAGER __________________ EXT.________________
Return completed agreement to marketing manager or buyer. Side 1 of 2
- 2 -
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
CIS/Manufacturer Product Information Library Content Distribution Agreement
This agreement "Agreement" is made and entered into as of the ___ day of
__________, 1997 (The "Commencement Date") between Ingram Micro Inc., a Delaware
corporation ("Ingram"), and ___________________ ("Manufacturer"), a
________________________ corporation.
The parties agree as follows:
1. DELIVERY AND LICENSE. Manufacturer agrees to provide Ingram data and
information regarding Manufacturer's products and services (collectively
"Information") for distribution by Ingram through its information distribution
services which may be updated from time to time (hereinafter referred to as the
"Manufacturers Product Information Library" or "MPLL"), including, but not
limited to, distribution via the World Wide Web, Fax, CD-Rom, Floppy disk, and
other electronic media. Manufacturer hereby grants Ingram a non-exclusive
worldwide license to market, license, distribute, display, perform, transmit and
promote the information through the MPIL. Manufacturer agrees to deliver the
information to Ingram in the manner and format set forth in the MPIL Policies
and Procedures Manual ("Procedures"). Manufacturer agrees to deliver the
information to Ingram in the manner and format set forth in the MPIL Policies
and Procedures Manual ("Procedures"). Manufacturer agrees that it is both
necessary and of mutual benefit to the parties that the information be as error
free as is commercially feasible.
2. USE. Both parties agree that the MPIL (and Manufacturer's information
therein) will be made available to users which have registered with Ingram to
use the MPIL. Manufacturer acknowledges that the information will be made
available to such users worldwide via the World Wide Web or other methods of
distribution.
3. INFORMATION WARRANTIES. Manufacturer hereby represents and warrants that the
information (i) will not infringe on or violate any copyright, patent or any
other proprietary right of any third party, and (ii) will not contain any
content, materials or services which violate any applicable law, regulation or
third party right, and (iii) contains no computer virus or similar program or
data.
4. INGRAM OPERATING RESPONSIBILITIES. Ingram will maintain and implement such
facilities, equipment, programming and data communications network and any other
combination of hardware and software as are necessary to offer and provide MPIL.
Ingram shall not be responsible for screening, editing, or monitoring the
information prior to its distribution by MPIL.
5. LIMITATION OF LIABILITY. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE
TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL CONSEQUENTIAL SPECIAL OR EXEMPLARY
DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF TH EPOSSIBILITY OF SUCH
DAMAGES), ARISING FROM THE USE OR INABILITY TO USE THE MPIL OR THE INFORMATION,
OR ANY OTHER PROVISIONS OF THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO, LOSS OF
REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS.
6. NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS ANY
REPRESENTATIONS OR WARRANTIES, EXPRES OR IMPLIED, REGARDING THE MPIL OR THE
INFORMATION, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR
COURSE OF PERFORMANCE.
7. INDEMNITY. Either party will defend, indemnify, save and hold harmless the
other party and the officers, directors, agents, affiliates, distributors,
franchisees and employees of the other party from any and all third party
claims, demands, liabilities, cost or expenses, including reasonable attorney's
fees ("Liabilities"), resuming from the indemnifying party's material breach of
any duty, representation, or warranty of this Agreement, except where
Liabilities result from the gross negligence or knowing and willful misconduct
of the other party.
8. LAW. The validity, construction, and performance of this Agreement will be
governed by the substantive law of the State of
[CONFIDENTIAL TREATMENT REQUESTED]**, not including its law on conflicts of
laws. If any provision of this Agreement is held by a court of competent
jurisdiction to be illegal, invalid, unenforceable, or otherwise contrary to
law, the remaining provisions of this Agreement shall remain in full force
and effect.
9. INDEPENDENT CONTRACTORS. The parties hereto hereby agree that in the
performance of their respective obligations hereunder, they are, and shall be
independent contractors, and not agents of each other.
10. WAIVER. The failure of either party to enforce or to exercise, at any time
or for any period of time, any term of or any right arising pursuant to this
Agreement does not constitute, and shall not be construed as, a waiver of such
term or right, and shall in no way affect that party's right later to enforce or
exercise it.
11. CONFIDENTIAL INFORMATION. Each party acknowledges that Confidential
Information may be disclosed to the other party during the course of this
Agreement. Each party agrees that it shall take reasonable steps, at least
substantially equivalent to the steps it takes to protect its own proprietary
information, during the period this Agreement is in effect, and for a period of
three (3) years following expiration or termination of this Agreement, to
prevent the duplication or disclosure of Confidential Information, other than by
or of its employees or agents who must have access to the Confidential
Information to perform such party's obligations hereunder, who shall each agree
to comply with this Section 11. Nor shall there be "Confidential Information"
for purposes of this Agreement, any information relating to or disclosed in the
course of the Agreement, which is or should be reasonably understood to be
confidential or proprietary to the disclosing party, including, but not limited
to, the material terms of this Agreement, technical processes and formulas, and
source codes, sales, projections and marketing data.
12. NOTICES. All notices or other communications required to be given hereunder
shall be in writing and delivered either personally or by mail or overnight
courier to the parties at the address provided by each party below, unless such
address has been changed and notice of such change has been delivered in
accordance with this provision.
13. ENTIRE AGREEMENT. The provisions of this Agreement or other agreements
authorizing Ingram to distribute manufacturer's information constitute the
entire Agreement between the subject matter hereof, except other related
agreements referenced herein. No amendment, modification, or waiver of any
provision of this Agreement shall be effective unless it is set forth in a
writing that refers to the Agreement and provisions so affected and is executed
by authorized representatives of both parties.
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
- --------------------------------------------------------------------------------
AGREED AS OF THE COMMENCEMENT DATE STATED ABOVE.
<TABLE>
<CAPTION>
<S> <C>
"MANUFACTURER" "INGRAM"
(Company Name) Ingram Micro Inc.
-------------------------------------
(Mailing Address) 1600 E St Andrew Place
----------------------------------
(City, State, Zip) Santa Ana, California 92706
-------------------------------
By: (and) By: (and)
----------------------------------------- ----------------------------------------
(sign) (sign)
----------------------------------------- ----------------------------------------
Title: Title: Ext.
-------------------------------------- ------------------------------------- ----
(must be signed by marketing manager or buyer)
</TABLE>
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
EXHIBIT D
PRODUCT PRICE LIST
The prices for the Products offered under this Agreement shall be (check one):
__________ As shown on Vendor's price list dated _____________.
__________ As shown below.
PRODUCT LIST PRICE DISCOUNT
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] Indicates material that has been omitted
and for which confidential treatment has been requested. All such omitted
material has been filed with the Securities and Exchange Commission pursuant to
Rule 406 promulgated under the Securities Act of 1933, as amended.
<PAGE>
EXHIBIT E
PARTNERSHIP AMERICA-SM- PROGRAM ADDENDUM
THIS PARTNERSHIP AMERICA-SM- PROGRAM ADDENDUM ("Addendum") is made and entered
into this ____ day of _________________, 199___ by and between INGRAM MICRO
INC., a DELAWARE corporation ("Ingram") and ________________________ ("Vendor")
a _____________ corporation (state of incorporation).
RECITALS
A. On or about _____________, 199__, Ingram and Vendor entered into a
Distribution Agreement ("Distribution Agreement"), whereby Ingram was
granted the right to distribute in the U.S., all micro-computer products
manufactured, produced and/or offered by Vendor ("Vendor Products").
B. Ingram and Vendor now desire to sell and distribute Vendor Products,
through resellers and system integrators, to federal, state and local
governments and their various agencies and departments ("Government") in
accordance with the terms and conditions of this Addendum.
NOW, THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and in consideration of the mutual covenants and promises
contained herein, the parties agree as follows:
1. PARTNERSHIP AMERICA-SM- PROGRAM. Vendor hereby grants to Ingram, and
Ingram hereby accepts, the non-exclusive right to provide product and
services to resellers and system integrators in connection with
Ingram's sale and distribution of Vendor Product(s) to the Government
in support of specific government contract opportunities.
2. VENDOR OBLIGATIONS
2.1. PRODUCT NOTIFICATION. Vendor shall notify Ingram of any new
Vendor Product(s), or any major revision of a Vendor Product(s),
and shall make such Vendor Product(s) available for distribution
by Ingram no later than the date of first introduction into the
Government marketplace.
2.2. FIRM FIXED PRICING. Upon request, Vendor shall provide "Firm
Fixed Pricing" which shall guarantee the pricing of the Vendor
Product(s) for the effective term of a specific Government
contract. Vendor shall give Ingram thirty (30) days advance
written notice of any Vendor Product(s) being discontinued.
2.3. REPRESENTATIONS AND CERTIFICATIONS. Vendor understands that due
to the nature of Government bidding, Vendor may be required to
enter into a procurement specific non-disclosure agreement or
make certain representations and certifications before any Vendor
Product(s) are sold or distributed into the Government
marketplace. In addition, Vendor agrees to provide Ingram with an
annual statement of representations and certifications.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
3. INGRAM OBLIGATIONS
3.1. GOVERNMENT SALE SPECIALISTS. Ingram shall maintain a separate
government sales office, which shall include sales specialists
with an understanding of Government regulations and Government
contract terms and conditions to support resellers and system
integrators in the Government marketplace.
3.2. CONFIGURATION. Ingram shall maintain a configuration facility for
system integration and testing in support of Government specific
contracts and opportunities for resellers.
3.3. REPORTS. Ingram agrees to make available to Vendor, within ten
(10) days after the close of each month, via an electronic
bulletin board system, a point-of-sale report by zip code, of
Vendor Products sold or distributed to resellers for Government
specific contracts. Vendor shall provide Ingram with a list of
individuals authorized to receive such reports.
4. PRICING. The price and applicable discount for all Vendor Products
sold through the Partnership America-SM- Program is set
forth in Exhibit "A" attached hereto. The pricing and discounts
for Vendor Products set forth therein shall only apply to Vendor
Products sold through the Partnership AmericaSM Program into the
Government marketplace. Ingram will, in its sole discretion,
determine the sale price to resellers and system integrators for
all Vendor Products. All Vendor Products pricing and discounts
set forth pursuant to this Section shall not apply to, amend or
affect the pricing and discounts set forth in connection with any
Vendor Products sold and distributed pursuant to the Distribution
Agreement. Vendor understands and agrees that for certain
Government proposals/quotes, which specify a significant quantity
of Vendor Products, Vendor shall provide program specific pricing
that will include additional discounts to those set forth in
Exhibit "A".
5. TERMINATION. Either Vendor or Ingram may terminate this Addendum,
with or without cause, by giving the other ninety (90) days
written notice. Termination of this Addendum shall not result in
the termination of the Distribution Agreement. Termination of
this Addendum shall not affect the terms and conditions of any
Letter of Supply, issued by Vendor pursuant to Subsection 2.2. In
the event this Addendum is terminated, the rights of the parties
shall be determined under the terms and conditions of the
Distribution Agreement.
6. DISTRIBUTION AGREEMENT TERMS AND CONDITIONS. Except as otherwise
provided pursuant to this Addendum, all terms and conditions of
the Distribution Agreement shall apply to the Partnership
America-SM- Program.
- --------------------------------------------------------------------------------
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
EXHIBIT F
RED HAT SOFTWARE, INC.
Trademark Usage Guide
Copyright (C) 1998 Red Hat Software, Inc. All rights reserved.
I. INTRODUCTION
The trademarks of Red Hat Software, Inc. represent the quality, innovation, and
excellence of Red Hat Software's products. They are recognized the world over as
a symbol of the most advanced computing technology. They serve to distinguish
those products that are officially endorsed by Red Hat Software, Inc. and those
that come from other entities. As a result, the trademarks of Red Hat Software,
Inc. are an extremely valuable resource, and are a critical component of Red Hat
Software's business strategy.
The development of a loyal brand following among customers is important to the
long term success of any business. This is especially important in the computer
software field, in which technology evolves extraordinarily rapidly and in which
new companies continually enter the marketplace. Nowhere is this more evident
than in the Linux-Registered Trademark- marketplace, in which the cooperative
development model fosters unsurpassed innovation and technological advancement.
In working with the cooperative development model, brand identity is often the
strongest and most visible aspect that separates one company from another.
Over a period of years, Red Hat Software has worked hard to develop a
consistent, high quality brand by producing computing products of the highest
possible technology, innovation, and quality. Our hard work has lead to several
prestigious international awards and multitudes of enthusiastic users across
the globe. As a result, the "Red Hat"-Registered Trademark- brand name and
associated trademarks have tremendous value in the marketplace, and arE an
extremely effective sales tool. Ensuring that the "Red Hat" brand and
trademarks are used properly and consistently will continue to develop the
value of that brand, and will allow you to benefit from it.
This Guide is designed to give you clear instructions for the use of Red Hat
Software trademarks. Please review it carefully. This document is designed to
assist you in implementing the separate written agreement you have entered with
Red Hat Software that permits you to use certain Red Hat Software trademarks.
Please review that separate written agreement to understand which trademarks you
are authorized to use, and to what extent and scope you may use them. The two
documents go hand in hand, but nothing in this document gives you greater rights
than the written contract between you and Red Hat Software. Rather, this
Trademark Guide is designed to help you implement the written contract.
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
The next few pages give you guidelines for the proper use of certain Red Hat
Software trademarks. Please be sure to follow those guidelines each time you use
any Red Hat Software trademark. The first section is a basic summary of
trademark law to help you understand the importance of adhering to these use
guidelines. The following sections address the particular circumstances of text
trademarks and logo trademarks.
Keep in mind that the trademarks of Red Hat Software are a valuable business
asset, and should be treated with care and respect. In order to preserve
trademark rights, all trademarks must be used consistent with these guidelines.
Failure to do so can result in a loss of trademark rights. The consistent use
over time will allow the value of the marks to increase, and will allow you to
benefit from that experience.
II. BASIC TRADEMARK USE RULES
The following guidelines apply to use of any and all trademarks, not just those
of Red Hat Software, Inc. They are helpful background information that should
assist you in preserving and enhancing the value of all trademarks you use
throughout your work.
1. DISTINGUISH. When using any trademark in printed materials, always try to
distinguish the mark in relation to other words in the text. This may be done by
printing the mark inside quotation marks, by printing it using all capital
letters, or by using bold print. This document is a good example of
distinguishing trademarks from surrounding text.
2. FORM. It is important to adhere to the exact form of each trademark. We are
an innovative and creative company, except when it comes to the use of our
trademarks. Do not use a clever play on words, or make other alterations to any
marks. Note that "RED HAT" is two separate and distinct words, and should never
be combined into a single word as "Redhat." The marks should not be translated
into other languages, nor should they be combined with marks of other
organizations. Be sure to review the guidelines in Section IV, for printing
graphical marks and logos.
3. ADJECTIVES. Always use marks as adjectives, and never as nouns. The use of
any mark in text should be immediately followed by a noun. For instance, state
"We recommend you use the RED HATTM Linux operating system," rather than, "We
recommend you use Red Hat." On a related note, avoid using marks in the
possessive form, in the plural, or as a verb. The examples below illustrate
proper usage.
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
<TABLE>
<CAPTION>
- ------------------- --------------------------------------------------- ----------------------------------------------
AVOID CORRECT
- ------------------- --------------------------------------------------- ----------------------------------------------
<S> <C> <C>
NOUN "RED HAT's performance is incredible." "The RED HAT Linux operating system's
performance is incredible."
- ------------------- --------------------------------------------------- ----------------------------------------------
PLURAL "Corporate demand for RED HATs is surging." "Corporate demand for the RED HAT Linux
operating system is surging."
- ------------------- --------------------------------------------------- ----------------------------------------------
VERB "RED HAT your entire network." "Set up your entire network using the RED
HAT Linux operating system."
- ------------------- --------------------------------------------------- ----------------------------------------------
</TABLE>
4. SYMBOL. When a trademark of Red Hat Software, Inc. first appears in
the body of printed text, it should be followed by the appropriate trademark
notice symbol. For registered marks, -Registered Trademark- is appropriate. For
unregistered marks, use TM. After the first use of one of these symbols, it
need not be used again after that mark in the text. Generally, the symbol is
not needed if the mark is used in the text's title or headline. Marks should
always have the appropriate symbol when used on product packaging, in
advertisements, or in other marketing material. In addition, be sure to include
an attribution statement for each mark used. Please see Section III.4 for the
proper form of such a statement.
III. TEXT TRADEMARKS
Proper use of Red Hat Software trademarks is essential to maintain and increase
their value in the marketplace. The guidelines that follow provide basic rules
of trademark usage, including the form, manner, and place of use.
Please refer to the Agreement signed by you and Red Hat Software, Inc., for
additional information. That Agreement outlines the rights you have to use
certain Red Hat Software trademarks, and this document is designed to assist you
in implementing and exercising those rights. Both documents function together,
and you should consult them regularly.
1. The words "RED HAT"
The words "RED HAT" are associated the world over with the quality and
innovation of Red Hat Software, Inc.'s products. These words must be used
carefully. Whenever possible, we recommend you use them only to refer to the
official products and services of Red Hat Software, Inc., or in conjunction with
your status as a Red Hat Software Partner.
Be sure to follow the general trademark use rules in Section II., Basic
Trademark Use Rules. The guidelines presented there are especially relevant and
helpful for handling the use of words as trademarks.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
2. Attribution Statements
When you us any Red Hat Software, Inc. trademark in the body of written text, be
sure to attribute it properly. In addition to placing the correct notation after
the first use of each trademark (see Basic Trademark Use Rules), also include an
attribution statement in a prominent place, such as a footnote, or at the
beginning of the document. For registered trademarks of Red Hat Software, the
correct attribution statement is:
"[TRADEMARK] is a registered trademark of Red Hat Software, Inc."
For unregistered marks, use:
"[TRADEMARK] is a trademark of Red Hat Software, Inc."
IV. LOGO TRADEMARKS
Logos are often the most unique trademarks of a company, and are instrumental in
developing consumer loyalty and brand identification. For this reason, it is
especially important that logos be used consistently. Modifications, even
slight, may confuse the public and can damage brand allegiance and loyalty. We
offer you the following guidelines to help you maintain the high value of the
RED HAT SHADOW MAN logo (the "Logo"). Any use of the Logo that varies or
deviates from these guidelines may be performed only with the written permission
of Red Hat Software, Inc.
1. COLOR. It is important to use consistent coloration of the Logo. The
following guidelines will ensure uniformity among all partners. Be sure to
review the camera-ready Logo slick, included with the packet of material
accompanying this Guide, for examples of proper usage.
a. All printing should be done on high-quality white stock paper.
b. Use the exact color scheme shown on the materials enclosed with this
booklet. The color red should be printed using Pantone-Registered Trademark-
Matching System (PMS) 1797, and black should be black.
c. Never use any colors other than the prescribed red, black, and
white.
d. If you use the Logo in black and white, do not use gray shading. For
example, the hat which is red in the full color version should be white, not
gray, in the black and white version.
2. SIZE. You may vary the size of the Logo to suit your needs, provided
that you abide by the following guidelines.
a. The minimum size of the Logo is five-eighths of an inch, or 0.7
centimeters, in height. This size may be appropriate for business cards and
other small materials. There is no maximum size for the Logo in large display
items such as trade show signs, blimps, and hot air balloons.
b. On products, the Logo should occupy no more than 10%, and no less
than 1%, of the surface area of any single surface. For instance, on a box with
100 square inches on the front, the Logo should occupy no more than 10 square
inches, and no less than 1 square inch.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
3. APPEARANCE. It is critical to ensure that any adjustments in size are made
proportionally, so that the overall impression is not distorted. Do not adjust
the length of the logo without similarly and proportionally adjusting the
height. Be sure to keep the logo intact as it exists currently. Do not use some
portions of the Logo while leaving other parts out.
4. ATTRIBUTION. As with Text trademarks, it is important that logo trademarks
are properly attributed. When using the Logo, include a proper attribution
statement.
V. CONCLUSION
The guidelines presented here establish a means to preserving trademark
protection for the Red Hat Software trademarks, including the Red Hat Shadow Man
logo. By following these guidelines, you make a wise investment in your future,
as you help ensure that today's trademarks will preserve their value over time.
Red Hat Software, Inc. looks forward to working with you throughout our
relationship to develop the fame and value of the Red Hat trademarks, and we are
pleased to have you as a partner in that endeavor.
Should you have any questions, please do not hesitate to contact us.
Pantone is a registered trademark of Pantone, Inc. Linux is a registered
trademark of Linus Torvalds.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
EXHIBIT G
POINT OF SALE REPORT
LICENSE AGREEMENT
This Agreement (the "Agreement") is made this 15th day of October, 1998 by and
between Ingram Micro Inc., a Delaware corporation with its principal place of
business at 1600 East St., Andrew Place, Santa Ana, California 92705
("Ingram"), and Red Hat Software, a Delaware corporation, with its principal
place of business at 4201 Research Commons, Suite 100, Research Triangle Park,
North Carolina 27709 ("Licensee").
WHEREAS Ingram is engaged in the research, collection, compilation and
distribution of- information relating to its sales and it is willing to
license such information to Licensee for its internal use. Licensee wishes to
receive such information and to use it in accordance with the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises set out herein, the
parties hereby agree as follows:
1. INFORMATION DEFINED. Ingram shall provide Licensee information relating to
its sales and such information includes, but is not limited to the Point of Sale
Report hereinafter referred to as "Proprietary Information".
2. LICENSE TO USE. Ingram hereby grants Licensee a nonassignable license to
use the Proprietary Information for internal purposes only. Licensee agrees not
to contact any customer or dealer listed in the Proprietary Information for the
purpose of soliciting a direct sales relationship between Licensee and such
customer or dealer. Notwithstanding the foregoing, Licensee shall not be
prohibited from contacting or soliciting those customers or dealers (a) with
whom Licensee already has a direct relationship, (b) who contact Licensee of
their own accord, and (c) who are developed as prospective customers or dealers
independent of the "Proprietary Information."
3. [CONFIDENTIAL TREATMENT REQUESTED]**
4. TERM. The term of this Agreement, unless terminated in accordance with
paragraph 9, shall be concurrent with the term of that mutual Distribution
Agreement between Ingram Micro Inc. and Licensee dated October 15, 1998,
incorporated by reference as if fully set forth herein. In the event of
expiration or earlier termination of the Distribution Agreement or the earlier
termination of this Agreement Ingram may deduct any outstanding accrual of the
rebated amount.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
5. COPYRIGHT. Licensee acknowledges that all Proprietary Information and all
written descriptions, extractions, or summaries thereof, whether made by
Licensee or Ingram, shall be the property of Ingram and that the granting of a
license to use the Proprietary Information hereunder shall in no way constitute
or be construed as a grant of any proprietary interests or copyrights in
Proprietary Information. Licensee agrees that it will not copy, scan, duplicate
or reproduce any of the Proprietary Information in any manner whatsoever, except
that Licensee shall be Permitted to create additional copies of the Proprietary
Information for its internal use only.
6. NON-DISCLOSURE. Licensee agrees to hold in confidence and not to directly
or indirectly use, reveal, report, publish, disclose or transfer to any other
person or entity any of the Proprietary Information or utilize any of the
Proprietary Information for any purpose at any time except as permitted under
Section 2. Licensee shall have the right to disclose the Proprietary Information
to key employees of Licensee to the extent necessary to perform tasks directly
related to the permitted uses; provided, however that the Licensee shall take
steps to ensure that such employees conduct themselves so as to preserve
confidentiality of the Proprietary Information. Licensee and Ingram mutually
agree that Ingram's public disclosure of the Proprietary Information, except
pursuant to a confidential disclosure agreement, to any party will release
Licensee from the obligation of confidentiality with respect to that portion of
the Proprietary Information actually disclosed by Ingram.
7. REMEDY IN EVENT OF UNAUTHORIZED DISCLOSURE. Because of the unique and
proprietary nature of the Proprietary Information, it is understood and agreed
that Ingram's remedies at law for a breach by Licensee of its obligations under
this Agreement will be inadequate and that Ingram shall, in the event of such
breach by Licensee, be entitled to equitable relief (including without
limitation, injunctive relief and specific performance) without any requirement
to post a bond as a condition for such relief, in addition to all other remedies
under this Agreement or available at law. In addition, Vendor agrees to and
shall indemnify Ingram from and compensate Ingram for any and all damage or
injury, including legal fees and costs incurred by Ingram because of Vendor's
misuse of any Proprietary Information or costs incurred by Ingram in enforcing
its rights hereunder. This provision shall survive the expiration or earlier
termination of this Agreement for a period of one (1) year.
8. DISCLAIMER OF LIABILITY. Ingram makes no warranty, either express or
implied, as to the completeness and accuracy of the Proprietary Information. All
Proprietary Information is provided to Licensee "as is". INGRAM DISCLAIMS ALL
WARRANTIES RELATING TO THE PROPRIETARY INFORMATION. INGRAM DISCLAIMS ALL IMPLIED
WARRANTIES, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTY OF FITNESS FOR A
PARTICULAR PURPOSE. Licensee's sole remedy in the event that Proprietary
Information contains a material error (which Ingram cannot correct within thirty
(30) days after Licensee notifies Ingram in writing) shall be to return the
Proprietary Information to Ingram for a refund of a prorate portion of the
license fee as applicable.
9. TERMINATION. Upon termination of this Agreement by either party for any
reason which shall be effective upon thirty (30) days written notice, Vendor
shall return all Proprietary Information, irrespective
- 2 -
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
of format, to Ingram within thirty (30) days of the effective date of
termination or if Ingram so requests, to certify to Ingram that all Proprietary
Information and copies have been destroyed. For purposes of enforcing this
provision, Vendor's return obligation shall survive the termination of this
Agreement.
10. ADDITIONAL PROVISIONS. This Agreement shall be governed by the laws of the
State of California. This Agreement contains the full and complete understanding
of the parties with respect to the subject matter hereof and supersedes all
prior representations or understandings, whether oral or written. In the event
that any provision is found invalid or unenforceable pursuant to statutory or
judicial decree, such provision shall be construed only to the maximum extent
permitted by law, and the remainder of the Agreement shall be valid and
enforceable - in accordance with its-terms. Notwithstanding the termination or
expiration of any other agreement between the parties, the obligations created
hereunder shall continue indefinitely.
INGRAM MICRO INC. RED HAT SOFTWARE
By: /s/ Michael Terrell By: /s/ Paul Mcnamara
------------------------------------- ------------------------
Name: Michael Terrell Name: Paul Mcnamara
------------------------------------- ------------------------
Title: Vice President Purchasing Title: Vice President
------------------------------------- ------------------------
Date: November 13, 1998 Date: November 6, 1998
------------------------------------- ------------------------
- 3 -
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
November 4, 19998
Geno Marcoux
Ingram Micro
Fax: 714-247-3223
Dear Geno:
As agreed upon in yesterday's meeting with Paul McNamara, the following pricing
schedule [CONFIDENTIAL TREATMENT REQUESTED]** will apply to Ingram Micro's sale
of Red Hat Software's retail software products.
<TABLE>
<CAPTION>
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
PRICING SCHEDULE
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
PRODUCT PRODUCT CODE LIST PRICE [CONFIDENTIAL TREATMENT
BOXED SETS REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
<S> <C> <C> <C>
Red Hat Linux 5.2/Intel RH5020 $49.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Red Hat Linux 5.2/Alpha ARH5020 $49.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Red Hat Linux 5.2/SPARC SRH5020 $49.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Red Hat Linux Power Tools PT1000 $39.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Red Hat Linux Extra! RH5300 $79.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Red Hat Secure Web Server 2.0 WB2000 $99.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
BOOK + CDROM
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Red Hat Motif 2.1.1 RH2110 $149.00 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
</TABLE>
- 1 -
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
JEWEL CASE
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
<S> <C> <C> <C>
Red Hat Variety Pack RH5400 $29.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Red Hat Off Line LA1000 $24.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Red Hat Linux Library RH5005 $29.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Linux Rough Cuts RC1000 $29.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Extreme Linux EX1000 $29.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
BOOKS
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Linux Undercover B20080 $39.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Maximum RPM B2005 $34.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Red Hat Linux 5.2
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
Installation Guide RH5021 $14.95 [CONFIDENTIAL TREATMENT
REQUESTED]**
- ------------------------------------------------ ----------------------- ---------------- ----------------------------
</TABLE>
[CONFIDENTIAL TREATMENT REQUESTED]**
[CONFIDENTIAL TREATMENT REQUESTED]**
[CONFIDENTIAL TREATMENT REQUESTED]**
Geno, please call me immediately if you have any questions, or require
additional information to set up products.
Best regards,
/s/ Terry Tomlinson
- -------------------
Terry Tomlinson
- 2 -
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
AMENDMENT
This is an amendment ("Amendment") to a separate written agreement ("Agreement")
entered into on October 15, 1998, by and between Ingram Micro, Inc. ("Ingram"),
a Delaware corporation, and Red Hat Software, Inc. ("Vendor"), a Delaware
corporation. The parties agree that since the Agreement took effect, Vendor has
introduced new products which consist primarily of services to be provided by
Vendor to customers, and Ingram wishes to distribute those products pursuant to
the Agreement. Therefore, the parties hereby agree to the following terms and
conditions:
1. This Amendment shall be effective as of the date it is executed by both
parties, and it shall terminate upon the termination of the Agreement, or as
otherwise agreed to in writing by both parties.
2. "Enterprise Product" means those products offered by Vendor which are
designed for use by enterprise customers. Enterprise Product offered by
Vendor may be determined by Vendor from time to time, and as of the date of
this Amendment includes the following:
A. Enterprise Support Product:
(1) 10-Incident Support Pack
(2) 25-Incident Support Pack
B. Enterprise Software Product:
(1) Red Hat Linux System Builder Edition OEM
(2) Red Hat Linux Commercial Server Edition OEM
(3) Red Hat Linux Commercial Server Edition
C. For purposes of this Amendment and the Agreement, Enterprise
Product shall be considered Product as defined in Agreement.
3. With respect solely to Enterprise Product, the last sentence of Section 1.1
of Agreement is deleted and is replaced with the following:
Ingram shall have the right to purchase, sell and ship Enterprise Product to any
and all Registered Resellers within the Territory. "Registered Reseller" means
those resellers that have registered with Vendor as required by Vendor in its
discretion from time to time, and which Vendor indicates to Ingram are properly
registered. Ingram shall not sell, ship or otherwise distribute Enterprise
Product to any party that is not a Registered Reseller.
4. With respect solely to Enterprise Product, Section 7 ("Returns") of the
Agreement is deleted and is replaced by the following:
- 1 -
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
A. STOCK BALANCING. In the event that Vendor releases a new version
of its Red Hat Linux software, Ingram may return unsold
Enterprise Software Product containing the previous version of
Red Hat Linux to Vendor [CONFIDENTIAL TREATMENT REQUESTED]**. Vendor
shall apply credit of the purchase price of returned Enterprise
Software Product to Ingram's purchase of the new
version of the Enterprise Software Product. In the event that
Enterprise Support Product is unsold after [CONFIDENTIAL TREATMENT
REQUESTED]**, Ingram may return it in unopened box condition only and,
upon receipt of returned Support Product by Vendor in satisfactory
condition, Vendor shall apply credit of purchase price of Enterprise
Support Product to purchase of Enterprise Software Product. All
Enterprise Software Product or Enterprise Support Product to be
returned to Vendor pursuant to this section must be in original,
complete, unused and unopened condition.
B. POST-TERM/TERMINATION. For [CONFIDENTIAL TREATMENT REQUESTED]** after
the expiration or earlier termination of the Agreement, Ingram may
return to Vendor unsold Enterprise Software Product in its inventory.
All Enterprise Software Product to be returned to Vendor pursuant to
this section must be in original, complete, unused and unopened
condition. Vendor shall apply credit of the purchase price
[CONFIDENTIAL TREATMENT REQUESTED]**, to Ingram's outstanding invoices,
and in the event there are no outstanding invoices, Vendor shall issue
a cash refund to Ingram.
C. PRODUCT DISCONTINUATION. Vendor reserves the right to discontinue,
cancel, change, or otherwise modify the support services component of
any or all Enterprise Product. Vendor shall provide Ingram with
[CONFIDENTIAL TREATMENT REQUESTED]** notice of any discontinuation,
cancellation, change to, or other modification of any or all Enterprise
Product, Ingram shall, upon written request from Vendor, return to
Vendor all such Enterprise Product in its inventory within
[CONFIDENTIAL TREATMENT REQUESTED]** of receipt of such request. Vendor
shall, upon receipt of such returned Enterprise Product, credit Ingram
for the purchase price paid for such Enterprise Products [CONFIDENTIAL
TREATMENT REQUESTED]**. All Enterprise Product to be returned by Ingram
pursuant to this section must be in original, complete, unused and
unopened condition. Except as provided in this section, no Enterprise
Support Product be returned to Vendor by Ingram.
D. DEFECTIVE PRODUCT.
(1) Ingram may return to Vendor the software or documentation
component of any Enterprise Product that is defective. Upon receipt of
such defective component, Vendor shall provide Ingram with replacement
component [CONFIDENTIAL TREATMENT REQUESTED]**. In no event shall the
support services component of any Enterprise Product to be considered
defective.
- 3 -
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
(2) If any Enterprise Product is recalled by Vendor because
of defects, Ingram will provide reasonable assistance to Vendor with
such recall, and Vendor shall pay Ingram's reasonable expenses in
connection with such recall.
5. Vendor's price list, set forth in Exhibit D of Agreement, is amended to
include the Enterprise Product price list attached to this Amendment as Schedule
A.
6. All provisions of Agreement not modified or amended by this Amendment shall
remain in full force and effect. To show their assent, the parties have executed
this Amendment as shown below:
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------- ----------------------------------------
RED HAT SOFWARE, INC. ("Vendor") INGRAM MICRO INC. ("Ingram")
By: /S/ TERESA SPANGLER By: /S/ MICHAEL TERRELL
Name: TERESA SPANGLER Name: MICHAEL TERRELL
Title: BUSINESS UNIT LEADER CHANNELS Title: VICE PRESIDENT, PURCHASING
Date: FEBRUARY 3, 1999 Date: FEBRUARY 9, 1999
- ------------------------------------------------------- ----------------------------------------
</TABLE>
February 1999 EXHIBIT A ADDENDUM TO INGRAM AGREEMENT
ENTERPRISE PRODUCTS
The products below are intended to be sold only to resellers registered as Red
Ht Registered Resellers of these products.
<TABLE>
<CAPTION>
PRODUCT CODE DESCRIPTION UPC# LIST PRICE INGRAM PRICE DISCOUNT
ENTERPRISE SOFTWARE PRODUCTS
<S> <C> <C> <C> <C> <C>
SBE5205 SYSTEM BUILDERoem/INTEL-5 PK 638347 50039 8 $249.75 [CONFIDENTIAL [CONFIDENTIAL
TREATMENT TREATMENT
REQUESTED]** REQUESTED]**
CSE5200 COMMERCIAL SERVERoem/INTEL-Single 638347 50031 2 $995.00 [CONFIDENTIAL [CONFIDENTIAL
TREATMENT TREATMENT
REQUESTED]** REQUESTED]**
CSE5300 COMMERCIAL SERVERoem/INTEL-Single 638347 50051 0 $995.00 [CONFIDENTIAL [CONFIDENTIAL
TREATMENT TREATMENT
REQUESTED]** REQUESTED]**
</TABLE>
- 3 -
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
ENTERPRISE SUPPORT PRODUCTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ESP1000 10 INCIDENT CALL PACK 638347 50035 0 $2,995.00 [CONFIDENTIAL [CONFIDENTIAL
TREATMENT TREATMENT
REQUESTED]** REQUESTED]**
ESP2500 25 INCIDENT CALL PACK 638347 50036 7 $7,295.00 [CONFIDENTIAL [CONFIDENTIAL
TREATMENT TREATMENT
REQUESTED]** REQUESTED]**
[CONFIDENTIAL TREATMENT REQUESTED]**
[CONFIDENTIAL TREATMENT REQUESTED]** Q1 1999
[CONFIDENTIAL [CONFIDENTIAL TREATMENT REQUESTED]** [CONFIDENTIAL
TREATMENT TREATMENT
REQUESTED]** REQUESTED]**
[CONFIDENTIAL [CONFIDENTIAL TREATMENT REQUESTED]** [CONFIDENTIAL
TREATMENT TREATMENT
REQUESTED]** REQUESTED]**
[CONFIDENTIAL [CONFIDENTIAL TREATMENT REQUESTED]** [CONFIDENTIAL
TREATMENT TREATMENT
REQUESTED]** REQUESTED]**
</TABLE>
- 4 -
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
AMENDMENT #1 to the
DISTRIBUTION AGREEMENT
THIS AMENDMENT (the "Amendment") is entered into this 23rd day of April 1999, by
and between INGRAM MICRO INC. ("Ingram") and RED HAT SOFTWARE, INC. ("Vendor").
The parties have agreed to amend their Distribution Agreement ("Agreement"),
effective October 15, 1998.
1. SECTION 4.1, SHIPPING/EXPORT, DELETE AND REPLACE WITH THE FOLLOWING:
Vendor shall ship Product pursuant to Ingram purchase order(s)
("P.O."). Product shall be shipped F.O.B. Vendor's U.S. designated
facility and Ingram shall pay all freight charges. Risk of loss or
damage by agreement of the parties will pass to Ingram upon delivery to
the warehouse specified in Ingram's P.O. Vendor shall ship all Products
in accordance with the instructions in Ingram's Vendor Routing Guide,
attached hereto as Exhibit A. [CONFIDENTIAL TREATMENT REQUESTED]**.
2. [CONFIDENTIAL TREATMENT REQUESTED]**.
3. SECTION 5.5, PAYMENT TERMS, DELETE AND REPLACE WITH THE FOLLOWING:
Ingram's payment terms shall be [CONFIDENTIAL TREATMENT REQUESTED]**.
Payment shall be deemed made on the payment postmark date.
4. SECTION 6.2, ADVERTISING, DELETE AND REPLACE WITH THE FOLLOWING:
Vendor agrees to cooperate in Ingram's or Ingram's customers'
advertising and promotion of Product and hereby grants Ingram a
cooperative advertising allowance which will be established by
mutual agreement for such advertising featuring Product and/or Vendor.
Ingram shall submit advertising to Vendor for review and approval
prior to any initial release, and Vendor shall not unreasonably
withhold or delay such approval. [CONFIDENTIAL TREATMENT REQUESTED]**
5. [CONFIDENTIAL TREATMENT REQUESTED]**
6. SECTION 7. 1, DELETE AND REPLACE WITH THE FOLLOWING: Notwithstanding
anything herein to the contrary, Ingram may return Products throughout
the term within [CONFIDENTIAL TREATMENT REQUESTED]** of the purchase
date which are in their original packaging to Vendor for full credit of
the Products' purchase price. [CONFIDENTIAL TREATMENT REQUESTED]**.
7. SECTION 7.3, DELETE AND REPLACE WITH THE FOLLOWING: Vendor shall give
Ingram [CONFIDENTIAL TREATMENT REQUESTED]** advance written notice of
Product discontinuation. Ingram may return all such Product to Vendor
- 1 -
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
for full credit of Product purchase price, provided that Ingram uses
commercially reasonable efforts to return all such Product in its
inventory within [CONFIDENTIAL TREATMENT REQUESTED]** of receipt of
written notice from Vendor of Product discontinuation. Within
[CONFIDENTIAL TREATMENT REQUESTED]** of receipt of written notice of
Product discontinuation, Ingram will provide a report to Vendor of
current Customer inventory levels of such Product for those resellers
that provide inventory reporting to Ingram. Ingram will use
commercially reasonable efforts to return to Vendor such Product from
its customers within [CONFIDENTIAL TREATMENT REQUESTED]** of receipt of
written notice of Product discontinuation. These reports are intended
to give Vendor a realistic expectation of the aforementioned
[CONFIDENTIAL TREATMENT REQUESTED]** returns period. [CONFIDENTIAL
TREATMENT REQUESTED]**.
8. SECTION 7.4(A) DELETE AND REPLACE WITH THE FOLLOWING:
Ingram may return any Product to Vendor that Ingram or its customer
finds defective. Ingram shall return such defective Product to Vendor
no more than once per month. [CONFIDENTIAL TREATMENT REQUESTED]**.
9. [CONFIDENTIAL TREATMENT REQUESTED]**
This Amendment shall remain in effect for the current term and any renewal term
of the Agreement.
Notwithstanding the foregoing, all other provisions of the Agreement remain
unchanged. The undersigned has read this Amendment, agrees hereto, and is an
authorized representative of its respective party.
<TABLE>
<CAPTION>
<S> <C>
INGRAM MICRO INC. RED HAT SOFTWARE
1600 St. Andrew Place 4201 Research Commons, Suite 100
Santa Ana, California 92705 Research Triangle Park, North Carolina 27709
By: /s/ Donna Grothian By: /s/ Teresa Spangler
Name: DONNA GROTHIAN Name: TERESA SPANGLER
Title: GENERAL MANAGER, SOFTWARE Title: BUSINESS UNIT LEADER
Date: APRIL 27, 1999 Date: APRIL 24, 1999
</TABLE>
- 2 -
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Exhibit 10.15
RED HAT PRODUCT DISTRIBUTION AGREEMENT
This is an agreement related to the distribution of certain products of
Red Hat Software, Inc. Red Hat Software, Inc., a Delaware corporation ("Red
Hat") and FRANK KASPER & ASSOCIATES, INC., a Minnesota corporation
("Distributor"), enter into this Agreement as of the last date following the
signatures below.
1. DEFINITIONS.
A. "Customers" of Distributor shall include dealers, resellers, value
added resellers, direct resellers and other entities that acquire the Products
from Distributor.
B. "DOA" shall mean Product, or any portion thereof, which fails to
operate properly on initial installation, boot, or use, as applicable.
C. "Documentation" shall mean user manuals, training materials, Product
descriptions and specifications, brochures, technical manuals, license
agreements, supporting materials and other printed information relating to the
Products and included with the Products, whether distributed in print,
electronic, or video format.
D. "Effective Date" shall mean the date on which this Agreement is
signed and dated by a duly authorized representative of each party.
E. "End Users" shall mean the final purchasers or licensees who have
acquired Products for their own use and not for resale, remarketing or
redistribution.
F. "Non-Saleable Products" shall mean any Product that has been
returned to Distributor by its Customers that has had the outside shrink
wrapping or other packaging seal broken; any components of the original package
are missing, damaged or modified; or is otherwise not fit for resale.
G. "Products" shall mean, individually or collectively, the software
licenses, electronic products, the sealed software packages comprised of the
computer programs encoded on media together with manuals, materials and other
contents of the packages associated therewith of Red Hat.
H. "Return Credit" shall mean a credit to Distributor in an amount
equal to the price paid by Distributor for Products less any price protection
credits but not including any early payment, prepayment or other discounts.
I. "Services" means any warranty, maintenance, advertising, marketing
or technical support and any other services performed or to be performed by Red
Hat.
J. "Territory" shall mean worldwide.
<PAGE>
-2-
2. APPOINTMENT AS DISTRIBUTOR.
Red Hat hereby grants to Distributor, and Distributor accepts, the
non-exclusive, non-transferable right and license to distribute Products during
the term of this Agreement within the Territory, together with any updates or
enhancements to the Products and any new releases related to the Products. This
license includes the right to order, possess and distribute the Products to
Customers and to provide the Products to Customers for use on demonstration
units. Red Hat and Distributor acknowledge and agree that the license to use the
Product is solely between Red Hat and the End User and is governed by the terms
of the Red Hat's standard end user license agreement enclosed with the Product.
Distributor will use commercially reasonable efforts to promote distribution of
the Products.
3. PURCHASE ORDERS.
A. Distributor shall issue to Red Hat one or more purchase orders
identifying the Products Distributor desires to purchase from Red Hat. The terms
and conditions of this Agreement shall govern all purchase orders, except that
purchase orders may include other terms and conditions which are consistent with
the terms and conditions of this Agreement, and which are mutually agreed to in
writing by Distributor and Red Hat. Purchase orders will be placed by
Distributor by fax or electronically transferred.
B. If for any reason Red Hat's production is not on schedule, Red Hat
agrees to use its best efforts to allocate inventory to Distributor and make
shipments in proportion to Distributor's percentage of all Red Hat's orders
during the previous [CONFIDENTIAL TREATMENT REQUESTED]** days.
4. ACCEPTANCE OF PRODUCT, SHIPPING
A. Distributor shall, after a reasonable time to inspect each shipment,
such time not to exceed ten days, accept Products (the "Acceptance Date") if the
Products and all necessary Documentation delivered to Distributor are in
accordance with the purchase order. Products shall be shipped FOB origin. Title
and risk of loss or damage to Products shall pass to Distributor at the time the
Products are delivered by Red Hat to common carrier for shipping to Distributor.
Red Hat shall ship Products to Distributor's warehouses anywhere in the world as
specified by Distributor. Distributor shall pay the reasonable costs and
expenses of shipping Products to Distributor.
B. Red Hat and Distributor agree that no title or ownership of the
proprietary rights to any software code is transferred by virtue of this
Agreement notwithstanding the use of terms such as "purchase", "sale" or the
like within this Agreement. Red Hat and third parties retain all ownership
rights and title to any and all software code within the Products.
- -------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-3-
5. RETURNS.
A. Red Hat agrees to accept return of overstocked Products returned by
Distributor, provided that the quantity of Products returned by Distributor does
not exceed [CONFIDENTIAL TREATMENT REQUESTED]** of the Products purchased by
Distributor during the previous [CONFIDENTIAL TREATMENT REQUESTED]**. Shipments
of Products being returned shall be new, unused and in sealed cartons. Red Hat
shall credit Distributor's account in the amount of the Return Credit.
Distributor shall bear all costs of shipping and risk of loss of those Products
returned under this Section to Red Hat's location.
B. Distributor shall have the right to return to Red Hat for Return
Credit any DOA Product or any Product that is returned to Distributor within
thirty (30) days after the initial delivery date to the End User and that fails
to perform in accordance with Red Hat's Product warranty. Red Hat shall bear all
costs of shipping and risk of loss of DOA and in-warranty Products to Red Hat's
location and back to Distributor or Distributor's Customer.
C. Distributor shall have the right to return for Return Credit,
[CONFIDENTIAL TREATMENT REQUESTED]** all Products that are damaged in transit,
become obsolete or Red Hat discontinues, updates, revises or are removed from
Red Hat's current price list; provided that Distributor uses it best efforts to
return all such Products within [CONFIDENTIAL TREATMENT REQUESTED]** after
Distributor receives written notice from Red Hat that such Products are
obsolete, superseded by a newer version, discontinued or are removed from Red
Hat's price list. Red Hat shall bear all reasonable costs of shipping and risk
of loss of obsolete or outdated Products to Red Hat's location.
D. Distributor shall have the right to return to Red Hat for Return
Credit Non-Saleable Products. Distributor shall bear all costs of shipping and
risk of loss of Non-Saleable Products to Red Hat's location.
E. As a condition precedent to returning Products, Distributor shall
request and Red Hat shall issue a Return Material Authorization Number (RMA)
within 15 days of the Distributor's request. Red Hat shall have no obligation to
accept returns in the absence of a valid RMA.
F. This Section 5 does not apply to any Products purchased by
Distributor prior to April 28, 1999. A good faith effort will be used by
Distributor to return products purchased before April 28, 1999 by Distributor in
accordance with the terms of this Section 5.
6. PRODUCT PRICES.
A. Charges, prices, quantities and discounts and shipping costs, if
any, for Products shall be determined as set forth in Exhibit A of this
Agreement, or as otherwise mutually agreed upon by the parties in writing. Such
charges, prices, quantities, discounts and shipping costs shall not be higher
than those charged to other same class of customers buying in like quantities.
- -------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-4-
[CONFIDENTIAL TREATMENT REQUESTED]**
B. Red Hat shall have the right to increase prices from time to
time, upon written notice to Distributor not less than
[CONFIDENTIAL TREATMENT REQUESTED]** days prior to the effective date of such
increase. All orders placed prior to the effective date of the increase, for
shipment prior to the effective date, shall be invoiced by Red Hat at the
lower price.
C. Red Hat shall have the right to decrease prices from time to time,
upon written notice to Distributor. Red Hat shall grant to Distributor, its
parent, affiliates and subsidiaries and Distributor's Customers a price credit
for the full amount of any Red Hat price decrease on all Products on order, in
transit and in their inventory on the effective date of such price decrease.
Distributor and its Customers shall, after receiving written notice of the
effective date of the price decrease, provide a list of all Products for which
they claim a credit.
7. PAYMENT.
A. Except as otherwise set forth in this Agreement, any undisputed sum
due to Red Hat pursuant to this Agreement shall be payable net [CONFIDENTIAL
TREATMENT REQUESTED]** after the Acceptance Date. Red Hat shall invoice
Distributor no earlier than the applicable shipping date for the Products
covered by such invoice. Any payments more than [CONFIDENTIAL TREATMENT
REQUESTED]** past due shall be subject to a late fee of [CONFIDENTIAL TREATMENT
REQUESTED]** percent per month, or the maximum allowable by law, whichever is
less.
B. Distributor shall be responsible for franchise taxes, sales or use
taxes, and all other taxes, or shall provide Red Hat with an appropriate
exemption certificate.
8. ADVERTISING.
A. Red Hat offers a [CONFIDENTIAL TREATMENT REQUESTED]** advertising
program [CONFIDENTIAL TREATMENT REQUESTED]**. Distributor shall have the
right, at Distributor's option, to participate in such programs.
B. Red Hat shall provide at no charge to Distributor and the Customers
of Distributor, reasonable marketing, support, and advertising materials in
reasonable quantities in connection with the resale of Products as are currently
offered or that may be offered by Red Hat. Red Hat shall bear no costs or
expenses incurred by Distributor related to Distributor's marketing of Products
unless such expenses are approved in advance in writing by Red Hat.
C. Upon request of Distributor, Red Hat shall consider providing
Customized Products for specific customers of Distributor.
9. WARRANTIES/INDEMNIFICATION
A. Subject to the provisions of Section 10., Limitation on Liability,
Red Hat shall defend, hold harmless, and indemnify, including reasonable
attorney's fees, Distributor from and against
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-5-
I. any claim that any of the Products infringes upon any
intellectual property interest of any third party; and
II. any claim that any of the Products is not year 2000
compliant, meaning that it is unable to correctly process and exchange
date data with respect to the change from the twentieth to the
twenty-first century.
III. any claim arising out of [CONFIDENTIAL TREATMENT
REQUESTED]**.
The indemnification obligations set forth in this Section 9.A shall
apply only provided that Distributor provides Red Hat with prompt written notice
of each such claim, and provided that Red Hat shall have complete control of the
defense of such claim and Distributor's reasonable cooperation in its defense.
B. EU WARRANTY. Vendor warrants and represents for Products distributed
to the European Union ("EU") that , that to the best of its knowledge, the
Products will be accepted under all EU directives, regulations and the EU
country's legislation.
C. MADE IN AMERICA CERTIFICATION. Vendor by the execution of this
Agreement certifies that it will not label any of its products as being "Made in
America," "Made in U.S.A.," or with similar wording, unless all components or
elements of such Product are in fact made in the United States of America.
Vendor further agrees to defend, indemnify and hold harmless from and against
any and all claims, demands, liabilities, penalties, damages, judgments or
expenses (including attorney's fees and court costs) arising out of or resulting
in any way from Product that does not conform to the Certification.
D. Distributor shall defend, hold harmless, and indemnify, including
reasonable attorney's fees, Red Hat from and against any claim arising out of
any action or inaction by Distributor with respect to the subject matter of this
Agreement, other than as set forth in Section 9.A., B or C. including but not
limited to liabilities that may result, in whole or in part, from Distributor's
negligence or willful misconduct in the distribution of the Products pursuant to
this Agreement, or for representations or warranties made by Distributor related
to the Products in excess of the warranties of Red Hat, provided that Red Hat
provides notice to Distributor of any all such claims and provides reasonable
assistance to Distributor in the defense of such claims at Distributor's
expense.
10. LIMITATION ON LIABILITY
A. EACH PARTY'S AGGREGATE LIABILITY FOR DAMAGES CLAIMED UNDER THIS
AGREEMENT SHALL BE LIMITED TO [CONFIDENTIAL TREATMENT REQUESTED]** TO THE
MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL RED HAT BE
LIABLE TO DISTRIBUTOR OR TO ANY THIRD PARTY FOR ANY SPECIAL, INDIRECT,
INCIDENTAL, OR CONSEQUENTIAL DAMAGES, PUNITIVE DAMAGES, OR ANY DAMAGES
RESULTING FROM LOSS OF DATA, USE OR PROFITS, OR LOSS OF
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-6-
CONTRACTS OR BUSINESS OPPORTUNITY, ARISING OUT OF THIS AGREEMENT OR THE USE OF
OR INABILITY TO USE THE SOFTWARE, DOCUMENTATION OR RED HAT PRODUCT OR ARISING
OUT OF RED HAT'S PERFORMANCE OR NON-PERFORMANCE HEREUNDER, WHETHER OR NOT
REASONABLY FORESEEABLE AND EVEN IF RED HAT HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES AND REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT
(INCLUDING NEGLIGENCE), STRICT LIABILITY, ARISING UNDER STATUTE OR OTHERWISE.
B. Nothing in this Section shall restrict either party's liability for
death, personal injury, or other damage not capable of limitation under
applicable law.
11. DISTRIBUTOR REPORTS.
Distributor shall provide to Red Hat monthly sales out reports related
to Distributor's sale of Products, which shall include the following
information: month and year sales activity occurred, internal product number
(assigned by Distributor), written description, Customer name, state and
zip-code of Customers location, unit cost (distributor's cost at quantity 1),
quantity and extended cost (cost times quantity). Distributor shall provide such
reports no later than [CONFIDENTIAL TREATMENT REQUESTED]** after the end of each
month.
12. TRADEMARK USAGE.
A. Red Hat grants to Distributor, and Distributor accepts, a
non-exclusive, non-transferable right and license to use and display the
trademarks of Red Hat associated with the Products (the "Marks"), solely in
conjunction with Distributors efforts to market the Products, subject to and in
accordance with policies and Guidelines established by Red Hat, in its sole
discretion, from time to time. Red Hat's current trademark usage guidelines are
attached hereto as Exhibit B and made a part hereof.
B. Distributor shall not use any of the Marks, in whole or in part, in
its company, corporate, domain or trade name.
C. Distributor shall not alter, cover, modify, delete, obfuscate or
remove any Mark or trademark designator contained in or appearing on or in the
Products or in advertising or promotional material prepared or furnished to
Distributor by Red Hat. Distributor shall not use any Red Hat trade name,
trademark or service mark in any manner other than as expressly authorized in
this Agreement or as otherwise agreed to in writing by Red Hat. Without limiting
the foregoing, Distributor shall not affix any Mark or other Red Hat designation
to any product or service, or use the same, other than on or in connection with
the Red Hat Product. All Red Hat trademarks shall remain in their exact form,
and shall not be translated into any other language by Distributor.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-7-
D. Distributor shall not indicate, state or imply that it has, or hold
itself out as having a corporate affiliation with Red Hat or any relationship
with Red Hat other than that set forth in this Agreement. In particular, but
without limitation, Distributor shall not create a web site or adopt a domain
name suggesting in any way that Distributor is a subsidiary or corporate
affiliate of Red Hat.
E. Distributor acknowledges that the Marks are the exclusive property
of Red Hat, and that it will not assert any claim of ownership to the Marks, or
to the goodwill or reputation thereof, by virtue of Distributor's use of the
Marks, or otherwise. All use of the Marks by Distributor under this Agreement
shall inure solely to the benefit of Red Hat. Distributor will not take any
action in derogation of any of the rights of Red Hat in the Marks.
F. Distributor shall not adopt or seek to register Red Hat's trademarks
(including, without limitation, the Marks) or any trademark, trade name, service
mark or domain name with any agency or administrative body anywhere in the world
which is confusingly similar to a Red Hat trademark or any translation thereof,
in any jurisdiction. Distributor further agrees that if it shall have obtained,
or if it obtains in the future, in any jurisdiction, any right, title or
interest in any mark, symbol, phrase or domain name which shall be identical to,
similar to or likely to be confused with any Mark, or any translation thereof,
then Distributor shall have acted or shall act as an agent and for the benefit
of Red Hat for the limited purpose of obtaining and assigning such registration
(and all right, title and interest in and to such mark, symbol, phrase or domain
name) to Red Hat. Distributor further agrees to execute any and all instruments
deemed by Red Hat to be necessary to transfer such registrations or such right,
title or interest to Red Hat. Distributor shall not challenge, or assist others
in challenging, the validity or ownership of any Marks.
G. If Distributor becomes aware of any infringement, actual or
suspected, or any other unauthorized use of the Marks, it shall promptly give
notice to Red Hat in writing specifying the particulars of the unauthorized use.
Red Hat, at its sole discretion, shall take whatever action it deems advisable
in connection with the unauthorized use. Red Hat shall notify Distributor of
whatever action is taken, or if none is taken. If Red Hat decides to take action
of any kind against the unauthorized use, Red Hat shall have sole control of the
conduct of any such action. Red Hat shall bear the entire cost and expense
associated with the conduct of any such action, and any recovery or compensation
that may be awarded as a result of such action, including but not limited to any
settlement that may be reached, shall belong to Red Hat. Distributor, if
requested by Red Hat, shall cooperate fully with Red Hat, at Red Hat's expense,
in the conduct of any such action. Such cooperation shall not entitle
Distributor to any claim for recovery or compensation in respect thereof, and
all such recovery or compensation shall belong solely to Red Hat.
13. CONFIDENTIALITY.
Each party acknowledges that in the course of performance of its
obligations pursuant to this Agreement, it may obtain certain information
specifically marked as confidential or proprietary. Each party hereby agrees
that all such information communicated to it by the other
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-8-
party, its parent, affiliates, subsidiaries, or Customers, whether before or
after the Effective Date, shall be and was received in strict confidence, shall
be used only for purposes of this Agreement, and shall not be disclosed without
the prior written consent of the other party, except as may be necessary by
reason of legal, accounting or regulatory requirements beyond either party's
reasonable control. The provisions of this Section shall survive termination or
expiration of this Agreement for any reason for a period of two (2) years after
said termination or expiration.
14. EXPORT RESTRICTIONS.
Distributor shall comply with all applicable laws, regulations and
legal requirements, including applicable United States export laws, regulations,
and legal requirements. Distributor acknowledges that the laws and regulations
of the United States may restrict the export and re-export of certain
commodities and technical data, including software, of United States origin.
Distributor agrees that it will not re-export the Software or any other
technical data received from Red Hat, or the direct product thereof, except as
permitted by the laws and regulations of the United States and the laws and
regulations of the jurisdiction in which Distributor obtained the Software or
other technical data. Red Hat agrees it will inform Distributor which Product is
not legally exportable, or clearly label such Product.
15. TERM AND TERMINATION.
A. The initial term of this Agreement shall be one year from the
Effective Date. Any renewal of this Agreement must be in a writing, signed by
both parties in order to be effective. Either party may terminate this
Agreement, with or without cause, upon giving the other party thirty (30) days
prior written notice. In the event that either party materially or repeatedly
defaults in the performance of any of its duties or obligations set forth in
this Agreement, and such default is not substantially cured within thirty (30)
days after written notice is given to the defaulting party specifying the
default, then the party not in default may, by giving written notice thereof to
the defaulting party, terminate this Agreement or the applicable purchase order
relating to such default as of the date specified in such notice of termination.
B. Either party may immediately terminate this Agreement and any
purchase orders by giving written notice to the other party in the event of (i)
the liquidation or insolvency of the other party, (ii) the appointment of a
receiver or similar officer for the other party, (iii) an assignment by the
other party for the benefit of all or substantially all of its creditors, (iv)
entry by the other party into an agreement for the composition, extension, or
readjustment of all or substantially all of its obligations, or (v) the filing
of a petition in bankruptcy by or against a party under any bankruptcy or
debtors' law for its relief or reorganization which is not dismissed within
ninety (90) days.
C. Termination or expiration of this Agreement shall not affect Red
Hat's right to be paid for undisputed invoices for Products already shipped and
accepted by Distributor or Distributor's rights to any credits or payments owed
or accrued to the date of termination or expiration. Distributor's rights to
credits upon termination or expiration shall include credits
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-9-
against which Distributor would, but for termination or expiration, be required
under this Agreement to apply to future purchases.
D. Upon termination or expiration of this Agreement, Distributor shall
discontinue holding itself out as a distributor of the Products.
E. Upon the effective date of termination or expiration of this
Agreement for any reason, [CONFIDENTIAL TREATMENT REQUESTED]**. Distributor
agrees to use its best efforts to return Products received from its customers
within sixty (60) days following the effective date of termination or
expiration.
16. MISCELLANEOUS.
A. This Agreement (including the Attachments and Schedules) constitutes
the complete and exclusive understanding and agreement of the parties, and
supersedes all prior representations, warranties, agreements, negotiations,
discussions and communications, written or oral, between Distributor and Red
Hat, relating to the subject matter hereof. This Agreement may not be modified
or amended except in a writing executed by the duly authorized representatives
of the parties.
B. Any notice under this Agreement shall be in English, in writing, and
shall be deemed to be given upon receipt. Notices to Red Hat shall be delivered
to Counsel, Red Hat Software, Inc., 2600 Meridian Parkway, Durham, NC 27713.
Notices to Distributor shall be delivered to Frank Kasper, Frank Kasper &
Associates, Inc. at 7351 Washington Avenue, South Edina, Minnesota 55439.
C. Sections 5, 6, 7, 9, 10, 13, 15 and 16 shall survive the expiration
or termination of this Agreement.
D. This Agreement shall be governed by and construed in accordance with
the laws of the state of the party against whom suit is commenced, without
regard to conflict of laws principles. The sole jurisdiction and venue for
actions arising out of the subject matter of this Agreement shall be the state
and federal courts of such state of the party against whom suit is commenced and
each of the parties to this Agreement hereby irrevocably submits to the personal
jurisdiction of such courts.
E. Neither party shall be liable for its failure to perform any of its
obligations hereunder, including, but not limited to, delivery obligations,
during any period in which such failure of performance is caused by an act of
God; act of any federal, state, or local governmental authority; fire or flood;
strike or labor unrest; degradation of telecommunications service; degradation
of computer services not under the direct control of such party; or unusually
severe weather conditions. Delays in delivery due to events beyond either
party's reasonable control shall automatically extend the delivery and payment
date for a period equal to the duration of such events.
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-10-
F. The parties acknowledge that the United Nations Convention on
Contracts for the International Sale of Goods is specifically excluded from
application to this Agreement.
G. If for any reason a court of competent jurisdiction finds any
provision of this Agreement, or portion thereof, to be unenforceable, that
provision of the Agreement shall be enforced to the maximum extent permissible
so as to effect the intent of the parties, and the remainder of this Agreement
shall continue in full force and effect.
H. Headings in this Agreement are used for convenience of reference
only and shall not affect the interpretation of the provisions of this
Agreement.
I. Failure or delay on the part of either party to exercise any right,
remedy, power or privilege hereunder will not operate as a waiver. In order to
be effective, a waiver must be in writing and signed by the party granting such
waiver.
J. No provision of this Agreement is to be interpreted for or against
either party on the grounds that one party or the other, or their legal counsel,
drafted such provision.
K. In the event that either party is merged with or consolidated into
another entity, or in the event that substantially all of the assets of either
party are sold or otherwise transferred to any other entity, the provisions of
this Agreement will be binding upon, and inure to the benefit of, such other
entity.
L. Nothing in this Agreement shall be construed to make the parties
partners, joint venturers, representatives, or agents of each other, nor shall
either party so hold itself out.
To show their assent, the duly authorized representatives of the
parties have signed this Agreement.
RED HAT SOFTWARE, INC. ("Red Hat")
/s/ Teresa Spangler
---------------------------------
Signature
Teresa Spangler
---------------------------------
Name
Business Unit Leader
---------------------------------
Title
April 30, 1999
---------------------------------
Date
FRANK KASPER & ASSOCIATES, INC,
/s/ Frank Kasper
---------------------------------
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<PAGE>
-11-
Signature
Frank Kasper
---------------------------------
Name
President
---------------------------------
Title
April 30, 1999
---------------------------------
Date
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<PAGE>
Exhibit
RED HAT SOFTWARE, INC.
DISTRIBUTOR PRICE LIST
EFFECTIVE APPRIL 26, 1999
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C>
Average Monthly Volume* [CONFIDENTIAL TREATMENT REQUESTED]**
<CAPTION>
PRODUCT CODE DESCRIPTION UPC CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C>
RH6000 Official Red Hat Linux 6.0/Intel 638347-50052-7 ** ** **
ARH6000 Official Red Hat Linux 6.0/Alpha 638347-50055-8 ** ** **
SRH6000 Official Red Hat Linux 6.0/SPARC 638347-50056-5 ** ** **
RH6300 Red Hat Linux 6.0 EXTRA 638347-50067-1 ** ** **
PT2000 PowerTools for Red Hat Linux 6.0 638347-50066-4 ** ** **
Red Hat Linux 6.0 E-Commerce
WB2100 Server June 28, 1999
EX1000 Extreme Linux 638347-99999-4 ** ** **
B2005 Maximum RPM 752063-11054-6 ** ** **
System Builder Edition Red Hat
SBE6005 Linux 6.0 (5-pack) 63847-50072-5 ** ** **
ESP1000 10 Incident Support Pack 638347-50035-0 ** ** **
ESP2500 25 Incident Support Pack 638347-50036-7 ** ** **
ESP3000G Gold Annual Support Subscription 638347-50037-4 ** ** **
Platinum Annual Support
ESP3000P Subscription 638347-50038-1 ** ** **
</TABLE>
*Average Monthly Volume defined as sales of Red Hat products to distributor's
customers
- -------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
RED HAT SOFTWARE, INC.
DISTRIBUTOR PRICE LIST
EFFECTIVE APPRIL 26, 1999
<TABLE>
<CAPTION>
FOR CANADIAN RETAILERS/ RESELLERS ONLY
FOR SALE WITHIN CANADA CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C>
Average Monthly Volume* [CONFIDENTIAL TREATMENT REQUESTED]**
<CAPTION>
PRODUCT CODE DESCRIPTION UPC CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C>
CARH6000 Official Red Hat Linux 6.0/Intel 638347-50079-4 ** ** **
CAARH6000 Official Red Hat Linux 6.0/Alpha ** ** **
CASRH6000 Official Red Hat Linux 6.0/SPARC ** ** **
CARH6300 Red Hat Linux 6.0 EXTRA ** ** **
CAPT2000 PowerTools for Red Hat Linux 6.0 ** ** **
Red hat Linux 6.0 E-Commerce
CAWB2100 Server
EX1000* Extreme Linux 638347-99999-4 ** ** **
B2005* Maximum RPM 752063-11054-6 ** ** **
CASBE6005 System Builder Edition Red Hat
Linux 6.0 (5-pack)
CAESP1000 10 Incident Support Pack
CAESP2500 25 Incident Support Pack
ESP3000G* Gold Annual Support Subscription 638347-50037-4 ** ** **
ESP3000P* Platinum Annual Support
Subscription 638347-50038-1 ** ** **
</TABLE>
* Canadian pricing does not apply to EX1000, B2005, ESP3000G, and ESP3000P.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
RED HAT SOFTWARE, INC.
DISTRIBUTOR PRICE LIST
EFFECTIVE APPRIL 26, 1999
FOR COLLEGE/UNIVERSITY RETAILERS ONLY
<TABLE>
<CAPTION>
PRODUCT CODE DESCRIPTION UPC CLASS A
<S> <C> <C> <C>
EDRH6000 Official Red Hat Linux 6.0/Intel 638347-50080-0 **
EDARH6000 Official Red Hat Linux 6.0/Alpha **
EDSRH6000 Official Red Hat Linux 6.0/SPARC **
EDRH6300 Red Hat Linux 6.0 EXTRA **
EDPT2000 PowerTools for Red Hat Linux 6.0 **
EDWB2100 Red Hat Linux 6.0 E-Commerce Server **
</TABLE>
Incident Support Packages and Support Subscriptions available.
Please call for prices.
- -------------
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Exhibit 10.16
SOFTWARE DISTRIBUTION AGREEMENT
BETWEEN
TECH DATA PRODUCT MANAGEMENT, INC.
AND
RED HAT SOFTWARE, INC.
<PAGE>
SOFTWARE DISTRIBUTION AGREEMENT
THIS AGREEMENT, DATED AS OF THIS 29TH DAY OF APRIL, 1999, IS BETWEEN TECH DATA
PRODUCT MANAGEMENT, INC., A FLORIDA CORPORATION ("TECH DATA"), WITH ITS
PRINCIPAL CORPORATE ADDRESS AT 5350 TECH DATA DRIVE, CLEARWATER, FLORIDA 33760
AND RED HAT SOFTWARE, INC., A DELAWARE CORPORATION ("RED HAT" OR "VENDOR"), WITH
ITS PRINCIPAL CORPORATE ADDRESS AT 5350 TECH DATA DRIVE, CLEARWATER, FLORIDA
33760 AND RED HAT SOFTWARE, INC., A DELAWARE CORPORATION ("RED HAT" OR
"VENDOR"), WITH ITS PRINCIPAL CORPORATE ADDRESS AT: 2600 MERIDIAN PARKWAY,
DURHAM, NC 27713.
RECITALS
A. Tech Data desires to purchase certain Products from Red Hat from
time to time and Red Hat desires to sell certain Products to Tech Data in
accordance with the terms and conditions set forth in this Agreement.
B. Red Hat desires to appoint Tech Data as its non-exclusive
distributor to market Products within the Territory (as hereinafter defined) and
Tech Data accepts such appointment on these terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the Recitals, the mutual covenants
contained in this Agreement and other good and valuable consideration, Tech Data
and Red Hat hereby agree as follows:
ARTICLE I
DEFINITIONS, APPOINTMENT AND TERM OF AGREEMENT
1.1 DEFINITIONS. The following definitions shall apply to this Agreement.
(a) "Customers" of Tech Data shall include dealers, resellers, value
added resellers, direct resellers and other entities that acquire the
Products from Tech Data.
(b) "DOA" shall mean Product, or any portion thereof, which fails to
operate properly on initial installation, boot, or use, as applicable.
(c) "Documentation" shall mean user manuals, training materials,
Product descriptions and specifications, brochures, technical manuals,
license agreements,
Tech Data /s/ SML Red Hat /s/ TS
Page 2
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
supporting materials and other information relating to the Products and
included with the Products, whether distributed in print, electronic,
or video format.
(d) "Effective Date" shall mean the date on which this Agreement is
signed and dated by a duly authorized representative of Tech Data.
(e) "End Users" shall mean the final purchasers or licensees who have
acquired Products for their own use and not for resale, remarketing or
redistribution.
(f) "Non-Saleable Products" shall mean any Product that has been
returned to Tech Data by its Customers that has had the outside shrink
wrapping or other packaging seal broken; any components of the original
package are missing, damaged or modified; or is otherwise not fit for
resale.
(g) "Products" shall mean, individually or collectively, the software
licenses, electronic products, the sealed software packages comprised
of the computer programs encoded on media together with manuals,
materials and other contents of the packages associated therewith, if
any, as more fully described in Schedule 1.1(g) attached hereto.
(h) "Return Credit" shall mean a credit to Tech Data in an amount equal
to the price paid by Tech Data for Products less any price protection
credits but not including any early payment, prepayment or other
discounts.
(i) "Services" means any warrant, maintenance, advertising, marketing
or technical support and any other services performed or to be
performed by Red Hat.
(j) "Territory" shall mean the United States, its territories and
possessions, and Canada.
1.2 TERM OF AGREEMENT. The term of this Agreement shall commence on the
Effective Date and, unless terminated by either party as set forth in
this Agreement, shall remain in full force and effect for a term of
one (1) year, and will be automatically renewed for successive
one (1) year terms unless prior written notification of termination
or non-renewal is delivered by one of the parties in accordance with
the notice Agreement.
Tech Data /s/ SML Red Hat /s/ TS
Page 3
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
1.3 APPOINTMENT AS DISTRIBUTOR. Red Hat hereby grants to Tech Data the
non-exclusive right and license to distribute Products during the term
of this Agreement within the Territory, together with any updates or
enhancements to the Products and any new releases related to the
Products. This license includes the right to order, possess and
distribute the Products. This license includes the right to order,
possess and distribute the Products to Customers and to provide the
Products to Customers for use on demonstration units. Red Hat and Tech
Data acknowledge and agree that the license to use the Product is
solely between Red Hat and the End User and is governed by the terms of
the Vendor's standard use license enclosed with the Product. This
Agreement does not grant Red Hat or Tech Data an exclusive right to
purchase or sell Products and shall not prevent either party from
developing or acquiring other vendors or customers or competing
Products. Tech Data will use commercially reasonable efforts to promote
distribution of the Products. Red Hat agrees that Tech Data may obtain
Products in accordance with this Agreement for the benefit of its
parent, affiliates and subsidiaries. Said parent, affiliates and
subsidiaries of Tech Data shall be entitled to order Products directly
from Red Hat pursuant to this Agreement.
ARTICLE II. PURCHASE ORDERS
2.1 ISSUANCE AND ACCEPTANCE OF PURCHASE ORDER.
(a) This Agreement shall not obligate Tech Data to purchase any
Products or Services except as specifically set forth in a written
purchase order.
(b) Tech Data may issue to Red Hat one or more purchase orders
identifying the Products Tech Data desires to purchase from Red Hat.
The terms and conditions of this Agreement shall govern all purchase
orders, except that purchase orders may include other terms and
conditions which are consistent with the terms and conditions of this
Agreement, or which are mutually agreed to in writing by Tech Data and
Red Hat. Purchase orders will be placed by Tech Data by fax or
electronically transferred.
(c) A purchase order shall be deemed accepted by Red Hat unless Red Hat
notifies Tech Data in writing within five (5) business days of the date
of the purchase order that Red Hat does not accept the purchase order.
2.2 PURCHASE ORDER ALTERATIONS OR CANCELLATIONS. Up to five (5) calendar
days prior to shipment of Products, Red Hat shall accept alterations to
a purchase order in order to: (i) change a location for delivery, (ii)
modify the quantity or type of Products
Tech Data /s/ SML Red Hat /s/ TS
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
to be delivered or (iii) correct typographical or clerical errors.
[CONFIDENTIAL TREATMENT REQUESTED]**.
2.3 EVALUATION OR DEMONSTRATION PURCHASE ORDERS. Red Hat shall provide to
Tech Data a reasonable number of demonstration or evaluation Products
at no charge.
2.4 PRODUCT SHORTAGES. If for any reason Red Hat's production is not on
schedule, Red Hat may allocate available inventory to Tech Data and
make shipments based upon a fair and reasonable percentage allocation
among Red Hat's customers. [CONFIDENTIAL TREATMENT REQUESTED]**.
2.5 PROOF OF DELIVERY ("POD"). Vendor shall provide to Tech Data, at no
charge, a hard copy Proof of Delivery for any drop shipment requested
by Tech Data. The POD shall be faxed to Tech Data within [CONFIDENTIAL
TREATMENT REQUESTED]** of the initial request. [CONFIDENTIAL TREATMENT
REQUESTED]**.
ARTICLE III. DELIVERY AND
ACCEPTANCE OF PRODUCTS
3.1 ACCEPTANCE OF PRODUCTS. Tech Data shall, after a reasonable time to
inspect each shipment, accept Products (the "Acceptance Date") if the
Products and all necessary documentation delivered to Tech Data are in
accordance with the purchase order. Any products not ordered or not
otherwise in accordance with the purchase order. Any Products not
ordered or not otherwise in accordance with the purchase order (e.g.
mis-shipments, overshipments) may be returned to Red Hat's expense
(including reasonable costs of shipment or storage). [CONFIDENTIAL
TREATMENT REQUESTED]**. Tech Data shall not be required to accept
partial shipment unless Tech Data agrees prior to shipment.
3.2 [CONFIDENTIAL TREATMENT REQUESTED]**
3.3 [CONFIDENTIAL TREATMENT REQUESTED]**
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]**.
ARTICLE IV. RETURNS
4.1 INVENTORY ADJUSTMENT. Red Hat and Tech Data will work together to
maintain reasonable inventory levels. Notwithstanding, Red Hat agrees
to accept return of overstocked Products [CONFIDENTIAL TREATMENT
REQUESTED]**. Shipments of Products being returned shall be new, unused
and in sealed cartons. Vendor shall credit Tech Data's account in the
amount of the Return Credit. Tech Data shall bear all costs of shipping
and risk of loss of those Products returned under this Section 4.1 to
Red Hat's location.
4.2 DEFECTIVE PRODUCTS/DEAD ON ARRIVAL (DOA). Tech Data shall have the
right to return to Red Hat for Return Credit any DOA Product or any
Product that fails to perform in accordance with Red Hat's Product
warranty that is returned to Tech Data within thirty (30) days after
Tech Data receives the RMA. Red Hat shall bear all costs of shipping
and risk of loss of DOA and in-warranty Products to Red Hat's location
and back to Tech Data or Tech Data's Customer.
4.3 OBSOLETE OR OUTDATED PRODUCT. Tech Data shall have the right to return
for Return Credit [CONFIDENTIAL TREATMENT REQUESTED]** Products
that become obsolete or Red Hat continues, updates, revises or are
removed from Red Hat's current price list. Tech Data is to return all
such Products in its inventory within [CONFIDENTIAL TREATMENT
REQUESTED]** after Tech Data receives written notice from Red Hat that
such Products are obsolete, superseded by a newer version, discontinued
or are removed from Red Hat's price list. Within [CONFIDENTIAL
TREATMENT REQUESTED]** of Tech Data's receipt of written notice, Tech
Data will use best efforts to provide Red Hat with reports indicating
current Customer inventory levels. These reports are intended to give
Red Hat a realistic expectation of the Customer returns that Red Hat
will be expected to accept following the expiration of the
aforementioned [CONFIDENTIAL TREATMENT REQUESTED]** return period.
[CONFIDENTIAL TREATMENT REQUESTED]**.
4.4 NON-SALEABLE. Tech Data shall have the right to return to Red Hat for
Return Credit Non-Saleable Products. [CONFIDENTIAL TREATMENT
REQUESTED]**.
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<PAGE>
4.5 CONDITION PRECEDENT TO RETURNS. As a condition precedent to returning
Products, Tech Data shall request and Red Hat shall issue a Return
Material Authorization Number (RMA) in accordance with and subject to
Section 8.9 of this Agreement.
ARTICLE V. PAYMENT TO RED HAT
5.1 CHARGES, PRICES AND FEES FOR PRODUCTS. Charges, prices, quantities and
discounts, if any, for Products shall be determined as set forth in
Schedule 1.1(g), or as otherwise mutually agreed upon by the parties in
writing, and may be confirmed at the time order. In no event shall
charges exceed Red Hat's then current established charges. Tech Data
shall not be bound by any of Red Hat's suggested prices.
5.2 [CONFIDENTIAL TREATMENT REQUESTED]**
5.3 INVOICES. A "correct" invoice shall contain (i) Red Hat's name and
invoice date, (ii) a reference to the purchase order or other
authorizing document, (iii) separate descriptions, unit prices and
quantities of the Products actually delivered, (iv) credits (if
applicable), (v) shipping charges (if applicable) (vi) name (where
applicable), title, phone number and complete mailing address as to
where payment is to be sent, and (vii) other substantiating
documentation or information as may reasonably be required by Tech Data
from time to time. Notwithstanding any pre-printed terms or conditions
on Red Hat's invoices, the terms and conditions of this Agreement shall
apply to and govern all invoices issued by Red Hat hereunder, except
that invoices may include other terms and conditions which are
consistent with the terms and conditions of this Agreement, or which
are mutually agreed to in writing by Tech Data and Red Hat.
Tech Data /s/ SML Red Hat /s/ TS
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
5.4 TAXES. Tech Data shall be responsible for franchise taxes, sales or use
taxes or shall provide Red Hat with an appropriate exemption
certificate. [CONFIDENTIAL TREATMENT REQUESTED]**.
5.5 [CONFIDENTIAL TREATMENT REQUESTED]**.
5.6 PRICE ADJUSTMENTS.
(a) [CONFIDENTIAL TREATMENT REQUESTED]**
(b) [CONFIDENTIAL TREATMENT REQUESTED]**.
5.7 ADVERTISING.
(a) MARKET DEVELOPMENT FUNDS. Red Hat may offer advertising credits, or
other promotional programs or incentives to Tech Data as it offers to
its other distributors or customers. Tech Data shall have the right, at
Tech Data's option, to participate in such programs.
(b) [CONFIDENTIAL TREATMENT REQUESTED]**.
(c) LAUNCH FUNDS. Prior to receipt of the initial purchase order, Red
Hat shall pay Tech Data for all launch funds expenditures to which Red
Hat and Tech Data have agreed.
(d) [CONFIDENTIAL TREATMENT REQUESTED]**.
ARTICLE VI. WARRANTIES,
INDEMNITIES AND OTHER OBLIGATIONS OF RED HAT
6.1 WARRANTY. [CONFIDENTIAL TREATMENT REQUESTED]**.
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]**. EXCEPT AS SET FORTH HEREIN
OR THEREIN, RED HAT DISCLAIMS ALL WARRANTIES WITH REGARD TO THE
PRODUCTS, INCLUDING WITHOUT LIMITATION, THE IMPLIED WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THIS
SECTION SHALL SURVIVE TERMINATION OR EXPIRATION OF THIS AGREEMENT.
6.2 [CONFIDENTIAL TREATMENT REQUESTED]**.
6.3 (a) [CONFIDENTIAL TREATMENT REQUESTED]**.
(b) TECH DATA. Tech Data agrees to indemnify and hold Red Hat, its
officers, directors and employees harmless from and against any and
all claims, damages, costs, expenses (including, but not limited,
reasonable attorney's fees and costs) or liabilities that may
result, in whole or in part from any warranty or Product liability
claim, or any claim for infringement, or for claims for violation of
any of the warranties made by Tech Data related to the Products in
excess of the warranties of Red Hat provided that Red Hat provides
notice to Tech Data of any all such claims and provides reasonable
assistance to Tech Data in the defense of such claims at Tech Data's
expense.
6.4 INSURANCE.
(a) The parties shall be responsible or providing Worker's Compensation
insurance in the statutory amounts required by the applicable state
laws.
(b) [CONFIDENTIAL TREATMENT REQUESTED]**, Red Hat shall maintain
Commercial General Liability or Comprehensive General Liability
Insurance in such amounts as is reasonable and standard for the
industry. [CONFIDENTIAL TREATMENT REQUESTED]**.
(c) [CONFIDENTIAL TREATMENT REQUESTED]**.
6.5 LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER
PURSUANT TO THIS AGREEMENT FOR AMOUNTS REPRESENTING INDIRECT, SPECIAL,
INCIDENTAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES OF THE OTHER PARTY
ARISING FROM THE
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
PERFORMANCE OR BREACH OF ANY TERMS OF THIS AGREEMENT.
6.6 ECCN/EXPORT. Red Hat agrees to provide Tech Data, upon signing this
Agreement and at any time thereafter that Red Hat modifies or adds
Products distributed or to be distributable by Tech Data, with the
Export Control Classification Number (ECCN) for each of Red Hat's
Products, and information as to whether or not any of such Products are
classified under the U.S. Munitions List.
6.7 This section was intentionally deleted.
6.8 This section was intentionally deleted.
6.9 TECH DATA REPORTS. Tech Data shall, if requested, render [CONFIDENTIAL
TREATMENT REQUESTED]** sales out reports on Tech Data's BBS system.
Information provided will include: month and year sales activity
occurred, internal product number (assigned by Tech Data), written
description, Customer name, state and zip-code of Customers location,
unit cost (distributor's cost at quantity 1), quantity and extended
cost (cost times quantity). Red Hat agrees that any such information
provided by Tech Data shall be received and held by Red Hat in strict
confidence and shall be used solely for sell through or compensation
reporting information and shall not be used for purpose related to Red
Hat's sales activities.
6.10 TRADEMARK USAGE. Tech Data is hereby authorized to use trademarks and
tradenames of Red Hat and third parties who have licensed their
trademarks or tradenames to Red Hat, if any, used in connection with
advertising, promoting or distribution the Products. Tech Data
recognizes Red Hat or other third parties may have rights or ownership
of certain trademarks, tradenames and patents associated with the
Products. Tech Data will act consistent with such rights, and Tech Data
shall comply with any reasonable written guidelines when provided by
Red Hat or third parties who have licensed their trademarks or
tradenames Red Hat related to such trademark or trade name usage. Tech
Data will notify Red Hat of any infringement of which Tech Data has
actual knowledge. Tech Data shall discontinue use of Red Hat's
trademarks or trade names upon termination o this Agreement, except as
may be necessary to sell or liquidate any Product remaining in Tech
Data's inventory.
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
ARTICLE VII. TERMINATION OR EXPIRATION
7.1 TERMINATION.
(a) TERMINATION WITH OR WITHOUT CAUSE. Either party may terminate this
Agreement, with or without cause, upon giving the other party thirty
(30) days prior written notice. In the event that either party
materially or repeatedly defaults in the performance of any of its
duties or obligations set forth in this Agreement, and such default is
not substantially cured within thirty (30) days after written notice is
given to the defaulting party specifying the default, then the party
not in default may, by giving written notice thereof to the defaulting
party, terminate this Agreement or the applicable purchase order
relating to such default as of the date specified in such notice of
termination.
(b) TERMINATION FOR INSOLVENCY OR BANKRUPTCY. Either party may
immediately terminate this Agreement and any purchase orders by giving
written notice to the other party in the event of (i) the liquidation
or insolvency of the other party, (ii) the appointment of a receiver or
similar officer for the other party, (iii) an assignment by the other
party for the benefit of all or substantially all of its creditors,
(iv) entry by the other party into an agreement for the composition,
extension, or readjustment of all or substantially all of its
obligations, or (v) the filing of a petition in bankruptcy by or
against a party under any bankruptcy or debtor's law for its relief of
reorganization which is not dismissed within ninety (90) days.
7.2 RIGHTS UPON TERMINATION OR EXPIRATION.
(a) Termination or expiration of this Agreement shall not affect Red
Hat's right to be paid for undisputed invoices for Products already
shipped and accepted by Tech Data or Tech Data's rights to any credits
or payments owed or accrued to the date of termination or expiration.
Tech Data's rights to credits upon termination or expiration shall
include credits against which Tech Data would, but for termination or
expiration, be required under this Agreement to apply to future
purchases.
(b) [CONFIDENTIAL TREATMENT REQUESTED]**.
(c) Upon termination or expiration of this Agreement, Tech Data shall
discontinue holding itself out as a distributor of the Products.
7.3 REPURCHASE OF PRODUCTS UPON TERMINATION OR EXPIRATION. Upon the
effective date of termination or expiration of this Agreement for any
reason, Red Hat agrees to
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<PAGE>
repurchase all Products in Tech Data's inventory and Products which are
returned to Tech Data by its Customers within [CONFIDENTIAL TREATMENT
REQUESTED]** following the effective date of termination or expiration.
[CONFIDENTIAL TREATMENT REQUESTED]**. Such returns shall not reduce or
offset any co-op payments or obligations owed to Tech Data. Within
[CONFIDENTIAL TREATMENT REQUESTED]** following the effective date of
termination or expiration, Tech Data shall return to Red Hat for
repurchase all Product held in Tech Data's inventory as of the
effective date of termination or expiration. Within [CONFIDENTIAL
TREATMENT REQUESTED]** following the effective date of termination or
expiration, Tech Data shall use best efforts to provide reports
indicating current Customer inventory levels. These reports are
intended to give Red Hat a realistic expectation of the Customer
returns that Red Hat will be expected to accept following the
expiration for the aforementioned [CONFIDENTIAL TREATMENT REQUESTED]**
return period. Red Hat will issue an RMA to Tech Data for all such
Products; provided, however, that Red Hat shall accept returned
Products in accordance with this Section absent an RMA if Red Hat fails
to issue said RMA within [CONFIDENTIAL TREATMENT REQUESTED]** of Tech
Data's request. Red Hat shall credit any outstanding balances owed to
Tech Data. If such credit exceeds amounts due from Tech Data, Red Hat
shall remit in the form of a check to Tech Data the excess within
[CONFIDENTIAL TREATMENT REQUESTED]** in receipt of the Product.
Customized Products shall not be eligible for repurchase pursuant to
this Section.
7.4 SURVIVAL OF TERMS. Termination or expiration of this Agreement for any
reason shall not release either party from any liabilities or
obligations set forth in his Agreement which (i) the parties have
expressly agreed shall survive any such termination or expiration, or
(ii) remain to be performed or by their nature would be in tended to be
applicable following any such termination or expiration.
[CONFIDENTIAL TREATMENT REQUESTED]**.
ARTICLE VIII. MISCELLANEOUS
8.1 BINDING NATURE, ASSIGNMENT, AND SUBCONTRACTING. This Agreement shall be
binding on the parties and their respective successors and assigns.
Neither party shall have the power to assign this Agreement without the
prior written consent of the other party, which consent will not
withheld or delayed.
8.2 COUNTERPARTS. This Agreement may be executed in several counterparts,
all of which taken together shall constitute one single agreement
between the parties.
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
8.3 HEADINGS. The Article and Section headings used in this Agreement are
for reference and convenience only and shall not affect the
interpretation of this Agreement.
8.4 RELATIONSHIP OF PARTIES. Tech Data is performing pursuant to this
Agreement only as an independent contractor. Nothing set forth in this
Agreement shall be construed to create the relationship of principal
and agent between Tech Data and Red Hat. Neither party shall act or
represent itself, directly or by implication, as an agent of the other
party.
8.5 CONFIDENTIALITY. Each party acknowledges that in the course of
performance of its obligations pursuant to this Agreement, it may
obtain certain information specifically marked as confidential or
proprietary. Each party hereby agrees that all such information
communicated to it by the other party, its parent, affiliates
subsidiaries, or customers, whether before or after the Effective date,
shall be and was received in strict confidence, shall be used only for
purposes of this Agreement, and shall not be disclosed without the
prior written consent of the other party, except as may be necessary by
reason of legal, accounting or regulatory requirements beyond either
party's reasonable control. The provisions of this Section shall
survive termination or expiration of this Agreement for any reason for
a period of [CONFIDENTIAL TREATMENT REQUESTED]** after said termination
or expiration.
8.6 This section was intentionally deleted.
8.7 NOTICE. Wherever one party is required or permitted to give notice to
the other party pursuant to this Agreement, such notice shall be deemed
given when actually delivered by hand, by telecopier (if and when
immediately confirmed in writing by any of the other means provided
herein ensuring acknowledgement of receipt thereof for purposes of
providing notice of default or termination), via overnight courier, or
when mailed by registered or certified mail, return receipt requested,
postage prepaid, and addressed as follows:
<TABLE>
<CAPTION>
IN THE CASE OF RED HAT: IN THE CASE OF TECH DATA:
----------------------- -------------------------
<S> <C>
Red Hat Software, Inc. Tech Data Product Management, Inc.
2600 Meridian Parkway, 5350 Tech Data Drive
Durham, NC 27713 Clearwater, FL 33760
Attn: Counsel Attn: Vice President-Marketing Operations
cc: Contracts Administration
</TABLE>
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<PAGE>
Either party may from time to time change its address for notification
purposes by giving the other party written notice of the new address
and the date upon which it will become effective.
8.8 FORCE MAJEURE. The term "Force Majeure" shall be defined to include
fires or other casualties or accidents, acts of God, severe weather
conditions, strikes or labor disputes, war or other violence, or any
law, order, proclamation, regulation, ordinance, demand or requirement
of any government agency.
(a) If a Force Majeure prevents a party from performance, such
performance is excused for so long as the excused party provides prompt
written notice describing the Force Majeure and immediately continues
performance once the Force Majeure condition is removed.
(b) If, due to a Force Majeure condition, the schedules time of
delivery or performance is or will be delayed for more than ninety (90)
days after the schedules date, the party not relying upon the Force
Majeure condition may terminate, without liability to the other party,
any purchase order or portion thereof covering the delayed Products.
8.9 RETURN MATERIAL AUTHORIZATION NUMBER. Red Hat is required to issue an
RMA to Tech Data within [CONFIDENTIAL TREATMENT REQUESTED]** days of
Tech Data's request, subject to the terms and condition of this
agreement; however, if the RMA is not received by Tech Data
[CONFIDENTIAL TREATMENT REQUESTED]**, Red Hat shall accept returned
Products absent an RMA.
8.10 CREDITS TO TECH DATA. In the event any provision of this Agreement or
any other agreement between Tech Data and Red Hat required that Red Hat
grant credits to Tech Data's account, and such credits are not received
within [CONFIDENTIAL TREATMENT REQUESTED]**, all such credits shall
become effective immediately upon notice to Red Hat. In such event,
Tech Data shall be entitled to deduct any such credits from the next
monies owed to Red Hat. In the event credits exceed any balances owed
by Tech Data to Red Hat, Red Hat shall, upon request from Tech Data,
issue a check payable to Tech Data within [CONFIDENTIAL TREATMENT
REQUESTED]** of such notice. [CONFIDENTIAL TREATMENT REQUESTED]**. Tech
Data shall have the right to set off against any amounts due to Red Hat
under this Agreement or any invoices issued by Red Hat related to this
Agreement any and all amounts due to Tech data from Red Hat, whether or
not arising under this Agreement.
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8.11 SEVERABILITY. If, but only to the extent that, any provision of this
Agreement is declared or found to be illegal, unenforceable or void,
then both parties shall be relieved of all obligations arising under
such provision, it being the intent and agreement of the parties that
this Agreement shall be deemed amended by modifying such provision to
the extent necessary to make it legal and enforceable while preserving
its intent.
8.12 WAIVER. A waiver by either of the parties of any covenants, conditions
or agreements to be performed by the other party or any breach thereof
shall not be construed to be a waiver of any succeeding breach thereof
or of any other covenant, condition or agreement herein contained. No
waiver shall be valid unless in writing and signed by the party
granting such waiver.
8.13 REMEDIES. All remedies set forth in this Agreement shall be cumulative
and in addition to and not in lieu of any other remedies available to
either party at law, in equity or otherwise, and may be enforced
concurrently or from time to time.
8.14 ENTIRE AGREEMENT. This Agreement, including any Exhibits and documents
referred to in this Agreement or attached hereto, constitutes the
entire and exclusive statement of Agreement between the parties with
respect to its subject matter and there are no oral or written
representations, understandings or agreements relating to this
Agreement which are not fully expressed herein. The parties agree that
unless otherwise agreed to in writing by the party intended to be
bound, the terms and conditions of this Agreement shall prevail over
any contrary terms in any purchase order, sales acknowledgement,
confirmation or any other document issued by either party affecting the
purchase or sale of Products hereunder.
8.14 GOVERNING LAW. This Agreement shall have [CONFIDENTIAL TREATMENT
REQUESTED]** as its situs and shall be governed by and construed in
accordance with the laws of the State of [CONFIDENTIAL TREATMENT
REQUESTED]**, without reference to choice of laws. The parties agree
that this Agreement excludes the application of the 1980 United Nations
Convention on Contracts for the International Sale of Goods, if
otherwise applicable.
8.16 TIME OF PERFORMANCE. Time is hereby expressly made of the essence with
respect to each and every term and condition of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have each caused this Agreement to be
signed and delivered by its duly authorized officer or representative as of the
Effective Date.
RED HAT SOFTWARE, INC. TECH DATA PRODUCT MANAGEMENT, INC.
By: /s/ TERESA SPANGLER By: /s/ GERALD M. LABIE
-------------------------------- -------------------------------------
Printed Name: TERESA SPANGLER Printed Name: GERALD M. LABIE
---------------------- ---------------------------
Title: BUSINESS UNIT LEADER SALES Title: SENIOR VICE PRESIDENT, MARKETING
----------------------------- ----------------------------------
Date: APRIL 18, 1999 Date: APRIL 29, 1999
------------------------------ -----------------------------------
Tech Data /s/ SML Red Hat /s/ TS
Page 16
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
SCHEDULE 1.1(g)
RED HAT SOFTWARE, INC.
DISTRIBUTOR PRICE LIST
EFFECTIVE APPRIL 26, 1999
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C>
Average Monthly Volume* $500,000.00 $100,000.00 $25,000.00
<CAPTION>
PRODUCT CODE DESCRIPTION UPC CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C>
RH6000 Official Red Hat Linux 6.0/Intel 638347-50052-7 $62.50 $67.96 $71.96
ARH6000 Official Red Hat Linux 6.0/Alpha 638347-50055-8 $62.50 $67.96 $71.96
SRH6000 Official Red Hat Linux 6.0/SPARC 638347-50056-5 $62.50 $67.96 $71.96
RH6300 Red Hat Linux 6.0 EXTRA 638347-50067-1 $78.25 $84.96 $89.96
PT2000 PowerTools for Red Hat Linux 6.0 638347-50066-4 $31.25 $33.96 $35.96
Red Hat Linux 6.0 E-Commerce
WB2100 Server June 28, 1999 TBA TBA TBA
EX1000 Extreme Linux 638347-99999-4 $23.50 $25.46 $26.96
B2005 Maximum RPM 752063-11054-6 $29.50 $30.50 $31.50
System Builder Edition Red Hat
SBE6005 Linux 6.0 (5-pack) 63847-50072-5 $196.05 $212.29 $249.75
ESP1000 10 Incident Support Pack 638347-50035-0 $2,635.60 $2,755.40 $2,845.25
ESP2500 25 Incident Support Pack 638347-50036-7 $6,419.60 $6,711.40 $6,930.25
ESP3000G Gold Annual Support Subscription 638347-50037-4 $30,800.00 $32,200.00 $33,250.00
Platinum Annual Support
ESP3000P Subscription 638347-50038-1 $52,800.00 $55,200.00 $57,000.00
</TABLE>
*Average Monthly Volume defined as sales of Red Hat products to distributor's
customers
<PAGE>
RED HAT SOFTWARE, INC.
DISTRIBUTOR PRICE LIST
EFFECTIVE APPRIL 26, 1999
<TABLE>
<CAPTION>
FOR CANADIAN RETAILERS/ RESELLERS ONLY
FOR SALE WITHIN CANADA CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C>
Average Monthly Volume* $500,000.00 $100,000.00 $25,000.00
<CAPTION>
PRODUCT CODE DESCRIPTION UPC CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C>
CARH6000 Official Red Hat Linux 6.0/Intel 638347-50079-4 $50.00 $54.37 $57.56
CAARH6000 Official Red Hat Linux 6.0/Alpha $50.00 $54.37 $57.56
CASRH6000 Official Red Hat Linux 6.0/SPARC $50.00 $54.37 $57.56
CARH6300 Red Hat Linux 6.0 EXTRA $62.60 $67.97 $71.96
CAPT2000 PowerTools for Red Hat Linux 6.0 $25.00 $27.17 $28.76
Red hat Linux 6.0 E-Commerce
CAWB2100 Server TBA TBA TBA
EX1000* Extreme Linux 638347-99999-4 $23.50 $25.46 $26.96
B2005* Maximum RPM 752063-11054-6 $29.50 $30.50 $31.50
CASBE6005 System Builder Edition Red Hat
Linux 6.0 (5-pack) $156.84 $169.83 $199.80
CAESP1000 10 Incident Support Pack $2,108.48 $2,204.32 $2,276.20
CAESP2500 25 Incident Support Pack $5,135.68 $5,369.12 $5,544.20
ESP3000G* Gold Annual Support Subscription 638347-50037-4 $30,800.00 $32,200.00 $33,250.00
ESP3000P* Platinum Annual Support
Subscription 638347-50038-1 $52,800.00 $55,200.00 $57,000.00
</TABLE>
* Canadian pricing does not apply to EX1000, B2005, ESP3000G, and ESP3000P.
<PAGE>
RED HAT SOFTWARE, INC.
DISTRIBUTOR PRICE LIST
EFFECTIVE APPRIL 26, 1999
FOR COLLEGE/UNIVERSITY RETAILERS ONLY
<TABLE>
<CAPTION>
PRODUCT CODE DESCRIPTION UPC CLASS A
<S> <C> <C> <C>
EDRH6000 Official Red Hat Linux 6.0/Intel 638347-50080-0 $56.25
EDARH6000 Official Red Hat Linux 6.0/Alpha $56.25
EDSRH6000 Official Red Hat Linux 6.0/SPARC $56.25
EDRH6300 Red Hat Linux 6.0 EXTRA $70.43
EDPT2000 PowerTools for Red Hat Linux 6.0 $28.13
EDWB2100 Red Hat Linux 6.0 E-Commerce Server TBA
</TABLE>
Incident Support Packages and Support Subscriptions available.
Please call for prices.
<PAGE>
Exhibit 10.17
AGREEMENT
This is a software development and services agreement Red Hat
Software, Inc. ("Red Hat"), a Connecticut, USA corporation, and Building
Number Three, Ltd. ("B3"), a Private Company, limited by shares and
registered at [CONFIDENTIAL TREATMENT REQUESTED]** enter into this agreement
as of the last date following the signatures below.
1. DEFINITIONS.
A. "Linux" means the Red Hat Linux operating system computer software for Intel
and compatible based computers, version 5.0 and later versions released by Red
Hat during the term of this Agreement.
B. "Red Hat Product" means the product of Red Hat currently known as "Official
Red Hat Linux" for Intel-based computers, version 5.0 and later versions
released by Red Hat during the term of this Agreement.
C. "B3 Software" means any and all software provided to Red Hat by B3 pursuant
to this Agreement.
D. "Bugs" means errors in a software program that cause the software to fail to
function as intended.
E. "Source Code" means software in written form which is easily understood by a
human knowledgeable in the art of computer programming.
F. "Binary Code" means software in machine-readable form that is not easily
understood by a human knowledgeable in the art of computer programming, but
which is understood and used by a computer to run the software.
K. "Confidential Information" means any information identified as being
Confidential Information by either party, either orally or in writing, at the
time it is disclosed, or designated as confidential in writing (either
electronically or by other means) within 30 days of the disclosure, provided
that the information (a) was not publicly known or generally in the public
domain prior to the disclosure, (b) does not become generally known or part of
the public domain through any improper action or disclosure by the receiving
party, or (c) can be shown to have been in the rightful possession of the
receiving party prior to having been identified as Confidential Information by
the disclosing party.
2. WORK MADE FOR HIRE.
A. B3 shall perform software development and consulting work as follows:
1. Develop, enhance, fix bugs, and otherwise work to improve the kernel
of Linux,
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-2-
as directed by Red Hat;
2. Perform high priority bug fixes and other custom development or
consulting work, as directed by Red Hat;
3. Perform other work or services related to Linux, as directed by Red
Hat.
B. The Source Code to be written by B3 pursuant to this Agreement shall be a
work made for hire, and Red Hat shall be the sole owner of the copyright of the
Source Code.
3. ADDITIONAL SERVICES.
From time to time, B3 shall send a representative designated by Red Hat to Red
Hat's offices for consultation and other purposes related to this Agreement. Red
Hat and B3 agree to cooperate in selecting dates and times for such meetings.
Red Hat shall bear the reasonable travel costs and expenses incurred by the B3
representative in attending these consultations.
4. PAYMENT.
A. In consideration for the work outlined in this Agreement, Red Hat shall make
monthly payments to B3 in accordance with the provisions of Schedule A. Both
parties may modify at any time the amounts to be paid by Red Hat to B3, but any
and all such modifications shall be in writing and shall be signed by both
parties in order to be effective.
B. Payment shall be made in U.K. funds on the last standard business day in the
United States of each month for the work performed that month. Work performed
for less than a full month shall be prorated accordingly. Payment shall be made
via bank wire transfer, or other means agreed to by both parties. Red Hat shall
bear the risk of any fluctuation in currency exchange rates between U.S. and
U.K. currency.
5. NON-EXCLUSIVITY.
This Agreement is a non-exclusive agreement, and both parties remain free to
enter into similar agreements with third parties. In the event that B3 enters
into an agreement with a third party in which B3 performs software development,
consulting, or other services related to Linux, B3 shall inform Red Hat of that
agreement before or at the time it enters into such agreement. Nothing in this
section limits or supercedes the provisions of Section 7.
6. OUALITY AND TESTING.
B3 shall thoroughly test the quality of all Source Code and Binary Code it
delivers to Red Hat in accordance with customary practice within the industry.
All such code delivered to Red Hat by B3 shall be of commercial production
quality. Red Hat shall have the option to test all such code
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-3-
pursuant to its own quality assurance procedures, and may reject any code it
reasonably believes does not meet commercial production quality. In the event
that bugs are discovered in the B3 Software, B3 will use its best effort to
correct the Bugs in a speedy manner.
7. CONFIDENTIALITY.
A. Both Red Hat and B3 agree that during the term of his Agreement, each party
may disclose to the other party certain Confidential Information. Either party
may designate any information it provides to the other party as Confidential
Information, and the receiving party shall not disclose that information to
third parties without the express permission of the disclosing party.
Information designated as Confidential Information shall remain confidential
until the disclosing party designates it as non-confidential or until the
information becomes public through no fault of the receiving party.
B. B3 agrees that all of its employees, contractors, and other agents shall
enter into a separate written confidentiality agreement with B3 that ensures
they will comply with the confidentiality provisions of this Agreement.
C. Both Red Hat and B3 agree that in the event either party breaches or
threatens to breach the provisions of this section, such breach or threatened
breach would cause irreparable harm to the non-breaching party, and the
non-breaching party would be entitled to injunctive and other equitable relief
to prevent such breach or to remedy an actual breach.
8. LIMITED WARRANTY.
A. Red Hat warrants that it has the right and authority to enter into this
Agreement, and that it will use its commercially reasonable best efforts to
distribute and market the Red Hat Product.
B. B3 warrants that it has the right and authority to enter into this Agreement,
and that, to the best of its knowledge, the B3 Software does not and will not
infringe upon any patent, copyright, trade secret, or other intellectual
property interest of any third party. B3 warrants that it will take all due and
reasonable care to avoid infringing any patent, copyright, trade secret, or
other intellectual property interest of any third party.
9. ADDITIONAL OBLIGATIONS.
A. Throughout the term of this Agreement, B3 shall employ and retain engineers
of world-class skills and qualifications who are practiced and capable of
performing the engineering obligations of B3 under this Agreement. Employees of
B3 who will perform work under this Agreement must be approved in advance by Red
Hat.
B. B3 shall establish and maintain sufficient office space, computer hardware,
and other equipment necessary to enable it to perform its obligations under this
Agreement in a
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-4-
professional and timely fashion. In the event that B3 requires additional
computer hardware in order to perform its responsibilities under this Agreement,
Red Hat will purchase or reimburse B3 for the cost of such hardware. All such
hardware purchases must be approved in advance by Red Hat, and Red Hat agrees to
lease all such hardware to B3 at no charge to B3 during the term of this
Agreement. Upon the termination of this Agreement for any reason, B3 shall
return to Red Hat all such hardware.
10. TERM AND TERMINATION.
This agreement shall begin on the date it is signed by both parties. Either
party may terminate this Agreement by written (electronic or other means) notice
of termination, which shall be effective upon receipt, at least 30 days in
advance of termination.
11. INDEMNITY
A. B3 shall defend, indemnify, and hold Red Hat harmless from and against any
liability, suits, claims, losses, damages and judgments, and shall pay all costs
(including reasonable attorneys' fees) and damages arising from a claim that B3
Software infringes any third party's patent, copyright, trademark or other
intellectual property interest, except as provided in Section 11.B. below. The
provisions of this Section shall survive the termination of this Agreement.
B. Red Hat shall defend, indemnify, and hold harmless B3 from and against any
liability, suits, claims, losses, damages and judgments against B3 made in the
United States, provided that B3 promptly notifies Red Hat of any and all such
claims and provided that Red Hat is given control over the defense of any and
all such claims.
The provisions of this Section shall survive the termination of this Agreement.
12. LIMITATION ON LIABILITY
To the extent allowed by applicable law, IN NO EVENT SHALL RED HAT, ITS
SUPPLIERS, DISTRIBUTORS, OR RESELLERS, BE LIABLE FOR ANY DAMAGES WHATSOEVER,
INCLUDING WITHOUT LIMITATION, ANY LOSS OF PROFITS, LOSS OF BUSINESS, LOSS OF USE
OR DATA, INTERRUPTION OF BUSINESS, OR FOR DIRECT, INDIRECT, SPECIAL, INCIDENTAL,
OR CONSEQUENTIAL DAMAGES OF ANY KIND, EVEN IF RED HAT HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE
OF ANY LIMITED REMEDY. (B) EXCEPT AS PROVIDED IN THIS AGREEMENT, IN NO EVENT
WILL RED HAT, ITS SUPPLIERS, DISTRIBUTORS, OR RESELLERS, BE LIABLE FOR ANY CLAIM
AGAINST B3 BY ANY THIRD PARTY. (C) IN NO EVENT SHALL RED HAT, ITS SUPPLIERS,
DISTRIBUTORS, OR RESELLERS, BE LIABLE FOR (I) ANY REPRESENTATION OR WARRANTY
MADE TO ANY THIRD PARTY BY B3, ITS DISTRIBUTOR, OR ITS AGENTS; (II) FAILURE OF
THE SOFTWARE OR THE PRODUCT TO PERFORM;
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-5-
(III) FAILURE OF THE SOFTWARE OR THE PRODUCT TO PROVIDE SECURITY; OR (IV) THE
RESULTS OR INFORMATION OBTAINED OR DECISIONS MADE BY END USERS OF THE SOFTWARE
OR THE PRODUCTS OR THE DOCUMENTATION. THIS LIMITATION OF LIABILITY IS AN
ESSENTIAL PART OF THE BARGAIN UNDER THIS AGREEMENT.
13. MISCELLANEOUS.
A. This Agreement shall be governed by and shall be construed in accordance with
the laws of the State of North Carolina, U.S.A., regardless of its choice of law
provisions. Any dispute, controversy, or other claim arising out of this
Agreement shall be resolved in an appropriate state or federal court within
North Carolina. The parties each agree that they are subject to the personal
jurisdiction of the state and federal courts within the State of North Carolina,
and each waives the right to challenge the personal jurisdiction of those courts
over it. The United Nations Convention on Contracts for the Sale of Goods shall
not apply to this Agreement.
B. Any notice under this Agreement shall be in English, in writing, and shall
be deemed to be given upon receipt. Notices to Red Hat shall be delivered to
Contracts Manager, Red Hat Software, Inc., 4201 Research Commons, Suite 100,
79 Alexander Drive, Research Triangle Park North Carolina 27709 USA. Notices
to B3 shall be delivered to The Director at B3's registered address, which as
of June 1, 1998 is [CONFIDENTIAL TREATMENT REQUESTED]**.
C. This Agreement, including all Schedules, constitutes the entire understanding
of the parties. This Agreement supersedes and terminates all prior
representations, warranties and agreements, written or oral, regarding the
subject matter of this Agreement. Any modification to this Agreement must be in
a writing signed by both parties.
D. All covenants and obligations of this Agreement shall survive the termination
of this Agreement.
E. If one or more of the provisions contained in this Agreement is held invalid,
illegal or unenforceable in any respect by any court of competent jurisdiction,
such holding will not impair the validity, legality, or enforceability of the
remaining provisions.
F. Headings in this Agreement are used for convenience of reference only and do
not affect the interpretation of the provisions.
G. Failure or delay on the part of any party to exercise any right, remedy,
power or privilege hereunder will not operate as a waiver. Any waiver must be in
writing and signed by the party granting such waiver in order to be effective.
H. No provision of this Agreement is to be interpreted for or against either
party on the
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-6-
grounds that one party or the other, or their legal counsel, drafted such
provision.
I. In the event that Red Hat is merged with or consolidated into any other
entity, or in the event that substantially all of the assets of Red Hat are sold
or otherwise transferred to any other entity, the provisions of this Agreement
will be binding upon, and inure to the benefit of, such other entity. D3 shall
not subcontract or assign this Agreement to any third party without the express
written consent of Red Hat.
J. Nothing in this Agreement shall be construed to make the parties partners,
joint venturers, representatives, or agents of each other, nor shall either
party so hold itself out.
To show their assent to this Agreement, the duly authorized officers of the
parties have signed below.
RED HAT SOFTWARE. INC. ("Red Hat") BUILDING NUMBER THREE, LTD. ("B3")
/s/ Robert F. Young /s/ Alan Cox
- ---------------------------------- ------------------------------------
Robert F. Young Alan Cox
President Director
Date: JUNE 10, 1998 Date: JUNE 9, 1999
----------------------------- -------------------------------
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-7-
SCHEDULE A
Red Hat shall make payments to B3 according to the following schedule:
<TABLE>
<CAPTION>
B3 EMPLOYEE AMOUNT TO BE PAID
----------- -----------------
<S> <C>
Alan Cox [CONFIDENTIAL TREATMENT REQUESTED]**
Stephen Tweedie [CONFIDENTIAL TREATMENT REQUESTED]**
</TABLE>
This Schedule may be amended by both parties from time to time, but only in
writing signed by both parties.
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**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Exhibit 10.18
INDEPENDENT CONTRACTOR AGREEMENT
This is an independent contractor software development and services agreement.
Red Hat Software, Inc. ("Red Hat"), a Connecticut, USA corporation, and Ingo
Molnar ("Molnar"), a resident of Hungary, enter into this agreement as of the
last date following the signatures below.
1. DEFINITIONS.
A. " Linux" means the Red Hat Linux operating system computer software for
Intel and compatible based computers, version 5.1 and later versions released by
Red Hat during the term of this Agreement.
B. "Red Hat Product" means the product of Red Hat currently known as " Official
Red Hat Linux for Intel-based computers, version 5.1 and later versions released
by Red Hat during the term of this Agreement.
C. " Molnar Software" means any and all software developed and provided to Red
Hat by Molnar pursuant to this Agreement.
D. " Bugs" means errors in a software program that cause the software to fail to
function as intended.
E. "Source Code" means software in written form which is the preferred form
for making modifications to the software and which is easily understood by a
human knowledgeable in the art of computer programming.
F. "Binary Code" means software in machine-readable form that is not easily
understood by a human knowledgeable in the art of computer programming, but
which is understood and used by a computer to run the software.
K. "Confidential Information" means any information identified as being
Confidential Information by either party, either orally or in writing, at the
time it is disclosed, or designated as confidential in writing (either
electronically or by other means) within 30 days of the disclosure, provided
that the information (a) was not publicly known or generally in the public
domain prior to the disclosure, (b) does not become generally known or part of
the public domain through any improper action or disclosure by the receiving
party, or (c) can be shown to have been in the rightful possession of the
receiving party prior to having been identified as Confidential Information 9 by
the disclosing party.
2. WORK MADE FOR HIRE.
A. Molnar shall perform software development and consulting work as follows:
1. Enhance software-RAID support, including, but not limited to, stability,
performance, and feature enhancements; 2. Tuning the memory handling of the
Linux kernel for a variety of machine configurations; 3. Enhancing SMP
scalability, performance and stability; and 4. Working with
<PAGE>
Stephen Tweedie and other kernel developers on the design and implementation of
a log-based filesystem for the Linux kernel.
B. The Source Code to be written by Molnar pursuant to this Agreement shall be a
work made for hire, and Red Hat shall be the sole owner of the copyright of the
Source Code.
3. INDEPENDENT CONTRACTOR.
Molnar shall be an independent contractor with respect to Red Hat. This
Agreement shall not render Molnar an employee, partner, agent of, or joint
venturer with Red Hat for any purpose. Red Hat shall not be responsible for
withholding taxes with respect to Molnar's compensation hereunder. Molnar shall
have no claim against Red Hat for vacation pay, sick leave, retirement benefits,
social security, worker's compensation, health or disability benefits,
unemployment insurance benefits, or employee benefits of any kind.
4. PAYMENT.
A. In consideration for the work outlined in this Agreement, Red Hat shall make
monthly payments to Molnar in the amount of [CONFIDENTIAL TREATMENT
REQUESTED]**. Both parties may modify at any time the amounts to be paid by Red
Hat to Molnar, but any and all such modifications shall be in writing and shall
be signed by both parties in order to be effective.
B. Payment shall be made in U.S. funds on the last standard business day in the
United States of each month for the work performed that month. Work performed
for less than a full month shall be prorated accordingly. Payment shall be made
via bank wire transfer, or other means agreed to by both parties. Molnar shall
bear the risk of any fluctuation in currency exchange rates between U.S. and
Hungary currency.
5. NON-EXCLUSIVITY.
This Agreement is a non-exclusive agreement, and both parties remain free to
enter into similar agreements with third parties. In the event that Molnar
enters into an agreement with a third party in which Molnar performs software
development, consulting, or other services related to Linux, Molnar shall inform
Red Hat of that agreement at or before the time he enters into such agreement.
Nothing in this section limits or supercedes the provisions of Section 7.
6. QUALITY AND TESTING.
Molnar shall thoroughly test the quality of all Source Code and Binary Code it
delivers to Red Hat in accordance with customary practice within the industry.
All such code delivered to Red Hat by Molnar shall be of commercial production
quality. Red Hat shall have the option to test all such code pursuant to its own
quality assurance procedures, and may reject any code it reasonably believes
does not meet commercial production quality. In the event that Bugs are
2
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
discovered in the Molnar Software, Molnar will use his best efforts to correct
the Bugs in an expeditious manner.
7. CONFIDENTIALITY.
A. Both Red Hat and Molnar agree that during the term of his Agreement, each
party, may disclose to the other party certain Confidential Information. Either
party may designate any information it provides to the other party as
Confidential Information, and the receiving party shall not disclose that
information to third parties without the express permission of the disclosing
party. Information designated as Confidential Information shall remain
confidential until the disclosing party designates it as non-confidential or
until the information becomes public through no fault of the receiving party.
B. Both Red Hat and Molnar agree that in the event either party breaches or
threatens to breach the provisions of this section, such breach or threatened
breach would cause irreparable harm to the non-breaching party, and the
non-breaching party would be entitled to injunctive and other equitable relief
to prevent such breach or to remedy an actual breach.
8. LIMITED WARRANTY.
A. Red Hat warrants that it has the right and authority to enter into this
Agreement, and that it will use its commercially reasonable best efforts to
distribute and market the Red Hat Product.
B. Molnar warrants that he has the, right and authority to enter into this
Agreement, and that, to the best of his knowledge, the Molnar Software does not
and will not infringe upon any patent, copyright, trade secret, or other
intellectual property interest of any third party. Molnar warrants that he will
take all due and reasonable care to avoid infringing any patent, copyright,
trade secret, or other intellectual property interest of any third party.
9. ADDITIONAL OBLIGATIONS.
Molnar shall establish and maintain sufficient office space, computer hardware,
Internet access, and other equipment and services necessary to enable it to
perform its obligations under this Agreement in a professional and timely
fashion. In the event that Molnar requires additional computer hardware in order
to perform its responsibilities under this Agreement, Red Hat will purchase or
reimburse Molnar for the cost of such hardware. All such hardware purchases must
be approved in advance by Red Hat, and Red Hat agrees to lease all such hardware
to Molnar at no charge to Molnar during the term of this Agreement. Upon the
termination of this Agreement for any reason, Molnar shall return to Red Hat all
such hardware.
3
- --------------
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
10. TERM AND TERMINATION
This agreement shall begin on the date it is signed by both parties. Either
party may terminate this Agreement by written (electronic or other means) notice
of termination, which shall be effective upon receipt, at least 30 days in
advance of termination.
11. INDEMNITY
A. Molnar shall defend, indemnify, and hold Red Hat harmless from and against
any liability, suits, claims, losses, damages and judgments, and shall pay all
costs (including reasonable attorney's fees) and damages arising from a claim
that Molnar Software infringes any third party's patent, copyright, trademark or
other intellectual property interest, except as provided in Section ll.B. below.
The provisions of this Section shall survive the termination of this Agreement.
B. Red Hat shall defend, indemnify, and hold harmless Molnar from and against
any liability, suits, claims, losses, damages and judgments against Molnar made
in the United States related to this Agreement, provided that Molnar promptly
notifies Red Hat of any and all such claims and provided that Red Hat is given
control over the defense of any and all such claims. The provisions of this
Section shall survive the termination of this Agreement.
12. LIMITATION ON LIABILITY
To the extent allowed by applicable law, IN NO EVENT SHALL RFD HAT, ITS
SUPPLIERS, DISTRIBUTORS, OR RESELLERS, BE LIABLE FOR ANY DAMAGES WHATSOEVER,
INCLUDING WITHOUT LIMITATION, ANY LOSS OF PROFITS, LOSS OF BUSINESS, LOSS OF USE
OR DATA, INTERRUPTION OF BUSINESS, OR FOR DIRECT, INDIRECT, SPECIAL, INCIDENTAL,
OR CONSEQUENTIAL DAMAGES OF ANY KIND, EVEN IF RED HAT HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE
OF ANY LIMITED REMEDY. (b) EXCEPT AS PROVIDED IN THIS AGREEMENT, IN NO EVENT
WILL RED HAT, ITS SUPPLIERS, DISTRIBUTORS, OR RESELLERS, BE LIABLE FOR ANY CLAIM
AGAINST MOLNAR BY ANY THIRD PARTY. (C) IN NO EVENT SHALL RED HAT, ITS SUPPLIERS,
DISTRIBUTORS, OR RESELLERS, BE LIABLE FOR (i) ANY REPRESENTATION OR WARRANTY
MADE TO ANY THIRD PARTY BY MOLNAR, ITS DISTRIBUTOR, OR ITS AGENTS; (ii) FAILURE
OF THE SOFTWARE OR THE PRODUCT TO PERFORM; (iii) FAILURE OF THE SOFTWARE OR THE
PRODUCT TO PROVIDE SECURITY; OR (iv) THE RESULTS OR INFORMATION OBTAINED OR
DECISIONS MADE BY END USERS OF THE SOFTWARE OR THE PRODUCTS OR THE
DOCUMENTATION. THIS LIMITATION OF LIABILITY IS AN ESSENTIAL PART OF THE BARGAIN
UNDER THIS AGREEMENT.
4
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
13. MISCELLANEOUS.
A. This Agreement shall be governed by and shall be construed in accordance with
the laws of the State of North Carolina, U.S.A., regardless of its choice of law
provisions. Any dispute, controversy or other claim arising out of this
Agreement shall be resolved in an appropriate state or federal court within
North Carolina. The parties each agree that they are subject to the personal
jurisdiction of the state and federal courts within the State of North Carolina,
and each waives the right to challenge the personal jurisdiction of those courts
over it. The United Nations Convention on Contracts for the Sale of Goods shall
not apply to this Agreement.
B. Any notice under this Agreement shall be in English, in writing, and shall
be deemed to be given upon receipt. Notices to Red Hat shall be delivered to
Contracts Manager, Red Hat Software, Inc., 4201 Research Commons, Suite 100,
79 Alexander Drive, P.O. Box 13588, Research Triangle Park, North Carolina
27709 USA. Notices to Molnar shall be delivered to [CONFIDENTIAL TREATMENT
REQUESTED]**.
C. This Agreement, including all Schedules, constitutes the entire understanding
of the parties. This Agreement supersedes and terminates all prior
representations, warranties and agreements, written or oral, regarding the
subject matter of this Agreement. Any modification to this Agreement must be in
a writing signed by both parties.
D. All covenants and obligations of this Agreement shall survive the termination
of this Agreement.
E. If one or more of the provisions contained in this Agreement is held invalid,
illegal or unenforceable in any respect by any court of competent jurisdiction,
such holding will not impair the validity, legality, or enforceability of the
remaining provisions.
F. Failure or delay on the part of any party to exercise any right, remedy,
power or privilege hereunder will not operate as a waiver. Any waiver must be in
writing and signed by the party granting such waiver in order to be effective.
G. In the event that Red Hat is merged with or consolidated into any other
entity, or in the event that substantially all of the assets of Red Hat are sold
or otherwise transferred to any other entity, the provisions of this Agreement
will be binding upon, and inure to the benefit of, such other entity. Molnar
shall not subcontract or assign this Agreement to any third party without the
express written consent of Red Hat.
H. Nothing in this Agreement shall be construed to make the parties partners,
joint venturers, representatives, or agents of each other, nor shall either
party so hold itself out.
5
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
To show their assent to this Agreement, the duly authorized officers of the
parties have signed below.
RED HAT SOFTWARE, INC. ("Red Hat")
/s/ Robert F. Young
- -----------------------------
Signature
ROBERT F. YOUNG Name
PRESIDENT Title
Date: August 18, 1998
------------------------
INGO MOLNAR ("Molnar")
/s/ Ingo Molnar
- -----------------------------
Signature
INGO MOLNAR Name
Date: August 17, 1998
------------------------
6
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
Exhibit 10.19
SOFTWARE LICENSE AND SHIPMENT AGREEMENT
This License and Shipment Agreement ("Agreement") is made and entered into as of
the 25th day of February, 1999 (the "Effective Date"), by and between Dell
Products L.P., by and on behalf of itself, Dell Computer Corporation, a Delaware
corporation, and the other affiliates of Dell Computer Corporation ("Dell"),
which its principal place of business at One Dell Way, Round Rock, Texas 78682
and Red Hat Software, Inc. a Delaware corporation ("Developer"), with principal
place of business at 2600 Meridian Parkway, Durham, NC 27713.
1. LICENSE RIGHTS. Developer grants to Dell a non-exclusive, worldwide
license to repro-duce, install on the hard drive of Dell computers and ship the
software program(s) (the "Software") and related materials described on Schedule
"A" (collectively, the "Products"). Within five (5) days of the Effective Date,
Devel-oper will provide Dell with a master copy of the current released version
of the Products. Within [CONFIDENTIAL TREATMENT REQUESTED]** of any change to
the current version of any of the Products, [CONFIDENTIAL TREATMENT
REQUESTED]**, Developer will provide Dell with updated masters of the Products
and a description of the changes. Dell will purchase packaged copies of the
Products containing diskettes and documentation from Developer or a distributor
selected by Dell for inclusion with each Dell Computer containing the Software
that is shipped for revenue. The parties acknowledge that Developer and not Dell
is the "distributor" of the Products in the context of the General Public
License, and Dell's activities with respect to the Product shall not constitute
"distribution" under or otherwise fall within the scope of the General Public
License.
2. STOCK BALANCING AND RETURNS. Dell may balance its stock of packaged
Products [CONFIDENTIAL TREATMENT REQUESTED]**.
3. [CONFIDENTIAL TREATMENT REQUESTED]**.
4. PURCHASING; DELIVERY; PAYMENT. Dell shall submit purchaser orders
("Orders") for the Products to Developer or Developer's authorized distributor
specifying quantities for each Product ordered and required delivery date.
[CONFIDENTIAL TREATMENT REQUESTED]**. Developer will label Products ordered by
Dell with bar codes in accordance with Dell's Bar Code Label Guidelines. Prices
in Schedule A are exclusive of any shipping charges, sales, use or similar
taxes. Payment shall be [CONFIDENTIAL TREATMENT REQUESTED]**.
5. TRADEMARKS. Any and all trademarks and trade names which Developer
uses in connection with the Prod-ucts are and will remain the exclusive property
of Developer. Developer grants Dell a limited license to reproduce any such
trademarks and trade names as necessary or appropriate for Dell to promote and
market the Products subject to Developer's trademark use guidelines.
6. WARRANTY; DISCLAIMER. Developer will warrant the Product directly
to the end-user in accordance with the terms and conditions set forth in
Developer's end-user license agreement, or modifications of the
same.[CONFIDENTIAL TREATMENT REQUESTED]**.
<PAGE>
-2-
EXCEPT AS EXPRESSLY SET FORTH IN THIS SECTION 6, DEVELOPER SPECIFICALLY
DISCLAIMS ALL OTHER WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, INCLUDING
WITHOUT LIMITATION, IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE
AND MERCHANTABILITY.
On an ongoing basis, Developer represents and warrants that:
(a) the Product(s) will operate in accordance with its written
specifications;
(b) [CONFIDENTIAL TREATMENT REQUESTED]**;
(c) [CONFIDENTIAL TREATMENT REQUESTED]**;
(d) [CONFIDENTIAL TREATMENT REQUESTED]**;
7. TERM AND TERMINATION. This Agreement will begin as of the Effective
Date and will continue for a period of one (1) year. This Agreement is
automatically renewable at one year periods unless either party terminates as
provided herein. Either party may terminate this Agreement for cause upon thirty
(30) days prior written notice of a material breach, if the breach has not been
cured within this 30 day period. Upon termination or expiration of this
Agreement, Dell will immediately stop reproducing Products as provided in
Section 1 above; [CONFIDENTIAL TREATMENT REQUESTED]**. Additionally, Dell will
immediately return to Developer the master diskettes of the Products, together
with any information of Developer marked "Confidential," "Proprietary," or
containing similar markings, including any copies thereof, except those needed
for customer support, and all packaged Products except for one copy for each
copy of Product already installed on Dell computers as of the date of
termination or expiration, and Developer shall refund to Dell all sums already
paid for such Products.
8. TRAINING SUPPORT. Dell may make copies of the software Products at
no charge for internal sales training and sup-port, and Developer will provide
Dell with marketing and other Product literature and materials reasonably
requested by Dell for purposes of such training and support. [CONFIDENTIAL
TREATMENT REQUESTED]**. Dell will have access to Developer's applicable bulletin
board services.
9. NOTICES. Any notice required to be given will be deemed given if in
writing and actually delivered, transmitted by facsimile, or deposited in the
United States mail in registered or certified form, return receipt requested,
postage prepaid, or if sent by air courier, fees prepaid, addressed to the party
at the address set forth below or to such other address as the party may
indicate in accordance with this Section.
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-3-
Developer address:
Red Hat Software, Inc.
Attn: Counsel
2600 Meridian Pkwy
Durham, NC 27713
Dell Address:
Dell Products L.P.
One Dell Way
EBP, Box 4
Round Rock, TX 78682
Attn: Strategic Commodity Manager
Software Procurement
Copy to:
Dell Computer Corporation
One Dell Way
Round Rock, TX 78682
Attn: Terry McElroy
Dell Legal
10. ENTIRE AGREEMENT. This Agreement and the Purchase Orders issued
hereunder constitute the entire understanding of the parties with respect to the
subject matter hereof and merges all prior written or oral communications,
understandings, and agreements. Neither party may assign this Agreement without
the written consent of the other.
11. GENERAL.
(a) Developer may not assign this Agreement without Dell's
specific prior written consent which Dell will not unreasonably withhold, and
any attempted assignment in violation of the foregoing will be void.
(b) Neither party will be responsible for delays beyond its
reasonable control.
(c) No waiver of any term or condition is valid unless it is
in writing and signed by an authorized representative of the party charged with
the waiver. A valid waiver is limited to the specific situation for which it was
given.
(d) Each party agrees to comply with all applicable laws,
rules, regulations, orders and ordinances of the United States and of any other
state or country with jurisdiction over each party or each party's activities in
performance of its obligations hereunder, including without limitation all
applicable import or export regulations and all incensing or permitting
requirements.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-4-
(e) This Agreement will be governed by and construed in
accordance with the laws of [CONFIDENTIAL TREATMENT REQUESTED]** and the
applicable laws of the United States, exclusive of any provisions of the
United Nations Convention on the International Sale of Goods and without
regard to principles of conflicts of law.
(f) Whenever possible, each provision of this Agreement will
be interpreted in such a manner as to be effective and valid under applicable
law, but if any provision of this Agreement is found to violate a law, it will
be severed from the rest of the Agreement and ignored.
(g) This Agreement may be executed in two or more counterparts
in the English language, and each counterpart will be deemed an original, but
all counterparts together will constitute a single instrument.
(h) The English language version of this Agreement will
control regardless of any subsequent translations of this Agreement.
(i) The headings contained in this Agreement are for the
purposes of convenience only and are not intended to define or limit the
contents of this Agreement.
(j) Dell and Developer are independent contractors; neither
party may bind or attempt to bind the other without the other's prior written
consent.
(k) This Agreement has been negotiated by the parties and
their respective counsel and will be interpreted fairly in accordance with its
terms and without any strict construction in favor of or against either party.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-5-
IN WITNESS WHEREOF, the parties have executed this Agreement by their
duly authorized representatives as of the date first set forth above.
DEVELOPER DELL
By: /s/ Paul McNamara By: Dell Products L.P.
------------------------
Name: Paul Mcnamara Name: Martin J. Garvin /s/
------------------------
Title: Vice President Title: VP, Worldwide Procurement
------------------------
Date: 3/17/99 Date: 3/17/99
------------------------ ----------------------------
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RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
SCHEDULE A
PRODUCT
Red Hat Linux
1. At Dell's option, Dell will use reasonable efforts to offer Red Hat Linux
(current version 5.2) installed by DPSI on selected configurations of Dell
servers by the end of March, 1999. Dell will be allowed to charge an
installation fee to Dell customers for this service. Developer will provide a
shrink-wrapped package containing System Builder Edition media and installation
manual to Dell for inclusion in the packaging of my Dell platform loaded with
Red Hat Linux. The cost of the package will be [CONFIDENTIAL TREATMENT
REQUESTED]**when purchased directly from Red Hat or at a standard mark-up when
purchased from an authorized distributor.
2. Two versions of the software, in English only, will be available to Dell
customers. Both have the same code, but different levels of support from
Developer. The System Builder addition is available at a cost of [CONFIDENTIAL
TREATMENT REQUESTED]**and includes no support. The Commercial Server Edition
includes 90-days of 24 x 7 support from Developer at a cost of [CONFIDENTIAL
TREATMENT REQUESTED]**. Developer will keep Dell informed should any other
languages as such languages become available.
3. Configurations will be limited due to lack of driver support for certain
peripherals.
4. [CONFIDENTIAL TREATMENT REQUESTED]**. Dell assumes no obligation in assuring
payment of such fees by Dell customers to Developer. Developer will arrange to
separately contract with Dell customers for support and service of Linux.
5. Initial installations will be on PE1300 and PE 2300. Additional platforms
including other server models, workstations, notebooks and desktops will be made
available, at Dell's option.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
SCHEDULE B
Year 2000 Readiness Disclosure
Red Hat Linux has been designed and tested from the beginning to work
for our customers in the Year 2000 and beyond. We have tested the system
utilities and kernel of Red Hat Linux versions 4.1 and greater, and have found
them to be Year 2000 compliant, meaning that they will not produce errors in
date data related to the year change from December 31, 1999 to January 1, 2000.
Customers who use versions of Red Hat Linux prior to version 4.1 may upgrade to
more recent and up-to-date versions at no charge, by downloading a new version
from Red Hat's ftp site at FTP.REDHAT.COM or from one of many mirror sites
around the world.
Red Hat Linux, as an operating system, is only one layer of many in a
functioning computer system. Some applications written to work with Red Hat
Linux may not be Year 2000 compliant, even though the operating system itself
is. Therefore, we encourage our customers to evaluate their hardware, software
applications, and other computer products carefully.
Red Hat software believes Year 2000 readiness issues are more about
testing, good practices, and user education than product warranty. We will
continue to provide information to customers about year 2000 readiness, but
contractual warranties specific to Year 2000 readiness are not appropriate given
the true nature of Year 2000 issues and the simple fact that a single technology
provider, even one as well prepared for the Year 2000 as Red Hat, cannot solve
all issues related to the transition to the Year 2000. Warranties for Red Hat
Software's products are set forth in the license agreements that accompany the
products and we recommend that customers read those warranties to understand
their rights. The information we disseminate about year 2000 readiness does not
constitute an extension of any warranty for Red Hat Software products. Red Hat
Software provides this information to assist our customers in evaluating and
correcting potential issues for using dates into the next century.
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AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated April 30, 1999, relating to the financial statements of Red
Hat, Inc., which appears in such Registration Statement. We also consent to the
references to us under the headings "Expert" and "Selected Financial Data" in
such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
June 4, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OUR
FINANCIAL STATEMENTS AS OF AND FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1996,
FEBRUARY 28, 1997, FEBRUARY 28, 1998 AND FEBRUARY 28, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE NOTES TO OUR FINANCIAL STATEMENTS INCLUDED IN
OUR REGISTRATION STATEMENT ON FORM S-1.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR YEAR YEAR
<FISCAL-YEAR-END> FEB-28-1995 FEB-28-1996 FEB-28-1997 FEB-28-1998 FEB-28-1999
<PERIOD-END> FEB-28-1995 FEB-28-1996 FEB-28-1997 FEB-28-1998 FEB-28-1999
<CASH> 0 0 0 1,293 10,055
<SECURITIES> 0 0 0 150 2,038
<RECEIVABLES> 64 90 342 794 1,287
<ALLOWANCES> 0 0 38 49 160
<INVENTORY> 20 42 57 141 346
<CURRENT-ASSETS> 84 133 373 2,662 13,854
<PP&E> 28 57 281 490 1,617
<DEPRECIATION> 6 26 55 153 346
<TOTAL-ASSETS> 106 245 670 3,131 15,276
<CURRENT-LIABILITIES> 148 0 0 1,121 2,753
<BONDS> 0 30 145 65 420
0 0 0 1,983 12,107
0 0 0 0 0
<COMMON> 1 1 1 2 2
<OTHER-SE> (43) (80) (47) (40) (7)
<TOTAL-LIABILITY-AND-EQUITY> 106 245 670 3,131 15,276
<SALES> 482 930 2,603 5,132 10,013
<TOTAL-REVENUES> 482 930 2,603 5,156 10,790
<CGS> 352 432 1,205 2,211 4,013
<TOTAL-COSTS> 485 673 1,696 3,463 7,124
<OTHER-EXPENSES> 123 390 851 1,702 3,704
<LOSS-PROVISION> 0 0 39 38 185
<INTEREST-EXPENSE> 1 22 23 13 9
<INCOME-PRETAX> (128) (155) 33 13 124
<INCOME-TAX> 0 0 0 5 215
<INCOME-CONTINUING> (128) (155) 33 8 (91)
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> (128) (155) 33 8 (91)
<EPS-BASIC> (.011) (.007) .001 .00 (.001)
<EPS-DILUTED> (.011) (.007) .001 .00 (.001)
</TABLE>
