<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 2000
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)
------------------------------
MATTHEW SZULIK
PRESIDENT 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>
PROPOSED
MAXIMUM PROPOSED
AGGREGATE MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) SHARE OFFERING PRICE (2) FEE
<S> <C> <C> <C> <C>
Common Stock, $.0001 par value............... 4,600,000 $124.345 $571,984,700 $151,004
</TABLE>
(1) Includes 600,000 shares of common stock which may be purchased by the
underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on the
basis of the average high and low prices of the Registrant's common stock on
January 7, 2000, as reported by Nasdaq.
------------------------------
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 JANUARY 14, 2000.
THE INFORMATION IN THIS 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 PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
4,000,000 Shares
[LOGO]
Common Stock
----------------
Red Hat, Inc. is offering 2,750,000 of the shares of common stock to be sold
in the offering. The selling stockholders identified in this prospectus are
offering an additional 1,250,000 shares of common stock. Red Hat will not
receive any of the proceeds from the sale of shares being sold by the selling
stockholders.
The common stock is quoted on the Nasdaq National Market under the symbol
"RHAT". The last reported sale price of the common stock on January 13, 2000 was
$131.3125 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 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 price to public.................................. $ $
Underwriting discount.................................... $ $
Proceeds, before expenses, to Red Hat.................... $ $
Proceeds, before expenses, to the selling stockholders... $ $
</TABLE>
If the underwriters sell more than 4,000,000 shares of common stock, the
underwriters have the option to purchase up to an additional 600,000 shares from
Red Hat at the initial price to public less the underwriting discount.
------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO.
CHASE H&Q
THOMAS WEISEL PARTNERS LLC
J.P. MORGAN & CO.
----------------
Prospectus dated , 2000.
<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 6.1 operating system
package. This picture is surrounded by an all black background.
<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 global developer and provider of open source software and
solutions. Unlike proprietary software, open source software has publicly
available source code and can be copied, modified and distributed with minimal
restrictions. Our software and solutions are provided for a variety of computing
systems, ranging from desktops, workstations and servers to special-purpose
computing devices such as wireless telephones, personal digital assistants,
routers and phone switches. Our principal product, Red Hat Linux, represented
approximately 56% of new license shipments of Linux-based server operating
systems in the U.S. in 1998 and was the most popular Linux-based system,
preferred by 68% of U.S. users, according to International Data Corporation.
We offer professional services for the Red Hat Linux operating system,
related tools and libraries and popular open source applications. Our services
include technical support and maintenance, developer support, custom
development, consulting, training and education and hardware certification.
Our web site, REDHAT.COM, is a leading destination for open source software
users and developers and serves as the primary delivery mechanism and customer
interface for many of our solutions. REDHAT.COM also offers extensive news and
content for the open source community, an important forum for open source
software development, a commerce site and priority access for software downloads
and upgrades.
We are committed to serving the interests and needs of open source software
users and developers and to sharing our product developments with the open
source community. We generated, on a pooled basis with Cygnus Solutions, which
we acquired in January 2000, approximately $29.6 million in revenue for the nine
months ended November 30, 1999. Companies with which we have strategic
relationships include Cisco, Compaq, Dell, Hewlett Packard, IBM, Intel, Nokia,
Nortel, Oracle, SAP, Silicon Graphics and Sony Computer Entertainment.
OUR MARKET OPPORTUNITY
We believe open source software offers many potential benefits for
customers, users and vendors. Customers and users are able to acquire the
software at little or no cost, install the software on as many computing devices
as they wish, and customize the software to suit their particular needs. 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.
We believe open source solutions are particularly well-suited for a new
category of computing devices that provide low-cost, easy access to the
internet. Open source solutions are flexible, modular, and robust, and can be
tailored to fit within resource-constrained environments, while still taking
advantage of common application programming interfaces from desktop programming
environments. This new category of computing platforms includes mobile devices
such as personal digital assistants, wireless telephones, television set top
boxes, kiosks and game consoles, as well as special-purpose server devices such
as routers, phone switches, and dedicated file and e-mail servers. The growth of
the internet has generated significant demand for these devices. For example,
IDC predicts that by 2002, there will be more than 55 million mobile computing
devices and that by 2005, shipment of these devices will exceed shipment of
personal computers.
3
<PAGE>
We believe there is a growing opportunity to provide extensive professional
services relating to the development and use of open source products across
computing platforms, particularly for the enterprise market. Furthermore, we
believe that we are well positioned to realize this opportunity, given our
comprehensive suite of open source offerings and the popularity of Linux-based
solutions. Open source 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. In addition, Linux-based operating systems are now the most commonly used
operating systems for web servers, representing approximately 29% of all
installations, according to the December 1999 Netcraft Web Server Survey.
OUR STRATEGY
We seek to enhance our position as a leading provider of open source
software and solutions by:
- increasing the adoption of open source software across all computing
platforms from servers to mobile computing devices, particularly through
technology alliances and through the sharing of our development efforts
and resources with third-party developers;
- expanding our presence in the enterprise market by increasing our
professional services capabilities and providing comprehensive offerings
of open source systems, tools and applications;
- continuing to enhance and expand our web site to create the definitive
online destination for the open source community;
- continuing to pursue strategic acquisitions and alliances;
- furthering our penetration into international markets; and
- continuing to invest in the development of open source technology.
RECENT DEVELOPMENTS
Since our initial public offering in August 1999 we have:
- acquired Cygnus Solutions, Inc., a leading developer and provider of open
source development tools and custom engineering services, which we believe
positions us to be the open source leader in both operating systems and
development tools;
- acquired Hell's Kitchen Systems, Inc., a leading developer of Linux- and
UNIX- based credit card processing software;
- enhanced our REDHAT.COM web site by launching "Wide Open News", a news
site, and our "Developer Network," a collection of technical and business
resources for developing software that runs on Red Hat Linux;
- released Red Hat Linux 6.1 in October 1999, including localized versions
for the German, French and Japanese markets; and
- established subsidiaries in Japan and Australia.
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. We made an initial public offering of our common stock in
August 1999. 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; all references to "Cygnus"
in this prospectus refer to Cygnus Solutions, Inc., a wholly-owned subsidiary of
Red Hat; and all references to "HKS" in this prospectus refer to
4
<PAGE>
Hell's Kitchen Systems, Inc., a wholly-owned subsidiary of Red Hat. 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", "PowerTools", "Red Hat
Certified Engineer", "RHCE", "Wide Open", "Always Open", "Red Hat Ready" and the
"Red Hat Ready" logo are trademarks or service marks of Red Hat. "Cygnus
Solutions", "GNUPro", "eCos", "eCosystem", "Source Navigator", "EL/IX" and
"Cygwin" are trademarks or service marks of Cygnus. Other trademarks and
tradenames in this prospectus are the property of their respective owners.
Except as presented 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;
- gives effect to a two-for-one stock split effected on January 7, 2000; and
- gives effect to our acquisitions of Cygnus and HKS, including our issuance
of common stock and assumption of options in connection with the Cygnus
acquisition.
THE OFFERING
<TABLE>
<S> <C>
Shares offered by Red Hat................... 2,750,000 shares
Shares offered by the selling 1,250,000 shares
stockholders................................
Shares to be outstanding after the 151,683,572 shares
offering....................................
Use of proceeds............................. To provide working capital and for other
general corporate purposes including
geographic expansion and possible strategic
acquisitions or alliances. See "Use of
Proceeds".
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 December 31, 1999. This number
includes 11,345,970 shares issued in connection with our acquisitions of Cygnus
and HKS. This number does not include 12,827,622 shares of common stock issuable
upon the exercise of stock options outstanding under Red Hat's stock plans on
December 31, 1999 with a weighted average exercise price of $8.15 per share and
2,412,737 shares of common stock issuable upon exercise of options outstanding
under Cygnus's stock plans on December 31, 1999 with a weighted average exercise
price of $2.87 per share, or 4,814,900 shares of common stock issuable upon
exercise of warrants outstanding on December 31, 1999 with an exercise price of
$0.0001 per share. This number also does not include an aggregate of 13,224,110
shares reserved as of December 31, 1999 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 Red Hat's historical financial
statements.
5
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes the historical financial data of our business
and supplementary pooled financial data reflecting our acquisition of Cygnus in
January 2000 in a merger accounted for using the pooling of interests method of
accounting. You should read this information with the discussion in
"Management's 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.................... $ 0.00 $ 0.00 $0.00 $0.00 $(0.01)
Diluted.................. 0.00 0.00 0.00 0.00 (0.01)
Weighted average common
shares outstanding:
Basic.................... 24,000 45,252 47,000 47,000 47,100
Diluted.................. 24,000 45,252 54,465 69,157 47,100
Pro forma earnings (loss)
per common share (2):
Basic.................... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $0.00
Diluted.................. 0.00 0.00 0.00 0.00 0.00
Pro forma weighted average
common shares
outstanding (2):
Basic.................... 24,000 45,252 47,000 61,684 87,860
Diluted.................. 24,000 45,252 54,465 61,684 87,860
<CAPTION>
SUPPLEMENTAL
POOLED
SUPPLEMENTAL NINE MONTHS NINE MONTHS
POOLED ENDED ENDED
YEAR ENDED NOVEMBER 30, NOVEMBER 30,
FEBRUARY 28, ------------------- ---------------------
1999 1998 1999 1998 1999
-------------- -------- -------- --------- ---------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue.................... $ 33,032 $ 7,113 $ 12,596 $ 23,590 $ 29,612
Net income (loss).......... (5,788) 200 (8,776) (4,564) (15,233)
Net income (loss) available
to common stockholders... (5,827) 184 (8,859) (4,580) (15,315)
Earnings (loss) per common
share:
Basic.................... $(0.12) $0.01 $(0.11) $(0.10) $ (0.18)
Diluted.................. (0.12) 0.00 $(0.11) (0.10) $ (0.18)
Weighted average common
shares outstanding:
Basic.................... 47,628 47,052 84,355 47,438 85,692
Diluted.................. 47,628 89,502 84,355 47,438 85,692
Pro forma earnings (loss)
per common share (2):
Basic.................... $(0.07) $0.00 $(0.06) $(0.05) $(0.12)
Diluted.................. (0.07) 0.00 0.06 (0.05) (0.12)
Pro forma weighted average
common shares
outstanding (2):
Basic.................... 88,388 81,577 151,880 81,984 127,048
Diluted.................. 88,388 89,502 151,880 81,984 127,048
</TABLE>
- ------------------------------
(1) Red Hat's fiscal year ended on February 29, 1996.
(2) These numbers are presented on a pro forma basis to reflect the conversion
of all of our outstanding preferred stock into our common stock at the
beginning of the period indicated or the date of issuance of the preferred
stock, if later.
The following table presents a summary of our unaudited balance sheet at
November 30, 1999:
- on an actual basis;
- on a pooled pro forma basis to reflect the consummation of our
acquisitions of Cygnus and HKS; and
- on a pooled pro forma as adjusted basis to reflect the sale by us of
2,750,000 shares of common stock in this offering at an estimated public
offering price of $131.3125 per share after deducting the estimated
underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
NOVEMBER 30, 1999
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 11,997 $21,453 $364,812
Working capital............................................. 15,195 19,361 362,720
Total assets................................................ 110,298 185,339 528,698
Long-term liabilities....................................... 203 835 835
Total stockholders' equity.................................. 98,535 162,395 505,754
</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 OUR LINUX-BASED OPEN SOURCE BUSINESS MODEL
OUR BUSINESS MAY NOT SUCCEED BECAUSE OPEN SOURCE SOFTWARE BUSINESS MODELS ARE
UNPROVEN
We have not demonstrated the success of our open source business model,
which gives our customers the right freely to copy and distribute our software.
No other company has built a successful open source business. Few open source
software products have gained widespread commercial acceptance 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. If open source software
should fail to gain widespread commercial acceptance, we would not be able to
sustain our revenue growth and our business could fail.
OUR RELIANCE ON THE SUPPORT OF LINUS TORVALDS AND OTHER PROMINENT LINUX
DEVELOPERS COULD IMPAIR OUR ABILITY TO RELEASE MAJOR PRODUCT UPGRADES AND
MAINTAIN MARKET SHARE
We may not be able to release major product upgrades of Red Hat Linux on a
timely basis because the core of Red Hat Linux, the Linux kernel, is maintained
by third parties. Linus Torvalds, the original developer of the Linux kernel and
a small group of independent engineers are primarily responsible for the
development and evolution of the Linux kernel. If this group of developers fails
to further develop the Linux kernel or 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 no longer work on the Linux kernel, we would have to
either rely on another party to further develop the kernel or develop it
ourselves. We cannot predict whether enhancements to the kernel would be
available from reliable alternative sources. We could be forced to rely to a
greater extent on our own development efforts, which would increase our
development expenses and may delay our product release and upgrade schedules. In
addition, any failure on the part of the kernel developers to further develop
and enhance the kernel could stifle the development of additional Linux-based
applications.
WE MAY NOT BE ABLE TO EFFECTIVELY ASSEMBLE AND TEST OUR SOFTWARE BECAUSE IT
CONSISTS LARGELY OF CODE DEVELOPED BY INDEPENDENT THIRD PARTIES OVER WHOM WE
EXERCISE NO CONTROL, WHICH COULD RESULT IN UNRELIABLE PRODUCTS AND DAMAGE TO
OUR REPUTATION
Red Hat Linux, in compressed form, consists of approximately 546 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 546 megabytes of code are
over 700 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. If these components are not reliable, Red Hat Linux could
fail, resulting in serious damage to our reputation and potential litigation.
Although we attempt to assemble only the best available components, we cannot be
sure that we will be able to identify the highest quality and most reliable
components or to successfully assemble and test them. In addition, if these
components were no longer available, we would have to develop them ourselves,
which would significantly increase our development expenses.
7
<PAGE>
THE SCARCITY OF SOFTWARE APPLICATIONS FOR LINUX-BASED OPERATING SYSTEMS COULD
PREVENT COMMERCIAL ADOPTION OF OUR PRODUCTS
Our products will not gain widespread commercial adoption until there are
more third-party software applications designed to operate on Linux-based
operating systems. 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, by providing open source tools to create these applications and by
maintaining our existing developer relationships through marketing and technical
support for third-party developers. If we are not successful in achieving these
goals, however, our products will not gain widespread commercial acceptance and
we will not be able to maintain our product sales growth.
WE MAY NOT BE ABLE TO GENERATE REVENUE FROM SALES OF OFFICIAL RED HAT LINUX IF
USERS CAN MORE QUICKLY DOWNLOAD IT FROM THE INTERNET
Anyone can download a free copy of Red Hat Linux from the internet. However,
because this download can take up to 36 hours using a standard telephone
connection, many of our users choose to buy 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 users to more quickly
download our products from the internet, users may no longer choose to purchase
Official Red Hat Linux. This could lead to a significant loss of product
revenue.
WE MAY NOT SUCCEED IN SHIFTING OUR BUSINESS FOCUS FROM TRADITIONAL SHRINK-
WRAPPED SOFTWARE SALES TO OFFERING SUBSCRIPTION-BASED PRODUCT AND SERVICES
OFFERINGS
While we have historically relied solely on sales of shrink-wrapped
software, we continue to focus our sales and marketing efforts on providing
subscription-based products and services. This change has required us to expend
significant financial and managerial resources and may ultimately not prove
successful. The failure to successfully implement this transition of our sales
model could materially adversely affect our operating results.
OUR CUSTOMERS MAY FIND IT DIFFICULT TO INSTALL AND IMPLEMENT RED HAT LINUX,
WHICH COULD LEAD TO CUSTOMER DISSATISFACTION AND DAMAGE OUR REPUTATION
Installation and implementation of Red Hat Linux often involves a
significant commitment of resources, financial and otherwise, by our customers.
This 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 to support our customers, the failure of companies
with which we have strategic alliances to commit sufficient resources towards
the installation and implementation of our products, or a delay in
implementation for any other reason could result in dissatisfied customers. This
could damage our reputation and the Red Hat brand, resulting in decreased
revenue.
WE MAY BE UNABLE TO PREDICT THE FUTURE COURSE OF OPEN SOURCE TECHNOLOGY
DEVELOPMENT, WHICH COULD REDUCE THE MARKET APPEAL OF OUR PRODUCTS AND DAMAGE
OUR REPUTATION
We do not exercise control over many aspects of the development of open
source technology. Historically at times different groups of open source
software programmers have competed with each other to develop new technology.
Typically one of those groups develops the technology that becomes more
8
<PAGE>
widely used than that developed by others. If we adopt new technology and
incorporate it into our products, and competing technology becomes more widely
used, the market appeal of our products may be reduced, which could harm our
reputation, diminish the Red Hat brand and result in decreased revenue.
NEGATIVE REACTION WITHIN THE OPEN SOURCE COMMUNITY TO OUR BUSINESS STRATEGY
COULD HARM OUR REPUTATION AND BUSINESS
Some members of the open source software community have criticized the
expansion of our strategic focus in online chat rooms, electronic bulletin
boards and articles posted on the web. These critics argue that our strategy
could fragment the Linux community into a variety of competing factions,
resulting in a less cohesive and cooperative development process. 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 result in decreased revenue.
RISKS RELATED TO OUR FINANCIAL RESULTS AND CONDITION
OUR LIMITED OPERATING HISTORY IN THE DEVELOPING MARKET FOR OPEN SOURCE PRODUCTS
AND SERVICES MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS
Red Hat was formed in March 1993. We began offering Red Hat Linux in
October 1994. Our limited operating history makes it difficult to evaluate the
risks and uncertainties that we face. Our failure to address these risks and
uncertainties could cause our business results to suffer and result in the loss
of all or part of your investment.
WE HAVE NO COMBINED OPERATING HISTORY WITH CYGNUS AND MAY HAVE DIFFICULTY
INTEGRATING THIS BUSINESS
The successful integration of the operations, products, services and
personnel of Red Hat and Cygnus is important to the future financial performance
of the combined enterprise. The anticipated benefits of this acquisition may not
be achieved unless, among other things, the operations, products, services and
personnel of Cygnus are successfully combined with those of Red Hat in a timely
and efficient manner. Integration of these companies' operations, products,
services and personnel may be hampered because, among other things:
- the products and services offered by Red Hat and Cygnus are highly complex
and have been developed independently;
- integration of Red Hat and Cygnus product lines will require the
coordination of separate development and engineering teams from each
company; and
- Red Hat, which is headquartered in Durham, North Carolina, and Cygnus,
which is headquartered in Sunnyvale, California, are located in disparate
geographic regions.
In addition, the costs associated with integrating these operations, products,
services and personnel may be substantial and could include, among other things:
- employee redeployment or relocation; and
- the combination of research and development teams and processes.
Any of these difficulties and costs encountered in the transition process
could divert the attention of management, and could have an adverse impact on
the revenue and operating results of the combined enterprise. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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WE EXPECT TO INCUR SUBSTANTIAL LOSSES FOR THE FORESEEABLE FUTURE
We have incurred operating losses in four of our previous five fiscal years,
including our most recent fiscal year ended February 28, 1999, as well as in the
nine months ended November 30, 1999. We expect to incur significant losses for
the foreseeable future, as we substantially increase our sales and marketing,
research and development and administrative expenses. In addition, we are
investing considerable resources in our web initiatives and to expand our
professional services offerings. As a result, we cannot be certain when or if we
will achieve sustained profitability. Failure to become and remain profitable
may adversely affect the market price of our common stock and our ability to
raise capital and continue operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview", "--Results of
Operations" and "--Liquidity and Capital Resources".
YOU SHOULD NOT RELY ON OUR QUARTERLY RESULTS OF OPERATIONS AS AN INDICATION OF
OUR FUTURE RESULTS BECAUSE THEY FLUCTUATE SIGNIFICANTLY AND ARE DIFFICULT TO
FORECAST
Due to our limited combined operating history and the unpredictability of
our business, our revenue and operating results 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 operating results for that quarter. You
should not rely on quarter-to-quarter comparisons of our results of operations
as an indication of our future performance. Our future operating results may
fall below expectations of securities analysts or investors, which would likely
cause the market price of our common stock to decline significantly. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations".
WE MAY NOT BE ABLE TO EFFECTIVELY ATTRACT ADDITIONAL ENTERPRISE CUSTOMERS AND
PRESERVE RELATIONSHIPS WITH CURRENT ENTERPRISE CUSTOMERS, WHICH COULD
ADVERSELY AFFECT REVENUE
Historically, we focused our sales and marketing efforts on product sales to
individuals. We have recently, however, begun to focus our efforts on expanding
our enterprise customer base. To this end, we have invested extensively to
attract enterprise customers. In addition, we have gained a significant number
of enterprise customers through our acquisition of Cygnus. These enterprise
customers expect diverse and extensive service offerings. If we are unable to
continue to successfully expand and enhance our service offerings, we may not be
able to meet these customers' needs or attract new customers, and, consequently,
our revenue would suffer.
OUR FAILURE TO UPDATE AND MODERNIZE OUR INTERNAL SYSTEMS, PROCEDURES AND
CONTROLS MAY PREVENT THE IMPLEMENTATION OF OUR BUSINESS STRATEGIES IN A
RAPIDLY EVOLVING MARKET AND MAY RETARD OUR FUTURE GROWTH
During this fiscal year, from March 1, 1999 to December 31, 1999, we have
substantially increased the number of our employees and corporate offices. To
accommodate this growth, we have evaluated our financial and operational
systems, procedures and controls. Although we have revised and updated most of
them, if we continue our rapid growth, we may not be able to improve our
transaction processing and reporting systems and procedures, or expand and train
our expanding workforce quickly enough to maintain a competitive position in our
markets. In addition, failure to quickly replace obsolete systems, procedures
and controls could impede our management's decision-making abilities. This, in
turn, may impair our ability to pursue business opportunities and may hamper
future growth.
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WE INTEND TO RECORD THE EXPENSES OF THE ACQUISITION OF CYGNUS AS A CURRENT
CHARGE WHICH WILL NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS FOR THE PERIOD
IN WHICH THE MERGER CLOSES
Because our merger with Cygnus will be accounted for under the pooling of
interests method, we intend to record all of the expenses of the merger, which
are expected to be substantial, in the fiscal quarter ending February 29, 2000.
The reporting of expenses of the merger as a current charge will have a
significant adverse impact on the combined results of operations of Red Hat and
Cygnus and may cause the market price of our common stock to decline
significantly. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
BECAUSE OUR HEADQUARTERS ARE NOT LOCATED IN A MAJOR METROPOLITAN AREA, WE MAY
NOT BE ABLE TO RECRUIT AND RETAIN QUALIFIED PROFESSIONALS, WHO ARE CURRENTLY
IN HIGH DEMAND AND WHOSE NUMBERS ARE LIMITED
We compete intensely with other software companies nationwide to recruit and
hire from a limited pool of qualified personnel. Because our headquarters are
not located in a major metropolitan area, many qualified candidates may be
unwilling to relocate to North Carolina and work for Red Hat. If we cannot
attract and hire additional qualified sales and marketing, professional services
and software engineering and development personnel, our business results will
suffer.
WE MAY NOT BE ABLE TO GENERATE ENOUGH ADDITIONAL REVENUE FROM OUR PLANNED
INTERNATIONAL EXPANSION TO OFFSET THE COSTS ASSOCIATED WITH ESTABLISHING AND
MAINTAINING FOREIGN OPERATIONS
A key component of our growth strategy is to expand our presence in foreign
markets. We have recently established subsidiaries or offices in Ireland, the
UK, Germany, Japan and Australia, and are considering further expansion
worldwide. We may also enter other markets as opportunities arise. It will be
costly to establish international facilities and operations, promote our brand
internationally, and develop localized web sites and other systems. Revenue from
international activities may not offset the expense of establishing and
maintaining these foreign operations. In addition, because we have little
experience in marketing and distributing products or services for these markets,
we may not benefit from any first-to-market advantages.
OUR MANAGEMENT TEAM MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS
STRATEGIES BECAUSE IT HAS ONLY RECENTLY BEGUN TO WORK TOGETHER
Our business is highly dependent on the ability of our management to work
together effectively to meet the demands of our growth. Several members of our
senior management, including our Chief Executive Officer and President, Matthew
Szulik, our Chief Operating Officer, Tim Buckley and our Chief Marketing
Officer, Tom Butta, have been employed by us for a relatively short period of
time. In addition, the members of our management team who have been with us
since 1997 or earlier have had only limited experience managing a rapidly
growing company on either a public or private basis. The failure of our
management team to work together effectively could prevent efficient
decision-making by our executive team, affecting product development and sales
and marketing efforts, which would negatively impact our operating results.
WE COULD LOSE ROBERT YOUNG, MATTHEW SZULIK AND TIM BUCKLEY OR OTHER KEY
PERSONNEL, WHICH COULD PREVENT US FROM EXECUTING OUR BUSINESS STRATEGIES
Our future success depends on the continued services of a number of key
directors and officers, including our Chairman, Robert Young, our Chief
Executive Officer and President, Matthew Szulik, and our Chief Operating
Officer, Tim Buckley. The loss of the technical knowledge and industry expertise
of any of these people could seriously impede our success. Moreover, the loss of
one or a
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group of our key employees, particularly to a competitor, and any resulting loss
of customers could reduce our market share and diminish the Red Hat brand.
WE MAY LACK THE FINANCIAL AND OPERATIONAL RESOURCES NEEDED TO INCREASE OUR
MARKET SHARE AND COMPETE EFFECTIVELY WITH MICROSOFT, OTHER ESTABLISHED
OPERATING SYSTEMS DEVELOPERS, SOFTWARE DEVELOPMENT TOOLS DEVELOPERS AND OTHER
SERVICE AND SUPPORT PROVIDERS
In the market for operating systems, we face significant competition from
larger companies with greater financial resources and name recognition than we
have. These competitors, which offer hardware-independent multi-user operating
systems for Intel platforms and/or UNIX-based operating systems, include AT&T,
Compaq, Hewlett-Packard, IBM, Microsoft, Novell, Olivetti, The Santa Cruz
Operation, Sun Microsystems and Unisys. Some of these competitors currently, or
may in the future, produce and market open source operating systems.
With our acquisition of Cygnus, we now face competition in the market for
software development tools and operating systems for special-purpose computing.
Our competitors in this market, some of which have greater market share than we
do, include Wind River Systems, Integrated Systems Incorporated, Green Hills
Software, and the Metrowerks subsidiary of Motorola. Some of these companies
currently produce or use open source software as part of their product
offerings. We may not be able to compete effectively in this market if customers
choose proprietary solutions. If the demand for open source solutions in this
market expands, however, we could lose market share as existing competitors
reposition or new companies emerge to address the opportunity.
As we increase our services offerings, we may face competition from larger
and more capable companies that currently service and support other operating
systems, particularly 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. We may not be able
to compete successfully with these current or potential competitors. See
"Business--Competition".
WE MAY NOT BE ABLE TO MATCH THE PROMOTIONAL ACTIVITIES AND PRICING POLICIES
OFFERED BY OTHER SUPPLIERS OF LINUX-BASED AND OTHER OPEN SOURCE OPERATING
SYSTEMS, WHICH COULD RESULT IN A LOSS OF MARKET SHARE
In the new and rapidly-evolving market for Linux-based operating systems, we
face intense competition from a number of other suppliers of Linux-based
operating systems. We also face competition to a lesser extent from developers
of non-Linux-based open source operating systems such as BSD-based operating
systems. BSD-based operating systems such as FreeBSD, NetBSD and OpenBSD are
open source operating systems produced by communities of developers working
together via the internet, and which are published and distributed by Walnut
Creek CD-ROM, among others. We expect competition in broader open source
operating systems and the Linux-based operating systems markets to intensify. In
addition, companies like Sun Microsystems and Corel, which are more established
and have larger customer bases than we do, 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 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 existing competitors may emerge
and rapidly acquire significant market share. See "Business--Competition".
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IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC DISTRIBUTION AND OTHER
COLLABORATIVE RELATIONSHIPS WITH INDUSTRY-LEADING COMPANIES, WE MAY NOT BE
ABLE TO ATTRACT AND RETAIN 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. These relationships allow us to offer our
products and services to a much larger customer base than we would otherwise be
able to through our direct sales and marketing efforts. We may not be able to
maintain these relationships or replace them on attractive terms.
In addition, our existing strategic relationships do not, and any future
strategic relationships may not, afford us any exclusive marketing or
distribution rights. As a result, 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.
Moreover, we cannot guarantee that the companies with which we have strategic
relationships will market our products effectively or continue to devote the
resources necessary to provide us with effective sales, marketing and technical
support. See "Business--Sales, Marketing and Distribution".
ANY DISRUPTION IN OUR RELATIONSHIPS WITH OUR TWO LARGEST DISTRIBUTORS, ON WHOM
WE RELY FOR A SIGNIFICANT PERCENTAGE OF OUR PRODUCT REVENUE, COULD CAUSE OUR
REVENUE TO DECLINE
We are highly dependent on revenue from sales to our two largest
distributors, Frank Kasper & Associates and Ingram Micro, who together accounted
for a significant percent of our total revenue for the fiscal year ended
February 28, 1999 and for the nine months ended November 30, 1999. These
distributors are not obligated to purchase products from us and the loss of one
or both of these distributors, or a reduction in the amount of product sales
generated by them, could significantly reduce our product revenue. See
"Business--Sales, Marketing and Distribution".
WE MAY NOT BE ABLE TO MEET THE OPERATIONAL AND FINANCIAL CHALLENGES THAT WE WILL
ENCOUNTER AS OUR INTERNATIONAL OPERATIONS EXPAND
As we expand our international operations, we will face a number of
additional challenges associated with the conduct of business overseas. For
example:
- we may have difficulty managing and administering a globally-dispersed
business;
- fluctuations in exchange rates may negatively affect our operating
results;
- we may not be able to repatriate the earnings of our foreign operations;
- we have to comply with a wide variety of foreign laws with which we are
not familiar;
- we may not be able to adequately protect our trademarks overseas due to
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 could negatively impact the operating
results of our foreign operations;
- export controls could prevent us from shipping our products into and from
some markets;
- multiple and possibly overlapping tax structures could significantly
reduce the financial performance of our foreign operations;
- changes in import/export duties and quotas could affect the competitive
pricing of our products and services and reduce our market share in some
countries; and
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- economic or political instability in some international markets could
result in the forfeiture of some foreign assets and the loss of sums spent
developing and marketing those assets.
EXPANDING OUR SERVICES BUSINESS WILL BE COSTLY AND MAY NOT RESULT IN ANY BENEFIT
TO US
We have recently expanded our strategic focus to place additional emphasis
on technical support and maintenance, developer support, custom development,
consulting, training and education or hardware certification services, from
which we have historically derived an insignificant amount of revenue. We cannot
be certain that our customers will engage our professional services organization
to assist with any of these services. 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. The need for
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.
ATTEMPTS TO EXPAND BY MEANS OF BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES MAY
NOT BE SUCCESSFUL AND MAY HARM OUR OPERATIONAL EFFICIENCY, FINANCIAL
PERFORMANCE AND RELATIONSHIPS WITH EMPLOYEES AND THIRD PARTIES
We may continue to expand our operations or market presence by entering into
additional business combinations, investments, joint ventures or other strategic
alliances with hardware manufacturers, software vendors, internet companies,
open source software developers or other companies both in the United States and
internationally. Our ability to expand in this way may be limited due to the
many financial and operational risks accompanying these transactions. For
example:
- we may have difficulty assimilating the operations, technology and
personnel of the combined companies;
- our business may be disrupted by the allocation of resources to consummate
these transactions;
- we may have problems retaining key technical and managerial personnel from
acquired companies;
- we may experience one-time in-process research and development charges and
ongoing expenses associated with amortization of goodwill and other
purchased intangible assets;
- our stockholders will suffer dilution if we issue equity to fund these
transactions;
- acquired businesses may initially be unprofitable resulting in our
assumption of operating losses and increased expenses;
- our reputation may be harmed if the open source development community does
not approve of these transactions; and
- our relationships with existing employees, customers and business partners
may be weakened or terminated as a result of these transactions.
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RISKS RELATED TO OUR INTERNET STRATEGY
WE MAY FAIL TO PROMOTE AND ENHANCE OUR WEB SITE EFFECTIVELY, WHICH MAY PREVENT
US FROM ATTRACTING NEW VISITORS, ELECTRONIC COMMERCE PARTNERS OR ADVERTISERS
TO OUR WEB SITE AND FROM DELIVERING OUR SOLUTIONS THROUGH OUR WEB SITE
Enhancing the REDHAT.COM web site is critical to our ability to increase our
revenue. In order to attract and retain internet users, electronic commerce
partners and advertisers, 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 ability to provide
high quality content, features and functionality. If we fail to promote our web
site successfully or if visitors to our web site, electronic commerce partners
or advertisers do not perceive our services to be useful, current or of high
quality, our ability to generate revenue from our web site will be significantly
impaired.
VISITORS TO OUR WEB SITE COULD EXPERIENCE DELAYS AND DECREASED PERFORMANCE
DURING PERIODS OF HEAVY TRAFFIC, WHICH COULD RESULT IN DISSATISFACTION WITH
OUR WEB SITE AND DAMAGE TO OUR REPUTATION
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 users might choose another web site or other
methods to obtain Linux-based operating systems or Linux-related information.
BECAUSE THERE IS NO INDUSTRY STANDARD FOR THE MEASUREMENT OF THE EFFECTIVENESS
OF INTERNET ADVERTISING, ADVERTISERS MAY NOT INCREASE OR EVEN MAINTAIN THEIR
CURRENT LEVELS OF INTERNET ADVERTISING, WHICH WOULD PREVENT US FROM GENERATING
A SIGNIFICANT AMOUNT OF REVENUE FROM OUR WEB SITE
As we execute our internet strategy, we expect to derive an increasing
percentage of our total revenue from sponsorships and advertising on our web
site. We may not generate this revenue if advertisers do not maintain or
increase their current levels of internet advertising. As there is no industry
standard for the measurement of the effectiveness of internet advertising,
advertisers that currently advertise on the internet may reduce or eliminate
this form of advertising and advertisers that have traditionally relied upon
other advertising media may be reluctant to begin to advertise on the internet.
Moreover, widespread adoption of currently available software programs that
limit or prevent advertisements from being delivered to an internet user's
computer would negatively affect the commercial viability of internet
advertising and would further deter advertisers from increasing or maintaining
current levels of internet advertising. 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.
WE MAY NOT BE ABLE TO RESPOND QUICKLY TO NEW PRICING MODELS FOR ADVERTISING,
WHICH COULD PREVENT US FROM ATTRACTING QUALITY SPONSORS TO OUR WEB SITE
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. If we
cannot quickly and successfully respond to changes in pricing models for
internet advertising, or identify and adopt any industry standards that may
emerge, we will not be able to attract a sufficient number of quality sponsors
and our internet advertising strategy will fail.
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WE MAY BE UNABLE TO ADEQUATELY MEASURE THE DEMOGRAPHICS OF VISITORS TO OUR WEB
SITE, WHICH IS CRITICAL TO OUR ABILITY TO ATTRACT ADVERTISING REVENUE
We expect that it will be important to our advertisers that we accurately
measure the demographics of the visitors to our web site. While we have not
committed significant resources to the measurement of demographics to date, we
are currently implementing systems designed to record demographic data on our
web site's visitors. This implementation may be costly, and if not done
effectively, may not permit us to accurately measure the demographic
characteristics of our web site's visitors. Until these new systems are
functional, we will continue to rely on third parties to provide some of these
measurement services. If these parties were unable to provide these services, we
would need to obtain them from other providers, which might not be readily
available. 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.
OUR INTERNET STRATEGY WILL FAIL IF THE INFRASTRUCTURE OF THE INTERNET IS NOT
CONTINUALLY DEVELOPED AND MAINTAINED
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 the number of
users and amount of traffic. If 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 this
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 volume of traffic on our web site. In addition, the
internet could lose its viability due to increased governmental regulation and
delays in the development or adoption of new standards and protocols to handle
increased levels of activity. 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 internet
strategy will not succeed.
WE ARE VULNERABLE TO UNEXPECTED NETWORK INTERRUPTIONS CAUSED BY SYSTEM FAILURES,
WHICH MAY RESULT IN REDUCED VISITOR TRAFFIC ON OUR WEB SITE, DECREASED REVENUE
AND HARM TO OUR REPUTATION
Substantially all of our communications hardware and other hardware related
to our web site is located at our facilities, although we have back-up and
co-location hardware for our web site located at third-party facitilies. 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. We could lose revenue and suffer damage to our
reputation 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
a formal disaster recovery plan.
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RISKS RELATED TO LEGAL UNCERTAINTY
WE COULD BE PREVENTED FROM SELLING OR DEVELOPING OUR PRODUCTS IF THE GNU GENERAL
PUBLIC LICENSE AND SIMILAR LICENSES UNDER WHICH OUR PRODUCTS ARE DEVELOPED AND
LICENSED ARE NOT ENFORCEABLE
The Linux kernel, the Red Hat Linux operating system and our other open
source products have been developed and licensed under the GNU General Public
License and similar licenses. These licenses state that any program licensed
under them may be liberally copied, modified and distributed. We know of no
circumstance under which these licenses have been challenged or interpreted in
court. Accordingly, it is possible that a court would hold these licenses to be
unenforceable in the event that someone were to file a claim asserting
proprietary rights in a program developed and distributed under them. Any ruling
by a court that these licenses are 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.
OUR PRODUCTS MAY CONTAIN DEFECTS THAT MAY BE COSTLY TO CORRECT, DELAY MARKET
ACCEPTANCE OF OUR PRODUCTS 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
have to make significant expenditures of capital to eliminate them and yet 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, failures in our products could cause system failures for our
customers who 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. Our insurance policies may not adequately limit
our exposure to this type of claim. These claims, even if unsuccessful, could be
costly and time consuming to defend.
WE ARE VULNERABLE TO CLAIMS THAT OUR PRODUCTS INFRINGE THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS PARTICULARLY BECAUSE OUR PRODUCTS ARE COMPRISED OF MANY
DISTINCT SOFTWARE COMPONENTS DEVELOPED BY THOUSANDS OF INDEPENDENT PARTIES
We may be exposed 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 place a
significant strain on our financial resources and harm our reputation.
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OUR EFFORTS TO PROTECT OUR TRADEMARKS MAY NOT BE ADEQUATE TO PREVENT THIRD
PARTIES FROM MISAPPROPRIATING OUR INTELLECTUAL PROPERTY RIGHTS
Our most valuable intellectual property is our collection of trademarks. The
protective steps we have taken in the past have been, and may in the future
continue to be, inadequate to deter misappropriation of our trademark rights.
Although we do not believe that we have suffered any material harm from
misappropriation to date, 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, Europe and Australia and have other
trademark applications pending in the United States, Europe, Australia, Canada,
Europe, Japan and many other countries. 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 damage 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. See
"Business--Intellectual Property".
WE MAY BE SUED AS A RESULT OF INFORMATION PUBLISHED OR POSTED ON OR ACCESSIBLE
FROM OUR REDHAT.COM 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, and can be costly to defend. We may 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. We believe that the scope and amount of our
commercial and general liability insurance is appropriate, given our current
financial position. However, this insurance may not adequately protect us
against these types of claims. We have not been a party to any lawsuit of this
type to date.
OUR SOFTWARE PRODUCTS, AS WELL AS THOSE OF OUR CUSTOMERS AND SUPPLIERS, COULD
FAIL AS A RESULT OF THE YEAR 2000 PROBLEM
We have conducted a review of Red Hat Linux and our internal systems to
identify functions that need correction to be "Year 2000 compliant". We have
not, however, tested our other products and have not tested or sought
certifications from third parties bundling software applications and components
with Official Red Hat Linux. Although we have not experienced any failures to
date, any failure by our products or third-party software bundled with our
products to function in the Year 2000 may decrease the value of our products,
give rise to warranty claims and tarnish the Red Hat brand. 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, causing a decrease in our product
revenue. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance".
RISKS RELATED TO THIS OFFERING
CONCENTRATION OF OWNERSHIP WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE
MATTERS
Immediately following this offering, our directors, executive officers and
their affiliates will beneficially own approximately 48.8% 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.
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PROVISIONS OF OUR CHARTER AND BY-LAWS MAY DELAY OR PREVENT TRANSACTIONS THAT
MANY STOCKHOLDERS MAY FAVOR
Provisions of our certificate of incorporation and by-laws may discourage,
delay or prevent a merger or acquisition that stockholders may consider
favorable, including transactions in which you might otherwise receive a premium
for your shares. 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".
OUR STOCK PRICE HAS BEEN EXTREMELY VOLATILE AND YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES AT OR ABOVE THE OFFERING PRICE
The trading price of our common stock has been and is likely to continue to
be highly volatile and could be subject to wide fluctuations in response to
factors such as:
- actual or anticipated variations in quarterly operating results;
- new products or services offered by Red Hat or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the internet, Linux and software industries;
- changes in the economic performance and/or market valuations of other
internet, Linux and software industries;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- sales of common stock; and
- other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the Nasdaq National Market and
the market for internet-related and technology companies in particular, has
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of such companies. The trading
prices of many technology companies' stocks, including our common stock, are at
or near historical highs and these trading prices and multiples are
substantially above historical levels. These trading prices and multiples may
not be sustained. In addition, broad market and industry factors may materially
adversely affect the market price of our common stock, regardless of our actual
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been instituted against such companies. Such litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources, which would materially adversely affect our business, financial
condition and operating results.
A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK COULD BE SOLD INTO THE PUBLIC
MARKET SOON AFTER THIS OFFERING, WHICH COULD DEPRESS OUR STOCK PRICE
Sales of significant amounts of our common stock in the public market after
this offering or the perception that such sales will occur could materially
adversely affect the market price of the common stock or our future ability to
raise capital through an offering of our equity securities.
Upon the completion of this offering, we will have outstanding 151,683,572
shares of common stock, based on the number of shares of common stock
outstanding as of December 31, 1999 and assuming no exercise of the
underwriters' overallotment option, no exercise of outstanding options or
warrants and the consummation of the Cygnus and HKS acquisitions. Of these
shares, the 6,900,000 shares sold in our initial public offering in
August 1999, the 4,000,000 shares sold in this offering and approximately
3,409,039 of the shares issued to stockholders of Cygnus will be freely tradable
without restriction and 3,980,000 shares will be
19
<PAGE>
tradeable under Rule 144(k) under the Securities Act, unless any of 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 133,394,533 shares of common
stock are restricted securities in that they may be sold in the public market
only if registered or if they qualify for an exemption from registration under
the Securities Act or Rule 144, or Rule 701 as promulgated under the Securities
Act. In addition, as of December 31, 1999, assuming the consummation of the
Cygnus and HKS acquisitions had been completed at such time, an additional
20,055,259 shares of common stock may be issued upon exercise of warrants and
exercisable options. Of these shares, the 4,814,900 shares issuable upon
exercise of these warrants will be restricted securities. The 15,240,359 shares
issuable upon exercise of these options will be freely tradeable.
More than 120,000,000 shares, or thirty times the number of shares sold in
this offering, are subject to transfer restrictions imposed by the underwriters
in connection with our initial public offering, which restrictions expire on
February 7, 2000. Of these shares, approximately 75,129,906 shares held by our
executive officers, directors and certain other stockholders are subject to
additional transfer restrictions imposed by contracts executed in connection
with the acquisition of Cygnus and approximately 46,361,648 shares are subject
to transfer restrictions imposed by the underwriters in connection with this
offering. The contractual restrictions imposed in connection with this offering
will expire 90 days after the effective date of the registration statement of
which this prospectus is a part. The contractual restrictions imposed in
connection with the acquisition of Cygnus will lapse two days after the
announcement of financial results covering 30 days of combined operations of Red
Hat and Cygnus. Upon expiration of these contractual obligations, these shares
will become eligible for resale in the public market in reliance on Rule 144 at
various dates.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
INVESTMENT
Investors purchasing shares of common stock in this offering will incur
immediate and substantial dilution in the amount of $128.36 per share, based on
an estimated public offering price of $131.3125 per share. In the event that we
issue additional common stock in the future, including shares that may be issued
as consideration for acquisitions or upon exercise of warrants and options and
other rights granted under our employee benefit plans, purchasers of common
stock in this offering may experience further dilution.
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
20
<PAGE>
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 2,750,000 shares of common
stock in this offering to be approximately $343,359,000 at the estimated public
offering price of $131.3125 per share and after deducting the underwriting
discount and estimated offering expenses. If the underwriters' over-allotment
option is exercised in full, we estimate net proceeds will be $418,602,000.
We will not receive any proceeds from the sale of shares being sold by the
selling stockholders.
The principal purposes of this offering are to increase our capitalization
and financial flexibility.
We expect to use the net proceeds for working capital and other general
corporate purposes, including geographic expansion. A portion of the net
proceeds may be used for possible future acquisitions of businesses, products
and technologies that are complementary to our own, or for strategic alliances.
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. The net proceeds of this offering will be invested in
short-term, interest-bearing, investment-grade securities until allocated for
specific use.
PRICE RANGE OF OUR COMMON STOCK
Our common stock is listed on The Nasdaq National Market under the symbol
"RHAT". As of December 31, 1999, there were approximately 614 registered holders
of common stock. The following table sets forth, for the periods indicated, the
high and low split-adjusted sales prices per share as reported by Nasdaq.
The last reported sales price of our common stock on the Nasdaq National
Market on January 13, 2000 was $131.3125 per share.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDING FEBRUARY 29, 2000
Second Fiscal Quarter (commencing August 11,
1999)............................................. $ 42.625 $ 26.032
Third Fiscal Quarter................................ 105.000 37.594
Fourth Fiscal Quarter (through January 13, 2000).... 143.125 100.500
</TABLE>
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.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Red Hat as of November 30,
1999:
- on an actual basis which reflects the two-for-one stock split as if it had
been in effect on November 30, 1999;
- on a pro forma basis to reflect the acquisitions of Cygnus and HKS in
January 2000 and the conversion of all Cygnus preferred stock into Cygnus
common stock and subsequently our common stock in connection with the
Cygnus acquisition; and
- on an as adjusted basis to reflect the sale of the 2,750,000 shares of
common stock offered by us in this offering at the estimated public
offering price of $131.3125 per share after deducting the estimated
underwriting discount and estimated offering expenses.
The outstanding share information excludes 12,493,976 shares of common stock
issuable upon the exercise of stock options outstanding on November 30, 1999,
4,814,900 shares of common stock issuable upon the exercise of warrants
outstanding on November 30, 1999 and 13,662,200 shares reserved as of
November 30, 1999 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 the Red Hat financial statements. The pro forma and as adjusted
outstanding share information excludes 2,412,737 shares of common stock issuable
upon the exercise of options assumed by Red Hat in connection with our
acquisition of Cygnus.
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>
NOVEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations...................................... $ 203 $ 835 $ 835
Stockholders' equity (deficit):
Preferred stock, par value $.0001; 5,000,000 shares
authorized and no shares issued or outstanding (actual,
pro forma and pro forma as adjusted)................... -- -- --
Common stock, par value $.0001; 225,000,000 shares
authorized, 137,589,208 shares issued and outstanding
(actual); 225,000,000 shares authorized, 148,935,188
shares issued and outstanding (pro forma); 225,000,000
shares authorized, 151,685,188 shares issued and
outstanding (pro forma as adjusted).................... 14 15 15
Additional paid-in capital................................. 115,143 226,728 570,087
Shareholder receivable..................................... -- (2,828) (2,828)
Deferred compensation...................................... (7,116) (37,310) (37,310)
Accumulated deficit........................................ (9,294) (23,998) (23,998)
Accumulated other comprehensive loss....................... (212) (212) (212)
------- -------- --------
Total stockholders' equity (deficit)....................... 98,535 162,395 505,754
------- -------- --------
Total capitalization....................................... $98,738 $163,230 $506,589
======= ======== ========
</TABLE>
22
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The statement of operations data presented 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 audited financial statements included elsewhere in this prospectus. The
statement of operations data for the nine months ended November 30, 1998 and
November 30, 1999 and the balance sheet data as of November 30, 1999 have been
derived from our unaudited financial statements included elsewhere in this
prospectus. In our opinion, these unaudited interim financial statements include
all adjustments, consisting of normal recurring adjustments, necessary for the
fair presentation of financial position, results of operations and cash flows.
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 presented
below together with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes to those
statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED FEBRUARY 28, NOVEMBER 30,
---------------------------------------------------- ----------------------
1995 1996(2) 1997 1998 1999 1998 1999
-------- -------- -------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software and related products................... $ 482 $ 930 $2,603 $5,132 $10,013 $ 6,505 $ 8,559
Web............................................. -- -- -- -- -- -- 626
Services and other.............................. -- -- -- 24 777 608 3,410
------ ------ ------ ------ ------- ------- --------
Total revenue..................................... 482 930 2,603 5,156 10,790 7,113 12,596
------ ------ ------ ------ ------- ------- --------
Cost of revenue:
Software and related products................... 352 432 1,205 2,211 4,013 2,647 4,738
Web............................................. -- -- -- -- -- -- 627
Services and other.............................. -- -- -- -- 28 -- 2,049
------ ------ ------ ------ ------- ------- --------
Total cost of revenue............................. 352 432 1,205 2,211 4,041 2,647 7,414
------ ------ ------ ------ ------- ------- --------
Gross profit...................................... 130 498 1,398 2,945 6,749 4,466 5,182
------ ------ ------ ------ ------- ------- --------
Operating expense:
Sales and marketing............................. 133 241 491 1,252 3,083 1,645 7,609
Research and development........................ 80 250 325 903 2,220 1,422 4,158
General and administrative...................... 44 140 526 799 1,484 1,046 2,871
Stock-based compensation........................ -- -- -- -- -- -- 1,009
Mergers and acquisitions........................ -- -- -- -- -- -- 124
------ ------ ------ ------ ------- ------- --------
Total operating expenses.......................... 257 631 1,342 2,954 6,787 4,113 15,771
------ ------ ------ ------ ------- ------- --------
Income (loss) from operations..................... (127) (133) 56 (9) (38) 353 (10,589)
Other income (expense), net....................... (1) (22) (23) 22 162 62 1,813
------ ------ ------ ------ ------- ------- --------
Income (loss) before income taxes................. (128) (155) 33 13 124 415 (8,776)
Provision for income taxes........................ -- -- -- 5 215 215 --
------ ------ ------ ------ ------- ------- --------
Net income (loss)................................. (128) (155) 33 8 (91) 200 (8,776)
Accretion on mandatorily redeemable preferred
stock........................................... -- -- -- -- (39) (16) (83)
------ ------ ------ ------ ------- ------- --------
Net income (loss) available to common
stockholders.................................... $ (128) $ (155) $ 33 $ 8 $ (130) $ 184 $ (8,859)
====== ====== ====== ====== ======= ======= ========
Earnings (loss) per common share (1):
Basic........................................... $(0.00) $(0.00) $ 0.00 $ 0.00 $ (0.01) $ 0.00 $ (0.11)
Diluted......................................... 0.00 0.00 0.00 0.00 (0.01) 0.00 (0.11)
Weighted average common shares outstanding:
Basic........................................... 24,000 45,252 47,000 47,000 47,100 47,052 84,355
Diluted......................................... 24,000 45,252 54,465 69,157 47,100 89,502 84,355
Pro forma net income (loss) per common share (1):
Basic........................................... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.06
Diluted......................................... 0.00 0.00 0.00 0.00 0.00 0.00 0.06
Shares of common stock used in computing pro forma
net income (loss) per common share:
Basic........................................... 24,000 45,252 47,000 61,684 87,860 81,577 151,880
Diluted......................................... 24,000 45,252 54,465 69,157 87,860 89,502 151,880
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
---------------------------------------------------- --------------
1995 1996(2) 1997 1998 1999 1999
-------- -------- -------- -------- -------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ -- $ -- $ -- $1,293 $10,055 $11,997
Working capital (deficit)................................. (129) (160) (324) 1,541 11,100 15,195
Total assets.............................................. 106 245 670 3,131 15,276 110,298
Long term liabilities..................................... -- 30 145 65 420 203
Mandatorily redeemable preferred stock.................... -- -- -- 1,983 12,107 --
Total stockholders' equity (deficit)...................... (42) (79) (46) (38) (5) 98,535
</TABLE>
- ------------------------------
(1) See note 2 to notes to Red Hat's historical financial statements.
(2) Red Hat's fiscal year ended on February 29, 1996.
24
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined balance sheet as of November 30, 1999 and
the unaudited pro forma combined statements of operations for the year ended
February 28, 1999 and the nine months ended November 30, 1999 combine the pooled
balance sheet and supplemental pooled statements of operations of Red Hat and
the historical balance sheets and historical statements of operations of HKS as
if the acquisition of HKS, which occurred on January 7, 2000, had been completed
on November 30, 1999 for purposes of the presentation of the unaudited pro forma
combined balance sheet and as of March 1, 1998 and March 1, 1999 for purposes of
the presentation of the unaudited pro forma statements of operations.
We purchased all of the outstanding common stock of HKS on January 6, 2000
in exchange for the issuance of up to a maximum of 796,670 shares of our common
stock. The total purchase price of the HKS acquisition was approximately
$57.9 million and has been accounted for using the purchase method of
accounting. At closing, we issued 478,004 shares of our common stock with a fair
value of approximately $57.7 million to the stockholders of HKS. We committed to
issue up to 239,000 shares to certain HKS stockholders over a three-year period
contingent upon their continued employment with us. Up to an additional 79,666
shares will be issued upon the achievement by the HKS business of certain
performance targets which shares are not reflected in these pro forma combined
financial statements due to uncertainty of whether they will be issued. The
unaudited pro forma combined financial statements should be read together with
the supplemental pooled consolidated financial statements including the notes to
these statements of Red Hat and the historical financial statements of HKS and
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this prospectus.
The pro forma adjustments reflecting the consummation of the HKS acquisition
are based on the purchase method of accounting, available financial information
and certain estimates and assumptions set forth in the notes to the unaudited
pro forma combined financial data. The unaudited pro forma combined financial
statements reflects our best estimates; however, the final purchase price
allocation and the actual financial position and results of operations may
differ significantly from the pro forma amounts reflected herein due to various
factors, including, without limitation, access to additional financial
information and changes in value. The pro forma adjustments do not reflect any
operating efficiencies or cost savings that may be achievable with respect to
the combined businesses of Red Hat and HKS.
The unaudited pro forma financial statements as of and for the year ended
February 28, 1999 and as of and for the nine months ended November 30, 1999, do
not purport to represent what the actual financial condition or results of
operations of the combined businesses would have been if the acquisition of HKS
had occurred on the dates indicated in these pro forma combined financial
statements nor does this information purport to project our results for any
future period.
25
<PAGE>
PRO FORMA COMBINED CONSOLIDATED
BALANCE SHEET
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
RED HAT
SUPPLEMENTAL
POOLED HKS
NOVEMBER 30, SEPTEMBER 30, PRO FORMA
1999 1999 COMBINED ADJUSTMENTS PRO FORMA
-------------- -------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............... $ 21,389,709 $ 62,988 $ 21,452,697 $ 21,452,697
Short-term investments.................. 7,630,705 -- 7,630,705 7,630,705
Accounts receivable, net................ 8,993,322 -- 8,993,322 8,993,322
Inventory............................... 1,853,711 -- 1,853,711 1,853,711
Prepaids and other current assets....... 1,530,827 8,585 1,539,412 1,539,412
------------ -------- ------------ ------------ -------------
Total current assets.................. 41,398,274 71,573 41,469,847 41,469,847
Property and equipment, net............... 7,640,897 28,150 7,669,047 7,669,047
Other Assets.............................. 1,823,789 -- 1,823,789 1,823,789
Goodwill and other intangibles............ -- 575,721 575,721 $ (575,721)(c) 57,743,278
57,743,278 (a)
Investments............................... 76,633,119 -- 76,633,119 76,633,119
------------ -------- ------------ ------------ -------------
Total assets.......................... $127,496,079 $675,444 $128,171,523 $ 57,167,557 $ 185,339,080
============ ======== ============ ============ =============
Current liabilities
Accounts payable........................ $ 5,500,110 $108,322 $ 5,608,432 $ 5,608,432
Royalties Payable....................... 221,343 -- 221,343 221,343
Accrued Expenses........................ 5,640,631 48,131 5,688,762 5,688,762
Deferred revenue........................ 9,583,002 10,977 9,593,979 9,593,979
Short-term notes payable................ 504,968 -- 504,968 504,968
Current portion of capital lease
obligation............................ 490,072 1,267 491,339 491,339
------------ -------- ------------ ------------ -------------
Total current liabilities............. 21,940,126 168,697 22,108,823 22,108,823
Long-term liabilities
Long-term notes payable................. 583,333 -- 583,333 583,333
Long-term capital lease obligations..... 246,002 5,878 251,880 251,880
------------ -------- ------------ ------------ -------------
Total long-term liabilities........... 829,335 5,878 835,213 835,213
Mandatorily redeemable preferred stock.... 6,252,000 -- 6,252,000 6,252,000
Stockholders' equity:
Preferred stock......................... 12,746,234 -- 12,746,234 12,746,234
Common stock............................ 13,909 962,233 976,142 (962,233)(d) 13,957
48 (a)
Additional paid in capital.............. 121,224,328 -- 121,224,328 57,670,644 (a) 207,730,813
28,835,350 (b)
Shareholder receivable.................. (2,824,908) (2,757) (2,827,665) (2,827,665)
Deferred compensation................... (8,474,657) -- (8,474,657) (28,835,350)(b) (37,310,007)
Accumulated other comprehensive loss.... (212,289) -- (212,289) (212,289)
Accumulated deficit..................... (23,997,999) (458,607) (24,456,606) 458,607 (d) (23,997,999)
------------ -------- ------------ ------------ -------------
Total stockholders'
equity (deficit).................... 98,474,618 500,869 98,975,487 57,167,557 156,143,044
------------ -------- ------------ ------------ -------------
Total liabilities and stockholders'
equity (deficit).................... $127,496,079 $675,444 $128,171,523 $ 57,167,557 $ 185,339,080
============ ======== ============ ============ =============
</TABLE>
- ------------------------------
(a) Reflects the value of the 478,004 shares of our common stock issued to
acquire HKS on January 6, 2000, based on the average closing price of our
common stock of $120.65 for the three day period immediately preceding and
following the date of our announcement of the acquisition of HKS. The
following is a calculation of the goodwill and other intangibles recorded in
the HKS acquisition:
<TABLE>
<S> <C>
Market Value of Shares Issued $57,671,183
Net liabilities assumed 72,095
-----------
Goodwill and other intangibles $57,743,278
</TABLE>
(b) Reflects the value of the 239,000 shares of our common stock to be issued to
certain HKS stockholders contingent on their continued employment with us
for a period of three years after the date of the acquisition.
(c) Reflects the elimination of the existing goodwill on the books of HKS.
(d) Reflects the elimination of the stockholders' equity balances of HKS as this
acquisition is being accounted for using the purchase method of accounting.
26
<PAGE>
PRO FORMA COMBINED CONSOLIDATED
UNAUDITED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
RED HAT
SUPPLEMENTAL
POOLED HKS
YEAR ENDED YEAR ENDED
FEBRUARY 28, DECEMBER 31, PRO FORMA PRO FORMA
1999 1998 COMBINED ADJUSTMENTS COMBINED
-------------- ------------------- ------------ ------------ ------------
(AUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software and related products.... $11,140,391 $ 33,694 $ 11,174,085 $ 11,174,085
Web.............................. -- -- -- --
Services and other............... 21,891,291 2,443 21,893,734 21,893,734
-- --
----------- --------- ------------ ------------ ------------
Total revenue................ 33,031,682 36,137 33,067,819 33,067,819
----------- --------- ------------ ------------ ------------
Cost of Revenue
Software and related
products..................... 4,104,903 23,364 4,128,267 4,128,267
Web............................ -- -- -- --
Services and other............. 8,610,686 21,238 8,631,924 8,631,924
----------- --------- ------------ ------------ ------------
Total cost of revenue........ 12,715,589 44,602 12,760,191 12,760,191
----------- --------- ------------ ------------ ------------
Gross profit (loss).............. 20,316,093 (8,465) 20,307,628 20,307,628
----------- --------- ------------ ------------ ------------
Operating expense:
Sales and marketing............ 11,051,549 28,048 11,079,597 11,079,597
Research and development....... 8,477,818 114,155 8,591,973 8,591,973
General and administrative..... 5,664,561 143,992 5,808,553 5,808,553
Stock-based compensation....... 227,261 -- 227,261 $ 9,611,783 (b) 9,839,044
Mergers and acquisitions....... -- -- -- --
Purchased in process research
and development.............. -- -- -- --
Amortization of goodwill......... -- -- -- 19,247,759(a) 19,247,759
----------- --------- ------------ ------------ ------------
Total operating expenses..... 25,421,189 286,195 25,707,384 28,859,543 54,566,927
----------- --------- ------------ ------------ ------------
Income (loss) from operations.... (5,105,096) (294,660) (5,399,756) (28,859,543) (34,259,299)
----------- --------- ------------ ------------ ------------
Other income (expense)
Interest income................ 376,039 -- 376,039 376,039
Interest expense............... (336,672) -- (336,672) (336,672)
----------- --------- ------------ ------------ ------------
Other income (expense), net.. 39,367 -- 39,367 39,367
----------- --------- ------------ ------------ ------------
Income (loss) before income
taxes.......................... (5,065,729) (294,660) (5,360,389) (28,859,543) (34,219,932)
Provision for (benefit from)
income taxes................... 722,216 -- 722,216 722,216
----------- --------- ------------ ------------ ------------
Net loss......................... (5,787,945) (294,660) (6,082,605) (28,859,543) (34,942,148)
Accretion on mandatorily
redeemable preferred stock..... (39,356) -- (39,356) (39,356)
----------- --------- ------------ ------------ ------------
Net loss available to common
stockholders................... $(5,827,301) $(294,660) $ (6,121,961) $(28,859,543) $(34,981,504)
=========== ========= ============ ============ ============
Pro forma combined loss per share
basic and diluted.............. $ (0.39)
============
Pro forma combined weighted
average shares outstanding..... $ 88,865,644
============
</TABLE>
- ------------------------------
(a) Reflects amortization of goodwill and intangible assets recorded in the HKS
acquisition using a three year life assuming the acquisition occurred on
March 1, 1998.
(b) Reflects amortization of deferred compensation recorded as part of the HKS
acquisition over the required employment period of three years assuming the
acquisition occurred on March 1, 1998.
27
<PAGE>
PRO FORMA COMBINED CONSOLIDATED
UNAUDITED STATEMENT OF OPERATIONS DATA
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1999
<TABLE>
<CAPTION>
HKS
RED HAT PERIOD HKS
SUPPLEMENTAL FROM PERIOD FROM
POOLED JANUARY 1, MARCH 10,
NINE MONTHS 1999 1999
ENDED TO TO
NOVEMBER 30, MARCH 9, SEPTEMBER 30, PRO FORMA PRO FORMA
1999 1999 1999 COMBINED ADJUSTMENTS COMBINED
------------- ----------- -------------- ------------ ------------ ------------
(UNAUDITED) (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Software and related products......... $ 9,735,698 $ 11,714 $ 84,578 $ 9,831,990 $ 9,831,990
Web................................... 626,384 -- -- 626,384 626,384
Services and other.................... 19,249,449 5,858 4,669 19,259,976 19,259,976
------------ -------- --------- ------------ ------------ ------------
Total revenue..................... 29,611,531 17,572 89,247 29,718,350 29,718,350
------------ -------- --------- ------------ ------------ ------------
Cost of Revenue
Software and related products....... 4,843,580 8,872 25,354 4,877,806 4,877,806
Web................................. 626,756 -- 15,025 641,781 641,781
Services and other.................. 10,559,114 5,258 -- 10,564,372 10,564,372
------------ -------- --------- ------------ ------------ ------------
Total cost of revenue............. 16,029,450 14,130 40,379 16,083,959 16,083,959
------------ -------- --------- ------------ ------------ ------------
Gross profit.......................... 13,582,081 3,442 48,868 13,634,391 13,634,391
------------ -------- --------- ------------ ------------ ------------
Operating expense:
Sales and marketing................. 15,353,663 -- 23,362 15,377,025 15,377,025
Research and development............ 7,894,877 29,703 87,826 8,012,406 8,012,406
General and administrative.......... 5,628,311 43,462 395,755 6,067,528 6,067,528
Stock-based compensation............ 1,641,507 -- -- 1,641,507 7,208,838(b) 8,850,345
Mergers and acquisitions............ 123,887 -- -- 123,887 123,887
Purchased in process research and
development....................... -- -- -- --
Amortization of Goodwill.......... -- -- -- -- 14,435,819(a) 14,435,819
------------ -------- --------- ------------ ------------ ------------
Total operating expenses.......... 30,642,245 73,165 506,943 31,222,353 21,644,657 52,867,010
------------ -------- --------- ------------ ------------ ------------
Income (loss) from operations......... (17,060,164) (69,723) (458,075) (17,587,962) (21,644,657) (39,232,619)
------------ -------- --------- ------------ ------------ ------------
Other income (expense)
Interest income..................... 2,508,166 -- -- 2,508,166 2,508,166
Interest expense.................... (439,908) (105) (532) (440,545) (440,545)
------------ -------- --------- ------------ ------------ ------------
Other income (expense), net....... 2,068,258 (105) (532) 2,067,621 2,067,621
------------ -------- --------- ------------ ------------ ------------
Income (loss) before income taxes..... (14,991,906) (69,828) (458,607) (15,520,341) (20,470,499) (37,164,988)
Provision for (benefit from) income
taxes............................... 240,981 -- -- 240,981 240,981
------------ -------- --------- ------------ ------------ ------------
Net loss.............................. (15,232,887) (69,828) (458,607) (15,761,322) (20,470,499) (36,924,017)
Accretion on mandatorily redeemable
preferred stock..................... (82,473) -- -- (82,473) (82,473)
------------ -------- --------- ------------ ------------ ------------
Net loss available to common
stockholders........................ $(15,315,360) $(69,828) $(458,607) $(15,843,795) $(20,470,499) $(37,006,490)
============ ======== ========= ============ ============ ============
Pro forma combined loss per share--
basic and diluted $ (0.29)
============
Pro forma combined weighted average
shares outstanding.................. 127,525,798
============
</TABLE>
- ------------------------------
(a) Reflects amortization of goodwill and intangible assets recorded in the HKS
acquisition using a three year life assuming the acquisition occurred on
March 1, 1999.
(b) Reflects amortization of deferred compensation recorded as part of the HKS
acquisition over the required employment period of three years assuming the
acquisition occurred on March 1, 1999.
28
<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
We are a leading global developer and provider of open source software and
solutions, and have built a comprehensive web site dedicated to the open source
software community. We were incorporated in Connecticut in March 1993 as ACC
Corp., Inc. In September 1995, we changed our name to Red Hat Software, Inc. In
September 1998, we reincorporated in Delaware. In June 1999, we changed our name
to Red Hat, Inc. We have financed our activities to date through proceeds from
the sale of equity securities and cash flow from operations.
In January 2000, we acquired Cygnus in a transaction accounted for as a
pooling of interests. As a result of this acquisition, our historical financial
statements will be restated, commencing with our first publication of financial
statements covering a period in which the acquisition was consummated (the
period ending February 29, 2000), to include the results of operations and
accounts of Cygnus for all periods presented. In January 2000, we acquired HKS
in a transaction accounted for in accordance with the purchase method of
accounting. As a result, our results of operations will include the results of
operations of HKS from the date of the acquisition. The discussion and analysis
which follows covers both:
- Red Hat's historical financial statements, without giving effect to the
pooling of interests with Cygnus, as those financial statements remain our
financial statements until we report results of operations for the period
ending February 29, 2000; and
- Red Hat's pooled financial statements, which give effect to the
acquisition of Cygnus, and which will become Red Hat's historical
financial statements at the time we report results of operations for the
period ending February 29, 2000.
Sales of Official Red Hat Linux have historically represented our principal
source of revenue. 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 original equipment manufacturers which license our software directly.
We recognize revenue from software product sales to distributors and
original equipment manufacturers for which no technical support is provided at
the time our products are shipped, net of a reserve for estimated sales returns.
This reserve is recognized based on our historical experience with these
distributors' rates of sell-through to the end user. Revenue from the sale of
software products to individual users and enterprises for which no technical
support is provided 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 and Red Hat Secure Web Server with 30 days of free
telephone technical support, 90 days of free e-mail technical support and
180 days of subscription services. In accordance with the provisions of
Statement of Opinion No. 97-2 ``Software Revenue Recognition", we are
recognizing all of the revenue from the sale of Versions 6.0 and 6.1 of Official
Red Hat Linux
29
<PAGE>
ratably over the period that the technical support and subscription services are
provided in proportion to the costs incurred to provide such technical support
and subscription services as compared to estimated total costs to be incurred.
Cygnus recognized revenue on the sale of its software products at the date
such products were shipped to the distributor or customer net of a reserve for
estimated sales returns. This reserve was recognized based on each individual
distributor's right of return under the distribution agreement and Cygnus's
historical experience of sales returns of its software products. Cygnus used the
same method of revenue recognition for product sales for which no technical
support is provided as we do, and we intend to continue to use this method for
these sales.
We have recently added new features to our REDHAT.COM web site and intend to
develop additional features which we believe will result in an increase in both
the number of visitors who access our web site and in revenue generated through
our web site, including through
- the sale of our own software and solutions;
- the sale of third-party products;
- the sale of products co-branded or bundled with third-party products; and
- the sale of advertising.
Web revenue is currently 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.
If we do not meet minimum guaranteed impressions requirements, we defer
recognition of the corresponding revenue until the minimum number of guaranteed
impressions is 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.
Prior to March 1999, we provided only minimal service offerings to our
customers. In March 1999, we developed and expanded our service offerings to
include comprehensive technical support and maintenance, developer support,
custom development, consulting, training and education and hardware
certification services. Although these services generated only an insignificant
amount of revenue through February 28, 1999, we earned $3.4 million in service
revenue during the nine months ended November 30, 1999. We believe that the
expansion of our service offerings will cause our services revenue to continue
to increase significantly as a percentage of total revenue in the fiscal year
ending February 29, 2000. Revenue from technical support and maintenance
arrangements is deferred and recognized ratably over the term of the related
agreement, which is typically one year. Revenue from custom development,
consulting, training and education services, developer support and hardware
certification services, is recognized as the services are provided.
Cygnus provides custom development services for integrated device
manufacturers and also provides engineering services and developer support
services for microprocessor and product manufacturing companies. Cygnus
recognized revenue on its service arrangements on the percentage of completion
method over the term of the related development agreement. These custom
development arrangements generally have a term of three to six months. Support
and maintenance arrangements typically have terms of three months to two years.
Revenue from ongoing technical support and maintenance services was recognized
ratably over the term of the related technical support and maintenance
agreement. We intend to
30
<PAGE>
continue to use this method of revenue recognition for these services.
Our software products are sold worldwide. For the fiscal year ended
February 28, 1999, all of our revenue came from North America, except for less
than $50,000 in royalties received from international sources. In August 1999,
we established international operations, and we expect total revenue derived
from sales outside of North America to increase in the fiscal year ending
February 29, 2000 as we expand these operations.
We have historically experienced fluctuations in our results of operations
related to the release of new versions of Red Hat Linux. We believe our
customers' anticipation of the release of these new versions has historically
resulted in, and will continue to result in, a decline in sales for several
months prior to the release and an increase in sales immediately following the
release. Prior to our release of Version 6.0 of Official Red Hat Linux in
May 1999 and of Version 6.1 of Official Red Hat Linux in October 1999, software
product sales decreased, but after each release we 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
initiatives.
Sales of software products to distributors comprised $0.7 million or 26.1%
of total historical software and related products revenue in the fiscal year
ended February 28, 1997, $0.9 million or 17.3% of total historical software and
related products revenue in the fiscal year ended February 28, 1998,
$5.9 million or 58.2% of total historical software and related products revenue
in the fiscal year ended February 28, 1999 and $6.3 million or 73.7% of total
historical software and related products revenue for the nine months ended
November 30, 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
historical software and related products revenue in the fiscal year ended
February 28, 1997, $3.0 million or 58.8% of total historical software and
related products revenue in the fiscal year ended February 28, 1998,
$3.2 million or 29.6% of total historical software and related products revenue
in the fiscal year ended February 28, 1999 and $1.8 million or 20.5% of total
historical software and related products revenue for the nine months ended
November 30, 1999.
We plan to expand sales through distributors as well as direct sales through
our web site. We continue to expand our original equipment manufacturer
relationships and expect related revenue for the fiscal year ending
February 29, 2000 to increase as a percentage of total revenue as compared to
the fiscal year ended February 28, 1999.
Sales to Frank Kasper & Associates, one of our primary distributors,
constituted approximately 16.0% of total historical revenue in the fiscal year
ended February 28, 1997, and 26.0% of total historical revenue in the fiscal
year ended February 28, 1998. Sales to Frank Kasper & Associates and to Ingram
Micro, our two largest distributors in fiscal 1999, comprised 54.0% of total
historical revenue in the fiscal year ended February 28, 1999 and 62.0% of total
historical revenue in the nine months ended November 30, 1999. We provide our
distributors an advertising allowance on a quarterly basis, determined upon our
approval of the distributors' advertising plans. Distributors must then submit
to us a detailed list of expenses incurred by us. We pay all approved expenses
and recognize these costs as a component of sales and marketing expense as such
expenses are incurred.
We employed 233 people at December 31, 1999, compared to 103 at March 1,
1999. This increase in headcount resulted primarily from:
- an increase in services personnel associated with our efforts to develop
our services organization;
- an increase in research and development personnel;
- the commencement of international operations; and
31
<PAGE>
- an increase in administrative personnel as we recruited our management
team.
In addition, our acquisitions of Cygnus and HKS in January 2000 added
approximately 185 employees, resulting in total headcount in excess of
400 employees. 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 either expand our
existing offices or lease additional office space at a separate location within
the next 12 months. We believe that this expansion will result in an increase in
total facilities costs.
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth the historical results of operations for Red
Hat expressed as a percentage of total revenue. These historical results are not
necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED FEBRUARY 28, NOVEMBER 30,
------------------------------ -----------------------
1997 1998 1999 1998 1999
-------- -------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software and related products.......................... 100.0% 99.5% 92.8% 91.5% 68.0%
Web.................................................... 0.0 0.0 0.0 0.0 5.0
Services and other..................................... 0.0 0.5 7.2 8.5 27.0
----- ----- ----- ----- -----
Total revenue............................................ 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenue:
Software and related products.......................... 46.3 42.9 37.2 37.2 37.6
Web.................................................... 0.0 0.0 0.0 0.0 5.0
Services and other..................................... 0.0 0.0 0.2 0.0 16.3
----- ----- ----- ----- -----
Total cost of revenue.................................... 46.3 42.9 37.4 37.2 58.9
----- ----- ----- ----- -----
Gross profit............................................. 53.7 57.1 62.6 62.8 41.1
----- ----- ----- ----- -----
Operating expense:
Sales and marketing.................................... 18.8 24.3 28.6 23.1 60.4
Research and development............................... 12.5 17.5 20.6 20.0 33.0
General and administrative............................. 20.2 15.5 13.7 14.7 22.8
Stock-based compensation............................... 0.0 0.0 0.0 0.0 8.0
Mergers and acquisitions............................... 0.0 0.0 0.0 0.0 1.0
----- ----- ----- ----- -----
Total operating expense.................................. 51.5 57.3 62.9 57.8 125.2
----- ----- ----- ----- -----
Income (loss) from operations............................ 2.2 (0.2) (0.3) 5.0 (84.1)
Other income (expense), net.............................. (0.9) 0.4 1.5 0.8 14.4
----- ----- ----- ----- -----
Income (loss) before income taxes........................ 1.3 0.2 1.2 5.8 (69.7)
Provision for income taxes............................... 0.0 0.1 2.0 3.0 0.0
----- ----- ----- ----- -----
Net income (loss)........................................ 1.3 0.1 (0.8) 2.8 (69.7)
Accretion on mandatorily redeemable preferred stock...... 0.0 0.0 (0.4) (0.2) (0.7)
----- ----- ----- ----- -----
Net income (loss) available to common stockholders....... 1.3% 0.1% (1.2)% 2.6% (70.4)%
===== ===== ===== ===== =====
</TABLE>
32
<PAGE>
NINE MONTHS ENDED NOVEMBER 30, 1999 AND 1998
TOTAL REVENUE
Total revenue increased to $12.6 million in the nine months ended
November 30, 1999 from $7.1 million in the nine months ended November 30, 1998.
The majority of our revenue in the nine months ended November 30, 1999 came from
customers located in the United States. However, in August 1999, we established
international operations that began to generate revenue in the fiscal quarter
ended November 30, 1999. Our international revenue totalled $1.0 million in the
nine months ended November 30, 1999 as compared to less than $50,000 in the nine
months ended November 30, 1998, which consisted entirely of royalty revenue. We
expect that our revenue from international sources will increase in the future.
SOFTWARE AND RELATED PRODUCTS REVENUE
Software and related products revenue is comprised primarily of revenue from
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 to $8.6 million in the nine months ended November 30, 1999
from $6.5 million in the nine months ended November 30, 1998. In addition, we
generated software and related products revenue of $0.5 million from our
international operations in the nine months ended November 30, 1999 as compared
to zero in the nine months ended November 30, 1998. The increase in software and
related products revenue is primarily due to the release of Version 6.0 of
Official Red Hat Linux in May 1999 and the release of Version 6.1 of Official
Red Hat Linux in October 1999. As a percentage of total revenue, software and
related products revenue decreased to 68.0% in the nine months ended
November 30, 1999 from 91.5% in the nine months ended November 30, 1998. This
decrease was due to the increase in web revenue and services and other revenue.
Software and related products revenue was comprised almost entirely of revenue
from sale of software products in the nine months ended November 30, 1999.
WEB REVENUE
Web revenue is comprised primarily of fees generated from short-term
contracts with advertisers to display advertisements on our web site. Web
revenue increased to $0.6 million in the nine months ended November 30, 1999
from zero in the nine months ended November 30, 1998. As a percentage of total
revenue, web revenue increased to 5.0% in the nine months ended November 30,
1999. These increases were due to the commencement of our web initiatives during
the fiscal year ending February 29, 2000. We expect web revenue to increase as a
percentage of revenue in the future as advertising revenue and revenue from the
sale of third-party products and products co-branded or bundled with third-party
products continue to grow.
SERVICES AND OTHER REVENUE
Services and other revenue is primarily comprised of technical support and
maintenance fees, custom development fees, training and education fees and
royalties received from licensing our trademarks. Services and other revenue
increased to $3.4 million in the nine months ended November 30, 1999 from $0.6
in the nine months ended November 30, 1998. As a percentage of total revenue,
services and other revenue increased to 27.0% in the nine months ended
November 30, 1999 from 8.5% in the nine months ended November 30, 1998. These
increases resulted primarily from an increase in training and education revenue
earned in the nine months ended November 30, 1999 as we expanded our course
offerings, and, to a lesser extent, from an increase in technical support and
maintenance revenue as we began to sell technical support and maintenance
services during the second quarter of the fiscal year ending February 29, 2000.
In addition, we generated services and other revenue of $0.5 million from our
international operations in the nine months ended November 30, 1999 as compared
to
33
<PAGE>
zero in the nine months ended November 30, 1998.
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 and
packaging, fulfillment and shipping. Also included are royalties we paid for
licensing third-party applications included in our software products. Cost of
software and related products increased to $4.7 million in the nine months ended
November 30, 1999 from $2.6 million in the nine months ended November 30, 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
increased to 55.4% in the nine months ended November 30, 1999 from 40.7% in the
nine months ended November 30, 1998. This increase was due to the offering of
technical support and subscription services with the sale of Version 6.0 of
Offical Red Hat Linux in May 1999 and Version 6.1 of Official Red Hat Linux in
October 1999. This increase was also due to higher costs associated with the
initiation of product sales by our international operations in the fiscal
quarter ended November 30, 1999. We expect the cost of software and related
products revenue of our international operations to decrease as a percentage of
revenue in the future as sales volumes increase.
WEB COSTS
Web costs include the costs of developing advertising and supporting our web
site. Web costs increased to $0.6 million in the nine months ended November 30,
1999 from zero in the nine months ended November 30, 1998. As a percentage of
web revenue, web costs were 100.1% in the nine months ended November 30, 1999.
These increases were due to the development of our web advertising group and our
offering of web advertising for the first time during the fiscal year ending
February 29, 2000. We expect web costs to decrease as a percentage of web
revenue as this business becomes more established.
COST OF SERVICES AND OTHER
Cost of services and other was primarily comprised of salaries and other
related costs incurred for technical support and maintenance, custom
development, training and education and hardware certification services. We
incur no direct costs related to royalties received from the licensing of our
trademarks to third parties. Cost of services and other increased to
$2.0 million in the nine months ended November 30, 1999 from zero in the nine
months ended November 30, 1998. As a percentage of services and other revenue,
cost of services and other was 60.1% in the nine months ended November 30, 1999.
These increases were due to the addition of personnel to provide training and
education and hardware certification courses and the development of our services
organization.
We expect cost of services and other to continue to increase as we further
expand our service offerings and develop 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 to $5.2 million in the nine months ended
November 30, 1999 from $4.5 million in the nine months ended November 30, 1998.
As a percentage of total revenue, gross profit decreased to 41.1% in the nine
months ended November 30, 1999 from 62.8% in the nine months ended November 30,
1998. The increase in gross profit was due to the increased sales of our
34
<PAGE>
software products, which were primarily the result of the release of Version 6.0
of Official Red Hat Linux in May 1999 and Version 6.1 of Official Red Hat Linux
in October 1999. The decrease in gross profit as a percentage of revenue was the
result of the increase in costs related to the expansion, development and
marketing of our service offerings during the fiscal year ending February 29,
2000 and higher costs associated with our international operations which were
established in August 1999.
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 and marketing materials and tradeshows. Sales and marketing expense
increased to $7.6 million in the nine months ended November 30, 1999 from
$1.6 million in the nine months ended November 30, 1998. As a percentage of
total revenue, sales and marketing expense increased to 60.4% in the nine months
ended November 30, 1999 from 23.1% in the nine months ended November 30, 1998.
These increases were due to higher advertising and promotional costs incurred to
promote the release of Versions 6.0 and 6.1 of Official Red Hat Linux during the
nine months ended November 30, 1999 and to promote REDHAT.COM and our service
offerings. In addition, we incurred a significant amount of sales and marketing
expense in the nine months ended November 30, 1999 related to our international
operations, which were established in August 1999. These increases were also due
to higher costs resulting from joint marketing arrangements with distributors.
We expect sales and marketing expense to continue to increase in dollar amount
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 development of our software products and web site. Research and
development expense increased to $4.2 million in the nine months ended
November 30, 1999 from $1.4 million in the nine months ended November 30, 1998.
As a percentage of total revenue, research and development expense increased to
33.0% in the nine months ended November 30, 1999 from 20.0% in the nine months
ended November 30, 1998. These increases resulted from increased spending
related to the development of our web initiatives and costs incurred to complete
the development of Versions 6.0 and 6.1 of Official Red Hat Linux. We expect
research and development expenses to continue to increase in dollar amount in
the future as we continue to develop our web site and create additional features
for 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 systems expenses. General and
administrative expense increased to $2.9 million in the nine months ended
November 30, 1999 from $1.0 million in the nine months ended November 30, 1998.
As a percentage of total revenue, general and administrative expense increased
to 22.8% in the nine months ended November 30, 1999 from 14.7% in the nine
months ended November 30, 1998. These increases resulted from:
- an increase in payroll costs due to an increase in the number of general
and administrative personnel to support the growth of our business;
- an increase in legal and accounting costs due to our initial public
offering and our geographic expansion; and
- an increase in insurance costs as a result of our becoming a public
company.
35
<PAGE>
We expect general and administrative expense to continue to increase in
dollar amount as we add administrative personnel to support our business
expansion.
STOCK-BASED COMPENSATION
Stock-based compensation expense consists of the amortization of deferred
compensation related to stock options granted to employees, primarily new
members of our management team that were recruited immediately prior to our
initial public offering in August 1999, with an exercise price below the fair
market value of our common stock at the date of grant. Deferred compensation is
amortized over the vesting period of the related stock options, which is
generally four years. Stock-based compensation expense increased to
$1.0 million in the nine months ended November 30, 1999 from zero in the nine
months ended November 30, 1998. As a percentage of total revenue, stock based
compensation expense increased to 8.0% in the nine months ended November 30,
1999. Stock-based compensation is expected to be approximately $2.3 million on
an annual basis through 2003.
MERGERS AND ACQUISITIONS
Mergers and acquistions expense consists of costs incurred in connection
with investigating potential acquisitions and acquisitions accounted for using
the pooling of interests method of accounting. Mergers and acquisitions expense
increased to $0.1 million in the nine months ended November 30, 1999 from zero
in the nine months ended November 30, 1998. As a percentage of total revenue,
mergers and acquisitions expense increased to 1.0% in the nine months ended
November 30, 1999. At November 30, 1999, we deferred $0.2 million in costs
related to the acquisition of Cygnus which will be expensed in the fiscal
quarter ending February 29, 2000.
OTHER INCOME (EXPENSE), NET
Other income (expense) consists of interest income earned on cash deposited
in money market accounts and other short-term investments, net of interest
expense incurred on capital leases. Other income (expense), net increased to
income of $1.8 million in the nine months ended November 30, 1999 from income of
$62,000 in the nine months ended November 30, 1998. As a percentage of total
revenue, other income (expense), net increased to 14.4% in the nine months ended
November 30, 1999 from 0.8% in the nine months ended November 30, 1998. These
increases resulted from higher average cash and investment balances in the nine
months ended November 30, 1999 as compared to the nine months ended
November 30, 1998 due to the receipt of proceeds from the sale of preferred
stock in September 1998 and in February, March and April 1999, and proceeds from
the sale of our common stock in our initial public offering in August 1999.
PROVISION FOR INCOME TAXES
Provision for income taxes decreased to zero for the nine months ended
November 30, 1999 from $0.2 million in the nine months ended November 30, 1998.
This decrease resulted from the decrease in our taxable income in the nine
months ended November 30, 1999 as compared to the nine months ended
November 30, 1998.
ACCRETION OF MANDATORILY REDEEMABLE PREFERRED STOCK
The increase in the accretion from mandatorily redeemable preferred stock to
$82,000 in the nine months ended November 30, 1999 from $16,000 for the nine
months ended November 30, 1998 was due to the fact that prior to September 1998
we had no outstanding mandatorily redeemable preferred stock. Accretion of
mandatorily redeemable preferred stock ceased with the completion of our initial
public offering in August 1999 when all outstanding mandatorily redeemable
preferred stock converted to common stock.
36
<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 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. 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 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 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
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 education and hardware certification program in
February 1999.
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.
COST OF REVENUE
COST OF SOFTWARE AND RELATED PRODUCTS
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 for the fiscal year ended February 28, 1999 was primarily
comprised of salaries and other related costs incurred for our training and
education and hardware certification services which commenced in February 1999.
Cost of services and other
37
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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.
These increases were due to greater costs associated with our preparation to
expand our service offerings through the hiring of additional personnel.
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 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. Costs associated with joint marketing arrangements with
distributors totaled $0.1 million in the fiscal year ended February 28, 1999, as
compared to zero 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 were due to greater costs attributable to cooperative marketing
arrangements with distributors, which were approximately $0.1 million in the
fiscal year ended February 28, 1999 and were zero in the fiscal year ended
February 28, 1998, and extensive public relations activities in the fiscal year
ended February 28, 1999 to promote our brand.
RESEARCH AND DEVELOPMENT
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.
GENERAL AND ADMINISTRATIVE
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. This increase resulted from:
- an increase in payroll costs of $0.3 million due to the increase in the
number of general and administrative personnel to 14 at February 28, 1999
from 5 at February 28, 1998;
- an increase in legal and accounting costs of $0.4 million in the fiscal
year ended February 28, 1999 incurred in connection with establishment of
new business activities; and
- to a lesser extent, due to approximately $60,000 in costs incurred
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
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<PAGE>
primarily to revenue increasing at a higher rate than general and administrative
expense.
OTHER INCOME (EXPENSE), NET
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 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 February 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.
Our effective tax rate increased to 173.6% of income before income taxes for the
fiscal year ended February 28, 1999 from 38.7% of income for the fiscal year
ended February 28, 1998. These increases resulted from the growth in our taxable
income and an increase in the valuation allowance on 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. Accretion of mandatorily
redeemable preferred stock ceased with the completion of our initial public
offering in August 1999 when all outstanding mandatorily redeemable preferred
stock converted to common stock.
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.
39
<PAGE>
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 the growth in the number of sales and marketing
personnel, increased costs attributable to cooperative marketing arrangements
with distributors, and higher advertising and tradeshows costs.
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.
40
<PAGE>
POOLED RESULTS OF OPERATIONS
The following table sets forth the pooled results of operations for Red Hat
and Cygnus expressed as a percentage of total revenue as if they had been
combined since March 1, 1997. These pooled results are not necessarily
indicative of results to be expected for any future period. This table should be
read together with the pooled consolidated financial statements appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED FEBRUARY 28, ENDED NOVEMBER 30,
--------------------------- -------------------------
1998 1999 1998 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Software and related products............................ 22.7% 33.7% 31.7% 32.9%
Web...................................................... 0.0 0.0 0.0 2.1
Services and other....................................... 77.3 66.3 68.3 65.0
----- ----- ----- -----
Total revenue.............................................. 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenue:
Software and related products............................ 9.8 12.4 11.5 16.4
Web...................................................... 0.0 0.0 0.0 2.1
Services and other....................................... 27.5 26.1 26.5 35.6
----- ----- ----- -----
Total cost of revenue...................................... 37.3 38.5 38.0 54.1
----- ----- ----- -----
Gross profit............................................... 62.7 61.5 62.0 45.9
Operating expense:
Sales and marketing...................................... 39.8 33.5 31.9 51.9
Research and development................................. 20.4 25.7 27.1 26.7
General and administrative............................... 16.2 17.1 19.3 19.0
Stock-based compensation................................. 0.0 0.7 0.7 5.5
Mergers and acquisitions................................. 0.0 0.0 0.0 0.4
----- ----- ----- -----
Total operating expense.................................... 76.5 77.0 79.0 103.5
----- ----- ----- -----
Income (loss) from operations.............................. (13.8) (15.5) (16.8) (57.6)
Other income (expense), net................................ 1.6 0.1 0.2 7.0
----- ----- ----- -----
Income (loss) before income taxes.......................... (12.1) (15.3) (16.8) (50.6)
Provision for income taxes................................. 1.0 2.2 2.5 0.8
----- ----- ----- -----
Net income (loss).......................................... (13.1) (17.5) (19.3) (51.4)
Accretion on mandatorily redeemable preferred stock........ 0.0 (0.1) (0.1) (0.3)
----- ----- ----- -----
Net income (loss) available to common stockholders......... (13.1)% (17.6)% (19.4)% (51.7)%
===== ===== ===== =====
</TABLE>
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NINE MONTHS ENDED NOVEMBER 30, 1999 AND 1998
TOTAL REVENUE
Total revenue increased 25.5% to $29.6 million in the nine months ended
November 30, 1999 from $23.6 million in the nine months ended November 30, 1998.
Revenue from international operations totaled $13.1 million during the nine
months ended November 30, 1999. Prior to October 1999, our international revenue
was limited to revenue generated from custom development services performed for
international customers.
SOFTWARE AND RELATED PRODUCTS REVENUE
Software and related products revenue is comprised primarily of revenue from
sales of Official Red Hat Linux and related software products, sales of
publications about Linux-based operating systems and sales of software
development tools for use. Software and related products revenue increased 30.4%
to $9.7 million in the nine months ended November 30, 1999 from $7.5 million in
the nine months ended November 30, 1998. As a percentage of total revenue,
software and related products revenue increased to 32.9% in the nine months
ended November 30, 1999 from 31.7% in the nine months ended November 30, 1998.
These increases were primarily due to the release of Version 6.0 of Official Red
Hat Linux in May 1999, the release of Version 6.1 of Official Red Hat Linux in
October 1999 and, to a lesser extent, to the initial release of our software
development tools in July 1999. In addition, we generated $0.5 million in
revenue from sales of Official Red Hat Linux and related products by our
international operations in the nine months ended November 30, 1999 as compared
to zero in the nine months ended November 30, 1998. Software and related
products revenue was comprised almost entirely of revenue from sales of software
products in the nine months ended November 30, 1999.
WEB REVENUE
Web revenue is comprised primarily of fees generated from short-term
contracts with advertisers to display advertisements on our web site. Web
revenue increased to $0.6 million in the nine months ended November 30, 1999
from zero in the nine months ended November 30, 1998. As a percentage of total
revenue, web revenue increased to 2.1% in the nine months ended November 30,
1999. These increases were due to the commencement of our web initiatives during
the fiscal year ending February 29, 2000. We expect web revenue to increase as a
percentage of revenue in the future as advertising revenue and revenue from the
sale of third-party products and products co-branded or bundled with third-party
products continues to grow.
SERVICES AND OTHER REVENUE
Services and other revenue is primarily comprised of custom development
fees, technical support and maintenance fees, training and education fees and
royalties received from licensing our trademarks. Services and other revenue
increased to $19.3 million in the nine months ended November 30, 1999 from $16.1
in the nine months ended November 30, 1998. The increase in services and other
revenue resulted primarily from an increase in custom development revenue due to
an increase in the number, size and scope of custom development contracts, an
increase in training and education revenue as we began offering these services
in the first quarter of the fiscal year ended February 28, 1999 and an increase
in technical support and maintenance revenue as we began to sell technical
support and maintenance services for Official Red Hat Linux and related software
products in the nine months ended November 30, 1999. The increase in training
and education revenue was a result of the expansion of our course offerings in
the nine months ended November 30, 1999. As a percentage of total revenue,
services and other revenue decreased to 65.0% in the nine months ended
November 30, 1999 from 68.3% in the nine months ended November 30, 1998. The
42
<PAGE>
decrease in services and other revenue as a percentage of total revenue is
primarily the result of the increase in software and related products revenue.
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 and
packaging, fulfillment and shipping. Also included are royalties we paid for
licensing third-party applications included in our software products. Cost of
software and related products increased to $4.8 million in the nine months ended
November 30, 1999 from $2.7 million in the nine months ended November 30, 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
increased to 49.7% in the nine months ended November 30, 1999 from 36.5% in the
nine months ended November 30, 1998. This increase was due to the offering of
technical support and subscription services with the sale of Version 6.0 of
Official Red Hat Linux released in May 1999 and Version 6.1 of Official Red Hat
Linux released in October 1999. This increase was also due to higher costs
associated with the initiation of product sales by our international operations
in the fiscal quarter ended November 30, 1999. We expect the costs of software
and related products of our international operations to decrease as a percentage
of revenue in the future as sales volumes increase.
WEB COSTS
Web costs include the cost of developing advertising and supporting our web
site. Web costs increased to $0.6 million in the nine months ended November 30,
1999 from zero in the nine months ended November 30, 1998. As a percentage of
web revenue, web costs were 100.1% in the nine months ended November 30, 1999.
These increases were due to the development of our web advertising group and our
offering of web advertising for the first time during the fiscal year ending
February 29, 2000. We expect web costs to decrease as a percentage of revenue as
this business becomes more established.
COST OF SERVICES AND OTHER
Cost of services and other was primarily comprised of salaries and related
costs incurred for technical support and maintenance, custom development,
training and education and hardware certification services. We incur no direct
costs related to royalties received from the licensing of our trademarks to
third parties. Cost of services and other increased to $10.6 million in the nine
months ended November 30, 1999 from $6.2 million in the nine months ended
November 30, 1998. As a percentage of services and other revenue, cost of
services and other increased to 54.9% in the nine months ended November 30, 1999
from 38.7% in the nine months ended November 30, 1998. These increases are due
to the addition of personnel to provide custom development, training and
education and hardware certification services and the development of our
services organization.
We expect cost of services and other to continue to increase as we further
expand our service offerings. 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;
- the number and scope of custom development contracts;
- whether such services are provided by us or third-party contractors; and
- the overall utilization rate of our services staff.
GROSS PROFIT
Gross profit decreased to $13.6 million in the nine months ended
November 30, 1999 from $14.6 million in the nine months ended November 30, 1998.
As a percentage of total revenue, gross profit decreased to 45.9% in the nine
months ended November 30, 1999 from 62.0% in the nine months ended
43
<PAGE>
November 30, 1998. These decreases were the result of the increase in costs
related to our custom development services, the expansion, development and
marketing of our technical support and maintenance offerings during the fiscal
year ending February 29, 2000 and higher costs associated with our international
software product revenue. These cost increases were partially offset by
increased sales of our software products, which were primarily a result of the
release of Version 6.0 in May 1999 and Version 6.1 of Official Red Hat Linux in
October 1999, and, to a lesser extent, increased revenue from sales of software
development tools.
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 and marketing materials and tradeshows. Sales and marketing expense
increased to $15.4 million in the nine months ended November 30, 1999 from
$7.5 million in the nine months ended November 30, 1998. As a percentage of
total revenue, sales and marketing expense increased to 51.9% in the nine months
ended November 30, 1999 from 31.9% in the nine months ended November 30, 1998.
These increases were due to higher advertising and promotional costs incurred to
promote the release of Versions 6.0 and 6.1 of Official Red Hat Linux, our web
advertising and service offerings and, to a lesser extent, our new software
development tools. In addition, we incurred a significant amount of sales and
marketing expense related to our international operations which were established
in August 1999 and international promotion of Version 6.1 of Official Red Hat
Linux in the nine months ended November 30, 1999. These increases were also due
to higher costs resulting from joint marketing arrangements with distributors.
We expect sales and marketing expense to continue to increase in dollar amount
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 development of our software products and web site. Research and
development expense increased to $7.9 million in the nine months ended
November 30, 1999 from $6.4 million in the nine months ended November 30, 1998.
As a percentage of total revenue, research and development expense decreased to
26.7% in the nine months ended November 30, 1999 from 27.1% in the nine months
ended November 30, 1998. The increase in research and development expense
resulted from increased spending related to the development of our web
initiatives and costs incurred to complete the development of Versions 6.0 and
6.1 of Official Red Hat Linux, partially offset by a decrease in spending
related to the development of software development tools as these products were
completed during the nine months ended November 30, 1999. The decrease in
research and development expense as a percentage of revenue is primarily due to
the fact that revenue has increased at a faster rate than research and
development expense. We expect research and development expense to continue to
increase in dollar amount as we continue to develop our web site and create
additional features for 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 systems expenses. General and
administrative expense increased to $5.6 million in the nine months ended
November 30, 1999 from $4.5 million in the nine months ended November 30, 1998.
As a percentage of total revenue, general and administrative expense increased
to 21.0% in the nine months ended November 30, 1999 from 20.0% in the nine
months ended November 30, 1998. These increases resulted from:
- an increase in payroll costs due to an increase in the number of general
and
44
<PAGE>
administrative personnel to support the growth of our business;
- an increase in legal and accounting costs due to our initial public
offering and our geographic expansion; and
- an increase in insurance costs as a result of our becoming a public
company.
We expect general and administrative expense to continue to increase in
dollar amount as we add administrative personnel to support our business
expansion.
STOCK-BASED COMPENSATION
Stock-based compensation expense consists of the amortization of deferred
compensation related to stock options granted to employees, primarily new
members of our management team that were recruited immediately prior to our
initial public offering in August 1999, with an exercise price below the fair
market value of our common stock at the date of grant. Deferred compensation is
amortized over the vesting period of the related stock options, which is
generally four years. Stock-based compensation expense increased to
$1.6 million in the nine months ended November 30, 1999 from $0.2 million in the
nine months ended November 30, 1998. As a percentage of total revenue, stock
based compensation expense increased to 8.0% in the nine months ended
November 30, 1999. Stock-based compensation is expected to be approximately
$2.3 million on an annual basis through 2003.
MERGERS AND ACQUISITIONS
Mergers and acquisitions expense consists of costs incurred in connection
with investigating potential acquisitions and acquisitions accounted for using
the pooling of interests method of accounting. Mergers and acquisitions expense
increased to $0.1 million in the nine months ended November 30, 1999 from zero
in the nine months ended November 30, 1998. As a percentage of total revenue,
mergers and acquisitions expense increased to 1.0% in the nine months ended
November 30, 1999. We expect to incur approximately $10.0 million in merger and
acquisitions expense related to the acquisition of Cygnus, which includes
$0.2 million in costs related to this acquisition which were deferred at
November 30, 1999. These costs will be recognized in the fiscal quarter ending
February 29, 2000.
OTHER INCOME (EXPENSE), NET
Other income (expense) consists of interest income earned on cash deposited
in money market accounts and other short-term investments, net of interest
expense incurred on capital leases. Other income (expense), net increased to
income of $2.1 million in the nine months ended November 30, 1999 from income of
$42,000 in the nine months ended November 30, 1998. As a percentage of total
revenue, other income (expense), net increased to 7.0% in the nine months ended
November 30, 1999 from 0.2% in the nine months ended November 30, 1998. These
increases resulted from higher average cash and investment balances in the nine
months ended November 30, 1999 as compared to the nine months ended
November 30, 1998 due primarily to the receipt of proceeds from the sale of
preferred stock in September 1998 and in February, March, April and May 1999,
and proceeds from the sale of our common stock in our initial public offering in
August 1999.
PROVISION FOR INCOME TAXES
Provision for income taxes decreased to $0.2 million for the nine months
ended November 30, 1999 from $0.5 million in the nine months ended November 30,
1998. This decrease resulted from the decrease in our taxable income in the nine
months ended November 30, 1999 as compared to the nine months ended
November 30, 1998.
ACCRETION OF MANDATORILY REDEEMABLE PREFERRED STOCK
The increase in the accretion from mandatorily redeemable preferred stock to
$82,000 in the nine months ended November 30, 1999 from $16,000 for the nine
months ended November 30, 1998 was due to the fact that prior to September 1998
we had no outstanding mandatorily redeemable preferred stock. Accretion of
mandatorily redeemable preferred stock ceased with the
45
<PAGE>
completion of our initial public offering in August 1999 when all outstanding
mandatorily redeemable preferred stock converted to common stock.
FISCAL YEARS ENDED FEBRUARY 28, 1999 AND 1998
TOTAL REVENUE
Total revenue increased 46.0% to $33.0 million in the fiscal year ended
February 28, 1999 from $22.6 million in the fiscal year ended February 28, 1998.
Our international revenue totaled $10.6 million in the fiscal year ended
February 28, 1999.
SOFTWARE AND RELATED PRODUCTS REVENUE
Software and related products revenue increased 117% to $11.1 million, or
33.7% of total revenue, in the fiscal year ended February 28, 1999 from
$5.1 million, or 22.7% of total revenue, in the fiscal year ended February 28,
1998.
Software products revenue increased to $10.1 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 and, to a lesser extent, to the initial release
of our software development tools. 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 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 increased to $21.9 million in the fiscal year
ended February 28, 1999 from $17.5 million in the fiscal year ended
February 28, 1998. This increase was the result of an increase in the number,
size and scope of our custom development arrangements and an increase in
technical support and maintenance revenue on custom development projects. As a
percentage of total revenue, services and other revenue decreased to 66.3% in
the fiscal year ended February 28, 1999 from 77.3% in the fiscal year ended
February 28, 1998. The decrease in services and other revenue as a percentage of
total revenue is primarily the result of the increase in software and related
products revenue.
COST OF REVENUE
COST OF SOFTWARE AND RELATED PRODUCTS
Cost of software and related products increased 85.7% to $4.1 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 36.8% 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 for the fiscal year ended February 28, 1999 was primarily
comprised of salaries and other related costs incurred for our technical support
and maintenance, custom development, training and education and hardware
certification services. Cost of services and other increased to $8.6 million in
the fiscal year ended February 28, 1999 from $6.2 million in the fiscal year
ended February 28, 1998. This increase was due to greater costs associated with
the expansion of our service offerings through the hiring of additional
personnel and to increased costs related to our custom development and technical
support and maintenance services. As a percentage of services and other revenue,
cost of services and other decreased to 27.0% in the fiscal year ended
February 28, 1999
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from 35.6% in the fiscal year ended February 28, 1998. This decrease was
primarily due to services and other revenue increasing at a higher rate than the
cost of services and other.
GROSS PROFIT
Gross profit increased 43.1% to $20.3 million in the fiscal year ended
February 28, 1999 from $14.2 million in the fiscal year ended February 28, 1998.
This increase was primarily due to increased revenue from custom development and
technical support and maintenance services and 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. As a percentage
of total revenue, gross profit decreased to 61.5% in the fiscal year ended
February 28, 1999 from 62.7% in the fiscal year ended February 28, 1998. This
decrease was primarily the result of a decrease in gross profit on services and
other revenue.
OPERATING EXPENSE
SALES AND MARKETING
Sales and marketing expense increased 22.6% to $11.1 million in the fiscal
year ended February 28, 1999 from $9.0 million in the fiscal year ended
February 28, 1998. This increase was due to extensive public relations
activities in the fiscal year ended February 28, 1999 to promote our brand and
software products, costs of marketing our software development tools and greater
costs attributable to cooperative marketing arrangements with distributors. As a
percentage of total revenue, sales and marketing expense decreased to 33.5% in
the fiscal year ended February 28, 1999 from 39.8% in the fiscal year ended
February 28, 1998. This decrease was primarily due to a significant increase in
total revenue.
RESEARCH AND DEVELOPMENT
Research and development expense increased 83.4% to $8.5 million in the
fiscal year ended February 28, 1999 from $4.6 million in the fiscal year ended
February 28, 1998. As a percentage of total revenue, research and development
expense increased to 25.7% in the fiscal year ended February 28, 1999 from 20.4%
in the fiscal year ended February 28, 1998. These increases resulted from
expenditures incurred in the development of a software emulation product that
began in the fiscal year ended February 28, 1999, 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.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 54.3% to $5.7 million in the
fiscal year ended February 28, 1999 from $3.7 million in the fiscal year ended
February 28, 1998. As a percentage of total revenue, general and administrative
expense increased to 17.1% in the fiscal year ended February 28, 1999 from 16.2%
in the fiscal year ended February 28, 1998. These increases resulted from:
- an increase in payroll costs due to an increase in the number of general
and administrative personnel at February 28, 1999 as compared to
February 28, 1998;
- an increase in legal and accounting costs in the fiscal year ended
February 28, 1999 incurred in connection with establishment of new
business activities; and
- to a lesser extent, due to costs incurred associated with relocating our
offices in January 1999.
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STOCK-BASED COMPENSATION
Stock-based compensation expense increased to $0.2 million in the nine
months ended November 30, 1999 from zero in the nine months ended November 30,
1998. As a percentage of total revenue, stock based compensation expense
increased to 0.7% in the nine months ended November 30, 1999 from zero in the
nine months ended November 30, 1998.
OTHER INCOME (EXPENSE), NET
Other income (expense), net decreased to income of $40,000 in the fiscal
year ended February 28, 1999 from income of $0.4 million in the fiscal year
ended February 28, 1998. As a percentage of total revenue, other income
(expense), net decreased to 0.1% in the fiscal year ended February 28, 1999 from
1.6% in the fiscal year ended February 28, 1998. These decreases resulted from
increased interest expense on our line of credit due to a higher average
outstanding balance in the fiscal year ended February 28, 1999 as compared to
the fiscal year ended February 28, 1998. This was partially offset by an
increase in interest income as a result of higher average cash and cash
equivalents and short term investment balances in the fiscal year ended
February 28, 1999 compared to the fiscal year ended February 28, 1998 due to
receipt of proceeds from the sale of preferred stock and the repayment of
outstanding notes payable during the fiscal year ended February 28, 1998.
PROVISION FOR INCOME TAXES
Provision for income taxes increased to $0.7 million in the fiscal year
ended February 28, 1999 from $0.2 million in the fiscal year ended February 28,
1998. This increase resulted from the growth in our taxable income in the United
States and withholding taxes on our foreign source income.
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. Accretion of mandatorily
redeemable preferred stock ceased with the completion of our initial public
offering in August 1999 when all outstanding mandatorily redeemable preferred
shares converted into common stock.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth Red Hat's unaudited historical quarterly
statement of operations data for each of the five fiscal quarters since
August 31, 1998 and an unaudited pooled quarterly statement of operations data
for the fiscal quarter ended November 30, 1999 to reflect our acquisition of
Cygnus. The historical quarterly 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 to those statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
POOLED
THREE MONTHS
THREE MONTHS ENDED ENDED
NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, NOV. 30,
1998 1999 1999 1999 1999 1999
-------- -------- -------- -------- -------- --------------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Software and related products................ $2,964 $3,508 $ 1,936 $ 3,255 $ 3,369 $ 3,671
Web.......................................... -- -- 80 105 441 441
Services and other........................... 360 169 781 1,010 1,619 6,438
------ ------ ------- ------- ------- --------
Total revenue................................ 3,324 3,677 2,797 4,370 5,429 10,550
------ ------ ------- ------- ------- --------
Cost of revenue:
Software and related products................ 1,179 1,366 1,181 1,519 2,038 2,083
Web.......................................... -- -- 123 203 301 301
Services and other........................... -- 28 443 914 692 3,844
------ ------ ------- ------- ------- --------
Total cost of revenue........................ 1,179 1,394 1,747 2,636 3,031 6,288
------ ------ ------- ------- ------- --------
Gross profit................................. 2,145 2,283 1,050 1,734 2,398 4,322
------ ------ ------- ------- ------- --------
Operating expense:
Sales and marketing.......................... 781 1,438 1,629 2,331 3,650 6,390
Research and development..................... 624 797 826 1,511 1,821 2,819
General and administrative................... 502 437 824 959 1,187 2,094
Stock-based compensation..................... -- -- -- 377 532 580
Mergers and acquisitions..................... -- -- -- -- 124 124
------ ------ ------- ------- ------- --------
Total operating expense...................... 1,907 2,672 3,279 5,178 7,314 12,007
------ ------ ------- ------- ------- --------
Income (loss) from operations................ 238 (389) (2,229) (3,444) (4,916) (7,685)
Other income (expense), net.................. 34 100 140 336 1,337 1,426
------ ------ ------- ------- ------- --------
Income (loss) before income taxes............ 272 (289) (2,089) (3,108) (3,579) (6,259)
Provision for income taxes................... 153 -- -- -- -- 39
------ ------ ------- ------- ------- --------
Net income (loss)............................ 119 (289) (2,089) (3,108) (3,579) (6,298)
Accretion on mandatorily redeemable preferred
stock...................................... (16) (23) (43) (39) -- --
------ ------ ------- ------- ------- --------
Net income (loss) available to common
stockholders............................... $ 103 $ (312) $(2,132) $ 3,147 $(3,579) $ (6,298)
====== ====== ======= ======= ======= ========
</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.
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Our quarterly operating results will fluctuate for many reasons, including:
- our ability to retain existing customers, attract new customers and
satisfy customer 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 our open source solutions;
- 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.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES
We have historically derived a significant portion of our liquidity and
operating capital from the sale of equity securities, including private sales of
preferred stock and the sale of common stock in our initial public offering, and
from cash flows from operations.
At November 30, 1999, cash and cash equivalents totaled $12.0 million, an
increase of $1.9 million as compared to February 28, 1999. The increase in cash
and cash equivalents resulted from the receipt of $88.5 million in net proceeds
from our initial public offering in August 1999, $3.2 million in proceeds from
issuance of preferred stock in March and April 1999 and $2.8 million in proceeds
from exercise of stock options and warrants. This was partially offset by
purchase of net investments in debt securities of $82.5 million, cash used by
operations of $5.6 million and $4.3 million for the purchase of office and
computer equipment.
Cash used by operations of $5.6 million in the nine months ended
November 30, 1999, represented the net loss of $8.8 million, an increase in
accounts receivable of $3.5 million, an increase in inventories of $1.5 million
and an increase in other assets of $1.7 million, partially offset by an increase
in accounts payable of $2.5 million and an increase in deferred revenue of
$4.1 million. The increase in accounts receivable, accounts payable, accrued
expenses and deferred revenue resulted from the release of Versions 6.0 of
Official Red Hat Linux to our distributors in late April 1999 and Version 6.1 of
Official Red Hat Linux in early October 1999. These releases resulted in
increased sales which resulted in higher amounts of accounts receivable from
distributors at November 30, 1999.
Cash used in investing activities was comprised of the purchase of
investments in debt securities, net of maturities, of $82.5 million and
purchases of office and computer equipment totaling $4.3 million.
Cash from financing activities of $94.3 million for the nine months ended
November 30, 1999 was comprised of $3.2 million in net proceeds from the sale of
our preferred stock, $2.8 million in proceeds from the exercise of stock options
and warrants and $88.5 million in net proceeds from the sale of our common stock
in our initial public offering in August 1999.
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
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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 $2.6 million was used to purchase
$1.9 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 preferred stock in September 1998 and $3.2 million in net proceeds
received from sales of preferred stock in February 1999. We received an
additional $3.2 million in net proceeds from the sale of 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 initiatives. Our capital
requirements during the fiscal year ending February 29, 2000 depend on numerous
factors including the amount of resources we devote to:
- fund our domestic and international expansion;
- enhance our REDHAT.COM web site;
- improve and extend our service offerings;
- pursue strategic acquisitions and alliances;
- make possible investments in businesses, products and technologies; and
- expand our sales and marketing programs and conduct more aggressive brand
promotions.
We believe that the net proceeds from our initial public offering of common
stock in August 1999, together with the net proceeds from this offering and our
cash flow from operations, will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for at least the next 12 to
18 months. We may need to raise additional funds, however, in order to fund more
rapid expansion. 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 issued Statement of
Financial Accounting Standards No. 133, ``Accounting for Derivative Instruments
and Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Statement of Financial
Accounting Standards No. 133 as amended by Statement of Financial Accounting
Standards No. 137, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000, with earlier application encouraged. We do not
currently nor do we intend in the future to use derivative instruments and
therefore do not expect that the adoption of Statement of Financial Accounting
Standards No. 133 will have any impact on our financial position or results of
operations.
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In December 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 98-9, "Modification of Statement of Position No. 97-2, Software Revenue
Recognition, with Respect to Certain Transactions". Statement of Position
No. 98-9 amends Statement of Position No. 97-2 to require recognition of revenue
using the ``residual method" in circumstances outlined in Statement of Position
No. 98-9. 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 Statement of Position 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.
Statement of Position No. 98-9 is effective for transactions entered into in
fiscal years beginning after March 15, 1999. Also, the provisions of Statement
of Position No. 97-2 that were deferred by Statement of Position No. 98-4 will
continue to be deferred until the date Statement of Position No. 98-9 becomes
effective. We do not expect that the adoption of Statement of Position No. 98-9
will have any impact on our financial position or results of operations.
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 is 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.
PRODUCTS
The committee tested Version 4.2 and later versions of Red Hat Linux by
accelerating the date within these software programs to December 31, 1999 and
observed which software components failed as the date changed to January 1,
2000. These tests revealed that all of these versions of Red Hat Linux were Year
2000 compliant. In addition, in June 1999 we hired an independent contractor to
test Versions 5.2 and 6.0 of Red Hat Linux for Year 2000 readiness. The
independent contractor certified these products as Year 2000 compliant. In light
of the testing results
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<PAGE>
and certification, we do not plan to generate a contingency plan if either of
these products is later found not to be Year 2000 compliant. We have not tested,
however, and do not plan to test any products other than Red Hat Linux.
To date, we are aware of no Year 2000 problems with any of our products. If
it is later determined that products that we have not tested are not Year 2000
compliant, we believe 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 the 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 have not experienced any Year 2000
problems with these third-party applications to date, and we intend to remedy
any problems on a case-by-case basis if they arise. Because we believe that the
costs associated with the failure of third-party products will not be material
to our business, results of operations or financial condition, we do not intend
to expend resources to seek out and correct problems before they arise.
Accordingly, although our customers have not reported any Year 2000 problems to
date, it is possible that some of our customers may yet 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. Responding to these requests may divert resources
away from the execution of our business strategy. Moreover, failure of
applications bundled with our software may reduce the value of our products,
decrease or delay revenue, diminish 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
In August 1999, we evaluated our mission-critical internal systems for Year
2000 compliance, including computer hardware, software, web server, and other
related equipment and systems, such as phone systems and networking security
systems. Based on certifications from our information systems,
telecommunications and information technology vendors, such as Oracle, Sun
Microsystems, Veritas, Lucent, and Cisco regarding these systems, we believe
that their level of Year 2000 preparedness is sufficient to permit us to proceed
without any major disruptions to our internal equipment and systems.
Additionally, the majority of our computer hardware, telecommunications systems,
software, and networking hardware and software is new and all major systems are
covered under manufacturer service warranties and on-support contracts. We have
experienced no Year 2000 problems with our internal systems to date.
The lessor of our corporate headquarters has indicated that our offices are
Year 2000 compliant. We currently house substantially all of our communications
hardware and our other computer operations related to our web site on site at
our facilities, although we have back-up and co-location hardware for our web
site located at third-party facilities. The owners of facilities we plan to use
for that purpose have also certified to us that all of their systems and
facilities are Year 2000 compliant.
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Since we have just recently opened offices in Ireland, the United Kingdom,
Germany, Italy and Japan and may open additional offices in the future, the Year
2000 committee has begun to examine the global impact of Year 2000 issues, such
as telecommunications and networking interfaces with vendors in foreign
countries. Although we have tried to maintain a centralized approach to the
management of distributed computing by establishing a sole-source vendor
supplier policy worldwide, certain localizations and in-country implementations
of our communications systems may require piece-by-piece testing for Year 2000
compliance. Our international offices have not experienced any significant Year
2000 problems to date, and we intend to remedy any problems on a case-by-case
basis if they arise.
Based upon the foregoing, we do not believe that the costs involved in
continuing to make our internal information technology and non-information
technology systems Year 2000 compliant will be material, nor do we expect to
incur material costs to upgrade or replace any non-compliant systems.
WORST CASE SCENARIO
We have not tested any of our products other than Red Hat Linux and have not
tested software provided by, nor sought certifications from, third-parties
bundling software with Official Red Hat Linux. Our reasonably likely worst case
Year 2000 scenario would be that these products and bundled software from
third-parties fail in the year 2000, resulting in a decreased demand for our
products and damage to the Red Hat brand. In the event of a Year 2000 failure we
would devote resources to correct it. Because we have skilled in-house
developers and relationships with the open source community and third-parties
whose software we bundle with Red Hat Linux, we believe we will be able to
respond promptly to any failures that occur. The costs of such response and the
diversion of resources, however, could have a material adverse effect on our
business, results of operation and financial condition.
YEAR 2000 COMPLIANCE EXPENSES
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 or financial condition. We have not hired
additional personnel to specifically address our Year 2000 compliance issues,
and presently, we do not expect to do so. Through December 31, 1999, we have
incurred approximately $300,000 in costs to make our internal systems Year 2000
compliant. These costs were primarily incurred to update our accounting and
financial management software and systems. The product and testing 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 of approximately $30,000 to the independent contractor that
tested Versions 5.2 and 6.0 of Red Hat Linux. All costs related to achieving
Year 2000 readiness have been expensed as incurred, unless they related to the
cost of new software or hardware for our internal systems.
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BUSINESS
RED HAT
We are a leading global developer and provider of open source software and
solutions. Our software and solutions are provided for a variety of computing
systems, ranging from desktops, workstations and servers to special-purpose
computing devices such as wireless telephones, personal digital assistants,
routers and phone switches. We offer a wide range of professional services for
the Red Hat Linux operating system, related tools and libraries and popular open
source applications. Our services include technical support and maintenance,
developer support, custom development, consulting, training and education and
hardware certification. Our web site, REDHAT.COM, is a leading destination for
open source software users and developers and serves as the primary delivery
mechanism and customer interface for many of our offerings. REDHAT.COM also
offers extensive news and information for the open source community, an
important forum for open source software development, a commerce site and
priority access for software downloads and upgrades. We are committed to serving
the interests and needs of open source software users and developers and to
sharing our product developments with the open source community.
INDUSTRY BACKGROUND
GROWTH OF OPEN SOURCE SOFTWARE
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, whereby multiple groups of developers 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 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.
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 1's and 0's that only computers understand. By
contrast, under the open source development model, the software developer
provides the user with access to both the binary code and the source code.
Source code is the language used by the developers. As compared to the
proprietary model, the open source model:
- allows a company's in-house development team to collaborate with a global
community of independent developers;
- provides the user access to both binary and source code, and the rights to
copy, modify, alter and redistribute the software; and
- permits the user 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 computing devices
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
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their products freely over the internet, enabling them to create large global
user bases quickly.
Participants in open source development can generate revenue in a variety of
ways, including:
- making their own open source products widely available, and then offering
technical support, custom development, and related services to customers;
- meeting consumer demand for convenience and quality by selling their open
source products to customers in shrink-wrapped packaging accompanied by
user manuals and other related documentation and access to services and
technical support offerings;
- using open source products as a means of attracting visitors to their web
sites, which in turn can result in the sale of other products, services,
and advertising; and
- developing brand loyalty and a reputation for quality by providing
technically superior open source software products, which they can
leverage to sell additional products and services to customers.
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.
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.
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.
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.
Since 1991, the use of Linux-based operating systems has grown rapidly.
According to IDC, Linux-based operating systems represented 17% of all new
license shipments of server operating systems in 1998. Linux-based operating
systems are now the most commonly used operating system for web servers,
representing approximately 29% of all installations, according to the
December 1999 Netcraft Web Server Survey.
OPEN SOURCE OPPORTUNITIES BEYOND SERVERS AND DESKTOP COMPUTERS
The growth of the internet, together with the reduction in cost and increase
in performance of computing platforms, has also stimulated the demand for
computing devices that provide low-cost, easy access to the internet. These
devices include mobile computing devices, such as personal digital assistants,
wireless telephones, television set-top boxes, kiosks and game consoles, as well
as special-purpose server devices such as routers, switches and dedicated file
and e-mail servers. According to IDC, whereas in 1997 personal computers
accounted for 96% of internet access devices shipped in the U.S., by 2002 mobile
computing devices are expected to account for nearly 50% of unit shipments in
the U.S. In addition, IDC predicts that from
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1998 through 2002 shipments of these devices will increase 76% annually, that by
2002 there will be more than 55 million mobile computing devices, and that by
2005, shipment of these devices will exceed shipment of personal computers.
Manufacturers of mobile computing devices and other special-purpose server
devices need flexible, robust and sophisticated operating systems to power these
devices to take advantage of common application interfaces from desktop
computing environments. Many of these manufacturers have, therefore, turned to
open source solutions. In addition, many software developers rely upon open
source tools, such as libraries, compilers and debuggers, to create software for
these devices. Microprocessor vendors also use open source development tools and
real time operating systems to design reference platforms for integrated device
manufacturers.
CHALLENGES TO THE WIDESPREAD ADOPTION OF OPEN SOURCE
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 PRODUCT OFFERINGS
We engineer what we believe to be the most technically advanced open source
operating system, Red Hat Linux. Red Hat Linux is comprised of more than 700
separate software packages, including compilers and web servers, e-mail servers,
file transfer protocol servers and file servers. Red Hat Linux is:
- flexible and scalable--capable of running a single desktop machine or the
entire network of a large business enterprise;
- functional--able to handle discrete or multiple applications accessed by
multiple users;
- modular--allowing the user to install only those applications that are
desired by the user;
- 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.
As a result, Red Hat accounted for 56% of new license shipments of
Linux-based server operating systems in the U.S. in 1998 and was the most
popular system, preferred by 68% of U.S. users, according to IDC. In addition,
Red Hat Linux has won numerous awards, including "Operating System Product of
the Year" by InfoWorld Magazine in 1996, 1997 and 1998.
We also engineer superior software development tools. Our GNUPro and Code
Fusion software development tools are based
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on the leading open source GNU standards, and feature a compiler, debugger,
various additional libraries and utilities, including advanced source code
browsing and editing technology. We believe that Cygnus has been responsible for
over 75% of the changes in GNU compiler source code over the past two years. We
make regular, supported releases of our GNUPro software across a broad range of
computing platforms that support all significant operating system environments.
Consequently, these tools have won numerous awards including "Show Favorite" at
the August 1999, Linux World show and Linux Journal's 1999 award for "Best New
Application--Software Development".
COMPREHENSIVE OPEN SOURCE SOLUTIONS
Our market leadership in open source operating systems and development tools
enables us to deliver end-to-end solutions for software developers and
enterprise customers from servers to mobile computing devices. We employ many of
the top contributors to the development and maintenance of the Linux kernel and
GNU tools. With this expertise, we are better able to encourage software
developers to rapidly develop applications across a broad range of computing
platforms and port these applications for use on the Red Hat Linux operating
system. We are also positioned to attract enterprise customers and expand the
adoption of open source solutions within these companies.
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 and maintenance, developer support, custom development, consulting,
training and education and hardware certification. 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 solutions. We also provide custom solutions for key
integrated device manufacturers and develop new technologies that meet their
business objectives. We provide engineering services and developer support to
microprocessor and product manufacturing partners to ensure that our development
tools provide functionality and flexibility that we believe are unmatched by any
proprietary tools vendor. 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 and other open
source solutions as full scale enterprise solutions.
LEADING ONLINE DESTINATION FOR THE OPEN SOURCE COMMUNITY
We are dedicated to serving the interests and needs of open source software
users and developers online. REDHAT.COM serves as our primary customer interface
and delivery mechanism for many of our solutions. REDHAT.COM also serves as a
comprehensive resource for the latest information related to open source
initiatives. It contains news of interest to open source users and developers,
features for the open source community, a commerce site and priority access for
software downloads and upgrades. 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.
We estimate, based on our internal data, that our web site had approximately
959,000 unique visitors in November 1999 and approximately 34.8 million page
views in the fiscal quarter ended November 30, 1999. A unique visitor is an
individual visitor to our REDHAT.COM web site. We calculate unique visitors by
tracking the number of unique internet protocol addresses that access our web
site. Page views are the total number of complete pages retrieved and viewed by
visitors to REDHAT.COM. We calculate page views as the total successful requests
to access our web site pages less requests to view images.
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By acting as a clearinghouse of open source and Linux-related information
and by 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 this model into their businesses while retaining
various features of the proprietary model, our product offerings are true open
source offerings. We share our 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. We have also sponsored the creation of the Red Hat Center
for Open Source, Inc., a non-profit foundation dedicated to the promotion of
open source activities and ideals. Furthermore, in addition to the open source
software we develop ourselves, we help 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.
STRATEGIC RELATIONSHIPS
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 Cisco, Compaq, Dell, Hewlett-Packard, IBM,
Intel, Nokia, Nortel, Oracle, SAP, Silicon Graphics and Sony Computer
Entertainment. Further, with our acquisition of Cygnus, we are positioned to
partner with many of the world's leading microprocessor companies to provide
open source software technologies on the latest computing platforms. 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 and other open-source 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. See "--Sales, Marketing and Distribution".
STRATEGY
Our objective is to enhance our position as a leading worldwide developer
and provider of advanced, open source software and solutions, via both
traditional channels and the internet. The key elements of our strategy are:
INCREASE THE ADOPTION OF OPEN SOURCE SOFTWARE ACROSS ALL COMPUTING PLATFORMS
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, establishing new alliances and sharing our development
efforts with third-party developers. The strength of these relationships 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.
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Our acquisition of Cygnus has broadened the market for our open source
products and solutions by permitting us to forge relationships with
manufacturers of mobile computing devices such as wireless phones and digital
personal organizers and special purpose server devices, such as routers and
phone switches. With our broad selection of open source products and our
comprehensive array of professional services, we believe that we can quickly and
effectively penetrate this market, expand our presence and increase the market
acceptance for open source solutions within it.
Additional means of increasing the market acceptance for Linux-based
operating systems and other open source software include maintaining and
improving our relationship with third-party developers and the open source
community, encouraging the development of open source applications and
publicizing success stories.
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 content related to Linux-based operating systems and
other open source projects. 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. We have recently added such enhancements as
software update notification and automatic software updating for those who want
it. New features we anticipate adding to our web site include:
- 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.
EXPAND OUR PRESENCE IN THE ENTERPRISE MARKET
Historically, enterprise customers had to obtain open source operating
systems from one source and application development tools from another source.
With our acquisition of Cygnus, we are now positioned to provide comprehensive
open source solutions. We intend to expand our service offerings, including
training, consulting, custom development and web-based services that customers
have come to expect from information technology providers, which will increase
their confidence in open source products and providers. We are currently
expanding our professional services organization to enhance our ability to
provide such services. Between March 1, 1999 and December 31, 1999 we added 39
people to our professional services organization. With our acquisition of
Cygnus, we now have 90 people in 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 customize their operating systems
and our development tools to perform optimally within their particular computing
environments across all of their computing platforms. We also expect that more
of our services will be provided as subscription services accessed through our
web site. 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
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ourselves as the premier open source service provider.
CONTINUE TO PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES
We intend to pursue a selective acquisition strategy as opportunities arise
to complement our product offerings, extend our service capabilities and expand
the features on our web site. We also intend to create strategic alliances where
it is beneficial to our business model. Our acquisition of Cygnus in
January 2000 allows us to expand the market for our products and foster the
rapid development of open source applications. In addition, we believe that our
strategic relationships with Cygnus's large corporate customers will encourage
the wide-spread acceptance of open source operating systems beyond the
traditional workstation and desktop computing environments. Our purchase of HKS
in January 2000 will help us expand our web site and provide open source
e-commerce solutions to our business partners.
INCREASE OUR PENETRATION INTO INTERNATIONAL MARKETS
We have only recently commenced operations in Europe, Asia and Australia,
but we are rapidly expanding worldwide. Since August 1999, we have established
subsidiaries in Japan and Australia. While we have a significant installed base
of international users, we intend to increase our overseas presence in the near
future by establishing additional foreign offices or subsidiaries. We offer Red
Hat Linux in English, French, German, Italian, and Japanese, and plan to
introduce it in other languages in the future.
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, 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. 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;
- the development of open source embedded operating systems and software,
which we believe will take Red Hat Linux from the personal computer to the
mobile computing device; and
- the design of new networking and scalability features, which are expected
to make Red Hat Linux more attractive as a server operating system.
In particular, we are going to sponsor a foundation which promotes open source
projects and ideals. We expect that, through our continued efforts, we will be
able not only to foster the advancement of open source technology, but also to
enhance our relationship with the open source community.
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, open source software
applications, documentation, manuals and general merchandise. Our professional
services offerings, principally directed towards our larger corporate customers
and strategic partners, include technical support and maintenance, custom
development, consulting, training and education, developer support and hardware
certification.
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Our shrink-wrapped products come with a limited subscription service. Users
of these services are entitled to priority downloads of products, access to
developer pages on our web site and are e-mailed news relating to developments
within the open source community.
RED HAT LINUX AND RELATED SOFTWARE
OFFICIAL RED HAT LINUX 6.1. 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 6.1, in October 1999. Official Red Hat
Linux is available for the Intel, Sun SPARC and Compaq Alpha platforms. We offer
the product in three versions:
- Standard--the basic collection of Red Hat Linux software includes a
printed user manual, limited installation technical support, and priority
access to software updates;
- Deluxe--includes the components of Standard, plus additional software
applications we license from third parties, an additional printed manual,
and limited telephone technical support; and
- Professional--includes the components of Deluxe, plus additional software
applications and technical support, and cryptography software we license
from RSA Data Security, Inc. used to create a secure web server suitable
for conducting secure transactions via the Internet. This is a successor
to our product previously known as the Red Hat Secure Web Server.
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 a computer as a general purpose desktop workstation to
perform virtually any computing function. Examples of the components included
within Red Hat Linux 6.1 are:
<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
Gtk.......................................... 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 (and other
languages)
RPM.......................................... Manages the various software packages
All other components......................... Libraries, tools, games and other integrated
applications
</TABLE>
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Other Red Hat products include:
LINUX APPLICATIONS LIBRARY. The Linux Applications Library is a collection
of applications developed by third parties that are designed to run on Red Hat
Linux. These products do not include printed documentation or technical support.
RED HAT ROUGH CUTS. Red Hat Rough Cuts is a collection of unofficial
versions of Red Hat Linux designed to run on PowerPC, UltraSPARC, MIPS and M68K
processors. This product does not include technical support or printed
documentation.
RMS LINUX. RMS Linux is a special collection of Red Hat Linux operating
system and applications containing only open source software, and does not
include technical support or printed documentation. Red Hat donates a portion of
the proceeds from the sale of this product to the Free Software Foundation.
CCVS. Credit Card Verification System (CCVS) is transaction processing
software that is embeddable and portable to most UNIX and Linux systems. CCVS
may be used for credit card authorization and settlement, as well as check
verification. CCVS is certified with the major clearing house protocols and
supports e-commerce applications ranging from a single web page or billing
application, to a payment gateway server supporting thousands of merchants. We
acquired this product with our acquisition of HKS.
SOFTWARE FOR SPECIAL-PURPOSE CLIENT AND SERVER DEVICES
With our acquisition of Cygnus, we are now able to provide a wide array of
products that enable application scalability and portability across a range of
computing platforms. Cygnus engineers tools and operating systems which are used
for applications development and deployment across a broad range of computing
platforms. These products reduce the complexity of cross-platform application
development and deployment by allowing a single body of source code to be
developed on or targeted toward a wide range of computing platforms. These
products include:
GNUPRO TOOLSUITE. GNUPro Toolsuite is a collection of software development
tools based on the popular GNU standard. We intend to sell GNUPro bundled with a
subscription service that includes regular software upgrades and developer
support services for rapid response and resolution of technical questions or
problems.
GNUPRO DEV KIT FOR LINUX. GNUPro Dev Kit for Linux features GNU development
tools designed for users of Linux-based operating systems using computers based
on the Intel architecture. Unlike GNUPro Toolsuite, GNU Pro Dev Kit for Linux
does not come bundled with any support packages.
CODE FUSION. Code Fusion is an integrated development environment, or IDE,
for Linux developers. Code Fusion IDE enables developers familiar with UNIX or
Windows programming to quickly become productive in developing for Linux. This
complete Linux IDE tightly integrates the C, C++, and Java programming languages
with a robust graphical user interface to enhance developer productivity and
reduce software product time-to-market.
ECOS. eCos, the "embedded Cygnus operating system", is an
application-specific operating system targeted at special-purpose client device
environments such as consumer electronics, wireless telephones, set top boxes,
and internet appliances. This highly configurable and scalable product is
currently bundled with host tools that allow for rapid operating system
configuration.
EL/IX. EL/IX brings a consistent application programming interface to
developers who wish to target Linux as a host operating system, Linux as an
embedded operating system, or eCos as a deeply embedded operating system. Use of
EL/IX provides developers with the ease of developing Linux applications
natively and redeploying them to a variety of targets and applications,
including special-purpose server
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and client applications that are running any EL/IX-compliant operating system.
CYGWIN. Cygwin allows Linux/UNIX developers to compile their applications
easily for the Windows platform, without any substantial rewriting of the source
code.
SOURCE-NAVIGATOR 4.5. Source-Navigator 4.5 is a tool for software
developers, enabling them to quickly understand and re-engineer complex code.
PROFESSIONAL SERVICES
With our acquisition of Cygnus, we have significantly expanded the scope of
our service offerings and professional services staff, and currently offer the
following services:
TECHNICAL SUPPORT AND MAINTENANCE AND DEVELOPER SUPPORT. We offer technical
support and maintenance to a broad range of customers ranging from individual
users to large corporations. We deliver installation, incident-based and
developer support via our web site, e-mail and telephone. 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 and maintenance capabilities.
CUSTOM DEVELOPMENT AND CONSULTING. We offer consulting and custom
development services for enterprise customers seeking to deploy Red Hat Linux
and open source applications. We also offer advanced assistance to third-party
software developers working to develop applications that run on Red Hat Linux.
In addition, we offer specific consulting and custom development services for
key integrated device and microprocessor manufacturers seeking to utilize
embedded open source operating systems on their devices.
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 sites around the world. We also conduct on-site training for
customers. We 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, our open source tools and other open source software.
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.
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.
REDHAT.COM
Our web site, REDHAT.COM, serves as the primary delivery mechanism and
customer interface for many of our offerings. We offer extensive resources for
the open source community, software updates and downloads and a commerce site
for our shrink-wrapped products and support offerings. REDHAT.COM also offers
users access to broad and authoritative content on open source software
including news, documentation, educational materials and case studies. Our web
site serves the interests and needs of a wide spectrum of open source software
users, from
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system administrators to developers to academics to mainstream technology users.
The REDHAT.COM audience is highly focused and technically sophisticated,
representing an attractive target market of computing professionals for
advertisers and merchants. We offer a number of advertising and sponsorship
programs to our partners and others seeking to reach this market.
Since August 1999, significant enhancements include:
- Red Hat Developer Network--The Red Hat Developer Network is a collection
of technical and business resources for developing software that runs on
Red Hat Linux. It includes news about recent open source software
developments, guidance on how to develop new applications that will run
optimally on Red Hat Linux, technical documentation and other resources,
and links to other resources that may be of interest to software
developers. It is targeted at a range of software developers, including
third parties that develop their own software application products,
enterprise developers, web application developers and open source software
developers. We plan to expand the Developer Network to include a variety
of partnership programs, co-marketing opportunities and specialized
support service offerings.
- Wide Open News--Wide Open News is a leading news and opinion forum for
open source solutions. It includes both original news and editorial
offerings, as well as content licensed from third parties, including
Industry Standard, Salon.com and The Register.
- Agent Update--We offer customers the ability to receive electronic
notification of the release of new open source products or product
upgrades. In addition, at their option, we can automatically download new
or upgraded products to the customers' computers when released.
- Red Hat Store--We intend to continue building 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.
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 customers which have purchased products and services from us in
the past, but which may not necessarily be ongoing customers. These customers
have purchased products and services ranging from one-time purchases of
approximately $2,000 to multi-year, multi-million dollar support, consulting and
custom development contracts:
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CORPORATE
<TABLE>
<S> <C>
American Airlines Inacom
America Online Intel
AT&T Lawrence Livermore National Laboratories
Autozone Nokia
Burlington Industries Nortel
Cisco Systems Oracle
Citrix Racal
Compaq Raytheon
Dell Sandia National Laboratories
Dreamworks SKG SAP
Fidelity Investments Siemens
Fujitsu (Amdahl) Silicon Graphics, Inc.
Gateway Sony Computer Entertainment
GTE Sprint
Hewlett-Packard Toshiba
IBM US Vision
</TABLE>
GOVERNMENT/ACADEMIC
<TABLE>
<S> <C>
Internal Revenue Service United States Department of the Army
Massachusetts Institute of Technology United States Marine Corps
National Weather Service United States Postal Service
Navy Surface Warfare Center Woods Hole Oceanographic Institution
</TABLE>
The following case studies provide examples of the manner in which our
products are used:
- The Exploration Department of Amerada Hess, a Fortune 500 global oil
company, was frustrated with the cost and difficulty of upgrading its
supercomputing hardware. In 1998, the Exploration Department replaced
approximately $2.5 million of its supercomputing hardware with a $420,000
cluster of more than 90 servers running Red Hat Linux. The department uses
this cluster to identify potential offshore oil and gas reservoirs using
three-dimensional modeling software.
- 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.
- Kenwood, a world leader in car audio and mobile electronics, is leveraging
Red Hat's affordability and flexibility to implement solutions for its
retail outlet store operations. Kenwood uses Red Hat Linux for mail relay,
print servers and file sharing. In addition, it serves as a firewall in
its outlet stores and selected branch offices.
- iCelebrate.com, an online provider of holiday and seasonal merchandise and
resources, purchased Red Hat's on-site consulting services to help create
its holiday shopping web site, quickly installing, integrating and tuning
Red Hat Linux on Oracle database software and Dell systems.
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THIRD-PARTY APPLICATIONS
The following is a partial list of the third-party applications that are
available today on Red Hat Linux:
<TABLE>
<S> <C>
Adobe Acrobat reader Lotus Domino
Apache Group Apache Web Server Netscape Communicator
Applix Applixware Netscape Messaging Server
Ardent UniData Oracle Oracle8i
Computer Associates Unicenter TNG Oracle Application Server
Corel Word Perfect Real Networks Real Server
Hewlett Packard Openmail SAP R/3
IBM DB2 Sendmail Sendmail
IBM Viavoice Sun Star Office
IBM Visual Age for Java for Linux Sybase Adaptive Server
IBM WebSphere
</TABLE>
The following is a partial list of the third-party applications that will be
available on Red Hat Linux in the near future:
<TABLE>
<S> <C>
American Power Conversion PowerChute Inprise C++Builder
Plus
Adobe Acrobat Creator Inprise Delphi
Adobe Framemaker Intershop Enterprise
Allaire Cold Fusion Intershop Hosting Product Line
Ardent UniVerse Intershop Enfinity
BEA Systems Tuxedo Knox Arkeia
BEA Systems Weblogic Netscape Directory Server
Computer Associates ArcServeIT Netscape Enterprise Server
Computer Associates InoculateIT Oracle Applications 11i
Checkpoint Firewall-1 Pervasive SQL
Citrix ICA Client Pervasive Tango
Citrix MetaFrame Progress AppServer
Digital Creations Zope Progress DataServers
EST BRU Progress WebSpeed Messenger
Hewlett Packard Openview Progress WebSpeed Transaction Server
IBM MQ Series Tivoli (all systems management
applications)
Informix Dynamic Server 2000 Tripwire Tripwire
Inprise JBuilder
</TABLE>
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The following represents a partial list of systems vendors that offer Red
Hat Linux on their servers and other systems:
<TABLE>
<S> <C>
SYSTEMS VENDOR RED HAT LINUX OFFERINGS
Cobalt All of Cobalt's server appliances use an
optimized version of Red Hat Linux.
Compaq Offers Red Hat Linux on its ProLiant, Prosignia
and AlphaServer series of servers and
workstations. Compaq also offers Red Hat Linux
bundled on its Deskpro EN and EP series upon
request.
Dell Offers Red Hat Linux factory-installed across
its entire line of Power-Edge servers and on
selected configurations of its workstations and
desktop personal computers.
Gateway Offers Red Hat Linux as an option on its Gateway
ALR servers (ALR 7000, 8000 and 9000).
Hewlett-Packard Offers Red Hat Linux on high end work stations
for the electronic design automation market and
has certified their Enterprise-ready LPR servers
on Red Hat Linux.
IBM Offers Red Hat Linux on the RS/6000 UNIX
systems, Netfinity server series, Intellistation
workstation and ThinkPad 600E.
Intel Offers Red Hat Linux tuned for its original
equipment manufacturer internet server
platforms.
Silicon Graphics Offers Red Hat Linux on the 1400L server
preloaded.
Sun Microsystems Offers Red Hat Linux as an option on its Deluxe
Sparc servers.
VA Linux Offers Red Hat Linux on all of its systems.
</TABLE>
SALES, MARKETING AND DISTRIBUTION
SOFTWARE PRODUCTS
We sell our products worldwide through direct marketing, telesales campaigns
and our web site, and indirectly through distributors, retailers, catalogs and
original equipment manufacturers. Our direct sales force of 18 individuals as of
December 31, 1999, is dedicated to increasing worldwide sales through our
retail, distribution and original equipment manufacturer channels. As of
December 31, 1999, our indirect distribution channel was composed of eight
distributors, over 100 retailers with thousands of locations and 50 original
equipment manufacturers. 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 historical
revenue during that fiscal year.
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Frank Kasper & Associates accounted for approximately 26% of our total
historical revenue in the fiscal year ended February 28, 1998, 20% for the
fiscal year ended February 28, 1999, and 12% in the nine months ended
November 30, 1999. Ingram Micro accounted for approximately 30% of our total
historical revenue in the nine months ended November 30, 1999.
Our agreements with our distributors 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 of equal marketing capabilities and reputation
could have a material adverse effect on our business, operating results and
financial condition.
We permit original equipment manufacturers to distribute Red Hat Linux with
their own hardware in exchange for royalty payments to us. We currently have
original equipment manufacturer agreements in place with Dell, Silicon Graphics
and others. These agreements are not exclusive, have no stated minimum purchase
or license obligations, and generally may not be terminated prior to the
expiration of their terms which, in the case of Dell, is one year and, in the
case of Silicon Graphics, is an initial term of one year, renewable for two
additional one-year terms.
SERVICES
We sell our service offerings worldwide directly to individuals and
companies through our sales force, direct marketing, telesales and our web site,
and indirectly through joint marketing alliances with companies such as Compaq,
IBM and Intel. Our direct sales force concentrates primarily on selling custom
development and technical support and maintenance contracts to our enterprise
customers worldwide. Our acquisition of Cygnus in January 2000 added 28 sales
professionals to our direct sales organization.
We have established joint marketing relationships with a number of leading
technology companies including Compaq, Hewlett-Packard, IBM, Intel and Oracle.
These agreements generally have one- or two-year terms and may be terminated
prior to the expiration of their terms by either party with prior notice.
Our direct 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 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 the development and maintenance
of our web site.
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COMPETITION
In the market for operating systems, we compete with a limited number of
large and well-established companies that have significantly greater financial
resources, 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 rapidly evolving open source- and Linux-based operating system
market, we compete with a number of well-respected vendors and development
projects. These competitors have established 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 original equipment
manufacturers with which we have agreements. Many of these companies have larger
and more experienced services organizations than we do currently. In addition,
we face potential competition from several companies devoted to providing open
source-based products and services, such as VA Linux Systems, a provider of
hardware pre-installed with open source software, and Corel Corp., a developer
of open source applications, each of which has indicated a growing interest in
the Linux-based operating systems market.
With our acquisition of Cygnus, we now face competition in the market for
software development tools and operating systems for special-purpose computing.
Our main competitors in this market include Wind River Systems, Integrated
Systems Incorporated, Green Hills Software, and the Metrowerks subsidiary of
Motorola. These companies are well established and have greater financial
resources and a larger direct sales staff than we do. Some of these companies
currently produce or use open source software as part of their product
offerings.
The open source solutions market is not characterized by the traditional
barriers to entry that are found in most other markets, due to the nature of our
products. For example, anyone can copy, modify and redistribute Red Hat Linux
and most of our other open source products 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 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,
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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 expand our distribution
capabilities, continuing to expand into the special-purpose computing device
market and attracting 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 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 collaborate with open source software development teams
working across the internet. This involvement enables us to remain abreast of
and lead 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.
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,
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<PAGE>
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.
Most of our software engineering and development work takes place at our
headquarters. As of December 31, 1999, we employed 84 individuals in our
engineering group, consisting of 42 software engineers, including several of the
top Linux kernel developers in the world, 30 web design and development
professionals, 7 quality assurance engineers, 5 documentation specialists. With
our acquisitions of Cygnus and HKS, we added 114 people to our engineering
group.
INTELLECTUAL PROPERTY
Red Hat Linux and our other open source products have been developed and
made available for licensing under the GNU General Public License and similar
licenses. These licenses generally permit anyone to 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 open
source nature of our software products and the licenses under which we develop
and distribute them, our 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 United States and in
other countries. We have registered the trademark "Red Hat" in the United
States, Australia, and the European Union, and have registrations pending in
many other countries, including Canada and Japan. We have registered the Red Hat
"Shadow Man" logo in the U.S., European Union and Australia and have
registrations pending for it in many other countries, including Canada and
Japan. Other trademarks we have registered or have registrations pending in the
United States include Red Hat Certified Engineer, RHCE, Wide Open, Always Open,
Red Hat Ready and the Red Hat Ready logo. Other trademarks Cygnus registered or
has registrations pending in the United States include Cygnus Solutions, GNUPro,
Code Fusion, eCos, eCosystem, SourceNavigator and Cygwin.
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, third parties have in the past asserted, and may in the future assert
infringement claims against us which may result in costly litigation or require
us to obtain a license to third-party intellectual rights. 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.
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<PAGE>
EMPLOYEES
As of December 31, 1999, we had a total of 233 employees. Of the total
employees, 84 were in software engineering, 74 in sales and marketing, 45 in
customer service and technical support and 30 in finance and administration.
With our acquisitions of Cygnus and HKS, the number of employees in our software
engineering and customer service and technical support departments has almost
doubled. 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 organized under 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 also have major offices in Sunnyvale, California
and in the United Kingdom. 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 December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Robert F. Young.............................. 45 Chairman of the Board of Directors
Matthew J. Szulik............................ 43 Chief Executive Officer, President and
Director
Michael Tiemann.............................. 35 Chief Technology Officer
Timothy J. Buckley........................... 48 Senior Vice President and Chief Operating
Officer
Manoj K. George.............................. 32 Chief Financial Officer, Director of
Administration and Treasurer
Tom Butta.................................... 43 Chief Marketing Officer
David G. Shumannfang......................... 31 Counsel and Secretary
Marc Ewing................................... 30 Director
Kevin Harvey (1)(2).......................... 35 Director
William S. Kaiser (1)(2)..................... 44 Director
Eric Hahn (1)(2)............................. 39 Director
Frank Battten, Jr. (3)....................... 40 Director
KEY EMPLOYEES
Erik W. Troan................................ 25 Director of Engineering, Red Hat Linux
Donald J. Barnes............................. 27 Director of Technical Projects
Dr. Charles A. Coleman, Jr................... 53 Director of Information Services
Matthew Butterick............................ 29 Director of Internet Strategy
Carolyn Sparano.............................. 37 Director of North American Services
Howard Jacobson.............................. 39 Director of Corporate Development
Walter McCormack............................. 31 Director of Corporate Development
Lawrence J. Weidman.......................... 46 Director of Business Development, e-Commerce
Paul F. McNamara............................. 38 Director of Sales, Enterprise Division
Don Langley.................................. 40 Director of Sales, Embedded and Tools Division
Tom Barton................................... 36 Director of Global Services
Kim Knuttilla................................ 42 Director of Engineering, Embedded Systems
Colin Tenwick................................ 39 General Manager for European Operations
Masanobu Hirano.............................. 47 General Manager for Japan Operations
Mark White................................... 31 General Manager for Asia/Pacific Operations
</TABLE>
- ------------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Resigned from the Board of Directors effective January 13, 2000.
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 as Chief Executive Officer and Chairman of the Board of Directors. In
November 1999, he resigned as Chief Executive Officer and currently serves as
the Chairman of the Board of Directors.
MATTHEW J. SZULIK has served as Chief Executive Officer of Red Hat since
November 1999, as President since November 1998 and as 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.
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MICHAEL TIEMANN has served as Red Hat's Chief Technology Officer since
January 2000. Prior to joining Red Hat, he was a co-founder of Cygnus in 1989,
and held various positions with Cygnus, including President, Director of
Business Development and Director of Technical Marketing.
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.
TOM BUTTA has served as Red Hat's Chief Marketing Officer since July 1999.
Prior to joining Red Hat, from July 1996 to July 1999, Mr. Butta served as Chief
Executive Officer of FGI, Inc., a marketing, consulting, research and
interactive communications firm. From January 1995 until June 1996, he served as
Chief Executive Officer of FGI New York, Inc., a marketing, consulting and
communications firm. Prior to that, Mr. Butta was a founder and Chief Executive
Officer of Christopher Vincent, Inc., an integrated and new media marketing
firm, from January 1989 to December 1994.
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.
MARC EWING co-founded Red Hat and has served as a Director of Red Hat since
its inception. He also served as its Executive Vice President and Chief
Technology Officer from inception until January 2000. 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. Prior to
founding Red Hat, for various periods from January 1991 to August 1992,
Mr. Ewing worked as a systems programmer for IBM.
KEVIN HARVEY has served as a Director of Red Hat since August 1999.
Mr. Harvey has been a Managing Member of the general partner of Benchmark
Capital Partners, a venture capital firm, since January 1995. From July 1993 to
January 1995, Mr. Harvey served as General Manager for Lotus Development
Corporation, a software company. Mr. Harvey is also a director of Silicon
Gaming, Inc., Critical Path, Inc. and several privately held companies.
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., Clarus Corporation and Student Advantage, Inc.
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.
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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.
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.
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 systems vendor evaluation, selection
and 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.
MATTHEW BUTTERICK has served as Red Hat's Director of Internet Business
since May 1999. Prior to joining Red Hat, Mr. Butterick was founder and
President of Atomic Vision, a web site development company, from September 1994
until May 1999.
CAROLYN SPARANO has served as Red Hat's Business Unit Manager of Services
since June 1999. Prior to joining Red Hat, Ms. Sparano served in several
positions with INTERSOLV, including Vice President of Worldwide Training from
March 1999 to May 1999; Director of Consulting Services from August 1998 to
March 1999; Director of World Wide DataDirect Solutions from March 1997 to
August 1998; Director of DataDirect Technical Support from August 1995 to
March 1997; and Manager of Technical Support from January 1992 to August 1995.
HOWARD JACOBSON has served as Red Hat's Director of Corporate Development
since January 1999. Prior to joining Red Hat, Mr. Jacobson was an attorney at
the law firm of Moore & Van Allen from August 1995 to January 1999. He was an
attorney at Gibson, Dunn and Crutcher from 1988 to July 1995.
WALTER MCCORMACK has served as Red Hat's Director of Corporate Development
since September 1999. Prior to joining Red Hat, from August 1996 through
September 1999, Mr. McCormack was an investment banker in the High Technology
Group at Goldman, Sachs & Co. From August 1994 to 1996 he earned his Masters in
Management from the J.L. Kellogg Graduate School of Management at Northwestern
University.
LAWRENCE J. WEIDMAN has served as Red Hat's Director of Business
Development, eCommerce, since January 2000. Prior to joining Red Hat, from
November 1998 to January 2000, Mr. Weidman served as President, Chief Executive
Officer and a Director of HKS. From January 1997 to August 1998, he was
President of 6DOS, Inc., a developer of web-based collaboration software. From
April 1995 to January 1997, he was vice president of marketing at GALT
Technologies. From June 1991 to February 1995, he was President and General
Manager of Cisigraph Corporation.
PAUL F. MCNAMARA has served as Director of Sales, Enterprise Division, since
August 1999. From May 1998 to August 1999 he served as Red Hat's Vice President
of Business Development. Prior to joining Red Hat, from September 1994 to May
1998, he
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was President and Chief Operating Officer of Asset Management Technologies, a
computer software company.
DON LANGLEY has served as Red Hat's Director of Sales, Embedded and Tools
Division, since January 2000. Prior to joining Red Hat, from July 1998 to
January 2000 Mr. Langley served as Vice President of North American Sales for
Cygnus. From January 1998 to July 1998 he was Director of Sales for C-Cube
Microsystems. From January 1997 to January 1998 he was Director and General
Manager of the Mainstream and Removable Products Group at Adaptec. Prior to
that, he served at SGS-Thomson as Managing Director, Data Storage Business Unit
from March 1995 to January 1997 and as Director of Marketing, Computer Business
Unit from February 1994 to March 1995.
TOM BARTON has served as Red Hat's Director of Global Services since January
2000. Prior to joining Red Hat, Mr. Barton held several positions with Cygnus,
including Senior Vice President and General Manager of Client Services from
December 1998 to January 2000, Senior Vice President of Operations from July
1998 to December 1998, Acting Chief Executive Officer from December 1997 to
July 1998, Vice President and General Manager of Platform Products from
April 1997 to December 1997, Vice President of Business Development from
January 1997 to April 1997, and Director of Marketing from August 1996 to
January 1997. From July 1993 to August 1996 Mr. Barton was an Associate and then
an Engagement Manager with McKinsey & Co.
KIM KNUTTILLA has served as Red Hat's Director of Engineering, Embedded
Division, since January 2000. Prior to joining Red Hat, Mr. Knuttilla held
several positions with Cygnus, including Vice President of Engineering from
February 1999 to January 2000, Vice President of Client Services, Engineering
from September 1998 to February 1999, Director of Client Services, Engineering
from February 1998 to September 1998, Director of Engineering from October 1996
to February 1998, and GCC Engineer from May 1995 to October 1996. From
April 1994 to May 1995 he was Director of Engineering for Visible Decisions.
COLIN TENWICK has served as Red Hat's General Manager for European
Operations since June 1999. Prior to joining Red Hat, Mr. Tenwick held numerous
positions with Sybase, including Vice President and General Manager, European
Operations from October 1998 to June 1999; Vice President and Managing Director,
U.K. Operations from November 1995 to October 1998; and Vice President,
Marketing and Channel Sales, European Operations from April 1994 to
November 1995.
MASANOBU HIRANO has served as Red Hat's General Manager for Japan Operations
since August 1999. Prior to joining Red Hat, Mr. Hirano was President of
Hyperion Japan from June 1998 until July 1999, an independent management
consultant from June 1997 to June 1998, and held several positions with ASCII
Corporation in Japan, including Director of Software Division from January 1995
to June 1995 and Vice President of Software Division from June 1995 to
May 1997.
MARK WHITE has served as Red Hat's General Manager for Asia-Pacific
Operations since November 1999. Prior to joining Red Hat, Mr. White served as
Director of UNIX Marketing for Compaq Asia-Pacific from June 1998 through
October 1999. From January 1997 through June 1998, he was Manager of UNIX &
Telecomms Platforms for the Asia-Pacific Division of Tandem Computers Inc. and
was UNIX Product Manager for the same firm from April 1995 to December 1996.
From January 1994 through March 1995, Mr. White served as Projects Director for
Pacific Star Communications Pty Ltd., a Bell Atlantic International joint
venture company.
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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.
With the exception of Kevin Harvey, who was appointed to the Board in
August 1999, all of the current Directors were selected as Directors of Red Hat
under 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 terminated upon the closing of Red Hat's initial public
offering. There are no family relationships among any of the executive officers
or directors of Red Hat.
Red Hat's Board of Directors is divided into three classes, with the members
of each class of directors serving for staggered three-year terms.
Messrs. Ewing and Hahn serve in the class the term of which expires in 2000;
Messrs. Szulik and Harvey serve in the class the term of which expires in 2001;
and Messrs. Young and Kaiser 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 and Anti-Takeover
Effects".
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has appointed a Compensation Committee consisting of
Messrs. Harvey, 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. Harvey, 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 internal accounting and financial control
policies and procedures. 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. In accordance
with a policy approved by the Board of Directors in June 1999, upon initial
election or appointment to the Board of Directors, new non-employee Directors
will be granted non-qualified stock options to purchase 40,000 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 1/3% at the end of each three-month period thereafter. Upon
re-election, non-employee directors will be granted non-qualified stock options
to purchase 20,000 shares of common stock to vest 33 1/3% one year from the date
of re-election and 8 1/3% at the end of 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 10,000 shares of common stock which will
be fully vested upon grant. In accordance with this policy, in August 1999,
Frank Batten, who was re-elected as a director in August 1999 and resigned from
the Board of Directors in January 2000, and Mr. Kaiser, who was re-elected as a
director in August 1999, were granted non-qualified stock options to
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purchase 20,000 shares of common stock at the initial public offering price and
on August 25, 1999, Mr. Harvey was granted non-qualified stock options to
purchase 40,000 shares of common stock at a price of $36.75 per share. All of
these options will vest as provided above, except for options held by
Mr. Batten, which have been canceled. 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 343,104 shares of common stock at an exercise
price of $.78525 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.
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 for services rendered in all capacities to Red Hat
during the fiscal year ended February 28, 1999. As of December 31, 1999, 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; Timothy J. Buckley--$155,000; and Tom Butta--$175,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION ALL OTHER
NAME AND PRINCIPAL ANNUAL AWARDS COMPENSATION ($)
POSITION COMPENSATION --------------------- ------------------
- ------------------ --------------------- SECURITIES UNDERLYING
SALARY($) BONUS($) OPTIONS(#)
--------- --------- ---------------------
<S> <C> <C> <C> <C>
Robert F. Young(1)
Chairman...................................... 161,458 25,000 -- 41,141
Marc Ewing(1)
Director...................................... 145,125 20,000 -- --
</TABLE>
- ------------------------------
(1) During the fiscal year ended February 28, 1999, Mr. Young served as Red
Hat's President and Chief Executive Officer and Mr. Ewing served as Red
Hat's Executive Vice President and Chief Technology Officer.
Red Hat has never granted any stock options to Mr. Young or Mr. Ewing.
SEVERANCE AND CHANGE IN CONTROL ARRANGEMENTS
Matthew Szulik, Red Hat's Chief Executive Officer and 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 on or before
March 13, 2000 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 Senior Vice President and 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 on or before
April 12, 2000 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
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without cause or by Mr. Buckley for good reason, following a change in control
of Red Hat.
Tom Butta, Red Hat's Chief Marketing Officer, is a party to a non-qualified
stock option agreement which provides for the lapsing of Red Hat's repurchase
right as to 50% of his unvested option shares upon the termination of his
employment by Red Hat without cause or by Mr. Butta for good reason. In
addition, pursuant to the terms of his employment offer letter, upon the
termination of Mr. Butta's employment by Red Hat without cause before July 20,
2000, Red Hat must pay Mr. Butta a severance amount equal to three month's
salary.
EMPLOYEE BENEFIT PLANS
RED HAT'S 1998 STOCK OPTION PLAN, AS AMENDED
Red Hat's 1998 Stock Option Plan, as amended, 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 June 1999. In June 1999, the Board of
Directors and the stockholders voted to terminate the 1998 Stock Option Plan
effective upon the consummation of Red Hat's initial public offering of its
common stock in August 1999. Under the 1998 Stock Option Plan, Red Hat granted
incentive stock options and non-qualified stock options to employees,
consultants, directors and officers of Red Hat. The 1998 Stock Option Plan is
administered by the Board of Directors and the Compensation Committee. The 1998
Stock Option Plan provides that the Board of Directors and the Compensation
Committee each has the authority to select the participants and determine the
terms of the stock options, awards and purchase rights granted under the 1998
Stock Option Plan. Options granted under the 1998 Stock Option Plan are
immediately exercisable. Red Hat has a right of repurchase over all exercised
but unvested shares which lapses over a period of four years. An incentive stock
option is not transferable by the recipient except by will or by the laws of
descent and distribution. Non-qualified stock options and other awards are
transferable only to the extent provided in the agreement relating to such
option or award or in response to a valid domestic relations order. No incentive
stock options 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. As of December 31, 1999, Red Hat had outstanding under the 1998
Stock Option Plan stock options for 11,551,732 shares of common stock.
RED HAT'S 1999 STOCK OPTION AND INCENTIVE PLAN
Red Hat's 1999 Stock Option and Incentive Plan was adopted by Red Hat's
Board of Directors and approved by its stockholders in June 1999. The 1999 Stock
Option and Incentive 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 incentive stock options and non-qualified stock
options and other equity-based awards. Incentive stock options may be granted
only to employees of Red Hat. A total of 13,000,000 shares of common stock may
be issued upon the exercise of options or other awards granted under the 1999
Stock Option and Incentive Plan. The maximum number of shares that may be
granted to any employee under the 1999 Stock Option and Incentive Plan shall not
exceed 6,500,000 shares of common stock during any calendar year.
The 1999 Stock Option and Incentive Plan is administered by the Board of
Directors and the Compensation Committee. The 1999 Stock Option and Incentive
Plan provides that 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 to be
granted. Payment of the exercise price of an award may be made in cash, shares
of
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common stock, a combination of cash or stock or by any other method approved by
the Board of Directors 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 Option and Incentive Plan, so long as such amendment, modification or
termination would not materially and adversely affect the participant. Each of
the Board of Directors 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 Option and Incentive
Plan may be exercised. As of December 31, 1999, Red Hat had outstanding under
the 1999 Stock Option and Incentive Plan stock options for 1,275,890 shares of
common stock.
RED HAT'S 1999 EMPLOYEE STOCK PURCHASE PLAN
The 1999 Employee Stock Purchase Plan was adopted by the Board of Directors
and approved by the stockholders in June 1999. The 1999 Employee Stock Purchase
Plan provides for the issuance of a maximum of 1,500,000 shares of common stock.
The 1999 Employee Stock Purchase Plan is administered by the Board of
Directors and the Compensation Committee. All employees of Red Hat whose
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 six-month payment
period are eligible to participate in the 1999 Employee Stock 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 Employee Stock Purchase Plan. To participate in the 1999
Employee Stock 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.
The first payment period commenced on October 1, 1999 and ends on March 31,
2000. Thereafter, the payment periods will commence on the first day of April
and October, and end 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 2,000 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 Employee Stock Purchase Plan may not be transferred or assigned. An
employee's rights under the 1999 Employee Stock 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 Employee Stock
Purchase Plan.
CYGNUS STOCK OPTION PLANS
In connection with the acquisition of Cygnus in January 1999, Red Hat
assumed all of Cygnus' obligations under the Cygnus 1995 Stock Plan, the Cygnus
1997 Stock Plan and the Cygnus 1998 Executive Stock Plan, and all options
granted thereunder are exercisable for Red Hat common stock. Upon the
consummation of the acquisition of Cygnus, all of these plans were terminated
and no further options may be granted under these plans. The Cygnus Stock Plans
shall be administered by Red Hat's Board of Directors and Compensation
Committee. Payment of the exercise price of an option under these Plans may be
made in cash, shares of common
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stock, promissory note or any combination of the foregoing or any other method
approved by the Board of Directors or the Compensation Committee consistent with
applicable law. Options under the Cygnus Plans are not assignable or
transferable except by will or the laws of descent and distribution. Red Hat
may, however, at any time and at its discretion offer to repurchase any option
previously granted under these plans on terms determined by the Board of
Directors or the Compensation Committee.
As of December 31, 1999 (giving effect to the Cygnus acquisition, which
closed on January 7, 2000), Red Hat had outstanding under the Cygnus stock plans
stock options for 2,412,737 shares of common stock.
401(K) PLAN
Red Hat has a Section 401(k) Profit Sharing 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 covers 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. 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.
Red Hat has not made any contributions to the 401(k) plan to date.
Employees of Cygnus after the acquisition will continue to participate in
the Cygnus 401(k) plan. This plan is a tax-qualified plan covering all Cygnus
employees who are over 21 years of age and who have completed one month of
service with Cygnus. If, however, an employee was employed by Cygnus prior to
October 1, 1996, the 401(k) plan covers such employee regardless of age. Under
this plan, participants may elect to defer a portion of their compensation.
There is no provision for matching contributions.
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 has obtained insurance which
insures the directors and officers of Red Hat against certain losses and which
insures Red Hat against its obligations to indemnify the directors and officers.
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TRANSACTIONS WITH AFFILIATES
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 in a private financing at a
price of $.294057 per share. The 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 Frank Batten, Jr., Frank Batten,
Louis F. Ryan as trustees under a trust agreement dated April 11, 1988, as
amended, 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 Frank
Batten, Jr., Frank Batten, Louis F. Ryan as trustees under a trust agreement
dated April 11, 1988, as amended, Intel Corporation, Greylock IX Limited
Partnership and Benchmark Capital Partners II L.P., each a 5% stockholder of Red
Hat.
In January 2000, in connection with our acquisition of Cygnus, we issued
Greylock IX Limited Partnership, a stockholder of Cygnus and a 5% stockholder of
Red Hat, an aggregate of 621,013 shares of common stock and Greylock Equity
Limited Partnership, a stockholder of Cygnus, an aggregate of 621,010 shares of
common stock. William Kaiser, a general partner of the general partner of
Greylock IX Limited Partnership and a general partner of the general partner of
Greylock Equity Limited Partnership, is a director of Red Hat. Mr. Kaiser
abstained from voting with respect to the approval by Red Hat's Board of
Directors of the Cygnus acquisition.
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 providing that 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
thirds parties and will be approved by a majority of the disinterested members
of Red Hat's Board of Directors.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to Red Hat regarding
beneficial ownership of Red Hat's common stock at December 31, 1999 (giving
effect to the stock split effected in January 2000 and the issuance of shares in
conncetion with our acquisitions of Cygnus and HKS in January 2000) 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;
- Red Hat's Chief Executive Officer;
- each of Red Hat's directors;
- all other selling stockholders; 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 over the shares listed, except for
shares owned jointly with that person's spouse.
The number of shares of common stock deemed outstanding includes shares
issuable upon exercise of options and warrants held by the respective person or
group which may be exercised within 60 days after December 31, 1999. For
purposes of calculating each person's or group's percentage ownership, stock
options exercisable within 60 days after December 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>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED SHARES TO OWNED
BEFORE THE OFFERING BE SOLD AFTER THE OFFERING
NAME AND ADDRESS OF ------------------------ ---------- ------------------------
BENEFICIAL OWNER (1) NUMBER PERCENTAGE NUMBER PERCENTAGE
-------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
Greylock IX Limited Partnership....... 18,689,755 12.6% -- 18,689,755 12.2%
One Federal Street
Boston, MA 02110
Benchmark Capital Partners II, L.P.... 11,631,820 7.8 -- 11,631,820 7.6
2840 Sand Hill Road, Suite 2000
Menlo Park, CA 94025
EXECUTIVE OFFICERS AND DIRECTORS
Robert F. Young (2)................... 18,163,652 12.2 321,502 17,842,150 11.9
Marc Ewing (3)........................ 18,176,952 12.2 331,745 17,845,207 11.9
Matthew Szulik (4).................... 5,472,496 3.6 38,826 5,433,670 3.5
Frank Batten, Jr. (5)................. 30,011,776 20.2 547,739 29,464,037 19.6
c/o Landmark Communications
150 W. Brambleton Avenue
Norfolk, VA 23510-2075
William S. Kaiser (6)................. 18,689,755 12.6 -- 18,689,755 12.2
c/o Greylock IX Limited Partnership
One Federal Street
Boston, MA 02110
Eric Hahn............................. 343,104 * -- 343,104 *
c/o Inventures Group
465 Melville Avenue
Palo Alto, CA 94301
Kevin Harvey (7)...................... 11,631,820 7.8 -- 11,631,820 7.6
c/o Benchmark Capital Partner II,
L.P.
2840 Sand Hill Road, Suite 2000
Menlo Park, CA 94025
Manoj K. George (8)................... 478,204 * 7,998 470,206 *
David G. Shumannfang (9).............. 160,000 * 2.190 157,810 *
All executive officers and directors
as a group (11 persons) (10)........ 77,953,223 49.7 1,250,000 76,703,223 48.8
</TABLE>
- --------------------------
* Represents beneficial ownership of less than one percent of outstanding
common stock.
(1) Unless otherwise indicated, the address for each beneficial owner is c/o Red
Hat, Inc., 2600 Meridian Parkway, Durham, N.C. 27713.
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(2) Shares beneficially owned includes 6,445,492 shares held of record by Nancy
Young, Mr. Young's wife, 600,000 held by the Nancy R. Young GRAT dated
April 28, 1999, 400,000 shares held of record by the Young Family Trust
dated April 28, 1999 and 2,836,320 shares held of record by trusts for the
benefit of Mr. Young's children. Mr. Young disclaims beneficial ownership of
these shares. Also includes 600,000 shares held of record by the Robert F.
Young GRAT dated April 28, 1999. Of the shares to be sold by Mr. Young,
160,751 shares will be sold by Mr. Young and 160,751 shares will be sold by
Nancy Young.
(3) Shares beneficially owned includes 400,000 shares held of record by the
Ewing Family Trust dated April 28, 1999 and 2,025,440 shares held of record
by trusts for the benefit of Mr. Ewing's children. Mr. Ewing disclaims
beneficial ownership of these shares. Also includes 1,200,000 shares held of
record by the Marc Ewing GRAT dated April 28, 1999.
(4) Shares beneficially owned includes 72,000 shares held of record by trusts
for the benefit of Mr. Szulik's children. Mr. Szulik disclaims beneficial
ownership of these shares. Also includes 55,356 shares held of record by the
Matthew J. Szulik GRAT dated May 26, 1999. Also includes 3,345,140 shares of
common stock issuable upon exercise of stock options.
(5) Shares beneficially owned includes 2,515,753 shares held of record by the
1988 Batten Trust, 26,973,284 shares held of record by the 1998 Frank
Batten, Jr. Grantor Annuity Trust and 522,739 shares held of record by the
Aimee and Frank Batten, Jr. Foundation. Of the shares to be sold by
Mr. Batten, 25,000 shares will be sold by the 1998 Frank Batten, Jr. Grantor
Annuity Trust and 522,739 shares will be sold by the Aimee and Frank Batten,
Jr. Foundation.
(6) Shares beneficially owned includes shares held of record by Greylock IX
Limited Partnership and 621,010 shares held of record by Greylock Equity
Limited Partnership. Mr. Kaiser is a general partner of the general partner
of each of Greylock IX Limited Partnership and Greylock Equity Limited
Partnership. Mr. Kaiser disclaims beneficial ownership of all of these
shares. Also includes 20,000 shares of common stock issuable upon exercise
of stock options.
(7) Shares beneficially owned includes shares held by Benchmark Capital Partners
II, L.P. Mr. Harvey is a managing member of Benchmark Capital Management Co.
II, L.L.C., the general partner of Benchmark Capital Partners II, L.P.
Mr. Harvey disclaims beneficial ownership of these shares.
(8) Shares beneficially owned includes 40,000 shares of common stock issuable
upon exercise of stock options.
(9) Shares beneficially owned includes 40,000 shares of common stock issuable
upon exercise of stock options.
(10) Shares beneficially owned includes 6,762,380 shares of common stock
issuable upon exercise of stock options.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of Red Hat consists 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.
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 and
Amended and Restated By-laws, filed as exhibits to the registration statement of
which this prospectus is a part.
COMMON STOCK
As of December 31, 1999, giving effect to the stock split effected in
January 2000 and the issuance of shares in connection with our acquisitions of
Cygnus and HKS in January 2000, there were 148,933,572 shares of common stock
outstanding held by approximately 775 stockholders of record. Based upon the
number of shares outstanding as of that date and giving effect to the issuance
of the 2,750,000 shares of common stock offered by Red Hat in this offering,
there will be 151,683,572 shares of common stock outstanding upon the closing of
this offering. In addition, as of December 31, 1999, giving effect to stock
split effected in January 2000 and the assumption of options in connection with
our acquisitions of Cygnus and HKS in January 2000, there were outstanding stock
options for the purchase of 15,240,359 shares of common stock and outstanding
warrants for the purchase of 4,814,900 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, after provision has been made for 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, and after the satisfaction of the 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 non-assessable. The rights, powers, preferences and privileges of
holders of common stock are subordinate 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, 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 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 subordinate 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
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<PAGE>
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
The provisions of Section 203 of the General Corporation Law of Delaware
prohibit Red Hat 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. An "interested stockholder" is defined as
a person who, at the time of determination whether a person is an interested
stockholder,
- beneficially owns 15% or more of Red Hat's common stock; or
- is an affiliate or associate of Red Hat and beneficially owned 15% or more
of Red Hat's common stock at any time within three years of the date of
determination.
Red Hat's Third Amended and 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, Red Hat's Third Amended and Restated
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 Red Hat's Third Amended and 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, because only two directors may be replaced by
stockholder vote at each annual meeting of stockholders, stockholders seeking to
replace a majority of the members of the Board of Directors will need at least
two annual meetings of stockholders to effect this change.
Red Hat's Third Amended and Restated Certificate of Incorporation also
provides that 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. Red Hat's Amended and 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. Red Hat's Amended and 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.
87
<PAGE>
The General Corporation Law of Delaware provides 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 by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. Red Hat's Third Amended and 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. Red Hat's Amended and Restated By-laws may be amended or repealed
by a majority vote of the Board of Directors except for provisions relating to
the Board of Directors which may only be amended or repealed by the affirmative
vote of the holders of at least 75% of the shares of capital stock issued and
outstanding and entitled to vote. The Amended and Restated By-laws may also be
amended or repealed by 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 in accordance with 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 ChaseMellon
Shareholder Services, LLC.
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. A
partner and three associates of Testa, Hurwitz & Thibeault, LLP own an aggregate
of 4,200 shares of Red Hat's common stock.
EXPERTS
The financial statements of Red Hat as of February 28, 1998 and 1999 and for
each of the three years in the period ended February 28, 1999 and the
supplemental pooled financial statements of Red Hat 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
(which contains an explanatory paragraph relating to the merger of Red Hat with
Cygnus) of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Hell's Kitchen Systems as of December 31, 1998,
March 9, 1999 and September 30, 1999 and for the year ended December 31, 1998,
the period from January 1, 1999 to March 9, 1999, and the period from March 10,
1999 to September 30, 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.
In addition, the supplementary pooled financial statements of Red Hat 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.
88
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Red Hat files reports and other information with the Securities and Exchange
Commission. Investors may inspect these reports and other information 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.
In addition, Red Hat has filed with the Commission a registration statement
on Form S-1 under the Securities Act relating 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 and
the exhibits and schedules filed as a part of the registration statement. For
further information concerning 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 the agreement filed as an exhibit
to the registration statement each statement being qualified by this reference.
The registration statement, including the exhibits and schedules filed as a part
of the registration statement, as well as other documents filed by Red Hat with
the Commission, may be inspected by investors as provided above.
89
<PAGE>
UNDERWRITING
Red Hat, the selling stockholders and the underwriters named below have
entered into an underwriting agreement concerning the shares being offered. Each
underwriter has severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co., Hambrecht & Quist LLC, Thomas Weisel
Partners LLC and J.P. Morgan Securities Inc. are the representatives of the
underwriters.
<TABLE>
<CAPTION>
Number of
Shares
Underwriters -----------
<S> <C>
Goldman, Sachs & Co.........................................
Hambrecht & Quist LLC.......................................
Thomas Weisel Partners LLC..................................
J.P. Morgan Securities Inc..................................
---------
Total:...................................................... 4,000,000
---------
</TABLE>
If the underwriters sell more shares than the total number presented in the
table above, the underwriters have an option to buy up to an additional 600,000
shares from Red Hat to cover such sales. They may exercise that option for
30 days. If any shares are purchased upon exercise of this option, the
underwriters will severally purchase shares in approximately the same proportion
as presented in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the underwriters by Red Hat and by the selling
stockholders. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase 600,000 additional shares.
<TABLE>
<CAPTION>
Paid by Red Hat
---------------
No Exercise Full Exercise
------------- -------------
<S> <C> <C>
Per Share................................................... $ $
Total....................................................... $ $
</TABLE>
<TABLE>
<CAPTION>
Paid by the selling stockholders
--------------------------------
No Exercise Full Exercise
------------- -------------
<S> <C> <C>
Per Share................................................... $ $
Total....................................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial price to public presented 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 price to public. 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 price to public. If all the shares are not sold at the initial price
to public, the representatives may change the offering price and the other
selling terms.
90
<PAGE>
Red Hat, its officers and directors, the selling stockholders and certain
other stockholders have agreed with the underwriters not to dispose of or hedge
shares of their 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 90 days after the date of this prospectus, except
(i) for an aggregate of 850,000 shares held by officers, directors, selling
shareholders and other stockholders as a group, or (ii) with the prior written
consent of Goldman, Sachs & Co. The 850,000 shares are, however, subject to
transfer restrictions, which will lapse two days after the announcement of
financial results for the quarter ending February 29, 2000, imposed in
connection with the acquisition of Cygnus.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager of
106 filed public offerings of equity securities, of which 79 have been
completed, and has acted as a syndicate member in an additional 54 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with Red Hat or any of our officers, directors or other
controlling persons, except for its contractual relationship with Red Hat under
the terms of the underwriting agreement entered into in connection with this
offering.
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.
Red Hat estimates that its share of the total expenses of the offering,
excluding underwriting commissions, will be approximately $ .
Red Hat and the selling stockholders have agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act.
91
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
RED HAT, INC. HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets at February 28, 1998 and 1999
and November 30, 1999 (unaudited)....................... F-3
Consolidated Statements of Operations for the years ended
February 28, 1997, 1998 and 1999 and the nine months
ended November 30, 1998 and 1999 (unaudited)............ F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended February 28, 1997, 1998 and 1999 and
the nine months ended November 30, 1999................. F-5
Consolidated Statements of Cash Flows for the years ended
February 28, 1997, 1998 and 1999 and the nine months
ended November 30, 1998 and 1999........................ F-6
Notes to Consolidated Financial Statements................ F-7
RED HAT, INC. SUPPLEMENTAL POOLED FINANCIAL STATEMENTS
Consolidated Balance Sheets at February 28, 1998 and 1999
and November 30, 1999 (unaudited)....................... F-26
Supplemental Pooled Consolidated Statements of Operations
for the years ended February 28, 1997, 1998 and 1999 and
the nine months ended November 30, 1998 and 1999
(unaudited)............................................. F-27
Supplemental Pooled Consolidated Statements of
Stockholders' Equity (Deficit) for the years ended
February 28, 1997, 1998 and 1999 and the nine months
ended November 30, 1999................................. F-28
Supplemental Pooled Consolidated Statements of Cash Flows
for the years ended February 28, 1997, 1998 and 1999 and
the nine months ended November 30, 1998 and 1999........ F-29
Notes to Supplemental Pooled Consolidated Financial
Statements.............................................. F-30
HELL'S KITCHEN SYSTEMS, INC. FINANCIAL STATEMENTS
Report of Independent Accountants......................... F-54
Consolidated Balance Sheets at February 28, 1998 and 1999
and November 30, 1999 (unaudited)....................... F-55
Consolidated Statements of Operations for the years ended
February 28, 1997, 1998 and 1999 and the nine months
ended November 30, 1998 and 1999 (unaudited)............ F-56
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended February 28, 1997, 1998 and 1999 and
the nine months ended November 30, 1999................. F-57
Consolidated Statements of Cash Flows for the years ended
February 28, 1997, 1998 and 1999 and the nine months
ended November 30, 1998 and 1999........................ F-58
Notes to Consolidated Financial Statements................ F-59
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of Red Hat, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit), and of
cash flows present fairly, in all material respects, the consolidated financial
position of Red Hat, Inc. and subsidiaries at February 28, 1998 and 1999 and the
results of their operations and their cash flows for each of the three years in
the period ended February 28, 1999, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States, 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.
As described in Note 15, on January 7, 2000, Red Hat merged with Cygnus
Solutions in a transaction accounted for as a pooling of interests. The
accompanying supplementary consolidated financial statements give retroactive
effect of the merger of Red Hat with Cygnus. Accounting principles generally
accepted in the United States proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Red Hat and its
subsidiaries after financial statements covering the date of consummation of the
business combination are issued.
In our opinion, based upon our audits, the accompanying supplementary
consolidated balance sheets and the related supplementary consolidated
statements of operations, of stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Red Hat and
its subsidiaries at February 28, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
February 28, 1999, in conformity with accounting principles generally accepted
in the United States. 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 auditing standards generally accepted in the
United States, 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, except as to
Note 14 to the financial statements which is as of January 7, 2000, and the
pooling of interests with Cygnus which is as of January 7, 2000
F-2
<PAGE>
RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28,
------------------------------------------
NOVEMBER 30,
1998 1999 1999
---------- ----------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,292,562 $10,055,227 $ 11,997,157
Short-term investments.................................... 100,000 2,037,992 7,630,705
Accounts receivable, net.................................. 744,551 1,241,338 4,536,431
Inventory................................................. 141,176 345,630 1,853,711
Prepaid expenses.......................................... 383,830 173,730 736,580
---------- ----------- ------------
Total current assets.................................. 2,662,119 13,853,917 26,754,584
Property and equipment, net................................. 337,327 1,270,576 5,095,166
Other assets, net........................................... 81,188 151,310 1,814,781
Investments................................................. 50,000 -- 76,633,119
---------- ----------- ------------
Total assets.......................................... $3,130,634 $15,275,803 $110,297,650
========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 773,936 $ 2,087,305 $ 4,589,370
Royalties payable......................................... 247,323 144,074 221,343
Accrued expenses.......................................... 50,334 379,757 2,167,704
Deferred revenue.......................................... 26,207 33,352 4,123,853
Current portion of capital lease obligations.............. 22,797 108,897 457,581
---------- ----------- ------------
Total current liabilities............................. 1,120,597 2,753,385 11,559,851
Capital lease obligations................................. 65,032 419,778 203,012
Commitments and contingencies (Note 12)...................
Mandatorily redeemable preferred stock:
Series A, 6,801,400, 6,801,400 and 0 shares authorized,
issued and outstanding at February 28, 1998, February
28, 1999 and November 30, 1999, respectively............ 1,983,209 1,992,184 --
Series B, 0, 8,116,550 and 0, shares authorized, issued
and outstanding at February 28, 1998, February 28, 1999
and November 30, 1999, respectively..................... -- 6,919,644 --
Series C, 0, 1,797,929 and 0 shares authorized at February
28, 1998, February 28, 1999 and November 30, 1999,
respectively; 0, 1,027,388 and 0 shares issued and
outstanding at February 28, 1998, February 28, 1999 and
November 30, 1999, respectively......................... -- 3,195,591 --
Stockholders' equity (deficit):
Preferred stock, 5,000,000 shares authorized, none
outstanding -- -- --
Common stock, $.0001 par value, 225,000,000 shares
authorized; 47,000,000, 47,705,900 and 137,589,208
shares issued and outstanding at February 28, 1998,
February 28, 1999 and November 30, 1999, respectively... 4,700 4,770 13,758
Additional paid-in capital................................ 261,300 425,079 115,142,628
Deferred compensation..................................... -- -- (7,115,756)
Accumulated deficit....................................... (304,204) (434,628) (9,293,554)
Accumulated other comprehensive loss...................... -- -- (212,289)
---------- ----------- ------------
Total stockholders' equity (deficit).................. (38,204) (4,779) 98,534,787
---------- ----------- ------------
Total liabilities and stockholders' equity
(deficit)........................................... $3,130,634 $15,275,803 $110,297,650
========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
RED HAT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED FEBRUARY 28, ENDED NOVEMBER 30,
--------------------------------------- ---------------------------
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software and related products.......... $ 2,603,131 $ 5,131,623 $10,012,923 $ 6,505,082 8,559,330
Web.................................... -- -- -- -- 626,384
Services and other..................... -- 24,000 776,996 607,985 3,409,967
----------- ----------- ----------- ----------- -------------
Total revenue........................ 2,603,131 5,155,623 10,789,919 7,113,067 12,595,681
----------- ----------- ----------- ----------- -------------
Cost of revenue:
Software and related products.......... 1,204,721 2,210,538 4,012,685 2,647,025 4,738,312
Web.................................... -- -- -- -- 626,756
Services and other..................... -- -- 28,148 -- 2,048,770
----------- ----------- ----------- ----------- -------------
Total cost of revenue................ 1,204,721 2,210,538 4,040,833 2,647,025 7,413,838
----------- ----------- ----------- ----------- -------------
Gross profit............................... 1,398,410 2,945,085 6,749,086 4,466,042 5,181,843
----------- ----------- ----------- ----------- -------------
Operating expense:
Sales and marketing.................... 491,473 1,252,362 3,083,162 1,644,838 7,609,146
Research and development............... 325,244 902,826 2,220,115 1,422,469 4,157,907
General and administrative............. 525,978 798,592 1,483,909 1,046,279 2,870,778
Stock-based compensation............... -- -- -- -- 1,009,503
Mergers and acquisitions............... -- -- -- -- 123,887
----------- ----------- ----------- ----------- -------------
Total operating expense.............. 1,342,695 2,953,780 6,787,186 4,113,586 15,771,221
----------- ----------- ----------- ----------- -------------
Income (loss) from operations.............. 55,715 (8,695) (38,100) 352,456 (10,589,378)
----------- ----------- ----------- ----------- -------------
Other income (expense):
Interest income........................ 200 34,410 171,181 68,208 1,828,065
Interest expense....................... (23,304) (13,036) (9,463) (6,396) (15,140)
----------- ----------- ----------- ----------- -------------
Other income (expense), net.......... (23,104) 21,374 161,718 61,812 1,812,925
----------- ----------- ----------- ----------- -------------
Income (loss) before income taxes.......... 32,611 12,679 123,618 414,268 (8,776,453)
Provision for income taxes................. -- 4,906 214,686 214,686 --
----------- ----------- ----------- ----------- -------------
Net income (loss).......................... 32,611 7,773 (91,068) 199,582 (8,776,453)
Accretion on mandatorily redeemable
preferred stock.......................... -- -- (39,356) (16,000) (82,473)
----------- ----------- ----------- ----------- -------------
Net income (loss) available to common
stockholders............................. $ 32,611 $ 7,773 $ (130,424) $ 183,582 $ (8,858,926)
=========== =========== =========== =========== =============
Net income (loss) per common share:
Basic.................................. $ 0.0007 $ 0.0002 $ (0.0028) $ 0.0039 $ (0.1050)
Diluted................................ $ 0.0006 $ 0.0001 $ (0.0028) $ 0.0021 $ (0.1050)
Weighted average common shares outstanding:
Basic.................................. 47,000,000 47,000,000 47,100,101 47,052,080 84,354,922
Diluted................................ 54,465,040 69,156,554 47,100,101 89,502,057 84,354,922
Pro forma net income (loss) per common
share (unaudited):
Basic.................................. $ (0.0010) $ 0.0025 $ (0.0578)
Diluted................................ $ (0.0010) $ 0.0022 $ (0.0578)
Pro forma weighted average common shares
outstanding (unaudited):
Basic.................................. 87,859,649 81,577,332 151,879,702
Diluted................................ 87,859,649 89,502,057 151,879,702
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
RED HAT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
---------------------- PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT INCOME (LOSS) EQUITY (DEFICIT)
----------- -------- ------------- -------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February
29, 1996............ 47,000,000 $ 4,700 $ 261,300 $ -- $ (344,588) $ -- $ (78,588)
Net income............ -- -- -- -- 32,611 -- 32,611
----------- ------- ------------ ----------- ----------- --------- -----------
Balance at February
28, 1997............ 47,000,000 4,700 261,300 -- (311,977) -- (45,977)
Net income............ -- -- -- -- 7,773 -- 7,773
----------- ------- ------------ ----------- ----------- --------- -----------
Balance at February
28, 1998............ 47,000,000 4,700 261,300 -- (304,204) -- (38,204)
Exercise of common
stock warrants...... 705,900 70 (52) -- -- -- 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............ 47,705,900 4,770 425,079 -- (434,628) -- (4,779)
Net loss.............. -- -- -- -- (8,776,453) -- (8,776,453)
Other comprehensive
income:
Unrealized loss on
investments in
marketable
securities........ -- -- -- -- -- (244,513) --
Foreign currency
translation
adjustment........ -- -- -- -- -- 32,224 --
---------
Other comprehensive
income.............. (212,289) (212,289)
Conversion of
preferred stock into
common stock........ 67,890,904 6,789 15,363,731 -- -- -- 15,370,520
Proceeds from sale of
common stock in
initial public
offering, net of
offering costs...... 13,800,000 1,380 88,465,549 -- -- -- 88,466,929
Exercise of common
stock options and
warrants............ 8,192,404 819 2,763,010 -- -- 2,763,829
Deferred
compensation........ -- -- 8,125,259 (8,125,259) -- -- --
Amortization of
deferred
compensation........ -- -- -- 1,009,503 -- -- 1,009,503
Accretion of
mandatorily
redeemable preferred
stock............... -- -- -- -- (82,473) -- (82,473)
----------- ------- ------------ ----------- ----------- --------- -----------
Balance at November
30, 1999
(unaudited)......... 137,589,208 $13,758 $115,142,628 $(7,115,756) $(9,293,554) $(212,289) $98,534,787
=========== ======= ============ =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
RED HAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED FEBRUARY 28, NOVEMBER 30,
------------------------------------- --------------------------
1997 1998 1999 1998 1999
---------- ---------- ----------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $ 32,611 $ 7,773 $ (91,068) $ 199,582 $ (8,776,453)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization............... 37,134 102,876 177,656 127,140 736,192
Tax benefit of stock options and warrants
exercised................................. -- -- 163,831 -- --
Deferred compensation....................... -- -- -- -- 1,009,503
Provision for doubtful accounts............. 38,986 38,141 185,092 55,558 212,085
Provision for inventory obsolescence........ -- -- 182,509 -- --
Deferred revenue............................ -- 26,207 7,145 (19,386) 4,090,501
Changes in operating assets and liabilities:
Accounts receivable....................... (251,774) (479,746) (681,879) (652,318) (3,507,178)
Inventory................................. (14,934) (84,507) (386,963) 22,045 (1,508,081)
Prepaid expenses.......................... (12,248) (370,571) 210,100 124,257 (562,850)
Other assets.............................. 1,613 (15,408) (75,478) (421,832) (1,668,710)
Accounts payable.......................... 282,453 290,253 1,313,369 556,242 2,502,065
Royalties payable......................... 57,477 189,846 (103,249) (49,682) 77,269
Accrued expenses.......................... (66,044) 19,019 329,423 863,301 1,787,947
---------- ---------- ----------- ---------- -------------
Net cash provided by (used in) operating
activities.............................. 105,274 (276,117) 1,230,488 804,907 (5,607,710)
---------- ---------- ----------- ---------- -------------
Cash flows from investing activities:
Purchase of investment securities............. -- (150,000) (1,966,600) -- (154,220,661)
Proceeds from sales and maturity of investment
securities.................................. -- -- 100,000 -- 71,750,316
Purchase of equipment......................... (201,322) (158,004) (654,235) (226,260) (4,285,391)
Proceeds from sale of equipment............... -- 24,272 -- -- --
---------- ---------- ----------- ---------- -------------
Net cash provided by (used in) investing
activities.............................. (201,322) (283,732) (2,520,835) (226,260) (86,755,736)
---------- ---------- ----------- ---------- -------------
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) -- 21,186 --
Proceeds from issuance of mandatorily
redeemable preferred stock, net............. -- 1,983,209 10,084,854 6,889,263 3,180,628
Proceeds from issuance of common stock, net... -- -- -- -- 88,466,929
Proceeds from exercise of common stock options
and warrants................................ -- -- 18 -- 2,763,829
Payments on capital lease obligations......... -- (4,750) (31,860) -- (138,234)
---------- ---------- ----------- ---------- -------------
Net cash provided by financing
activities.............................. 96,048 1,852,411 10,053,012 6,910,449 94,273,152
---------- ---------- ----------- ---------- -------------
Effect of exchange rate changes on cash and
cash equivalents............................ -- -- -- -- 32,224
Net increase in cash and cash equivalents..... -- 1,292,562 8,762,665 7,489,096 1,941,930
Cash and cash equivalents beginning of the
period...................................... -- -- 1,292,562 1,292,562 10,055,227
---------- ---------- ----------- ---------- -------------
Cash and cash equivalents end of period....... $ -- $1,292,562 $10,055,227 $8,781,658 $ 11,997,157
========== ========== =========== ========== =============
</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. and subsidiaries ("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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL STATEMENTS
The consolidated financial statements as of November 30, 1999 and for the
nine month periods ended November 30, 1998 and 1999 are unaudited and reflect
all adjustments (consisting of normal recurring adjustments) which are, in the
opinion of the Company's management, necessary for a fair presentation of
financial position, results of operations and cash flows. All financial
statement disclosures related to the nine month periods ended November 30, 1998
and 1999 are also unaudited.
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 at February 28, 1997, 1998 and 1999 were in debt
securities which were classified as held-to-maturity and were carried at
amortized cost in accordance with Statement of Financial Accounting Standards
No. 115 "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115"), as the Company had both the positive intent and ability to
hold them to maturity. Investments with a maturity period of greater than one
year at date of purchase are recorded as long-term investments.
During the nine month period ended November 30, 1999, all of the Company's
investments matured or were sold and re-invested in new securities. The
Company's investments at November 30, 1999 are in debt and equity securities.
The Company has classified these investments as available for sale and is
carrying these investments at market value in accordance with SFAS No. 115. The
Company's investments are considered available for sale as these securities
could potentially be sold in response to needs for liquidity, changes in the
availability of and the yield on alternative instruments or changes in funding
sources or terms. At November 30, 1999, the Company has an unrealized loss of
$244,513 related to these investments which is
F-7
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recorded as other comprehensive income which is a separate component of
stockholders' equity. The Company had an insignificant amount of net realized
losses on sales and maturities of investments during the nine months ended
November 30, 1999.
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. The reserve for inventory obsolescence
was $0 at November 30, 1999.
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 concerning 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 and November 30, 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
Leasehold improvements...................................... 4 to 25 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
investments in other companies accounted for using the cost method of
accounting, security deposits which are expected to be refunded to the Company
upon termination
F-8
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of certain leases, deferred merger and acquisition costs related to the
Company's pending acquisition of Cygnus Solutions, Inc. (Cygnus) (see Note 3)
and the long term portion of the Company's prepaid directors' and officers'
insurance premium. The deferred merger and acquisition costs will be expensed at
the closing date of the Company's acquisition of Cygnus. Prepaid insurance will
be amortized over the term of the related policy.
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 or the nine months ended
November 30, 1999.
REVENUE RECOGNITION
Revenues from the sale of software products for which no technical support
is provided 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. The Company recognizes revenues from the sale of software products
to new distributors of its software products based upon sell-through to the end
user until the Company has sufficient historical experience with the distributor
to allow the accurate estimation of sales returns.
Upon the release of Version 6.0 of Official Red Hat Linux in May 1999, the
Company began providing certain telephone and e-mail technical support services
with Official Red Hat Linux and Red Hat Secure Web Server for a period of
90 days from the date of registration of the software products for no additional
fee. In June 1999, the Company also began to provide to purchasers of Official
Red Hat Linux and Red Hat Secure Web Server certain subscription services for a
period of six months from the date of registration of the software products. In
October 1999, the Company released Version 6.1 of Red Hat Linux and included the
Secure Web Server product in the "professional version" of Version 6.1 of
Official Red Hat Linux. In accordance with the provisions of Statement of
Opinion No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), the Company is
recognizing all of the revenue from the sale of Versions 6.0 and 6.1 of Official
Red Hat Linux over the period that the technical support and subscription
services are provided as the Company does not sell these technical support and
subscription services separately and therefore does not have vendor specific
objective evidence of the fair value of these services. These revenues are
recognized ratably over the period that the technical support and subscription
services are provided in proportion to the costs incurred to provide such
technical support and subscription services as compared to estimated total costs
to be incurred. The Company currently does not provide support and maintenance
services as part of the fee for any of its software products, other than
Official Red Hat Linux.
Revenue for technical support and maintenance services, other than
installation support, is deferred and recognized ratably over the term of the
agreement, which is typically twelve months.
F-9
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue from customer training and education and other services is
recognized at the date the services are 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, published by the Company, which is
included in software and related products revenue is recognized at the date of
shipment, net of a reserve for estimated returns.
Web revenue related to advertising is recognized ratably over the period in
which the advertisement is displayed, provided that the Company has no
significant remaining obligations, at the lesser of the ratio of impressions to
the advertiser's web site delivered over total guaranteed impressions to the
advertiser's web site or the straight line basis over the term of the contract.
If 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 its web site
during the fiscal years ended February 28, 1997, 1998 and 1999. The Company
began selling advertising space on its web site in May 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.
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. In the event that stock options are
granted with an exercise price below the estimated fair value of the Company's
common stock at the grant date, the difference between the fair value of the
Company's common stock and the exercise price of the stock option is recorded as
deferred compensation. Deferred compensation is amortized to compensation
expense over the vesting period of the stock option. The Company recognized
$1,009,503 in non-cash compensation expense related to amortization of deferred
compensation during the nine months ended November 30, 1999. The Company did not
recognize any non-cash compensation expense in the years ended February 28, 1998
and 1999 as no options were granted at prices below fair value until
April 1999. 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.
F-10
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, including cooperative marketing
arrangements, 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
salaries for Company 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 enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
SIGNIFICANT CUSTOMERS AND CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company primarily places its temporary cash
investments with high-credit quality financial institutions which invest
primarily in U.S. Government securities, commercial paper of prime quality and
certificates of deposit guaranteed by banks which are members of the FDIC. Cash
deposits are primarily in financial institutions in the United States, however,
cash for monthly operating costs of international operations are deposited with
financial institutions outside of the United States. 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. Receivables from two
distributors comprised 75% and 25%, respectively, of net accounts receivable at
February 28, 1999. Accounts receivable from one distributor comprised 42% of net
receivables at February 28, 1998.
F-11
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Prior to October 1999, all of the Company's software revenues were from
sales transactions originating in the United States, however, in October 1999,
the Company began making direct sales from its international subsidiaries to
customers located outside the United States. The Company has historically
received certain royalty payments from international sources; however, such
amounts have been insignificant to date.
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 48,598,142 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 converted
automatically upon the effectiveness of the Company's initial public offering on
August 11, 1999 into 67,890,904 shares of common stock (see Note 9) at March 1,
1999 or the date of issuance, if later.
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 financial statements. It also requires
segment disclosures about products and services, geographic
F-12
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 or as of November 30, 1999. See below for disclosure regarding the
Company's geographic segments.
The Company established international sales offices in the United Kingdom,
Germany, Ireland and Japan during the Company's fiscal quarter ended August 31,
1999. These operations did not begin to generate revenues until the Company's
fiscal quarter ended November 30, 1999. None of these international operations
are material on an individual basis for the nine month period ended
November 30, 1999, therefore, the following disclosure aggregates all the
Company's international operations:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Revenues from external customers................ $ 11,594,274 $ 1,001,407 $ 12,595,681
Net loss........................................ $ (7,125,314) $(1,651,159) $ (8,776,453)
Total Assets.................................... $105,765,867 $ 4,531,783 $110,297,650
</TABLE>
INTERNAL USE SOFTWARE
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. The
Company adopted SOP No. 98-1 effective March 1, 1999. The adoption of SOP
No. 98-1 did not have a material impact on the Company's financial position or
results of operations.
COMPREHENSIVE INCOME (LOSS)
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. The Company's items of other
comprehensive income during the nine months ended November 30, 1999 are net
unrealized losses on investments in marketable securities of $244,513 and a
change in the cumulative translation adjustment of $32,224 for fiscal 1999
foreign currency gains and losses.
FOREIGN CURRENCY TRANSLATION
The majority of the Company's international sales are denominated in
currencies other than the U.S. dollar and most of the costs of the Company's
international operations are paid in currencies other than the U.S. dollar.
Foreign exchange gains and losses, which result from the translation of foreign
currency financial statements into U.S. dollars, are included as a separate
component of stockholders' equity.
F-13
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the 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. SFAS 133 as amended by SFAS 137, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000, with earlier
application encouraged. 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 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 SOP 98-9. 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 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
YEAR ENDED BEGINNING INCOME OR END OF
FEBRUARY 28, OF YEAR EXPENSE DEDUCTIONS (A) YEAR
- ------------ ----------- ----------- --------------- -----------
<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>
The Company's allowance for doubtful accounts totaled $134,162 at November 30,
1999. Bad debt expense for the nine month period ended November 30, 1999 was
$212,085
- ------------------------
(a) Represents amounts written-off as uncollectible accounts receivable.
F-14
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
The Company's property and equipment consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------- NOVEMBER 30,
1998 1999 1999
--------- ---------- --------------
<S> <C> <C> <C>
Computer equipment.................. $ 420,523 $ 818,676 $ 5,017,087
Furniture and fixtures.............. 69,256 583,175 744,016
Leasehold improvements.............. -- 214,868 412,813
--------- ---------- -----------
489,779 1,616,719 6,173,916
Less: accumulated depreciation...... (152,452) (346,143) (1,078,750)
--------- ---------- -----------
$ 337,327 $1,270,576 $ 5,095,166
========= ========== ===========
</TABLE>
5. OTHER ASSETS
Other assets were comprised of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------- NOVEMBER 30,
1998 1999 1999
-------- --------- --------------
<S> <C> <C> <C>
Cost basis investment................... $ -- $ -- $ 500,000
Prepaid insurance....................... -- -- 419,972
Security deposits....................... 11,900 78,130 92,442
Trademarks, patents and copyrights,
net................................... 69,288 73,180 121,745
Deferred merger and acquisition costs... -- -- 230,995
Other................................... -- -- 449,627
------- -------- ----------
$81,188 $151,310 $1,814,781
======= ======== ==========
</TABLE>
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 U.S. Government obligations.
The Company's investments in debt and equity securities are considered as
available for sale at November 30, 1999 and are carried at their respective fair
values in accordance with SFAS
F-15
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
No. 115. Following is a summary of the historical cost, unrealized loss and fair
values of the Company's investments at November 30, 1999:
<TABLE>
<CAPTION>
COST UNREALIZED GAIN (LOSS) FAIR VALUE
----------- ---------------------- -----------
<S> <C> <C> <C>
Short-term investments... $ 7,630,705 $ -- $ 7,630,705
Long-term investments.... 76,877,622 (244,503) 76,633,119
----------- --------- -----------
$84,508,327 $(244,503) $84,263,824
=========== ========= ===========
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses were comprised of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------- NOVEMBER 30,
1998 1999 1999
-------- --------- --------------
<S> <C> <C> <C>
Payroll................................. $ -- $212,608 $ 143,499
Vacation................................ 3,501 59,165 231,202
Taxes................................... 5,151 14,025 263,356
Trade................................... -- -- 1,414,196
Other................................... 41,682 93,959 115,451
------- -------- ----------
$50,334 $379,757 $2,167,704
======= ======== ==========
</TABLE>
8. INCOME TAXES
The components of the Company's provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED FEBRUARY 28, NOVEMBER 30,
------------------------------- --------------------
1997 1998 1999 1998 1999
-------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Current tax provision:
Federal....................... $ -- $ -- $149,284 $149,284 $ --
State......................... -- 4,906 65,402 65,402 --
---- ------ -------- -------- ----
Current tax expense........... -- 4,906 214,686 214,686 --
---- ------ -------- -------- ----
Deferred tax benefit:
Federal....................... -- -- -- -- --
State......................... -- -- -- -- --
---- ------ -------- -------- ----
Deferred tax benefit.......... -- -- -- -- --
---- ------ -------- -------- ----
Net provision for income
taxes......................... $ -- $4,906 $214,686 $214,686 $ --
==== ====== ======== ======== ====
</TABLE>
F-16
<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>
FEBRUARY 28,
--------------------- NOVEMBER 30,
1998 1999 1999
--------- --------- --------------
<S> <C> <C> <C>
Deferred Tax Assets:
Domestic net operating loss
carryforwards...................... $ 23,697 $ -- $ 2,414,970
Foreign net operating loss
carryforwards...................... -- -- 611,666
Accounts receivable.................. 21,818 217,777 54,591
Allowance for inventory
obsolescence....................... -- 70,785 --
Allowance for returns................ -- -- 138,297
Research and development credit...... 67,629 -- 73,810
Deferred compensation................ -- -- 339,046
Other accruals....................... 1,376 22,947 97,099
--------- --------- -----------
Total deferred tax assets.......... 114,520 311,509 3,729,479
Valuation allowance for deferred tax
assets............................. (109,040) (307,423) (3,725,192)
--------- --------- -----------
Net deferred tax assets: 5,480 4,086 4,287
--------- --------- -----------
Deferred Tax Liabilities:
Property and equipment............... (5,480) (4,086) (4,287)
--------- --------- -----------
Total deferred tax liabilities..... (5,480) (4,086) (4,287)
--------- --------- -----------
Net deferred taxes................. $ -- $ -- $ --
========= ========= ===========
</TABLE>
As of February 28, 1998 and 1999, and November 30, 1999 the Company provided
a full valuation allowance against its net deferred tax assets since realization
of these benefits cannot be reasonably assured. An increase in the valuation
allowance was recorded during fiscal 1999 and the nine months ended
November 30, 1999 to reserve the increase in total deferred tax assets at
February 28, 1999 and November 30, 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. As of November 30, 1999, the Company had federal and state
net operating loss carryforwards of approximately $6,224,000. The use of federal
net operating loss carryforwards may be subject to limitation under the rules
regarding a change in stock ownership as determined by the Internal Revenue
Code. The federal and state net operating loss carryforwards will begin to
expire in 2020 and 2015, respectively. Additionally, the Company had net
operating loss carryforwards for tax purposes in various jurisdictions outside
the United States amounting to approximately $1,485,000. The majority of foreign
loss carryforwards will never expire under local country tax rules.
F-17
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision for income taxes as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED FEBRUARY 28, ENDED
----------------------------------- NOVEMBER 30,
1997 1998 1999 1999
-------- -------- --------- --------------
<S> <C> <C> <C> <C>
Effective rate.......... 0% 39% 174% 0%
-------- -------- -------- -----------
United States Federal
tax at statutory
rate.................. $ 12,214 $ 4,311 $ 42,030 $(2,966,404)
State taxes (net of
Federal benefit)...... 1,897 13,392 7,619 (336,889)
Foreign rate
differential.......... -- -- -- (106,629)
Change in valuation
reserves.............. (17,040) 28,993 198,477 3,417,768
Research and development
credit................ -- (67,629) (43,959) (73,810)
Non-deductible items.... 2,929 25,839 10,519 65,964
-------- -------- -------- -----------
Provision for income
taxes................. $ -- $ 4,906 $214,686 $ --
======== ======== ======== ===========
</TABLE>
9. MANDATORILY REDEEMABLE PREFERRED STOCK
At February 28, 1999, the Company had 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 had a par value of $0.0001 per share.
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
F-18
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
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.
CONVERSION
Each share of Series A, Series B and Series C mandatorily redeemable
preferred stock could be converted to common stock at the option of the Holders
at a two-to-one conversion rate, after certain adjustments. This conversion rate
could 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 could also be adjusted for common stock splits,
reverse common stock splits, dividends and distributions.
All outstanding shares of Series A, Series B and Series C mandatorily
redeemable preferred stock automatically converted into 67,890,904 shares of
common stock, upon the effectiveness of the Company's initial public offering
("IPO") on August 11, 1999.
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 could
first be made by the Holders on February 25, 2004 and on each of the first and
second anniversaries thereof. The redemption price was 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, after adjustment for certain events. The
carrying value of the Company's mandatorily redeemable preferred stock was
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 in September 1998, 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 was to be charged to
accumulated deficit over the period from issuance until redemption first became
available. The amount of accretion recognized during each period was 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 mandatorily
redeemable preferred stock prior to the fiscal year ended February 28, 1999. The
Company sold an additional 1,027,388 shares of Series C preferred stock for net
proceeds of $3,164,156 in March and April 1999 with a redemption value of
$4,004,758. Accretion on preferred stock was $82,473 for the nine months ended
November 30, 1999. Accretion on preferred stock ceased upon the effectiveness of
the Company's IPO.
F-19
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 225,000,000 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 winding up of the Company, holders of
common stock will be entitled to receive the assets of the Company after
satisfaction of the preferential rights of any outstanding 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 5,251,000 shares of common stock to the Series B Investors for
$1,125,000 or $0.215 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 984,368 shares of common stock to the Series C Investors for
$772,975 or $0.786 per share. Upon additional closings of the Series C
mandatorily redeemable preferred stock financing in March and April of 1999, an
additional 984,368 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 $0.786 per share.
On August 16, 1999, the Company closed its initial public offering of
13,800,000 shares of its common stock at a price of $7.00 per share. The Company
received proceeds of $88,466,929 net of $8,133,071 in offering costs.
11. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
During September 1998, the Company's Board of Directors approved a stock
option plan. As of February 28, 1999, 14,929,600 shares of common stock were
reserved for issuance upon exercise of options granted to any employee, officer
or director or consultant of the Company at terms and prices to be determined by
the Board of Directors. In June 1999, the option pool was increased to
18,869,600 shares. At November 30, 1999, 12,423,976 shares of common stock are
reserved for issuance under the Company's stock option plan. 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 with
the same vesting provisions as the original option. The Company, at its option,
may repurchase these restricted shares at the original purchase price under
certain circumstances.
F-20
<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 November 30, 1999 is presented in the
following table. Prior to March 1, 1998, the Company had granted no stock
options.
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
UNDERLYING EXERCISE PRICE
OPTIONS PER SHARE
----------- --------------
<S> <C> <C>
Outstanding at February 28, 1998............... -- $ --
Granted........................................ 8,645,140 0.18
Forfeited...................................... (40,000) 0.09
----------- -----
Outstanding at February 28, 1999............... 8,605,140 0.18
Granted (unaudited)............................ 10,316,140 3.68
Exercised (unaudited).......................... (6,232,404) 0.47
Forfeited (unaudited).......................... (178,900) 0.70
----------- -----
Outstanding at November 30, 1999 (unaudited)... 12,509,976 $2.93
=========== =====
</TABLE>
The Company recorded deferred compensation of $8,125,259 during the nine
months ended November 30, 1999 to reflect the difference between the aggregate
fair market value and exercise price during this period of all stock options
granted with an exercise price below the fair market value of the Company's
common stock at the date of the grant. Amortization of deferred compensation
totaled $1,009,503 during the nine months ended November 30, 1999.
The following summarizes information about the Company's stock options at
February 28, 1999:
<TABLE>
<CAPTION>
FEBRUARY 28, 1999
- ------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------------- ------------ ------------ --------- ------------ ---------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
0.09....$..... 2,400,000 9.58 $0.09 2,400,000 $0.09
$0.21 6,205,140 9.67 $0.21 6,205,140 $0.21
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1999
- ------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------------- ------------ ------------ --------- ------------ ---------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
$ 0.09 729,000 8.77 $ 0.09 729,000 $ 0.09
$ 0.21 3,734,140 8.98 $ 0.21 3,734,140 $ 0.21
$ 0.79 3,282,240 9.36 $ 0.79 3,282,240 $ 0.79
$ 2.50 2,291,796 9.53 $ 2.50 2,271,996 $ 2.50
$ 5.00-$5.50 1,611,000 9.66 $ 5.21 1,611,000 $ 5.21
$ 7.00 40,000 9.70 $ 7.00 40,000 $ 7.00
$36.75-$42.94 41,800 9.86 $40.73 41,800 $40.73
</TABLE>
F-21
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK WARRANTS
On October 10, 1995, the Company issued warrants (which are equivalent to
nonqualified stock options) to purchase 7,480,800 shares of common stock to
three of its employees with an exercise price of $0.0001 per share. The warrants
vest 25% annually on each May 1, beginning May 1, 1996 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>
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
----------- ---------- ----------- ---------- ----------- ----------
YEAR ENDED FEBRUARY 28,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 7,480,800 $0.0001 7,480,800 $ 0.0001 7,480,800 $0.00005
Exercised................ -- -- -- -- (705,900) $0.00005
Outstanding at end of
year................... 7,480,800 $0.0001 7,480,800 $ 0.0001 6,774,900 $0.00005
Exercisable at end of
year................... 1,870,200 $0.0001 3,740,400 $ 0.0001 4,904,700 $0.00005
</TABLE>
During the nine month period ended November 30, 1999, 1,960,000 warrants to
purchase shares were exercised. At November 30, 1999, warrants to purchase
4,814,900 shares remained outstanding, all of which were exercisable.
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
F-22
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
was estimated using the following assumptions for the year ended February 28,
1999 and the nine months ended November 30, 1999:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
FEBRUARY 28, 1999 NOVEMBER 30, 1999
------------------ -------------------
EMPLOYEE EMPLOYEE
STOCK STOCK
OPTIONS OPTIONS
------------------ -------------------
<S> <C> <C>
Expected dividend yield............ 0.00% 0.00%
Risk-free interest rate............ 4.98% 5.01%
Expected volatility................ 0.00% 134.41%
Expected life (in years)........... 6 5
</TABLE>
SFAS 123 pro forma numbers are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28, NINE MONTHS ENDED
1999 NOVEMBER 30, 1999
------------ -------------------
<S> <C> <C>
Net loss available to common
stockholders as reported
under APB No. 25...................... $130,424 $ 8,858,126
Pro forma net loss available to common
stockholders.......................... $287,288 $11,906,767
</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 $0.14 per share and was $16.96
during the nine months ended November 30, 1999.
F-23
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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 BENEFITS
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, after complying
with 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.
F-24
<PAGE>
RED HAT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFITS (CONTINUED)
In June 1999, the Company established an employee stock purchase plan which
provides for the issuance of up to 1,500,000 shares of the Company's common
stock. Employees of the Company can elect to defer up to 10% of their total cash
compensation to purchase the Company's common stock under the terms of this
plan. No options have been granted to date under this plan.
14. STOCK SPLITS
On August 11, 1999, the Company effected a two-for-one common stock split
immediately prior to the effectiveness of the Company's initial public offering.
All share and per share information in the accompanying financial statements and
notes to the financial statements has been restated to reflect the effects of
this stock split.
In addition, an amendment to the Company's certificate of incorporation
became effective on August 11, 1999, to increase the authorized capital stock to
225,000,000 shares of common stock and 5,000,000 shares of preferred stock each
with a par value of $.0001 per share.
On January 7, 2000, the Company effected a two-for-one common stock split.
All share and per share information in the accompanying financial statements and
notes to the financial statements has been restated to reflect the effect of
this stock split.
15. EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF ACCOUNTANTS' REPORT
On January 7, 2000, Red Hat completed a merger with Cygnus Solutions, Inc.
("Cygnus") by exchanging 10,867,966 shares of its common stock for all of the
outstanding common and preferred stock of Cygnus. In addition, approximately
1,514,168 outstanding Cygnus employee stock options were converted at the same
exchange factor into options to purchase approximately 2,380,722 shares of Red
Hat's common stock.
The merger constituted a tax-free reorganization and will be accounted for
using the pooling of interests method of accounting under Accounting Principles
Board Opinion No. 16 ("APB No. 16").
In addition, on January 4, 2000, the Company completed the acquisition of
all the outstanding common stock of Hells Kitchen Systems, Inc. ("HKS") in
exchange for the issuance of up to 798,670 shares of the Company's common stock
to the shareholders of HKS. The Company issued 478,000 shares of its common
stock to the stockholders of HKS at closing. The Company committed to issue up
to an additional 239,000 shares of its common stock to certain HKS stockholders
over a three year period contingent upon their continued employment with the
Company and the Company committed to issue up to an additional 79,666 shares of
its common stock to the HKS stockholders upon achievement of certain performance
targets by the HKS business. The acquisition of HKS will be accounted for using
the purchase method of accounting in accordance with APB No. 16.
F-25
<PAGE>
RED HAT, INC.
SUPPLEMENTAL POOLED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------------- NOVEMBER 30,
1998 1999 1999
------------ ------------ --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,752,120 $19,485,586 $ 21,389,709
Short-term investments.................................... 1,065,526 2,037,992 7,630,705
Accounts receivable, net.................................. 5,660,949 5,895,173 8,993,322
Inventory................................................. 141,176 345,630 1,853,711
Prepaid expenses.......................................... 971,225 812,665 1,530,827
----------- ----------- ------------
Total current assets.................................... 13,590,996 28,577,046 41,398,274
Property and equipment, net................................. 2,969,855 3,921,798 7,640,897
Other assets, net........................................... 302,015 232,379 1,823,789
Investments................................................. 50,000 -- 76,633,119
----------- ----------- ------------
Total assets............................................ $16,912,866 $32,731,223 $127,496,079
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,584,898 $ 2,584,489 5,500,110
Royalties payable......................................... 247,323 144,074 221,343
Accrued expenses.......................................... 2,343,460 3,209,080 5,640,631
Deferred revenue.......................................... 7,592,784 6,096,465 9,583,002
Short term notes payable.................................. -- 1,509,936 504,968
Current portion of capital lease obligations.............. 45,110 139,112 490,072
----------- ----------- ------------
Total current liabilities............................... 11,813,575 13,683,156 21,940,126
Capital lease obligations................................... 144,488 482,796 246,002
Long term notes payable..................................... 49,345 916,667 583,333
Commitments and contingencies (Note 12)..................... -- -- --
Mandatorily redeemable preferred stock:
Series A, 6,801,400, 6,801,400 and 0 shares authorized,
issued and outstanding at February 28, 1998,
February 28, 1999 and November 30, 1999,
respectively............................................ 1,983,209 1,992,184 --
Series B, 0, 8,116,550 and 0 shares authorized, issued and
outstanding at February 28, 1998, February 28, 1999 and
November 30, 1999, respectively......................... -- 6,919,644 --
Series C, 0, 1,797,929 and 0 shares authorized at
February 28, 1998, February 28, 1999 and November 30,
1999, respectively; 0, 1,027,388 and 0 shares issued and
outstanding at February 28, 1998, February 28, 1999 and
November 30, 1999, respectively......................... -- 3,195,591 --
Series B Cygnus, 1,042,000 shares authorized and
outstanding at February 28, 1998, February 28, 1999 and
November 30, 1999....................................... 6,252,000 6,252,000 6,252,000
Stockholders' equity (deficit):
Preferred stock, 5,000,000 shares authorized, none
outstanding............................................. -- -- --
Preferred stock........................................... 411,691 7,728,094 12,746,234
Common stock, $.0001 par value, 225,000,000 shares
authorized, 47,000,000, 48,865,107 and 139,094,102
shares issued and outstanding at February 28, 1998,
February 28, 1999 and November 30, 1999, respectively... 4,700 4,887 13,909
Additional paid-in capital................................ 261,300 5,265,667 121,224,328
Shareholder receivables................................... (170,790) (2,857,355) (2,824,908)
Deferred compensation..................................... -- (1,188,155) (8,474,657)
Accumulated deficit....................................... (3,836,652) (9,663,953) (23,997,999)
Accumulated other comprehensive income (loss)............. -- -- (212,289)
----------- ----------- ------------
Total stockholders' equity (deficit).................... (3,329,751) (710,815) 98,474,618
----------- ----------- ------------
Total liabilities and stockholders' equity (deficit).... $16,912,866 $32,731,223 $127,496,079
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-26
<PAGE>
RED HAT, INC.
SUPPLEMENTAL POOLED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED FEBRUARY 28, ENDED NOVEMBER 30,
---------------------------------------- --------------------------
1997 1998 1999 1998 1999
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software and related products................ $ 2,603,131 $ 5,131,623 $ 11,140,391 $ 7,466,845 $ 9,735,698
Web advertising.............................. -- -- -- -- 626,384
Services and other........................... 12,525,856 17,511,827 21,891,291 16,123,271 19,249,449
----------- ----------- ------------ ----------- ------------
Total revenue.............................. 15,128,987 22,643,450 33,031,682 23,590,116 29,611,531
----------- ----------- ------------ ----------- ------------
Cost of revenue:
Software and related products................ 1,204,721 2,210,538 4,104,903 2,725,627 4,843,580
Web advertising -- -- -- -- 626,756
Services and other........................... 4,574,535 6,237,612 8,610,686 6,246,651 10,559,114
----------- ----------- ------------ ----------- ------------
Total cost of revenue...................... 5,779,256 8,448,150 12,715,589 8,972,278 16,029,450
----------- ----------- ------------ ----------- ------------
Gross profit................................... 9,349,731 14,195,300 20,316,093 14,617,838 13,582,081
----------- ----------- ------------ ----------- ------------
Operating expense:
Sales and marketing.......................... 5,246,710 9,016,388 11,051,549 7,517,133 15,353,663
Research and development..................... 826,144 4,622,409 8,477,818 6,401,006 7,894,877
General and administrative................... 3,352,092 3,672,167 5,664,561 4,539,578 5,628,311
Stock based compensation..................... -- -- 227,261 170,346 1,641,507
Merger and acquisition....................... -- -- -- -- 123,887
Purchased in process research and
development................................ 1,386,017 -- -- -- --
----------- ----------- ------------ ----------- ------------
Total operating expense.................... 10,810,963 17,310,964 25,421,189 18,628,063 30,642,245
----------- ----------- ------------ ----------- ------------
Loss from operations........................... (1,461,232) (3,115,664) (5,105,096) (4,010,225) (17,060,164)
----------- ----------- ------------ ----------- ------------
Other income (expense):
Interest income.............................. 196,771 509,558 376,039 254,426 2,508,166
Interest expense............................. (55,940) (144,392) (336,672) (212,440) (439,908)
----------- ----------- ------------ ----------- ------------
Other income (expense), net................ 140,831 365,166 39,367 41,986 2,068,258
----------- ----------- ------------ ----------- ------------
Loss before income taxes....................... (1,320,401) (2,750,498) (5,065,729) (3,968,239) (14,991,906)
Provision for income taxes..................... 191,094 215,348 722,216 595,334 240,981
----------- ----------- ------------ ----------- ------------
Net loss....................................... (1,511,495) (2,965,846) (5,787,945) (4,563,573) (15,232,887)
Accretion on mandatorily redeemable preferred
stock........................................ -- -- (39,356) (16,000) (82,473)
----------- ----------- ------------ ----------- ------------
Net loss available to common stockholders...... $(1,511,495) $(2,965,846) $ (5,827,301) $(4,579,573) $(15,315,360)
=========== =========== ============ =========== ============
Net loss per common share:
Basic........................................ (0.03216) (0.06310) (0.12235) (0.09649) (0.17873)
Diluted...................................... (0.03216) (0.06310) (0.12235) (0.09649) (0.17873)
Weighted average common shares outstanding:
Basic........................................ 47,000,000 47,000,000 47,628,096 47,437,780 85,691,876
Diluted...................................... 47,000,000 47,000,000 47,628,096 47,437,780 85,691,876
Pro forma net loss per common share
(unaudited):
Basic........................................ (0.06548) 0.0557 (0.1190)
Diluted...................................... (0.06548) 0.0557 (0.1190)
Pro forma weighted average common shares
outstanding (unaudited):
Basic........................................ 88,387,644 81,984,468 127,047,798
Diluted...................................... 88,387,644 81,984,468 127,047,798
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-27
<PAGE>
RED HAT, INC.
SUPPLEMENTAL POOLED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at February 29, 1996........................ -- -- 52,571,284 $ 5,257 $ 420,459
Repurchase and retirement of preferred stock........ (37,124) (112,500) -- -- --
Issuance of common stock............................ -- -- 311,349 31 263,710
Conversion of common stock to Series A preferred.... 5,882,633 423,457 (5,882,633) (588) (422,869)
Net loss............................................ -- -- -- -- --
----------- ----------- ----------- ------- ------------
Balance at February 28, 1997........................ 5,845,509 310,957 47,000,000 4,700 261,300
Exercise of common stock options and warrants....... -- -- -- -- --
Issuance of Series A preferred stock from options... 288,455 117,555 -- -- --
Repurchase and retirement of preferred stock........ (48,884) (16,821) -- -- --
Net loss............................................ -- -- -- -- --
----------- ----------- ----------- ------- ------------
Balance at February 28, 1998........................ 6,085,080 411,691 47,000,000 4,700 261,300
Exercise of common stock options and warrants....... -- -- 1,865,107 187 3,121,860
Tax benefit on exercise of common stock warrants.... -- -- -- -- 163,831
Issuance of Series A preferred stock from options... 205,812 165,586 -- -- --
Issuance of Series C preferred stock, net........... 709,555 6,760,594 -- -- --
Repurchase and retirement of preferred stock........ (141,386) (44,357) -- -- --
Deferred compensation............................... -- -- -- -- 1,415,416
Amortization of deferred compensation............... -- -- -- -- --
Stock options issued for services................... -- 434,580 -- -- 303,260
Accretion of mandatorily redeemable preferred
stock............................................. -- -- -- -- --
Net (increase) decrease in shareholder notes
receivable........................................ -- -- --
Net loss............................................ -- -- -- -- --
----------- ----------- ----------- ------- ------------
Balance at February 28, 1999........................ 6,859,061 7,728,094 48,865,107 4,887 5,265,667
Net loss............................................ -- -- -- -- --
Adjustment for inclusion of Cygnus September 1999
net loss in results of operations twice........... -- -- -- -- --
Other comprehensive income:
Unrealized loss on investments in marketable
securities...................................... -- -- -- -- --
Foreign currency translation adjustment........... -- -- -- -- --
Other comprehensive income.......................... -- -- -- -- --
Conversion of preferred stock into common stock..... -- -- 67,890,904 6,789 15,363,730
Sale of common stock in initial public offering..... -- -- 13,800,000 1,380 88,465,549
Exercise of common stock options and warrants....... -- -- 8,354,111 835 3,159,934
Repurchase and retirement of preferred stock........ (7,372) (1,119) -- -- --
Issuance of Series A preferred stock from options... 420,225 73,311 -- -- --
Issuance of Series C preferred stock, net........... 524,160 4,973,882 -- -- --
Conversion of convertible preferred to common
stock............................................. (183,980) (27,934) 183,980 18 27,916
Deferred compensation............................... -- -- -- -- 8,928,009
Amortization of deferred compensation............... -- -- -- -- --
Stock options issued for services................... -- -- -- -- 13,523
Net (increase) decrease in shareholder notes
receivable........................................ -- -- -- -- --
Accretion of mandatorily redeemable preferred
stock............................................. -- -- -- -- --
----------- ----------- ----------- ------- ------------
Balance at November 30, 1999 (unaudited)............ 7,612,094 $12,746,234 139,094,102 $13,909 $121,224,328
=========== =========== =========== ======= ============
<CAPTION>
ACCUMULATED
SHAREHOLDER OTHER
DEFERRED NOTES ACCUMULATED COMPREHENSIVE
COMPENSATION RECEIVABLE DEFICIT INCOME/(LOSS)
-------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Balance at February 29, 1996........................ $ -- $ (65,530) $ 640,689 $ --
Repurchase and retirement of preferred stock........ -- 112,500 -- --
Issuance of common stock............................ -- (225,931) -- --
Conversion of common stock to Series A preferred.... -- -- -- --
Net loss............................................ -- -- (1,511,495) --
----------- ----------- ------------ ---------
Balance at February 28, 1997........................ -- (178,961) (870,806) --
Exercise of common stock options and warrants....... -- (22,500) -- --
Issuance of Series A preferred stock from options... -- -- -- --
Repurchase and retirement of preferred stock........ -- 30,671 -- --
Net loss............................................ -- -- (2,965,846) --
----------- ----------- ------------ ---------
Balance at February 28, 1998........................ -- (170,790) (3,836,652) --
Exercise of common stock options and warrants....... -- (2,745,901) -- --
Tax benefit on exercise of common stock warrants.... -- -- -- --
Issuance of Series A preferred stock from options... -- -- -- --
Issuance of Series C preferred stock, net........... -- -- -- --
Repurchase and retirement of preferred stock........ -- 72,877 -- --
Deferred compensation............................... (1,415,416) -- -- --
Amortization of deferred compensation............... 227,261 -- -- --
Stock options issued for services................... -- -- -- --
Accretion of mandatorily redeemable preferred
stock............................................. -- -- (39,356) --
Net (increase) decrease in shareholder notes
receivable........................................ -- (13,541) -- --
Net loss............................................ -- -- (5,787,945) --
----------- ----------- ------------ ---------
Balance at February 28, 1999........................ (1,188,155) (2,857,355) (9,663,953) --
Net loss............................................ -- -- (15,232,887) --
Adjustment for inclusion of Cygnus September 1999
net loss in results of operations twice........... -- -- 981,314 --
Other comprehensive income:
Unrealized loss on investments in marketable
securities...................................... -- -- -- (244,513)
Foreign currency translation adjustment........... -- -- -- 32,224
---------
Other comprehensive income.......................... -- -- -- (212,289)
Conversion of preferred stock into common stock..... -- -- -- --
Sale of common stock in initial public offering..... -- -- -- --
Exercise of common stock options and warrants....... -- 127,670 -- --
Repurchase and retirement of preferred stock........ -- -- -- --
Issuance of Series A preferred stock from options... -- -- -- --
Issuance of Series C preferred stock, net........... -- -- -- --
Conversion of convertible preferred to common
stock............................................. -- -- -- --
Deferred compensation............................... (8,928,009) -- -- --
Amortization of deferred compensation............... 1,641,507 -- -- --
Stock options issued for services................... -- -- -- --
Net (increase) decrease in shareholder notes
receivable........................................ -- (95,223) -- --
Accretion of mandatorily redeemable preferred
stock............................................. -- -- (82,473) --
----------- ----------- ------------ ---------
Balance at November 30, 1999 (unaudited)............ $(8,474,657) $(2,824,908) $(23,997,999) $(212,289)
=========== =========== ============ =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY/(DEFICIT)
----------------
<S> <C>
Balance at February 29, 1996........................ $ 1,000,875
Repurchase and retirement of preferred stock........ --
Issuance of common stock............................ 37,810
Conversion of common stock to Series A preferred.... --
Net loss............................................ (1,511,495)
------------
Balance at February 28, 1997........................ (472,810)
Exercise of common stock options and warrants....... (22,500)
Issuance of Series A preferred stock from options... 117,555
Repurchase and retirement of preferred stock........ 13,850
Net loss............................................ (2,965,846)
------------
Balance at February 28, 1998........................ (3,329,751)
Exercise of common stock options and warrants....... 376,146
Tax benefit on exercise of common stock warrants.... 163,831
Issuance of Series A preferred stock from options... 165,586
Issuance of Series C preferred stock, net........... 6,760,594
Repurchase and retirement of preferred stock........ 28,520
Deferred compensation............................... --
Amortization of deferred compensation............... 227,261
Stock options issued for services................... 737,840
Accretion of mandatorily redeemable preferred
stock............................................. (39,356)
Net (increase) decrease in shareholder notes
receivable........................................ (13,541)
Net loss............................................ (5,787,945)
------------
Balance at February 28, 1999........................ (710,815)
Net loss............................................ (15,232,887)
Adjustment for inclusion of Cygnus September 1999
net loss in results of operations twice........... 981,314
Other comprehensive income:
Unrealized loss on investments in marketable
securities......................................
Foreign currency translation adjustment...........
Other comprehensive income.......................... (212,289)
Conversion of preferred stock into common stock..... 15,370,519
Sale of common stock in initial public offering..... 88,466,929
Exercise of common stock options and warrants....... 3,288,439
Repurchase and retirement of preferred stock........ (1,119)
Issuance of Series A preferred stock from options... 73,311
Issuance of Series C preferred stock, net........... 4,973,882
Conversion of convertible preferred to common
stock............................................. --
Deferred compensation............................... --
Amortization of deferred compensation............... 1,641,507
Stock options issued for services................... 13,523
Net (increase) decrease in shareholder notes
receivable........................................ (95,223)
Accretion of mandatorily redeemable preferred
stock............................................. (82,473)
------------
Balance at November 30, 1999 (unaudited)............ $ 98,474,618
============
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-28
<PAGE>
RED HAT, INC.
SUPPLEMENTAL POOLED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED FEBRUARY 28, ENDED NOVEMBER 30,
---------------------------------------- ----------------------------
1997 1998 1999 1998 1999
----------- ----------- ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $(1,511,495) $(2,965,846) $ (5,787,945) $ (4,563,573) $ (15,232,887)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Effect on net loss of inclusion of Cygnus
September 1999 results of operation twice....... -- -- -- -- 981,314
Depreciation and amortization..................... 599,166 1,085,106 1,600,919 728,566 1,365,645
Amortization of deferred compensation............. 227,261 170,346 1,641,507
Tax benefit of stock options and warrants
exercised....................................... -- -- 163,831 -- --
Noncash management compensation expense........... -- -- 737,840 737,840 13,523
Provision for doubtful accounts................... 38,986 38,141 185,092 148,662 362,060
Provision for inventory obsolescence.............. -- -- 182,509 -- --
(Gain) loss on sale of property and equipment..... -- 116,063 46,058 -- --
Deferred revenue.................................. 1,735,705 2,731,660 (1,496,319) (2,085,583) 3,486,537
Changes in operating assets and liabilities:
Accounts receivable............................... (806,429) (2,302,497) (419,316) 633,163 (3,460,209)
Inventory......................................... (14,934) (84,507) (386,963) 22,045 (1,508,081)
Prepaid expenses.................................. (362,904) 53,402 18,801 (100,552) (718,162)
Other assets...................................... (442,201) 242,021 64,280 (421,832) (1,668,710)
Accounts payable.................................. 695,832 500,200 999,591 249,865 2,915,621
Royalties payable................................. 770,001 (785,649) (103,249) (49,682) 77,269
Accrued expenses.................................. (23,044) 526,848 865,620 1,798,982 2,431,551
----------- ----------- ------------ ------------ -------------
Net cash provided by (used in) operating
activities...................................... 678,683 (845,058) (3,101,990) (2,731,753) (9,313,022)
Cash flows from investing activities:
Purchase of investment securities................... (7,419,959) (150,000) (1,966,600) -- (154,220,661)
Proceeds from sales and maturity of investment
securities........................................ -- 5,769,921 1,065,526 965,526 71,750,316
Purchase of equipment............................... (1,336,769) (2,139,445) (1,986,887) (785,028) (4,737,292)
Proceeds from sale of equipment..................... -- 24,272 -- -- --
----------- ----------- ------------ ------------ -------------
Net cash provided by (used in) investing
activities.................................... (8,756,728) 3,504,748 (2,887,961) 180,498 (87,207,637)
----------- ----------- ------------ ------------ -------------
Cash flows from financing activities:
Proceeds from borrowing from stockholders........... 50,000 -- -- -- --
(Increase) decrease in stockholder receivable....... -- 13,850 14,978 (13,541) (95,223)
Repayments of borrowings from stockholders.......... -- (86,243) -- -- --
Issuance of restricted stock........................ 37,810 -- -- 28,520 --
Proceeds from notes payable......................... 1,096,048 239,214 2,416,667 2,416,667
Repurchase of restricted stock...................... (1,119)
Repayments of notes payable......................... (25,160) (279,019) (39,409) (933,028) (1,338,302)
Proceeds from issuance of mandatorily redeemable
preferred stock, net.............................. 6,252,000 1,983,209 10,084,854 6,889,263 3,180,628
Proceeds from issuance of preferred stock........... -- -- 6,760,594 -- 4,973,881
Proceeds from issuance of common stock.............. -- -- -- 88,466,929
Proceeds from exercise of stock options and
warrants.......................................... -- 95,055 541,731 193,207 3,361,750
Payments on capital lease obligations............... (34,708) (22,569) (55,998) (16,370) (155,986)
----------- ----------- ------------ ------------ -------------
Net cash provided by financing activities....... 7,375,990 1,943,497 19,723,417 8,564,718 98,392,558
----------- ----------- ------------ ------------ -------------
Effect of foreign currency exchange rates on cash
and cash equivalents.............................. -- -- -- -- 32,224
Net increase (decrease) in cash and cash
equivalents....................................... (702,055) 4,603,187 13,733,466 6,013,463 1,904,123
Cash and cash equivalents at beginning of period.... 1,850,988 1,148,933 5,752,120 5,752,120 19,485,586
----------- ----------- ------------ ------------ -------------
Cash and cash equivalents at end of period.......... $ 1,148,933 $ 5,752,120 $ 19,485,586 11,765,583 21,389,709
=========== =========== ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
BUSINESS ACTIVITY
Red Hat, Inc. and its subsidiaries ("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. On January 7, 2000, Red Hat acquired Cygnus Solutions, Inc. in a
transaction accounted for using the pooling of interests method of accounting
(See Note 3). All prior period financial statements of Red Hat have been
restated to reflect this combination as if it had occurred March 1, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL STATEMENTS
The consolidated financial statements as of November 30, 1998 and 1999 and
for the nine month period then ended are unaudited and reflect all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of the
Company's management, necessary for a fair presentation of financial position,
results of operations and cash flows. All financial statement disclosures
related to the nine month period ended November 30, 1998 and 1999 are unaudited.
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 at February 28, 1997, 1998 and 1999 were in debt
securities which were classified as held-to-maturity and are carried at
amortized cost in accordance with Statement of Financial Accounting Standards
No. 115 "Accounting for Certain Investments in Debt and Equity Securities ("SFAS
No. 115")", as the Company had both the positive intent and ability to hold them
to maturity.
During the nine month period ended November 30, 1999, all of the Company's
investments matured or were sold and reinvested in new securities. The Company's
investments at November 30, 1999 are in debt and equity securities. The Company
has classified these investments as available for sale and is carrying these
investments at market value in accordance with SFAS No. 115. The Company's
investments are considered as available for sale as these securities could
potentially be sold in response to needs for liquidity, changes in the
availability of
F-30
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and the yield on alternative instruments or changes in funding sources or terms.
At November 30, 1999, the Company's investments are carried at fair value in
accordance with SFAS No. 115. The Company has an unrealized loss of $244,513
related to these investments at November 30, 1999 which is recorded as other
comprehensive income which is a separate component of stockholders' equity at
November 30, 1999.
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. The reserve for inventory obsolescence
was $0 at November 30, 1999.
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 concerning 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, February 28, 1999 and November 30, 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
Leasehold improvements...................................... 4 to 25 years
</TABLE>
F-31
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, deferred merger and acquisition costs, goodwill, a cost-basis
investment in another company accounted for using the cost method and the
long-term portion of the Company's prepaid directors' and officers' insurance
premiums. Deferred merger and acquisition costs will be expensed upon the
closing of the merger between Red Hat and Cygnus.
Goodwill is included in other assets at cost less accumulated amortization.
Goodwill is amortized over the estimated useful life which is three years.
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 or the nine months ended
November 30, 1999.
REVENUE RECOGNITION
Revenues from the sale of software products for which no technical support
is provided 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. The Company recognizes revenues from the sale of software products
to new distributors of its software products based upon sell-through to the end
user until the Company has sufficient historical experience with the distributor
to allow the accurate estimation of sales returns.
Upon the release of Version 6.0 of Official Red Hat Linux in May 1999, the
Company began providing certain telephone and e-mail technical support services
with Official Red Hat Linux and Red Hat Secure Web Server for a period of 90
days from the date of registration of the software products for no additional
fee. In June 1999, the Company also began to provide to purchasers of Official
Red Hat Linux and Red Hat Secure Web Server subscription services for a period
of six months from the date of registration of the software products. In October
1999, the Company released Version 6.1 of Red Hat Linux and included the Secure
Web Server product in the "professional" version of Version 6.1 of Official Red
Hat Linux. In accordance with the provisions of Statement of Opinion ("SOP")
No. 97-2, "Software Revenue Recognition" ("SOP 97-2") as amended by SOP
No. 98-4 and SOP No. 98-9, the Company is recognizing all of the revenue from
the sale of Versions 6.0 and 6.1 Official Red Hat Linux over the period that the
technical support and subscription services are provided as the Company does not
sell these technical support and subscription services separately and therefore
does not have vendor specific objective evidence of the fair value of these
services. These revenues are recognized ratably over the period that the
F-32
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
technical support and subscription services are provided in proportion to the
costs incurred to provide such technical support and subscription services as
compared to estimated total costs to be incurred. The Company currently does not
provide support and maintenance services as part of the fee for any of its
software products, other than Official Red Hat Linux.
Service revenues consist of revenue for technical support and maintenance
services, other than installation support and revenue for software compiling,
debugging and optimization contracts ("Development Contracts"). Revenue for
technical support and maintenance services, other than installation support, is
deferred and recognized ratably over the term of the agreement, which is
typically twelve months.
Revenues for custom development services are recognized on the percentage of
completion method provided that the fee for such engineering services is fixed
or determinable and the collection of the resulting receivable is probable.
Revenue from customer training and education and other services is
recognized at the date the services are 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.
Web revenue related to advertising is recognized ratably in the period in
which the advertisement is displayed, provided that the Company has no
significant remaining obligations, at the lesser of the ratio of connections to
the advertiser's website delivered over total guaranteed connections to the
advertiser's website or the straight line basis over the term of the contract.
If minimum guaranteed connections are not met, the Company defers recognition of
the corresponding revenue until the guaranteed connections are achieved. The
Company did not generate revenue from the sale of advertising on its web site
during the fiscal years ended February 28, 1997, 1998 and 1999. The Company
began selling advertising space on its web site in the three months ended
May 31, 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.
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
F-33
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. In the event that stock options are granted with an exercise price below
the estimated fair market value of the Company's common stock at the grant date,
the difference between the fair market value of the Company's common stock and
the exercise price of the stock option is recorded as deferred compensation.
Deferred compensation is amortized to compensation expense over the vesting
period of the stock option. The Company recognized $170,346 and $1,641,507 in
non-cash compensation expense related to amortization of deferred compensation
during the nine months ended November 30, 1998 and 1999, respectively. 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, including cooperative marketing
arrangements, the software products, books and related services offered by the
Company are expensed as incurred. Advertising expense totaled $113,964, $434,094
and $1,003,517 for the years ended February 28, 1997, 1998 and 1999,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development expenses include all direct costs, primarily
salaries for Company 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 and ending when a product is available for general
release to customers. To date, such costs have been insignificant.
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 enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
FOREIGN CURRENCY TRANSLATION
The majority of the Company's international sales are currently denominated
in U.S. dollars. The U.S. dollar has been determined to be the functional
currency for the Company's European operations and local currencies have been
determined to be the functional currencies for the Company's Asian operations.
Foreign exchange gains and losses, which result from the process of remeasuring
foreign currency financial statements into U.S. dollars are included in the
statements of
F-34
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
operations. Foreign exchange gains and losses which result from the translation
of foreign currency financial statements into U.S. dollars where the local
currency is the functional currency is included as a separate component of
stockholders' equity.
SIGNIFICANT CUSTOMERS AND CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company primarily places its temporary cash
investments with high-credit quality financial institutions which invest
primarily in U.S. Government instrumentalities, commercial paper of prime
quality and certificates of deposit guaranteed by banks which are members of the
FDIC. Cash deposits are primarily in financial institutions in the United
States, however, cash from monthly operating costs of international operations
are deposited in banks outside the United States. 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 19% of software
and related product revenue for the years ended February 28, 1997, 1998 and
1999, respectively. Sales to one other distributor comprised $3,719,162 or 33%
of total revenues for the year ended February 28, 1999. In addition, the Company
generated services and other revenue from a single customer which comprised 12%,
13% and 16% of total revenue for the years ended February 28, 1997, 1998 and
1999, respectively. Receivables from one distributor and one other customer
comprised 14% and 10%, respectively, of net accounts receivable at February 28,
1999. Accounts receivable from one customer comprised 14% of net receivables at
February 28, 1998.
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.
CASH FLOWS
The Company made cash payments for interest of $23,304, $22,941, and
$103,121 for the years ended February 28, 1997, 1998, and 1999, respectively.
The Company made cash payments for income taxes during the years ended
February 28, 1997 and 1998 and February 28, 1999 of $305,235, $3,117 and
$164,461 respectively.
The Company acquired property and equipment through the assumption of
capital lease obligations amounting to $102,935, $122,541 and $488,310 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
F-35
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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.
PRO FORMA (UNAUDITED)
Pro forma net income (loss) per common share is calculated assuming
conversion of all mandatorily redeemable preferred stock which converted
automatically upon the effectiveness of the Company's initial public offering on
August 11, 1999 into 67,890,904 shares of common stock (see Note 11) at
February 28, 1999.
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 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. Required segment disclosures are presented below:
The Company has international sales offices in the United Kingdom, Ireland,
Germany, Switzerland and Japan. The following disclosure aggregates individually
immaterial international operations and separately discloses the significant
international operations at and for the year ended February 28, 1999.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28, 1999
-------------------------------------------------------------------
UNITED UNITED OTHER
STATES KINGDOM IRELAND INTERNATIONAL TOTAL
----------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues from
external
customers.......... $19,885,561 $334,579 $10,592,689 $2,218,853 $33,031,682
Net Income (Loss).... $(6,474,777) $134,523 $ (471,207) $ 984,360 $(5,827,301)
Total Assets......... $31,769,839 $287,879 $ 106,726 $ 566,779 $37,731,223
</TABLE>
INTERNAL USE SOFTWARE
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. The Company
adopted SOP No. 98-1 effective March 1, 1999. The adoption of SOP No. 98-1 did
not have a material impact on the Company's financial position or results of
operations.
F-36
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The Company's only item of other
comprehensive income during nine months ended November 30, 1999 is an unrealized
loss on investments in marketable securities of $244,503.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the 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. SFAS 133 as amended by SFAS 137, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000, with earlier
application encouraged. 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
adoption of SOP No. 98-1 in the three months ended May 31, 1999, did not have a
material impact on its financial position or results of operations.
3. BUSINESS COMBINATION
In January 2000, Red Hat completed a merger with Cygnus Solutions, Inc.
("Cygnus") by exchanging 10,867,966 shares of its common stock for all of the
outstanding common and preferred stock of Cygnus. In addition, approximately
1,574,168 outstanding Cygnus employee stock options were converted at the same
exchange factor into options to purchase approximately 2,380,722 shares of Red
Hat's common stock.
The merger constituted a tax-free reorganization and has been accounted for
using the pooling of interests method of accounting under Accounting Principles
Board Opinion No. 16. Accordingly, all prior period financial statements have
been restated to include the results of operations, financial position and cash
flows of Cygnus as though it had always been a part of Red Hat.
Prior to the merger, Cygnus' fiscal year ended on June 30. In recording the
business combination, Cygnus' prior period financial statements have been
restated to a year ended March 31, to be within a 90-day period of Red Hat's
fiscal year end. In order to fully conform Cygnus'
F-37
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS COMBINATION (CONTINUED)
period end with the fiscal quarter end of Red Hat, in preparing the results of
operations for Cygnus for the nine month period ended November 30, 1999, the
results of operations of Cygnus for the month of September 1999, have been
included twice. Cygnus' net loss for the month of September 1999 was $981,314. A
credit to accumulated deficit has been recorded to remove the effect of
including the net loss of Cygnus for the month of September 1999, in the results
of operations of the Company more than once.
The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28, NINE MONTHS
--------------------------------------------- ENDED
1997 1998 1999 NOVEMBER 30, 1999
----------- ----------- ----------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total revenue
Red Hat.................... $ 2,603,131 $ 5,155,623 $10,789,919 $ 12,595,681
Cygnus..................... 12,525,856 17,487,827 22,241,763 17,015,850
----------- ----------- ----------- ------------
Combined................... $15,128,987 $22,643,450 $33,031,682 $ 29,611,531
=========== =========== =========== ============
Net income (loss) available
to common stockholders
Red Hat.................... $ 32,611 $ 7,733 $ (130,424) $ (8,858,926)
Cygnus..................... (1,544,457) (2,973,619) (5,696,877) (6,408,857)
----------- ----------- ----------- ------------
Combined................... $(1,511,846) $(2,965,846) $(5,827,301) $(15,267,783)
=========== =========== =========== ============
</TABLE>
Immaterial adjustments were made to conform Red Hat and Cygnus' accounting
policies. Certain reclassifications were made to Cygnus' financial statements to
conform to Red Hat's presentation.
In connection with the merger, the Company will record a charge of
approximately $10.0 million to operating expenses for costs incurred related to
the merger at the date of the merger is completed. Merger costs totaling
$230,995 are deferred and included in prepaids and other assets in the
accompanying consolidated balance sheet at November 30, 1999 until the merger is
completed. These merger costs consist primarily of $6,000,000 in investment
banking fees and costs of attorneys, accountants, and other directly related
costs.
F-38
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. 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................................. $207,000 $ 39,455 $ (1,304) $245,151
1998................................. $245,151 $ 38,141 $(152,904) $130,388
1999................................. $130,388 $185,092 $ (61,999) $253,481
</TABLE>
The Company's allowance for doubtful accounts at November 30, 1999 is $377,245.
Bad debt expense for the nine months ended November 30, 1999 was $362,060.
- ------------------------
(a) Represents amounts written-off as uncollectible accounts receivable.
5. PROPERTY AND EQUIPMENT
The Company's property and equipment consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
------------------------- ------------
1998 1999 1999
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment................ $ 4,169,343 $ 4,847,833 $9,376,163
Furniture and fixtures............ 666,933 1,388,118 1,616,664
Leasehold improvements............ -- 214,868 412,813
Software.......................... 220,293 540,125 594,401
----------- ----------- ----------
5,056,569 6,990,944 12,000,041
Less: accumulated depreciation.... (2,086,714) (3,069,146) (4,359,144)
----------- ----------- ----------
$ 2,969,855 $ 3,921,798 $7,640,897
=========== =========== ==========
</TABLE>
F-39
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ASSETS
Other assets were comprised of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
------------------- ------------
<S> <C> <C> <C>
1998 1999 1999
-------- -------- ----------
(UNAUDITED)
Security deposits...................... $ 11,900 $ 78,130 $ 92,442
Trademarks, patents and copyrights,
net.................................. 69,288 73,180 121,745
Deferred merger and acquisition
costs................................ -- -- 230,995
Goodwill............................... 189,160 81,069 437,863
Prepaid directors' and officers'
insurance............................ -- -- 419,972
Cost basis investment.................. -- -- 500,000
Other.................................. 31,667 -- 20,772
-------- -------- ----------
$302,015 $232,379 $1,823,789
======== ======== ==========
</TABLE>
7. 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 U.S. Government obligations.
The fair value of the Company's short-term and long-term investments at
November 30, 1999, differed from their historical cost by $244,503. Following is
a summary of the historical cost, unrealized gain (loss) and fair values of the
Company's investments at December 30, 1999:
<TABLE>
<CAPTION>
UNREALIZED GAIN
COST (LOSS) FAIR VALUE
----------------- ----------------- -----------------
<S> <C> <C> <C>
Short-term........... $ 7,630,705 $ -- $ 7,630,705
76,877,622 (244,503) 76,633,119
----------- --------- -----------
$84,508,327 $(244,503) $84,263,824
=========== ========= ===========
</TABLE>
F-40
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ACCRUED EXPENSES
Accrued expenses were comprised of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
----------------------- ------------
1998 1999 1999
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Payroll............................ $ 977,929 $1,220,403 $ 874,033
Vacation........................... 330,501 563,197 870,595
Commissions........................ 225,643 160,926 55,422
Trade.............................. 151,314 232,304 1,792,909
Taxes.............................. 357,753 255,824 976,698
Other.............................. 300,320 776,426 1,070,974
---------- ---------- ----------
$2,343,460 $3,209,080 $5,640,631
========== ========== ==========
</TABLE>
9. LINE OF CREDIT
The Company has a line of credit agreement with a bank which provides the
Company the ability to borrow up to $4,000,000. The amount available is adjusted
for certain items, including outstanding letters of credit. The line of credit,
which is collateralized by the assets of the Company, matures on December 15,
1999 and requires the Company to maintain certain financial covenants.
Borrowings under the line of credit bear interest at the bank's prime rate
(8.26% at February 28, 1999) plus 0.5%. At February 28, 1999 and November 30,
1999, the Company had no borrowings under the line of credit.
Additionally, the Agreement provided for equipment advances of $1,500,000
through January 17, 1999. During the year ended February 28, 1999, the Company
obtained an advance of $1,500,000 for capital acquisitions, with interest
accruing from the date of the advance at bank's prime rate plus 0.5%. The
advance is payable in 36 monthly installments of principal, plus accrued
interest, beginning February 17, 1999. At February 28, 1999, the outstanding
obligation was approximately $1,417,000. Borrowings on the facility are due as
follows (IN THOUSANDS):
<TABLE>
<S> <C>
YEAR ENDING FEBRUARY 28,
2000................................................. $ 500
2001................................................. 500
2002................................................. 417
------
$1,417
======
</TABLE>
At November 30, 1999, the outstanding obligation on this facility was
$1,083,339.
F-41
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
The components of the Company's provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED FEBRUARY 28, NOVEMBER 30,
--------------------------------- ---------------------
1997 1998 1999 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current tax provision:
Federal.................. $ 20,594 $(34,500) $149,284 $149,284 $ --
State.................... 2,000 (1,950) 69,820 68,715 --
Foreign.................. 28,500 251,798 503,112 377,335 240,981
-------- -------- -------- -------- --------
Current tax expense...... 51,094 215,348 722,216 595,334 240,981
-------- -------- -------- -------- --------
Deferred tax provision:
Federal.................. 115,500 -- -- -- --
State.................... 24,500 -- -- -- --
-------- -------- -------- -------- --------
Deferred tax benefit..... 140,000 -- -- -- --
-------- -------- -------- -------- --------
Net provision for income
taxes.................... $191,094 $215,348 $722,216 $595,334 $240,981
======== ======== ======== ======== ========
</TABLE>
The provision for income taxes in all periods primarily relates to foreign
withholding taxes on foreign revenues earned by a U.S. Company. These
withholding taxes paid may be creditable against U.S. federal income taxes in
future periods.
F-42
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
at February 28, 1999, February 28, 1998 and November 30, 1999, consisted of the
following:
<TABLE>
<CAPTION>
FEBRUARY 28,
------------------------- NOVEMBER 30,
1998 1999 1999
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred Tax Assets:
Domestic net operating loss
carryforwards..................... $ 746,988 $ 2,906,601 7,688,907
Foreign net operating loss
carryforwards..................... -- -- 611,666
Accounts receivable................. 70,620 284,957 151,482
Allowance for inventory
obsolescence...................... -- 70,785 --
Other accruals and liabilities...... 431,574 92,090 538,571
Property and equipment.............. -- 146,048 142,880
Intangibles......................... 742,398 673,125 660,120
Research and development credit..... 553,154 809,258 1,120,400
Foreign tax credit.................. 322,730 885,730 886,302
Compensation-related accruals....... 86,399 98,582 926,334
----------- ----------- ------------
Total deferred tax assets......... 2,953,863 5,967,176 12,726,662
Valuation allowance for deferred tax
assets............................ (2,709,945) (5,967,176) (12,726,662)
----------- ----------- ------------
Deferred Tax Liabilities:
Deferred tax assets............... 243,918 -- --
----------- ----------- ------------
Property and equipment.............. (243,918) -- --
----------- ----------- ------------
Total deferred tax liabilities.... (243,918) -- --
----------- ----------- ------------
Net deferred taxes................ $ -- $ -- $ --
=========== =========== ============
</TABLE>
As of February 28, 1998 and 1999, and November 30, 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 and the nine months ended
November 30, 1999 to reserve the increase in total deferred tax assets at
February 28, 1999 and November 30, 1999 due to uncertainty of realizability.
As of November 30, 1999, the Company had Federal and state net operating
loss carryforwards of approximately $19,112,000 and 12,222,000 respectively.
These net operating loss carryforwards expire in varying amounts beginning in
2011 and 2001 for Federal and state income tax purposes, respectively. The
utilization of the Federal net operating loss carryforwards may be subject to
limitation under the rules regarding a change in stock ownership as determined
by the Internal Revenue Code. If the Company's utilization of its net operating
loss carryforwards is limited and the Company has taxable income which exceeds
the permissible yearly net operating loss utilization, the Company would incur a
Federal income tax liability even though its net operating loss carryforwards
exceed its taxable income.
F-43
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Additionally, the Company had net operating loss carryforwards for taxes
purposes in various jurisdictions outside the United States amounting to
approximately $1,485,000. The majority of the foreign loss carryforwards will
never expire under local country tax rules. The Company has not provided taxes
on undistributed earnings of foreign subsidiaries because the Company assumes
that the foreign subsidiaries will reinvest the undistributed earnings
indefinitely.
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......................................... (14.5)% (7.9)% (14.3)%
--------- ----------- ----------
United States Federal tax at statutory rate............ $(448,936) $ (935,169) (1,722,348)
State taxes (net of Federal benefit)................... (127,920) (81,845) (440,355)
Foreign taxes.......................................... 28,500 250,798 422,680
Charge in valuation reserves........................... 897,084 1,812,861 3,257,231
Research and development credit........................ -- (553,154) (256,104)
Foreign tax credit..................................... -- (322,730) (563,000)
Refund due to credits.................................. (169,106) -- --
Nondeductible items.................................... 11,472 44,587 24,112
--------- ----------- ----------
Provision for income taxes............................. $ 191,094 $ 215,348 $ 722,216
========= =========== ==========
</TABLE>
11. MANDATORILY REDEEMABLE PREFERRED STOCK
At November 30, 1999, the Company has authorized 5,000,000 shares of
preferred stock with a par value of $0.0001 per share. The Company has no
outstanding shares of preferred stock at November 30, 1999.
At February 28,1999, the Company had 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.
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
F-44
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
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.
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, after certain adjustments. This conversion rate
could 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.
All outstanding shares of Series A, Series B and Series C mandatorily
redeemable preferred stock automatically converted into 67,890,904 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.
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, after 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 in September 1998, 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
accumulated deficit over the period from issuance until redemption first
F-45
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
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
mandatorily redeemable preferred stock prior to the fiscal year ended
February 28, 1999. The Company sold an additional 1,027,388 shares of Series C
preferred stock for net proceeds of $3,164,156 in March and April 1999 with a
redemption value of $4,004,758. Accretion on preferred stock was $43,080 for the
three months ended May 31, 1999.
CYGNUS SERIES B MANDATORILY REDEEMABLE PREFERRED STOCK
Cygnus had authorized 1,042,000 shares of Series B mandatorily redeemable
preferred stock at February 28, 1998, February 28, 1999 and November 30, 1999.
On January 27, 1997, Cygnus entered into a purchase agreement with several
investors (the "Cygnus Series B Investors"). In connection with this agreement,
the Company issued 1,042,000 shares of Series B preferred stock for $6,252,000
or $6.00 per share.
The holders of the Cygnus Series B preferred stock could require Cygnus to
redeem, at any time after January 1, 2004, in two equal annual installments, the
holders' outstanding Series B preferred stock at a redemption price of $6 per
share or a total of $6,252,000.
The Cygnus Series B preferred stock was convertible at the option of the
holder into the number of shares of common stock of Cygnus as is determined by
dividing $6 by the conversion price in effect at the date of conversion. The
Cygnus Series B preferred stock converted into 1,638,520 shares of Red Hat stock
on January 7, 2000, the closing date of the merger with Red Hat.
12. COMMON AND PREFERRED STOCK
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 125,000,000 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 winding up of the Company, holders of
common stock will be entitled to receive the assets of the Company after
satisfaction of 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 5,251,000 shares of common stock to the Series B Investors for
$1,125,000 or $0.215 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
F-46
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMON AND PREFERRED STOCK (CONTINUED)
this agreement, those stockholders sold 984,368 shares of common stock to the
Series C Investors for $772,975 or $0.786 per share. Upon additional closings of
the Series C mandatorily redeemable preferred stock financing in March and April
of 1999, an additional 984,368 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 $0.786 per share.
On August 16, 1999, the Company closed its initial public offering of
13,800,000 shares of its common stock at a price of $7.00 per share. The Company
received proceeds from this offering of $88,466,929 net of $8,133,107 in
offering costs.
CYGNUS PREFERRED STOCK
Cygnus had authorized 7,798,180 shares of Series A preferred stock at
February 28, 1998, February 28, 1999 and November 30, 1999. On January 15, 1997,
Cygnus converted 5,882,633 outstanding shares of common stock to Series A
preferred stock. In addition, 914,493 Series A preferred shares were issued from
exercise of options by employees to purchase Cygnus Series A preferred stock.
The Cygnus Series A preferred stock was convertible, at the option of the
holder, into the number of common shares of Cygnus common stock determined by
dividing $3.11 by the conversion price in effect at the date of conversion. All
outstanding Cygnus Series A preferred stock was converted into 6,318,219 shares
of Red Hat common stock on January 7, 2000, the closing date of the merger
between Red Hat and Cygnus.
Cygnus had authorized 1,572,476 shares of Series C preferred stock at
February 28, 1999 and November 30, 1999. In March and June 1999, Cygnus entered
into purchase agreements with several investors, whereby, 1,233,715 shares of
Cygnus Series C preferred stock were sold for $9.50 per share, or net proceeds
of $11,734,476.
The Cygnus Series C preferred stock was convertible into Cygnus common
stock, at the option of the holder, into the number of common shares determined
by dividing $9.50 by the conversion price in effect at the date of conversion.
All outstanding Cygnus Series C preferred stock was converted into 1,233,715
shares of Red Hat common stock on January 7, 2000.
13. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
During September 1998, the Company's Board of Directors approved a stock
option plan. As of February 28, 1999, 14,929,600 shares of common stock were
reserved for issuance upon exercise of options granted to any employee, officer
or director or consultant of the Company at terms and prices to be determined by
the Board of Directors. In June 1999, the option pool was increased to
18,929,600 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
F-47
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTIONS AND WARRANTS (CONTINUED)
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 with the same vesting provisions as the original option.
The Company, at its option, may repurchase these restricted shares at the
original purchase price under certain circumstances.
CYGNUS STOCK OPTION PLANS
In March 1997, Cygnus's Board of Directors adopted the 1997 Cygnus Stock
Plan. At the time of adoption, all of the remaining shares available under the
1995 Cygnus Stock Plan were rolled into the 1997 Cygnus Stock Plan and 959,210
shares of common stock were reserved for issuance under the 1997 Cygnus Stock
Plan. The provisions of the 1997 Cygnus Stock Plan provided for incentive stock
options to be issued to employees and nonstatutory stock options and stock
purchase rights to be issued to employees and consultants.
The exercise price of incentive stock options and nonstatutory stock options
granted under the 1997 Cygnus Stock Plan was required to be at least 100% and
85%, respectively, of the fair market value of the shares on the date of grant.
Options issued under the Cygnus 1997 Stock Plan generally expired ten years from
the date of the grant or such shorter term as may be provided in the option
agreement. Options granted under the 1997 Cygnus Stock Plan typically vest over
a four year period at a rate of 25% after the first year and ratably each month
thereafter.
Stock Purchase Rights provide for issuance of common stock at not less than
85% of the fair market value of the stock. The 1997 Cygnus Stock Plan provides
that the Administrator of the 1997 Cygnus Stock Plan shall advise the offeree in
writing of the terms, conditions and restrictions related to the offer.
Restricted stock purchases generally vest 25% after the first year and 1/48th
each month thereafter. Unvested shares are subject to repurchase upon
termination of employment.
In May 1998, Cygnus's Board of Directors adopted the 1998 Cygnus Executive
Stock Plan (the 1998 Plan) and 959,025 shares of common stock were reserved for
issuance under the 1998 plan. Also in May 1998 Cygnus granted rights to purchase
959,025 shares of common stock to the Chief Executive Officer of Cygnus. The
exercise price of the shares was $2.86. The Company has the right to repurchase
738,878 shares of common stock at $2.86, which right shall lapse at a rate of
1/48 of the shares at the end of each calendar month following the Chief
Executive Officer's commencement of employment with Cygnus. Subject to other
conditions, 220,147 shares are subject to repurchase by Cygnus at a repurchase
price of $2.86. In January 1999, Cygnus authorized an additional 613,451 shares
for issuance under this plan, for a total of 1,572,476 shares.
F-48
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTIONS AND WARRANTS (CONTINUED)
The activity for the stock option plans for the year ended February 28, 1999
and for the period from March 1, 1999 to November 30, 1999 is presented in the
following table and includes common stock options of Red Hat and both common and
preferred stock options of Cygnus.
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
UNDERLYING EXERCISE PRICE
OPTIONS PER SHARE
----------- --------------
<S> <C> <C>
Outstanding at February 28, 1998............................ 2,156,560 $0.95
Granted..................................................... 11,442,215 0.84
Exercised................................................... (1,365,019) 2.41
Forfeited................................................... (702,267) 2.06
----------- -----
Outstanding at February 28, 1999............................ 11,531,488 0.60
Granted (unaudited)......................................... 10,756,433 3.81
Exercised (unaudited)....................................... (6,900,337) 0.50
Forfeited (unaudited)....................................... (448,257) 1.59
----------- -----
Outstanding at November 30, 1999 (unaudited)................ 14,939,328 $2.92
=========== =====
</TABLE>
Options outstanding at November 30, 1999 include 342,320 options to purchase
Cygnus' Series preferred stock. These preferred stock options converted into
options to purchase Red Hat's common stock on the closing of the merger between
Red Hat and Cygnus (see Note 3).
The Company recorded deferred compensation of $8,886,509 during the nine
months ended November 30, 1999 to reflect the difference between the aggregate
fair value and exercise price during this period of all stock options granted
with an exercise price below the fair value of the Company's common stock at the
date of the grant. Amortization of deferred compensation totaled $737,840 and
$1,023,026 during the year ended February 28, 1999 and the nine months ended
November 30, 1999, respectively.
The following summarizes information about the Company's stock options at
February 28, 1999:
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>
$ 0.09 2,400,000 9.58 $0.09 2,400,000 $0.09
$ 0.15 510,487 6.20 $0.15 145,291 $0.15
$ 0.22 6,205,140 9.67 $0.22 6,205,140 $0.22
$ 0.64 204,502 7.25 $0.64 54,118 $0.64
$0.95-$1.27 460,114 8.09 $1.04 234,117 $1.02
$1.75-$2.07 349,739 8.64 $1.79 90,989 $1.78
$ 2.86 1,401,506 9.69 $2.86 139,317 $2.86
</TABLE>
F-49
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK WARRANTS
On October 10, 1995, the Company issued warrants (which are equivalent to
nonqualified stock options) to purchase 7,480,800 shares of common stock to
three of its employees with an exercise price of $0.0001 per share. The warrants
vest 25% annually on each May 1, beginning May 1, 1996 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................ 7,480,800 $.00005 7,480,800 $.00005 7,480,800 $.00005
--------- ------- --------- ------- --------- -------
Exercised................ -- -- -- -- (705,900) $.00005
Outstanding at end of
year................... 7,480,800 $.00005 7,480,800 $.00005 6,774,900 $.00005
Exercisable at end of
year................... 1,870,200 $.00005 3,740,400 $.00005 4,908,700 $.00005
</TABLE>
During the nine month period ended November 30, 1999, warrants to purchase
1,960,000 shares were exercised. At May 31, 1999, warrants to purchase 4,814,900
shares remained outstanding. Amounts as of November 30, 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
F-50
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTIONS AND WARRANTS (CONTINUED)
was estimated using the following assumptions for the year ended February 28,
1999 and the nine months ended November 30, 1999:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
FEBRUARY 28, 1999 NOVEMBER 30, 1999
------------------ ------------------
EMPLOYEE EMPLOYEE
STOCK STOCK
OPTIONS OPTIONS
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Expected dividend yield............ 0.00% 0.00%
Risk-free interest rate............ 4.98% 5.01%
Expected volatility................ 0.00% 134.41%
Expected life (in years)........... 6 5
</TABLE>
SFAS 123 pro forma numbers are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
FEBRUARY 28, NOVEMBER 30,
1999 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Net loss available to common stockholders as
reported
under APB No. 25............................ $5,827,301 $15,315,360
Pro forma net loss available to common
stockholders................................ $6,565,864 $19,016,808
</TABLE>
The weighted average estimated fair value of employee stock options granted
during the year ended February 28, 1999 was $0.41 per share and was $16.14
during the nine months ended November 30, 1999. The weighted average estimated
fair value of the warrants at the time of grant was $0.0001 per share.
14. STOCK SPLIT
On August 11, 1999, the Company effected a two-for-one stock split
immediately prior to the effectiveness of the Company's initial public offering.
All share and per share information have been restated to reflect the effects of
this stock split.
On January 7, 2000, the Company effected a two-for-one stock split. All
share and per share information has been restated to reflect the effects of this
stock split.
F-51
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. 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................................................. $1,794,633 $176,833
2001................................................. 1,618,642 173,313
2002................................................. 1,394,975 151,072
2003................................................. 982,742 113,729
Thereafter........................................... 899,291 99,687
---------- --------
Total minimum lease payments....................... $6,690,283 714,634
==========
Less amount representing interest (at rates ranging
from 8.2% to 9.6%)................................. (92,726)
--------
Present value of net minimum lease payments.......... 621,908
Less current portion................................. (139,112)
--------
Long-term portion.................................. $482,796
========
</TABLE>
Rent expense under operating leases for the years ended February 28, 1997,
1998 and 1999 was $642,313, $1,018,191 and $1,205,973 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.
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.
16. 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, after complying
with 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.
F-52
<PAGE>
RED HAT, INC.
NOTES TO SUPPLEMENTAL POOLED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. ACQUISITIONS (UNAUDITED)
In January 2000, the Company completed the acquisition of all of the
outstanding common stock of Hells Kitchen Systems, Inc. ("HKS") in exchange for
the issuance of 769,670 shares of the Company's common stock to the shareholders
of HKS. The acquisition of HKS will be accounted for using the purchase method
of accounting in accordance with APB No. 16.
F-53
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Hell's Kitchen Systems, Inc.
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 Hell's Kitchen
Systems, Inc. at December 31, 1998, March 9, 1999 and September 30, 1999, and
the results of its operations and its cash flows for the year ended
December 31, 1998, the period from January 1, 1999 to March 9, 1999, and the
period from March 10, 1999 to September 30, 1999 in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States 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.
Raleigh, North Carolina
December 16, 1999
F-54
<PAGE>
HELL'S KITCHEN SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
DECEMBER 31, MARCH 9, SEPTEMBER 30,
1998 1999 1999
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.......................................... $ 27,238 $ 9,940 $ 62,988
Prepaid expenses and other current assets..... 7,882 -- 8,585
--------- --------- ---------
Total current assets...................... 35,120 9,940 71,573
Property and equipment, net..................... 34,769 34,247 28,150
Goodwill, net................................... -- -- 575,721
--------- --------- ---------
Total assets.............................. $ 69,889 $ 44,187 $ 675,444
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.............................. $ 3,000 $ 6,153 $ 108,322
Accrued expenses.............................. 11,304 41,874 48,131
Deferred revenue.............................. 390 1,690 10,977
Current portion of capital lease
obligations................................. 706 676 1,267
--------- --------- ---------
Total current liabilities................. 15,400 50,393 168,697
Capital lease obligations....................... 3,786 5,419 5,878
Stockholders' equity (deficit):
Common stock, no par value, 2,000,000 shares
authorized; no shares issued or outstanding
at December 31, 1998 and March 9, 1999; and
1,344,932 shares issued and outstanding at
September 30, 1999.......................... 483,695 491,195 962,233
Stockholder receivables....................... -- -- (2,757)
Accumulated deficit........................... (432,992) (502,820) (458,607)
--------- --------- ---------
Total stockholders' equity (deficit)...... 50,703 (11,625) 500,869
--------- --------- ---------
Total liabilities and stockholders' equity
(deficit)............................... $ 69,889 $ 44,187 $ 675,444
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
HELL'S KITCHEN SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
PERIOD FROM PERIOD FROM
JANUARY 1, 1999 MARCH 10, 1999
YEAR ENDED TO TO
DECEMBER 31, 1998 MARCH 9, 1999 SEPTEMBER 30, 1999
--------- -------- ---------
<S> <C> <C> <C>
Revenue:
Software and related
products.................... $ 33,694 $ 11,714 $ 84,578
Services and other............ 2,443 5,858 4,669
--------- -------- ---------
Total revenue............. 36,137 17,572 89,247
--------- -------- ---------
Cost of revenue:
Software and related
products.................... 23,364 8,872 25,354
Services and other............ 21,238 5,258 15,025
--------- -------- ---------
Total cost of revenue..... 44,602 14,130 40,379
--------- -------- ---------
Gross margin (loss)............. (8,465) 3,442 48,868
--------- -------- ---------
Operating expense:
Sales and marketing........... 28,048 -- 23,362
Research and development...... 114,155 29,703 87,826
General and administrative.... 143,992 43,462 395,755
--------- -------- ---------
Total operating
expenses................ 286,195 73,165 506,943
--------- -------- ---------
Loss from operations............ (294,660) (69,723) (458,075)
Interest expense.............. -- (105) (532)
--------- -------- ---------
Net loss........................ $(294,660) $(69,828) $(458,607)
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
HELL'S KITCHEN SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK STOCKHOLDERS
--------------------- ACCUMULATED STOCKHOLDER EQUITY
SHARES AMOUNT DEFICIT RECEIVABLES (DEFICIT)
--------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997.... -- $164,782 $(138,332) $ -- $ 26,450
Proceeds from capital
contributions................. -- 318,913 -- -- 318,913
Net loss........................ -- -- (294,660) -- (294,660)
--------- -------- --------- ------ ---------
Balance at December 31, 1998.... -- 483,695 (432,992) -- 50,703
Stock issued in lieu of
compensation.................. -- 7,500 -- -- 7,500
Net loss........................ -- -- (69,828) -- (69,828)
--------- -------- --------- ------ ---------
Balance at March 9, 1999........ -- $491,195 $(502,820) $ -- $ (11,625)
========= ======== ========= ====== =========
- ------------------------------------------------------------------------------------------------------
Balance at March 10, 1999....... -- $ -- $ -- $ -- $ --
Stock issued in formation of
Heureka....................... 407,803 13,207 -- -- 13,207
Issuance of common stock to
acquire Hell's Kitchen
Systems, Inc. on March 10,
1999.......................... 690,950 690,950 -- -- 690,950
Proceeds from issuance of common
stock......................... 243,345 255,319 -- -- 255,319
Issuance of common stock in
exchange for stockholder
receivable.................... 2,834 2,757 -- (2,757) --
Net loss........................ -- -- (458,607) -- (458,607)
--------- -------- --------- ------ ---------
Balance at September 30, 1999... 1,344,932 $962,233 $(458,607) $(2,757) $ 500,869
========= ======== ========= ====== =========
</TABLE>
F-57
<PAGE>
HELL'S KITCHEN SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1, 1999 MARCH 10, 1999
DECEMBER 31, TO MARCH 9, TO SEPTEMBER 30,
1998 1999 1999
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(294,660) $(69,828) $(458,607)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization......... 14,708 2,333 135,521
Noncash compensation expense.......... -- 7,500 13,207
Changes in operating assets and
liabilities:
Prepaid expenses...................... (1,527) 7,882 (8,585)
Accounts payable...................... 3,000 3,153 102,169
Accrued expenses...................... (591) 30,570 6,257
Deferred revenue...................... 390 1,300 9,287
--------- -------- ---------
Net cash used in operating
activities........................ (278,680) (17,090) (200,751)
--------- -------- ---------
Cash flows used in investing activities:
Purchase of equipment................. (19,873) -- (982)
--------- -------- ---------
Cash flows from financing activities:
Capital contributions/proceeds from
issuance of common stock............ 318,913 -- 255,319
Payments on capital lease obligations... -- (208) (538)
--------- -------- ---------
Net cash provided by (used in)
financing activities.............. 318,913 (208) 254,781
--------- -------- ---------
Net increase (decrease) in cash......... 20,360 (17,298) 53,048
Cash beginning of the period............ 6,878 27,238 9,940
--------- -------- ---------
Cash end of period...................... $ 27,238 $ 9,940 $ 62,988
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
HELL'S KITCHEN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
BUSINESS ACTIVITY
Hell's Kitchen Systems, Inc. ("HKS" or the "Company") develops and markets
Internet credit card verification software ("CCVS") that enables users to
process credit card transactions directly with the credit card clearinghouses.
HKS was incorporated on September 20, 1994 in New Jersey.
BASIS OF PRESENTATION
Prior to March 10, 1999 HKS was a New Jersey corporation. Effective
March 10, 1999 HKS was acquired by Heureka Management Corporation ("Heureka"),
which was a Pennsylvania corporation, which was established with the sole
purpose of acquiring HKS. Immediately following the acquisition, Heureka changed
its name to Hell's Kitchen Systems, Inc.
The financial statements of HKS for the year ended December 31, 1998 and the
period from January 1, 1999 to March 9, 1999 represent the results of operations
and financial position of HKS based on the carrying values of its assets and
liabilities prior to the acquisition by Heureka. The financial statements of HKS
for the period subsequent to the acquisition by Heureka (March 10, 1999 to
September 30, 1999) reflect the impact on HKS's financial position and results
of operations of the purchase accounting adjustments discussed in Note 9.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
PROPERTY AND EQUIPMENT
Property and equipment is primarily equipment and computer software which
are recorded at cost and depreciated over their estimated useful lives using the
double declining balance 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. The rest of HKS's property and equipment
is depreciated over a period of three years.
IMPAIRMENT OF LONG-LIVED ASSETS
HKS evaluates the recoverability of its property and equipment and other
long-lived assets in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of,
("SFAS No. 121"). SFAS No. 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 assets relate. No impairments were required to be recognized during
the year ended December 31, 1998, the period from January 1, 1999 to March 9,
1999 or the period from March 10, 1999 to September 30, 1999.
F-59
<PAGE>
HELL'S KITCHEN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
HKS's revenue is derived from software licenses as well as related support
and maintenance and consulting services. The Company adopted American Institute
of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended by SOP No. 98-4 effective January 1,
1998. The adoption did not have a material effect on the timing of the Company's
revenue recognition or cause changes to its revenue recognition policies.
Revenue from software licenses is recognized when there is evidence of an
arrangement, the product has been shipped, fees are fixed and determinable, and
collection of the related receivable is probable. Support and maintenance
revenue, which is included in services and other revenue, is deferred and
recognized ratably over the service period which is typically twelve months.
When software and services are sold under one contract, revenue is allocated to
each element based on their respective fair values, with these fair values being
determined using the price charged when that element is sold separately.
Consulting revenue, which is included in services and other revenue, is
recognized as the related consulting services are performed which generally take
less than one week to complete.
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. In the event that stock options are
granted with an exercise price below the estimated fair value of the Company's
common stock at the grant date, the difference between the fair value of the
Company's common stock and the exercise price of the stock option is recorded as
deferred compensation. Deferred compensation is amortized to compensation
expense over the vesting period of the stock option. Management of the Company
believes that all stock options which have been issued by the Company to date
have been issued with an exercise price equal to the fair value of the Company's
common stock on the date of the grant. The Company has adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," ("SFAS No. 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 of costs, including salaries and sales
commissions, of all personnel involved in the sales process. Sales and marketing
expenses also include costs of advertising, trade shows and certain indirect
costs. Advertising expense totaled $23,624 for the year ended December 31, 1998,
$0 for the period from January 1, 1999 to March 9, 1999 and $23,362 for the
period from March 10, 1999 to September 30, 1999. All advertising costs are
expensed as incurred.
SOFTWARE AND WEB SITE DEVELOPMENT COSTS
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be
F-60
<PAGE>
HELL'S KITCHEN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Sold, Leased or Otherwise Marketed." Under this standard, capitalization of
software development costs begins upon the establishment of technological
feasibility and ceases upon general release of the product, subject to net
realizable value considerations. To date, the period between achieving
technological feasibility and the general availability of such software has
substantially coincided; therefore, no software development costs have been
capitalized.
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. The
Company adopted SOP No. 98-1 effective January 1, 1999 and accounts for its web
site development costs in accordance with SOP No. 98-1. The adoption of SOP
No. 98-1 did not have a material impact on the Company's financial position or
results of operations.
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 enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
CONCENTRATION OF 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 credit evaluations.
All of the Company's software licensing and services and other revenue are
from sales transactions originating in the United States.
CASH FLOW INFORMATION
The Company acquired property and equipment through the assumption of
capital lease obligations amounting to $4,492 for the year ended December 31,
1998, $1,811 for the period from January 1, 1999 to March 9, 1999 and $1,588 for
the period from March 10, 1999 to September 30, 1999.
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 financial statements. It also requires
segment disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS 131 effective for its year ended
December 31, 1998. The Company has determined that it did not have any
separately reportable operating segments as of December 31, 1998, March 9, 1999
and September 30, 1999.
F-61
<PAGE>
HELL'S KITCHEN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
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 on January 1, 1998 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 year ended December 31, 1998, the period from
January 1, 1999 to March 9, 1999 or the period from March 10, 1999 to
September 30, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
No. 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. SFAS 133, as amended, is effective for fiscal years beginning after
June 15, 2000, with earlier application encouraged. The Company does not
currently 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 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 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 ("VSOE") 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 97-2 that were deferred by SOP
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 98-9 will have a
significant impact on the Company's results of operations or financial position.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, which are comprised primarily of cash
in demand deposit accounts and accounts payable, are carried at cost which
approximates their fair market value at December 31, 1998, March 9, 1999 and
September 30, 1999.
F-62
<PAGE>
HELL'S KITCHEN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT, NET
The Company's property and equipment consisted of the following:
<TABLE>
DECEMBER 31, MARCH 9, SEPTEMBER 30,
1998 1999 1999
------- ------- -------
<S> <C> <C> <C>
Equipment........................................ $75,007 $76,818 $36,817
Computer software................................ 12,425 12,425 --
------- ------- -------
87,432 89,243 36,817
Less: accumulated depreciation................... (52,663) (54,996) (8,667)
------- ------- -------
$34,769 $34,247 $28,150
======= ======= =======
</TABLE>
5. GOODWILL, NET
The Company's goodwill consisted of the following:
<TABLE>
DECEMBER 31, MARCH 9, SEPTEMBER 30,
1998 1999 1999
--------- --------- --------
<S> <C> <C> <C>
Goodwill......................................... $ -- $ -- $702,575
Less: accumulated amortization................... -- -- (126,854)
--------- --------- --------
$ -- $ -- $575,721
========= ========= ========
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses were comprised of the following:
<TABLE>
DECEMBER 31, MARCH 9, SEPTEMBER 30,
1998 1999 1999
------- ------- -------
<S> <C> <C> <C>
Payroll.......................................... $ 3,324 $33,948 $13,589
Taxes............................................ 4,772 5,626 10,207
Legal............................................ -- -- 21,527
Other............................................ 3,208 2,300 2,808
------- ------- -------
$11,304 $41,874 $48,131
======= ======= =======
</TABLE>
7. INCOME TAXES
There is no current income tax provision or benefit for the year ended
December 31, 1998, the period from January 1, 1999 to March 9, 1999 or the
period from March 10, 1999 to September 30, 1999 because the Company has
generated net operating losses since inception.
F-63
<PAGE>
HELL'S KITCHEN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1998, March 9, 1999 and September 30, 1999 consisted of the
following:
<TABLE>
DECEMBER 31, MARCH 9, SEPTEMBER 30,
1998 1999 1999
-------- -------- --------
<S> <C> <C> <C>
Net operating loss carryforwards................. $170,097 $198,361 $335,414
Total deferred tax assets...................... 170,097 198,361 335,414
Valuation allowance for deferred tax assets...... (170,097) (198,361) (335,414)
-------- -------- --------
Net deferred tax assets........................ $ -- $ -- $ --
======== ======== ========
</TABLE>
At December 31, 1998, March 9, 1999 and September 30, 1999, the Company
provided a full valuation allowance against its net deferred tax assets since
realization of these benefits could not be reasonably assured. The increase in
the valuation allowance during 1998, the period from January 1, 1999 to
March 9, 1999 and the period from March 10, 1999 to September 30, 1999 resulted
from the net operating losses generated.
As of December 31, 1998, March 9, 1999 and September 30, 1999, the Company
had Federal and state net operating loss carryforwards of approximately
$420,000, $489,000 and $826,000, respectively. The net operating loss
carryforwards expire in various amounts starting in 2009 and 2001 for Federal
and state tax purposes, respectively. The utilization of the Federal net
operating loss carryforward may be subject to limitation under the rules
regarding a change in stock ownership as determined by the Internal Revenue
Code. If the Company's utilization of its net operating loss carryforwards is
limited, and the Company has taxable income which exceeds the permissible yearly
net operating loss carryforward, the Company would incur a Federal income tax
liability even though its net operating loss carryforwards exceed its taxable
income.
Taxes computed at the statutory Federal income tax rate of 34% are
reconciled to the provision for income taxes as follows:
<TABLE>
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1, 1999 MARCH 10, 1999
DECEMBER 31, TO MARCH 9, TO SEPTEMBER 30,
1998 1999 1999
--------- -------- ---------
<S> <C> <C> <C>
Effective rate.......................... 0% 0% 0%
United States Federal tax at statutory
rate.................................. $(100,184) $(23,674) $(155,926)
State taxes (net of Federal benefit).... (19,310) (4,590) (22,262)
Change in valuation allowance........... 118,884 28,264 137,053
Non-deductible items.................... 610 -- 41,135
--------- -------- ---------
Provision for income taxes.............. $ -- $ -- $ --
========= ======== =========
</TABLE>
8. STOCKHOLDER RECEIVABLES
Stockholder receivables consist of amounts due from stockholders for the
purchase of 2,834 shares of common stock in August and September 1999. The total
receivable of $2,757 was repaid in December 1999.
F-64
<PAGE>
HELL'S KITCHEN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL STOCK
The Company has authorized 2,000,000 shares of common stock with no par
value per share. Holders of these shares have one vote per share.
Prior to the merger of HKS into Heureka Management Corporation ("Heureka")
on March 10, 1999 (the "Effective Date"), no shares of HKS were legally issued.
The cash and other contributions to HKS were instead accounted for as capital
stock with no related share amounts. In conjunction with the merger, individuals
that had contributed capital to HKS were granted a total of 690,950 shares with
a fair value of $1 per share in the surviving corporation, Heureka. Heureka
changed its name to Hell's Kitchen Systems, Inc., a Pennsylvania Corporation, in
conjunction with the transaction.
The transaction was accounted for as a purchase. At the Effective Date, each
share of common stock in HKS (690,950 shares) and each share of common stock in
Heureka (407,803 shares) converted into one share of the surviving corporation
(a total of 1,098,753 shares). The total purchase price paid by Heureka was
$746,762, including assumption of liabilities of HKS at the date of the
acquisition. In connection with the merger, approximately $43,000 in tangible
assets were acquired and $703,000 of goodwill was created, which will be
amortized over a period of 3 years.
During the period from March 10, 1999 to September 30, 1999, the Company
sold 243,345 shares common stock to a number of investors at prices ranging from
$1.00 to $1.50 per share.
10. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
During the period from March 10, 1999 to September 30, 1999 the Company
granted stock options for the purchase of a total of 74,500 shares to employees
at an exercise price of $1.00 and options for the purchase of a total of 5,500
shares to employees at an exercise price of $1.50. No options were granted prior
to March 10, 1999.
All options granted during the period from March 10, 1999 to September 30,
1999 were granted with an exercise price equal to or greater than the fair value
of the underlying common stock on the grant date, as determined by the board of
directors. All options granted were immediately vested. The fair value of each
option is estimated on the grant date using the minimum value method with the
following assumptions during the period ended September 30, 1999: risk free
interest of 5.63%, expected life of 2 years, dividend yield of 0%, and a
volatility factor 0%. The weighted average fair value of options granted during
the period from March 10, 1999 to September 30, 1999 was $0.11.
The following table summarizes information about the Company's stock options
outstanding at September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------
WEIGHTED
AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
74,500 5 $1.00 74,500 $1.00
5,500 5 $1.50 5,500 $1.50
</TABLE>
F-65
<PAGE>
HELL'S KITCHEN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company applies APB No. 25 and related interpretations in accounting for
the options. Had compensation costs for the options been determined based on the
fair value at the grant dates for awards consistent with the methods of SFAS
No. 123, the Company's net loss would be $467,193 for the period from March 10,
1999 to September 30, 1999. The Company did not grant any stock options or
warrants during the year ended December 31, 1998 or the period from January 1,
1999 to March 9, 1999 and, therefore, no pro forma disclosure for these years is
provided.
11. COMMITMENTS AND CONTINGENCIES
As of September 30, 1999, the Company has leased office space and certain
equipment under various noncancelable operating and capital leases. Future
minimum payments required under the operating and capital leases at
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- --------
<S> <C> <C>
Remaining 1999.............................................. $ 6,425 $ 591
2000........................................................ 28,838 2,362
2001........................................................ 2,438 2,362
2002........................................................ 813 2,362
2003........................................................ -- 2,075
------- ------
Total minimum lease payments................................ $38,514 9,752
=======
Less amount representing interest (at rates ranging from 14%
to 17.25%)................................................ 2,607
------
Present value of net minimum lease payments................. 7,145
Less current portion........................................ 1,267
------
Long-term portion........................................... $5,878
======
</TABLE>
Rent expense under operating leases during the year ended December 31, 1998,
the period from January 1, 1999 to March 9, 1999 and the period from March 10,
1999 to September 30, 1999 was $18,000, $5,000 and $13,000, respectively.
The gross amount of equipment and related accumulated depreciation recorded
under capital leases and included in property and equipment was as follows:
<TABLE>
DECEMBER 31, MARCH 9, SEPTEMBER 30,
1998 1999 1999
------ ------ ------
<S> <C> <C> <C>
Equipment........................................ $4,492 $6,303 $7,891
Less accumulated depreciation.................... -- (75) (1,857)
------ ------ ------
$4,492 $6,228 $6,034
====== ====== ======
</TABLE>
12. SUBSEQUENT EVENT (UNAUDITED)
In January 2000, HKS was acquired by Red Hat, Inc. ("Red Hat"). The Company
exchanged all their outstanding stock and stock options for up to 796,670 shares
of Red Hat's common stock. This acquisition was accounted for using the purchase
method of accounting in accordance with APB No. 16 as a portion of the shares to
be issued to the HKS shareholders (318,668 shares) is
F-66
<PAGE>
HELL'S KITCHEN SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
contingent upon continued employment with Red Hat by certain employees of HKS
for a period of up to three years after the date of the acquisition and upon the
HKS business achieving certain performance targets.
F-67
<PAGE>
DESCRIPTION OF INSIDE BACK COVER
This inside back cover contains the following:
A picture of the Red Hat "Shadow Man" logo. This picture is surrounded by an
all white background.
<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.................... 3
Risk Factors.......................... 7
Special Note Regarding Forward-
Looking Statements.................. 20
Use of Proceeds....................... 21
Price Range of our Common Stock....... 21
Dividend Policy....................... 21
Capitalization........................ 22
Selected Financial Data............... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 29
Business.............................. 55
Management............................ 74
Transactions with Affiliates.......... 83
Principal and Selling Stockholders.... 84
Description of Capital Stock.......... 86
Legal Matters......................... 88
Experts............................... 88
Where You Can Find More Information... 89
Underwriting.......................... 90
Index to Financial Statements......... F-1
</TABLE>
4,000,000 Shares
Red Hat
Common Stock
--------------------
[LOGO]
--------------------
GOLDMAN, SACHS & CO.
CHASE H&Q
THOMAS WEISEL PARTNERS LLC
J.P. MORGAN & CO.
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................. 151,004
NASD filing fee...................... 57,700
Nasdaq National Market listing fee... 17,500
Printing and engraving expenses...... 125,000
Legal fees and expenses.............. 500,000
Accounting fees and expenses......... 375,000
Transfer agent and registrar fees and
expenses........................... 10,000
Miscellaneous........................ 263,796
---------
Total................................ 1,500,000
</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 filed as
Exhibit 3.1 hereto and the registrants by-laws filed as Exhibit 3.2 hereto.
The underwriting agreements executed in connection with this offering and
with our initial public offering each provide 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 to our Registration Statement on
Form S-1 (File No. 333-80051) and to the form of underwriting agreement filed as
Exhibit 1.1 hereto.
The registrant currently has in place and maintains 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.
II-1
<PAGE>
On October 10, 1995, the registrant issued warrants to certain employees
exercisable for an aggregate of 4,814,900 shares of common stock with an
exercise price per share of $.0001.
From September 4, 1998 through August 11, 1999, the registrant granted
options to purchase an aggregate of 11,656,176 shares of common stock under the
1998 Stock Option Plan, as amended, exercisable at a weighted average price of
$1.542 per share.
From August 11, 1999 through December 31, 1999, the registrant granted
options to purchase an aggregate of 837,800 shares of common stock under the
1999 Stock Option and Incentive Plan, exercisable at a weighted average price of
$41.72 per share.
On January 6, 2000, in connection with the acquisition of Hell's Kitchen
Systems, Inc., the registrant issued shares of its common stock to 30
shareholders of HKS. The registrant issued 478,004 shares to such shareholders
upon the closing of the acquisition and 318,666 shares may be issued at certain
dates over a period of three years based upon continued employment with the
registrant and designated performance targets.
On January 7, 2000, in connection with the acquisition of Cygnus, the
registrant issued an aggregate of 10,867,966 shares of common stock. These
shares do not include 2,412,737 shares of common stock outstanding under the
Cygnus 1995 Stock Plan, the Cygnus 1997 Stock Plan and the Cygnus 1998 Executive
Stock Plan, which options have been assumed by Red Hat. The offering and sale of
the shares in the transaction were made in reliance upon the exemption provided
by Section 3(a)(10) of the Securities Act for transactions not involving a
public offering.
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.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT INDEX
- --------------------- -------------
<C> <S>
1.1 Form of Underwriting Agreement
2.1 Agreement and Plan of Reorganization by and among the
registrant, Cygnus Solutions, Inc., Miami Acquisition Corp.
and Michael Tiemann, as Securityholder Agent, dated as of
November 5, 1999 (incorporated by reference from Exhibit 2.1
to the registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended November 1999)
2.2 Agreement and Plan of Merger by and among the registrant,
HKS Acquisition Corp., Hell's Kitchen Systems, Inc. and
certain shareholders of Hell's Kitchen Systems, Inc., dated
as of January 4, 2000
3.1 Third Amended and Restated Certificate of Incorporation, as
amended, of the registrant
3.2 Amended and Restated By-laws, as amended, of the registrant
4.1 Specimen certificate representing the common stock
(incorporated by reference from Exhibit 4.1 to the
registrant's Registration Statement on Form S- 1 (File no.
333-80051))
5.1 Opinion of Testa, Hurwitz & Thibeault, LLP
10.1 Red Hat, Inc. 1998 Stock Option Plan, as amended
(incorporated by reference from Exhibit 10.1 to the
registrant's Registration Statement on Form S- 1 (File no.
333-80051))
10.2 Red Hat, Inc. 1999 Stock Option and Incentive Plan
(incorporated by reference from Exhibit 10.2 to the
registrant's Registration Statement on Form S- 1 (File no.
333-80051))
10.3 Red Hat, Inc. 1999 Employee Stock Purchase Plan
(incorporated by reference from Exhibit 10.3 to the
registrant's Registration Statement on Form S- 1 (File no.
333-80051))
10.4 Cygnus Solutions 1995 Stock Plan
10.5 Cygnus Solutions 1997 Stock Plan
10.6 Cygnus Solutions 1998 Executive Stock Plan
10.7 Amended and Restated Warrant Agreement by and among the
registrant, Robert F. Young, Nancy R. Young, Marc Ewing and
Erik Troan, dated as of October 21, 1999
10.8 Amended and Restated Warrant Agreement, by and among the
registrant, Robert F. Young, Nancy R. Young, Marc Ewing and
Donald Barnes, dated as of October 21, 1999
10.9 Amended and Restated Warrant Agreement by and among the
registrant, Robert F. Young, Nancy R. Young, Marc Ewing and
Lisa Sullivan, dated as of October 21, 1999
10.10 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
(incorporated by reference from Exhibit 10.7 to the
registrant's Registration Statement on Form S-1 (File no.
333-80051))
10.11 Registration Rights Agreement by and among the registrant
and the sellers listed therein, dated as of January 6, 2000
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT INDEX
- --------------------- -------------
<C> <S>
10.12 Asset Purchase Agreement by and among the registrant and
Open Source, Inc., dated as of December 14, 1999
10.13 Escrow Agreement by and among the registrant, Miami
Acquisition Corp., Cygnus Solutions, Inc., Michael Tiemann,
as Securityholder Agent, and First Union National Bank, as
Escrow Agent, dated as of January 7, 2000 (incorporated by
reference from Exhibit 10.1 to the registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended
November 30, 1999)
10.14 Office Lease by and between the registrant and CMD
Properties, Inc., dated November 13, 1998 (incorporated by
reference from Exhibit 10.8 to the registrant's Registration
Statement on Form S-1 (File no. 333-80051))
10.15 Non-Qualified Stock Option Agreement by and between the
registrant and Matthew Szulik (incorporated by reference
from Exhibit 10.9 to the registrant's Registration Statement
on Form S-1 (File no. 333-80051))
10.16 Incentive Stock Option Agreement by and between the
registrant and Matthew Szulik (incorporated by reference
from Exhibit 10.10 to the registrant's Registration
Statement on Form S-1 (File no. 333-80051))
10.17 Non-Qualified Stock Option Agreement by and between the
registrant and Timothy Buckley (incorporated by reference
from Exhibit 10.11 to the registrant's Registration
Statement on Form S-1 (File no. 333-80051))
10.18 Incentive Stock Option Agreement by and between the
registrant and Timothy Buckley (incorporated by reference
from Exhibit 10.12 to the registrant's Registration
Statement on Form S-1 (File no. 333-80051))
10.19 Non-Qualified Stock Option Agreement by and between the
registrant and Tom Butta
10.20 GNU General Public License (incorporated by reference from
Exhibit 10.13 to the registrant's Registration Statement on
Form S-1 (File no. 333-80051))
10.21* Distribution Agreement by and between the registrant and
Ingram Micro Inc. dated as of October 15, 1998, as amended
(incorporated by reference from Exhibit 10.14 to the
registrant's Registration Statement on Form S-1 (File no.
333-80051))
10.22* Red Hat Product Distribution Agreement by and between the
registrant and Frank Kasper Associates, Inc., dated as of
April 30, 1999 (incorporated by reference from Exhibit 10.15
to the registrant's Registration Statement on Form S-1 (File
no. 333-80051))
10.23* Software Distribution Agreement between Tech Data Product
Management, Inc. and the registrant, dated as of April 29,
1999 (incorporated by reference from Exhibit 10.16 to the
registrant's Registration Statement on Form S-1 (File no.
333-80051))
10.24* Independent Contractor Agreement by and between the
registrant and Ingo Molnar, dated as of August 18, 1998
(incorporated by reference from Exhibit 10.18 to the
registrant's Registration Statement on Form S-1 (File no.
333-80051))
21.1 Subsidiaries of the registrant
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-6)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT INDEX
- --------------------- -------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Confidential materials omitted and filed separately with the Securities and
Exchange Commission
(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 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 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-5
<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
January 14, 2000.
<TABLE>
<S> <C> <C>
RED HAT, INC.
BY: /S/ MATTHEW SZULIK
-----------------------------------------
Matthew Szulik
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
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, will
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, regulation 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MATTHEW J. SZULIK Chief Executive Officer, President and
------------------------------- Director (principal executive officer) January 14, 2000
Matthew J. Szulik
/s/ MANOJ K. GEORGE Chief Financial Officer
------------------------------- (principal financial and accounting January 14, 2000
Manoj K. George officer)
/s/ ROBERT F. YOUNG Director
------------------------------- January 14, 2000
Robert F. Young
/s/ MARC EWING Director
------------------------------- January 14, 2000
Marc Ewing
/s/ WILLIAM S. KAISER Director
------------------------------- January 14, 2000
William S. Kaiser
/s/ KEVIN HARVEY Director
------------------------------- January 14, 2000
Kevin Harvey
/s/ ERIC HAHN Director
------------------------------- January 14, 2000
Eric Hahn
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT INDEX
- --------------------- -------------
<C> <S>
1.1 Form of Underwriting Agreement
2.1 Agreement and Plan of Reorganization by and among the
registrant, Cygnus Solutions, Inc., Miami Acquisition Corp.
and Michael Tiemann, as Securityholder Agent, dated as of
November 5, 1999 (incorporated by reference from Exhibit 2.1
to the registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended November 1999)
2.2 Agreement and Plan of Merger by and among the registrant,
HKS Acquisition Corp., Hell's Kitchen Systems, Inc. and
certain shareholders of Hell's Kitchen Systems, Inc., dated
as of January 4, 2000
3.1 Third Amended and Restated Certificate of Incorporation, as
amended, of the registrant
3.2 Amended and Restated By-laws, as amended, of the registrant
4.1 Specimen certificate representing the common stock
(incorporated by reference from Exhibit 4.1 to the
registrant's Registration Statement on Form S-1 (File no.
333-80051))
5.1 Opinion of Testa, Hurwitz & Thibeault, LLP
10.1 Red Hat, Inc. 1998 Stock Option Plan, as amended
(incorporated by reference from Exhibit 10.1 to the
registrant's Registration Statement on Form S-1 (File no.
333-80051))
10.2 Red Hat, Inc. 1999 Stock Option and Incentive Plan
(incorporated by reference from Exhibit 10.2 to the
registrant's Registration Statement on Form S-1 (File no.
333-80051))
10.3 Red Hat, Inc. 1999 Employee Stock Purchase Plan
(incorporated by reference from Exhibit 10.3 to the
registrant's Registration Statement on Form S-1 (File no.
333-80051))
10.4 Cygnus Solutions 1995 Stock Plan
10.5 Cygnus Solutions 1997 Stock Plan
10.6 Cygnus Solutions 1998 Executive Stock Plan
10.7 Amended and Restated Warrant Agreement by and among the
registrant, Robert F. Young, Nancy R. Young, Marc Ewing and
Erik Troan, dated as of October 21, 1999
10.8 Amended and Restated Warrant Agreement, by and among the
registrant, Robert F. Young, Nancy R. Young, Marc Ewing and
Donald Barnes, dated as of October 21, 1999
10.9 Amended and Restated Warrant Agreement by and among the
registrant, Robert F. Young, Nancy R. Young, Marc Ewing and
Lisa Sullivan, dated as of October 21, 1999
10.10 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
(incorporated by reference from Exhibit 10.7 to the
registrant's Registration Statement on Form S-1 (File no.
333-80051))
10.11 Registration Rights Agreement by and among the registrant
and the sellers listed therein, dated as of January 6, 2000
10.12 Asset Purchase Agreement by and among the registrant and
Open Source, Inc., dated as of December 14, 1999
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT INDEX
- --------------------- -------------
<C> <S>
10.13 Escrow Agreement by and among the registrant, Miami
Acquisition Corp., Cygnus Solutions, Inc., Michael Tiemann,
as Securityholder Agent, and First Union National Bank, as
Escrow Agent, dated as of January 7, 2000 (incorporated by
reference from Exhibit 10.1 to the registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended
November 30, 1999)
10.14 Office Lease by and between the registrant and CMD
Properties, Inc., dated November 13, 1998 (incorporated by
reference from Exhibit 10.8 to the registrant's Registration
Statement on Form S-1 (File no. 333-80051))
10.15 Non-Qualified Stock Option Agreement by and between the
registrant and Matthew Szulik (incorporated by reference
from Exhibit 10.9 to the registrant's Registration Statement
on Form S-1 (File no. 333-80051))
10.16 Incentive Stock Option Agreement by and between the
registrant and Matthew Szulik (incorporated by reference
from Exhibit 10.10 to the registrant's Registration
Statement on Form S-1 (File no. 333-80051))
10.17 Non-Qualified Stock Option Agreement by and between the
registrant and Timothy Buckley (incorporated by reference
from Exhibit 10.11 to the registrant's Registration
Statement on Form S-1 (File no. 333-80051))
10.18 Incentive Stock Option Agreement by and between the
registrant and Timothy Buckley (incorporated by reference
from Exhibit 10.12 to the registrant's Registration
Statement on Form S-1 (File no. 333-80051))
10.19 Non-Qualified Stock Option Agreement by and between the
registrant and Tom Butta
10.20 GNU General Public License (incorporated by reference from
Exhibit 10.13 to the registrant's Registration Statement on
Form S-1 (File no. 333-80051))
10.21* Distribution Agreement by and between the registrant and
Ingram Micro Inc. dated as of October 15, 1998, as amended
(incorporated by reference from Exhibit 10.14 to the
registrant's Registration Statement on Form S-1 (File no.
333-80051))
10.22* Red Hat Product Distribution Agreement by and between the
registrant and Frank Kasper Associates, Inc., dated as of
April 30, 1999 (incorporated by reference from Exhibit 10.15
to the registrant's Registration Statement on Form S-1 (File
no. 333-80051))
10.23* Software Distribution Agreement between Tech Data Product
Management, Inc. and the registrant, dated as of April 29,
1999 (incorporated by reference from Exhibit 10.16 to the
registrant's Registration Statement on Form S-1 (File no.
333-80051))
10.24* Independent Contractor Agreement by and between the
registrant and Ingo Molnar, dated as of August 18, 1998
(incorporated by reference from Exhibit 10.18 to the
registrant's Registration Statement on Form S-1 (File no.
333-80051))
21.1 Subsidiaries of the registrant
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-6)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Confidential materials omitted and filed separately with the Securities and
Exchange Commission
II-8
<PAGE>
Exhibit 1.1
RED HAT, INC.
COMMON STOCK
(PAR VALUE $0.0001 PER SHARE)
UNDERWRITING AGREEMENT
----------------------
_________, 2000
Goldman, Sachs & Co.
Hambrecht & Quist LLC
Thomas Weisel Partners LLC
J.P. Morgan Securities Inc.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
Red Hat, Inc., a Delaware corporation (the "Company"), proposes, subject to
the terms and conditions stated herein, to issue and sell to the Underwriters
named in Schedule I hereto (the "Underwriters") an aggregate of _________ shares
(the "Firm Shares") and, at the election of the Underwriters, up to _________
additional shares (the "Optional Shares") of Common Stock, $0.0001 par value per
share ("Stock"), of the Company and the stockholders of the Company named in
Schedule II hereto (the "Selling Stockholders") propose, subject to the terms
and conditions stated herein, to sell to the Underwriters an aggregate of
________ shares of Stock. The aggregate of ______________ shares to be sold by
the Company and the Selling Stockholders is herein called the "Firm Shares" and
the aggregate of up to ____ additional shares to be sold by the Company is
herein called the "Optional Shares". The Firm Shares and the Optional Shares
that the Underwriters elect to purchase pursuant to Section 2 hereof are herein
collectively called the "Shares".
1. (a) The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-_____) (the "Initial
Registration Statement") in respect of the Shares has been filed with the
Securities and Exchange Commission (the "Commission"); copies of the Initial
Registration Statement
<PAGE>
and any pre- and post-effective amendments thereto have heretofore been
delivered to you by the Company; the Initial Registration Statement, as amended,
has been declared effective by the Commission; other than a registration
statement, if any, increasing the size of the offering (a "Rule 462(b)
Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act
of 1933, as amended (the "Act"), which became effective upon filing, and other
than any pre- and post-effective amendments to the Initial Registration
Statement (including schedules and exhibits thereto), together with any
transmittal letters, each previously delivered to you, no other document with
respect to the Initial Registration Statement has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of the Initial
Registration Statement, any post-effective amendment thereto or the Rule 462(b)
Registration Statement, if any, has been issued and no proceeding for that
purpose has been initiated or threatened by the Commission; any preliminary
prospectus included in the Initial Registration Statement or filed with the
Commission pursuant to Rule 424(a) of the rules and regulations of the
Commission under the Act is hereinafter called a "Preliminary Prospectus"; the
various parts of the Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and
deemed by virtue of Rule 430A under the Act to be part of the Initial
Registration Statement at the time it was declared effective, each as amended at
the time such part of the Initial Registration Statement became effective or
such part of the Rule 462(b) Registration Statement, if any, became or hereafter
becomes effective, are hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant to Rule
424(b) under the Act, is hereinafter called the "Prospectus";
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(iii) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information
- 2 -
<PAGE>
furnished in writing to the Company by an Underwriter through Goldman, Sachs &
Co. expressly for use therein;
(iv) Neither the Company nor any of its subsidiaries has sustained since
the date of the latest audited financial statements included in the Prospectus
any material loss or interference with its business from fire, explosion, flood
or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
there has not been any change in the authorized capital stock or long-term debt
of the Company or any of its subsidiaries or any material adverse change, or any
development involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity or results
of operations of the Company and its subsidiaries, otherwise than as set forth
or contemplated in the Prospectus;
(v) The Company and its subsidiaries have good and marketable title to all
personal property owned by them as described in the Prospectus as owned by them,
in each case free and clear of all liens, encumbrances and defects except such
as are described in the Prospectus or such as do not materially affect the value
of such property and do not interfere with the use made and proposed to be made
of such property by the Company and its subsidiaries; neither the Company nor
any subsidiary owns any real property; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries;
(vi) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject to
no material liability or disability by reason of the failure to be so qualified
in any such jurisdiction; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation; and the merger of a subsidiary of the
Company into Cygnus Solutions, Inc. ("Cygnus") pursuant to which Cygnus became a
wholly-owned subsidiary of the Company has been duly and validly effected; and
the merger of a subsidiary of the Company into Hell's Kitchen Systems, Inc.
("HKS") pursuant to which HKS became a wholly-owned subsidiary of the Company
has been duly and validly effected; and none of the subsidiaries of the Company,
other than Cygnus and HKS (the "United States subsidiaries", and each a "United
States subsidiary") is a "significant subsidiary", as such term is defined in
Rule 405 of the rules and regulations under the Act.
- 3 -
<PAGE>
(vii) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description of the Stock contained in the Prospectus; and all
of the issued shares of capital stock of each subsidiary of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and (except for directors' qualifying shares and except as set forth in the
Prospectus) are owned directly or indirectly by the Company, free and clear of
all liens, encumbrances, equities or claims;
(viii) The Shares to be issued and sold by the Company to the Underwriters
hereunder have been duly and validly authorized and, when issued and delivered
against payment therefor as provided herein, will be duly and validly issued and
fully paid and non-assessable and will conform to the description of the Stock
contained in the Prospectus;
(ix) The issue and sale of the Shares to be sold by the Company and the
compliance by the Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or any of
their properties; and no consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement, except the registration
under the Act of the Shares, and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the Shares by
the Underwriters;
(x) Neither the Company nor any of its subsidiaries is in violation of its
Certificate of Incorporation, By-laws or other organizational documents or in
default in the performance or observance of any material obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a party or by
which it or any of its properties may be bound;
(xi) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock, are accurate, complete and fair;
(xii) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries
is a
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party or of which any property of the Company or any of its subsidiaries is the
subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material adverse
effect on the current or future business, properties, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries taken as a whole (a "Material Adverse Effect"); and, to the best of
the Company's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(xiii) Other than as set forth in the Prospectus, the Company and its
subsidiaries have sufficient interests in all patents, trademarks, service
marks, trade names, domain names, copyrights, trade secrets, information,
proprietary rights and processes ("Intellectual Property") necessary for their
business as described in the Prospectus and, to the Company's knowledge,
necessary in connection with the products and services under development,
without any conflict with or infringement of the interests of others, except for
such conflicts which, individually or in the aggregate, have not had, and are
not reasonably likely to result in, a Material Adverse Effect, and have taken
all reasonable steps necessary to secure interests in such Intellectual Property
from their contractors; except as set forth in the Prospectus, the Company is
not aware of outstanding options, licenses or agreements of any kind relating to
the Intellectual Property of the Company which are required to be set forth in
the Prospectus, and, except as set forth in the Prospectus, neither the Company
nor any of its subsidiaries is a party to or bound by any options, licenses or
agreements with respect to the Intellectual Property of any other person or
entity which are required to be set forth in the Prospectus; none of the
technology employed by the Company has been obtained or is being used by the
Company or its subsidiaries in violation of any contractual or fiduciary
obligation binding on the Company or any of its subsidiaries or, to the
Company's knowledge, any of its directors or officers or any of its employees or
otherwise in violation of the rights of any persons; except as disclosed in the
Prospectus, neither the Company nor any of its subsidiaries has received any
written or, to the Company's knowledge, oral communications alleging that the
Company or any of its subsidiaries has violated, infringed or conflicted with,
or, by conducting its business as set forth in the Prospectus, would violate,
infringe or conflict with any of the Intellectual Property of any other person
or entity other than any such violations, infringements or conflicts which,
individually or in the aggregate, have not had, and are not reasonably likely to
result in, a Material Adverse Effect; and the Company and its subsidiaries have
taken and will maintain reasonable measures to prevent the unauthorized
dissemination or publication of their confidential information and, to the
extent contractually required to do so, the confidential information of third
parties in their possession;
(xiv) The Company maintains insurance of the types and in the amounts
generally deemed adequate for its business, including, but not limited to,
general liability insurance, business interruption insurance and insurance
covering real and personal property owned or leased by the Company against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect;
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(xv) There are no contracts, other documents or other agreements required
to be described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the rules and regulations thereunder
which have not been described or filed as required; except as described in the
Prospectus, the contracts so described in the Prospectus are in full force and
effect on the date hereof; and neither the Company nor, to the Company's
knowledge, any other party is in breach of or default under any of such
contracts other than such breaches or defaults which, individually or in the
aggregate, have not had, and are not reasonably likely to result in, a Material
Adverse Effect;
(xvi) Except as described in or contemplated by the Prospectus, the Company
and its subsidiaries possess all certificates, authorizations and permits issued
by the appropriate federal, state or foreign regulatory authorities necessary to
conduct their respective businesses, and neither the Company nor any such
subsidiary has received any notice of proceedings relating to the revocation or
modification of, or failure to obtain, any such certificate, authorization or
permit which, individually or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a Material Adverse Effect;
(xvii) Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Act with respect to any securities of the Company or to require the Company
to include such securities with the Shares registered pursuant to the
Registration Statement, and the right of each person who is a party to any
contract, agreement or understanding so described to include such securities
pursuant to the Registration Statement has been effectively satisfied or waived;
(xviii) The Company has reviewed its operations and that of its
subsidiaries and any third parties with which the Company or any of its
subsidiaries has a material relationship to evaluate the extent to which the
business or operations of the Company or any of its subsidiaries will be
affected by the Year 2000 Problem. As a result of such review, the Company has
no reason to believe, and does not believe, that the Year 2000 Problem will have
a Material Adverse Effect. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval, retransmission or
other utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the case of
dates or time periods occurring prior to January 1, 2000;
(xix) The Company is not and, after giving effect to the offering and sale
of the Shares, will not be an "investment company", or an entity "controlled" by
an "investment company", as such terms are defined in the Investment Company Act
of 1940, as amended (the "Investment Company Act"); and
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(xx) PricewaterhouseCoopers LLP, who have certified certain financial
statements of the Company and its subsidiaries and Cygnus and its subsidiaries
and HKS and its subsidiaries, are independent public accountants as required by
the Act and the rules and regulations of the Commission thereunder.
(b) Each of the Selling Stockholders severally represents and warrants to,
and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary for the
execution and delivery by such Selling Stockholder of this Agreement and the
Power of Attorney and the Custody Agreement hereinafter referred to, and for the
sale and delivery of the Shares to be sold by such Selling Stockholder
hereunder, have been obtained; and such Selling Stockholder has full right,
power and authority to enter into this Agreement, the Power-of-Attorney and the
Custody Agreement and to sell, assign, transfer and deliver the Shares to be
sold by such Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by such Selling Stockholder
hereunder and the compliance by such Selling Stockholder with all of the
provisions of this Agreement, the Power of Attorney and the Custody Agreement
and the consummation of the transactions herein and therein contemplated will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any statute, indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder is bound or
to which any of the property or assets of such Selling Stockholder is subject,
nor will such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of such Selling Stockholder if such
Selling Stockholder is a corporation, the Partnership Agreement of such Selling
Stockholder if such Selling Stockholder is a partnership or any statute or any
order, rule or regulation of any court or governmental agency or body having
jurisdiction over such Selling Stockholder or the property of such Selling
Stockholder;
(iii) Such Selling Stockholder has, and immediately prior to the each Time
of Delivery (as defined in Section 4 hereof) such Selling Stockholder will have,
good and valid title to the Shares to be sold by such Selling Stockholder
hereunder, free and clear of all liens, encumbrances, equities or claims; and,
upon delivery of such Shares and payment therefor pursuant hereto, good and
valid title to such Shares, free and clear of all liens, encumbrances, equities
or claims, will pass to the several Underwriters;
(iv) During the period beginning from the date hereof and continuing to and
including the date 90 days after the date of the Prospectus, not to offer, sell
contract to sell or otherwise dispose of, except as provided hereunder, any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock option
plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Agreement), without
your prior written consent; provided that, notwithstanding the foregoing, (A)
this
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prohibition shall not apply to __% of the Shares held by such Selling
Stockholder as of the date hereof and (B) such Selling Stockholder may transfer
such securities (i) as a BONA FIDE gift or gifts, provided that the donee or
donees thereof agree to be bound by the restrictions set forth herein, or (ii)
to any trust for the direct or indirect benefit of the undersigned or the
immediate family of the undersigned, or from a trust to one or more such
immediate family member(s) or to the undersigned, whether or not for
consideration, provided that the trustee of the trust or the family member(s)
agree to be bound by the restrictions set forth herein. For purposes hereof,
"immediate family" shall mean any relationship by blood, marriage or adoption,
not more remote than first cousin.
(v) Such Selling Stockholder has not taken and will not take, directly or
indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares;
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity with
written information furnished to the Company by such Selling Stockholder
expressly for use therein, such Preliminary Prospectus and the Registration
Statement did, and the Prospectus and any further amendments or supplements to
the Registration Statement and the Prospectus, when they become effective or are
filed with the Commission, as the case may be, will conform in all material
respects to the requirements of the Act and the rules and regulations of the
Commission thereunder and will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading;
(vii) In order to document the Underwriters' compliance with the reporting
and withholding withhold provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 with respect to the transactions herein contemplated, such Selling
Stockholder will deliver to you prior to or at each Time of Delivery (as defined
in Section 4 hereof) a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by Treasury
Department regulations in lieu thereof);
(viii) Certificates in negotiable form representing all of the Shares to be
sold by such Selling Stockholder hereunder have been placed in custody under a
Custody Agreement, in the form heretofore furnished to you (the "Custody
Agreement"), duly executed and delivered by such Selling Stockholder to the
Company, as custodian (the "Custodian"), and such Selling Stockholder has duly
executed and delivered a Power of Attorney, in the form heretofore furnished to
you (the "Power of Attorney"), appointing the persons indicated in Schedule II
hereto, and each of them, as such Selling Stockholder's attorneys-in-fact (the
"Attorneys-in-Fact") with authority to execute and deliver this Agreement on
behalf of such Selling Stockholder, to determine the purchase price to be paid
by the Underwriters to the Selling Stockholders as provided in Section 2 hereof,
to authorize the delivery of the Shares to be sold by such Selling Stockholder
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<PAGE>
hereunder and otherwise to act on behalf of such Selling Stockholder in
connection with the transactions contemplated by this Agreement and the Custody
Agreement; and
(ix) The Shares represented by the certificates held in custody for such
Selling Stockholder under the Custody Agreement are subject to the interests of
the Underwriters hereunder; the arrangements made by such Selling Stockholder
for such custody, and the appointment by such Selling Stockholder of the
Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable; the
obligations of the Selling Stockholders hereunder shall not be terminated by
operation of law, whether by the death or incapacity of any individual Selling
Stockholder or, in the case of an estate or trust, by the death or incapacity of
any executor or trustee or the termination of such estate or trust, or in the
case of a partnership or corporation, by the dissolution of such partnership or
corporation, or by the occurrence of any other event; if any individual Selling
Stockholder or any such executor or trustee should die or become incapacitated,
or if any such estate or trust should be terminated, or if any such partnership
or corporation should be dissolved, or if any other such event should occur,
before the delivery of the Shares hereunder, certificates representing the
Shares shall be delivered by or on behalf of the Selling Stockholders in
accordance with the terms and conditions of this Agreement and of the Custody
Agreements; and actions taken by the Attorneys-in-Fact pursuant to the Powers of
Attorney shall be as valid as if such death, incapacity, termination,
dissolution or other event had not occurred, regardless of whether or not the
Custodian, the Attorneys-in-Fact, or any of them, shall have received notice of
such death, incapacity, termination, dissolution or other event.
2. Subject to the terms and conditions herein set forth, (a) the Company
and each of the Selling Stockholders agree, severally and not jointly, to sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company and each of the Selling Stockholders,
at a purchase price per share of $_____, the number of Firm Shares (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
the aggregate number of Shares to be sold by the Company and each of the Selling
Stockholders as set forth opposite their respective names in Schedule II hereto
by a fraction, the numerator of which is the aggregate number of Firm Shares to
be purchased by such Underwriter as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the aggregate
number of Firm Shares to be purchased by all of the Underwriters from the
Company and all of the Selling Stockholders hereunder and (b) in the event and
to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company, at the purchase price per share set forth in clause
(a) of this Section 2, that portion of the number of Optional Shares as to which
such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of Optional
Shares by a fraction the numerator of which is the maximum number of Optional
Shares which such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
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<PAGE>
The Company hereby grants to the Underwriters the right to purchase at
their election up to _______ Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering sales of
shares in excess of the number of Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Attorneys-in-Fact shall be delivered by or on
behalf of the Company and the Selling Stockholders to Goldman, Sachs & Co.,
through the facilities of the Depository Trust Company ("DTC"), for the account
of such Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor by wire transfer of Federal (same-day) funds to the
account or accounts specified by the Company and the Custodian to Goldman, Sachs
& Co. at least forty-eight hours in advance. The Company will cause the
certificates representing the Shares to be made available for checking and
packaging at least twenty-four hours prior to the Time of Delivery (as defined
below) with respect thereto at the office of DTC or its designated custodian
(the "Designated Office"). The time and date of such delivery and payment shall
be, with respect to the Firm Shares, 9:30 a.m., New York time, on _______, 2000
or such other time and date as Goldman, Sachs & Co., the Company and the
Attorneys-in-Fact may agree upon in writing, and, with respect to the Optional
Shares, 9:30 a.m., New York time, on the date specified by Goldman, Sachs & Co.
in the written notice given by Goldman, Sachs & Co. of the Underwriters'
election to purchase such Optional Shares, or such other time and date as
Goldman, Sachs & Co. and the Company may agree upon in writing. Such time and
date for delivery of the Firm Shares is herein called the "First Time of
Delivery", such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery", and each
such time and date for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 hereof, including the cross-receipt
for the Shares and any additional documents requested by the Underwriters
pursuant to Section 7(k) hereof, will be delivered at the offices of Testa,
Hurwitz & Thibeault, LLP, 125 High Street, Boston, Massachusetts 02110 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A
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meeting will be held at the Closing Location at 3:00 p.m., New York City time,
on the New York Business Day next preceding such Time of Delivery, at which
meeting the final drafts of the documents to be delivered pursuant to the
preceding sentence will be available for review by the parties hereto. For the
purposes of this Section 4, "New York Business Day" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which banking
institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file such
Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's
close of business on the second business day following the execution and
delivery of this Agreement, or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) under the Act; to make no further amendment or any
supplement to the Registration Statement or Prospectus which shall be
disapproved by you promptly after reasonable notice thereof; to advise you,
promptly after it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any supplement to
the Prospectus or any amended Prospectus has been filed and to furnish you with
copies thereof; to advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or supplementing
of the Registration Statement or Prospectus or for additional information; and,
in the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or suspending any
such qualification, promptly to use its best efforts to obtain the withdrawal of
such order;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Shares for offering and sale under the securities laws of
such jurisdictions as you may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such jurisdictions for
as long as may be necessary to complete the distribution of the Shares, provided
that in connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process in any
jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York Business Day
next succeeding the date of this Agreement and from time to time, to furnish the
Underwriters with copies of the Prospectus in New York City in such quantities
as you may reasonably request, and, if the delivery of a prospectus is required
at any time prior to the expiration of nine months after the time of issue of
the Prospectus in connection with the offering or sale of the Shares and if at
such time any event shall have occurred as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
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made when such Prospectus is delivered, not misleading, or, if for any other
reason it shall be necessary during such period to amend or supplement the
Prospectus in order to comply with the Act, to notify you and upon your request
to prepare and furnish without charge to each Underwriter and to any dealer in
securities as many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of any of the Shares
at any time nine months or more after the time of issue of the Prospectus, upon
your request but at the expense of such Underwriter, to prepare and deliver to
such Underwriter as many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
of the Commission thereunder (including, at the option of the Company, Rule
158);
(e) During the period beginning from the date hereof and continuing to and
including the date 90 days after the date of the Prospectus, not to sell, offer
to sell, contract to sell, grant any option or warrant for the sale or purchase
of, or otherwise dispose of, except as provided hereunder, any shares of Stock
or any securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock option
plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Agreement), without
the prior written consent of Goldman, Sachs & Co.;
(f) To furnish to its stockholders as soon as practicable after the end of
each fiscal year an annual report (including a balance sheet and statements of
income, stockholders' equity and cash flows of the Company and its consolidated
subsidiaries certified by independent public accountants) and, as soon as
practicable after the end of each of the first three quarters of each fiscal
year (beginning with the fiscal quarter ending after the effective date of the
Registration Statement), to make available to its stockholders consolidated
summary financial information of the Company and its subsidiaries for such
quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such
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financial statements to be on a consolidated basis to the extent the accounts of
the Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the Nasdaq
National Market ("NASDAQ"); and
(j) If the Company elects to rely upon Rule 462(b), the Company shall file
a Rule462(b) Registration Statement with the Commission in compliance with Rule
462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and
the Company shall at the time of filing either pay to the Commission the filing
fee for the Rule 462(b) Registration Statement or give irrevocable instructions
for the payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company and each of the Selling Stockholders covenants and agrees
with the several Underwriters that (a) the Company will pay or cause to be paid
the following: (i) the fees, disbursements and expenses of the Company's counsel
and accountants in connection with the registration of the Shares under the Act
and all other expenses in connection with the preparation, printing and filing
of the Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey;
(iv) all fees and expenses in connection with listing the Shares on NASDAQ; (v)
the filing fees incident to, and the fees and disbursements of counsel for the
Underwriters in connection with, securing any required review by the National
Association of Securities Dealers, Inc. ("NASD") of the terms of the sale of the
Shares; (vi) the cost of preparing stock certificates; (vii) the cost and
charges of any transfer agent or registrar and (h) all other costs and expenses
incident to the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section; and (b) such Selling Stockholder will
pay or cause to be paid all costs and expenses incident to the performance of
such Selling Stockholder's obligations hereunder which are not otherwise
specifically provided for in this Section or in the First Amended and Restated
Investor Rights Agreement dated as of February 25, 1999 by and among the Company
and certain stockholders, including (i) any fees and expenses of counsel for
such Selling Stockholder, (ii) such Selling Stockholder's pro rata share of the
fees and expenses of the Attorneys-in-Fact and the Custodian, and (iii) all
expenses and taxes incident to the sale and delivery of the Shares to be sold by
such Selling Stockholder to
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the Underwriters hereunder. In connection with clause (b) of the preceding
sentence, Goldman, Sachs & Co. agrees to pay New York State stock transfer tax,
and the Selling Stockholder agrees to reimburse Goldman, Sachs & Co. for
associated carrying costs if such tax payment is not rebated on the day of
payment and for any portion of such tax payment not rebated. It is understood
that, except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and the Selling Stockholders herein are, at and as of such Time of
Delivery, true and correct, the condition that the Company and the Selling
Stockholders shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule424(b) within the applicable time period prescribed for such filing by the
rules and regulations under the Act and in accordance with Section 5(a) hereof;
if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 p.m., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Hale and Dorr LLP, counsel for the Underwriters, shall have furnished
to you their written opinion (a draft of such opinion is attached as Annex II(a)
hereto), dated such Time of Delivery, with respect to the matters covered in
paragraphs (i), (ii), (vi), (x) and (xii) of subsection (c) below as well as
such other related matters as you may reasonably request, and such counsel shall
have received such papers and information as they may reasonably request to
enable them to pass upon such matters;
(c) Testa, Hurwitz & Thibeault, LLP, counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is attached as
Annex II(b) hereto), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own its properties and conduct its business, as
such properties and business are described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
(including the
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Shares being delivered at such Time of Delivery) have been duly and validly
authorized and issued and are fully paid and non-assessable; and the Shares
conform, or when issued, delivered and paid for in accordance with the terms of
this Agreement will conform, in all material respects, to the description of the
Stock contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of the State of
California, the State of North Carolina, the State of Texas, the State of
Washington and the District of Columbia, which are the only jurisdictions in the
United States in which, to such counsel's knowledge, the Company currently
maintains an office or owns or leases real property;
(iv) Each United States subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation; and all of the issued shares of
capital stock of each such subsidiary have been duly and validly authorized and
issued, are fully paid and non-assessable, and (except for directors' qualifying
shares and except as otherwise set forth in the Prospectus), are owned of record
directly or indirectly by the Company, to such counsel's knowledge free and
clear of all liens, encumbrances, equities or claims (such counsel being
entitled to rely in respect of the opinion in this clause upon opinions of local
counsel and in respect of matters of fact upon certificates of officers of the
Company or its subsidiaries, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such opinions and
certificates);
(v) To the best of such counsel's knowledge and other than as set forth in
the Prospectus as amended or supplemented, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is a party
or of which any property of the Company or any of its subsidiaries is the
subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material Adverse
Effect; and, to the best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by others;
(vi) This Agreement has been duly authorized, executed and delivered by the
Company;
(vii) The issue and sale of the Shares being delivered at such Time of
Delivery by the Company and the compliance by the Company with all of the
provisions of this Agreement and the consummation of the transactions herein
contemplated will not (A) conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument known
to such counsel to which the Company or any of its United States subsidiaries is
a party or by which the Company or any of its United States subsidiaries is
bound or to which any of the property or assets of the Company or any of its
United States subsidiaries is subject, (B) result in any violation of the
provisions of the Certificate of Incorporation or by-laws of the Company or (C)
result in
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any violation of any applicable statute or any order, rule or regulation known
to such counsel of any United States court or governmental agency or body having
jurisdiction over the Company or any of its United States subsidiaries or any of
their properties (except that such counsel need not express a view as to state
securities laws);
(viii) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares to be sold by the Company or the
consummation by the Company of the transactions contemplated by this Agreement,
except the registration under the Act of the Shares, the approval by the NASD of
the terms of the sale of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by the Underwriters;
(ix) To such counsel's knowledge, the Company is not in violation of its
Certificate of Incorporation or By-laws, which violation could be reasonably
expected to have a Material Adverse Effect;
(x) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock, are accurate summaries and descriptions of such terms
and provisions in all material respects;
(xi) The Company is not an "investment company", or an entity "controlled"
by an "investment company", as such terms are defined in the Investment Company
Act; and
(xii) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to such Time of
Delivery (other than the financial statements, including the notes and schedules
thereto, and other financial data, as to which such counsel need express no
belief) comply as to form in all material respects with the requirements of the
Act and the rules and regulations thereunder. Such counsel shall also state that
although they do not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus, except for those referred to in the opinion in subsection (x) of
this Section 7(c), they have no reason to believe that, as of its effective
date, the Registration Statement or any further amendment thereto made by the
Company prior to such Time of Delivery (other than the financial statements,
including the notes and schedules thereto, and other financial data, as to which
such counsel need express no belief) contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that, as of its date,
the Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial statements,
including the notes and schedules thereto, and other financial data, as to which
such counsel need express no belief) contained an untrue statement of a material
fact or omitted to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
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not misleading or that, as of such Time of Delivery, either the Registration
Statement or the Prospectus or any further amendment or supplement thereto made
by the Company prior to such Time of Delivery (other than the financial
statements, including the notes and schedules thereto, and other financial data,
as to which such counsel need express no belief) contains an untrue statement of
a material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and they do not know of any contracts or other documents
of a character required to be filed as an exhibit to the Registration Statement
or required to be described in the Registration Statement or the Prospectus
which are not filed or described as required;
The foregoing opinion of Testa, Hurwitz & Thibeault, LLP may be limited to
the laws of the Commonwealth of Massachusetts, the General Corporation Law of
the State of Delaware and the Federal laws of the United States. In rendering
any such opinion, such counsel may rely, as to matters of fact, to the extent
such counsel deems proper, on certificates of responsible officers of the
Company and of public officials and, in respect of opinions relating to the
Company's United States subsidiaries, such counsel may rely on the opinions of
local counsel.
(d) Counsel for each of the Selling Stockholders, in each case reasonably
satisfactory to you, shall have furnished to you their written opinion with
respect to such Selling Stockholder (a draft of each such opinion is attached as
Annex II(c) hereto), dated the First Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) A Power-of-Attorney and a Custody Agreement have been duly executed and
delivered by such Selling Stockholder and constitute valid and binding
agreements of such Selling Stockholder in accordance with their terms;
(ii) This Agreement has been duly executed and delivered by or on behalf of
such Selling Stockholder; and the sale of the Shares to be sold by such Selling
Stockholder hereunder and the compliance by such Selling Stockholder with all of
the provisions of this Agreement, the Power-of-Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of any
terms or provisions of, or constitute a default under, any statute, indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument known
to such counsel to which such Selling Stockholder is a party or by which such
Selling Stockholder is bound or to which any of the property or assets of such
Selling Stockholder is subject, nor will such action result in any violation of
the provisions of the Certificate of Incorporation or By-laws of such Selling
Stockholder if such Selling Stockholder is a corporation, the Partnership
Agreement of such Selling Stockholder if such Selling Stockholder is a
partnership or any order, rule or regulation known to such counsel of any court
or governmental agency or body having jurisdiction over such Selling Stockholder
or the property of such Selling Stockholder;
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(iii) No consent, approval, authorization or order of any court or governmental
agency or body is required for the consummation of the transactions contemplated
by this Agreement in connection with the Shares to be sold by such Selling
Stockholder hereunder, except such as have been obtained under the Act and such
as may be required under state securities or Blue Sky laws in connection with
the purchase and distribution of such Shares by the Underwriters;
(iv) To the best of such counsel's knowledge, immediately prior to such
Time of Delivery, such Selling Stockholder had good and valid title to the
Shares to be sold at such Time of Delivery by such Selling Stockholder under
this Agreement, free and clear of all liens, encumbrances, equities or claims,
and full right, power and authority to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder hereunder; and
(v) Upon delivery and payment for the Shares to be sold by each Selling
Stockholder, the Underwriters who have purchased such Shares for value, in good
faith and without notice of any lien, encumbrance, equity or claim or any other
adverse claim within the meaning of the Uniform Commercial Code will acquire
good and valid title to such Shares free and clear of all liens, encumbrances,
equities or claims within the meaning of the Uniform Commercial Code.
In rendering the opinion required by this Section 6(d), such counsel may
rely upon a certificate of such Selling Stockholder in respect of matters of
fact, provided that such counsel shall state that they believe that both you and
they are justified in relying upon such certificate.
(e) On the date of the Prospectus at a time prior to the execution of this
Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, PricewaterhouseCoopers
LLP shall have furnished to you a letter or letters, dated the respective dates
of delivery thereof, in form and substance satisfactory to you, to the effect
set forth in Annex I hereto (the executed copy of the letter delivered prior to
the execution of this Agreement is attached as Annex I(a) hereto and a draft of
the form of letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(f) Neither the Company nor any of its subsidiaries shall have sustained
since the date of the latest audited financial statements included in the
Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
material change in the capital stock or long-term debt of the Company or any of
its subsidiaries or any change, or any development involving a prospective
change, in or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as
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set forth or contemplated in the Prospectus, the effect of which, in any such
case described in clause (i) or (ii), is in the judgment of the Representatives
so material and adverse as to make it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares being delivered at such
Time of Delivery on the terms and in the manner contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by either Federal
or New York State authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of a
national emergency or war, if the effect of any such event specified in this
clause (iv) in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been duly
listed for quotation on NASDAQ;
(i) The Company has obtained and delivered to the Underwriters executed
copies of an agreement from each director, officer and holder of more than 5% of
the outstanding Stock of the Company, in form and substance satisfactory to you,
to the effect that, during the period beginning from the date hereof and
continuing to and including the date 90 days after the date of the Prospectus,
such person will not sell, offer to sell, contract to sell, grant any option or
warrant for the sale or purchase of, or otherwise dispose of, any shares of
Stock or any securities of the Company that are substantially similar to the
Shares, including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than transfers as bona fide gifts or to
any trust for the direct or indirect benefit of the holder or his immediate
family, or upon the conversion or exchange of convertible or exchangeable
securities outstanding as of, the date of this Agreement), without the prior
written consent of Goldman, Sachs & Co., provided that such prohibition shall
not apply to __% of the Shares held by such stockholder on the date hereof;
(j) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York Business
Day next succeeding the date of this Agreement; and
(k) The Company and the Selling Stockholders shall have furnished or caused
to be furnished to you at such Time of Delivery certificates of officers of the
Company and the Selling Stockholders satisfactory to you as to the accuracy of
the representations and warranties of the Company and the Selling Stockholders,
respectively, herein at and as of such Time of Delivery, as to the performance
by the Company and the Selling Stockholders of all of their respective
obligations hereunder to
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be performed at or prior to such Time of Delivery, and as to such other matters
as you may reasonably request, and the Company shall have furnished or caused to
be furnished certificates as to the matters set forth in subsections (a) and (f)
of this Section.
8. (a) The Company and each of the Selling Stockholders, jointly and
severally, will indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that (i)
the Company and the Selling Stockholders shall 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 an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein; (ii) those Selling
Stockholders indicated with an asterisk on Schedule II [non-affiliates of Red
Hat will be asterisked] shall be liable only to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Selling Stockholder expressly for use therein;
and (iii) the liability of each Selling Stockholder pursuant to this subsection
8 shall not exceed the product of the number of Shares sold by such Selling
Stockholder (including any Optional Shares) and the initial public offering
price of the Shares as set forth in the Prospectus.
(b) Each Underwriter will indemnify and hold harmless the Company and each
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or such Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
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reimburse the Company and each Selling Stockholder for any legal or other
expenses reasonably incurred by the Company or such Selling Stockholder in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act, by or on behalf of
any indemnified party.
(d) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling Stockholders on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders on the one
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hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholders bear to the total
underwriting discounts received by the Underwriters, in each case as set forth
in the table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Selling
Stockholders on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, each of the Selling
Stockholders and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this subsection (d) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this subsection (d),
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company and the Selling Stockholders under this
Section 8 shall be in addition to any liability which the Company or the Selling
Stockholders may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section 8
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company (including any person who, with his or her
consent, is named in the Registration Statement as about to become a director of
the Company) and to each person, if any, who controls the Company or any Selling
Stockholder within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six hours after such
default by any Underwriter you do not arrange for the purchase of such Shares,
then the Company and the Selling Stockholders shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such
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Shares on such terms. In the event that, within the respective prescribed
periods, you notify the Company and the Selling Stockholders that you have so
arranged for the purchase of such Shares, or the Company and the Selling
Stockholders notify you that they have so arranged for the purchase of such
Shares, you or the Company and the Selling Stockholders shall have the right to
postpone such Time of Delivery for a period of not more than seven days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you, the Company and the
Selling Stockholders as provided in subsection (a) above, the aggregate number
of such Shares which remains unpurchased does not exceed one-eleventh of the
aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholders shall have the right to require
each non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you, the Company and the
Selling Stockholders as provided in subsection (a) above, the aggregate number
of such Shares which remains unpurchased exceeds one-eleventh of the aggregate
number of all of the Shares to be purchased at such Time of Delivery, or if the
Company and the Selling Stockholders shall not exercise the right described in
subsection (b) above to require non-defaulting Underwriters to purchase Shares
of a defaulting Underwriter or Underwriters, then this Agreement (or, with
respect to the Second Time of Delivery, the obligations of the Underwriters to
purchase and of the Company to sell the Optional Shares) shall thereupon
terminate, without liability on the part of any non-defaulting Underwriter, the
Company or the Selling Stockholder, except for the expenses to be borne by the
Company and the Selling Stockholders and the Underwriters as provided in Section
6 hereof and the indemnity and contribution agreements in Section 8 hereof; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
10. The respective indemnities, agreements, representations, warranties and
other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of
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any Underwriter or any controlling person of any Underwriter, or the Company or
any Selling Stockholder or any officer or director or controlling person of the
Company or any Selling Stockholder, and shall survive delivery of and payment
for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason any Shares are not delivered by or on behalf of the
Company and the Selling Stockholders as provided herein, the Company and each of
the Selling Stockholders pro rata (based on the number of Shares to be sold by
the Company and such Selling Stockholder hereunder) will reimburse the
Underwriters through you for all out-of-pocket expenses approved in writing by
you, including fees and disbursements of counsel, reasonably incurred by the
Underwriters in making preparations for the purchase, sale and delivery of the
Shares not so delivered, but the Company and the Selling Stockholders shall then
be under no further liability to any Underwriter in respect of the Shares not so
delivered except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
Representatives and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice, or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; if to any Selling Stockholder shall be delivered or sent by mail,
telex or facsimile transmission to one of the Attorneys-in Fact at the address
of the Company; and if to the Company shall be delivered or sent by mail, telex
or facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Secretary; provided, however, that any notice
to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by
mail, telex or facsimile transmission to such Underwriter at its address set
forth in its Underwriters' Questionnaire or telex constituting such
Questionnaire, which address will be supplied to the Company and the Selling
Stockholders by you on request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Stockholders and, to the
extent provided in Sections 8 and 10 hereof, the officers and directors of the
Company and each person who controls the Company, any Selling Stockholder or any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No
- 24 -
<PAGE>
purchaser of any of the Shares from any Underwriter shall be deemed a successor
or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This agreement shall be governed by and construed in accordance with
the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties hereto
in any number of counterparts, each of which shall be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us one for the Company and each of the Representatives plus one for
each counsel and the Custodian counterparts hereof, and upon the acceptance
hereof by you, on behalf of each of the Underwriters, this letter and such
acceptance hereof shall constitute a binding agreement among each of the
Underwriters, the Company and each of the Selling Stockholders. It is understood
that your acceptance of this letter on behalf of each of the Underwriters is
pursuant to the authority set forth in a form of Agreement among Underwriters,
the form of which shall be submitted to the Company and the Selling Stockholders
for examination, upon request, but without warranty on your part as to the
authority of the signers thereof.
- 25 -
<PAGE>
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Stockholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing and
binding Power-of-Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
Red Hat, Inc.
By:___________________________________
Name: Matthew Szulik
Title: Chief Executive Officer
[Names of Selling Stockholders]
By:___________________________________
Name:________________________
Title:_______________________
As Attorney-in-Fact acting on behalf of each of the
Selling Stockholders named in Schedule II of the
Agreement
Accepted as of the date hereof
Goldman, Sachs & Co.
Hambrecht & Quist LLC
Thomas Weisel Partners LLC
J.P. Morgan Securities Inc.
By: /s/ Goldman, Sachs & Co.
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
- 26 -
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Optional Shares
Total Number of to be Purchased if
Firm Shares to be Maximum Option
Purchased Exercised
--------------- -------------
Underwriter
<S> <C> <C>
Goldman, Sachs & Co.........................
Hambrecht & Quist LLC.......................
Thomas Weisel Partners LLC..................
J.P. Morgan Securities Inc..................
</TABLE>
- 27 -
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
TOTAL NUMBER OF
FIRM SHARES TO BE
SOLD
------------------
<S> <C>
The Company
The Selling Stockholders:
.........[Name of Selling Stockholder] (a)
.........[Name of Selling Stockholder] (b)
.........[Name of Selling Stockholder] (c)
.........[Name of Selling Stockholder] (d)
.........[Name of Selling Stockholder] (e)
.........
----------------
Total ================
</TABLE>
(a) This Selling Stockholder is represented by ____________________ [name
and address of counsel] and has appointed Matthew J. Szulik, Manoj
George and David Shumannfang, and each of them, as the Attorneys-in-Fact
for such Selling Stockholder.
(b) This Selling Stockholder is represented by ____________________ [name
and address of counsel] and has appointed Matthew J. Szulik, Manoj
George and David Shumannfang, and each of them, as the Attorneys-in-Fact
for such Selling Stockholder.
(c) This Selling Stockholder is represented by ____________________ [name
and address of counsel] and has appointed Matthew J. Szulik, Manoj
George and David Shumannfang, and each of them, as the Attorneys-in-Fact
for such Selling Stockholder.
(d) This Selling Stockholder is represented by ____________________ [name
and address of counsel] and has appointed Matthew J. Szulik, Manoj
George and David Shumannfang, and each of them, as the Attorneys-in-Fact
for such Selling Stockholder.
- 28 -
<PAGE>
(e) This Selling Stockholder is represented by ____________________ [name
and address of counsel] and has appointed Matthew J. Szulik, Manoj
George and David Shumannfang, and each of them, as the Attorneys-in-Fact
for such Selling Stockholder.
- 29 -
<PAGE>
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries, with respect to Cygnus and
its subsidiaries and with respect to HKS and its subsidiaries within
the meaning of the Act and the applicable published rules and
regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and pro forma
financial information) of the Company, of Cygnus and of HKS examined by
them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company, of Cygnus and
of HKS for the periods specified in such letter, as indicated in their
reports thereon, copies of which have been separately furnished to the
representatives of the Underwriters (the "Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
of the Company, of Cygnus and of HKS included in the Prospectus as
indicated in their reports thereon copies of which have been separately
furnished to the Representatives and on the basis of specified
procedures including inquiries of officials of the Company, of Cygnus
and of HKS who have responsibility for financial and accounting matters
regarding whether the unaudited condensed consolidated financial
statements referred to in paragraph (vi)(A)(i) below comply as to form
in all material respects with the applicable accounting requirements of
the Act and the related published rules and regulations, nothing came
to their attention that caused them to believe that the unaudited
condensed consolidated financial statements of the Company, of Cygnus
and of HKS do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations;
- 30 -
<PAGE>
(iv) The unaudited selected financial information with respect
to the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for
such five fiscal years which were included in the Prospectus;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter nothing
came to their attention as a result of the foregoing procedures that
caused them to believe that this information does not conform in all
material respects with the disclosure requirements of Items 301, 302
and 402, respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of the Company and its subsidiaries, of
Cygnus and its subsidiaries and of HKS and its subsidiaries, inspection
of the minute books of the Company and its subsidiaries, of Cygnus and
its subsidiaries and of HKS and its subsidiaries since the date of the
latest audited financial statements included in the Prospectus,
inquiries of officials of the Company and its subsidiaries, of Cygnus
and its subsidiaries and of HKS and its subsidiaries responsible for
financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of
income, consolidated balance sheets and consolidated
statements of cash flows of the Company, of Cygnus and of HKS
included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements
of the Act and the related published rules and regulations, or
(ii) any material modifications should be made to the
unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of
cash flows of the Company, of Cygnus and of HKS and its
subsidiaries included in the Prospectus for them to be in
conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not agree
with the corresponding items in the unaudited consolidated
financial statements from which such data and items were
derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis
for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
- 31 -
<PAGE>
(C) the unaudited financial statements of the
Company, of Cygnus and of HKS which were not included in the
Prospectus but from which were derived any unaudited condensed
financial statements referred to in clause (A) and any
unaudited income statement data and balance sheet items
included in the Prospectus and referred to in clause (B) were
not determined on a basis substantially consistent with the
basis for the audited consolidated financial statements of the
Company, of Cygnus and of HKS included in the Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply
as to form in all material respects with the applicable
accounting requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have not
been properly applied to the historical amounts in the
compilation of those statements;
(E) as of a specified date not more than five days
prior to the date of such letter, there have been any changes
in the consolidated capital stock (other than issuances of
capital stock upon exercise of options and stock appreciation
rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which were
outstanding on the date of the latest financial statements
included in the Prospectus) or any increase in the
consolidated long-term debt of the Company and its
subsidiaries, of Cygnus and its subsidiaries or of HKS and its
subsidiaries, or any decreases in consolidated net current
assets or stockholders' equity or other items specified by the
Representatives, or any increases in any items specified by
the Representatives, in each case as compared with amounts
shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which
the Prospectus discloses have occurred or may occur or which
are described in such letter; and
(F) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in clause (E) there were any
decreases in consolidated net revenues or operating profit or
the total or per share amounts of consolidated net income or
other items specified by the Representatives, or any increases
in any items specified by the Representatives, in each case as
compared with the comparable period of the preceding year and
with any other period of corresponding length specified by the
Representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(vii) In addition to the examination referred to in their report
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and (vi)
above, they have carried out certain specified procedures, not constituting an
examination in accordance with generally
- 32 -
<PAGE>
accepted auditing standards, with respect to certain amounts, percentages and
financial information specified by the Representatives, which are derived from
the general accounting records of the Company and its subsidiaries, of Cygnus
and its subsidiaries or of HKS and its subsidiaries, which appear in the
Prospectus, or in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared certain of such
amounts, percentages and financial information with the accounting records of
the Company and its subsidiaries, of Cygnus and its subsidiaries or of HKS and
its subsidiaries and have found them to be in agreement.
- 33 -
<PAGE>
RED HAT, INC.
COMMON STOCK
(PAR VALUE $0.0001 PER SHARE)
AGREEMENT AMONG UNDERWRITERS
INCLUDING
UNDERWRITING AGREEMENT
_________, 2000
- 34 -
<PAGE>
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
RED HAT, INC.,
HKS ACQUISITION CO.,
HELL'S KITCHEN SYSTEMS, INC.
AND
THE MAJORITY SHAREHOLDERS OF HELL'S KITCHEN SYSTEMS, INC.
Dated as of January 4, 2000
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I DEFINITIONS............................................................................................2
Section 1.1 DEFINITIONS.........................................................................2
Section 1.2 GENERAL RULES OF INTERPRETATION....................................................10
ARTICLE II TRANSACTION AND TERMS OF MERGER......................................................................11
Section 2.1 SURVIVING CORPORATION..............................................................11
Section 2.2 EFFECTIVE TIME.....................................................................11
Section 2.3 CLOSING............................................................................12
ARTICLE III STATUS AND CONVERSION OF SECURITIES.................................................................12
Section 3.1 STATUS AND CONVERSION OF SECURITIES................................................12
Section 3.2 DISSENTER'S RIGHTS.................................................................13
Section 3.3 ESCROW.............................................................................13
Section 3.4 EARN-OUT...........................................................................13
Section 3.5 SECURITIES ACT EXEMPTION; RESTRICTED SECURITIES....................................18
Section 3.6 SURRENDER AND ISSUANCE OF CERTIFICATES.............................................19
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS...................................................19
Section 4.1 ORGANIZATION, SUBSISTENCE AND AUTHORITY OF HKS.....................................19
Section 4.2 ARTICLES OF INCORPORATION; BYLAWS; MINUTE BOOKS....................................20
Section 4.3 DUE AUTHORIZATION, EXECUTION AND DELIVERY..........................................20
Section 4.4 TITLE TO SHARES; CAPITALIZATION; ETC...............................................20
Section 4.5 SUBSIDIARIES AND AFFILIATES........................................................21
Section 4.6 CONSENTS; NO CONFLICT..............................................................21
Section 4.7 TAX MATTERS........................................................................22
Section 4.8 EMPLOYEES, LABOR MATTERS, ETC......................................................23
Section 4.9 FINANCIAL STATEMENTS...............................................................23
Section 4.10 CHANGES OF FINANCIAL CONDITION; UNDISCLOSED LIABILITIES............................24
Section 4.11 REAL PROPERTY......................................................................24
Section 4.12 TANGIBLE PERSONAL PROPERTY.........................................................25
Section 4.13 INTENTIONALLY OMITTED..............................................................25
Section 4.14 INTELLECTUAL PROPERTY..............................................................25
Section 4.15 BUSINESS CONTRACTS.................................................................28
Section 4.16 LITIGATION AND CLAIMS..............................................................30
Section 4.17 COMPLIANCE WITH LAWS AND ORDERS....................................................30
Section 4.18 EMPLOYEE BENEFITS..................................................................30
Section 4.19 LICENSES...........................................................................32
Section 4.20 INSURANCE POLICIES.................................................................32
Section 4.21 ENVIRONMENTAL MATTERS..............................................................32
Section 4.22 RELATIONSHIP WITH AFFILIATES.......................................................33
Section 4.23 BROKERS............................................................................33
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
Section 4.24 NO GUARANTEES......................................................................33
Section 4.25 ACCOUNTS RECEIVABLE; PAYABLES......................................................33
Section 4.26 BANK ACCOUNTS......................................................................34
Section 4.27 [Intentionally Omitted.]...........................................................34
Section 4.28 CUSTOMERS AND SUPPLIERS............................................................34
Section 4.29 DISCLOSURE.........................................................................34
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE PARENT AND MERGERCO.............................................34
Section 5.1 ORGANIZATION AND AUTHORITY.........................................................34
Section 5.2 DUE AUTHORIZATION, EXECUTION AND DELIVERY..........................................35
Section 5.3 CONSENTS; NO CONFLICT..............................................................35
Section 5.4 [Intentionally omitted]............................................................35
Section 5.5 PARENT STOCK.......................................................................35
Section 5.6 CAPITALIZATION.....................................................................35
Section 5.7 BROKERS............................................................................36
Section 5.8 DISCLOSURE.........................................................................36
Section 5.9 SEC FILINGS........................................................................36
ARTICLE VI ADDITIONAL AGREEMENTS OF THE SHAREHOLDERS AND HKS....................................................36
Section 6.1 OPERATION OF BUSINESS..............................................................36
Section 6.2 ACCESS TO BOOKS AND RECORDS OF BUSINESS............................................37
Section 6.3 EXCLUSIVITY........................................................................38
Section 6.4 NO REGISTRATION / LIMITATION ON TRANSFERS..........................................38
Section 6.5 STOCKHOLDERS'MEETING; PROXY MATERIAL...............................................39
ARTICLE VII ADDITIONAL AGREEMENTS...............................................................................40
Section 7.1 CONFIDENTIALITY....................................................................40
Section 7.2 FURTHER ASSURANCES.................................................................40
Section 7.3 UPDATING SCHEDULES.................................................................40
Section 7.4 [Intentionally Omitted]............................................................40
Section 7.5 EFFORTS TO CLOSE...................................................................41
Section 7.6 CERTAIN TAX MATTERS................................................................41
Section 7.7 EMPLOYEES AND BENEFIT PLANS........................................................42
ARTICLE VIII [INTENTIONALLY OMITTED]............................................................................42
ARTICLE IX CONDITIONS TO OBLIGATIONS OF THE PARENT AND MERGERCO.................................................43
Section 9.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES.........................................43
Section 9.2 PERFORMANCE OF AGREEMENTS..........................................................43
Section 9.3 [Intentionally omitted.]...........................................................43
Section 9.4 BRING-DOWN CERTIFICATE.............................................................43
Section 9.5 HKS'S DOCUMENTS....................................................................43
Section 9.6 ADVERSE CHANGE.....................................................................44
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
Section 9.7 NO ADVERSE PROCEEDINGS.............................................................44
Section 9.8 OTHER ASSURANCES...................................................................44
Section 9.9 CONSENTS AND APPROVALS.............................................................44
Section 9.10 OPINION OF HKS'S COUNSEL...........................................................45
Section 9.11 DELIVERY OF SHARES; DISSENTER'S RIGHTS.............................................45
Section 9.12 RESIGNATION OF OFFICERS AND DIRECTORS..............................................45
Section 9.13 AFFILIATES TRANSACTIONS............................................................45
Section 9.14 DELIVERY OF ESCROW AGREEMENT.......................................................45
Section 9.15 DELIVERY OF INVESTMENT REPRESENTATION LETTERS......................................45
Section 9.16 DELIVERY OF LOCK-UP AGREEMENT......................................................46
Section 9.17 DELIVERY OF REGISTRATION RIGHTS AGREEMENT..........................................46
Section 9.18 DELIVERY OF NON-COMPETITION AGREEMENTS.............................................46
Section 9.19 WARRANTS, OPTIONS AND SHARE RIGHTS.................................................46
Section 9.20 TRANSFER OF EMPLOYEES TO PARENT HEADQUARTERS.......................................46
Section 9.21 APPROVAL...........................................................................46
Section 9.22 TERMINATION OF EMPLOYMENT AGREEMENTS...............................................47
ARTICLE X CONDITIONS TO OBLIGATIONS OF THE SHAREHOLDERS AND HKS.................................................47
Section 10.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES.........................................47
Section 10.2 PERFORMANCE OF AGREEMENTS..........................................................47
Section 10.3 [Intentionally omitted]............................................................47
Section 10.4 BRING-DOWN CERTIFICATE.............................................................47
Section 10.5 THE PARENT'S DOCUMENTS.............................................................47
Section 10.6 OPINION OF THE PARENT'S COUNSEL....................................................48
Section 10.7 NO ADVERSE PROCEEDINGS.............................................................48
Section 10.8 OTHER ASSURANCES...................................................................48
Section 10.9 CONSENTS AND APPROVALS.............................................................49
Section 10.10 DELIVERY OF ESCROW AGREEMENT.......................................................49
Section 10.11 DELIVERY OF REGISTRATION RIGHTS AGREEMENT..........................................49
ARTICLE XI SURVIVAL AND INDEMNIFICATION.........................................................................49
Section 11.1 SURVIVAL...........................................................................49
Section 11.2 INDEMNIFICATION BY THE SHAREHOLDERS................................................49
Section 11.3 INDEMNIFICATION BY THE PARENT......................................................50
Section 11.4 METHOD OF ASSERTING CLAIMS.........................................................50
Section 11.5 CONTINUED LIABILITY FOR INDEMNITY CLAIMS...........................................52
Section 11.6 LIMITATIONS ON INDEMNIFICATION.....................................................52
Section 11.7 EXCLUSIVE REMEDIES.................................................................54
Section 11.8 TIME LIMITS ON CLAIMS..............................................................54
ARTICLE XII TERMINATION.........................................................................................55
Section 12.1 GROUNDS FOR TERMINATION............................................................55
Section 12.2 EFFECT OF TERMINATION..............................................................55
Section 12.3 TERMINATION FOR BREACH.............................................................55
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE XIII MISCELLANEOUS......................................................................................56
Section 13.1 NOTICES............................................................................56
Section 13.2 FEES AND EXPENSES..................................................................57
Section 13.3 PUBLIC ANNOUNCEMENTS...............................................................57
Section 13.4 TAX CONSEQUENCES...................................................................58
Section 13.5 ENTIRE AGREEMENT...................................................................58
Section 13.6 WAIVER; REMEDIES...................................................................58
Section 13.7 AMENDMENT..........................................................................58
Section 13.8 BENEFITS AND BINDING EFFECT........................................................58
Section 13.9 CAPTIONS...........................................................................59
Section 13.10 EXHIBITS AND SCHEDULES.............................................................59
Section 13.11 GOVERNING LAW......................................................................59
Section 13.12 ARBITRATION........................................................................59
Section 13.13 COUNTERPARTS.......................................................................60
Section 13.14 SEVERABILITY.......................................................................60
Section 13.15 NO THIRD PARTY BENEFICIARY.........................................................60
</TABLE>
iv
<PAGE>
EXHIBITS
Exhibit A -- Articles of Merger
Exhibit B -- Shareholders' Bring-Down Certificate
Exhibit C -- HKS Secretary's Certificate
Exhibit D -- Thorp, Reed & Armstrong, LLP Opinion Letter
Exhibit E -- Escrow Agreement
Exhibit F -- Parent's Bring-Down Certificate
Exhibit G -- Parent Secretary's Certificate
Exhibit H -- Moore & Van Allen, PLLC Opinion Letter
Exhibit I -- Investor Representation Letter and Related Appendices
Exhibit J -- Registration Rights Agreement
Exhibit K -- Lock-Up Agreement
Exhibit L -- Non-Competition Agreement
v
<PAGE>
SCHEDULES
Schedule 1.1 -- Existing Indebtedness
Schedule 3.1(b) -- Division of Merger Consideration
Schedule 4.1 -- Qualifications to do Business
Schedule 4.4(a) -- Other Holders and Other Holders' Shares
Schedule 4.4(b) -- Authorized and Issued Capital Stock of HKS
Schedule 4.6 -- HKS's Consents and Approvals
Schedule 4.7 -- Tax Matters
Schedule 4.8 -- Labor Matters
Schedule 4.9 -- Financial Statements
Schedule 4.10(a) -- Adverse Change
Schedule 4.10(b) -- Undisclosed Liabilities
Schedule 4.11(a) -- Owned and Leased Real Property
Schedule 4.11(b) -- Title Exceptions
Schedule 4.11(d) -- Condition of Improvements
Schedule 4.12 -- Tangible Personal Property Liens
Schedule 4.14(a) -- Material Intellectual Property
Schedule 4.14(c) -- Registered Intellectual Property
Schedule 4.14(d) -- Third Party Intellectual Property
Schedule 4.15 -- Business Contracts
Schedule 4.16 -- Litigation
Schedule 4.17 -- Violations of Law
Schedule 4.18(a) -- Benefit Plans
Schedule 4.18(b) -- Benefit Plans Compliance
Schedule 4.18(c) -- Benefit Plan Filings
Schedule 4.19 -- Licenses
Schedule 4.20 -- Insurance Policies
Schedule 4.21(a) -- Environmental Matters Compliance
Schedule 4.21(b) -- Environmental Contaminations
Schedule 4.22 -- Affiliate Transactions
Schedule 4.24 -- Guarantees
Schedule 4.25 -- Accounts Receivable
Schedule 4.26 -- Bank Accounts
Schedule 4.28 -- Customers and Suppliers
Schedule 5.3 -- Parent's Consents and Approvals
vi
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "AGREEMENT"), is made and
entered into as of the 4th day of January, 2000 by and among
HELL'S KITCHEN SYSTEMS, INC., a Pennsylvania corporation ("HKS"),
L. TODD MASCO, a resident of Pittsburgh, Pennsylvania, and LAWRENCE J.
WEIDMAN, a resident of Pittsburgh, Pennsylvania, being the holders of a majority
of the capital stock of HKS (L. Todd Masco and Lawrence J. Weidman are sometimes
hereinafter referred to individually as a "SHAREHOLDER" and collectively as the
"SHAREHOLDERS"),
HKS ACQUISITION CO., a Pennsylvania corporation ("MERGERCO"), and
RED HAT, INC., a Delaware corporation which owns all of the issued and
outstanding capital stock of MergerCo. (the "PARENT").
RECITALS:
A. The Shareholders own in the aggregate the following number and
percentage of the issued and outstanding shares of capital stock of HKS
(together with the issued and outstanding shares of capital stock of HKS owned
by the Other Holders as listed on EXHIBIT A, collectively, the "SHARES").
<TABLE>
<CAPTION>
Number of Percentage of Issued and
Name Shares Outstanding Shares
---- ------ ------------------
<S> <C> <C>
L. Todd Masco 442,380 30.69%
Lawrence J. Weidman 469,234 32.56%
</TABLE>
B. HKS is engaged in the business of developing and marketing payment
processing software for Linux and Unix and in providing support and other
services related to such software, and has a headquarters in Pittsburgh,
Pennsylvania (the "BUSINESS").
C. The Shareholders, HKS, the Parent and the board of directors and
sole Shareholder of MergerCo have approved the merger of MergerCo with and into
HKS (the "MERGER"), upon the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, in consideration of the mutual promises, covenants,
representations and warranties contained herein and of the mutual benefits to be
derived herefrom, the parties hereto agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS.
As used in this Agreement, the following defined terms have the
meanings indicated below:
"ADDITIONAL CONSIDERATION" has the meaning set forth in Section 3.4.
"AFFILIATE" of a Person or entity means a Person or entity that,
directly or indirectly through one or more intermediates, controls, is
controlled by, or is under common control with, the first Person or entity.
"CONTROL" (including the terms "controlled by" and "under common control with")
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management policies of a Person or entity, whether through
the ownership of voting securities, by contract, as trustee or executor, or
otherwise. For purposes of any Benefit Plan, including any Multiemployer Plan,
Affiliate means any Person, trade or business (whether or not incorporated)
which, together with HKS, is treated as a single employer under Section 414(b),
(c), (m) or (o) of the Code.
"ARBITRATOR" has the meaning set forth in Section 3.4
"ARTICLES OF MERGER" has the meaning set forth in Section 2.3(b).
"ASSETS" means all rights, titles and interests in, to and under all of
the properties, assets, rights, claims and Contracts of every kind, character
and description owned or held by HKS, whether real, personal or mixed, tangible
or intangible (including goodwill), and whether now owned or hereafter acquired,
including, without limitation, all assets reflected on the Interim Balance
Sheet, as the same may exist on the Closing Date.
"BENEFIT PLAN" means any Plan established by HKS, or any predecessor or
Affiliate of HKS, existing at the Closing or prior thereto, to which HKS or any
Affiliate contributes or has contributed on behalf of any present or former
Employee, officer, director, independent contractor or consultant (in each case
rendering services to HKS) or under which any such Person or any beneficiary
thereof is covered, is eligible for coverage or has benefit rights.
"BOARD OF ARBITRATION" has the meaning set forth in Section 13.12.
"BUSINESS" has the meaning set forth in Recital B.
"BUSINESS DAY" means any day which is not a Saturday, Sunday or legal
holiday in Research Triangle Park, North Carolina.
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"BUSINESS RELATIONSHIP" - An Employee Shareholder shall be deemed to
have a Business Relationship with the Parent or HKS so long as such Employee
Shareholder maintains continuous service to such Person as an employee, officer,
director or consultant.
"CCVS" means the HKS product "Credit Card Verification System."
"CERCLA" means the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, and the rules and
regulations promulgated thereunder.
"CERCLIS" means the federal Comprehensive Environmental Response and
Liability Information System, as provided for by 40 C.F.R. Section 300.5.
"CLAIM" means any Liens, restrictions, vesting agreements, proxies,
options, rights of first refusal, contracted rights or other interests.
"CLAIM NOTICE PERIOD" has the meaning set forth in Section 11.4(b).
"CLOSING" has the meaning set forth in Section 2.3(a).
"CLOSING DATE" has the meaning set forth in Section 2.3(a).
"CODE" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
"CONFIDENTIAL INFORMATION" has the meaning set forth in Section 7.1.
"CONTRACT" means any contract, agreement, license agreement, lease,
assignment, purchase agreement, indenture, mortgage, instrument of indebtedness,
security agreement, guaranty, purchase order, sales order, or distribution
agreement.
"CUMULATIVE MERCHANT COUNT TARGET" has the meaning set forth in Section
3.4.
"DISABILITY" - An Employee Shareholder shall be deemed to have a
"Disability" if, for physical or mental reasons, the Employee Shareholder is
unable to render services in accordance with the material terms or requirements
of his or her Business Relationship with HKS or Red Hat for 120 consecutive
days, or 180 days during any twelve (12) month period, as determined in
accordance with this definition. The Disability of the Employee Shareholder
shall be determined by a medical doctor selected by written agreement of Red Hat
or HKS (as the case may be) and the Employee Shareholder upon the request of
either party by notice to the other. If Red Hat or HKS (as the case may be) and
the Employee Shareholder cannot agree on the selection of a medical doctor, each
of them will select a medical doctor and the two medical doctors so selected
will select a third medical doctor who will determine whether the Employee
Shareholder has a Disability. The determination of Disability under this
definition will be binding on both parties. The Employee Shareholder must submit
to a reasonable number of examinations by the medical doctor making the
determination of Disability under this definition, and the Employee
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Shareholder must authorize the disclosure and release to Red Hat or HKS (as the
case may be) of such determination and all supporting medical records. If the
Employee Shareholder is not legally competent, the Employee Shareholder's legal
guardian or duly authorized attorney-in-fact will act in the Employee
Shareholder's stead, under this definition, for the purposes of submitting the
Employee Shareholder to the examinations and providing the authorization of
disclosure as required under this definition.
"DISPUTED MATTERS" has the meaning set forth in Section 3.4.
"EARN-OUT PORTION" has the meaning set forth in Section 3.4.
"EFFECTIVE TIME" has the meaning set forth in Section 2.2.
"EMPLOYEE" means each full-time employee of HKS.
"EMPLOYEE INCENTIVE PORTION" has the meaning set forth in Section 3.4.
"EMPLOYEE SHAREHOLDER" has the meaning set forth in Section 3.4
"EMPLOYEE SHAREHOLDER PORTION" has the meaning set forth in Section 3.4
"ENVIRONMENTAL LAW" means all Laws and Orders concerning pollution or
protection of the environment, public health and safety, or employee health and
safety, including laws relating to emissions, discharges, releases, or
threatened releases of pollutants, contaminants, or chemical, industrial,
hazardous, or toxic materials or wastes into ambient air, surface water,
groundwater, or lands or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials
or wastes including, without limitation, CERCLA, the Resource Conservation and
Recovery Act, as amended, the Clean Air Act, as amended, the Clean Water Act, as
amended, and the Occupational Safety and Health Act, as amended, and similar
state and local laws, rules and regulations.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"ESCROW AGREEMENT" has the meaning set forth in Section 9.14.
"EXISTING INDEBTEDNESS" means the Indebtedness of HKS evidenced by the
instruments and agreements set forth in SCHEDULE 1.1.
"FINANCIAL STATEMENTS" has the meaning set forth in Section 4.9.
"FOR CAUSE" means (a) an Employee Shareholder's breach of any
Non-Competition Agreement entered into as of the Closing Date between such
Employee Shareholder, HKS and Red Hat; (b) an Employee Shareholder's substantial
and continuing failure, after five (5) days
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written notice thereof, to render services in accordance with the material terms
or requirements or his or her Business Relationship with HKS or Red Hat, or an
Employee Shareholder's gross negligence or willful misconduct in rendering such
services; (c) an Employee Shareholder's appropriation (or undisputed attempted
appropriation) of a material business opportunity of HKS or Red Hat, including
attempting to secure or securing any personal profit in connection with any
transaction entered into on behalf of HKS or Red Hat; (d) the misappropriation
(or undisputed attempted misappropriation) of any of HKS's or Red Hat's funds or
material property; (e) the final and non-appealable conviction of, the
indictment for (or its procedural equivalent), or the entering of a guilty plea
or plea of no contest with respect to, a felony, the equivalent thereof, or any
other crime with respect to which imprisonment is a possible punishment and
which, in the reasonable judgment of the board of directors of Red Hat, has a
material adverse effect on the business or reputation of Red Hat or HKS.
"FOR GOOD REASON" means any of the following: (a) the assignment of
Lawrence J. Weidman without his consent to responsibilities or duties of a
materially lesser status or degree of responsibility than his responsibilities
or duties as of the Closing Date, if such action does not serve a reasonable
business purpose of Red Hat; (b) a decrease in Lawrence J. Weidman's or L. Todd
Masco's respective salaries below the level set forth opposite Lawrence J.
Weidman's and L. Todd Masco's names set forth on SCHEDULE 1.1, except pursuant
to a change in the compensation structure, policies or practices of Red Hat; or
(c) the requirement by HKS or Red Hat that an Employee Shareholder (other than
Lawrence J. Weidman) be based anywhere other than the metropolitan Research
Triangle Park, North Carolina area within six (6) months following the Closing
Date, and, with respect to Lawrence J. Weidman, Pittsburgh, Pennsylvania within
eighteen (18) months following the Closing Date, in any case without such
Employee Shareholder's or Lawrence J. Weidman's consent, as applicable.
"FORM 10-Q" has the meaning set forth in Section 5.9.
"GAAP" means United States generally accepted accounting principles,
consistently applied.
"GOVERNMENTAL AUTHORITY" means any court, tribunal, arbitrator,
authority, agency, commission, official or other instrumentality of the United
States, any foreign country or any domestic or foreign state, county, city or
other political subdivision.
"HAZARDOUS MATERIALS" means (A) any petroleum or petroleum products,
flammable or explosive materials, radioactive materials, asbestos in any form
that is friable, urea formaldehyde foam insulation and transformers or other
equipment that contain dielectric fluid containing levels of polychlorinated
biphenyls (PCBs); (B) any chemicals or other materials or substances which are
now or hereafter become defined as or included in the definition of "hazardous
substances," "hazardous wastes," "hazardous materials," "extremely hazardous
wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants"
or words of similar import under any Environmental Law; and (C) any other
chemical or other material or substance, exposure to which is now or hereafter
prohibited, limited or regulated by any Governmental Authority under any
Environmental Law.
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"HKS" has the meaning set forth in the preamble to this Agreement.
"HKS COMMON STOCK" means the common stock, no par value, of HKS.
"INCOME TAXES" means all Taxes relating to income, profits, gross
receipts, net worth or capital.
"INDEBTEDNESS" shall mean as to any Person: (i) indebtedness of such
person for borrowed money (including principal and accrued interest thereof), as
evidenced by bonds, notes, debentures, or similar instruments, or obligations to
reimburse letters of credit; and (ii) indebtedness of others of the type
described in clause (i) above guaranteed by such Person or secured by Liens on
the property of such Person, whether or not the obligation so secured has been
assumed by such Person.
"INDEMNIFIED PARTY" means any Person claiming indemnification under any
provision of Article XI hereof or such Person's authorized representative.
"INDEMNIFYING PARTY" means any Person against whom a claim for
indemnification is being asserted under any provision of Article XI.
"INDEMNITY NOTICE" has the meaning set forth in Section 11.4(b).
"INDEMNITY RESPONSE PERIOD" has the meaning set forth in
Section 11.4(b).
"INITIAL STOCK AMOUNT" has the meaning set forth in Section 3.1(a).
"INSURANCE POLICIES" means all casualty, liability or other policies of
insurance of HKS.
"INTELLECTUAL PROPERTY" has the meaning set forth in Section 4.14(g).
"INTERIM BALANCE SHEET" has the meaning set forth in Section 4.9(b).
"INTERIM INCOME STATEMENT" has the meaning set forth in Section 4.9(b).
"IRS" means the United States Internal Revenue Service.
"KNOWLEDGE" and "KNOWN" -- An individual will be deemed to have
"Knowledge" of a particular fact or matter, and a particular fact or matter will
be deemed to be "Known" to an individual, if:
(a) such individual is actually aware of such fact or matter;
or
(b) a prudent individual could be expected to discover or
otherwise become aware of such fact or matter in the course of
conducting a reasonably comprehensive investigation concerning the
existence of such fact or matter.
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"LAWS" means all laws, statutes, rules, regulations, ordinances and
other pronouncements having the effect of law of the United States, any foreign
country or any domestic or foreign state, county, city or other political
subdivision or of any Governmental Authority.
"LIABILITIES" means all Indebtedness, obligations and other liabilities
of a Person (whether absolute, accrued, contingent or fixed, whether due or to
become due).
"LICENSES" means all licenses, permits, certificates of authority,
variances, authorizations, approvals, registrations, franchises and similar
consents granted or issued by any Governmental Authority.
"LIENS" means any mortgage, pledge, assessment, security interest,
lease, lien, adverse claim, levy, charge or other encumbrance of any kind, or
any conditional sale contract, title retention contract or other contract to
give any of the foregoing.
"LINUX" means the computer software comprising the operating system
known as Linux.
"LOCK-UP AGREEMENT" has the meaning set forth in Section 9.16.
"LOSSES" means, for purposes of Article XI hereof, any and all damages,
fines, costs, fees, penalties, deficiencies, losses, amounts paid in settlement
and expenses (including, without limitation, interest, court costs, reasonable
fees of attorneys, accountants and other experts or other expenses of litigation
or other proceedings or of any claim, default or assessment).
"MAXIMUM INDEMNITY AMOUNT" has the meaning set forth in
Section 11.6(c).
"MERCHANT COUNT" means the total cumulative number of merchants, net of
any trial or temporary merchant accounts, who have purchased HKS's CCVS (or any
successor product).
"MERCHANT COUNT CERTIFICATION" has the meaning set forth in
Section 3.4.
"MERGER" has the meaning set forth in Recital C.
"MERGER CONSIDERATION" has the meaning set forth in Section 3.1(b).
"MERGERCO" has the meaning set forth in the preamble to this Agreement.
"MULTIEMPLOYER PLAN" has the meaning set forth in Section 4.18(i).
"NON-COMPETITION AGREEMENT" has the meaning set forth in Section 9.18.
"NON-EMPLOYEE SHAREHOLDER PORTION" has the meaning set forth in
Section 3.4
"NOTICE OF DISAGREEMENT" has the meaning set forth in Section 3.4.
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"NPL" means the National Priorities List under CERCLA.
"ORDER" means any writ, judgment, decree, injunction or similar order
of any Governmental Authority (in each such case, whether preliminary or final).
"ORDINARY COURSE OF BUSINESS" means the ordinary course of business
consistent with past custom and practice.
"OTHER HOLDERS" has the meaning set forth in Section 1.2(j).
"PARENT" has the meaning set forth in the preamble to this Agreement.
"PARENT STOCK" means the Parent's common stock, par value $.0001 per
share.
"PBCL" has the meaning set forth in Section 2.1(a).
"PBGC" means the Pension Benefit Guaranty Corporation established under
ERISA.
"PENSION BENEFIT PLAN" means each Benefit Plan which is a pension
benefit plan within the meaning of Section 3(2) of ERISA.
"PERMITTED LIEN" means (i) any Lien for ad valorem Taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings, (ii) any
statutory Lien arising in the ordinary course of business by operation of Law
with respect to a Liability that is not yet due or delinquent and (iii) any
minor imperfection of title or recorded easements, covenants or other
restrictions which individually or in the aggregate with other such items could
not reasonably be expected to have a material adverse effect on the
marketability of title to the Assets of the Business.
"PERSON" means any natural person, corporation, general partnership,
limited partnership, proprietorship, limited liability company, joint venture,
other business organization, trust, union, association or Governmental
Authority.
"PLAN" means any bonus, incentive compensation, deferred compensation,
pension, profit sharing, retirement, stock purchase, stock option, stock
ownership, stock purchase, stock appreciation rights, phantom stock, leave of
absence, layoff, vacation, day or dependent care, legal services, cafeteria,
life, health, accident, disability, workmen's compensation or other insurance,
severance, separation, unemployment or other employee benefit plan, practice,
policy or arrangement of any kind, whether written or oral, including, but not
limited to, any "employee benefit plan" as defined in Section 3(3) of ERISA.
"PPM" has the meaning set forth in Section 6.5.
"PROSPECTUS" has the meaning set forth in Section 5.9.
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"PROXY STATEMENT" has the meaning set forth in Section 6.5.
"QUALIFIED PLAN" means each Benefit Plan which is intended to qualify
under Section 401 of the Code.
"REGISTRATION RIGHTS AGREEMENT" has the meaning set forth in
Section 9.17.
"REGISTRATIONS" has the meaning set forth in Section 4.14(c).
"RELEASE" has the meaning set forth in Section 101(22) of CERCLA, 42
U.S.C. Section 9601(22).
"REPRESENTATIVES" has the meaning set forth in Section 6.2.
"RULES OF ARBITRATION" has the meaning set forth in Section 13.12.
"SEC" shall have the meaning set forth in Section 5.9.
"SECURITIES ACT" has the meaning set forth in Section 6.4.
"SHAREHOLDERS" has the meaning set forth in the preamble to this
Agreement.
"SHARES" has the meaning set forth in Recital A.
"SPECIAL MEETING" has the meaning set forth in Section 6.5.
"STOCK ESCROW DEPOSIT" has the meaning set forth in Section 3.3.
"SURVIVING CORPORATION" has the meaning set forth in Section 2.1(a).
"TAX" means any federal, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Section 59A of
the Code), customs duties, capital stock, franchise, profits, withholding,
social security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
"TAX RETURNS" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"THIRD PARTY CLAIM" has the meaning set forth in Section 11.4(a).
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"THIRD PARTY CLAIM NOTICE" has the meaning set forth in
Section 11.4(a).
"THIRD PARTY CLAIM NOTICE PERIOD" has the meaning set forth in
Section 11.4(a).
"THIRD PARTY CLAIM RESPONSE PERIOD" has the meaning set forth in
Section 11.4(a).
"THRESHOLD AMOUNT" has the meaning set forth in Section 11.6(b).
"TREASURY REGULATIONS" means the regulations prescribed under the Code.
"UNIX" means the computer software comprising the operating system
known as Unix.
"UPDATE PERIOD" has the meaning set forth in Section 7.3.
"YEAR 2000 COMPLIANT" has the meaning set forth in Section 4.14(f).
"YEAR-END FINANCIAL STATEMENTS" has the meaning set forth in
Section 4.9(a).
SECTION 1.2 GENERAL RULES OF INTERPRETATION.
Except as otherwise expressly provided herein, the following rules of
interpretation shall apply to this Agreement:
(a) the singular includes the plural and the plural includes the
singular;
(b) the word "or" is not exclusive;
(c) a reference to a governmental rule includes any amendment or
modification of such governmental rule and all regulations,
rulings and other governmental rules promulgated under such
governmental rule;
(d) a reference to a Person includes that Person's permitted
successors and assigns;
(e) except as expressly modified, accounting terms have the
meanings assigned to them by GAAP, as consistently applied by
the accounting entity to which they refer;
(f) the words "include," "includes" and "including" are not
limiting;
(g) references to any document or agreement (i) shall include all
exhibits, schedules and other attachments thereto, (ii) shall
include all documents, instruments or agreements issued or
executed in replacement thereof, and (iii) shall mean such
document, instrument or agreement, or replacement or
predecessor thereto, as amended, modified and supplemented
from time to time and in effect at any given time;
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(h) the words "hereof," "herein" and "hereunder" and words of
similar import refer to the Agreement as a whole and not to
any particular provision, unless otherwise indicated;
(i) references to "days" shall mean calendar days, unless
otherwise indicated; and
(j) the words "pro rata," when used in connection with the
Shareholders and the other holders of the HKS Common Stock
(collectively, the "OTHER HOLDERS") refer to the proportionate
holdings of HKS Common Stock by the Shareholders and the Other
Holders immediately prior to the Effective Time.
ARTICLE II
TRANSACTION AND TERMS OF MERGER
SECTION 2.1 SURVIVING CORPORATION.
(a) At the Effective Time and in accordance with the
provisions of this Agreement and the Pennsylvania Business Corporation
Law (the "PBCL"), MergerCo shall be merged with and into HKS and shall
cease to exist. HKS shall be the surviving corporation in the Merger
(hereinafter sometimes called the "SURVIVING CORPORATION"), shall
continue its corporate existence under the laws of the Commonwealth of
Pennsylvania, and shall succeed to all rights, privileges, powers,
franchises, assets, liabilities and obligations of HKS and MergerCo in
accordance with the provisions of the PBCL.
(b) The Articles of Incorporation of HKS as in effect at the
Effective Time and as amended by the Articles of Merger, shall continue
in effect as the Articles of Incorporation of the Surviving Corporation
until thereafter amended as provided by law. The by-laws of MergerCo,
as in effect at the Effective Time, shall be the by-laws of the
Surviving Corporation, until amended as therein provided.
(c) The officers and directors of MergerCo at the Effective
Time shall be the officers and directors of the Surviving Corporation,
each to hold office in accordance with the terms of the Articles of
Incorporation and by-laws of the Surviving Corporation.
SECTION 2.2 EFFECTIVE TIME.
The Merger shall become effective at the time of the filing of the
Articles of Merger with the Department of State of the Commonwealth of
Pennsylvania (or at such later time as shall be agreed to by HKS and MergerCo
and as shall be set forth in the Articles of Merger) in accordance with the
PBCL, which Articles of Merger shall be so filed at the time of the Closing. The
date and time when the Merger becomes effective are herein referred to as the
"EFFECTIVE TIME."
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SECTION 2.3 CLOSING.
(a) Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to
the provisions of Section 12.1, the closing (the "CLOSING") of the
transactions contemplated by this Agreement shall take place at the
offices of Moore & Van Allen, PLLC, One Hannover Square, Suite 1700,
Raleigh, North Carolina 27601 at 10:00 a.m. on January 6, 2000 or at
such other place, time and date or by such other means as the parties
may mutually agree. The date and time of such Closing are herein
referred to as the "CLOSING DATE."
(b) At the Closing, HKS and MergerCo shall execute Articles of
Merger substantially in the form of EXHIBIT A hereto (the "ARTICLES OF
MERGER") and cause the Articles of Merger to be delivered for filing
and recordation with the Secretary of Commonwealth of the Commonwealth
of Pennsylvania in accordance with the PBCL.
ARTICLE III
STATUS AND CONVERSION OF SECURITIES
SECTION 3.1 STATUS AND CONVERSION OF SECURITIES.
At the Effective Time, by virtue of the Merger and without any action on the
part of the holders thereof the shares, of the constituent corporations shall be
converted as follows:
(a) Each share of HKS Common Stock, if any, which is being
held by HKS as treasury shares shall be canceled and retired without
any payment therefor.
(b) Each share of HKS Common Stock issued and outstanding
immediately prior to the Effective Time shall cease to be outstanding
and shall be converted into and exchanged for (i) the right to receive
that number of shares of Parent Stock (rounded up or down to the
nearest whole share) (the "MERGER CONSIDERATION") calculated by
dividing (A) the difference between (x) $21,000,000 and (y) the amount
of Existing Indebtedness outstanding as of the Closing Date and any
obligations of HKS for Income Taxes payable for periods ending
immediately prior to the Closing Date by (B) $43.932815 (which amount
reflects that certain 2-for-1 stock split with a record date of
December 27, 1999 declared by the Parent), subject to the requirement
that a portion of such shares be retained by the Parent as the Stock
Escrow Deposit as provided in Section 3.3, and (ii) the right to
receive the Additional Consideration as set forth in Section 3.4, in
each case divided by the number of shares of HKS Common Stock issued
and outstanding as of the Closing Date, in accordance with SCHEDULE
3.1(b).
(c) Each share of common stock, par value $0.01 per share, of
MergerCo outstanding immediately prior to the Effective Time shall be
converted into one (1) fully paid and nonassessable share of common
stock of the Surviving Corporation.
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(d) At the Effective Time, all rights in respect of
outstanding shares of HKS Common Stock shall cease to exist, other than
(i) the right to receive the Parent Stock as provided in this Article
III and (ii) the right to receive the Additional Consideration.
SECTION 3.2 DISSENTER'S RIGHTS.
Each of the Shareholders agrees that he will not seek to assert
dissenters' rights to which such Shareholder would be entitled under applicable
provisions of the PBCL.
SECTION 3.3 ESCROW.
At the Closing, the Shareholders and the Other Holders will place in
escrow shares of Parent Stock equal to ten percent (10%) of the Merger
Consideration pursuant to Section 3.1(b) (the "STOCK ESCROW DEPOSIT"), and such
shares shall be held in escrow pursuant to the Escrow Agreement.
SECTION 3.4 EARN-OUT.
The Shareholders and the Other Holders shall be entitled to receive, on
a pro rata basis, additional merger consideration (the "ADDITIONAL
CONSIDERATION") as follows:
(a) MAXIMUM ADDITIONAL CONSIDERATION. The maximum amount of
Additional Consideration (the "MAXIMUM ADDITIONAL CONSIDERATION") shall
be that number of shares of Parent Stock (rounded up or down to the
nearest whole share) calculated by dividing (A) $14,000,000 by (B)
$43.932815.
(b) EMPLOYEE SHAREHOLDERS. Each Shareholder and each Other
Holder who remains employed by HKS or Red Hat on a full-time basis
following the Closing (each an "EMPLOYEE SHAREHOLDER") may earn up to
one hundred percent (100%) of his or her pro rata portion of the
Maximum Additional Consideration (the portion of the Maximum Additional
Consideration which may be collectively obtained by Employee
Shareholders is hereinafter referred to as the "EMPLOYEE SHAREHOLDER
PORTION") as follows:
(i) Such Employee Shareholder may earn up to
seventy-five percent (75%) of his pro rata share of the
Employee Shareholder Portion (the "EMPLOYMENT INCENTIVE
PORTION") by continuing in the full-time employment of HKS or
Red Hat for three (3) full years following the Closing Date.
The Employment Incentive Portion shall be payable in
accordance with paragraph (e)(i) below. Any Employee
Shareholder whose employment is terminated by HKS or Red Hat
(as the case may be) prior to or on the third anniversary of
the Closing Date other than For Cause, or any Employee
Shareholder who terminates his employment For Good Reason
prior to or on the third anniversary of the Closing Date,
shall be entitled to receive his full pro rata share of the
Employment Incentive Portion promptly upon such termination.
Any Employee Shareholder
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whose employment is terminated as a result of death or
Disability shall be entitled (or, in the case of death, his
personal representative shall be entitled) to receive
twenty-five percent (25%) of his pro rata share of the
Employment Incentive Portion, in installments corresponding
(but only with respect to such twenty-five percent (25%)) to
the installment payment provisions of paragraph (e)(i) below;
and
(ii) Such Employee Shareholder may earn up to
twenty-five percent (25%) of his pro rata share of the
Employee Shareholder Portion (the "EARN-OUT PORTION") if HKS
achieves a cumulative Merchant Count of 500,000 merchants no
later than December 31, 2002 (the "CUMULATIVE MERCHANT COUNT
TARGET"). The Earn-Out Portion shall be payable in accordance
with paragraph (e)(ii) below.
(c) OTHER HOLDERS NOT EMPLOYEE SHAREHOLDERS. Each Other Holder
who is not an Employee Shareholder may earn up to one hundred percent
(100%) of his or her pro rata portion of the Maximum Additional
Consideration (the portion of the Maximum Additional Consideration
which may be collectively obtained by Other Holders who are not
Employee Shareholders is hereinafter referred to as the "NON-EMPLOYEE
SHAREHOLDER PORTION") if HKS achieves a cumulative Merchant Count of
500,000 merchants no later than December 31, 2002. The Non-Employee
Shareholder Portion shall be payable in accordance with paragraph (f)
below.
(d) DETERMINATION DATES FOR MERCHANT COUNT. Within ninety (90)
days after December 31 of each of the years 2000, 2001 and 2002, the
Parent shall deliver to each of the Shareholders a certificate,
together with calculations and reasonable supporting documentation with
respect thereto (a "MERCHANT COUNT CERTIFICATION"), setting forth the
Parent's calculation of HKS's Merchant Count for (i) the one (1) year
period then ended as of December 31, 2000, (ii) the one (1) year period
then ended as of December 31, 2001, and (iii) the one (1) year period
then ended as of December 31, 2002.
Each such Merchant Count shall become final and
binding on the parties unless the Shareholders give written notice of a
disagreement (a "NOTICE OF DISAGREEMENT") to the Parent within fifteen
(15) days after their receipt of a Merchant Count Certification. If a
Notice of Disagreement is given by the Shareholders, then the Merchant
Count determination shall become final and binding upon the parties on
the earlier of (1) the date the parties hereto resolve in writing any
differences they may have with respect to any matter specified in such
Notice of Disagreement and (2) the date any Disputed Matters (as
hereinafter defined) are finally resolved in writing by the Arbitrator
(as hereinafter defined). Any such Notice of Disagreement shall state
in reasonable detail the nature of any disagreement so asserted and the
amount in dispute. During a period of ten (10) Business Days following
the receipt by the Parent of a Notice of Disagreement, the Parent and
the Shareholders shall attempt to resolve in writing any differences
that they may have with respect to any matter specified in the Notice
of Disagreement. If at the end of such ten (10) Business-Day period,
the Parent and the Shareholders have failed to reach written agreement
with respect to all such matters, then all such matters as
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specified in any Notice of Disagreement as to which such written
agreement has not been reached (the "DISPUTED MATTERS") shall be
submitted to and reviewed by an arbitrator ("ARBITRATOR"), which shall
be an independent accounting firm which is a member of the Private
Companies Section of the Division of Firms of the American Institute of
Certified Public Accountants having an office in the metropolitan
Research Triangle Park, North Carolina area, and having no other
relationship with any party hereto during the past five (5) years. The
identity of the Arbitrator shall be determined mutually by the Parent
and the Shareholders, and if the Parent and the Shareholders cannot
agree as to the selection of the Arbitrator, then each of them shall
select one nominee and the parties shall choose the Arbitrator by lot.
The Arbitrator shall consider only the Disputed Matters and shall be
instructed to act promptly to resolve all Disputed Matters and its
decision shall be final and binding upon the Parent and the
Shareholders. The fees and expenses of the Arbitrator with respect to
all Disputed Matters shall be allocated between the Parent and the
Shareholders in the same proportion that the aggregate amount of all
Disputed Matters is resolved by the Arbitrator in favor of or against
the Parent and the Shareholders
(e) PAYMENT OF ADDITIONAL CONSIDERATION / EMPLOYEE
SHAREHOLDERS.
(i) EMPLOYMENT INCENTIVE PORTION. Subject to
paragraph (b)(i) above:
(A) Within fifteen (15) days following the
first anniversary of the Closing Date the Parent
shall issue to the Employee Shareholders, on a pro
rata basis, the first twenty-two and one-half percent
(22.5%) of the Employment Incentive Portion.
(B) On each successive April 1, July 1,
October 1 and January 1 (or if such date is not a
Business Day, then on the next succeeding Business
Day) over the two (2) year period between the first
and third anniversaries of the Closing Date, the
Parent shall issue to the Employee Shareholders, on a
pro rata basis, the remaining fifty-two and one-half
percent (52.5%) of the Employment Incentive Portion
in eight (8) equal installments.
(ii) EARN-OUT PORTION. No later than fifteen (15)
days after the final determination of HKS's Merchant Count for
each of the one (1) year periods ended as of December 31,
2000, December 31, 2001, and December 31, 2002, the Parent
shall issue to the Employee Shareholders, on a pro rata basis,
a percentage of the Earn-Out Portion equivalent to the
percentage of the Cumulative Merchant Count Target achieved by
HKS for each of such one (1) year periods (up to a maximum of
the number of shares represented by the Earn-Out Portion). For
example:
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HYPOTHETICAL
EXAMPLE 1. If the Merchant Count is
100,000 as of December 31,
2000, the Employee
Shareholders (considered
collectively) would be
entitled to receive twenty
percent (20%) of the Earn-Out
Portion. If the Merchant
Count is 300,000 as of
December 31, 2001, the
Employee Shareholders
(considered collectively)
would be entitled to receive
an additional forty percent
(40%) of the Earn-Out
Portion. If the Merchant
Count is 500,000 as of
December 31, 2002, the
Employee Shareholders
(considered collectively)
would be entitled to receive
the remaining forty percent
(40%) of the Earn-Out
Portion.
HYPOTHETICAL
EXAMPLE 2. If the Merchant Count is
400,000 as of December 31,
2000, the Employee
Shareholders (considered
collectively) would be
entitled to receive eighty
percent (80%) of the Earn-Out
Portion. If the Merchant
Count is 500,000 as of
December 31, 2001, the
Employee Shareholders
(considered collectively)
would be entitled to receive
the remaining twenty percent
(20%) of the Earn-Out
Portion. No part of the
Earn-Out Portion would be
payable for any periods after
December 31, 2001.
HYPOTHETICAL
EXAMPLE 3. If the Merchant Count is
500,000 as of December 31,
2000, the Employee
Shareholders (considered
collectively) would be
entitled to receive one
hundred percent (100%) of the
Earn-Out Portion. No
Additional Consideration
would be payable for any
periods after December 31,
2000.
HYPOTHETICAL
EXAMPLE 4. If the Merchant Count is
100,000 as of December 31,
2000, the Employee
Shareholders (considered
collectively) would be
entitled to receive twenty
percent (20%) of the Earn-Out
Portion. If the Merchant
Count is 200,000 as of
December 31, 2001, the
Employee Shareholders
(considered collectively)
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<PAGE>
would be entitled to receive
an additional twenty percent
(20%) of the Earn-Out
Portion. If the Merchant
Count is 300,000 as of
December 31, 2002, the
Employee Shareholders
(considered collectively)
would be entitled to receive
an additional twenty percent
(20%) of the Earn-Out
Portion. The Employee
Shareholders would not be
entitled to receive any other
Additional Consideration.
(f) PAYMENT OF ADDITIONAL CONSIDERATION / OTHER HOLDERS NOT
EMPLOYEE SHAREHOLDERS. No later than fifteen (15) days after the final
determination of HKS's Merchant Count for each of the one (1) year
periods ended as of December 31, 2000, December 31, 2001, and December
31, 2002, the Parent shall issue to the Other Holders who are not
Employee Shareholders, on a pro rata basis, an amount of Additional
Consideration equivalent to the percentage of the Cumulative Merchant
Count Target achieved by HKS for each of such one (1) year periods (up
to a maximum of the number of shares represented by the Non-Employee
Shareholder Portion). For example:
HYPOTHETICAL
EXAMPLE 1. If the Merchant Count is 100,000 as
of December 31, 2000, the Other
Holders who are not Employee
Shareholders (considered collectively)
would be entitled to receive twenty
percent (20%) of the Non-Employee
Shareholder Portion. If the Merchant
Count is 300,000 as of December 31,
2001, the Other Holders who are not
Employee Shareholders (considered
collectively) would be entitled to
receive an additional forty percent
(40%) of the Non-Employee Shareholder
Portion. If the Merchant Count is
500,000 of December 31, 2002, the
Other Holders who are not Employee
Shareholders (considered collectively)
would be entitled to receive the
remaining forty percent (40%) of the
Non-Employee Shareholder Portion.
HYPOTHETICAL
EXAMPLE 2. If the Merchant Count is 400,000 as
of December 31, 2000, the Other
Holders who are not Employee
Shareholders (considered collectively)
would be entitled to receive eighty
percent (80%) of the Non-Employee
Shareholder Portion. If the Merchant
Count is 500,000 as of December 31,
2001, the Other Holders who are not
Employee Shareholders (considered
collectively) would be entitled to
receive the remaining twenty percent
(20%) of the Non-Employee Shareholder
Portion. No Additional Consideration
would be payable any periods after
December 31, 2001.
HYPOTHETICAL
EXAMPLE 3. If the Merchant Count is 500,000 as
of December 31, 2000, the Other
Holders who are not Employee
Shareholders (considered collectively)
would be entitled to receive one
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<PAGE>
hundred percent (100%) of the
Non-Employee Shareholder Portion. No
Additional Consideration would be
payable for any periods after December
31, 2000.
HYPOTHETICAL
EXAMPLE 4. If the Merchant Count is 100,000 as of
December 31, 2000, the Other Holders
who are not Employee Shareholders
(considered collectively) would be
entitled to receive twenty percent
(20%) of the Non-Employee Shareholder
Portion. If the Merchant Count is
200,000 as of December 31, 2001, the
Other Holders who are not Employee
Shareholders (considered collectively)
would be entitled to receive an
additional twenty percent (20%) of the
Non-Employee Shareholder Portion. If
the Merchant Count is 300,000 as of
December 31, 2002, the Other Holders
who are not Employee Shareholders
(considered collectively) would be
entitled to receive an additional
twenty percent (20%) of the
Non-Employee Shareholder Portion. The
Other Holders who are not Employee
Shareholders would not be entitled to
receive any other Additional
Consideration.
(g) FORM OF PAYMENTS. All payments of Additional Consideration
shall be made by the Parent with Parent Stock. In no event shall the
Additional Consideration payable hereunder exceed the Maximum
Additional Consideration. If, on or before the date any Additional
Consideration becomes payable hereunder, the outstanding shares of
Parent Stock shall be changed into a different number of shares by
reason of any reclassification, recapitalization, split-up, combination
or exchange of shares, or any dividend payable in stock or other
securities is declared thereon with a record date within such period,
or any similar event shall occur, the Additional Consideration will be
adjusted accordingly to provide to the Shareholders and the Other
Holders the same economic effect as contemplated by this Agreement
prior to such reclassification, recapitalization, split-up,
combination, exchange or dividend or similar event.
SECTION 3.5 SECURITIES ACT EXEMPTION; RESTRICTED SECURITIES.
The shares of Parent Stock to be issued in the Merger shall not be
registered under the Securities Act in reliance upon the exemptions set forth in
Section 4(2) thereof and Regulation D promulgated under the Securities Act.
Accordingly, such shares shall be "restricted securities" as such term is
defined in Rule 144(a)(2) promulgated under the Securities Act. Certificates
representing shares of Parent Stock to be issued in the Merger shall bear the
legend set forth in Section 6.4 of this Agreement.
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<PAGE>
SECTION 3.6 SURRENDER AND ISSUANCE OF CERTIFICATES.
(a) MERGER CONSIDERATION NOT SUBJECT TO STOCK ESCROW DEPOSIT.
As soon as reasonably practicable following the Effective Time and the
surrender by the Shareholders and the Other Holders of the certificates
representing their Shares, the Parent will cause its registrar and
transfer agent to mail to each Shareholder and each Other Holder a
certificate for the number of shares of Parent Stock representing the
Merger Consideration into which such Shareholder's or Other Holder's
Shares were converted at the Effective Time in accordance with Section
3.1(b), less the number of shares of Parent Stock to be retained by the
Parent as the Stock Escrow Deposit pursuant to Section 3.3. Until the
certificates for the shares of Parent Stock representing the Merger
Consideration into which each Shareholder's and each Other Holder's
Shares were converted at the Effective Time are issued, the
certificates formerly representing the Shares shall be deemed to
represent the number of shares of Parent Stock representing the Merger
Consideration into which each Shareholder's or each Other Holder's
Shares were converted at the Effective Time.
(b) MERGER CONSIDERATION TO BE RETAINED AS STOCK ESCROW
DEPOSIT. As soon as reasonably practicable following the Effective Time
and the surrender by the Shareholders and the Other Holders of the
certificates representing their Shares, the Parent will cause its
registrar and transfer agent to issue and deliver to the Parent a
certificate registered in the name of Lawrence J. Weidman as
shareholder representative for the Shareholders and the Other Holders,
for the number of shares of Parent Stock to be retained by the Parent
representing the Merger Consideration as the Stock Escrow Deposit
pursuant to Section 3.3.
(c) ADDITIONAL CONSIDERATION. As soon as reasonably
practicable following the date or dates on which any Additional
Consideration becomes payable hereunder, the Parent will cause its
registrar and transfer agent to mail to each Shareholder and each Other
Holder entitled thereto a certificate for the number of shares of
Parent Stock representing the amount of Additional Consideration.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE SHAREHOLDERS
The Shareholders hereby jointly and severally represent and warrant to
the Parent and MergerCo:
SECTION 4.1 ORGANIZATION, SUBSISTENCE AND AUTHORITY OF HKS.
HKS is duly organized, validly existing and presently subsisting under
the laws of the Commonwealth of Pennsylvania. HKS is duly qualified to do
business as a foreign corporation in the jurisdictions set forth opposite its
name in SCHEDULE 4.1, which are all the jurisdictions
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<PAGE>
where the character of the properties it owns, leases or operates, or the
conduct of its business, requires such qualification, other than in any
jurisdiction where the failure to so qualify could not reasonably be expected to
have a material adverse effect on HKS. HKS has full corporate power and
authority to own the properties and assets owned by it, to lease the properties
and assets held by it under lease, to carry on the operation of its business as
it is now being conducted, and to operate its business as heretofore operated.
SECTION 4.2 ARTICLES OF INCORPORATION; BYLAWS; MINUTE BOOKS.
True and complete copies of the articles of incorporation and by-laws
of HKS, as amended to and including the date hereof, have been delivered to the
Parent and MergerCo. HKS is not in material violation of any provision of its
articles of incorporation or by-laws. The minute books, stock books and stock
transfer records of HKS, true and complete copies of which have been made
available to the Parent and MergerCo, contain true and complete minutes and
records of all issuances and transfers of capital stock of HKS and of all
meetings, consents, proceedings and other actions of the shareholders, board of
directors and committees of the board of directors of HKS from the date of
incorporation of HKS to and including the date hereof.
SECTION 4.3 DUE AUTHORIZATION, EXECUTION AND DELIVERY.
Each Shareholder has full capacity to execute and deliver this
Agreement, to perform his obligations hereunder and to consummate the
transactions contemplated hereby. Each Shareholder has duly executed and
delivered this Agreement, and this Agreement constitutes, and all other
agreements and other documents to be executed and delivered hereunder, when so
executed and delivered, will constitute, the legal, valid and binding
obligations of each Shareholder, enforceable against each such Shareholder in
accordance with its terms, except that such enforcement (a) may be limited by
bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights
generally, and (b) is subject to the availability of equitable remedies, as
determined in the discretion of the court before which such a proceeding may be
brought. HKS has full corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. A duly authorized officer of HKS has duly
executed and delivered this Agreement, and this Agreement constitutes, and all
other agreements and other documents to be executed and delivered hereunder,
when so executed and delivered, will constitute, the legal, valid and binding
obligations of HKS, enforceable against HKS in accordance with its terms, except
that such enforcement (a) may be limited by bankruptcy, insolvency, moratorium
or similar laws affecting creditors' rights generally, and (b) is subject to the
availability of equitable remedies, as determined in the discretion of the court
before which such a proceeding may be brought.
SECTION 4.4 TITLE TO SHARES; CAPITALIZATION; ETC.
(a) TITLE. Each Shareholder owns, beneficially and of record,
all of the Shares set forth opposite such Shareholder's name in Recital
A, free and clear of any Liens. Each of the Other Holders owns,
beneficially and of record, all of the Shares set forth opposite such
Other Holder's name on SCHEDULE 4.4(a). All of the Shares set forth
20
<PAGE>
opposite such Other Holder's name on SCHEDULE 4.4(a) are, to the
Knowledge of the Shareholders, free and clear of any Liens.
(b) AUTHORIZED AND ISSUED CAPITAL STOCK OF HKS. The authorized
capital stock of HKS is as set forth on SCHEDULE 4.4(b). The Shares
have been duly authorized and validly issued, are fully paid and
nonassessable and are the only issued and outstanding shares of capital
stock of HKS.
(c) NO EQUITY RIGHTS. There are no preemptive or similar
rights on the part of any holders of any class of securities of HKS.
There are no subscriptions, options, warrants, conversion or other
rights, agreements, commitments, arrangements or understandings of any
kind obligating HKS, any Shareholder or, to the Knowledge of the
Shareholders, any other Person or entity, contingently or otherwise, to
issue or sell, or cause to be issued or sold, any shares of capital
stock of HKS, or any securities convertible into or exchangeable for
any such shares, and no authorization therefor has been given. There
are no outstanding contractual or other rights or obligations to or of
HKS, any Shareholder or, to the Knowledge of the Shareholders, any
other Person or entity to repurchase, redeem or otherwise acquire any
outstanding shares or other equity interests of HKS.
SECTION 4.5 SUBSIDIARIES AND AFFILIATES.
HKS does not own, directly or indirectly, any shares of capital stock
or other equity interest (or any other interest convertible into an equity
interest) in any corporation, partnership, joint venture, association or other
entity, and has no commitment to contribute to the capital of, make loans to, or
share in the profits or losses of, any other entity. HKS has no Affiliates other
than the Shareholders.
SECTION 4.6 CONSENTS; NO CONFLICT.
Except as set forth in SCHEDULE 4.6, (a) neither HKS nor any of the
Shareholders is required to obtain the consent, authorization or approval of any
Person, or License from any Governmental Authority, as a condition to the
consummation of this Agreement by the Shareholders, and (b) the execution and
delivery of this Agreement by the Shareholders and the consummation of the
transactions contemplated hereby will not conflict with, result in the
termination of, contravene or constitute a default under, or be an event which
with the giving of notice or passage of time or both will become a default
under, or give to others any rights of termination or cancellation of, or
accelerate the performance required by or maturity of, or result in the creation
of any Lien or loss of any material rights with respect to HKS pursuant to any
of the terms, conditions or provisions of or under, any applicable Laws, the
articles of incorporation or by-laws of HKS, or under any material Contract,
binding upon HKS or any of the Shareholders or, to the Knowledge of the
Shareholders, the Other Holders, or to which the property of HKS or, to the
Knowledge of the Shareholders (except with respect to the shares of the HKS
Common Stock held by the Shareholders), any share of the HKS Common Stock is
subject under any License.
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<PAGE>
SECTION 4.7 TAX MATTERS.
(a) TAX RETURNS. Except as set forth on SCHEDULE 4.7, (i) HKS
has duly and timely filed (including under any valid extensions of
time) all Tax Returns that it was required to file prior to the date
hereof, (ii) all such Tax Returns were correct and complete in all
material respects, and (iii) HKS is not currently the beneficiary of
any extension of time within which to file any Tax Return.
(b) COMPLIANCE. Except as set forth on SCHEDULE 4.7, (i) all
Taxes that are or may become payable by HKS or chargeable as a Lien
upon the Assets (whether or not shown on any Tax Return) as of the date
hereof have been duly and timely paid, and (ii) HKS has complied in all
respects with applicable Laws relating to the reporting, payment and
withholding of Taxes in connection with amounts paid to its Employees,
creditors, independent contractors or other third parties and has,
within the time and in the manner prescribed by law, withheld from such
amounts and timely paid over to the proper Governmental Authorities all
such amounts required to be so withheld and paid over under applicable
Laws.
(c) CLAIMS. Except as set forth on SCHEDULE 4.7, (i) no
written claim (other than a claim that has been finally settled) has
ever been made by a Governmental Authority in a jurisdiction where HKS
does not file Tax Returns or pay or collect Taxes in respect of a
particular type of Tax imposed by that jurisdiction that HKS is or may
be subject to an obligation to file Tax Returns or pay or collect Taxes
in respect of such Tax in that jurisdiction and (ii) there has been no
material claim or issue (other than a claim or issue that has been
finally settled) concerning any liability for Taxes of HKS either (A)
asserted, raised or, to the Knowledge of the Shareholders, threatened
by any Governmental Authority in writing or (B) Known to the
Shareholders.
(d) WAIVERS. Except as set forth on SCHEDULE 4.7, HKS has not
(i) waived any statute of limitations, (ii) agreed to any extension of
the period for assessment or collection or (iii) executed or filed any
power of attorney in each case with respect to any Taxes, which waiver,
agreement or power of attorney is currently in force.
(e) AUDITS. SCHEDULE 4.7 sets forth (i) all Income Tax Returns
filed by HKS that have ever been audited and (ii) any pending or
proposed audit, proceeding, assessment, reassessment or request for
information by any Governmental Authority relating to any HKS Tax
Return or any Tax owed or which may be owed to HKS.
(f) ELECTIONS. SCHEDULE 4.7 lists all elections for Income
Taxes made by HKS that are currently in force or to which HKS is bound.
(g) CONSENTS. HKS has not filed a consent under Section 341(f)
of the Code concerning collapsible corporations and there are no
outstanding adjustments for Income Tax purposes applicable to HKS
required as a result of changes in methods of accounting
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<PAGE>
effected on or before the date hereof.
(h) TAX SHARING AGREEMENTS. HKS is not a party to or bound by,
and has no obligation under, any Tax allocation, sharing, indemnity or
similar agreement or arrangement, and HKS (i) is not or has not been a
member of any group of companies filing a consolidated, combined or
unitary Income Tax Return or (ii) has no liability for the Taxes of any
Person under Section 1.1502-6 of the Treasury Regulations (or any
similar provision of state, local or foreign law); as a transferee,
successor, indemnitor or guarantor; by contract or otherwise.
(i) SUFFICIENT PROVISION FOR TAXES. The provisions made for
Taxes on the Interim Balance Sheet are sufficient in all material
respects for the payment of all unpaid Taxes for all periods ended on
or prior to the date of the Interim Balance Sheet.
SECTION 4.8 EMPLOYEES, LABOR MATTERS, ETC.
Except as set forth on SCHEDULE 4.8, HKS is not a party to or bound by
any collective bargaining or other labor agreement, and there are no labor
unions or other organizations representing any Employees employed by HKS. During
the past five (5) years, there has not occurred or been threatened any strike,
slowdown, picketing, union organizing activities, work stoppage, concerted
refusal to work overtime or other similar labor activity with respect to any
Employees of HKS. Except as set forth on SCHEDULE 4.8, there are no labor
disputes currently subject to any grievance procedure, arbitration or litigation
and there is no representation petition pending or threatened with respect to
any Employee of HKS. SCHEDULE 4.8 sets forth the name, position and current
annual compensation of all current Employees of HKS with current annual
compensation in excess of $15,000, together with the date and amount of the last
compensation increase for each such Person. Except as set forth on SCHEDULE 4.8,
all Employees of HKS are employees at will. No Employee has given notice of
intent to terminate employment if the transactions contemplated by this
Agreement are completed. HKS has complied in all material respects with all Laws
pertaining to the employment or termination of employment of its employees,
including, without limitation, all Laws relating to labor relations, equal
employment opportunities, fair employment practices, immigration, prohibited
discrimination or distinction and other similar employment activities.
SECTION 4.9 FINANCIAL STATEMENTS.
SCHEDULE 4.9 contains true and complete copies of the following
financial statements (collectively, the "FINANCIAL STATEMENTS"):
(a) Internally prepared unaudited income statements and
balance sheets of HKS as of December 31, 1994, December 31, 1995,
December 31, 1996, December 31, 1997 and December 31, 1998 and for each
of the five (5) years then ended (the "YEAR-END FINANCIAL STATEMENTS");
and
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<PAGE>
(b) Internally prepared unaudited balance sheet of HKS as of
September 30, 1999 (the "INTERIM BALANCE SHEET") and the related
unaudited income statement, balance sheet comparison, profit and loss
statement and contingent liability statement for the period from
January 1, 1999 to September 30, 1999 (the "INTERIM INCOME STATEMENT").
Except as set forth in the notes thereto or as disclosed in SCHEDULE
4.9 hereof, all such Financial Statements (i) were prepared from the regular
accounting books and records of HKS and (ii) fairly present in all material
respects the financial condition and results of operations of HKS as of the
respective dates thereof and for the respective periods covered thereby.
SECTION 4.10 CHANGES OF FINANCIAL CONDITION; UNDISCLOSED LIABILITIES.
(a) Except for the execution and delivery of this Agreement
and as disclosed on SCHEDULE 4.10(a) hereof, since the date of the
Interim Balance Sheet, there has not been any adverse change, or any
event or development which, individually or together with other such
events or developments, has resulted in or could reasonably be expected
to result in a material adverse change in the business, financial
condition or, to the Knowledge of the Shareholders, prospects, of HKS
other than those occurring as a result of general economic or financial
conditions not unique to HKS. Except as set forth in SCHEDULE 4.10(a),
since the date of the Interim Balance Sheet, to the Knowledge of the
Shareholders, HKS has not taken any action or failed to take any action
which would have violated any of the covenants set forth in Sections
6.1(a) and (d) hereof if such covenants had been given on such date.
Except as otherwise disclosed in this Agreement, including the
Schedules hereto, HKS has been operated in the Ordinary Course of
Business since the date of the Interim Balance Sheet.
(b) Except as set forth in SCHEDULE 4.10(b), to the Knowledge
of the Shareholders, HKS has no Liability arising out of transactions
entered into prior to the Closing, or any action or inaction prior to
Closing, or any other state of facts existing prior to Closing other
than: (i) Liabilities set forth on the Interim Balance Sheet; (ii)
Liabilities which have arisen in the Ordinary Course of Business since
the date of the Interim Balance Sheet; (iii) Liabilities arising in the
Ordinary Course of Business of the type not required to be disclosed on
a balance sheet prepared in accordance with GAAP; or (iv) Liabilities
which, individually or in the aggregate, do not have a material adverse
effect on the Business or financial condition of HKS.
SECTION 4.11 REAL PROPERTY.
(a) OWNED AND LEASED REAL PROPERTY. SCHEDULE 4.11(a) contains
a true and correct list of each parcel of real property leased by HKS
(as lessor or lessee) under any real property lease. HKS does not own
any real property.
(b) LEASED REAL PROPERTY. HKS has a valid leasehold estate in
the real properties leased by it, subject to the real property lease
relating thereto, for the full term
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thereof. Each such real property lease is a legal, valid and binding
agreement of HKS, enforceable against HKS in accordance with its terms,
and except as set forth in SCHEDULE 4.11(c), there is no default (or,
to the Knowledge of the Shareholders, any event which, after notice or
lapse of time or both, would constitute a default) thereunder.
(c) DOCUMENTS. HKS has delivered to the Parent and MergerCo
prior to the execution of this Agreement true and complete copies of
all real property leases (including any amendments and renewal letters
relating thereto) with respect to the real property leased by HKS.
(d) CONDITION OF IMPROVEMENTS. Except as disclosed in SCHEDULE
4.11(d), the improvements located on the real property leased by HKS
are in all respects in good condition and in good repair, ordinary wear
and tear excepted, and, to the Knowledge of the Shareholders, there are
no condemnation proceedings pending or threatened against any of such
real property or improvements. HKS's use of, and, to the Knowledge of
the Shareholders, all improvements located on, all real property
identified in SCHEDULE 4.11(a) comply with all applicable material
zoning and similar requirements. To the Knowledge of the Shareholders,
no improvements on such real property encroach any boundary or
easement, violate any setback requirement or are located on a 100-year
flood plain.
SECTION 4.12 TANGIBLE PERSONAL PROPERTY.
HKS is in possession of and has good title to, or has valid leasehold
interests in or valid rights under contract to use, all the tangible personal
property used in and material to the conduct of the business of HKS. Except as
disclosed in SCHEDULE 4.12, all such tangible personal property is free and
clear of all Liens, other than Permitted Liens, and is in good condition,
ordinary wear and tear excepted.
SECTION 4.13 INTENTIONALLY OMITTED.
SECTION 4.14 INTELLECTUAL PROPERTY.
(a) INTELLECTUAL PROPERTY RIGHTS. Except as set forth on SCHEDULE
4.14(a), HKS owns or has the legal right to use all Intellectual Property which
is material to and necessary for the operation of the business of such company,
including that necessary to sell or license HKS's present products, as presently
conducted and as presently planned to be conducted by such company with respect
to such products. Each item of Intellectual Property owned or used by HKS
immediately prior to the Effective Time will be owned or available for use by
such company on identical terms and conditions immediately subsequent to the
Closing.
(b) INFRINGEMENT. HKS has not interfered with, infringed upon, or
misappropriated any Intellectual Property rights of any other Person, and has
never received any charge, complaint, claim, demand, or notice alleging any such
interference, infringement, misappropriation, or violation (including any claim
that HKS must license or refrain from using
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any Intellectual Property rights of any other Person). To the Knowledge of the
Shareholders, no third Person has interfered with, infringed upon,
misappropriated, or otherwise violated any Intellectual Property rights of HKS.
(c) REGISTERED INTELLECTUAL PROPERTY. SCHEDULE 4.14(c) identifies (i)
each patent, copyright registration, trademark, service mark, or trade dress
registration, mask work registration, and industrial design registration
(collectively, "REGISTRATIONS"), which Registrations have been issued to HKS
with respect to any of its Intellectual Property; (ii) each application for
registration of Intellectual Property which HKS has made with respect to any of
its Intellectual Property; (iii) each license, agreement, or other permission
which HKS has granted to any third Person with respect to any of its
Intellectual Property; (iv) any claims that a third Person may have interfered
with, infringed upon, misappropriated, or otherwise violated any Intellectual
Property rights of HKS and (v) all computer software included in a named
component of a commercially released product of HKS. HKS has delivered to the
Parent and MergerCo correct and complete copies of all such Registrations,
pending patent applications or applications for registration for any of its
Intellectual Property, licenses, agreements, and permissions (as amended to
date) and has made available to the Parent and MergerCo correct and complete
copies of all other written documentation evidencing ownership of each such
item. With respect to each item of Intellectual Property required to be
identified by HKS on SCHEDULE 4.14(c):
(A) HKS possesses all right, title, and interest in and to the
item, free and clear of any Lien, license, or other restriction, other
than restrictions contained in any licenses obtained by HKS with
respect to such Intellectual Property (as further described in SCHEDULE
4.14(d)), and prior licenses granted by HKS in connection with the
licensing or distribution of products or Intellectual Property of HKS
in the ordinary course of business;
(B) the item is not subject to any Order; and
(C) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, to the Knowledge of
the Shareholders, is threatened which challenges the legality,
validity, enforceability, use, or ownership of the item.
(d) INTELLECTUAL PROPERTY FROM OTHERS. SCHEDULE 4.14(d) identifies each
item of Intellectual Property that any third Person owns and that HKS uses
pursuant to license, sublicense, agreement or similar Contract or permission.
With respect to licenses, sublicenses, agreements, or similar Contracts and
permissions and with an unexpired term of more than twelve (12) months or
involving aggregate payments in excess of $5,000, HKS has delivered to the
Parent and MergerCo correct and complete copies of all such licenses,
sublicenses, agreements, or similar Contracts and permissions (in each case, as
amended to date). With respect to each item of Intellectual Property required to
be identified in SCHEDULE 4.14(d):
(i) the license, sublicense, agreement, or similar Contract or
permission covering the item is legal, valid, binding, enforceable, and
in full force and effect, except that such enforcement: (A) may be
limited by bankruptcy, insolvency, moratorium or
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similar laws affecting creditors' rights generally, and (B) is subject
to the availability of equitable remedies, as determined in the
discretion of the court before which an equitable proceeding may be
brought;
(ii) no party to the license, sublicense, agreement, or
similar Contract or permission is in breach or default thereunder, and
no event has occurred which, with notice or lapse of time or both,
would constitute a breach or default or permit termination,
modification, or acceleration thereunder;
(iii) no party to the license, sublicense, agreement, or
similar Contract or permission has repudiated any provision thereof;
(iv) with respect to each sublicense, the representations and
warranties set forth in subsections (i) and (iii) of this Section
4.14(d) above are true and correct with respect to the underlying
license; and
(v) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, is threatened which
challenges the legality, validity, or enforceability of the underlying
item of Intellectual Property.
(e) CONTINUED OPERATIONS. To the Knowledge of the Shareholders, neither
HKS nor the Intellectual Property owned by HKS, nor any of the products
manufactured or released by HKS, nor any third party Intellectual Property used
by HKS, interferes with, infringes upon, misappropriates, or otherwise violates
any Intellectual Property rights existing today of third Persons.
(f) YEAR 2000 COMPLIANCE. The Intellectual Property owned by HKS is,
and any products manufactured and commercially released by HKS which are, as of
the date hereof, covered by any express or implied warranty enforceable against
HKS are, fully Year 2000 Compliant and will not cease to be fully Year 2000
Compliant at any time prior to, during or after the calendar year 2000, assuming
that time/date data are accurately presented to such products. For the purposes
of this Agreement, "YEAR 2000 COMPLIANT" means that neither the performance nor
the functionality of any applicable product is or will be affected by dates
prior to, during or after the calendar year 2000 A.D. and in particular (but
without limitation):
(i) such product accurately receives, provides and processes,
and will accurately receive, provide and process, date/time data
(including calculating, comparing and sequencing) from, into and
between the twentieth and twenty-first centuries, including calendar
years 1999 AND 2000;
(ii) such product will not malfunction, cease to function,
provide invalid or incorrect results or cause any interruption in the
operation of the business of HKS as a result of any date/time data;
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(iii) date-based functionality of such product behaves and
will continue to behave consistently for dates prior to, during and
after the year 2000;
(iv) in all interfaces and data storage of such product, the
century in any date is and will be specified either explicitly or by
unambiguous algorithms or inferencing rules; and
(v) the year 2000 is and will be recognized as a leap year of
such product.
(g) For purposes of this Agreement, "INTELLECTUAL PROPERTY" means (i)
inventions (whether patentable or unpatentable and whether or not reduced to
practice), improvements thereto, and patents, patent applications, and patent
disclosures, together with reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (ii) marks, trademarks,
service marks, trade dress, logos, trade names, and corporate names, together
with translations, adaptations, derivations, and combinations thereof and
applications, registrations, and renewals in connection therewith, (iii)
copyrightable works, copyrights, and applications, registrations and renewals in
connection therewith, (iv) mask works and applications, registrations and
renewals in connection therewith, (v) all trade secrets and confidential
business information (including ideas, research and development, know-how,
formulae, compositions, manufacturing and production processes and techniques,
technical data, designs, drawings, specifications, engineering notebooks,
customer and supplier lists, pricing and cost information, and business and
marketing plans and proposals), (vi) all types of computer software programs,
including operating systems, application programs, software tools, firmware and
software imbedded in equipment, including both object code and source code
versions thereof and all written or electronic materials that explain the
structure or use of software or that were used in the development of software,
including logic diagrams, flow charts, procedural diagrams, error reports,
manuals and training materials, (vii) industrial designs and applications
therefor, and (viii) rights under and remedies against infringement of any of
the foregoing, and rights to protection of interests in any of the foregoing
under the laws of any jurisdiction.
SECTION 4.15 BUSINESS CONTRACTS.
(a) DESCRIPTION OF BUSINESS CONTRACTS. SCHEDULE 4.15 contains
a true and complete list of each of the following Contracts (true and
complete copies of which, together with all amendments and supplements
thereto, have been delivered to the Parent and MergerCo prior to the
execution of this Agreement) to which HKS is a party:
(i) all Contracts (excluding Benefit Plans)
providing for a commitment of employment or consultation
services for a specified or unspecified term to, or otherwise
relating to employment or the termination of employment or the
severance of, any Employee;
(ii) all Contracts with any Person containing
any provision or covenant prohibiting or limiting the ability
of HKS to engage in any business activity or compete with any
Person in connection with the Business, or
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prohibiting or limiting the ability of any Person to compete
with HKS in connection with the Business;
(iii) all partnership, joint venture or
shareholders' Contracts with any Person;
(iv) all Contracts with distributors, dealers,
manufacturer's representatives, sales agencies or franchises
with whom HKS deals in connection with the Business which in
any case involve the payment or potential payment, pursuant to
the terms of any such Contract, by or to either HKS of more
than $5,000 annually;
(v) all Contracts providing for indemnification
or contribution by HKS of any other Person where the
indemnification or contribution obligation is reasonably
expected to potentially exceed $5,000;
(vi) all Contracts under which the consequences
of default or termination could reasonably be expected to have
a material adverse effect on the condition (financial or
otherwise), business or prospects of HKS;
(vii) all Contracts between HKS, on the one hand,
and either Shareholder or any family member of either
Shareholder or any Affiliate of the foregoing, on the other
hand;
(viii) all Contracts pertaining to matters that
are not within the Ordinary Course of Business of HKS;
(ix) all Contracts relating to the future
disposition or acquisition of any Assets other than
dispositions or acquisitions of raw materials or inventory in
the Ordinary Course of Business;
(x) all other Contracts (other than Benefit
Plans, the real property leases referred to in Section 4.11(d)
and insurance policies listed in SCHEDULE 4.20) to which HKS
is a party that (A) involve the payment or potential payment,
pursuant to the terms of any such Contract, by or to HKS of
more than $5,000 annually and (B) cannot be terminated within
sixty (60) days after giving notice of termination without
resulting in any cost or penalty to HKS.
(b) STATUS OF BUSINESS CONTRACTS. Each Contract required to be
disclosed in SCHEDULE 4.15 is in full force and effect and constitutes
a legal, valid and binding agreement of HKS, enforceable against HKS in
accordance with its terms, and except as disclosed in SCHEDULE 4.15,
neither HKS nor, to the Knowledge of the Shareholders, any other party
to such Contract is in violation or breach of or default under any such
Contract (or with notice or lapse of time or both, would be in
violation or breach of or default under any such Contract).
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SECTION 4.16 LITIGATION AND CLAIMS.
SCHEDULE 4.16 discloses each instance in which HKS (or, to the
Knowledge of the Shareholders, its directors, officers or Employees, in such
capacities) is a party to or, to the Knowledge of the Shareholders, is
threatened to be made a party to, any charge, complaint, action, suit,
arbitration, proceeding, hearing, or investigation which, individually or in the
aggregate could reasonably be expected to have a material adverse effect on HKS.
HKS is not subject to any Order which could reasonably be expected to have a
material adverse effect on HKS.
SECTION 4.17 COMPLIANCE WITH LAWS AND ORDERS.
Except as disclosed in SCHEDULE 4.17, HKS is not in any material
respect in violation of or in default under any Law or Order Known by the
Shareholders to be applicable to it, its Business or its Assets, and, to the
Knowledge of the Shareholders, no facts or circumstances exist that, with or
without the passage of time or the giving of notice or both, might reasonably
serve as the basis for any claim that HKS is not in compliance with any such
Laws or Orders. HKS has not received any communication from a Governmental
Authority alleging that it is not in compliance with any Law or Order relating
to the operation of the Business. HKS has filed in a timely manner all reports,
documents and other materials required to be filed (and the information
contained therein was correct and complete in all material respects) under
applicable Laws with respect to the Business, the failure of which to be filed
would have a material adverse effect on the Business.
SECTION 4.18 EMPLOYEE BENEFITS.
(a) DESCRIPTION OF BENEFIT PLANS. SCHEDULE 4.18(a) contains a
true and complete list of the Benefit Plans and identifies each Benefit
Plan that is a Qualified Plan.
(b) COMPLIANCE. Except as disclosed on SCHEDULE 4.18(b), each
Benefit Plan (and each related trust or insurance contract) complies in
form and in operation in all material respects with its respective
governing documents and the applicable requirements of ERISA and the
Code.
(c) FILINGS. Except as disclosed on SCHEDULE 4.18(c), all
required reports and descriptions (including, without limitation, Form
5500 Annual Reports, Summary Annual Reports, PBGC-1's, and Summary Plan
Descriptions) have been filed or distributed in a timely manner with
respect to each Benefit Plan. The requirements of Part 6 of Subtitle B
of Title I of ERISA and of Code Section 4980B(f) have been met in all
material respects with respect to each group health plan.
(d) CONTRIBUTIONS. All contributions (including all employer
contributions and employee salary reduction contributions) which are
due have been paid to each Pension Benefit Plan in a timely manner
(including any extensions) and all contributions for any
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period ending on or before the Closing Date which are not yet due have
been paid to each Pension Benefit Plan or accrued in the Financial
Statements in accordance with GAAP. All premiums or other payments for
all periods ending on or before the date hereof have been paid in a
timely manner with respect to each Welfare Benefit Plan (as defined in
ERISA Section 3(1)).
(e) DETERMINATION LETTERS. Each Pension Benefit Plan which is
required to comply with Code Section 401(a) satisfies the material
requirements of Code Section 401(a) and has received, a favorable
determination letter from the IRS regarding such status and has not,
since receipt of the most recent favorable determination letter, been
amended or operated in a way which would adversely affect such
qualified status.
(f) ASSET VALUATION. As of the valuation date contained in the
most recent actuarial report, the market value of assets under each
Pension Benefit Plan (other than any Multiemployer Plan) which is
subject to Title IV of ERISA equals or exceeds the present value of
accrued benefits thereunder through the date thereof (determined on a
plan termination basis), and since such valuation date, nothing has
come to the attention of the Shareholders indicating that the market
value of such assets does not equal or exceed such present value. No
Pension Benefit Plan (other than any Multiemployer Plan) has been
completely or partially terminated or been the subject of a reportable
event (as defined in ERISA Section 4043) as to which a 30-day notice
would be required to be filed with the PBGC. No proceeding by the PBGC
to terminate any Pension Benefit Plan (other than any Multiemployer
Plan) has been instituted or, to the Knowledge of the Shareholders,
threatened.
(g) NO PROHIBITED TRANSACTIONS. There has been no Prohibited
Transaction (as defined in ERISA Section 406 and Code Section 4975) or
any reportable event (as defined in ERISA Section 4043) for which a
30-day notice is required with respect to any Benefit Plan which is
subject to Title IV of ERISA. No fiduciary within the direct control of
HKS, nor to the Knowledge of the Shareholders, any fiduciary that is
outside the direct control of HKS, with respect to any Benefit Plan has
any material Liability for breach of fiduciary duty or any other
failure to act or comply in connection with the administration or
investment of the assets of any Benefit Plan. No charge, complaint,
action, suit, proceeding, hearing, investigation, claim, or demand with
respect to the administration or the investment of the assets of any
Benefit Plan (other than routine claims for benefits) is pending
against HKS and, to the Knowledge of the Shareholders, there is no
basis for any such charge, complaint, action, suit, proceeding,
hearing, investigation, claim, or demand.
(h) DOCUMENTATION. HKS has made available to the Parent and
MergerCo true and complete copies of (i) the plan documents and summary
plan descriptions for each Benefit Plan to which it is a party, (ii)
the most recent determination letters received from the Internal
Revenue Service for each Qualified Plan, (iii) the most recent Forms
5500 Annual Report for each Benefit Plan, and (iv) all related trust
agreements, insurance contracts, and other funding agreements with
respect to each Benefit Plan.
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(i) MISCELLANEOUS. Neither HKS nor any Affiliate has ever
contributed to, nor ever has been required to contribute to, any
multiemployer plan (as defined in Section 3(37) or 4001(a)(3) of ERISA)
(a "MULTIEMPLOYER PLAN") nor has any Liability (including withdrawal
Liability) under any Multiemployer Plan. Neither HKS nor any Affiliate
has incurred, nor does either have any reason to expect that it will
incur, any Liability to the PBGC (other than PBGC premium payments) or
otherwise under Title IV of ERISA (including any withdrawal Liability)
or under the Code with respect to any Pension Benefit Plan that HKS or
any Affiliate maintains or has ever maintained or to which any of them
contributes, has ever contributed, or has ever been required to
contribute. Except as disclosed in SCHEDULE 4.18, no Benefit Plan (i)
provides medical benefits, life insurance or similar benefits to
retirees or their families or (ii) is self-funded. There is no lien
upon any property of HKS or any Affiliate outstanding pursuant to
Section 412(n) of the Code in favor of any Benefit Plan. No assets of
HKS or any Affiliate have been provided as security for any Benefit
Plan pursuant to Section 401(a)(29) of the Code.
SECTION 4.19 LICENSES.
SCHEDULE 4.19 contains a true and complete list of all Licenses of HKS
(and all pending applications for any such Licenses). Prior to the execution of
this Agreement, HKS has delivered to the Parent and MergerCo true and complete
copies of all such Licenses. Each such License is valid, binding and in full
force and effect. HKS is not, nor has it received any notice that it is, in
default (or, with the giving of notice or lapse of time or both, would be in
default) under any such License.
SECTION 4.20 INSURANCE POLICIES.
SCHEDULE 4.20 contains a true and complete list of all Insurance
Policies maintained by HKS. Each such Insurance Policy is in full force and
effect and all premiums due thereunder or self-insurance funding amounts
required thereby, as the case may be, have been paid or accrued in the Financial
Statements. HKS has not received any notice of cancellation or termination with
respect to any such Insurance Policy, and HKS is not in default thereunder in
any material respect. No insurer has denied liability or is defending with
reservation of rights regarding to any presently existing claim.
SECTION 4.21 ENVIRONMENTAL MATTERS.
(a) COMPLIANCE. Except as disclosed on SCHEDULE 4.21(a), HKS
has obtained, and complied in all material respects with all the terms
and conditions of, all Licenses required by any Environmental Law in
connection with its Business. Each such License obtained by HKS is in
full force and effect. HKS has at all times complied in all material
respects and is in compliance in all material respects with all
Environmental Laws.
(b) CONTAMINATION. Except as disclosed in SCHEDULE 4.21(b),
HKS has not, and to the Knowledge of the Shareholders, no other Person
has, caused or allowed any
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Release of any hazardous or toxic substance, waste, pollutant or
contaminant, petroleum product or any substance regulated under any
Environmental Law, and to the Knowledge of the Shareholders, no such
substance, waste, pollutant, contaminant or petroleum product is
present on, in, under or about any real property leased or otherwise
used by HKS (except for such quantities as are used in the Ordinary
Course of Business and stored in appropriate containers in compliance
in all material respects with all Environmental Laws).
(c) NO NOTICE. No written notice or any other communication
from Governmental Authority of any alleged violation of any
Environmental Law has been communicated to HKS, except for notices or
communications that have been complied with in all material respects.
(d) PENALTIES. During the past three (3) years HKS has not
paid any civil or criminal fines, penalties, judgments or other amounts
relating to alleged failure to comply with Environmental Laws.
SECTION 4.22 RELATIONSHIP WITH AFFILIATES.
Except as set forth in SCHEDULE 4.22, no Shareholder or family member
of any shareholder or any Affiliate of the foregoing of HKS provides or supplies
assets, services or facilities which are individually or in the aggregate
material to HKS, and HKS provides or supplies any assets, services or facilities
to any such person which are individually or in the aggregate material to HKS.
Except as disclosed on SCHEDULE 4.22, each of the transactions listed in
SCHEDULE 4.22 is engaged in on an arm's-length basis.
SECTION 4.23 BROKERS.
No broker or other representative has acted on behalf of the
Shareholders or HKS in connection with the transaction contemplated hereby in
such manner as to give rise to any valid claim by any Person against the Parent,
MergerCo or HKS for a finder's fee, brokerage commission or similar payment.
SECTION 4.24 NO GUARANTEES.
Except as disclosed on SCHEDULE 4.24, none of the Liabilities of HKS is
guaranteed by or subject to a similar contingent obligation of any other Person,
nor has HKS guaranteed or become subject to a similar contingent obligation in
respect of the Liabilities of any customer, supplier or other Person.
SECTION 4.25 ACCOUNTS RECEIVABLE; PAYABLES.
Except as set forth in SCHEDULE 4.25, the accounts receivable of HKS
outstanding on the Closing Date (a) arose from BONA FIDE sales transactions in
the Ordinary Course of Business and are payable on ordinary trade terms and (b)
are collectible in the Ordinary Course of Business in
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the aggregate recorded amounts thereof, less the allowance for bad debt shown in
the Interim Balance Sheet. SCHEDULE 4.25 accurately lists and ages HKS's
Accounts Receivable and Accounts Payable as of November 30, 1999. None of HKS's
accounts payable currently outstanding bears any interest.
SECTION 4.26 BANK ACCOUNTS.
SCHEDULE 4.26 sets forth a complete and correct list containing the
names of each bank in which either HKS has an account or safe deposit or lock
box, the account or box number, as the case may be, and the name of every Person
authorized to draw thereon or having access thereto.
SECTION 4.27 [INTENTIONALLY OMITTED.]
SECTION 4.28 CUSTOMERS AND SUPPLIERS.
Except as set forth on SCHEDULE 4.28, none of HKS's customers or
suppliers has notified HKS of its intention to cease or alter its business with
HKS before or after the Closing Date.
SECTION 4.29 DISCLOSURE.
The representations and warranties of the Shareholders contained in
this Agreement, and in any schedule, certificate, or agreement furnished by the
Shareholders to the Parent and MergerCo pursuant to this Agreement do not
contain any untrue statement of a fact or omit to state a fact necessary in
order to make the statements herein or therein, in the light of the
circumstances under which they were made, not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PARENT AND MERGERCO
The Parent and MergerCo hereby jointly and severally represent and
warrant to the Shareholders:
SECTION 5.1 ORGANIZATION AND AUTHORITY.
The Parent is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. MergerCo is a corporation
duly organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. Each of the Parent and MergerCo has full corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated herein.
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SECTION 5.2 DUE AUTHORIZATION, EXECUTION AND DELIVERY.
The execution of this Agreement by the Parent and MergerCo and the
performance by the Parent and MergerCo of the transactions contemplated herein
have been duly authorized by all necessary corporate action of the Parent and
MergerCo, and this Agreement has been duly executed and delivered by a duly
authorized officer of each of the Parent and MergerCo and constitutes a valid
and binding agreement of each of the Parent and MergerCo, enforceable against
each of the Parent and MergerCo in accordance with its terms, except that such
enforcement (a) may be limited by bankruptcy, insolvency, moratorium or similar
laws affecting contract or creditors' rights generally, and (b) is subject to
the availability of equitable remedies, as determined in the discretion of the
court before which a proceeding seeking such enforcement may be brought.
SECTION 5.3 CONSENTS; NO CONFLICT.
Except as set forth on SCHEDULE 5.3, neither the Parent nor MergerCo is
required to obtain the consent, authorization or approval of any Person or any
License from any Governmental Authority as a condition to the consummation of
this Agreement by the Parent or MergerCo, and the execution and delivery of this
Agreement by the Parent or MergerCo, and the consummation by each of them of the
transactions contemplated hereby will not conflict with, result in the
termination of, result in a breach of, or constitute a default under the terms
of any Contract to which the Parent or MergerCo is a party or to which its
property is subject which would adversely affect the Parent or MergerCo's
ability to perform its obligations hereunder.
SECTION 5.4 [INTENTIONALLY OMITTED].
SECTION 5.5 PARENT STOCK.
The shares of Parent Stock to be received by the Shareholders hereunder
shall be validly issued, fully paid and non-assessable.
SECTION 5.6 CAPITALIZATION.
The authorized capital stock of the Parent consists of 225,000,000
shares of common stock, $0.0001 par value, and 5,000,000 shares of preferred
stock, $0.0001 par value. As of the date hereof, there were 68,794,404 shares of
Parent Stock issued, of which no shares were held in treasury and the remainder
were outstanding. Also as of the date hereof, 750,000 shares of Parent Stock
were subject to issuance pursuant to employee stock purchase plans, 12,328,088
shares of Parent Stock were subject to issuance upon exercise of options, and
2,407,450 shares of Parent Stock were subject to issuance upon exercise of
warrants. All of the issued and outstanding shares of Parent Stock are duly and
validly issued and outstanding and fully paid and non-assessable. None of the
outstanding shares of Parent Stock has been, and none of the shares of Parent
Stock to be issued in exchange for the Shares upon consummation of the Merger
will be, issued in violation of any preemptive rights of the current or past
shareholders of the Parent.
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SECTION 5.7 BROKERS.
No broker or other representative has acted on behalf of the Parent or
MergerCo in connection with the transaction contemplated hereby in such manner
as to give rise to any valid claim by any Person against the Shareholders or HKS
for a finder's fee, brokerage commission or similar payment.
SECTION 5.8 DISCLOSURE.
The representations and warranties of the Parent and MergerCo contained
in this Agreement, and in any schedule, certificate or agreement furnished by
the Parent and MergerCo to the Shareholders pursuant to this Agreement, do not
contain any untrue statement of a fact or omit to state a fact necessary in
order to make the statements herein or therein, in light of the circumstances
under which they were made, not misleading.
SECTION 5.9 SEC FILINGS.
The Parent's Prospectus, dated August 11, 1999 (the "PROSPECTUS"), and
Quarterly Report on Form 10-Q for the quarter ended August 31, 1999 (the "FORM
10-Q"), (i) at the time filed, complied in all material respects with the
applicable requirements of applicable federal securities laws and regulations
promulgated by the U.S. Securities and Exchange Commission (the "SEC") and (ii)
did not, at the time they were filed, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. Since the date of the most recent
financial statements included in the Prospectus or the Form 10-Q, except as
disclosed in the Parent's most recent earnings report for the quarter ended
November 30, 1999, there has not been any material adverse change in the
business or financial condition of the Parent.
ARTICLE VI
ADDITIONAL AGREEMENTS OF THE SHAREHOLDERS AND HKS
SECTION 6.1 OPERATION OF BUSINESS.
From the date hereof until the Closing Date except to the extent the
Parent otherwise agrees in writing:
(a) HKS shall, and the Shareholders shall cause HKS to,
operate in the Ordinary Course of Business (including paying accounts
payable, accrued Liabilities, maintaining inventories, making normal
capital expenditures and collecting receivables all in accordance with
the past practices) and use reasonable commercial efforts to preserve
the present business organization and present relationships with
Persons having business dealings with HKS.
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(b) HKS shall not, and the Shareholders shall cause HKS not
to, take any action or fail to take any action that would cause any of
the representations and warranties made by the Shareholders in this
Agreement not to remain true and correct as if made at and as of the
Closing Date.
(c) HKS shall, and the Shareholders shall cause HKS to, give
prompt written notice to the Parent of any material adverse development
affecting HKS or the financial condition, operations, cash flows,
assets, Liabilities of results of operations of HKS, or that any
representation or warranty of the Shareholders is no longer true and
the Shareholders shall give prompt written notice to the Parent of any
development affecting the ability of the Shareholders to consummate the
transactions contemplated by this Agreement.
(d) Except with the prior written consent of the Parent, HKS
shall, and the Shareholders shall cause HKS to, from the date hereof
until the Closing: (i) maintain the Assets in good operating condition
and repair, ordinary wear and tear excepted, and continue normal
maintenance thereof, (ii) not make any Contract for capital
expenditures in excess of $5,000, (iii) not declare or pay any
dividends on any capital stock of any HKS, (iv) not purchase or
otherwise acquire, transfer, sell or issue any shares or capital stock
of HKS or grant any options or other rights to purchase the same, (v)
not change its articles of incorporation or bylaws, (vi) not sell,
mortgage, alienate or dispose of any items of property except inventory
and obsolete Assets in the Ordinary Course of Business, (vii) not lend
or agree to lend any funds other than for travel advances to Employees
in the Ordinary Course of Business, (viii) not increase salaries or
wages, (ix) not declare bonuses, increase benefits or institute any new
benefit plan or program, (x) comply in all material respects with all
laws applicable to HKS, (xi) not amend or in any way modify in any
material respect any Contract, (xii) not enter into any transaction,
Contract or commitment in the Ordinary Course of Business which
obligates it to pay a sum greater than $5,000 in any one instance or
$10,000 in the aggregate to any one person, or obligates it for a
period ending after the Closing, (xiii) not introduce any change with
respect to the operation of its businesses, including method,
principle, or practice of accounting, or (xiv) not enter into any
transaction or other relationship with any Shareholder or any family
member of any Shareholder or any Affiliate of the foregoing.
SECTION 6.2 ACCESS TO BOOKS AND RECORDS OF BUSINESS.
From the date hereof until the Closing Date or any earlier termination
of this Agreement, HKS shall, and the Shareholders shall cause HKS to, (a) give
the Parent and MergerCo and their respective officers, employees, counsel,
financial advisers, consultants and other representatives (collectively, the
"REPRESENTATIVES") full access upon reasonable notice and during normal business
hours to the appropriate officers and Employees of HKS, to HKS's accountants, to
HKS's premises, books, contracts, records and documents, (b) upon request of
Parent of MergerCo, furnish the Parent and MergerCo with copies of all such
books, contracts, records and documents, and (c) furnish the Parent and MergerCo
with all such additional financial, operating
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and other information and data concerning HKS as the Parent and MergerCo may
reasonably request in order to review the legal, financial, environmental and
business condition and affairs of HKS and its Assets and so long as such access
does not unreasonably interfere with the operation of the Business.
SECTION 6.3 EXCLUSIVITY.
Until the earlier of the Closing Date, the termination of this
Agreement or January 31, 2000, neither HKS nor the Shareholders shall (and the
Shareholders shall cause HKS not to and cause any agent or representative or any
other Person acting on behalf of HKS not to):
(a) solicit, initiate or encourage the submission of any
proposal or offer from any Person relating to any (i) liquidation,
dissolution or recapitalization or, (ii) merger, consolidation with or
into, (iii) acquisition or purchase of substantially all of the assets
of or any equity interest in or (iv) similar transaction or business
accommodation involving, HKS; or
(b) participate in any discussions or negotiations regarding,
furnish any information with respect to, assist or participate in, or
facilitate in any other manner any effort or attempt by any other
Person to do or seek any of the foregoing.
The Shareholders agree that they will (and will cause HKS to)
discontinue immediately any negotiations or discussions with respect to any of
the foregoing. The Shareholders agree that they will (and will cause HKS to)
give the Parent immediate notice of any unsolicited proposal or offer they (or
HKS) receive from any Person prior to the Closing.
SECTION 6.4 NO REGISTRATION / LIMITATION ON TRANSFERS.
Each Shareholder acknowledges that the issuance of the Parent Stock in
the Merger will not be registered under the Securities Act (except pursuant to
the Registration Rights Agreement) in reliance upon the exemption(s) from
registration provided thereby, including Section 4(2) and regulations
promulgated thereunder. Each Shareholder also acknowledges that the issuance of
the Parent Stock issued in the Merger will not be registered under the
securities laws of any state. Consequently, each Shareholder understands that
the shares of Parent Stock issued in the Merger cannot be resold unless they are
registered under the Securities Act and applicable state securities laws, or
unless an exemption from such registration requirements is available. Each
Shareholder has been advised and acknowledges that although Parent may hereafter
register offers and sales of its securities under the Securities Act, Parent is
under no obligation to take any action necessary in order to register any Parent
Stock issued in the Merger (except pursuant to the Registration Rights
Agreement) or make available any exemption for transfer of such Parent Stock
without registration. Each Shareholder understands that there will be placed on
the certificates representing the Parent Stock issued in the Merger as Merger
Consideration or Additional Consideration a legend stating in substance the
following and each Shareholder understands that Parent will refuse to permit the
transfer of the Parent Stock out of such Shareholder's name in the absence of
compliance with the terms of such legend:
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY
STATE SECURITIES LAWS AND MAY NOT BE SOLD, PLEDGED, TRANSFERRED,
ASSIGNED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH SUCH ACT
AND THE RULES AND REGULATIONS THEREUNDER AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS. RED HAT, INC. (THE "CORPORATION")
WILL NOT TRANSFER THE SECURITIES REPRESENTED BY THIS CERTIFICATE EXCEPT
UPON RECEIPT OF EVIDENCE SATISFACTORY TO THE CORPORATION, WHICH MAY
INCLUDE AN OPINION OF COUNSEL, THAT THE REGISTRATION PROVISIONS OF SUCH
ACT HAVE BEEN COMPLIED WITH OR THAT SUCH REGISTRATION IS NOT REQUIRED
AND THAT SUCH TRANSFER WILL NOT VIOLATE ANY APPLICABLE STATE SECURITIES
LAWS.
SECTION 6.5 STOCKHOLDERS' MEETING; PROXY MATERIAL.
(a) HKS shall, in accordance with applicable Law and its
articles of incorporation and bylaws, duly call, give notice of,
convene and hold a special meeting of the Shareholders and the Other
Holders (the "SPECIAL MEETING") as promptly as practicable, but in no
event later than January 5, 2000, for the purpose of considering and
taking action upon this Agreement and the Merger. HKS shall give notice
to Red Hat of the action taken by the Shareholders and the Other
Holders in the Special Meeting as promptly as practicable after such
meeting.
(b) Prior to holding the Special Meeting, HKS shall prepare a
proxy statement relating to the adoption of this Agreement and the
approval of the Merger by the Shareholders and the Other Holders (the
"PROXY STATEMENT"). Similarly, Red Hat shall prepare a private
placement memorandum in which information for the Proxy Statement will
be included, relating to the shares of Parent Stock issuable in
connection with the Merger (such private placement memorandum, as it
may be amended or supplemented, is herein referred to as the "PPM").
HKS and Red Hat shall cooperate with each other in connection with the
preparation of the Proxy Statement and the PPM, which may, together
with any exhibits and attachments thereto, be combined into one
document. HKS will cause the Proxy Statement and the PPM to be mailed
or otherwise delivered to the Shareholders and the Other Holders as
promptly as practicable after the Proxy Statement and PPM are prepared.
All mailings to the Shareholders and the Other Holders in connection
with the transactions contemplated by this Agreement, including the
Proxy Statement and the notice of the Special Meeting, shall be subject
to the prior review of Red Hat.
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ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1 CONFIDENTIALITY.
The Parent, HKS and the Shareholders will maintain in confidence, and
will cause the directors, officers, employees, agents, and advisors of the
Parent and HKS to maintain in confidence, any written information stamped
"confidential" when originally furnished by another party in connection with
this Agreement or the transaction hereby contemplated, unless (a) such
information is already known to such party or to others not bound by a duty of
confidentiality or such information becomes publicly available through no fault
of such party, (b) the use of such information is necessary or appropriate in
making any filing or obtaining any consent or approval required for the
consummation of the transaction hereby contemplated, or (c) the furnishing or
use of such information is required by or necessary or appropriate in connection
with legal proceedings.
If the transaction contemplated by this Agreement is not consummated,
each party will return or destroy as much of such written information as the
other party may reasonably request. Whether or not the Closing takes place, the
Shareholders waive, and will upon the Parent's request cause HKS to waive, any
cause of action, right, or claim arising out of the access of the Parent or its
representatives to any trade secrets or other confidential information of HKS
except for the intentional competitive misuse by the Parent of such trade
secrets or confidential information.
SECTION 7.2 FURTHER ASSURANCES.
Each party agrees (a) to cooperate fully with the other parties hereto
and their respective authorized Representatives, (b) to execute and deliver or
cause to be executed and delivered at all reasonable times and places such
additional instruments and documents as the other party or parties may
reasonably request for the purpose of carrying out this Agreement, and (c) to do
such other acts and things as any other party may reasonably request for the
purpose of carrying out the intent of this Agreement and the documents referred
to in this Agreement.
SECTION 7.3 UPDATING SCHEDULES.
The Shareholders may update the Schedules to this Agreement after the
date hereof and prior to Closing (the "UPDATE PERIOD") to reflect factors,
circumstances or events first arising or (in the case of representations given
to the Shareholders) becoming Known to the Shareholders during the Update Period
by providing the Parent with written notice setting forth the proposed update
and specifying the Schedule or Schedules to be updated thereby.
SECTION 7.4 [INTENTIONALLY OMITTED]
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SECTION 7.5 EFFORTS TO CLOSE.
HKS, the Shareholders and the Parent shall each use best efforts to (a)
take or cause to be taken all actions, and do or cause to be done all things,
which are necessary, proper or advisable to cause any other part of the
conditions set forth in Articles IX and X to be fully satisfied, but not waived,
and (b) consummate and make effective as promptly as practicable the
transactions contemplated by this agreement.
SECTION 7.6 CERTAIN TAX MATTERS.
(a) TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE. The
Shareholders shall prepare or cause to be prepared and file or cause to
be filed all Tax Returns for HKS for all periods ending on or prior to
the Closing Date which are required to be filed after the Closing Date.
Such returns shall be prepared in compliance with applicable law and
consistent with HKS's past practice for preparing such returns. No
later than ten (10) days before the due date (as it may be properly
extended) for the filing of such returns, the Shareholders shall permit
the Parent to review and comment on each such Tax Return described in
the preceding sentence (along with appropriate supporting work papers
and other documents). In the event that the Parent does not approve
such returns, the Shareholders may nonetheless file such returns, but
such filings shall be without prejudice to the Parent's right to seek
indemnification for a breach of this Section 7.6(a) pursuant to the
provisions of Article XI hereof. To the extent permitted by applicable
Law, the Shareholders shall include any income, gain, loss, deduction
or other Tax items for such periods on their Income Tax Returns in any
manner consistent with the Schedule K-1's prepared or caused to be
prepared by the Shareholders for HKS for such periods.
(b) COOPERATION ON TAX MATTERS.
(i) The Parent, HKS and the Shareholders shall
cooperate fully, as and to the extent reasonably requested by
the other party, in connection with the filing of Tax Returns
pursuant to this Section and any audit, litigation or other
proceeding with respect to Taxes of HKS attributable to any
and all periods ending on or prior to the Closing Date. Such
cooperation shall include the retention and (upon the other
parties' request) the provision of records and information
which are reasonably relevant to any such audit, litigation or
other proceeding and making employees available on a mutually
convenient basis to provide additional information and
explanation of any material provided hereunder. HKS agrees to
retain all books and records with respect to Tax matters
pertinent to HKS relating to any taxable period beginning
before the Closing Date until the expiration of the applicable
statute of limitations (and, to the extent notified by the
Shareholders, any extensions thereof) of the respective
taxable periods, and to abide by all record retention
agreements entered into with any taxing authority.
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(ii) The Parent and the Shareholders further agree,
upon request, to use their best efforts (at the sole cost of
the requesting party) to obtain any certificate or other
document from any Governmental Authority or any other Person
as may be necessary to mitigate, reduce or eliminate any Tax
that could be imposed (including, but not limited to, with
respect to the transactions contemplated hereby).
(c) REORGANIZATION TREATMENT. Each party undertakes and agrees
to use commercially reasonable efforts to cause the Merger to qualify
for treatment as a "reorganization" within the meaning of Section
368(a)(1)(A) and Section 368(a)(2)(E) of the Code for federal income
tax purposes.
SECTION 7.7 EMPLOYEES AND BENEFIT PLANS.
(a) HKS REQUIREMENTS. On or before the Closing Date, HKS shall
take all action necessary or otherwise appropriate to terminate each
Benefit Plan effective immediately prior to the Closing Date,
including, but not limited to, (i) the timely adoption of valid
resolutions of the board of directors of HKS resolving to terminate
each such plan; (ii) providing timely notice of the termination of each
such plan to the plan's trustee, administrator and plan participants
affected by such termination; (iii) fully vesting all accrued benefits
of the affected plan participants in each such plan, (iv) amending each
such plan, to the extent necessary, to provide for an allocation of any
employer contributions for the period through the Closing Date to plan
participants who otherwise would have been entitled to an allocation of
such contributions at the end of the current plan year; (v) making the
employer contributions described in (iv); and (vi) taking all actions
necessary to assist the Parent with the timely preparation and filing
with the Internal Revenue Service after the Closing Date of an
application for a determination letter with respect to the qualified
status upon termination of any such plan that is intended to be
qualified under Section 401(a) of the Code.
(b) PARENT REQUIREMENTS. The Parent shall provide or cause to
be provided to each Employee who is employed by the Parent or remains
employed by the Surviving Corporation following the Closing Date such
benefits and perquisites as the Parent customarily makes available to
employees in a comparable position of responsibility, and in connection
therewith shall recognize and credit each Employee with his years of
service with HKS prior to the Closing Date for purposes of determining
eligibility under the employee benefit plans, programs, policies or
arrangements covering such Employees established, continued or
otherwise sponsored by the Parent or its Affiliates after the Closing
Date.
ARTICLE VIII
[INTENTIONALLY OMITTED]
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ARTICLE IX
CONDITIONS TO OBLIGATIONS OF THE PARENT AND MERGERCO
The obligations of the Parent and MergerCo to consummate the
transactions provided for herein on the Closing Date are subject to the
fulfillment on or before the Closing Date of each of the following conditions,
except to the extent that the Parent may, in its absolute discretion, waive one
or more thereof in writing in whole or in part:
SECTION 9.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Shareholders contained herein
(as updated pursuant to Section 7.3) shall be true in all respects on and as of
the Closing Date with the same force and effect as if made on and as of such
date, and the facts, circumstances or events disclosed in any update provided
under Section 7.3 shall not indicate a material adverse change in HKS.
SECTION 9.2 PERFORMANCE OF AGREEMENTS.
The Shareholders and HKS shall have performed in all respects all
obligations and agreements, and complied in all respects with all covenants,
contained in this Agreement, to be performed and complied with by the
Shareholders at or prior to the Closing Date.
SECTION 9.3 [INTENTIONALLY OMITTED.]
SECTION 9.4 BRING-DOWN CERTIFICATE.
The Shareholders shall have furnished the Parent with a certificate in
the form of EXHIBIT B hereof executed by each of them, dated the Closing Date,
to the effect that the Shareholders have fulfilled the conditions specified in
Sections 9.1 and 9.2 hereof.
SECTION 9.5 HKS'S DOCUMENTS.
The Shareholders shall have delivered to the Parent the following
documents which, except for any such documents the form of which is attached as
an exhibit hereto, shall be reasonably satisfactory in form and content to the
Parent and its counsel:
(a) SUBSISTENCE CERTIFICATES. A subsistence certificate with
respect to HKS issued as of the date within ten (10) days prior to the
Closing Date by the appropriate official of the Department of State of
the Commonwealth of Pennsylvania and a good standing certificate with
respect to HKS issued within ten (10) days prior to the Closing Date by
the secretary of state or comparable official of each other state in
which HKS is qualified to do business.
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(b) ARTICLES OF INCORPORATION AND BYLAWS. The articles of
incorporation and bylaws of HKS, together with a certificate of a duly
authorized officer of HKS in the form of EXHIBIT C dated the Closing
Date, certifying as to the accuracy and completeness of such corporate
documents.
(c) DIRECTORS AND SHAREHOLDERS RESOLUTIONS. Resolutions, as
required by the PBCL, of the board of directors of HKS authorizing HKS
to execute, deliver and perform this Agreement duly certified by the
Secretary or an Assistant Secretary of HKS.
(d) INCUMBENCY CERTIFICATE. An incumbency certificate of the
President or any duly authorized Vice President of HKS who will be
executing this Agreement, or any other document, instrument or
certificate to be delivered pursuant to the terms hereof or thereof
(including the name, title and signature of each such officer) in the
form of EXHIBIT C.
(e) OTHER CERTIFICATES AND AGREEMENTS. Such other
certificates, documents and agreements related to this Agreement as may
be reasonably required by the Parent.
SECTION 9.6 ADVERSE CHANGE.
There shall have been no material adverse change in the business,
operations, properties or financial condition of HKS whether or not arising in
the Ordinary Course of Business, except for changes relating to general economic
events or trends.
SECTION 9.7 NO ADVERSE PROCEEDINGS.
No action, suit or proceeding before any Governmental Authority or
other Person shall have been commenced, no investigation by any Governmental
Authority shall have been commenced, and no action, suit or proceeding by any
Governmental Authority or other Person shall have been threatened, against any
of the parties to this Agreement relating to the transactions contemplated
hereby which could reasonably be expected to have a material adverse effect on
the Business or financial condition of HKS.
SECTION 9.8 OTHER ASSURANCES.
The Shareholders shall have delivered to the Parent such other and
further certificates, assurances and documents as the Parent may reasonably
request in order to evidence the accuracy of the representations and warranties
of the Shareholders, the performance of covenants and agreements to be performed
by the Shareholders pursuant hereto at or prior to the Closing, and the
fulfillment of the conditions to the obligations of the Parent.
SECTION 9.9 CONSENTS AND APPROVALS.
All consents, waivers, authorizations and approvals of any Governmental
Authority, domestic or foreign, and of any other Person required in connection
with the execution, delivery
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and performance of this Agreement, shall have been obtained and shall be in full
force and effect on the Closing Date.
SECTION 9.10 OPINION OF HKS'S COUNSEL.
The Shareholders and HKS shall provide to the Parent an opinion, dated
the Closing Date, from Thorp Reed & Armstrong, LLP, counsel to the Shareholders
and HKS, in substantially the form and substance of the form of opinion set
forth in EXHIBIT D, and otherwise reasonably satisfactory to counsel for the
Parent.
SECTION 9.11 DELIVERY OF SHARES; DISSENTER'S RIGHTS.
At the Closing the Shareholders and the Other Holders shall have
surrendered to the Parent for cancellation at the Effective Time all of the
certificates representing the Shares, except those Shares for which any Other
Holder shall have exercised any rights of dissent and appraisal provided by
applicable Law. Not more than eight percent (8%) of the outstanding shares of
any class of HKS's capital stock shall have exercised any rights of dissent and
appraisal afforded to such shares by applicable Law.
SECTION 9.12 RESIGNATION OF OFFICERS AND DIRECTORS.
All officers and directors of HKS whose resignations shall have been
requested by the Parent not less than three (3) Business Days prior to the
Closing Date shall have submitted their resignations or been removed from office
effective as of the Closing Date.
SECTION 9.13 AFFILIATES TRANSACTIONS.
Upon the Parent's request, HKS will terminate or otherwise resolve, in
a manner reasonably satisfactory to the Parent, all agreements and relationships
between HKS, on the one hand, and any Shareholder or any family member of any
Shareholder or any Affiliate of the foregoing, on the other hand.
SECTION 9.14 DELIVERY OF ESCROW AGREEMENT.
The Shareholders shall have entered into the Escrow Agreement, dated
the Closing Date, in substantially the form and substance of EXHIBIT E (the
"ESCROW AGREEMENT").
SECTION 9.15 DELIVERY OF INVESTMENT REPRESENTATION LETTERS.
At the Closing, each Shareholder and each Other Holder shall deliver to
the Parent an Investor Representation Letter in substantially the form and
substance of EXHIBIT I, and, if applicable, supporting documentation in
substantially the form and substance of the appendices to EXHIBIT I.
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SECTION 9.16 DELIVERY OF LOCK-UP AGREEMENT.
Each of the Shareholders and each of the Other Holders shall have
entered into a Lock-Up Agreement, dated the Closing Date, in substantially the
form and substance of EXHIBIT K (each a "LOCK-UP AGREEMENT" and collectively,
the "LOCK-UP AGREEMENTS").
SECTION 9.17 DELIVERY OF REGISTRATION RIGHTS AGREEMENT.
The Shareholders and the Other Holders shall have entered into the
Registration Rights Agreement, dated the Closing Date, in substantially the form
and substance of EXHIBIT J (the "REGISTRATION RIGHTS AGREEMENT").
SECTION 9.18 DELIVERY OF NON-COMPETITION AGREEMENTS.
Lawrence J. Weidman, L. Todd Masco, Douglas DeJulio, and Andrew Plotkin
each shall have entered into a Non-Competition Agreement, dated the Closing
Date, in substantially the form and substance of EXHIBIT L (each a
"NON-COMPETITION AGREEMENT" and collectively, the "NON-COMPETITION AGREEMENTS").
SECTION 9.19 WARRANTS, OPTIONS AND SHARE RIGHTS.
All outstanding vested warrants, options and share rights (including
accelerated vesting rights) granted by HKS shall have been exercised, terminated
or waived. All outstanding nonvested stock options, warrants or share rights
granted by HKS shall have been terminated or waived.
SECTION 9.20 TRANSFER OF EMPLOYEES TO PARENT HEADQUARTERS.
The Parent shall have received letters of agreement from each of L.
Todd Masco, Douglas DeJulio and Andrew Plotkin, each of whom were full-time
employees of HKS prior to the Closing, evidencing such individuals' agreement to
relocate the place of their employment to the headquarters of the Parent in
Research Triangle Park, North Carolina.
SECTION 9.21 APPROVAL.
This Agreement and the Merger contemplated hereby shall have been
approved and adopted by the requisite vote of the Shareholders and the Other
Holders required under the PBCL and HKS's articles of incorporation and, in any
event, by at least a majority of the outstanding shares of capital stock of HKS,
and the Parent shall have received a certificate signed by the chief executive
officer of HKS to that effect.
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SECTION 9.22 TERMINATION OF EMPLOYMENT AGREEMENTS.
Those certain Employment Agreements dated as of August 5, 1999 by and
between HKS and Lawrence J. Weidman and L. Todd Masco, respectively, shall have
been terminated without HKS incurring any additional obligations to either of
them.
ARTICLE X
CONDITIONS TO OBLIGATIONS OF THE SHAREHOLDERS AND HKS
The obligations of the Shareholders and HKS to consummate the
transactions provided for herein on the Closing Date are subject to the
fulfillment on or before the Closing Date of each of the following conditions,
except to the extent that the Shareholders or HKS may, in their absolute
discretion, waive one or more thereof in writing in whole or in part:
SECTION 10.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Parent and MergerCo contained
herein shall be true in all respects on and as of the Closing Date with the same
force and effect as if made on and as of such date.
SECTION 10.2 PERFORMANCE OF AGREEMENTS.
The Parent and MergerCo shall have performed in all respects all
obligations and agreements, and complied in all respects with all covenants,
contained in this Agreement, to be performed and complied with by the Parent and
MergerCo at or prior to the Closing Date.
SECTION 10.3 [INTENTIONALLY OMITTED].
SECTION 10.4 BRING-DOWN CERTIFICATE.
The Parent shall have furnished the Shareholders with a certificate in
the form of EXHIBIT G executed on its behalf by its duly authorized executive
officer, dated the Closing Date, to the effect that the Parent has fulfilled the
conditions specified Sections 10.1 and 10.2 hereof.
SECTION 10.5 THE PARENT'S DOCUMENTS.
The Parent shall have delivered to the Shareholders the following
documents which, except for any such documents the form of which is attached as
an exhibit hereto, shall be reasonably satisfactory in form and content to the
Shareholders and their counsel:
(a) GOOD STANDING CERTIFICATES. A good standing certificate
with respect to the Parent and MergerCo issued within thirty (30) days
preceding the date of Closing by the appropriate official of the state
of incorporation of each of the Parent and MergerCo.
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(b) CERTIFICATE OF INCORPORATION AND BYLAWS. The certificate
or articles of incorporation and bylaws or other governing instruments
of the Parent and MergerCo, together with a certificate of a duly
authorized officer of the Parent and MergerCo in the form of EXHIBIT G
dated the Closing Date, certifying as to the accuracy and completeness
of such corporate documents.
(c) CORPORATE RESOLUTIONS. Copies of resolutions of the Board
of Directors each of the Parent and MergerCo, duly certified by the
Secretary or an Assistant Secretary of the Parent and MergerCo, as the
case may be, in the form of the certificate attached as EXHIBIT G,
authorizing the execution, delivery and performance of this Agreement,
and all other documents, instruments, and certificates contemplated
hereby or thereby to which the Parent and MergerCo, as the case may be,
is a party and authorizing the consummation of transactions
contemplated hereby.
(d) INCUMBENCY CERTIFICATES. An incumbency certificate of the
President or any duly authorized Vice President of the Parent and
MergerCo who will be executing this Agreement, or any other document,
instrument or certificate to be delivered pursuant to the terms hereof
or thereof (including the name, title and signature of each such
officer) in the form of EXHIBIT G.
SECTION 10.6 OPINION OF THE PARENT'S COUNSEL.
The Parent shall provide to HKS and the Shareholders an opinion, dated
the Closing Date, of Moore & Van Allen, PLLC, counsel to the Parent and
MergerCo, in substantially the form and substance of the form of opinion set
forth in EXHIBIT H, and otherwise reasonably satisfactory to counsel for HKS and
the Shareholders.
SECTION 10.7 NO ADVERSE PROCEEDINGS.
No action, suit or proceeding before any Governmental Authority or
other Person shall have been commenced, no investigation by any Governmental
Authority shall have been commenced, and no action, suit or proceeding by any
Governmental Authority or other Person shall have been threatened, against any
of the parties to this Agreement, or HKS relating to the transactions
contemplated hereby.
SECTION 10.8 OTHER ASSURANCES.
The Parent and MergerCo shall have delivered to the Shareholders such
other and further certificates, assurances and documents as the Shareholders may
reasonably request in order to evidence the accuracy of the representations and
warranties of the Parent and MergerCo, the performance of covenants and
agreements to be performed by the Parent and MergerCo pursuant hereto at or
prior to the Closing, and the fulfillment of the conditions to the obligations
of the Shareholders.
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SECTION 10.9 CONSENTS AND APPROVALS.
All consents, waivers, authorizations and approvals of any Governmental
Authority, domestic or foreign, and of any other Person required in connection
with the execution, delivery and performance of this Agreement, shall have been
obtained and shall be in full force and effect on the Closing Date.
SECTION 10.10 DELIVERY OF ESCROW AGREEMENT.
The Parent shall have entered into the Escrow Agreement.
SECTION 10.11 DELIVERY OF REGISTRATION RIGHTS AGREEMENT.
The Parent shall have entered into the Registration Rights Agreement.
ARTICLE XI
SURVIVAL AND INDEMNIFICATION
SECTION 11.1 SURVIVAL.
The parties hereto agree that their respective representations and
warranties, covenants and agreements contained in this Agreement shall survive
the Closing for the applicable periods set forth in Section 11.8 hereof.
SECTION 11.2 INDEMNIFICATION BY THE SHAREHOLDERS.
Subject to the other provisions of this Article XI, the Shareholders
shall indemnify and hold harmless the Parent and the Surviving Corporation from
and against any and all Losses suffered or incurred by the Parent and the
Surviving Corporation after the Closing as a result of or arising out of:
(a) the falsity or incorrectness of or breach of any
representation or warranty of the Shareholders in this Agreement or in
any schedule, certificate or agreement furnished to the Parent and
MergerCo by the Shareholders pursuant to this Agreement (determined
without regard for (i) any qualifications relating to materiality or
material adverse effect in such representations, warranties, schedules,
certificates or agreements, or (ii) with respect to the representations
and warranties contained in Section 4.4, any qualifications relating to
Knowledge) at the time such representation or warranty was made; or
(b) the failure by the Shareholders to perform any covenant or
agreement of the Shareholders under this Agreement or under any
schedule, certificate or agreement furnished to the Parent or MergerCo
by the Shareholders pursuant to this Agreement.
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SECTION 11.3 INDEMNIFICATION BY THE PARENT.
Subject to the other provisions of this Article XI, the Parent shall
indemnify and hold harmless the Shareholders and the Other Holders from and
against any and all Losses suffered or incurred by the Shareholders and the
Other Holders after the Closing as a result of or arising out of:
(a) the falsity or incorrectness of or breach of any
representation or warranty of the Parent or MergerCo in this Agreement
or in any schedule, certificate or agreement furnished by the Parent or
MergerCo pursuant to this Agreement; or
(b) the failure by the Parent or MergerCo to perform any
covenant or agreement of the Parent or MergerCo under this Agreement or
under any schedule, certificate or agreement furnished by the Parent or
MergerCo pursuant to this Agreement.
SECTION 11.4 METHOD OF ASSERTING CLAIMS.
All claims for indemnification by any Indemnified Party under this
Article XI shall be asserted and resolved as follows:
(a) THIRD PARTY CLAIMS. If any claim or demand in respect of
which an Indemnified Party might seek indemnity under this Article XI
is asserted against such Indemnified Party by a Person other than a
Shareholder or Other Holder or the Parent (a "THIRD PARTY CLAIM"), the
Indemnified Party shall give written notice (the "THIRD PARTY CLAIM
NOTICE") and the details thereof including copies of all relevant
pleadings, documents and information to the Indemnifying Party within a
period of thirty (30) days following the assertion of the Third Party
Claim against the Indemnified Party (the "THIRD PARTY CLAIM NOTICE
PERIOD"). If the Indemnified Party fails to provide the Third Party
Claim Notice within the Third Party Claim Notice Period, the
Indemnifying Party will not be obligated to indemnify the Indemnified
Party with respect to such Third Party Claim to the extent that the
Indemnifying Party's ability to defend has been prejudiced by such
failure of the Indemnified Party. The Indemnifying Party will notify
the Indemnified Party within a period of thirty (30) days after receipt
of the Third Party Claim Notice by the Indemnifying Party (the "THIRD
PARTY CLAIM RESPONSE PERIOD"):
(i) whether the Indemnifying Party disputes its
liability to the Indemnified Party under this Article XI with
respect to such Third Party Claim; and
(ii) whether the Indemnifying Party desires, at
its sole cost and expense, to defend the Indemnified Party
against such Third Party Claim.
If the Indemnifying Party notifies the Indemnified Party
within the Third Party Claim Response Period that the Indemnifying
Party does not dispute its indemnity
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obligations and desires to defend the Indemnified Party against the
Third Party Claim, then the Indemnifying Party at its sole cost and
expense shall defend, with counsel reasonably satisfactory to the
Indemnified Party, such Third Party Claim by all appropriate
proceedings, which proceedings will be diligently prosecuted to a final
conclusion or will be settled at the discretion of the Indemnifying
Party (with the consent of the Indemnified Party, which consent shall
not be unreasonably withheld). The Indemnified Party will cooperate in
such defense at the sole cost and expense of the Indemnifying Party.
The Indemnified Party may, at the Indemnifying Party's cost and
expense, at any time prior to the Indemnifying Party's delivery of the
notice referred to in the last sentence of the preceding paragraph,
file any pleadings or take any other action that the Indemnified Party
reasonably believes to be necessary or appropriate to protect its
interests. The Indemnified Party, at its expense, may participate in,
but not control, any defense or settlement of any Third Party Claim
conducted by the Indemnifying Party pursuant to this Section 11.4(a).
If the Indemnifying Party fails to notify the Indemnified
Party within the Third Party Claim Response Period that the
Indemnifying Party does not dispute its indemnity obligations and
desires to defend the Third Party Claim or if the Indemnifying Party
gives such notice but fails to prosecute diligently or settle the Third
Party Claim, then the Indemnified Party shall defend, at the sole cost
and expense of the Indemnifying Party, the Third Party Claim by all
appropriate proceedings, which proceedings will be prosecuted by the
Indemnified Party in a reasonable manner and in good faith or will be
settled at the discretion of the Indemnified Party (with the consent of
the Indemnifying Party, which consent shall not be unreasonably
withheld). The Indemnifying Party will, at its sole cost and expense,
cooperate in such defense. Notwithstanding the foregoing provisions of
this paragraph, if the Indemnifying Party is determined not to be
liable for such Third Party Claim pursuant to the last paragraph of
this Section 11.4(a) and Section 13.12, the Indemnifying Party will not
be required to bear the costs and expenses of the Indemnified Party's
defense or the Indemnifying Party's participation therein pursuant to
this paragraph, and the Indemnified Party will reimburse the
Indemnifying Party in full for all reasonable costs and expenses
incurred by the Indemnifying Party in connection with such defense.
If the Indemnifying Party notifies the Indemnified Party that
it does not dispute its liability to the Indemnified Party with respect
to the Third Party Claim under this Article XI or is determined under
Section 13.12 to be liable to indemnify the Indemnified Party, the
actual Losses as finally determined will be conclusively deemed a
liability of the Indemnifying Party under this Article XI, and the
Indemnifying Party shall pay the amount of such Losses to the
Indemnified Party on demand. If the Indemnifying Party notifies the
Indemnified Party within the Third Party Claim Response Period that the
Indemnifying Party disputes its liability to the Indemnified Party with
respect to such claim, the Indemnifying Party and the Indemnified Party
will proceed in good faith to negotiate a resolution of such dispute,
and if not resolved through negotiations within a period of thirty (30)
days from the date of such Notice, such dispute shall be resolved by
arbitration in accordance with Section 13.12 hereof.
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(b) OTHER CLAIMS. In the event any Indemnified Party should
have a claim under this Article XI against any Indemnifying Party that
does not involve a Third Party Claim, the Indemnified Party shall
promptly give written notice (the "INDEMNITY NOTICE") and the details
thereof, including copies of all relevant information and documents to
the Indemnifying Party within a period of thirty (30) days following
the discovery of the claim by the Indemnified Party (the "CLAIM NOTICE
PERIOD"). If the Indemnified Party fails to give the Indemnity Notice
within the Claim Notice Period, the Indemnifying Party will not be
obligated to indemnify the Indemnified Party with respect to such claim
to the extent that the Indemnifying Party demonstrates that it has been
prejudiced thereby. The Indemnifying Party will notify the Indemnified
Party within a period of thirty (30) days after the receipt of the
Indemnify Notice by the Indemnifying Party (the "INDEMNITY RESPONSE
PERIOD") whether the Indemnifying Party disputes its liability to the
Indemnified Party under this Article XI with respect to such claim. If
the Indemnifying Party notifies the Indemnified Party that it does not
dispute the claim described in such Indemnity Notice or fails to notify
the Indemnified Party within the Indemnity Response Period whether the
Indemnifying Party disputes the claim described in such Indemnity
Notice, the actual Losses as finally determined will be conclusively
deemed to be a liability of the Indemnifying Party under this Article
XI and the Indemnifying Party shall pay the amount of such Losses to
the Indemnified Party on demand. If the Indemnifying Party notifies the
Indemnified Party within the Indemnity Response Period that the
Indemnifying Party disputes its liability with respect to such claim,
the Indemnifying Party and the Indemnified Party will proceed in good
faith to negotiate a resolution of such dispute, and if not resolved
through negotiations within a period of thirty (30) days from the date
of such notice, such dispute shall be resolved by arbitration in
accordance with Section 13.12 hereof.
SECTION 11.5 CONTINUED LIABILITY FOR INDEMNITY CLAIMS.
The liability of any Indemnifying Party hereunder with respect to
claims hereunder shall continue for so long as any claims for indemnification
may be made hereunder pursuant to Section 11.8 hereof and, with respect to any
such indemnification claims duly and timely made, thereafter until the
Indemnifying Party's liability therefor is finally determined and satisfied.
SECTION 11.6 LIMITATIONS ON INDEMNIFICATION.
(a) CERTAIN TYPES OF DAMAGES. Neither the Shareholders nor the Parent
shall be required to provide indemnification hereunder for Losses which are
indirect or consequential other than those sought to be recovered against an
Indemnified Party in a Third Party Claim.
(b) THRESHOLD AMOUNT FOR THIRD PARTY CLAIMS. No amount of indemnity
shall be payable in the case of a claim by an Indemnified Party under Section
11.2(a) unless, until and only to the extent that the Indemnified Party has
suffered or incurred Losses aggregating in excess of Two Hundred Thousand
Dollars ($200,000) (the "THRESHOLD AMOUNT") as a result of or arising out of the
matters described in Section 11.2(a), at which point the Indemnifying Party will
52
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be obligated to indemnify the Indemnified Party from and against all such Losses
relating back to the first dollar; PROVIDED, HOWEVER, the foregoing limitation
shall not apply to (i) any breach of the representations and warranties
contained in Sections 4.3, 4.4, 4.7, 4.10(b) (whether any Liabilities as to
which such representations and warranties are made were known or unknown when
made), 4.14(b), 4.23 or any other matters for which the Employee Shareholders
are obligated to indemnify the Parent and HKS pursuant to any other writing
executed and delivered in connection with this Agreement, or (ii) any
representations or warranties which were knowingly false or knowingly and
materially inaccurate when made.
(c) LIMITATION ON RECOVERY FROM THE SHAREHOLDERS. The Parent and the
Shareholders agree that the maximum aggregate amount of Losses for which the
Shareholders shall be liable to pay to the Parent or HKS in the case of a claim
by the Parent or HKS under Section 11.2(a) shall be the sum of Ten Million
Dollars ($10,000,000) (the "MAXIMUM INDEMNITY AMOUNT"), which includes any
amounts paid from the Stock Escrow Deposit; PROVIDED, HOWEVER, that the Maximum
Indemnity Amount shall not apply and there shall be no limit in the case of a
claim by the Parent or HKS under Section 11.2(a) relating to Sections 4.3, 4.4
(except as hereinafter provided), or any representations or warranties which
were knowingly false or knowingly and materially inaccurate when made; AND
PROVIDED FURTHER, that with respect to any claim by the Parent or HKS under
Section 11.2(a) arising from the falsity or incorrectness of or breach of the
representation and warranty contained in the third sentence of Section 4.4(a),
the Parent and HKS shall recover any and all amounts relating to such claim from
the Stock Escrow Deposit and the Shareholders shall have no liability for any
such amounts except pursuant to the Escrow Agreement).
(d) ESCROW. In the event that the Parent or the Surviving Corporation
is entitled to receive any amount from the Shareholders under this Agreement,
including any indemnification payment under this Agreement, the Parent or the
Surviving Corporation shall first recover all or any portion of such amount from
the Stock Escrow Deposit in accordance with the terms of the Escrow Agreement.
In the event that the Shareholders become obligated to indemnify the Parent or
the Surviving Corporation pursuant to this Article XI, the Stock Escrow Deposit
may be used for the timely payment of any cost of defense incurred in connection
with any such claim. For purposes of determining the number of shares of Parent
Stock held in the Stock Escrow Deposit that are equivalent to the dollar value
of payments to which the Parent or the Surviving Corporation is entitled under
this Article XI, the Parent Shares will be valued at the average closing price
per share of Parent Stock on the Nasdaq National Market measured over the ten
(10) trading-day period ending on the day immediately prior to earlier of the
date on which (i) the Parent or the Surviving Corporation receives notice that
there is no dispute that the Parent or the Surviving Corporation is entitled to
an indemnification payment under this Agreement, or (ii) it is finally
determined by arbitration conducted in accordance with Section 13.12 that the
Parent is entitled to indemnification hereunder.
(e) INSURANCE OR THIRD PARTY INDEMNIFICATION. Notwithstanding anything
to the contrary herein, an Indemnifying Party shall not be liable for Losses
arising out of or in connection with any matter described in this Article XI if
and to the extent such Losses (a) are covered by a policy of insurance or
benefits from a right to indemnification from a Person not
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party to this Agreement and payment is made under such policy to the Indemnified
Party by the insurer or under such right to indemnification by such Person, as
applicable, or (b) result in an actual realized Tax benefit to the Indemnified
Party; PROVIDED that to the extent that any Tax benefit is realized in a Tax
year other than the year in which the indemnity is paid, the Indemnified Party
shall make a payment to the Indemnifying Party in the amount of such realized
Tax benefit in the year in which it is realized. For purposes of this Section,
an actual realized Tax benefit is an actual reduction in taxes payable or a
refund of Taxes previously paid.
SECTION 11.7 EXCLUSIVE REMEDIES.
The sole and exclusive remedies for any party hereto with respect to
any claim relating to this Agreement or the transactions contemplated hereby and
the facts and circumstances relating and pertaining hereto shall be governed by
this Agreement (whether any such claim shall be made in contract, breach of
warranty, tort or otherwise); PROVIDED, HOWEVER, that the foregoing shall not
limit the availability of injunctive and other equitable relief.
SECTION 11.8 TIME LIMITS ON CLAIMS.
Notwithstanding anything in this Agreement to the contrary, a claim by
any Indemnified Party under this Article XI may be made only:
(a) if with respect to the violation of a representation or
warranty, within eighteen (18) months following the Closing Date, with
the exception of (i) Sections 4.7 and 4.18, with respect to which such
representations and warranties shall survive and claims thereon may be
made until the expiration of the applicable statute of limitations; and
(ii) Section 4.3 and 4.4, with respect to which such representations
and warranties shall survive without any limitations as to time; and
(b) if with respect to the violation of a covenant or
agreement, within eighteen (18) months following the last day upon
which such covenant or agreement is required to be performed, with the
exception of (i) the covenants and agreements contained in Sections
7.1, 7.2, 7.6, 7.7 and 13.12, with respect to which such covenants and
agreements shall survive and claims thereon may be made until the
expiration of the applicable statute of limitations; and (ii) the
indemnification covenants and agreements contained in Article XI and
any other written covenant, agreement or understanding between the
parties concerning indemnification, with respect to which such
covenants, agreements and understandings shall survive for the longest
applicable survival period for any representation, warranty, covenant
or agreement hereunder or thereunder.
Notwithstanding anything in this Agreement to the contrary, any claim
not made within the foregoing relevant time period shall expire and be forever
barred thereafter.
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ARTICLE XII
TERMINATION
SECTION 12.1 GROUNDS FOR TERMINATION.
This Agreement may be terminated and the transactions contemplated by
this Agreement may be abandoned at any time prior to the Closing Date:
(a) by mutual consent of the Parent and the Shareholders; or
(b) by the Parent or the Shareholders if the Closing shall not
have occurred on or before January 31, 2000; PROVIDED, HOWEVER, the
right to terminate this Agreement under this Section 12.1(b) shall not
be available to any party whose failure to fulfill any obligation under
this Agreement shall have been the primary cause of or resulted
primarily in, the failure of the Closing to occur on or before such
date; or
(c) by the Parent or the Shareholders if any court of
competent jurisdiction shall have issued an order, decree, or a ruling
or taken any other action enjoining or otherwise prohibiting the
transactions contemplated by this Agreement; or
(d) By the Shareholders, if the Parent or MergerCo is in
default or breach in any respect under this Agreement and such default
or breach is not cured within five (5) days after written notice is
given by the Shareholders to the defaulting party.
(e) By the Parent if the Shareholders are in default in any
respect under this Agreement and such default or breach is not cured
within five (5) days after written notification is given by the Parent
to the defaulting party.
SECTION 12.2 EFFECT OF TERMINATION.
If this Agreement is terminated pursuant to Section 12.1, such
termination shall be without liability of any party, or any shareholder,
director, officer, employee, agent, consultant or representative of such party,
to any other parties to this Agreement; PROVIDED that if such termination shall
result from the breach by a party of the representations, warranties or
covenants of such party contained in this Agreement, such party shall be liable
for any and all Losses sustained or incurred by the other parties to this
Agreement.
SECTION 12.3 TERMINATION FOR BREACH.
Nothing in this Article XII shall affect the rights which any party
hereto might otherwise have to terminate this Agreement as a result of a breach
thereof by any other party hereto.
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ARTICLE XIII
MISCELLANEOUS
SECTION 13.1 NOTICES.
All notices, requests and other communications hereunder shall be in
writing and will be deemed to have been duly given and received for purposes of
this Agreement (a) when personally delivered, (b) when sent by telefax to a
party at the number listed below for such party, (c) two (2) Business Days after
the day on which the same has been delivered prepaid to a national courier
service or (d) three (3) Business Days after the deposit in the United States
mail, registered or certified, return receipt requested, postage prepaid, in
each case addressed to the party to whom such notice is to be given at the
following address for such party:
If to the Parent or MergerCo
(before the Closing): Red Hat, Inc.
2600 Meridian Parkway
Post Office Box 13588
Research Triangle Park, NC 27713
Attn: Counsel
Telefax No.: 919-547-0024
With copies to: Moore & Van Allen, PLLC
One Hannover Square, Suite 1700
Post Office Box 26507
Raleigh, NC 27601
Attn: Martin H. Brinkley, Esq.
Telefax No.: 919-828-4254
If to the Parent, MergerCo
or HKS (after the Closing): Red Hat, Inc.
2600 Meridian Parkway
Post Office Box 13588
Research Triangle Park, NC 27713
Attn: Counsel
Telefax No.: 919-547-0024
With copies to: Moore & Van Allen, PLLC
One Hannover Square, Suite 1700
Post Office Box 26507
Raleigh, NC 27601
Attn: Martin H. Brinkley, Esq.
Telefax No.: 919-828-4254
56
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If to HKS (before the Closing): 2732 Murray Avenue
Pittsburgh, PA 15217
Telefax No.: 412-521-2994
With copies to: Thorp, Reed & Armstrong, LLP
One Riverfront Center
20 Stanwix Street
Pittsburgh, PA 15222-4895
Attn: Priscilla S. Johnson, Esq.
Telefax No.: 412-394-2555
If to the Shareholders: L. Todd Masco
2732 Murray Avenue
Pittsburgh, PA 15217
Lawrence J. Weidman
1252 Murray Hill Avenue
Pittsburgh, PA 15217
With copies to: Thorp, Reed & Armstrong, LLP
One Riverfront Center
20 Stanwix Street
Pittsburgh, PA 15222-4895
Attn: Priscilla S. Johnson, Esq.
Telefax No.: 412-394-2555
Any party from time to time may change its address, telefax number or other
information for the purpose of notices to that party by giving notice specifying
such change to the other parties hereto.
SECTION 13.2 FEES AND EXPENSES.
The Parent shall pay the expenses of the Shareholders, the Other
Holders and HKS in connection with the negotiation and preparation of this
Agreement, all documents and instruments contemplated hereby, and the
consummation of the transactions contemplated hereby, including, without
limitation, the fees and expenses of their respective counsel, accountants,
investment bankers and consultants, up to a maximum amount of $50,000.00; the
Shareholders and Other Holders shall pay all such expenses to the extent they
exceed $50,000.00. The Parent shall pay its own expenses (and those of MergerCo)
in connection with the negotiation and preparation of this Agreement, all
documents and instruments contemplated hereby and the consummation of the
transactions contemplated hereby, including, without limitation, the fees and
expenses of its counsel, accountants, investment bankers, and consultants.
SECTION 13.3 PUBLIC ANNOUNCEMENTS.
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Any public announcement or similar publicity with respect to this
Agreement or the transaction contemplated hereby will be issued, if at all, at
such time and in such manner as the Parent determines.
Unless consented to by the Parent in advance or required by Law, prior
to the Closing the Shareholders shall, and shall cause HKS to, keep this
Agreement strictly confidential and may not make any disclosure of this
Agreement to any Person. HKS and the Parent will consult with each other
concerning the means by which HKS's employees, customers, and suppliers and
others having dealings with HKS will be informed of the transaction contemplated
hereby, and will have the right to be present for any such communication.
SECTION 13.4 TAX CONSEQUENCES.
Notwithstanding any other provision of this Agreement, the Shareholders
acknowledge that they shall be responsible for obtaining such assurances from
their advisors regarding the tax consequences to them of the transactions
contemplated hereby as they deem appropriate and shall assume the risk of any
adverse tax consequences to them relating to the transactions contemplated
hereby.
SECTION 13.5 ENTIRE AGREEMENT.
This Agreement, and any other agreement, document or instrument
executed and delivered in connection with this Agreement which makes specific
reference to this Agreement, supersede all prior discussions and agreements
between the parties with respect to the subject matter hereof and contain the
sole and entire agreement between the parties hereto with respect to the subject
matter hereof.
SECTION 13.6 WAIVER; REMEDIES.
Any term or condition of this Agreement may be waived at any time by
the party that is entitled to the benefit thereof, but no such waiver shall be
effective unless set forth in a written instrument duly executed by or on behalf
of the party waiving such term or condition. No waiver by any party of any term
or condition of this Agreement, in any one or more instances, shall be deemed to
be or construed as a waiver of the same or any other term or condition of this
Agreement on any future occasion. All remedies, either under this Agreement or
by Law or otherwise afforded, will be cumulative and not alternative.
SECTION 13.7 AMENDMENT.
This Agreement may be amended, supplemented or modified only by a
written instrument duly executed by or on behalf of each party hereto.
SECTION 13.8 BENEFITS AND BINDING EFFECT.
Neither this Agreement nor any right, interest or obligation hereunder
may be assigned by
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any party hereto without the prior written consent of the other parties hereto
and any attempt to do so will be void; provided that the Parent may assign and
delegate its rights, interests and obligations hereunder (other than its
obligations to issue Parent Stock and enter into this Agreement) to any direct
or indirect subsidiary of the Parent upon written notice to all of the parties
hereto at or before the Closing Date, in which event the Parent will guarantee
the performance of all obligations of the Parent hereunder by such subsidiary.
Subject to the preceding sentence, this Agreement is binding upon, inures to the
benefit of and is enforceable by the parties hereto and their respective
successors and assigns. No Shareholder or Other Shareholder may assign his, her
or its right to receive Additional Consideration to any other person or entity.
SECTION 13.9 CAPTIONS.
The captions used in this Agreement have been inserted for convenience
of reference only and do not define or limit the provisions hereof.
SECTION 13.10 EXHIBITS AND SCHEDULES.
All exhibits and schedules referred to in this Agreement, all
attachments to exhibits or schedules, and any other attachment to this Agreement
are hereby incorporated by reference into this Agreement and hereby are made a
part of this Agreement as if set out in full.
SECTION 13.11 GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the Laws of the State of North Carolina applicable to a contract executed and
performed in such State, without giving effect to the conflicts of laws
principles thereof.
SECTION 13.12 ARBITRATION.
Any dispute required to be submitted to arbitration pursuant to this
Agreement shall be finally and conclusively determined in accordance with the
Commercial Arbitration Rules of the American Arbitration Association (the "RULES
OF ARBITRATION") then in effect by the decision of three (3) arbitrators (the
"BOARD OF ARBITRATION") selected in accordance with the Rules of Arbitration.
The Board of Arbitration shall meet in the metropolitan Research Triangle Park,
North Carolina, area and shall render a decision in writing (concurred in by a
majority of the members of the Board of Arbitration) with respect to the dispute
submitted to it. The decision of the Board of Arbitration shall be rendered as
soon as practical following commencement of proceedings with respect thereto.
The Board of Arbitration shall cause its written decision to be delivered to the
Parent, the Surviving Corporation and the Shareholders. Any decision made by the
Board of Arbitration shall be final, binding and conclusive on the Parent, the
Surviving Corporation and the Shareholders and entitled to be enforced to the
fullest extent permitted by law and entered in any court of competent
jurisdiction.
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The Shareholders, the Surviving Corporation and the Parent hereby
consent to the jurisdiction of the foregoing Board of Arbitration and to the
jurisdiction of any local, state or federal court located in the State of North
Carolina for the purpose of enforcing the decision or award of the Board of
Arbitration or otherwise. The Shareholders, the Surviving Corporation and the
Parent agree that all service of process may be made on any such party by
personal delivery or by registered or certified mail addressed to the
appropriate party at the address for such party set forth in Section 13.1
hereof. The Shareholders hereby irrevocably appoint L. Todd Masco as their
lawful agent in the State of North Carolina to receive and forward on their
behalf service of all necessary processes in any action, suit or proceeding
arising under this Agreement, the Escrow Agreement, and the Registration Rights
Agreement that may be brought against either of the Shareholders or any of the
Other Holders in any court (including federal courts) in the State of North
Carolina. Such service of process or notice received thereof by the agent will
have the same force and effect as if served upon the Shareholders or the Other
Holders (or any of them).
All fees, costs and expenses of the Parent, the Surviving Corporation
and the Shareholders in relation to the arbitration, including, but not limited
to, attorneys' fees shall be paid by such parties as determined by the Board of
Arbitration. Each and every arbitration proceeding commenced pursuant to this
Section 13.12 shall be consolidated with any arbitration proceeding
simultaneously or previously commenced under this Section 13.12.
SECTION 13.13 COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together will constitute one
and the same instrument. Signature pages exchanged by telecopier shall be fully
binding.
SECTION 13.14 SEVERABILITY.
Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction, shall as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
SECTION 13.15 NO THIRD PARTY BENEFICIARY.
This Agreement shall not confer any rights or remedies upon any Person
or entity other than the parties hereto and their respective successors and
permitted assigns.
[SIGNATURES ON THE FOLLOWING PAGE]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the date first above written.
THE SHAREHOLDERS:
/s/ L. Todd Masco (SEAL)
---------------------------
L. Todd Masco
/s/ Lawrence J. Weidman (SEAL)
---------------------------
Lawrence J. Weidman
HELL'S KITCHEN SYSTEMS, INC.
By: /s/ Lawrence J. Weidman
-----------------------------
Name: Lawrence J. Weidman
----------------------------
Title: President
---------------------------
[SIGNATURES CONTINUED ON NEXT PAGE]
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THE PARENT:
RED HAT, INC.
By:/s/ Manoj George
---------------------------------
Name: Manoj George
Title: Chief Financial Officer
MERGERCO:
HKS ACQUISITION CO.
By:/s/ David Shumannfang
---------------------------------
Name: David Shumannfang
Title: Secretary
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Exhibit 3.1
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.
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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
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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.
(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
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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.
(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,
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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 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
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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.
(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
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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.
(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.
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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
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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 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;
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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
<PAGE>
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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 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
<PAGE>
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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 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
<PAGE>
-15-
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
<PAGE>
-16-
(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
<PAGE>
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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
<PAGE>
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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>
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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
<PAGE>
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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.
<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
<PAGE>
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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>
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(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
<PAGE>
-25-
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 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.
<PAGE>
-26-
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.
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.
<PAGE>
-27-
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
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 10th day of
August, 1999.
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
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RED HAT, INC.
Red Hat, 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 Third Amended and Restated Certificate of Incorporation,
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, Article FOURTH of
the Corporation's Third Amended and Restated Certificate
of Incorporation, be amended and restated and shall read
in its entirety as set forth on EXHIBIT A attached
hereto.
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 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>
-2-
IN WITNESS WHEREOF, the undersigned has executed, signed and
acknowledged this Certificate of Amendment this 16th day of August, 1999.
RED HAT, INC.
By:/s/ Robert F. Young
---------------------------
Name: Robert F. Young
Title: Chief Executive Officer
[SEAL]
Attest:
By:/s/ David Shumannfang
---------------------
David Shumannfang
Secretary
<PAGE>
-3-
EXHIBIT A
"FOURTH. The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is 230,000,000 shares, consisting of
225,000,000 shares of Common Stock with a par value of $.0001 per share (the
"Common Stock") and 5,000,000 shares of Preferred Stock with a par value of
$.0001 per share (the "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>
-4-
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.
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."
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BY-LAWS
OF
RED HAT, INC.
<PAGE>
BY-LAWS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<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>
-ii-
<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>
-iii-
<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
<PAGE>
-2-
meeting, during ordinary business hours, for a period of at least 10 days prior
to the meeting, 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
<PAGE>
-3-
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 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
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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.
(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
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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 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.
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(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.
(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;
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(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;
(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
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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.
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.
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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 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
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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.
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.
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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.
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
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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 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.
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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
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.
<PAGE>
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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 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
<PAGE>
-15-
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 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
<PAGE>
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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
(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.
<PAGE>
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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 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
<PAGE>
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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 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
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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 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>
AMENDMENT NO. 1
TO THE
AMENDED AND RESTATED BY-LAWS
OF
RED HAT, INC.
Pursuant to a Written Consent of the Board of Directors of Red Hat,
Inc. (the "Company"), dated as of December 14, 1999, the Company's By-laws (the
"By-laws") are amended by deleting the last sentence of the second paragraph of
Section 4.5 of the By-laws and replacing it in its entirety with the following:
"If no record date is fixed, 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."
<PAGE>
EXHIBIT 5.1
Red Hat, Inc.
2600 Meridian Parkway
Durham, NC 27713
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
This opinion relates to an aggregate of 4,600,000 shares of common
stock, par value $.0001 per share ("common stock"), of Red Hat, Inc. (the
"Company"), which are the subject matter of a Registration Statement on Form S-1
as filed with the Securities and Exchange Commission (the "Commission") on
January 14, 2000, as such may be amended (the "Registration Statement").
The 4,600,000 shares of common stock covered by the Registration
Statement consist of 2,750,000 shares being sold by the Company, 1,750,000
shares being sold for the account of selling stockholders (the "Selling
Stockholders") and 600,000 shares subject to an over-allotment option granted
by the Company to the underwriters named in the prospectus (the "Prospectus")
incorporated in the Registration Statement.
Based upon such investigation as we have deemed necessary, we are of
the opinion that when the 3,350,000 shares of common stock to be sold by the
Company pursuant to the Prospectus have been issued and paid for in accordance
with the terms described in the Prospectus, such shares of common stock will
have been validly issued and will be fully paid and nonassessable. Further,
we are of the opinion that the 1,250,000 shares of common stock to be sold by
the Selling Stockholders pursuant to the Prospectus are validly issued, fully
paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm in the Prospectus under
the caption "Legal Matters."
Very truly yours,
TESTA, HURWITZ & THIBEAULT, LLP
<PAGE>
EXHIBIT 10.4
CYGNUS SOLUTIONS
1995 STOCK PLAN
1. PURPOSES OF THE PLAN. The purposes of this 1995 Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as
amended.
(d) "COMMITTEE" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) of the Plan.
(e) "COMMON STOCK" means the Common Stock of the Company.
(f) "COMPANY" means Cygnus Solutions, a California
corporation.
(g) "CONSULTANT" means any person, including an advisor, who
is engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not, provided that if and in the event the
Company registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who arc not
compensated for their services or are paid only a director's fee by the Company.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company, its Subsidiaries or their respective successors. For
purposes of this Plan, a change in status from an Employee to a Consultant or
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from a Consultant to an Employee will not constitute an interruption of
Continuous Status as an Employee or Consultant.
(i) "EMPLOYEE" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company,
with the status of employment determined based upon such minimum number of hours
or periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment of a director's fee by the
Company shall not be sufficient to constitute "employment" by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(k) "FAIR MARKET VALUE" means, as of any date, the fair market
value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system including without limitation the
National Market System of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported), as quoted on such system or exchange, or the exchange with the
greatest volume of trading in Common Stock for the last market trading day prior
to the time of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ
System (but not on the National Market System thereof) or regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high bid and low asked prices for the
Common Stock for the last market trading day prior to the time of determination,
as reported in THE WALL STREET JOURNAL or such other source as the Administrator
deems reliable; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(1) "INCENTIVE STOCK OPTION" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended
to qualify as an Incentive Stock Option.
(n) "OPTION" means a stock option granted pursuant to the
Plan.
(o) "OPTIONED STOCK" means the Common Stock subject to an
Option or a Stock Purchase Right.
(p) "OPTIONEE" means an Employee or Consultant who receives an
Option or a Stock Purchase Right.
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(q) "PARENT" means a "parent corporation", whether now or
hereafter existing, as defined in Section 424(c) of the Code, or any successor
provision.
(r) "PLAN" means this 1995 Stock Plan.
(s) "REPORTING PERSON" means an officer, director, or greater
than ten percent shareholder of the Company within the meaning of Rule 16a-2
under the Exchange Act, who is required to rile reports pursuant to Rule 16a-3
under the Exchange Act.
(t) "RESTRICTED STOCK" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 10 below.
(u) "RULE 16B-3" means Rule 16b-3 promulgated under the
Exchange Act, as the same may be amended from time to time, or any successor
provision.
(v) "SHARE" means a share or the common Stock, as adjusted in
accordance with Section 12 of the Plan.
(w) "STOCK EXCHANGE" means any stock exchange or consolidated
stock price reporting system an which prices for the Common Stock are quoted at
any given time.
(x) "STOCK PURCHASE RIGHT" means the right to purchase Common
Stock pursuant to Section 10 below.
(y) "SUBSIDIARY" means a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 424(f) of the Code, or any
successor provision.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of shares that may be optioned and
sold under the Plan is 1,329,120 shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
the unpurchased Shares that were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan. In
addition, any shares of Common Stock which are retained by the Company upon
exercise of an Option or Stock Purchase Right in order to satisfy the exercise
or purchase price for such Option or Stock Purchase Right or any withholding
taxes due with respect to such exercise shall be treated as not issued and shall
continue to be available under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) INITIAL PLAN PROCEDURE. Prior to the date, if any, upon
which the Company becomes subject to the Exchange Act, the Plan shall be
administered by the Board or a committee appointed by the Board.
(b) PLAN PROCEDURE AFTER THE DATE, IF ANY. UPON WHICH THE
COMPANY BECOMES SUBJECT TO THE EXCHANGE ACT.
<PAGE>
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(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by
Rule 16b-3, the Plan may be administered by different bodies with respect to
directors, non-director officers and Employees or Consultants who are not
Reporting Persons.
(ii) ADMINISTRATION WITH RESPECT TO REPORTING
PERSONS. With respect to grants of Options or Stock Purchase Rights to Employees
who are Reporting Persons, the Plan shall be administered by (A) the Board if
the Board may administer the Plan in compliance with Rule 16b-3 with respect to
a plan intended to qualify thereunder as a discretionary plan, or (B) a
committee designated by the Board to administer the Plan, which committee shall
be constituted in such a manner as to permit the Plan to comply with Rule 16b-3
with respect to a plan intended to qualify thereunder as a discretionary plan.
Once appointed, such committee shall continue to serve in its designated
capacity until otherwise directed by the Board. 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, and remove all members of the
committee and thereafter directly administer the Plan, all to the extent
permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as
a discretionary plan. No person serving as a member of an Administrator that has
authority with respect to grants to Reporting Persons shall be eligible to
receive any grant under the Plan which would cause such member to cease to be
"disinterested" within the mean of Rule 16b-3.
(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND
OTHER EMPLOYEES. With respect to grants of Options or Stock Purchase Rights to
Employees or Consultants who are not Reporting Persons, the Plan shall be
administered by (A) the Board or (B) a committee designated by the Board which
committee shall be constituted in such a manner as to satisfy the legal
requirements relating to the administration of incentive stock option plans, if
any, of California corporate and securities law, of the Code and of any
applicable Stock Exchange (the "Applicable Laws"). Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. 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, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of
the Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, and subject to the approval of any relevant
authorities, including the approval, if required, of any Stock Exchange, the
Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom
Options and Stock Purchase Rights may from time to time be granted hereunder;
<PAGE>
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(iii) to determine whether and to what extent Options
and Stock Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common
Stock to be covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the
Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder,
(vii) to determine whether and under what
circumstances an Option may be settled in cash under Section 9(f) instead of
Common Stock;
(viii) to reduce the exercise price of any Option to
the then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted;
(ix) to determine the terms and restrictions
applicable to Stock Purchase Rights and the Restricted Stock purchased by
exercising such Stock Purchase Rights;
(x) to construe and interpret the terms of the Plan
and awards granted pursuant to the Plan; and
(xi) in order to fulfill the purposes of the Plan and
without amending the Plan, to modify grants of Options or Stock Purchase Rights
to participants who are foreign nationals or employed outside of the United
States in order to recognize differences in local law, tax policies or customs.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options or Stock Purchase Rights.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee or Consultant who has been granted an Option or
Stock Purchase Right may, if he or she is otherwise eligible, be granted
additional Options or Stock Purchase Rights.
(b) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of the Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options.
<PAGE>
-6-
(c) For purposes of Section 5(b), Incentive Stock Options
shall be taken into account in the order in which they were granted, and the
Fair Market Value of the Shares subject to an Incentive Stock Option shall be
determined as of the date of the grant of such Option.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with such Optionee's right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement. However, in the case of an Option granted to
an Optionee who, at the time the Option is granted, owns stock representing more
than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as ii determined by the
Board, but shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time
of the grant of such Incentive Stock Option, owns stock representing more than
ten percent (10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be no less than
110% of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a Nonstatutory Stock Option that
is:
(A) granted to a person who, at the time of
the grant of such Option, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of the grant.
<PAGE>
-7-
(B) granted to any person, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.
(b) The consideration to be paid for the Shares to be issued
upon exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares that (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender or such other period as may be required
to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) authorization for the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (6) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price and any applicable
income or employment taxes, (7) delivery of an irrevocable subscription
agreement for the Shares that irrevocably obligates the option holder to take
and pay for the Shares not more than twelve months after the date of delivery of
the subscription agreement, (8) any combination of the foregoing methods of
payment, or (9) such other consideration and method of payment for the issuance
of Shares to the extent permitted under Applicable Laws. In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, including performance criteria
with respect to the Company and/or the Optionee, and as shall be permissible
under the terms of the Plan; provided that such Option shall become exercisable
at the rate of at least twenty percent (20%) per year over five (5) years from
the date the Option is granted.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
not
<PAGE>
-8-
withstanding the exercise of the Option. The Company shall issue (or cause to be
issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares that thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP.
Subject to Section 9(c), in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant with the Company, such Optionee may, but
only within three (3) months (or such other period of time not less than thirty
(30) days as is determined by the Administrator, with such determination in the
case of an Incentive Stock Option being made at the time of grant of the Option
and not exceeding three (3) months) after the date of such termination (but in
no event later than the expiration date of the term of such Option as set forth
in the Option Agreement), exercise his or her Option to the extent that the
Optionee was entitled to exercise it at the date of such termination. To the
extent that Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 9(b) shall not apply if
(i) the Optionee is a Consultant who becomes an Employee; or (ii) the Optionee
is an Employee who becomes a Consultant.
(c) DISABILITY OF OPTIONEE.
(i) Notwithstanding the provisions of Section 9(b)
above, in the event of termination of an Optionee's Continuous Status as an
Employee or Consultant as a result of his or her total and permanent disability
(within the meaning of Section 22(e)(3) of the Code), Optionee may, but only
within twelve (12) months from the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination. To the extent that Optionee was not
entitled to exercise the Option at the date of termination, or if Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate.
(ii) In the event of termination of an Optionee's
Continuous Status as an Employee or Consultant as a result of a disability which
does not fall within the meaning of total and permanent disability (as set Forth
in Section 22(e)(3) of the Code), Optionee may, but only within six (6) months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. However, to the extent that such Optionee fails to exercise an
Option which is an Incentive Stock Option ("ISO") (within the meaning of Section
422 of the Code) within three (3) months of the date of such termination, the
Option will not qualify for ISO treatment under the Code. To the extent that
Optionee was not entitled to exercise the Option at the date of termination, or
if Optionee
<PAGE>
-9-
does not exercise such Option to the extent so entitled within six months (6)
from the date of termination, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an
Optionee during the period of Continuous Status as an Employee or Consultant, or
within thirty (30) days following the termination of the Optionee's Continuous
Status as an Employee or Consultant, the Option may be exercised, at any time
within six (6) months following the date of death (but in no event later than
the expiration date of the term of such Option as set forth in the Option
Agreement), by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent the
Optionee was entitled to exercise the Option at the date of death or, if
earlier, the date of termination of the Continuous Status as an Employee or
Consultant. To the extent that Optionee was not entitled to exercise the Option
at the date of death or termination, as the case may be, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate.
(e) RULE 16B-3. Options granted to Reporting Persons shall
comply with Rule 16b-3 and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum exemption
for Plan transactions.
(f) BUYOUT PROVISIONS. The Administrator may at any time offer
to buy out for a payment in cash or Shares, an Option previously granted, based
on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
10. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing of the terms, conditions and restrictions related
to the offer, including the number of Shares that such person shall be entitled
to purchase, the price to be paid (which price shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which the Administrator made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a Restricted Stock purchase agreement in the form determined by the
Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right
shall be referred to herein as "Restricted Stock."
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability), The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original purchase price paid by
the Purchaser and may be paid by cancellation of any indebtedness of the
Purchaser to the
<PAGE>
-10-
Company. The repurchase option shall lapse at such rate as the Administrator may
determine, but at a minimum rate of 20% per year.
(c) OTHER PROVISIONS. The Restricted Stock purchase agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 12
of the Plan.
11. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods (a) by cash payment, or (b) out of
Optionee's current compensation, (c) if permitted by the Administrator, in its
discretion, by surrendering to the Company Shares that (i) in the case of Shares
previously acquired from the Company, have been owned by the Optionee for more
than six months on the date of surrender, and (ii) have a fair market value on
the date of surrender equal to or less than Optionee's marginal tax rate times
the ordinary income recognized, or (d) by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option, or the Shares to be
issued in connection with the Stock Purchase Right, if any, that number of
Shares having, a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").
Any surrender by a Reporting Person of previously owned Shares to
satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may bc required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable
Tax Date;
<PAGE>
-11-
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option or Stock Purchase Right as to which the election
is made;
(c) all elections shall be subject to the consent or
disapproval of the Administrator;
(d) if the Optionee is a Reporting Person, the election must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN OTHER
TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the shareholders of the Company. the number of shares of Common Stock covered
by each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. 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 of Common Stock subject
to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) MERGER OR SALE OF ASSETS. In the event of a proposed sale
of all or substantially all of the Company's assets or a merger of the Company
with or into another
<PAGE>
-12-
corporation where the successor corporation issues its securities to the
Company's shareholders, each outstanding Option or Stock Purchase Right shall be
assumed or an equivalent option or right shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
successor corporation does not agree to assume the Option or Stock Purchase
Right or to substitute an equivalent option or right, in which case such Option
or Stock Purchase Right shall terminate upon the consummation of the merger or
sale of assets.
(d) CERTAIN DISTRIBUTIONS. In the event of any distribution to
the Company's shareholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without receipt
of consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
13. NON-TRANSFERABILITY OF OPTIONS, STOCK PURCHASE RIGHTS AND
RESTRICTED STOCK. Options, Stock Purchase Rights or Restricted Stock may not be
sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised or purchased during thc lifetime of the Optionee, Stock Purchase
Rights Holder or Restricted Stock Purchaser only by the Optionee, Stock Purchase
Rights Holder or Restricted Stock Purchaser.
14. TIME OF GRANTING OPTIONS AND STOCK PURCHASE The date of grant of an
Option or Stock Purchase Right shall, for all purposes, be the date on which the
Administrator makes the determination granting such Option or Stock Purchase
Right, or such other date as is determined by the Board. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 or
with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any Stock Exchange), the Company shall obtain
shareholder approval of any Plan amendment in such a manner and to such a degree
as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment or
termination of the Plan shall adversely affect Options already granted, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as
<PAGE>
-13-
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any Stock Exchange.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by law.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. AGREEMENTS. Options and Stock Purchase Rights shall be evidenced by
written agreements in such form as the Administrator shall approve from time to
time.
19. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any Stock Exchange upon which the Common Stock is listed. All Options
and Stock Purchase Rights issued under the Plan shall become void in the event
such approval is not obtained.
20. INFORMATION TO OPTIONEES AND PURCHASERS. The Company shall provide
financial statements at least annually to each Optionee and to each individual
who acquired Shares Pursuant to the Plan, during the period such Optionee or
purchaser has one or more Options or Stock Purchase Rights outstanding, and in
the case of an individual who acquired Shares pursuant to the Plan, during the
period such individual owns such Shares. The Company shall not be required to
provide such information if the issuance of Options or Stock Purchase Rights
under the Plan is limited to key employees whose duties in connection with the
Company assure their access to equivalent information.
<PAGE>
CYGNUS SOLUTIONS
1997 STOCK PLAN
1. PURPOSES OF THE PLAN. The purposes of this 1997 Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or nonstatutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as
amended.
(d) "COMMITTEE" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) of the Plan.
(e) "COMMON STOCK" means the Common Stock of the Company.
(f) "COMPANY" means Cygnus Solutions, a California
corporation.
(g) "CONSULTANT" means any person, including an advisor, who
is engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not, provided that if and in the event the
Company registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company, its Subsidiaries or their respective successors. For
purposes of this Plan, a change in status from an Employee to a Consultant or
<PAGE>
from a Consultant to an Employee will not constitute an interruption of
Continuous Status as an Employee or Consultant.
(i) "EMPLOYEE" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company,
with the status of employment determined based upon such minimum number of hours
or periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment by the Company of a
director's fee to a Director shall not be sufficient to constitute "employment"
of such Director by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(k) "FAIR MARKET VALUE" means, as of any date, the fair market
value of Common Stock determined as follows:
(i) If the Common Stock is listed on any
established stock exchange or a national market system including without
limitation the National Market of the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value shall
be the closing sales price for such stock (or the closing bid, if no sales were
reported), as quoted on such system or exchange, or the exchange with the
greatest volume of trading in Common Stock for the last market trading day prior
to the time of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq
System (but not on the National Market thereof) or regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high bid and low asked prices for the
Common Stock for the last market trading day prior to the time of determination,
as reported in The Wall Street Journal or such other source as the Administrator
deems reliable; or
(iii) In the absence of an established market for
the Common Stock, the Fair Market Value thereof shall be determined in good
faith by the Administrator.
(l) "INCENTIVE STOCK OPTION" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code, as designated in the applicable written option agreement.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended
to qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(n) "OPTION" means a stock option granted pursuant to the
Plan.
(o) "OPTIONED STOCK" means the Common Stock subject to an
Option or a Stock Purchase Right.
<PAGE>
(p) "OPTIONEE" means an Employee or Consultant who receives an
Option or a Stock Purchase Right.
(q) "PARENT" means a "parent corporation", whether now or
hereafter existing, as defined in Section 424(e) of the Code, or any
successor provision.
(r) "PLAN" means this 1997 Stock Plan.
(s) "REPORTING PERSON" means an officer, director, or greater
than ten percent shareholder of the Company within the meaning of Rule 16a-2
under the Exchange Act, who is required to file reports pursuant to Rule 16a-3
under the Exchange Act.
(t) "RESTRICTED STOCK" means shares of Common Stock
acquired pursuant to a grant of a Stock Purchase Right under Section 10 below.
(u) "RULE 16b-3" means Rule 16b-3 promulgated under the
Exchange Act, as the same may be amended from time to time, or any successor
provision.
(v) "SHARE" means a share of the Common Stock, as
adjusted in accordance with Section 12 of the Plan.
(w) "STOCK EXCHANGE" means any stock exchange or
consolidated stock price reporting system on which prices for the Common Stock
are quoted at any given time.
(x) "STOCK PURCHASE RIGHT" means the right to purchase Common
Stock pursuant to Section 10 below.
(y) "SUBSIDIARY" means a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 424(f) of the Code, or
any successor provision.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of Shares that may be optioned and
sold under the Plan shall be equal to the sum of (A) 1,114,449 shares, plus (B)
such number of shares under the Company's 1995 Stock Plan that are subject to
outstanding and unexercised options as of March 28, 1997 (the date of adoption
of this Plan by the Board), and which options are canceled or otherwise
terminated without exercise; provided that in no event shall the total number of
shares reserved for issuance from time to time under this Plan exceed 1,857,767
shares of Common Stock. The Shares may be authorized, but unissued, or
reacquired Common Stock. If an Option should expire or become unexercisable for
any reason without having been exercised in full, the unpurchased Shares that
were subject thereto shall, unless the Plan shall have been terminated, become
available for future grant under the Plan. In addition, any Shares of Common
Stock which are retained by the Company upon exercise of an Option or Stock
Purchase Right in order to satisfy the exercise or purchase price for such
Option or Stock Purchase Right or any withholding taxes due with respect to such
exercise shall be treated as not issued and shall continue to be available under
the Plan. Shares repurchased by the Company pursuant to any
<PAGE>
repurchase right which the Company may have shall not be available for future
grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) INITIAL PLAN PROCEDURE. Prior to the date, if any,
upon which the Company becomes subject to the Exchange Act, the Plan shall be
administered by the Board or a committee appointed by the Board.
(b) PLAN PROCEDURE AFTER THE DATE, IF ANY, UPON WHICH THE
COMPANY BECOMES SUBJECT TO THE EXCHANGE ACT.
(i) MULTIPLE ADMINISTRATIVE BODIES.
If permitted by Rule 16b-3, grants under the Plan may be made by different
bodies with respect to directors, non-director officers and Employees or
Consultants who are not Reporting Persons.
(ii) ADMINISTRATION WITH RESPECT TO REPORTING
PERSONS. With respect to grants of Options or Stock Purchase Rights to
Employees who are Reporting Persons, such grants shall be made by (A) the Board
if the Board may make grantsto Reporting Persons under the Plan in compliance
with Rule 16b-3, or (B) a committee designated by the Board to make grants to
Reporting Persons under the Plan, which committee shall be constituted in such a
manner as to permit grants under the Plan to comply with Rule 16b-3. Once
appointed, such committee shall continue to serve in its designated capacity
until otherwise directed by the Board. 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, and remove all members of the committee and
thereafter directly make grants to Reporting Persons under the Plan, all to the
extent permitted by Rule 16b-3.
(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS
AND OTHER EMPLOYEES. With respect to grants of Options or Stock Purchase Rights
to Employees or Consultants who are not Reporting Persons, the Plan shall be
administered by (A) the Board or (B) a committee designated by the Board, which
committee shall be constituted in such a manner as to satisfy the legal
requirements relating to the administration of incentive stock option plans, if
any, of California corporate and securities laws, of the Code and of any
applicable Stock Exchange (the "APPLICABLE LAWS"). Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. 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, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of
the Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, and subject to the approval of any relevant
authorities, including the approval, if required, of any Stock Exchange, the
Administrator shall have the authority, in its discretion:
<PAGE>
(i) to determine the Fair Market Value of the
Common Stock, in accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to
whom Options and Stock Purchase Rights may from time to time be granted
hereunder;
(iii) to determine whether and to what extent
Options and Stock Purchase Rights or any combination thereof are granted
hereunder;
(iv) to determine the number of shares of Common
Stock to be covered by each such award granted hereunder;
(v) to approve forms of agreement for use under
the Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what
circumstances an Option may be settled in cash under Section 9(f) instead of
Common Stock;
(viii) to reduce the exercise price of any Option
to the then current Fair Market Value if the Fair Market Value of the Common
Stock covered by such Option shall have declined since the date the Option was
granted;
(ix) to determine the terms and restrictions
applicable to Stock Purchase Rights and the Restricted Stock purchased by
exercising such Stock Purchase Rights; and
(x) to construe and interpret the terms of the
Plan and awards granted pursuant to the Plan; and
(xi) in order to fulfill the purposes of the
Plan and without amending the Plan, to modify grants of Options or Stock
Purchase Rights to participants who are foreign nationals or employed outside of
the United States in order to recognize differences in local law, tax policies
or customs.
(d) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options or Stock Purchase Rights.
5. ELIGIBILITY.
(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options and Stock
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees. An Employee or Consultant who has been
granted an Option or Stock Purchase Right may, if he or she is otherwise
eligible, be granted additional Options or Stock Purchase Rights.
<PAGE>
(b) TYPE OF OPTION. Each Option shall be designated in the
written option agreement as either an Incentive Stock Option or a Nonstatutory
Stock Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of Shares with respect to which Options designated
as Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with such Optionee's right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement and provided further that, in the case of an
Incentive Stock Option granted to an Optionee who, at the time the Option is
granted, owns stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the term of the Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the written option
agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Board and set forth in the applicable agreement, but shall be subject to the
following:
(i) In the case of an Incentive Stock Option
that is:
(A) granted to an Employee who, at the
time of the grant of such Incentive Stock Option, owns stock representing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Parent or Subsidiary, the per Share exercise price
shall be no less than 110% of the Fair Market Value per Share on the date of
grant.
(B) granted to any other Employee, the
per Share exercise price shall be no less than 100% of the Fair Market Value per
Share on the date of grant.
<PAGE>
(ii) In the case of a Nonstatutory Stock
Option that is:
(A) granted to a person who, at the
time of the grant of such Option, owns stock representing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or any Parent or Subsidiary, the per Share exercise price shall be no less than
110% of the Fair Market Value per Share on the date of the grant.
(B) granted to any person, the per
Share exercise price shall be no less than 85% of the Fair Market Value per
Share on the date of grant.
(b) The consideration to be paid for the Shares to be issued
upon exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares that (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender or such other period as may be required
to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) authorization for the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (6) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price and any applicable
income or employment taxes, (7) delivery of an irrevocable subscription
agreement for the Shares that irrevocably obligates the option holder to take
and pay for the Shares not more than twelve months after the date of delivery of
the subscription agreement, (8) any combination of the foregoing methods of
payment, or (9) such other consideration and method of payment for the issuance
of Shares to the extent permitted under Applicable Laws. In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, and reflected in the written
option agreement, which may include vesting requirements and/or performance
criteria with respect to the Company and/or the Optionee; provided that such
Option shall become exercisable at the rate of at least twenty percent (20%) per
year over five (5) years from the date the Option is granted. In the event that
any of the Shares issued upon exercise of an Option should be subject to a right
of repurchase in the Company's favor, such repurchase right shall lapse at the
rate of at least twenty percent (20%) per year over five (5) years from the date
the Option is granted.
An Option may not be exercised for a fraction of a
Share.
<PAGE>
An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance
with the terms of the Option by the person entitled to exercise the Option
and the Company has received full payment for the Shares with respect to
which the Option is exercised. Full payment may, as authorized by the Board,
consist of any consideration and method of payment allowable under Section
8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry
on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote or
receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, not withstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such stock certificate
promptly upon exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a
decrease in the number of Shares that thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
(b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP.
Subject to Section 9(c), in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant with the Company, such Optionee may, but
only within three (3) months (or such other period of time not less than thirty
(30) days as is determined by the Administrator, with such determination in the
case of an Incentive Stock Option being made at the time of grant of the Option
and not exceeding three (3) months) after the date of such termination (but in
no event later than the expiration date of the term of such Option as set forth
in the Option Agreement), exercise his or her Option to the extent that the
Optionee was entitled to exercise it at the date of such termination. To the
extent that Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 9(b) shall not apply if
(i) the Optionee is a Consultant who becomes an Employee; or (ii) the Optionee
is an Employee who becomes a Consultant.
(c) DISABILITY OF OPTIONEE.
(i) Notwithstanding Section 9(b) above, in the
event of termination of an Optionee's Continuous Status as an Employee or
Consultant as a result of his or her total and permanent disability (within the
meaning of Section 22(e)(3) of the Code), Optionee may, but only within twelve
(12) months from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate.
(ii) In the event of termination of an Optionee's
Continuous Status as an Employee or Consultant as a result of a disability which
does not fall within the meaning of
<PAGE>
total and permanent disability (as set forth in Section 22(e)(3) of the Code),
Optionee may, but only within six (6) months from the date of such termination
(but in no event later than the expiration date of the term of such Option as
set forth in the Option Agreement), exercise the Option to the extent otherwise
entitled to exercise it at the date of such termination. However, to the extent
that such Optionee fails to exercise an Option which is an Incentive Stock
Option ("ISO") (within the meaning of Section 422 of the Code) within three (3)
months of the date of such termination, the Option will not qualify for ISO
treatment under the Code. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option to the extent so entitled within six months (6) from the date of
termination, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an
Optionee during the period of Continuous Status as an Employee or Consultant
since the date of grant of the Option, or within thirty (30) days following
termination of Optionee's Continuous Status as an Employee or Consultant, the
Option may be exercised, at any time within six (6) months following the date of
death (but in no event later than the expiration date of the term of such Option
as set forth in the Option Agreement), by Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of death or, if
earlier, the date of termination of Optionee's Continuous Status as an Employee
or Consultant. To the extent that Optionee was not entitled to exercise the
Option at the date of death or termination, as the case may be, or if Optionee
does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.
(e) RULE 16b-3. Options granted to Reporting Persons shall
comply with Rule 16b-3 and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum exemption
for Plan transactions.
(f) BUYOUT PROVISIONS. The Administrator may at any time offer
to buy out for a payment in cash or Shares, an Option previously granted, based
on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
10. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing of the terms, conditions and restrictions related
to the offer, including the number of Shares that such person shall be entitled
to purchase, the price to be paid (which price shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer, or, in the case of
a person owning stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the price shall not be less than one hundred percent (100%) of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which
<PAGE>
the Administrator made the determination to grant the Stock Purchase Right. The
offer shall be accepted by execution of a Restricted Stock purchase agreement in
the form determined by the Administrator. Shares purchased pursuant to the grant
of a Stock Purchase Right shall be referred to herein as "RESTRICTED STOCK."
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine, but at a minimum rate of 20% per year.
(c) OTHER PROVISIONS. The Restricted Stock purchase agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 12
of the Plan.
11. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash payment, or (b) out of
Optionee's current compensation, (c) if permitted by the Administrator, in its
discretion, by surrendering to the Company Shares that (i) in the case of Shares
previously acquired from the Company, have been owned by the Optionee for more
than six months on the date of surrender, and (ii) have a fair market value on
the date of surrender equal to or less than Optionee's marginal tax rate times
the ordinary income recognized, or (d) by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option, or the Shares to be
issued in connection with the Stock Purchase Right, if any, that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "TAX DATE").
<PAGE>
Any surrender by a Reporting Person of previously owned Shares
to satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3.
All elections by an Optionee to have Shares withheld to
satisfy tax withholding obligations shall be made in writing in a form
acceptable to the Administrator and shall be subject to the following
restrictions:
(a) the election must be made on or prior to the
applicable Tax Date;
(b) once made, the election shall be irrevocable as to
the particular Shares of the Option or Stock Purchase Right as to which the
election is made; and
(c) all elections shall be subject to the consent or
disapproval of the Administrator.
In the event the election to have Shares withheld is made by
an Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN OTHER
TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. 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 of Common Stock subject
to an Option or Stock Purchase Right.
<PAGE>
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) MERGER OR SALE OF ASSETS. In the event of a proposed sale
of all or substantially all of the Company's assets or a merger of the Company
with or into another corporation where the successor corporation issues its
securities to the Company's shareholders, each outstanding Option or Stock
Purchase Right shall be assumed or an equivalent option or right shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the successor corporation does not agree to assume
the Option or Stock Purchase Right or to substitute an equivalent option or
right, in which case such Option or Stock Purchase Right shall terminate upon
the consummation of the merger or sale of assets.
(d) CERTAIN DISTRIBUTIONS. In the event of any distribution to
the Company's shareholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without receipt
of consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
13. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Options
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised or purchased during the lifetime of
the Optionee or Stock Purchase Rights Holder only by the Optionee or Stock
Purchase Rights Holder.
14. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board; provided
however that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the determination
shall be given to each Employee or Consultant to whom an Option or Stock
Purchase Right is so granted within a reasonable time after the date of such
grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AUTHORITY TO AMEND OR TERMINATE. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 or
with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any Stock Exchange), the Company shall obtain
shareholder approval of any Plan amendment in such a manner and to such a degree
as required.
<PAGE>
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment or
termination of the Plan shall adversely affect Options already granted, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange. As a condition to the exercise of an Option,
the Company may require the person exercising such Option to represent and
warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required by law.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. AGREEMENTS. Options and Stock Purchase Rights shall be
evidenced by written agreements in such form as the Administrator shall approve
from time to time.
19. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any Stock Exchange upon which the Common Stock is listed. All Options
and Stock Purchase Rights issued under the Plan shall become void in the event
such approval is not obtained.
20. INFORMATION AND DOCUMENTS TO OPTIONEES AND PURCHASERS. The Company
shall provide financial statements at least annually to each Optionee and to
each individual who acquired Shares Pursuant to the Plan, during the period such
Optionee or purchaser has one or more Options or Stock Purchase Rights
outstanding, and in the case of an individual who acquired Shares pursuant to
the Plan, during the period such individual owns such Shares. The Company shall
not be required to provide such information if the issuance of Options or Stock
Purchase Rights under the Plan is limited to key employees whose duties in
connection with the Company assure their access to equivalent information. In
addition, at the time of issuance of any securities under the Plan, the Company
shall provide to the Optionee or the Purchaser a copy of the Plan and a copy of
the agreement(s) pursuant to which securities under the Plan are issued.
<PAGE>
Exhibit 10.6
CYGNUS SOLUTIONS
1998 EXECUTIVE STOCK PLAN
1. PURPOSES OF THE PLAN. The purposes of this 1998 Executive Stock Plan
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to Employees and
Consultants of the Company, and its Subsidiaries and to promote the success of
the Company's business. Options granted under the Plan shall be Nonstatutory
Stock Options. Stock purchase rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) of the Plan.
(e) "COMMON STOCK" means the Common Stock of the Company.
(f) "COMPANY" means Cygnus Solutions, a California corporation.
(g) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not, provided that if and in the event the
Company registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided than
such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise Pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company, its Subsidiaries or their respective successors. For
purposes of this Plan, a change in status from an Employee to a Consultant or
from a Consultant to an Employee will not constitute an interruption of
Continuous Status as an Employee or Consultant.
(i) "EMPLOYEE" means any person including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company, with the
status of employment
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determined based upon such minimum number of hours or periods worked as shall be
determined by the Administrator in its discretion, subject to any requirements
of the Code. The payment by the Company of a director's fee to a Director shall
not be sufficient to constitute "employment" of such Director by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(k) "FAIR MARKET VALUE" means, as any date, the fair market value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the
National Market of the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value
shall be the closing sales price for such stock (or the closing bid,
if no sales were reported), as quoted on such system or exchange, or
the exchange with the greatest volume of trading in Common Stock for
the last market trading day prior to the time of determination, as
reported in THE WALL STREET JOURNAL or such other source as the
Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but
not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean between the high bid and low asked prices for
the Common Stock for the last market trading day prior to the time of
determination, as reported in THE WALL STREET JOURNAL or such other
source as the Administrator deems reliable; or
(iii) In the abuse of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith
by the Administrator.
(l) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(m) "OPTION" means a stock option granted pursuant to the Plan.
(n) "OPTIONED STOCK" means the Common Stock subject to an Option or
a Stock Purchase Right.
(o) "OPTIONEE" means an Employee or Consultant who receives an
Option or a Stock Purchase Right.
(p) "PARENT" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code, or any successor provision.
(q) "PLAN" means this 1998 Executive Stock Plan.
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(r) "REPORTING PERSON" means on officer, director, or greater than
ten percent shareholder of the Company within the meaning of Rule 16a-2 under
the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under
the Exchange Act.
(s) "RESTRICTED STOCK" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 10 below.
(t) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange
Act, as the same may be amended from time to time, or any successor provision.
(u) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(v) "STOCK EXCHANGE" means any stock exchange or consolidated stock
price reporting system on which prices for the Common Stock are quoted at any
given time.
(w) "STOCK PURCHASE RIGHTS" means the right to purchase Common Stock
pursuant to Section 10 below.
(x) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of Shares that may be optioned and
sold under the Plan shall be 609,882 shares. The Shares may be authorized, but
unissued, or reacquired Common Stock. If an Option should expire or become
unexercisable for any reason without having been exercised in full, the
unpurchased Shares that were subject thereto shall, unless the Plan shall have
been terminated, become available for future grant under the Plan. In addition,
any Shares of Common Stock which are retained by the Company upon exercise of an
Option or Stock Purchase Right in order to satisfy the exercise or purchase
price for such Option or Stock Purchase Right or any withholding taxes due with
respect to such exercise shall be treated as not issued and shall continue to be
available under the Plan. Shares repurchased by the Company pursuant to any
repurchase right which the Company may have shall be available for future grant
under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) INITIAL PLAN PROCEDURE. Prior to the date, if any, upon which
the Company becomes subject to the Exchange Act, the Plan shall be administered
by the Board or a committee appointed by the Board.
(b) PLAN PROCEDURE AFTER THE DATE, IF ANY, UPON WHICH THE COMPANY
BECOMES SUBJECT TO THE EXCHANGE ACT.
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule
16b-3, grants under the Plan may be made by different bodies with
respect to directors, non-director officers and Employees or
Consultants who are not Reporting Persons.
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(ii) ADMINISTRATION WITH RESPECT TO REPORTING PERSONS. With
respect to grants of Options or Stock Purchase Rights to Employees who
are Reporting Persons, such grants shall be made by (A) the Board if
the Board may make grants to Reporting Persons under the Plan in
compliance with Rule 16b-3, or (B) a committee designated by the Board
to make grants to Reporting Persons under the Plan, which committee
shall be constituted in such a manner as to permit grants under the
Plan to comply with Rule 16b-3. Once appointed, such committee shall
continue to serve in its designated capacity until otherwise directed
by the Board. From time to time the Board may increase the size of the
committee am appoint additional members thereof, remove members (with
or without cause) and appoint new members in substitution therefor,
fill vacancies, however caused, and remove all members of the committee
and thereafter directly make grants to Reporting Persons under the
Plan, all to the extent permitted by Rule 16b-3.
(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER
EMPLOYEES. With respect to grants of Options or Stock Purchase Rights
to Employees or Consultants who are not Reporting Persons, the Plan
shall be administered by (A) the Board or (B) a committee designated by
the Board, which committee shall be constituted in such a manner as to
satisfy the legal requirements relating to the administration of
incentive stock option plans, if any, of California corporate and
securities laws, of the Code and of any applicable Stock Exchange (the
"APPLICABLE LAWS"). Once appointed, such Committee shall continue to
serve in its designated capacity until otherwise directed by the Board.
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 therefore fill
vacancies, however caused, and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent Permitted by
the Applicable Laws.
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities.
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock,
in accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options
and Stock Purchase Rights may from time to time be granted hereunder,
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
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(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what circumstances may be
settled in cash under Section 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option
was granted;
(ix) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Restricted Stock purchased by exercising
such Stock Purchase Rights; and
(x) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan; and
(xi) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights
to participants who are foreign nationals or employed outside of the
United States in order to recognize differences in local law, tax
policies or customs.
(d) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options or Stock Purchase Rights.
5. ELIGIBILITY.
(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options and Stock
Purchase Rights may be granted to Employees and Consultants. An Employee or
Consultant who has been granted an Option or Stock Purchase Right may, if he or
she is otherwise eligible, be granted additional Options or Stock Purchase
Rights.
(b) TYPE OF OPTION. Option shall be designated in the written option
agreement as a Nonstatutory Stock Option.
(c) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with such Optionce's right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon its adoption by
the Board of Directors. It shall continue in effect for a term of ten (10) years
unless sooner terminated under Section 15 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement.
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8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Administrator.
(b) The consideration to be paid for the Shares to be issued upon
exercise of in Option, including the method of payment shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares that (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender or such other period as may be required
to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) authorization for the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value an the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (6) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price and any applicable
income or employment taxes, (7) delivery of an irrevocable subscription
agreement for the Shares that irrevocably obligates the option holder to take
and pay for the Shares not more than twelve months after the date of delivery of
the subscription agreement, (8) any combination of the foregoing methods of
payment, or (9) such other consideration and method of payment for the issuance
of Shares to the extent permitted under Applicable Laws. In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, and reflected in the written option
agreement, which may include vesting requirements and/or performance criteria
with respect to the Company and/or the Optionee.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment
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will be made for a dividend or other right for which the record date is prior to
the date the stock certificate is issued, except as provided in Section 12 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares that thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. Subject to
Section 9(c), in the event of termination of an Optionce's Continuous Status as
an Employee or Consultant with the Company, such Optionee may, but only within
three (3) months (or such other period of time not less than thirty (30) days as
is determined by the Administrator) after the date of such termination (but in
no event later than the expiration date of the term of such Option as set forth
in the Option Agreement), exercise his or her Option to the extent that the
Optionee was entitled to exercise it at the date of such termination. To the
extent that Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 9(b) shall not apply if
(i) the Optionee is a Consultant who becomes an Employee; or (ii) the Optionee
is an Employee who becomes a Consultant.
(c) DISABILITY OF OPTIONEE. Notwithstanding Section 9(b) above, in
the event of termination of an Optionee's Continuous Status as an Employee or
Consultant as a result of his or her total and permanent disability (within the
meaning of Section 22(e)(3) of the Code), Optionee may, but only within twelve
(12) months from the date of such termination (but in no event later than the
expiration date of the term of such Option as ret forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination. To the Optionee does not exercise such Option
to the extent so entitled within the time specified herein, the Option shall
terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within thirty (30) days following termination of
Optionce's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six (6) months following the date of death (but in
no event later than the expiration date of the term of such Option as set forth
in the Option Agreement), by Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of death or, if earlier,
the date of termination of Optionce's Continuous Status as an Employee or
Consultant. To the extent that Optionee was not entitled to exercise the Option
at the date of death or termination, as the case may be, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate.
(e) RULE 16b-3. Options granted to Reporting Persons shall comply
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
(f) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares. an Option previously granted, based on
such terms and
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conditions as the Administrator shall establish and communicate to the Optionee
at the time that such offer is made.
10. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or Cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid, and the time within which such person must
accept such offer, which shall in no event exceed thirty (30) days from the date
upon which the Administrator made the determination to grant the Stock Purchase
Right. The offer shall be accepted by execution of a Restricted Stock purchase
agreement in the form determined by the Administrator. Shares purchased pursuant
to the grant of a Stock Purchase Right shall be referred to herein as
"RESTRICTED STOCK."
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine.
(c) OTHER PROVISIONS. The Restricted Stock purchase agreement shall
contain other terms, provisions and conditions not inconsistent with the Plan as
may be determined by the Administrator in its sole discretion. In addition, the
provisions of Restricted Stock purchase agreements need not be the same with
respect to each purchaser.
(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock c Right is exercised, except as provided in Section 12 of the
Plan.
11. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash payment, or (b) out of
Optionee's current compensation, (c) if permitted by the Administrator, in its
on, by surrendering to the Company Shares that (i) in the case of Shares
previously acquired from the Company, have been owned by the Optionee for more
than six months on the date of surrender, and (ii) have a fair market value
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on the date of surrender equal to or less than Optionce's marginal tax rate
times the ordinary income recognized, or (d) by electing to have the Company
withhold from the Shares to be issued upon exercise of the Option, or the Shares
to be issued in connection with the Stock Purchase Right, if any, that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "TAX DATE").
Any surrender by a Reporting Person of previously owned Shares to
satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
Particular Shares Of the Option or Stock Purchase Right as to which the election
is made; and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN OTHER
TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Rights and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Fight, as well as the price per share of Common Stock covenant by each
such outstanding Option or Stock Purchase Right, shall be proportionately
covered by each such outstanding Option or Stock Purchase Right, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination, recapitalization or reclassification of the Common Stock,
or any other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as
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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 of Common Stock subject to an Option or Stock Purchase
Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(e) MERGER OR SALE OF ASSETS. In the event of a proposed sale of all
or substantially all of the Company's assets or a merger of the Company with or
into another corporation where the successor corporation issues its securities
to the Company's shareholders, each outstanding Option or Stock Purchase Right
shall be assumed or an equivalent option or right shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the successor corporation does not agree to assume the Option or Stock
Purchase Right or to substitute an equivalent option or right, in which case
such Option or Stock Purchase Right shall terminate upon the consummation of the
merger or sale of assets.
(d) CERTAIN DISTRIBUTIONS. In the event of any distribution to the
Company's shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
13. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Options
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised or purchased during the lifetime of
the Optionee or Stock Purchase Rights Holder only by the Optionee or Stock
Purchase Rights Holder.
14. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Administrator makes the dot on granting such Option or Stock
Purchase Right or such other date as is determined by the Board, provided
however that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the determination
shall be given to each Employee or Consultant to whom an Option or Stock
Purchase Right is so granted within a reasonable time after the date of such
grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AUTHORITY TO AMEND OR TERMINATE. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to
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comply with Rule 16b-3 or with Section 422 of the Code (or any other applicable
law or regulation, including the requirements of any Stock Exchange), the
Company shall obtain shareholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment or termination
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange. As a condition to the exercise of an option,
the Company may require the person exercising such Option to represent and
warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required by law.
17. RESERVATION OF SHARES. The Company, during the tem of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. AGREEMENTS. Options and Stock Purchase Rights shall be evidenced by
written agreements in such form as the Administrator shall approved from time to
time.
19. INFORMATION AND DOCUMENTS TO OPTIONEES AND PURCHASERS. The Company
shall provide financial statements at least annually to each Optionee and to
each individual who acquired Shares pursuant to the Plan, during the period such
Optionee or purchaser has one or more Options or Stock Purchase Rights
outstanding, and in the case of an individual who acquired Shares pursuant to
the Plan, during the period such individual owns such Shares. The Company shall
not be required to provide such information if the issuance of Options or Stock
Purchase Rights under the Plan is limited to key employees whose duties in
connection with the Company assure their access to equivalent information. In
addition, at the time of issuance of any securities under the Plan the Company
shall provide to the Optionee or the Purchaser a copy of the Plan and a copy of
the agreement(s) pursuant to which securities under the Plan are issued.
<PAGE>
Exhibit 10.7
AMENDED AND RESTATED
AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT, made as of the 21st day of October
1999, 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,
INC., a Delaware corporation with offices in Durham, North Carolina (the
"Corporation");
W I T N E S S E T H:
WHEREAS, Employee was granted warrants (the "Warrants") to purchase
1,540,400 (split adjusted) 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
WHEREAS, the Individual Parties entered into an Agreement (the
"Original Agreement") binding Employee and the Corporation to its terms with
respect to the Warrants and for any and all shares of the Corporation issued to
Employee upon exercise of the Warrants (the "Warrant Shares"); and
WHEREAS, the Individual Parties amended the Original Agreement on May
24, 1999 to modify the terms of the Original Agreement and to extend the term of
the Warrants, and pursuant to such amendment, certain sections of the Original
Agreement were terminated as of the consummation of the Corporation's initial
public offering on August 16, 1999; and
WHEREAS, as of the date hereof, the Employee has partially exercised
the Warrants for Warrant Shares and all of the remaining Warrant Shares are
fully and immediately exercisable; and
WHEREAS, the Individual Parties and the Corporation desire to amend and
restate the terms and conditions upon which the Warrants may be exercised and
terminated and the terms and conditions under which the 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:
<PAGE>
-2-
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 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 as of the date of the
Employment Agreement no profit sharing plan had 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 EXERCISE. Unless this Warrant is earlier terminated pursuant to
Section 1.5 hereof, Employee has the option to purchase the number of Warrant
Shares set forth on Schedule A hereto (the "Remaining Warrant Shares"). The
Employee may exercise the Warrants for all or any portion of the Remaining
Warrant Shares at any time; provided that 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
the date hereof, the Employee has exercised 523,950 of his Warrants. Upon the
exercise of any Warrants hereunder, Schedule A shall be automatically amended
and restated to reduce the Remaining Warrant Shares appropriately.
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 by giving ten (10) days prior 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;
<PAGE>
-3-
(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;
(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 right as a shareholder with respect to the
Warrant Shares until payment of the purchase price per Warrant Share set forthin
Section 1.3 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 applicable securities laws restrictions on
transfer.
1.8 TIME IS OF THE ESSENCE. Time is of the essence in exercising the
Warrants under this Agreement.
<PAGE>
-4-
ARTICLE II
GENERAL PROVISIONS
2.1 CORPORATE ACTION. The Corporation and the Individual Parties shall
take all action required pursuant to this Agreement to effectuate the provisions
herein.
2.2 WARRANT SHARES. All references to Warrant Shares and Remaining
Warrant Shares shall be automatically adjusted with respect to any stock split,
stock dividend, combination, recapitalization, reorganization or any other
transaction or event that would otherwise have an effected on the Corporation's
Common Stock.
2.3 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.
2.4 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.
2.5 GOVERNING LAW. This Agreement shall be subject to and governed by
the laws of the State of Delaware.
2.6 ENTIRE AGREEMENT. This Agreement together with Schedule A, as such
may be amended and restated from time to time, 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 the Employee and the Corporation. 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 the Original Agreement and 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
gives him no rights or expectations except those embodied in this Agreement.
2.7 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.
2.8 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 or Warrant Shares sold or transferred in violation of any of
the provisions set forth in this Agreement or to treat as owner of this Warrant
or those Warrant Shares or to pay dividends to any transferee to whom any of
those Warrant Shares shall have been so sold or transferred.
<PAGE>
-5-
2.9 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.
2.10 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).
2.11 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.
2.12. 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.
2.13 TRANSFERABILITY. Any rights or interests of the parties set forth
in this Agreement are personal and nontransferable.
2.14 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).
2.15 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.
2.16 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.
<PAGE>
-6-
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Agreement to be signed by its duly authorized officers, and the
Individual Parties have hereunto set their hands, all as of the day and year
first above written.
RED HAT, INC.
By: /s/ Robert F. Young
---------------------------
Title: Chief Executive Officer
/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>
-7-
SCHEDULE A
<TABLE>
<S> <C>
Remaining Warrant Shares 1,016,450
</TABLE>
<PAGE>
Exhibit 10.8
AMENDED AND RESTATED
AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT, made as of the 21st day of October
1999, 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,
INC., a Delaware corporation with offices in Durham, North Carolina (the
"Corporation");
W I T N E S S E T H:
WHEREAS, Employee was granted warrants (the "Warrants") to purchase
1,100,000 (split adjusted) 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
WHEREAS, the Individual Parties entered into an Agreement (the
"Original Agreement") binding Employee and the Corporation to its terms with
respect to the Warrants and for any and all shares of the Corporation issued to
Employee upon exercise of the Warrants (the "Warrant Shares"); and
WHEREAS, the Individual Parties amended the Original Agreement on May
24, 1999 to modify the terms of the Original Agreement and to extend the term of
the Warrants, and pursuant to such amendment, certain sections of the Original
Agreement were terminated as of the consummation of the Corporation's initial
public offering on August 16, 1999; and
WHEREAS, as of the date hereof, the Employee has partially exercised
the Warrants for Warrant Shares and all of the remaining Warrant Shares are
fully and immediately exercisable; and
WHEREAS, the Individual Parties and the Corporation desire to amend and
restate the terms and conditions upon which the Warrants may be exercised and
terminated and the terms and conditions under which the 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:
<PAGE>
-2-
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 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 as of the date of the
Employment Agreement no profit sharing plan had 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 EXERCISE. Unless this Warrant is earlier terminated pursuant to
Section 1.5 hereof, Employee has the option to purchase the number of Warrant
Shares set forth on SCHEDULE A hereto (the "Remaining Warrant Shares"). The
Employee may exercise the Warrants for all or any portion of the Remaining
Warrant Shares at any time; provided that 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
date hereof, the Employee has exercised 380,000 of his Warrants. Upon the
exercise of any Warrants hereunder, Schedule A shall be automatically amended
and restated to reduce the Remaining Warrant Shares appropriately.
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 by giving ten (10) days prior 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;
<PAGE>
-3-
(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;
(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 right as a shareholder with respect to the
Warrant Shares until payment of the purchase price per Warrant Share set forth
in Section 1.3 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 applicable securities laws restrictions on
transfer.
1.8 TIME IS OF THE ESSENCE. Time is of the essence in exercising the
Warrants under this Agreement.
<PAGE>
-4-
ARTICLE II
GENERAL PROVISIONS
2.1 CORPORATE ACTION. The Corporation and the Individual Parties shall
take all action required pursuant to this Agreement to effectuate the provisions
herein.
2.2 WARRANT SHARES. All references to Warrant Shares and Remaining
Warrant Shares shall be automatically adjusted with respect to any stock split,
stock dividend, combination, recapitalization, reorganization or any other
transaction or event that would otherwise have an effect on the Corporation's
Common Stock.
2.3 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.
2.4 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.
2.5 GOVERNING LAW. This Agreement shall be subject to and governed by
the laws of the State of Delaware.
2.6 ENTIRE AGREEMENT. This Agreement together with Schedule A, as such
may be amended and restated from time to time, 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 the Employee and the Corporation. 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 the Original Agreement and 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
gives him no rights or expectations except those embodied in this Agreement.
2.7 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.
2.8 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 or Warrant Shares sold or transferred in violation of any of
the provisions set forth in this Agreement or to treat as owner of this Warrant
or those Warrant Shares or to pay dividends to any transferee to whom any of
those Warrant Shares shall have been so sold or transferred.
<PAGE>
-5-
2.9 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.
2.10 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).
2.11 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.
2.12. 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.
2.13 TRANSFERABILITY. Any rights or interests of the parties set forth
in this Agreement are personal and nontransferable.
2.14 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).
2.15 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.
2.16 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.
<PAGE>
-6-
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Agreement to be signed by its duly authorized officers, and the
Individual Parties have hereunto set their hands, all as of the day and year
first above written.
RED HAT, INC.
By: /s/ Robert F. Young
-------------------
Title: Chief Executive Officer
/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>
-7-
SCHEDULE A
<TABLE>
<S> <C>
Remaining Warrant Shares 720,000
</TABLE>
<PAGE>
Exhibit 10.9
AMENDED AND RESTATED
AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT, made as of the 21st day of October
1999, 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,
INC., a Delaware corporation with offices in Durham, North Carolina (the
"Corporation");
W I T N E S S E T H:
WHEREAS, Employee was granted warrants (the "Warrants") to purchase
1,100,000 (split adjusted) 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
WHEREAS, the Individual Parties entered into an Agreement (the
"Original Agreement") binding Employee and the Corporation to its terms with
respect to the Warrants and for any and all shares of the Corporation issued to
Employee upon exercise of the Warrants (the "Warrant Shares"); and
WHEREAS, the Individual Parties amended the Original Agreement on May
24, 1999 to modify the terms of the Original Agreement and to extend the term of
the Warrants, and pursuant to such amendment, certain sections of the Original
Agreement were terminated as of the consummation of the Corporation's initial
public offering on August 16, 1999; and
WHEREAS, as of the date hereof, the Employee has partially exercised
the Warrants for Warrant Shares and all of the remaining Warrant Shares are
fully and immediately exercisable; and
WHEREAS, the Individual Parties and the Corporation desire to amend and
restate the terms and conditions upon which the Warrants may be exercised and
terminated and the terms and conditions under which the 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:
<PAGE>
-2-
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 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 as of the date of the
Employment Agreement no profit sharing plan had 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 EXERCISE. Unless this Warrant is earlier terminated pursuant to
Section 1.5 hereof, Employee has the option to purchase the number of Warrant
Shares set forth on Schedule A hereto (the "Remaining Warrant Shares"). The
Employee may exercise the Warrants for all or any portion of the Remaining
Warrant Shares at any time; provided that 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
date hereof, the Employee has exercised 429,000 of her Warrants. Upon the
exercise of any Warrants hereunder, Schedule A shall be automatically amended
and restated to reduce the Remaining Warrant Shares appropriately.
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 by giving ten (10) days prior 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;
<PAGE>
-3-
(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;
(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 right as a shareholder with respect to the
Warrant Shares until payment of the purchase price per Warrant Share set forth
in Section 1.3 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 applicable securities laws restrictions on
transfer.
1.8 TIME IS OF THE ESSENCE. Time is of the essence in exercising the
Warrants under this Agreement.
<PAGE>
-4-
ARTICLE II
GENERAL PROVISIONS
2.1 CORPORATE ACTION. The Corporation and the Individual Parties shall
take all action required pursuant to this Agreement to effectuate the provisions
herein.
2.2 WARRANT SHARES. All references to Warrant Shares and Remaining
Warrant Shares shall be automatically adjusted with respect to any stock split,
stock dividend, combination, recapitalization, reorganization or any other
transaction or event that would otherwise have an effect on the Corporation's
Common Stock.
2.3 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.
2.4 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.
2.5 GOVERNING LAW. This Agreement shall be subject to and governed by
the laws of the State of Delaware.
2.6 ENTIRE AGREEMENT. This Agreement together with Schedule A, as such
may be amended and restated from time to time, 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 the Employee and the Corporation. 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 the Original Agreement and 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
gives her no rights or expectations except those embodied in this Agreement.
2.7 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.
2.8 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 or Warrant Shares sold or transferred in violation of any of
the provisions set forth in this Agreement or to treat as owner of this Warrant
or those Warrant Shares or to pay dividends to any transferee to whom any of
those Warrant Shares shall have been so sold or transferred.
<PAGE>
-5-
2.9 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.
2.10 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).
2.11 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.
2.12. 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.
2.13 TRANSFERABILITY. Any rights or interests of the parties set forth
in this Agreement are personal and nontransferable.
2.14 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).
2.15 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.
2.16 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.
<PAGE>
-6-
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Agreement to be signed by its duly authorized officers, and the
Individual Parties have hereunto set their hands, all as of the day and year
first above written.
RED HAT, INC.
By: /s/ Robert F. Young
--------------------
Title: Chief Executive Officer
/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>
-7-
SCHEDULE A
<TABLE>
<S> <C>
Remaining Warrant Shares 671,000
</TABLE>
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") is entered into as
of the 6th day of January, 2000 by and between RED HAT, INC., a Delaware
corporation ("RED HAT"), and the Sellers identified on SCHEDULE I hereto (each a
"SELLER" and, collectively, the "SELLERS") by and through Lawrence J. Weidman,
as attorney-in-fact for each of the Sellers other than himself ("SHAREHOLDER
REPRESENTATIVE").
W I T N E S S E T H:
WHEREAS, the Sellers are the owners of all of the issued and
outstanding capital stock of Hell's Kitchen Systems, Inc., a Pennsylvania
corporation (the "COMPANY"); and
WHEREAS, simultaneously with the execution of this Agreement, the
Sellers will sell all of the issued and outstanding capital stock of the Company
to Red Hat in exchange for (i) the issuance to them at closing of that number of
shares of Red Hat common stock equal to $21,000,000 divided by $43.932815 (the
"REGISTRABLE SECURITIES") and (ii) the right to receive, if certain conditions
are satisfied after closing, additional shares of Red Hat common stock, all
pursuant to the terms of that certain Agreement and Plan of Merger By and Among
Red Hat, HKS Acquisition Co., the Company, and the Majority Shareholders of the
Company, dated as of January 4th, 2000 (the "MERGER AGREEMENT"); and
WHEREAS, the Registrable Securities will be subject to contractual
restrictions on their disposition pursuant to separate Lock-Up Agreements to be
entered into with each of the Sellers dated the date hereof, (the "LOCK-UP
AGREEMENTS"); and
WHEREAS, the execution of this Agreement by the parties hereto is a
condition precedent to the obligation of the Sellers to consummate the
transactions contemplated by the Merger Agreement.
NOW, THEREFORE, in consideration of the mutual promises, covenants,
representations and warranties contained herein and of the mutual benefits to be
derived herefrom, and intending to be legally bound, the parties hereto agree as
follows:
SECTION 1. INCIDENTAL REGISTRATION.
(a) Whenever, during the period beginning as of the date
hereof and ending August 17, 2000, Red Hat is required by Section 2.2
of the First Amended and Restated Investor Rights Agreement dated as of
February 25, 1999 (the "INVESTOR RIGHTS AGREEMENT") by and among Red
Hat and the entities listed on the signature pages thereto (the
"STOCKHOLDERS") to give notice to the Stockholders of Red Hat's intent
to file a Registration Statement, Red Hat will give notice of its
intent to do so and afford the same
<PAGE>
incidental registration rights to all holders of Registrable Securities
under this Agreement on the terms and conditions set forth in the
Investor Rights Agreement; PROVIDED, HOWEVER, the holders of
Registrable Securities under this Agreement shall for such purposes be
considered Other Holders (as defined in the Investor Rights Agreement)
and, in no event, shall the incidental registration rights granted to
the holders of Registrable Securities hereunder be interpreted to be
more favorable than the rights granted to Other Holders (as defined in
the Investor Rights Agreement) to include securities in a registration
initiated by Red Hat or by the Stockholders.
SECTION 2. REQUIRED REGISTRATION.
(a) If Red Hat shall receive at any time during the period
beginning on August 18, 2000 and ending on the first anniversary of the
execution of this Agreement, a written request from holders of at least
thirty-five percent (35%) of the Registrable Securities (the
"INITIATING HOLDERS"), that Red Hat file a registration statement under
the Securities Act covering the registration of at least thirty-five
percent (35%) of the Registrable Securities (a "REQUIRED
REGISTRATION"), then Red Hat shall promptly give written notice of such
request to all other holders of Registrable Securities of its intention
to effect such registration. Red Hat will include in such registration
all Registrable Securities with respect to which Red Hat has received
written requests for inclusion therein within twenty (20) business days
after Red Hat has provided notice to the other holders. Thereupon, Red
Hat shall, as expeditiously as possible, use its best efforts to effect
the Required Registration on an appropriate form of all Registrable
Securities which Red Hat has been requested to so register (provided,
however, that Red Hat will only be obligated to effect such
registration on Form S-3 (or any successor form) if Red Hat is at the
time of the Required Registration eligible to file a registration
statement on such form (or successor form)).
(b) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request for a Required
Registration by means of an underwriting, they shall so advise Red Hat
as a part of their request made pursuant to Section 2(a) and Red Hat
shall include such information in the written notice to other holders
referred to in Section 2(a). The underwriter shall be selected by a
majority in interest of the Initiating Holders and shall be reasonably
acceptable to Red Hat. In such event, the right of any other holder to
include its Registrable Securities in such registration shall be
conditioned upon such other holder's participation in such underwriting
and the inclusion of such other holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by such other holder and
a majority in interest of the Initiating Holders (excluding such other
holder)) to the extent provided herein. All holders proposing to
distribute their securities through such underwriting shall together
with Red Hat enter into an underwriting agreement in customary form
with the underwriter or underwriters selected for such underwriting as
provided above. Notwithstanding any other provision of this Section
2(b), if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holders shall so advise the other
holders of Registrable Securities that would otherwise
2
<PAGE>
be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall
be allocated among all participating holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the
amount of Registrable Securities of Red Hat owned by each participating
holder.
(c) Red Hat shall be obligated to effect only one (1) such
registration pursuant to Section 2(a).
(d) If at the time of any request to register Registrable
Securities by Initiating Holders pursuant to this Section 2, Red Hat
has 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 Red Hat's Board of Directors, would be adversely affected by the
requested registration, then Red Hat 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, in which event the termination date specified in
Section 10 below shall be extended for a period equal to the period of
such delay.
(e) The right of the holders of Registrable Securities to
request that Red Hat file a registration statement under this Section 2
and their right to have Registrable Securities included in such
Registration Statement are subject in each instance to the provision of
Section 2.9 of the Investor Rights Agreement that Stockholders shall be
entitled to include their Registrable Shares (as defined in the
Investor Rights Agreement) in such Registration Statement on a pro rata
basis with the holders of Registrable Securities based on the number of
shares of Common Stock of Red Hat (on an as-converted basis) owned by
Stockholders and the holders of Registrable Securities hereunder.
SECTION 3. RESALES PURSUANT TO RULE 144. In order to make available to
the holders of Registrable Securities the benefits of Rule 144 and any other
rule or regulation of the Securities and Exchange Commission (the "SEC") that
may at any time permit a holder of Registrable Securities to sell securities of
Red Hat to the public without registration, Red Hat shall:
(a) make and keep adequate current public information
available at all times as required by Rule 144; and
(b) take such action as is necessary to enable the holders of
Registrable Securities to utilize Rule 144 for the sale of their
Registrable Securities, including, but not limited to, the filing with
the SEC in a timely manner all reports and other documents required of
Red Hat under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"); and
(c) furnish to any holder, so long as such holder owns any
Registrable Securities, forthwith upon request (i) a written statement
by Red Hat that it has complied with the reporting requirements of Rule
144, the Securities Act and the Exchange Act, (ii)
3
<PAGE>
a copy of the most recent annual or quarterly report of Red Hat and
such other reports and documents so filed by Red Hat, and (iii) such
other information as may be reasonably requested by such holder to
permit the holder to use any rule or regulation of the SEC that permits
the selling of any such securities without registration.
SECTION 4. REGISTRATION PROCEDURES. Whenever the holders of Registrable
Securities have requested that any Registrable Securities be registered pursuant
to Section 2 of this Agreement, Red Hat will use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto Red Hat will as
expeditiously as possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to
cause such registration statement to become effective and remain
effective for one hundred twenty (120) days from the effective date or
such lesser period until all such Registrable Securities are sold;
(b) Furnish to each Seller of Registrable Securities such
reasonable number of copies of such registration statement, each
amendment and supplement thereto, the prospectus included in such
registration statement (including each preliminary prospectus) and such
other documents as such Seller may reasonably request in order to
facilitate the public sale or other disposition of the Registrable
Securities owned by such Seller;
(c) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period of not less than one hundred twenty
(120) consecutive days or such shorter period which will terminate when
Registrable Securities covered by such registration statement have been
sold and comply with the provisions of the Securities Act (including
the antifraud provisions thereof);
(d) If Red Hat has delivered a prospectus to the Sellers of
Registrable Securities and after having done so, the prospectus is
amended to comply with the requirements of the Securities Act, Red Hat
shall promptly notify the Sellers and, if requested, the Sellers shall
immediately cease making offers of Registrable Securities and return
all prospectuses to Red Hat. Red Hat shall promptly provide the Sellers
with revised prospectuses and, following receipt of the revised
prospectuses, the Sellers shall be free to resume making offers of the
Registrable Securities;
(e) Use its best efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of
such jurisdictions within the United States as the Sellers shall
request and do any and all other acts and things which may be
reasonably necessary or advisable to enable such sellers to consummate
the public sale or other disposition in such jurisdictions of the
Registrable Securities owned by such Sellers; provided, however, that
Red Hat shall not be required to qualify as a foreign corporation or
execute a general consent to service of process in any jurisdiction;
4
<PAGE>
(f) Notify each Seller of Registrable Securities, promptly
after Red Hat shall receive notice thereof, of the time when a
Registration Statement with respect to Registrable Shares has become
effective or a supplement to any prospectus used in connection
therewith in forming a part of such Registration Statement has been
filed;
(g) In the event that, in the judgment of Red Hat, 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 Red Hat believes
public disclosure would be detrimental to Red Hat, Red Hat shall notify
all Sellers to such effect, and, upon receipt of such notice, each such
Seller shall immediately discontinue any sales of Registrable
Securities pursuant to such Registration Statement until such Seller
has received copies of a supplemented or amended prospectus or until
such Seller is advised in writing by Red Hat 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, Red Hat shall not exercise its rights under this Section to
suspend sales of Registrable Securities for a period in excess of 90
days in any 365-day period;
(h) Promptly make available for inspection by any Seller of
Registrable Securities, any underwriter participating in any
disposition pursuant to such registration statement and any attorney,
accountant or other agent retained by any such Seller or underwriter,
all financial and other records (reasonably requested), pertinent
corporate documents and contracts of Red Hat as shall be reasonably
necessary to enable them to exercise their due diligence
responsibility, and cause Red Hat'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, PROVIDED, HOWEVER, that
each Seller of Registrable Securities agrees that information obtained
by it as a result of such inspections which is deemed confidential
shall not be used by it as the basis for any market transaction in
securities of Red Hat unless and until such information is made
generally available to the public and each such Seller shall cause any
attorney, accountant or agent retained by such Seller to keep
confidential any such information;
(i) In the event of the issuance of any stop order suspending
the effectiveness of a registration statement, or of any order
suspending or preventing the use of any related prospectus or
suspending the qualification of any common stock included in such
registration statement for sale in any jurisdiction, Red Hat will use
reasonable efforts promptly to obtain the withdrawal of such order; and
(j) If the offering is to be underwritten, enter into any
necessary agreements in connection therewith (including an underwriting
agreement containing customary representations, warranties and
agreements); and
5
<PAGE>
(k) Take all such other reasonable actions in connection
therewith in order to expedite or facilitate the disposition of such
Registrable Securities and in such connection, whether or not an
underwriting agreement is entered into and whether or not the
registration is an underwritten registration, make such representations
and warranties to the holders of such Registrable Securities and the
underwriters, if any, in such form, substance and scope as are
customarily made by issuers to underwriters in primary underwritten
offerings, obtain opinions of counsel to Red Hat and updates thereof
(which counsel and opinions, in form, scope and substance, shall be
reasonably satisfactory to the managing underwriters, if any, and the
Sellers), and obtain "cold comfort" letters and updates thereof from
Red Hat's independent certified public accountants addressed to the
sellers and the underwriters, if any, such letters to be in customary
form and covering matters of the type customarily covered in "cold
comfort" letters to underwriters in connection with primary
underwritten offerings.
SECTION 5. REGISTRATION EXPENSES.
(a) COMPANY EXPENSES. All expenses (herein called
"REGISTRATION EXPENSES") incident to Red Hat's performance of or
compliance with this Agreement, including, without limitation, all
registration and filing fees, fees and expenses of compliance with
securities and blue sky laws, printing expenses, messenger and delivery
expenses, fees and disbursements of counsel for Red Hat, and fees and
disbursements of all Red Hat's certified public accountants,
underwriters (excluding discounts and commissions) and any Persons
retained by Red Hat, will be paid by Red Hat.
(b) HOLDER EXPENSES. Except as otherwise paid by Red Hat
pursuant to Section 5(a) above, each holder of Registrable Securities
shall bear all expenses incurred by such holder in connection with the
negotiation and preparation of any registration statement, underwriting
agreement and all other documents and instruments contemplated hereby
to which any such holder is a party, including, without limitation, the
fees and expenses, if any, of its legal counsel.
SECTION 6. UNDERTAKINGS OF THE HOLDERS OF REGISTRABLE SECURITIES.
(a) SUSPENSION OF SALES. If any Registrable Securities are
included in a registration statement pursuant to the terms of this
Agreement, the holder thereof will not (until further notice) effect
sales thereof after receipt of written notice from Red Hat to suspend
sales to permit Red Hat to correct or update a registration statement
or prospectus.
(b) COMPLIANCE. If any Registrable Securities are being
registered in any registration pursuant to this Agreement, the holder
thereof will comply with all anti-stabilization, manipulation and
similar provisions of Section 10 of the Exchange Act applicable to the
Holder, and any rules promulgated thereunder by the SEC applicable to
the Holder and, at the request of Red Hat, will execute and deliver to
Red Hat and to any underwriter participating in such offering an
appropriate agreement to such effect.
6
<PAGE>
(c) TERMINATION OF EFFECTIVENESS. At the end of the period
during which Red Hat is obligated to keep a registration statement
current and effective as described herein, each holder of Registrable
Securities included in the registration statement shall discontinue
sales thereof pursuant to such registration statement, unless such
holder has received written notice from Red Hat of its intention to
continue the effectiveness of such registration statement with respect
to any of such securities which remain unsold.
SECTION 7. UNDERWRITTEN REGISTRATIONS
(a) FURNISH INFORMATION. No holder of Registrable Securities
may participate in any registration hereunder which is underwritten
unless such holder (i) agrees to sell such holder's securities on the
basis provided in any underwriting arrangements approved by the holder
or holders entitled hereunder to approve such arrangements, and (ii)
completes and executes all customary questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements,
provided that no holder of Registrable Securities included in any
underwritten registration shall be required to make any representations
or warranties to Red Hat or the underwriters on account of the
registration of shares owned by such holder other than representations
and warranties regarding such holder and such holder's intended method
of distribution.
(b) RIGHT OF APPROVAL. Red Hat shall not include in any
registration statement (or attachments or exhibits thereto), filed by
Red Hat (under this Agreement or otherwise) pursuant to the Securities
Act any information describing or relating to the Sellers or their
relationship with Red Hat without the advance written consent of the
Sellers, which consent shall not be unreasonably withheld or delayed.
(c) DELAY OF REGISTRATION. No holder of Registrable Securities
shall have any right to obtain or seek an injunction restraining or
otherwise delaying the preparation of, or declaration of the
effectiveness of, any registration statement initiated in accordance
with the terms of this Agreement if such injunction is the result of
any controversy that might arise with respect to the interpretation or
implementation of this Agreement.
SECTION 8. ASSIGNMENT OF THE SELLERS' REGISTRATION RIGHTS. The right of
a holder to participate in a registration under this Agreement may be assigned
to any person or entity to which at least 25% of the Registrable Securities
owned by such investor as of the date hereof are transferred and such transferee
shall be deemed a seller for purposes of this Agreement; PROVIDED, HOWEVER, that
(i) Red Hat must receive written notice prior to the time of said transfer and
(ii) said transferee or assignee must agree to be bound by this Agreement and
execute a counterpart signature page evidencing such acceptance of this
Agreement. No such transfer shall be permitted by any Seller pursuant to this
Section 8 to any person or entity that a majority of the Board of Directors of
Red Hat deem to be a competitor of Red Hat.
7
<PAGE>
SECTION 9. INDEMNIFICATION AND CONTRIBUTION
(a) In the event of any registration of any of the
Registrable Securities under the Securities Act pursuant to this
Agreement, Red Hat will indemnify and hold harmless the seller of such
Registrable Securities, each underwriter of such Registrable
Securities, 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 Securities 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 Red Hat 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 Red Hat 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 Red Hat, in writing, by
or on behalf of such seller, underwriter or controlling person
specifically for use in the preparation thereof.
(b) In the event of any registration of any of the Registrable
Securities under the Securities Act pursuant to this Agreement, each
seller of Registrable Securities, severally and not jointly, will
indemnify and hold harmless Red Hat, each of its directors and officers
and each underwriter (if any) and each person, if any, who controls Red
Hat 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 Red Hat, 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 Securities 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 Red Hat by or on behalf of such seller
specifically for use in connection with the preparation of such
Registration
8
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Statement, prospectus, amendment or supplement; PROVIDED, HOWEVER, that
the obligations of a Seller hereunder shall be limited to an amount
equal to the net proceeds to such Seller of Registrable Securities 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.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section
9 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 Red Hat on the one hand and the Sellers 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 Red Hat and the Sellers
shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of material fact related to
information supplied by Red Hat or the Sellers and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. Red Hat
9
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and the Sellers agree that it would not be just and equitable if
contribution pursuant to this Section 9 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 9, (i) in
no case shall any one Seller be liable or responsible for any amount in
excess of the net proceeds received by such Seller from the offering of
Registrable Securities and (ii) Red Hat 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.
SECTION 10. TERMINATION. All of Red Hat's obligations to register
Registrable Securities under this Agreement shall terminate at midnight on the
first anniversary of the date hereof, unless extended as provided in Section
2(d) above.
SECTION 11. LOCK-UP AGREEMENT RESTRICTIONS.
(a) Except as provided in Sections 11(b) and (c) below, the
registration rights granted in Sections 1 and 2 above shall not apply
to any Registrable Shares that continue to be subject to the
restrictions on disposition imposed by the Lock-Up Agreements.
(b) In the case of any required registration under Section 2
or an incidental registration under Section 1 that is not a registered
public offering involving an underwriting, Red Hat will include
Registrable Shares that continue to be subject to the restrictions on
disposition imposed by the Lock-Up Agreements if, prior to the end of
the 120 day period beginning with the effective date of the
registration statement pursuant to which those Registrable Shares are
to be distributed, the restrictions imposed by the Lock-Up Agreement on
the disposition of those Registrable Shares will by their terms have
lapsed.
(c) In the case of an incidental registration under Section 1
that is a registered public offering involving an underwriting, Red Hat
will include Registrable Shares that continue to be subject to the
restrictions on disposition imposed by the Lock-Up Agreements if, prior
to the effective date of the registration statement pursuant to which
these Registrable Shares are to be distributed, the restrictions
imposed by the Lock-Up Agreements on the disposition of those
Registrable Shares will by their terms have lapsed.
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SECTION 12. MISCELLANEOUS.
(a) NOTICES. All notices, requests and other communications
hereunder shall be in writing and will be deemed to have been duly
given and received (i) when personally delivered, (ii) when sent by
telefax to a party at the number listed below for such party, (iii)
three (3) business days after the day on which the same has been
delivered prepaid to an international courier service, or (iv) three
(3) business days after the deposit in the United States mail,
registered or certified, return receipt requested, postage prepaid, in
each case addressed to the party to whom such notice is to be given at
the following address for such party:
If to Red Hat: BY MAIL TO:
P.O. Box 13588
Research Triangle Park, NC 27709
Attn: President
Telefax No.: (919) 547-0024
BY OVERNIGHT COURIER TO:
2600 Meridian Parkway
Durham, NC 27713
Attn: President
Telefax No: (919) 547-0024
With copies to: Moore & Van Allen, PLLC
One Hannover Square, Suite 1700
Raleigh, NC 27601
Attn: Martin Brinkley, Esq.
Telefax No.: (919) 828-4254
If to the Sellers: c/o Lawrence J. Weidman
Shareholder Representative
1252 Murray Hill Avenue
Pittsburgh, PA 15217
Telefax No.: (412) 521-2994
With copies to: Thorp Reed & Armstrong, LLP
20 Stanwix Street
One Riverfront Center
Pittsburgh, PA 15222-4895
Attn: Priscilla S. Johnson
Telefax No.: (412) 394-2555
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Any party hereto from time to time may change its address, telefax
number or other information for the purpose of notices to that party by
giving notice specifying such change to the other parties hereto.
(b) RIGHTS OF HOLDERS. Each holder of Registrable Securities
shall have the absolute right to exercise or refrain from exercising
any right or rights that such holder may have by reason of this
Agreement, including, without limitation, the right to consent to the
waiver or modification of any obligation under this Agreement, and such
holder shall not incur any liability to any other holder of any
securities of Red Hat as a result of exercising or refraining from
exercising any such right or rights.
(c) WAIVER. Any term or condition of this Agreement may be
waived at any time by the party that is entitled to the benefit
thereof, but no such waiver shall be effective unless set forth in a
written instrument duly executed by or on behalf of the party waiving
such term or condition. No waiver by either party of any term or
condition of this Agreement, in any one or more instances, shall be
deemed to be or construed as a waiver of the same or any other term or
condition of this Agreement on any future occasion.
(d) AMENDMENT. This Agreement may be amended, supplemented or
modified only by a written instrument duly executed by or on behalf of
each party hereto.
(e) REMEDIES. Each party hereto will be entitled to enforce
any right granted to such party by any provision of this Agreement
specifically to recover damages caused by reason of any breach of any
provision of this Agreement and to exercise all other rights granted by
law. The parties hereto agree and acknowledge that money damages may
not be an adequate remedy for any breach of the provisions of this
Agreement and that any party may in its sole discretion apply to any
court of law or equity of competent jurisdiction (without posting any
bond or other security) for specific performance and for other
injunctive relief in order to enforce or prevent violation of the
provisions of this Agreement.
(i) ENTIRE AGREEMENT. This Agreement supersedes all prior
discussions and agreements among the parties hereto with respect to the
subject matter hereof and contains the sole and entire agreement among
the parties hereto with respect to the subject matter hereof.
(j) CAPTIONS. The captions used in this Agreement have been
inserted for convenience of reference only and do not define or limit
the provisions hereof.
(k) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina
applicable to a contract executed and performed in such State, without
giving effect to the conflicts of laws principles thereof.
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<PAGE>
(l) COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all
of which together will constitute one and the same instrument.
(m) SEVERABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof,
and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other
jurisdiction.
(n) NO THIRD PARTY BENEFICIARY. This Agreement shall not
confer any rights or remedies upon any Person other than the parties
hereto and their respective successors and permitted assigns.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
RED HAT:
RED HAT
By:/s/ MANOJ GEORGE
---------------------------------
Name: Manoj George
Title: Chief Financial Officer
SELLERS:
--------
(See SCHEDULE I attached hereto)
By: /s/ LAWRENCE J. WEIDMAN
--------------------------------------
Lawrence J. Weidman, for himself
and as Shareholder Representative,
being attorney-in-fact for each of
the Sellers listed on SCHEDULE I hereto
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SCHEDULE I
SELLERS:
Lawrence J. Weidman Eleanor DeJulio
L. Todd Masco Robert A. & Mary K. Cumming
Andrew M. Bressen Frank J. DeJulio
Barbara Jean Masco Abdul-Malek Robert Weidman
Stephen G. Wadlow Clifford B. & Rosanne M. Levine
Victoria Landgraf Maria DiMaria
Gregory Plesur Marina LaCagnina
Joshua Bluestein Douglas DeJulio
Robert Miles R. Joseph Vetter
Regis Donovan Thomas G. Dopirak
Maurice Rickard Jonathan L. Coburn
Andrew M. Boardman Thomas N. Canfield
John G. Myers Cynthia McMillin
Neil Masco Andrew Plotkin
Richard Horn Thorp, Reed & Armstrong, LLP
15
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exhibit 10.12
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement ("Agreement") entered into as of this 14th day
of December, 1999 ("Effective Date") by and between Open Source, Inc., a
Texas corporation having its place of business in Carrolton, Texas ("Seller")
and Red Hat, Inc., a Delaware corporation having its principal place of
business in Durham, North Carolina ("Buyer").
BACKGROUND
Seller now owns and wishes to sell to Buyer the Internet domain name
opensource.com, including all variants of the domain name, such as
www.opensource.com and ftp.opensource.com, (collectively, the "Domain Name"),
but not including the pages comprising the Seller's Web site or any database or
other content at such Web site as of the Closing Date; and
Buyer wishes to purchase the Domain Name from Seller.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants
and agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Buyer and Seller agree
as follows:
1. PURCHASE AND SALE.
1.1. Subject to the terms and conditions set forth in this Agreement, Buyer
hereby agrees to purchase, and Seller hereby agrees to sell, any and
all of Seller's right, title and interest in and to the Domain Name,
including, but not limited to, all goodwill, trademarks, service marks,
trademark or service mark applications (if any) for the Domain Name or
any variant of the Domain Name, URLs, and domain name registrations
(including, without limitation, www.opensource.com and
ftp.opensource.com), and all related contracts, agreements, licenses or
permits (collectively, the "Purchased Assets"), free and clear of all
mortgages, pledges, security interests, adverse claims, encumbrances
and liens.
1.2. The closing of the transactions contemplated in this Agreement (the
"Closing ") shall take place on a date and at a time and location
specified by Buyer (the "Closing Date "). On the Closing Date, the
Purchased Assets will be transferred to Buyer by Seller, and Seller
will do all things that are deemed necessary by Buyer to transfer the
Purchased Assets. The Purchased Assets will be delivered to Buyer in
such electronic or other format as Buyer shall reasonably request.
Seller shall complete and execute the bill of sale and other documents
attached as EXHIBIT A and all other documents necessary to effectuate
the sale and transfer of the Purchased Assets, and promptly
take such action as required by Network Solutions, Inc. ( "Network
Solutions ") to transfer the Domain Name to Buyer. For the purpose of
accomplishing the transfer of the Domain Name, Seller appoints Buyer as
its attorney in fact to execute all documents and take all action
required by Network Solutions to effect the assignment and transfer of
the Domain Name to Buyer. Failure to consummate the Closing in the
manner described above and in accordance with the other terms of this
Agreement will not result in termination of this Agreement and will not
relieve any party of any of its obligations under this Agreement.
1.3. Seller acknowledges that Buyer is not purchasing or assuming any
liabilities, obligations or indebtedness of Seller (collectively, the
"Liabilities"), regardless of whether such Liabilities are related to
the Purchased Assets, arise as a result of the transactions
contemplated by this Agreement, or are otherwise related to the
Seller's business in any manner. Not in limitation of any other
provision of this Agreement, Seller jointly and severally hereby agrees
to pay, perform and discharge the Liabilities of Seller related to or
connected with the Purchased Assets, and to indemnify and hold Buyer
harmless from any and all claims, costs, expenses, liabilities, losses
or damages, including attorneys' fees, relating to or arising out of
the Liabilities.
<PAGE>
2. PURCHASE PRICE.
2.1. In exchange for the Purchased Assets and subject to the terms and
conditions of this Agreement, Buyer shall pay to Seller at the Closing
Seventy Five Thousand Dollars ($75,000) payable in cash via wire
transfer to such account as designated by Seller. Seller shall pay all
sales and transfer taxes, if any, required with or resulting from the
sale of the Purchased Assets pursuant to this Agreement.
2.2. At the Closing, Seller shall deliver to Buyer such other and further
certificates, assurances and documents as Buyer may request in order to
evidence the accuracy of the representations and warranties of Seller
and the performance of the covenants and agreements to be performed by
Seller pursuant hereto at or prior to the Closing.
2.3. At the Closing, Seller shall deliver to Buyer a Registrant Name Change
Agreement Version 3.0 - Transfers, as required by Network Solutions,
Inc., ("Transfer Agreement") properly completed, signed, and notarized.
After delivery by Seller to Buyer of the Transfer Agreement, Buyer
shall complete whatever additional transactions with Network Solutions
that are necessary for the Buyer to take possession of the Purchased
Assets; provided that Sellers shall give Buyer all cooperation
reasonably requested by Buyer to complete the transfer of the Purchased
Assets.
2.4 Within five days after the date that Buyer receives notification from
Network Solutions of the effectiveness of the transfer of the Domain
Name in accordance with the Transfer Agreement ("Transfer Date"), Buyer
shall issue and deliver to Seller a number of unregistered shares of
the common stock of Buyer ("Shares") determined by dividing Eight
Hundred Fifty Thousand Dollars ($850,000) by the Issuance Average
Price. The "Issuance Average Price" shall mean the average closing
price per share for Buyer's common stock as quoted on the NASDAQ
National Market on the twenty (20) trading days immediately preceding
the Transfer Date. Section 8.5 below sets forth the registration rights
applicable to the Shares. In the event that the calculation of Shares
under this Agreement creates a fractional Share, the number of Shares
to be issued shall be rounded to the nearest whole number thereof.
2.5 Upon the earlier of (i) the effective date of a registration statement
registering the Shares for resale by Seller, or (ii) the first
anniversary of the Transfer Date (such earlier date shall be the
"Terminal Date"), the parties shall calculate the aggregate market
value of the Shares as of the Terminal Date ("Terminal Date Value") by
multiplying the number of Shares issued under Section 2.4 (as adjusted
to reflect any stock splits or similar events occurring prior to the
Terminal Date) by the Terminal Average Price. The "Terminal Average
Price" shall mean the average closing price per share of Buyer's common
stock as quoted on the NASDAQ National Market on the twenty (20)
trading days immediately preceding the Terminal Date.
2.5.1 In the event that the Terminal Date Value is less than Eight
Hundred Fifty Thousand Dollars ($850,000) ( "Shortfall "), then
Buyer shall promptly, at Buyer's option and subject to the terms
of Section 2.5.2 below, either (a) pay Seller an amount equal to
the Shortfall in cash, payable by wire transfer to an account
designated by Seller, or (b) issue and deliver to Seller that
number of shares of the common stock of Buyer which shall be
equal in aggregate value (based on the Terminal Average Price)
to the Shortfall. If Buyer elects to pay a Shortfall in stock,
and the event triggering the Terminal Date is the effectiveness
of a Registration Statement by Buyer in accordance with Section
8.5, then subject to the terms of Section 8.5 and to whether the
form of Registration Statement would accommodate Buyer's doing
so, Buyer will use its best efforts to include the additional
shares constituting payment of the Shortfall in such
Registration Statement.
2.5.2 Buyer, if electing to satisfy the Shortfall through the issuance
of common stock under Section 2.5.1 above, may delay such
issuance if and for so long as conditions exist which would
permit Buyer to issue a Suspension Notice under Section 8.5.2
below if a Registration Statement were in effect thereunder.
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3. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller hereby represents and warrants as follows:
3.1. Seller owns good, valid and marketable title to the Purchased Assets,
free and clear of all liens, encumbrances, security interests,
restrictions or claims of any kind or nature, and no other person has
any interest in, or right or claim to, the Purchased Assets or any part
thereof;
3.2. Seller's use and operation of the Domain Name does not infringe upon,
violate or constitute a misappropriation of any intellectual property
or other right of any other person or entity or of any applicable law
or regulation as Seller is currently using the Domain Name. No claim
has been asserted by any person (i) that such person has any right,
title or interest in or to any intellectual property that is included
in the Purchased Assets, (ii) that such person has any right to use any
mark or trade name that is included within the Purchased Assets, or
(iii) that challenges the legality, validity or enforceability of any
of the intellectual property included within the Purchased Assets;
3.3. Seller has duly registered with all required authorities the Domain
Name, and is the sole and exclusive owner of and possesses all rights
necessary to use the Domain Name as Seller is currently using such
Domain Name;
3.4. No consent, approval or authorization from, or filing with or notice
to, any third party or any governmental authority is required in
connection with Seller's execution and delivery of this Agreement or
the performance of Seller's obligations hereunder;
3.5 There exists no contract, agreement or undertaking in connection with
the Purchased Assets to which Seller is a party or by which Seller is
or may become bound, or to which any of the Purchased Assets are
subject (collectively, the "Contracts"): (a) containing any provision
or covenant prohibiting or limiting the ability of Seller to engage in
any business activity with respect to the Purchased Assets, (b) under
which Seller has granted (or may grant) a lien, encumbrance or security
interest on or in the Purchased Assets (or any of them), (c) relating
to ownership, the right to use, or the future disposition or
acquisition of, any of the Purchased Assets, (d) otherwise limiting in
any way currently or with the passage of time Buyer's right to use the
Purchased Assets or convey any right or interest in the Purchased
Assets, or (e) under which Seller or any party thereto is, or with the
passage of time or the occurrence of an event may be, in breach.
3.6 No license, permit, authorization, approval, registration (except with
Network Solutions) or similar consent must be granted by any third
party or governmental authority (collectively, "Licenses") to Seller in
connection with the Purchased Assets. Seller is not in violation of any
rule, regulation, policy, or procedure of Network Solutions in
connection with the Purchased Assets. There are no proceedings pending
or threatened that would have the effect of revoking or limiting or
affecting the transfer or renewal of the registration of the Domain
Name with Network Solutions. The Domain Name registration may be
transferred and assigned to Buyer without the consent of any person
other than Seller.
3.7 Seller is not a party to or threatened to be made a party to, any
charge, complaint, action, suit, arbitration, hearing, investigation or
other proceeding in connection with the Purchased Assets.
3.8. Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of Texas. Seller has full
corporate power and authority (i) to own the Purchased Assets, (ii) to
execute and deliver this Agreement and all other agreements and
documents contemplated by this Agreement to which Seller is a party,
(iii) to perform its obligations hereunder and thereunder, and (iv) to
consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and such other agreements and
documents has been duly authorized by Seller and the Agreement and the
other agreements and documents contemplated hereby
3
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constitute the legal, valid and binding obligations of Seller,
enforceable against Seller in accordance with their terms, subject to
bankruptcy, insolvency or other laws of general applicability affecting
the rights and remedies of creditors and subject to the availability of
the remedy of specific performance or injunctive or other equitable
relief.
3.9. The execution and delivery of this Agreement by Seller and the
performance by it of the transactions contemplated by this Agreement do
not and will not (a) conflict with, or result in a violation, breach or
termination of or default under, any term or provision of its corporate
charter or by?laws, or any statute, rule or regulation of any
governmental authority, or any contract or agreement to which it is a
party or by which it is bound or (b) result in the imposition of any
lien or encumbrance upon any of the Purchased Assets.
3.10 No broker or other representative has acted on behalf of Seller in
connection with the transactions contemplated hereby in such a manner
as to give rise to any claim by any person against Buyer for a finder's
fee, brokerage commission or similar payment.
3.11 Seller has no liability (whether absolute, accrued, contingent or
otherwise) in connection with the Purchased Assets, and there is no
basis for any present or future action, suit, proceeding, claim,
demand, proceeding or investigation against Seller giving rise to any
liability in connection with the Purchased Assets, other than
liabilities disclosed in the Disclosure Letter.
3.12 Seller is acquiring the Shares and will acquire any shares issued to
compensate a Shortfall pursuant to Section 2.5.2 solely for investment
for Seller's own account and not with a view to, or for resale or
distribution thereof, other than pursuant to the registration statement
referred to in Section 8.5 below.
3.13. Seller represents that it has such knowledge and experience in
financial and business matters that Seller is capable of evaluating the
merits and risks of the investment in the Shares. Seller also
represents it has not been organized for the purpose of acquiring the
Shares. Seller acknowledges that the acquisition of the Shares involves
substantial risk; and Seller represents and warrants to the Buyer that
it can bear the economic risk of its investment in the Shares.
3.14. The representations and warranties of Seller contained in this
Agreement or any other agreement or document to be delivered at the
Closing by Seller to Buyer do not and will not contain any untrue
statement of a material fact and do not and will not omit to state a
material fact necessary in order to make the statements herein or
therein, in the light of the circumstances in which they were made, not
misleading.
4. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer hereby represents and warrants to Seller as follows:
4.1. Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has full
corporate power and authority and all material governmental licenses,
authorizations, consents and approvals required to acquire the
Purchased Assets; and
4.2. The execution and delivery of this Agreement and the other agreements
and documents contemplated hereby and the transactions contemplated
hereby have been duly authorized by the Board of Directors of Buyer.
This Agreement and the other agreements and documents contemplated
hereby constitute the legal, valid and binding obligation of Buyer
enforceable against Buyer in accordance with its terms, subject to
bankruptcy, insolvency or other laws of general applicability affecting
the rights and remedies of creditors or other equitable relief.
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4.3. No broker or other representative has acted on behalf of Buyer in
connection with the transactions contemplated hereby in such a manner
as to give rise to any valid claim by any person against Seller for a
finder's fee, brokerage commission or similar payment.
4.4. The representations and warranties of Buyer contained in this Agreement
or any other agreement or document to be delivered at the Closing by
Buyer to Seller do not and will not contain any untrue statement of a
material fact and do not and will not omit to state a material fact
necessary in order to make the statements herein or therein, in the
light of the circumstances in which they were made, not misleading.
5. COVENANTS OF SELLER.
5.1. The parties agree that Buyer will be irreparably damaged if Seller does
not transfer the Purchased Assets on the Closing Date. Accordingly,
without limiting Section 6 below, Buyer shall be entitled to a
temporary or permanent injunction, without showing any actual damage,
and/or a decree for specific performance, in order to effect the
transfer of Purchased Assets at the Closing Date.
5.2. Seller agrees that, unless this Agreement is properly terminated
pursuant to Section 17 below, Seller will not, directly or indirectly,
through any officer, director, shareholder, affiliate or agent or
otherwise, solicit, initiate, encourage or negotiate any proposal or
offers from any third party relating to (a) the acquisition of any of
the Purchased Assets or (b) the licensing, assignment or granting of
any other right in or to the Purchased Assets or any of the
intellectual property relating to any of the Purchased Assets, nor will
any of Seller's officers, directors, shareholders, affiliates or agents
participate in any negotiations regarding, or furnish to any person any
information with respect to, or otherwise cooperate with or facilitate
any effort by any person to do or seek any such transaction.
5.3 Seller agrees that, by the earlier of (i) notification from Network
Solutions of the effectiveness of the transfer of the Domain Name in
accordance with the Transfer Agreement, or (ii) thirty (30) days after
the Closing, Seller shall cease all use of the Domain Name, and if
necessary Seller shall implement on Seller's web servers an automated
redirect which shall route all Internet traffic that would otherwise be
directed to the Domain Name, to a URL provided by Buyer ("Redirect"),
and Seller shall maintain such Redirect until Network Solutions
provides notification of the effectiveness of the transfer of the
Domain Name in accordance with the Transfer Agreement.
6. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS.
The obligations of Buyer under this Agreement are subject to the satisfaction,
at or before the Closing, of all the conditions set out below in this Section 6.
Buyer may, in its absolute discretion, waive any or all of these conditions in
whole or in part without prior notice; PROVIDED, HOWEVER, that no such waiver of
a condition shall constitute a waiver by Buyer of any of its other rights or
remedies, at law or in equity, if Seller shall be in breach or default of any of
its representations, warranties or covenants under this Agreement.
6.1. The representations and warranties of Seller contained in this
Agreement were true when made, and shall be true as of the Closing Date
with the same force and effect as if made at and as of the Closing
Date, and Seller shall, at the request of Buyer, which request Buyer
hereby makes, deliver at Closing a written certification as to the
truthfulness of such representations and warranties, which shall not
indicate the occurrence of a material adverse change with respect to
the Purchased Assets.
6.2. Seller shall have performed, satisfied and complied with all covenants,
agreements, and conditions required by this Agreement to be performed,
satisfied or complied with by Seller prior to or on the Closing Date
and Seller shall deliver at Closing a written certification thereof.
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6.3. Seller shall have executed and delivered all documents and agreements
contemplated by this Agreement to which Seller is a party.
6.4. No action, suit or proceeding before any court or any governmental body
or authority, pertaining to the transactions contemplated by this
Agreement or to their consummation or in any way relating to or
affecting the Purchased Assets or any part thereof, shall have been
instituted or threatened.
6.5. Buyer shall have satisfactorily completed its pre?acquisition
investigation and review of Seller and the Purchased Assets and shall
be satisfied with the results of such investigation and review in its
sole discretion; PROVIDED, HOWEVER, that no such investigation or
review shall in any way relieve Seller from, or affect Buyer's right to
rely upon, the representations and warranties made by Seller under this
Agreement.
7. CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS.
The obligations of Seller under this Agreement are subject to the satisfaction,
at or before the Closing, of all the conditions set out below in this Section 7.
Seller may, in its absolute discretion, waive any or all of these conditions in
whole or in part without prior notice; PROVIDED, HOWEVER, that no such waiver of
a condition shall constitute a waiver by Seller of any of their other rights or
remedies, at law or in equity, if Buyer shall be in breach or default of any of
its representations, warranties or covenants under this Agreement.
7.1. The representations and warranties of Buyer contained in this Agreement
were true when made, and shall be true as of the Closing Date with the
same force and effect as if made at and as of the Closing Date. Buyer
shall deliver at Closing a written certification as to the truthfulness
of such representations and warranties.
7.2. Buyer shall have performed, satisfied and complied with all covenants,
agreements, and conditions required by this Agreement to be performed,
satisfied or complied with by Buyer prior to or on the Closing Date and
Buyer shall deliver at Closing a written certification thereof.
7.3. Buyer shall have executed and delivered all documents and agreements
contemplated by this Agreement to which Buyer is a party.
8. STOCK TRANSFER RESTRICTIONS AND RELATED MATTERS.
8.1. Seller acknowledges that the Shares (which shall include, solely for
purposes of this Section 8.1, any shares of Buyer's common stock issued
to pay any Shortfall pursuant to Section 2.5.1) are being issued in
reliance on an exemption from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act ") for an offer
and sale of securities that does not involve a public offering and,
upon issuance, shall not have been registered under any federal or
state securities laws, and that such Shares cannot be resold in the
absence of applicable and effective registration except pursuant to an
exemption from, or in a transaction not subject to the registration
requirements of applicable federal and state securities laws. Seller
agrees that it shall refrain from transferring in any manner any
interest in any of the Shares prior to the filing with the Securities
and Exchange Commission of Buyer's next Annual Report on Form 10-K,
except pursuant to the provisions on Section 8.5 below. After such
date, Seller agrees that it shall refrain from transferring any of the
Shares except in a transaction registered under the Securities Act or
unless it shall have delivered to the Buyer an opinion of counsel,
which counsel and opinion shall be reasonably satisfactory to the
Buyer, that such transfer is being effected in accordance with an
available exemption from, or in a transaction not subject to the
registration requirements of the Securities Act. Seller also
acknowledges that the Buyer is under no obligation to effect any such
registration under the Securities Act or otherwise with respect to
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such shares (or any securities issued in exchange or substitution
therefor) or to file for or comply with any exemption from such
registration except as set forth in Section 8.5 below.
8.2. The certificates representing such Shares shall bear legends in
substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER ANY FEDERAL OR STATE SECURITIES LAWS AND HAVE BEEN ISSUED UNDER
EXEMPTIONS THAT DEPEND IN PART ON THE INTENT OF THE HOLDER NOT TO SELL
OR TRANSFER SUCH SHARES IN ANY MANNER NOT PERMITTED BY SUCH LAWS. THE
SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT OR UNLESS (1) COVERED BY AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
(2) IN ACCORDANCE WITH RULE 144 OF THE RULES AND REGULATIONS OF SUCH
ACT, OR (3) IN ACCORDANCE WITH A LEGAL OPINION SATISFACTORY TO COUNSEL
FOR RED HAT, INC. THAT SUCH SALE OR TRANSFER IS OTHERWISE EXEMPT FROM
THE REGISTRATION REQUIREMENTS OF SUCH ACT. TRANSFER OF THE SECURITIES
EVIDENCED BY THIS CERTIFICATE IS SUBJECT TO AN ASSET PURCHASE AGREEMENT
DATED ON OR ABOUT [THE DATE OF THIS AGREEMENT] BETWEEN RED HAT, INC.
AND OPEN SOURCE, INC. A COPY OF SAID ASSET PURCHASE AGREEMENT IS ON
FILE IN THE OFFICE OF RED HAT, INC., AND A COPY THEREOF WILL BE MAILED
TO THE HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT OF A WRITTEN REQUEST
THEREFOR.
8.3. Seller acknowledges that the Buyer is a reporting company under Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"); that Seller has received and had an opportunity to review the
Buyer's various filings previously made pursuant to the Exchange Act,
which are publicly available; and that Seller has been given the
opportunity to ask questions of and receive answers from the officers
of the Buyer concerning the Buyer and the terms and conditions of the
transactions contemplated by this Agreement.
8.4 Transfers in Violation. Any sale, assignment, transfer, pledge,
hypothecation, mortgage or disposition of any Shares, by gift or
otherwise, in violation of any provision of this Agreement shall be
void and of no effect and shall not be recognized by Buyer as
transferring any interest in any of such Shares.
8.5. Registration Rights.
8.5.1. If, at any time after the Transfer Date, the Buyer shall file a
registration statement with the Securities and Exchange
Commission (the "SEC ") which in form is suitable for inclusion
of the Shares (which shall include, solely for purposes of this
Section 8.5, any shares of Buyer's common stock issued to pay
any Shortfall pursuant to Section 2.5.1), the Buyer shall so
notify Seller. In such event, Seller may include some or all of
the Shares in such registration statement (the "Registration
Statement ") by completing and signing the Buyer's notification
form and returning it within ten days of the date of the notice,
and thereafter taking such other related actions as the Buyer
reasonably shall request; provided, however, that the foregoing
right to have shares included in any such Registration Statement
shall (i) be subject to cutback in the discretion of the
managing underwriter in the case of an underwritten offering;
and (ii) expire if and when all of the Shares may be sold during
a single three-month period under Rule 144 promulgated under the
Securities Act.
8.5.2. Notwithstanding Section 8.5.1 above, the Buyer shall not be
required to take any action with respect to the filing or the
declaration or continuation of effectiveness of the Registration
Statement following notice to Seller from the Buyer (a
"Suspension Notice") of the existence of any state of facts or
the happening of any event (including without
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limitation pending negotiations relating to, or the consummation
of a transaction) or the occurrence of any event which in the
opinion of the Buyer might require additional disclosure of
material, non-public information by the Buyer in the
Registration Statement as to which the Buyer believes it has a
bona fide business purpose for preserving confidentiality or
which renders the Buyer unable to comply with the published
rules and regulations of the SEC promulgated under the
Securities Act or the Exchange Act, as in effect at any relevant
time. Upon receipt of a Suspension Notice from the Buyer, Seller
will forthwith discontinue disposition of all of such shares
pursuant to the Registration Statement until receipt from the
Buyer of copies of prospectus supplements or amendments prepared
by or on behalf of the Buyer, together with a notification that
the Suspension Notice is no longer in effect, and, if so
directed by the Buyer, Seller will deliver to the Buyer all
copies in its possession of the prospectus covering such shares
current at the time of receipt of any Suspension Notice.
8.5.3. All expenses incurred in connection with the registration
pursuant to this Section 8.5 shall be borne by the Buyer, except
that all selling discounts and commissions (if any) and stock
transfer taxes applicable to the shares covered by the
Registration Statement and all fees and disbursements of counsel
for the Seller relating thereto shall be borne by the Seller.
8.5.4. Buyer will indemnify Seller, each of Seller's directors and
officers, and each person who controls Seller within the meaning
of Section 15 of the Securities Act, against all expenses,
claims, losses, damages, or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement
of any litigation, commenced or threatened, arising out of or
based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement,
prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any
omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they
were made, not misleading, or any violation by Buyer of the
Securities Act or any rule or regulation promulgated under the
Securities Act applicable to Buyer in connection with any such
registration, qualification or compliance, and Buyer will
reimburse Seller and each such other person for any legal and
any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that Buyer will not be
liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any
untrue statement or omission or alleged untrue statement or
omission made in conformity with information furnished to Buyer
by Seller.
8.5.5. Seller will indemnify Buyer, each of Buyer's directors and
officers, each person who controls Buyer within the meaning of
Section 15 of the Securities Act, and each other person or
entity including securities in such registration, qualification
or compliance and each controlling person thereof against all
claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any
such registration statement, prospectus, offering circular or
other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and
will reimburse Buyer and all such directors, officers and
persons for any legal or any other expenses reasonably incurred
in connection with investigating or defending any such claim,
loss, damage, liability or action, in each case to the extent,
but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in
such registration statement, prospectus, offering circular or
other document in conformity with information furnished to Buyer
by Seller.
8.5.6. The registration rights in this Section 8.5 are not transferable
by Seller.
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9. INDEMNIFICATION.
9.1. Each party ("Indemnitor") shall indemnify the other ("Indemnitee")
against and shall hold the Indemnitee harmless from any and all
liabilities, losses, damages, costs and expenses (collectively,
"Damages") incurred by the Indemnitee (including, without limitation,
reasonable attorneys' fees and expenses) by reason of any falsity in or
breach or incorrectness of any representation and warranty of, or
failure to perform any covenant or agreement made or given by, the
Indemnitor in this Agreement or in connection with the consummation of
the transactions contemplated hereby.
9.2. Indemnitee shall provide prompt written notice to Indemnitor of any
claim or the commencement of any suit, action, or proceeding in respect
of which indemnity may be sought under this Section 9. The failure of
Indemnitee to provide prompt written notice shall not impair
Indemnitee's rights hereunder except to the extent that Indemnitor
demonstrates that Indemnitor's ability to defend has been materially
prejudiced by such failure of Indemnitee. Indemnitor shall have thirty
(30) days to negotiate, settle or defend (or institute the defense of),
without cost to Indemnitee, any claim or dispute before Indemnitor's
indemnification obligation shall arise under this Section 9; PROVIDED,
HOWEVER, that Indemnitor may not settle any action without the consent
of Indemnitee, which shall not be unreasonably withheld or delayed.
Indemnitor shall not be liable under this Section for any settlement
effected without its reasonable consent of any claim, suit, action or
proceeding in respect of which indemnity may be sought hereunder.
9.3. Indemnitor shall promptly pay to Indemnitee the amount of any Damages
to which Indemnitee may become entitled to by reason of the provisions
of this Agreement. The payment required to be made pursuant to this
Section 9.3 shall be made in cash.
10. CONFIDENTIALITY; PUBLIC ANNOUNCEMENTS.
10.1. Seller and Buyer shall keep confidential, and shall cause its officers,
directors, employees, accountants, counsel, consultants, advisors and
other agents (collectively, "Representatives ") to keep confidential,
the terms of this Agreement and all confidential documents and
information concerning the other party provided pursuant to this
Agreement or in connection with the transactions contemplated hereby
(collectively, the "Confidential Information "), unless disclosure is
compelled by judicial or administrative process, by the terms of this
Agreement, or other applicable law; PROVIDED, that Buyer shall have no
obligation to keep confidential or cause its Representatives to keep
confidential this Agreement or any trade secrets, know-how,
intellectual property rights and other Purchased Assets acquired by
Buyer pursuant to this Agreement. For purposes of this Section 10, all
trade secrets, know-how, intellectual property rights and other
Purchased Assets acquired by Buyer shall be deemed to be Confidential
Information of Buyer from and after the Closing Date. Without limiting
any of the foregoing, a party shall disclose Confidential Information
only to those of its Representatives who have a need to know such
information for a purpose contemplated by the terms of this Agreement,
PROVIDED, that the person receiving such Confidential Information shall
be informed of the proprietary nature of the information and
shall agree not to disclose such Confidential Information except in
accordance with the terms hereof.
10.2. All press releases and other public disclosures concerning this
transaction shall be made only by Buyer, except as required by
applicable law. The parties agree to issue a press release concerning
this transaction mutually approved by the parties promptly after the
Closing.
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11. COSTS AND EXPENSES.
Except as otherwise provided for hereunder, the parties hereto shall bear and be
responsible for their respective attorneys' fees, accountants' fees, broker's
fees and all other expenses incurred by them in the preparation, negotiation and
execution of this Agreement and all related documents and the consummation of
the transactions contemplated hereby.
12. BEST EFFORTS; FURTHER ASSURANCES.
Subject to the terms and conditions of this Agreement, each party will use its
reasonable best efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary or desirable under applicable laws and
regulations to consummate the transactions contemplated by this Agreement. Buyer
and Seller agree without further consideration to execute and deliver such other
documents, certificates, agreements and other writings and to take such other
actions as may be necessary or desirable in order to consummate or implement
expeditiously the transactions contemplated by this Agreement and to vest in
Buyer good, valid and marketable title to the Purchased Assets.
13. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
The representations, warranties and covenants contained herein shall survive the
Closing until the date which is one year after the Closing Date, PROVIDED,
HOWEVER, that any covenants or agreements of a party that are required to be
performed following the Closing shall continue in effect as specified herein.
Notwithstanding the foregoing, (a) the confidentiality obligations of the
parties pursuant to Section 10 shall survive in perpetuity and (b) any
representation, warranty, covenant or agreement in respect of which indemnity
may be sought under Section 9 shall survive the time at which it would otherwise
terminate pursuant to this Section, if notice of a claim under Section 9 for
indemnity shall have been given to Seller prior to such time.
14. GOVERNING LAW.
The execution, performance and interpretation of this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of North Carolina, without regard to conflicts of laws principles.
15. NOTICES.
All notices required or permitted to be given under this Agreement must be in
writing, and will be deemed given on the date of receipt if delivered in person
or by facsimile, or on the date of mailing if mailed by overnight courier or
registered or certified mail, postage prepaid, return receipt requested, to the
applicable party at the following addresses:
If to Buyer:
Red Hat, Inc.
2600 Meridian Parkway
Durham, NC 27713
Attention: General Counsel
Fax: (919) 547?0024
If to Seller:
Open Source, Inc.
1925 E. Beltline Road, Suite 409
Carrolton, Texas 75006
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Attention: Srini Vasan
Fax: (972) 478-5931
Either party may change its address for purposes of this Agreement by giving
fifteen (15) days' prior written notice of such change of address to the other
party in the manner described in this Section.
16. BINDING EFFECT; ASSIGNMENT.
Seller shall not assign any of its respective rights, or delegate any of its
obligations under the Agreement to any third party without the consent of Buyer.
This Agreement is binding upon, and shall inure solely to the benefit of, the
parties hereto and their respective heirs, personal representatives, successors
and permitted assigns. This Agreement is not intended to benefit, and shall not
be construed as benefiting, any third party, and no third party shall have
standing to enforce any provision of this Agreement.
17. TERMINATION.
17.1. This Agreement may be terminated:
17.1.1. prior to the Closing by the mutual written agreement of Seller
and Buyer;
17.1.2. prior to the Closing by Buyer upon written notice of such
termination to Seller if (a) there is a material breach of any
covenant or obligation of Seller contained herein, or (b) Buyer
reasonably determines that the timely satisfaction of any
condition set forth in Section 6 has become impossible or
impractical (other than as a result of any failure on the part
of Buyer to comply with or perform its covenants and obligations
under this Agreement), or (c) if the Closing has not occurred on
or prior to December 31, 1999;
17.1.3. prior to the Closing by Seller upon written notice of such
termination to Buyer if (a) there is a material breach of any
covenant or obligation of Buyer contained herein, or (b) Seller
reasonably determines that the timely satisfaction of any
condition set forth in Section 7 has become impossible or
impractical (other than as a result of any failure on the part
of Seller to comply with or perform their covenants and
obligations under this Agreement), or (c) if the Closing has not
occurred on or prior to December 31, 1999;
17.1.4 after the Closing by Buyer in the event that Network Solutions
refuses to or fails to effect transfer of the Domain Name
pursuant to the Transfer Agreement within sixty (60) days
after the Closing.
17.2. If this Agreement is terminated pursuant to Section 17.1, all further
obligations of the parties under this Agreement shall terminate;
PROVIDED, HOWEVER, that:
17.2.1. no party shall be relieved of any obligation or other liability
arising from any breach by such party of any provision of this
Agreement;
17.2.2. the parties shall, in all events, remain bound by and continue
to be subject to the provisions set forth in Sections 9, 10 and
11 hereof;
17.2.3 In the event of any termination of this Agreement after
the Closing, Seller shall refund to Buyer all funds paid under
Section 2.1 of this Agreement.
17.3. The termination rights provided in Section 17.1 above are not
exclusive. The exercise by any party of its right to terminate this
Agreement pursuant to Section 17.1 shall not be deemed to be an
election of remedies and shall not be deemed to prejudice, or to
constitute or operate as a waiver of any other right or remedy that
such party may be entitled to exercise (whether under this Agreement,
under any statute, rule or law, at common law, in equity or otherwise).
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18. MODIFICATION.
No purported modification, amendment or waiver of this Agreement or any of its
terms shall be effective unless it is in writing, and signed by all of the
parties hereto.
19. DISPUTE RESOLUTION.
19.1 The parties shall attempt in good faith to settle a dispute or
controversy for a period of thirty (30) days following the date on
which such dispute or controversy arises through consultation and
negotiation, in good faith and a spirit of mutual cooperation.
19.2 If the parties cannot resolve any dispute or controversy pursuant to
Section 19.1, then the parties hereby agree to submit all disputes or
controversies arising out of or in connection with this Agreement to
binding arbitration in Durham, North Carolina, under the Commercial
Arbitration Rules (the "Rules of Arbitration") then in effect of the
American Arbitration Association. Any award rendered shall be final and
conclusive upon the parties and a judgment thereon may be entered in
any court having in personam and subject matter jurisdiction. Buyer and
Seller submit to the in personam jurisdiction of the Federal and State
Courts in North Carolina, for the purpose of confirming any such award
and entering judgment thereon. All costs and expenses, including
attorneys' fees, of all parties incurred in any dispute which is
determined and/or settled by arbitration pursuant to this Section 19.2
shall be borne by the party determined to be liable in respect of such
dispute; PROVIDED, HOWEVER, that if complete liability is not assessed
against any one party, the parties shall share the total costs of such
liability in proportion to their respective amounts of liability so
determined. The decision of the arbitrator(s) shall (i) be rendered in
writing, and concurred in by a majority of the arbitrators, if more
than one, and (ii) be final, binding and conclusive and entitled to be
enforced to the fullest extent permitted by law in any court of
competent jurisdiction. Except where clearly prevented by the area in
dispute, both parties agree to continue performing their respective
obligations under this Agreement while the dispute is being resolved.
Notwithstanding any provision to the contrary contained herein, no
provision of this Agreement shall prevent Buyer from seeking injunctive
relief for any purported violation or breach of any of Seller's
covenants contained in Section 5 or any confidentiality or
nondisclosure provision applicable to Seller pursuant to this
Agreement.
19.3 Sections 19.1 and 19.2 are the exclusive means of resolving any dispute
or controversy between the parties hereto. All proceedings under this
Section 19, and all evidence given or discovered pursuant hereto, shall
be maintained in confidence by all parties. All proceedings under this
Section 19, and all evidence given or discovered pursuant hereto, shall
be maintained in confidence by all parties.
20. SEVERABILITY.
If any provision of this Agreement is invalid, illegal or incapable of being
enforced by any rule of law or public policy, all other provisions of this
Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transaction contemplated hereby is not
affected in any manner adverse to any party. Upon such determination that any
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith or modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that the transactions contemplated hereby are fulfilled.
21. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement of Buyer and Seller with respect
to the subject matter hereof, and supersedes any and all prior and
contemporaneous understandings or agreements, whether oral or written,
concerning such subject matter. Each party acknowledges that it enters into this
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Agreement without relying on any statement by the other party which is not
specifically set forth in this Agreement.
22. WAIVER.
Any term or condition of this Agreement may be waived at any time by the party
entitled to the benefit thereof, but no such waiver shall be effective unless
set forth in a written instrument duly executed by or on behalf of the party
waiving such term or condition. No waiver by any party of any term or condition
of this Agreement, in any one or more instances, shall be deemed to be or
construed as a waiver of the same or any other term or condition of this
Agreement on any future occasion.
23. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of which shall
be deemed to be an original and all of which together shall constitute one and
the same agreement. Facsimile copies shall also be deemed originals, except that
any facsimile signature shall as soon as practicable be replaced with a manual
signature.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the
date first written above.
OPEN SOURCE, INC.
By: /s/ Venkadesamy Srinivasan
------------------------------------------
Name: Venkadesamy Srinivasan
------------------------------------------
Title: President
--------------------------------------
Date: 12/14/99
----------------------------------------
RED HAT, INC.
By: /s/ Tim Buckley
------------------------------------------
Name: Tim Buckley
----------------------------------------
Title: Chief Operating Officer
---------------------------------------
Date: 1/4/00
----------------------------------------
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Exhibit 10.19
RED HAT, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
COVER SHEET
Red Hat, 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: Tom Butta
----------------------
Grant Date: July 20, 1999
----------------------
Vesting Start Date: July 20, 199
----------------------
Number of Option Shares: 175,000
----------------------
Exercise Price Per Share: $10.00
----------------------
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/ Tom Butta
- --------------------------- RED HAT, INC.
(Optionee Signature) 2600 Meridian Parkway
Durham, NC 27713
---------------------------
(Street Address)
By:/s/ Matthew Szulik
-----------------------
--------------------------- Name: Matthew Szulik
(City/State/Zip Code) Title: President
ESCROW AGENT
RED HAT, 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-
<TABLE>
<S> <C>
On the Vesting Start Date - 25,000 of the Option Shares
One year from the Vesting Start Date - 25% of the remaining Option Shares
On the first day of each subsequent three - 6.25% of the remaining Option Shares
month period following one year from the
Vesting Start Date
</TABLE>
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
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, then immediately prior to such
termination one-half of 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.
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
<PAGE>
-3-
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.
(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
<PAGE>
-4-
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 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 unconditionalundertaking
satisfactory in form and substance to the Company, by acreditworthy 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.
<PAGE>
-5-
(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.
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).
<PAGE>
-6-
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 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
<PAGE>
-7-
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 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.
<PAGE>
-8-
(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.
(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.
<PAGE>
-9-
(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.
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.
<PAGE>
-10-
(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 21.1
Subsidiaries
- ------------
Cygnus Solutions, Inc., a California corporation
Hell's Kitchen Systems, Inc., a Pennsylvania corporation
<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, except as to Note 14 which is as of
January 7, 2000 and except as to the pooling of interests with Cygnus which is
as of January 7, 2000, relating to the financial statements of Red Hat,
Inc., which appears in such Registration Statement. We also consent to the
use in this Registration Statement on Form S-1 of our report dated December
16, 1999 relating to the financial statements of Hell's Kitchen Systems, Inc.,
which appears in such Registration Statement. We also consent to the
references to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
January 14, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF RED HAT, INC. AND ITS SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001087423
<NAME> RED HAT, INC.
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 9-MOS
<FISCAL-YEAR-END> FEB-28-1999 NOV-30-1999 NOV-30-1998
<PERIOD-START> MAR-01-1998 MAR-01-1999 MAR-01-1998
<PERIOD-END> FEB-28-1999 NOV-30-1999 NOV-30-1998
<CASH> 10,055 11,997 0
<SECURITIES> 2,038 7,631 0
<RECEIVABLES> 1,401 4,748 0
<ALLOWANCES> (160) (212) 0
<INVENTORY> 346 1,854 0
<CURRENT-ASSETS> 13,854 26,755 0
<PP&E> 1,617 6,174 0
<DEPRECIATION> (346) (1,079) 0
<TOTAL-ASSETS> 15,276 110,298 0
<CURRENT-LIABILITIES> 2,753 11,560 0
<BONDS> 420 203 0
12,107 0 0
0 0 0
<COMMON> 5 14 0
<OTHER-SE> (9,549) 98,535 0
<TOTAL-LIABILITY-AND-EQUITY> 15,276 110,298 0
<SALES> 10,013 8,559 0
<TOTAL-REVENUES> 10,780 12,596 0
<CGS> 4,013 4,738 0
<TOTAL-COSTS> 4,041 7,414 0
<OTHER-EXPENSES> 6,787 15,771 4,114
<LOSS-PROVISION> 185 212 56
<INTEREST-EXPENSE> 9 15 6
<INCOME-PRETAX> 124 (8,776) 414
<INCOME-TAX> 215 0 215
<INCOME-CONTINUING> (91) (8,776) 200
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (91) (8,776) 200
<EPS-BASIC> (.003) (.105) .004
<EPS-DILUTED> (.003) (.105) .002
</TABLE>
