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Form 10-K
RED HAT INC - RHT
Filed: April 25, 2013 (period: February 28, 2013)
Annual report with a comprehensive overview of the company
The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user
assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be
limited or excluded by applicable law. Past financial performance is no guarantee of future results.
Table of Contents
10-K - FORM 10-K
PART I
Item 1.
2
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
MARKET FOR REGISTRANT S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7.
MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
Exhibit Index
EX-3.1 (EX-3.1)
EX-10.15 (EX-10.15)
EX-10.16 (EX-10.16)
EX-10.17 (EX-10.17)
EX-10.18 (EX-10.18)
EX-10.19 (EX-10.19)
EX-10.47 (EX-10.47)
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
EX-21.1 (EX-21.1)
EX-23.1 (EX-23.1)
EX-31.1 (EX-31.1)
EX-31.2 (EX-31.2)
EX-32.1 (EX-32.1)
Source: RED HAT INC, 10-K, April 25, 2013
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The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any
use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended February 28, 2013
OR
 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from
to
.
Commission File Number: 001-33162
RED HAT, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
06-1364380
(I.R.S. Employer Identification No.)
100 E. Davie St., Raleigh, North Carolina 27601
(Address of principal executive offices, including zip code)
(919) 754-3700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.0001 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  No 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes 
No 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes  No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes  No 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer

Non-accelerated filer 
(Do not check if a smaller reporting company)
Accelerated filer 
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes  No 
The aggregate market value of the common equity held by non-affiliates of the registrant as of August 31, 2012 was approximately $8.1 billion based on the closing
price of $56.04 of our common stock as reported by the New York Stock Exchange on August 31, 2012. For purposes of the immediately preceding sentence, the term
“affiliate” consists of each director, executive officer and greater than 10% stockholder of the registrant. There were 189,598,561 shares of common stock outstanding
as of April 18, 2013.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Red Hat, Inc.’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with its
annual meeting of stockholders to be held on August 8, 2013 are incorporated by reference into Part III of this Form 10-K. With the exception of the portions of the
Proxy Statement expressly incorporated into this Annual Report on Form 10-K by reference, such document shall not be deemed filed as part of this Annual Report on
Form 10-K.
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
Source: RED HAT INC, 10-K, April 25, 2013
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The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any
use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
Table of Contents
TABLE OF CONTENTS
Page No.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
2
17
35
35
35
35
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
36
39
40
61
63
105
105
105
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
106
106
106
106
106
Item 15.
PART IV
Exhibits and Financial Statement Schedules
107
1
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
CAUTIONARY NOTE ON FOWARD-LOOKING STATEMENTS
Certain statements contained in this report and the documents incorporated by reference in this report, including in Management’s Discussion and Analysis of
Financial Condition and Results of Operations, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements provide current expectations of future events based on certain assumptions and any statement that is not strictly a historical statement
could be deemed to be a forward-looking statement (for example, statements regarding current or future financial performance, management’s plans and objectives for
future operations, product plans and performance, management’s expectations regarding market risk and market penetration, management’s assessment of market
factors or strategies, objectives and plans of Red Hat and its partners). Words such as “anticipates,” “believes,” “expects,” “estimates,” “intends,” “plans,”
“projects,” and similar expressions, may also identify such forward-looking statements. Red Hat may also make forward-looking statements in other filings made with
the Securities and Exchange Commission (“SEC”), press releases, materials delivered to stockholders and oral statements made by management. Investors are
cautioned that these forward-looking statements are inherently uncertain, are not guarantees of Red Hat’s future performance and are subject to a number of risks and
uncertainties that could cause Red Hat’s actual results to differ materially from those found in the forward-looking statements and from historical trends. These risks
and uncertainties include the risks and cautionary statements detailed in Item 1A, “Risk Factors” and elsewhere in this report as well as in Red Hat’s other filings with
the SEC, copies of which may be accessed through the SEC’s web site at http://www.sec.gov. Readers are urged to carefully review these risks and cautionary
statements. Moreover, Red Hat operates in a rapidly changing and highly competitive environment. It is impossible to predict all risks and uncertainties or assess the
impact of any new risk or uncertainty on our business or any forward-looking statement. The forward-looking statements included in this report represent our views as
of the date of this report. We specifically disclaim any obligation to update these forward-looking statements in the future. These forward-looking statements should not
be relied upon as representing our views as of any date subsequent to the date of this report.
ITEM 1.
BUSINESS
OVERVIEW
Red Hat is a leading global provider of open source software solutions, using a community-powered approach to develop and offer reliable and high-performing
operating system, middleware, virtualization, storage and cloud technologies.
Our business model
Development. Red Hat employs an open source software development model that uses the collective input, resources and knowledge of a global community of
contributors who collaborate to develop, maintain and enhance software. We believe this model offers advantages to Red Hat because we are able to offer our software
more quickly and with less development cost than is typical of many software vendors who use a proprietary model to develop their products. Our open source
development model also benefits our customers, who are able to take advantage of the quality and value of open source software that we help to develop, aggregate,
integrate, test, certify, deliver, maintain, enhance and support.
Licensing. We typically distribute our software offerings under open source licenses that permit access to the software’s human-readable source code. These
licenses also provide relatively broad rights for recipients of the software to use, copy, modify and redistribute the software. These broad rights afford significant
latitude for our customers to inspect, suggest changes, customize and enhance the software if they so choose.
2
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
Subscriptions. We provide our software offerings primarily under annual or multi-year subscriptions. A subscription generally entitles a customer to, among
other things, a specified level of support, as well as new versions of the software, security updates, fixes, functionality enhancements and upgrades to the technology, if
and when available, and compatibility with an ecosystem of certified hardware and software applications.
Our offerings
Our software offerings are designed to provide customers with high-performing, scalable, flexible, reliable, secure and stable technologies that meet the
information technology (“IT”) infrastructure needs of enterprises. These offerings include:

Red Hat Enterprise Linux—an operating system that runs on a broad range of hardware, including mainframes, servers and work stations.

Red Hat JBoss Middleware—a range of technologies used for developing, deploying and managing distributed applications.

Red Hat Enterprise Virtualization—software that allows customers to use a common hardware infrastructure to run multiple operating systems and
applications. Our virtualization offerings are designed to permit customers to optimize resource allocation and operational flexibility in their IT
environment.

Red Hat Storage Server—software that enables enterprises to treat physical storage as a scalable, standardized, centrally managed pool of virtual storage.
Our portfolio of offerings can be combined to enable cloud computing. Cloud computing is a term used to refer to an IT infrastructure that allows multiple users
to access a shared pool of computing resources (such as networks, processors, storage and applications). In a cloud environment, computing resources can be deployed
more rapidly and efficiently, and usage can be increased or decreased as needed. We also offer a wide range of services that are designed to help customers derive
additional value from Red Hat enterprise technologies.
Red Hat, Inc. was incorporated in Connecticut in March 1993 as ACC Corp., Inc., which subsequently changed its name to Red Hat Software, Inc. Red Hat
Software, Inc. reincorporated in Delaware in September 1998 and changed its name to Red Hat, Inc. in June 1999. Except as otherwise indicated, all references in this
report to “we”, “us”, “our”, the “Company”, the “registrant”, or “Red Hat” refer to Red Hat, Inc. and its subsidiaries. Our fiscal year ends on the last day of February,
and we identify our fiscal years by the calendar years in which they end. For example, we refer to the fiscal year ended February 28, 2013 as “fiscal 2013.”
OUR BUSINESS
We use the open source software development and licensing model to offer enterprise technologies to customers primarily on a subscription basis. Subscriptions
for our offerings are marketed and sold to customers directly and through channel partners.
Open source software
The open source software development and licensing model originated in academic and research environments. Under the open source model, a software
developer distributes the human-readable source code version of the software under an open source license, such as the GNU General Public License (“GPL”) or GNU
Lesser General Public License. Open source licenses provide relatively broad rights for recipients of the software to use, copy, modify and redistribute the software.
These rights afford significant latitude for recipients to inspect, suggest changes, customize or enhance the software. The open source model provides an inherent level
of transparency and choice that contrasts with the proprietary software model.
3
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
Under the proprietary software model, a software vendor generally develops the software itself or acquires components from other vendors, without the input
from a wider community of participants. The vendor generally licenses to the user only the machine-readable binary (or object) code version of the software, with no or
limited rights to copy, modify or redistribute the software, and does not make the source code available to the user or other developers. Moreover, peer review and
collaborative enhancements are not readily possible because of the lack of access to the underlying source code.
The growth of the Internet has greatly increased the scale and efficiency of open source software development through the availability of collaborative
technologies such as email lists, code repositories and websites. These technologies have enabled a global community of developers to collaborate on more complex
open source projects, many of which are commercially funded.
We believe that open source software is a viable and arguably superior alternative to traditional proprietary software for the enterprise customer. As compared to
proprietary software, open source software:

enables an enterprise customer’s in-house development team to collaborate and innovate with a global community of independent developers and testers;

provides an enterprise customer’s in-house development team access to both binary and source code, and the right to use, copy, modify and redistribute the
software;

offers an enterprise customer greater flexibility through open rather than proprietary protocols and formats;

permits an enterprise customer ongoing access to improvements made to the software that are distributed by others; and

allows an enterprise customer to inspect and help diagnose problems easily and customize the software to suit their particular needs.
Subscription business model
We provide our software offerings to our customers primarily under annual or multi-year subscriptions. Our subscription business model is designed to provide
customers with a comprehensive technology solution for the duration of their subscription. A subscription generally entitles a customer to, among other things, a
specified level of support, as well as new versions of the software, security updates, fixes, functionality enhancements and upgrades to the technology, if and when
available, and compatibility with an ecosystem of certified hardware and software applications. Our customers have the ability to purchase higher levels of subscriptions
that increase the level of support the customer is entitled to receive. In addition, our customers are eligible to participate in Red Hat’s Open Source Assurance program,
which provides certain protections in the event there is an intellectual property infringement issue with our enterprise offerings.
Our subscription business model contrasts with the typical proprietary software license model from a revenue recognition perspective. Under a proprietary
software license model, the vendor typically recognizes license revenue in the period that the software is initially licensed. In contrast, under our subscription model, we
generally defer revenue when we bill the customer and recognize revenue over the life of the subscription term.
Distribution of Red Hat offerings
We make Red Hat enterprise technologies available directly to customers and indirectly through various channels of distribution. Our direct sales channels
include our sales force and our web store. Our indirect sales channels include distributors, systems integrators, value added resellers (“VARs”), telecom/network
technology companies, and independent software vendors (“ISVs”). In addition, hardware original equipment manufacturers (“OEMs”) support and pre-load Red Hat
enterprise technologies on their hardware products and also sell their
4
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
hardware together with Red Hat enterprise technologies as part of pre-configured solutions. Red Hat Enterprise Linux and Red Hat JBoss Middleware technologies also
have gained widespread support from many of the leading ISVs and independent hardware vendors (“IHVs”). With the support and tools we make available, many of
these companies have engineered and certified that their offerings run on or with Red Hat Enterprise Linux, Red Hat JBoss Middleware technologies and Red Hat
Virtualization. In some cases, IHVs and ISVs have built their products using Red Hat Enterprise Linux, Red Hat JBoss Middleware and Red Hat Virtualization. We
believe widespread support from these companies helps to increase the level of market acceptance and adoption of our enterprise technologies.
Support by leading independent software and hardware vendors
To facilitate the widespread deployment of Red Hat offerings, we have focused on gaining broad support for our technologies from the providers of hardware,
software and systems integrator services critical to enterprises. For example, leading software vendors with applications that run on, or with, our enterprise technologies
include BMC Software, Inc. (“BMC”), CA, Inc. (“CA”), EMC Corporation (“EMC”), Hewlett-Packard Company (“HP”), International Business Machines Corporation
(“IBM”), Microsoft Corporation (“Microsoft”), Oracle Corporation (“Oracle”), SAP AG (“SAP”), SAS Institute Inc. (“SAS”), Symantec Corporation (“Symantec”) and
VMware, Inc. (“VMware”). In addition, we have certification and pre-load arrangements with leading hardware providers including HP, IBM and Dell Inc. (“Dell”), as
well as Cisco Systems, Inc. (“Cisco”), Fujitsu Limited (“Fujitsu”), Hitachi, Ltd (“Hitachi”) and NEC Corporation (“NEC”), and certification agreements with leading
networking and storage companies including Cisco, EMC, HP, NetApp, Inc. (“NetApp”), Nokia Corporation (“Nokia”) and Nokia Siemens Networks (“Nokia
Siemens”). We also have strategic relationships with leading semiconductor companies, such as Advanced Micro Devices, Inc. (“AMD”) and Intel Corporation (“Intel”)
and cloud providers, such as Amazon.com, Inc. (“Amazon”), Fujitsu, IBM and Rackspace Hosting, Inc. (“Rackspace”).
Red Hat’s role in the open source community
We are an active contributor in many open source communities, often in a leadership role. Red Hat’s participation in the open source development process is
illustrated by our sponsorship of the Fedora Project, JBoss.org, GlusterFS and other open source communities. This participation enables us to leverage the efforts of
these worldwide communities, which we believe allows us to reduce both development cost and time and enhance acceptance and support of our offerings and
technologies. Thus, we are able to use the Fedora Project, JBoss.org and other open source communities as proving grounds and virtual laboratories for innovations that
we can draw upon for inclusion in our enterprise offerings and technologies. Additionally, the open and transparent nature of these communities provides our customers
and potential customers with access and insights into, and the ability to influence, the future direction of Red Hat offerings and technologies.
We are dedicated to helping serve the interests and needs of open source software users and developers online. Our websites, which include redhat.com,
fedoraproject.org, jboss.org, opensource.com and gluster.org, serve as substantial resources for information related to open source initiatives and our open source
offerings. These websites contain news we believe to be of interest to open source users and developers, features for the open source community, a commerce site and a
point-of-access for software downloads and upgrades. Visitors to our websites can organize and participate in user groups, make available fixes and enhancements and
share knowledge regarding the use and development of open source software and methods. By acting as a publisher of open source information and by facilitating the
interaction of users and developers, particularly through the Fedora and JBoss.org projects, we believe our websites have become community centers for open source.
Additionally, redhat.com serves as a primary customer interface, web store and order mechanism for many of our offerings.
5
Source: RED HAT INC, 10-K, April 25, 2013
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Factors influencing our success
We believe our success is influenced by:

the extent to which we can expand the breadth and depth of our technology and service offerings;

our ability to enhance the value of subscriptions for Red Hat enterprise technologies through frequent and continuing innovations to these technologies
while maintaining stable platforms over multi-year periods;

our ability to generate increasing revenue from channel partner and other strategic relationships, including distributors, OEMs, IHVs, ISVs, cloud
computing providers, VARs and systems integrators;

the acceptance and widespread deployment of open source technologies by enterprises and similar institutions, such as government agencies;

our ability to generate new and recurring subscription revenue for Red Hat enterprise technologies; and

our ability to provide customers with consulting and training services that generate additional revenue.
Challenges to the widespread adoption of open source by the enterprise
Even though market acceptance of Red Hat Enterprise Linux, Red Hat JBoss Middleware and other Red Hat enterprise technologies by enterprises is growing, a
number of obstacles exist to the continued growth and adoption of these technologies within an enterprise, including:

competition from well-established proprietary software industry participants such as EMC, HP, IBM, Microsoft, NetApp, Oracle and VMware;

competition from a growing number of companies, such as Amazon, Google, Inc. (“Google”), Microsoft and Rackspace, that allow customers to consume
computing infrastructure as a service without the need to purchase hardware or software;

a limited number of established, profitable and viable open source industry participants; and

uncertainty surrounding a development, licensing and business model not based on limiting access to proprietary technology.
Geographic Areas and Segment Reporting
As of February 28, 2013, Red Hat had more than 80 locations around the world, including offices in North America, South America, Europe, Asia and Australia.
Red Hat is organized primarily on the basis of three geographic business segments: the Americas (U.S., Canada and Latin America), EMEA (Europe, Middle East and
Africa) and Asia Pacific. These business segments are aggregated into one reportable segment due to the similarity in the nature of offerings, financial performance,
economic characteristics (e.g., revenue growth and gross margin), methods of production and distribution and customer classes (e.g., distributors, resellers and
enterprise). See NOTE 2—Summary of Significant Accounting Policies and NOTE 20—Segment Reporting to our Consolidated Financial Statements for further
discussion of our geographic segments. See Item 1A, “Risk Factors”, for a discussion of some of the risks attendant to our operations, including foreign operations.
Backlog
The total value of all non-cancellable subscription and service agreements at February 28, 2013 included deferred revenue classified as a current liability of
$830.5 million, long-term deferred revenue of $259.5 million and backlog (the value of customer contracts to be billed in the future) not reflected in our financial
statements in excess of $280.0 million. The total value of all non-cancellable subscription and service agreements at February 29, 2012 included deferred revenue
classified as a current liability of $711.4 million, long-term
6
Source: RED HAT INC, 10-K, April 25, 2013
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deferred revenue of $235.3 million and backlog not reflected in our financial statements in excess of $200.0 million. The amount of backlog at February 28, 2013 that
we expect to be billed during the fiscal year ending February 28, 2014 is in excess of $180.0 million.
We report our off-balance sheet backlog as a conservative approximation, often describing the amount as “in excess of”, primarily because the value of
underlying contracts is derived from data not yet subjected to the complete application of our revenue recognition policies. We endeavor to derive the value of our
off-balance sheet backlog in a consistent manner year over year and therefore believe amounts are comparable.
BUSINESS STRATEGY
Our business strategy is designed to generate (i) adoption of Red Hat enterprise technologies by enterprise customers globally, (ii) increasing revenue from our
existing user base by renewing existing subscriptions, converting users of free versions of our enterprise technologies to paying subscribers, providing additional value
to our customers and growing the number of open source enterprise technologies we offer, (iii) increasing revenue by providing additional consulting and other targeted
services and (iv) increasing revenue from strategic acquisitions and channel partner relationships, including distributors, OEMs, IHVs, ISVs, cloud computing
providers, VARs and systems integrators, and from our own international expansion, among other means. Further details of our strategy are set forth below.
Increase the adoption of Red Hat enterprise technologies by enterprise customers
A growing number of customers view Red Hat Enterprise Linux and Red Hat JBoss Middleware as mainstream enterprise technologies for mission-critical areas
of their IT infrastructure. An increasing number of these customers deploy Red Hat JBoss Middleware as a reference architecture and portfolio of offerings for
development, deployment and integration of distributed applications, business processes and web services used in a service-oriented architecture (where software
platform or infrastructure resources are provided as services). In addition, we see increasing interest among customers for our virtualization, storage and cloud offerings.
We seek to promote further adoption of our enterprise technologies by expanding the breadth and depth of our technology offerings, offering expanded consulting and
other targeted services, focusing on new geographic markets, and capitalizing on the success of our existing channel and other strategic partner relationships. We
believe the relationships with our partners will continue to stimulate the technical advancement and widespread distribution of our enterprise technologies and the
growth of existing third-party enterprise applications using Red Hat enterprise technologies. We seek to encourage users of free versions of our enterprise technologies
to become paying customers by helping these users understand the value of the subscriptions we offer. We believe that the low-cost, high-value offerings from Red Hat
are a catalyst for change in the IT industry, enabling new deployments and migrations, which encourage a larger ecosystem of compatible hardware and software
solutions.
Continue to expand virtualization, storage, cloud and other platform offerings
We intend to continue to expand our enterprise virtualization suite of server, client and management offerings to enable customers to increase their deployments
of virtualization in enterprise environments. We also expect to continue to invest resources to further develop and market our storage and high-performance distributed
computing offerings. Moreover, we intend to continue to leverage and build upon our technologies that seek to optimize resource allocation and enhance performance
and flexibility in public, private and hybrid cloud computing environments.
Continue to expand routes to market
We intend to continue to grow our direct sales channel as well as our distributors, VAR, OEM, IHV, ISV, cloud computing providers and channel partner
networks on a global basis. In addition, we are enhancing our relationships with systems integrators in order to expand our reach to customers who traditionally rely on
system integrators for advice and recommendations regarding their technology purchases.
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Source: RED HAT INC, 10-K, April 25, 2013
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Continue to pursue strategic acquisitions and alliances
We expect to continue to pursue a selective acquisition strategy as opportunities arise to complement and expand our enterprise technology offerings and service
capabilities. In our fiscal year ended February 28, 2013, we completed the following transactions:

FuseSource—acquired a provider of messaging software for our middleware platform offering;

ManageIQ—acquired a provider of enterprise cloud management and automation software that enables enterprises to deploy, manage and optimize
heterogeneous private clouds, virtualized infrastructures and virtual desktops; and

Polymita Technologies—acquired business process management technology from Polymita for our middleware platform offering.
We also intend to create and extend our strategic alliances where it is beneficial to our business. To facilitate the widespread deployment of Red Hat offerings,
we will continue efforts to build broader and deeper relationships with providers of hardware, software, cloud computing and systems integrator services critical to
enterprises.
Continue to grow our presence in international markets
We have operations in a number of countries in the Americas, EMEA and Asia Pacific, with over 80 offices worldwide. We expect to continue to expand our
operations geographically. See NOTE 2—Summary of Significant Accounting Policies and NOTE 20—Segment Reporting to our Consolidated Financial Statements
for a discussion of our revenue by geographic area. We offer our technologies and documentation in various languages.
Continue to invest in the development of open source technologies
We intend to continue to invest significant resources in the development of new open source technologies in areas that include operating systems, middleware,
virtualization, storage, cloud computing and management, capitalizing on our substantial experience working with open source development communities. We expect
this continued investment to take the form of expenditures on internal development efforts, as well as continued funding of third-party open source projects and the
expansion of our developer services.
PRODUCTS AND SERVICES
Red Hat’s software offerings are designed to provide enterprises with high-performing, scalable, flexible, reliable, secure and stable technologies that meet
customers’ IT infrastructure needs, both on-premise (i.e., running on computers located within an enterprise’s premises) and in a cloud. Our service offerings,
principally directed toward our enterprise customers and the leading hardware providers with whom we have strategic or channel partner relationships, include technical
support, training, professional consulting services, and engineering services.
Red Hat Enterprise Linux technologies
Red Hat Enterprise Linux is an operating system built from various open source software components including the Linux kernel, and is designed expressly for
enterprise computing. An operating system is the software that allows a computer and its various hardware and software components to interact. A worldwide
community of developers collaborates to improve Linux, and we believe we are able to integrate the best of those improvements into our stable, yet innovative and
high-performing Red Hat Enterprise Linux platform. Moreover, Red Hat Enterprise Linux enjoys the support of major OEMs, IHVs and ISVs, increasing the interest of
developers in adding further enhancements to the Linux kernel.
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Source: RED HAT INC, 10-K, April 25, 2013
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Red Hat Enterprise Linux is intended to be:

flexible—capable of running on a broad range of hardware, including mainframes, servers, work stations and personal computers and across a variety of
hardware architectures, virtualization methods and clouds;

scalable—running on a single device, a cluster of thousands of systems within an enterprise, or through a certified cloud provider;

functional—able to handle discrete or multiple applications accessed by multiple users;

adaptable—allowing the user to modify the software to meet particular needs and requirements;

stable—upgrades and fixes provided periodically on an if-and-when-available basis with a multi-year support lifecycle;

reliable—regularly reviewed and fine-tuned by developers worldwide;

secure—offering some of the highest levels of security in the commercial operating system market;

cost-effective—an attractive total cost of ownership for enterprise IT environments; and

high-performing—yielding an array of quality performance results using leading industry benchmarks.
Red Hat Enterprise Linux delivers the features required for enterprise deployments, including support for a wide range of ISV applications from vendors such as
BMC, CA, EMC, HP, IBM, Microsoft, Oracle, SAP, SAS and Symantec; certification on multiple architectures and leading OEM platforms, including platforms
offered by Cisco, Dell, Fujitsu, HP, Hitachi, IBM, NEC and Oracle; and comprehensive technical support, with up to 24x7, one-hour response, available both from Red
Hat and selected ISV and OEM partners.
In addition, Red Hat offers a portfolio of add-ons that extends the features of Red Hat Enterprise Linux. These add-ons, which are designed to tailor a customer’s
computing environment to suit its specific requirements, include:

High Availability—provides failover services between nodes within a cluster intended to make applications more resistant to downtime.

Resilient Storage—enables a shared storage or clustered file system to provide a single point of storage access over a network.

Network Load Balancer—provides redundancy and scalability for web servers, databases, networking and storage.

Scalable File System—provides support for file systems up to 100 terabytes in size using advanced features such as 64-bit journaling and advanced locking
algorithms.

High Performance Network—delivers remote directory memory access over converged Ethernet helping improve network latency and capacity.

Smart Management—includes Red Hat Network Satellite management and provisioning modules that allow a customer to provision, patch, configure and
control Red Hat Enterprise Linux development, test and production systems.

Extended Lifecycle Support—provides software security updates, fixes and support after Red Hat’s published end of life date for certain versions of Red Hat
Enterprise Linux.

Extended Update Support—extends the support period of a Red Hat Enterprise Linux update for up to 18 months and delivers overlapping release support to
give enterprise customers more flexibility.
We believe that these add-ons provide customers with increased features, flexibility and choice.
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Red Hat JBoss Middleware
Red Hat JBoss Middleware provides a range of middleware offerings for developing, deploying, and managing applications that are accessible via the Internet,
enterprise intranets, extranets, clouds and virtual private networks. Middleware generally refers to the software that enables the development, operation and integration
of applications and other software. Red Hat JBoss Middleware integrates, tests, and refines enterprise-ready features from JBoss.org community projects into supported,
stable, enterprise-class middleware distributions.
Our middleware platforms and tools are intended to be:

easily deployable—decreasing development complexity;

intuitive—improving end-user experience;

effective—reducing business process friction;

flexible—working with many different applications and enterprise environments; and

cost-effective—lowering the total cost of ownership for enterprise IT environments.
Red Hat JBoss Middleware offerings consist of a number of deployment platforms and tools, including:

Red Hat JBoss Application Platform—provides an environment for building, hosting and deploying applications and services. It includes Red Hat JBoss
Application Server, Seam, Hibernate, Red Hat JBoss Cache, Red Hat JBoss Transactions, Red Hat JBoss Messaging and Red Hat JBoss Web services.

Red Hat JBoss Web Server—provides a single enterprise open source solution for large scale websites and lightweight applications that utilize Apache
Tomcat and Apache Web Server.

Red Hat JBoss SOA Platform—provides the environment for deploying and integrating service-oriented architectures and business processes.

Red Hat JBoss Portal Platform—provides a Java-based platform for deploying standards-based portals.

Red Hat JBoss Business Rules Management System—provides a business rules management system that enables business policy and rules development,
access and change management.

Red Hat JBoss Developer Studio—provides an Eclipse-based application development environment for developing applications and development tools used
to build rich web-based applications and service-oriented architecture services.

Red Hat JBoss Data Services Platform—provides an environment integrating distributed data sources and provides for data federation, data abstraction, data
transformation and metadata management.

Red Hat JBoss Data Grid—provides a scalable, distributed in-memory data grid that permits cost-effective scaling of big data tiers.

Red Hat JBoss Fuse and Red Hat JBoss A-MQ—provide customers messaging and integration tools for distributed applications.
Red Hat Enterprise Virtualization
Red Hat Enterprise Virtualization includes standalone virtualization functionality and management tools for both server and desktop deployments. Virtualization
allows a single computer system to function as multiple virtual systems by abstracting operating systems and application software from the underlying hardware
infrastructure, thereby allowing customers to use a common hardware infrastructure to run multiple operating systems and applications. Virtualization is intended to
enhance the capital and operational efficiencies of enterprises by increasing server utilization and deployment flexibility.
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Source: RED HAT INC, 10-K, April 25, 2013
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The latest versions of Red Hat Enterprise Linux include integrated virtualization. Red Hat Enterprise Virtualization for Servers combines the Kernel-based
Virtual Machine (“KVM”) hypervisor included in the Linux kernel with the oVirt open source virtualization management system to offer enterprises a platform for
large-scale virtualization initiatives and cloud deployments. Red Hat Enterprise Virtualization for Servers is designed to be compatible with Red Hat Enterprise Linux
and its wide ecosystem of certified hardware systems and software applications.
Red Hat Enterprise Virtualization for Desktops is available as an add-on and provides support and management functionality for remote desktop operating
systems.
Red Hat Storage Server
Red Hat Storage Server is software that enables users to treat storage as a virtualized resource, and is available for deployment both on-premise and in public or
hybrid clouds. Red Hat Storage Server aggregates disk and memory resources into a unified storage capability that abstracts physical hardware from users and
applications, offering enterprises the ability to treat physical storage as a scalable, standardized, centrally managed pool of virtual storage.
Red Hat cloud offerings
Red Hat provides a portfolio of offerings, such as Red Hat Enterprise Linux, Red Hat JBoss Middleware, Red Hat Enterprise Virtualization and Red Hat Storage
Server, that can be combined to enable public, private and hybrid cloud deployments.
Cloud computing is a term used to refer to an IT infrastructure that enables the use of a shared pool of computing resources (such as networks, processors,
storage and applications) by multiple users. In a cloud environment, computing resources can be deployed rapidly and efficiently, and usage can be increased or
decreased as needed.
Cloud computing can be implemented in different ways. In a public cloud, computing resources are made available to the general public by an entity that
controls and operates these resources. In a private cloud, computing resources are operated solely for the benefit of a particular entity. A hybrid cloud blends the public
and private cloud models and enables interoperability between public and private clouds.
Red Hat systems management offerings
Red Hat’s systems management offerings are designed to help enterprises increase productivity, lower costs and enhance security by provisioning, managing,
monitoring, updating and configuring Red Hat technologies and other technologies both on-premise or in a cloud.
Red Hat’s management offerings include the following:

Red Hat Network—provides a method for customers to obtain certified software and upgrades and to manage, provision and monitor deployments of Red
Hat Enterprise Linux and Red Hat Enterprise Virtualization.

Red Hat Customer Portal—provides an online method for customers to obtain certified software, access a knowledge base and software update alerts and
advisories, as well as interact with our technical support engineers.

Red Hat JBoss Operations Network—provides customers the ability to manage Red Hat JBoss Middleware environments. Red Hat JBoss Operations
Network functionality includes inventory, software update, administration, configuration management and resource deployment.
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Additional Red Hat enterprise technologies
Red Hat enterprise offerings also include other technologies, such as for software development, high-performance distributed computing, directory services and
user authentication. These applications broaden customer choice and are components of our open source architecture vision for the enterprise.
Red Hat training, consulting and support services
Red Hat offers a range of services that are designed to help our customers derive additional value from Red Hat enterprise technologies.
Training. Our training services consist of an array of performance-based courses designed to meet the diverse needs of our customers. We deliver more than 30
Red Hat Enterprise Linux and Red Hat JBoss Middleware courses worldwide in classroom, corporate on-site and online settings. These courses span topics such as
system administration and advanced enterprise development, deployment security, middleware and role-based offerings. Certification paths include Red Hat Certified
Technician, Red Hat Certified Engineer, Red Hat Certified Data Specialist, Red Hat Certified Security Specialist, Red Hat Certified Virtualization Administrator, Red
Hat Certified Architect and JBoss Certified Application Administrator.
Consulting. We offer the services of experienced consultants principally in connection with our technology offerings to assist with the technology infrastructure
needs of our customers. Our offerings include assessments, implementations, upgrade planning, platform migrations, solution integration and application development.
Support. Our Red Hat subscriptions generally include varying levels of technical support to assist customers with implementing, configuring and using Red Hat
enterprise technologies. Additionally, we offer a technical account management service for customers who require a more personalized support relationship. The
technical account management service is designed to offer a highly skilled, proactive support engineer who understands a customer’s IT infrastructure and serves as a
primary point of contact for technical support that is tailored to the customer’s business.
By providing consulting and support services that help to enable infrastructure, application integration and middleware solutions both on-premise or in a cloud,
we facilitate further adoption and use of our technologies in the enterprise. In addition, our training services help populate customers with skilled Red Hat and JBoss
certified professionals who often serve as internal open source advocates, increasing opportunities for successful adoption and use of our enterprise technologies. Our
service capabilities promote and reinforce the use of open source technologies as well as our Red Hat and JBoss brands.
COMPETITION
We compete with a number of large and well-established companies that have significantly greater financial resources, larger development staffs and more
extensive marketing and distribution capabilities. No assurance can be given that our efforts to compete effectively will be sufficient.
We believe that the major factors affecting the competitive landscape for our offerings include:

the name and reputation of the vendor or competitive offering;

the ability to adapt development, sales, marketing and support to the open source software model;

the product price, performance, reliability, security and functionality;

the alliances of the vendor with major industry hardware and/or software providers;

the quality of support and consulting services;
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 the financial and value relationship of subscription services;

the number of Global 2000 reference accounts;

the number of cloud computing partners and reference accounts;

the availability of third-party enterprise applications that are compatible with the technology;

the breadth of hardware and software ecosystem compatibility;

the management framework for administering the software technologies;

the ability of the vendor to quickly diagnose software issues and provide patches and other solutions;

the distribution strength and number of distribution partners of the vendor; and

the strength of the vendor’s relationships and reputation in the open source community.
With respect to our operating systems offerings, our competitors include Microsoft which offers a hardware-independent, multi-user operating system that
competes with Red Hat’s offerings. Moreover, we also compete with HP, IBM, Oracle and Unisys Corporation, each of which offer the UNIX operating system. Many
of these competitors bundle competitive operating systems, such as UNIX, with their own hardware and additional software offerings, thereby making it more difficult
for us to penetrate their customer bases. With respect to Linux operating systems, our chief competitor has historically been Attachmate Corporation (“Attachmate”),
with its SUSE brand of Linux. Canonical Ltd. and Oracle also sell support for their versions of the Linux operating system. We also compete with freely available
Linux distributions, such as Fedora, CentOS and Debian.
With respect to our middleware offerings our competitors include IBM, Microsoft, Oracle and VMware, all of which offer portfolios of enterprise Java and
non-Java middleware products. All of these vendors offer the majority of their middleware products under a typical proprietary software license model. IBM and Oracle
often bundle hardware and software for their customers, making it more difficult for us to penetrate their customer bases. Our middleware offering is heavily dependent
on the Java programming language, which is controlled by Oracle.
With respect to our virtualization offerings our competitors include Attachmate, Citrix, Microsoft, Oracle and VMware. Microsoft and VMware offer
virtualization technologies that are certified and supported with Red Hat Enterprise Linux operating system offerings.
With respect to our storage offerings we compete with companies that provide software-based storage products, such as EMC and NetApp. Public cloud
providers such as Amazon and Rackspace also offer storage capabilities.
With respect to our cloud technologies we compete with companies that provide tools for enterprises to create private clouds, such as Citrix, Microsoft and
VMware, as well as with companies that provide public clouds and that allow users to consume computing infrastructure such as hardware and software as a service
without the need to purchase equipment or software, such as Amazon, Google, Microsoft and Rackspace.
With respect to our management offerings our competitors include Attachmate, BMC, CA, HP, IBM, Microsoft and Oracle, all of which offer support for
heterogeneous operating system environments, such as Linux, Solaris, AIX, HP-UX and Windows. Many of these competitors have legacy client/server offerings that
require relatively long implementation cycles and are difficult to displace in enterprise customers due to, among other reasons, switching costs. There are numerous
other companies that focus exclusively on management offerings that are likely to support Linux-based systems as well as non-Linux-based systems.
With respect to our service offerings we face competition in the markets for services related to the development, deployment and integration of enterprise
technologies. Our competitors in these markets include
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Accenture plc, HP, IBM and Tata Consultancy Services Limited, as well as other technology consulting companies.
Due to the nature of open source technology, the open source software model is not characterized by the traditional barriers to entry that are found in the
proprietary software model. For example, the financial and legal barriers to creating a new Linux distribution are relatively low because the software components
typically included in Linux distributions are publicly available under open source licenses that permit copying, modification and redistribution. Anyone can use, copy,
modify and redistribute Red Hat Enterprise Linux, Red Hat JBoss Middleware and our other open source offerings. However, they are not permitted to refer to these
products as “Red Hat” or “JBoss” products unless they have a formal business relationship with us that allows such references. Moreover, our customers agree that
during their support relationship with Red Hat, they will purchase a support subscription for each computer system, core, socket or other unit on which they deploy Red
Hat’s software. In addition, the primary means by which customers can receive a certified version of Red Hat enterprise software, as well as new versions of the
software, security updates, fixes, functionality enhancements and upgrades to the technology, if and when available, is to purchase and maintain a current subscription
directly from us or our partners with whom we have agreements.
Although we believe that we generally compete on par or favorably with many of our competitors in a number of respects, we believe that a number of our key
competitors currently have superior marketing and distribution capabilities. In addition, there are significantly more enterprise infrastructure applications available for
competing operating systems technologies, such as Windows, than there are for Red Hat Enterprise Linux. An integral part of our strategy has been to help address
these shortcomings by, among other methods, strengthening our existing strategic and channel partner relationships and entering into new ones to expand our marketing
and distribution capabilities and by attracting more attention to the open source movement. Also, increasing the volume of subscriptions of Red Hat enterprise
technologies should create additional opportunities and incentives for software developers to write more applications that are compatible with Red Hat enterprise
technologies.
SOFTWARE ENGINEERING AND DEVELOPMENT
We have invested, and intend to continue to invest, significant resources in research and development. We expended $263.2 million, $208.7 million and $171.3
million, in our fiscal years ended February 28, 2013, February 29, 2012 and February 28, 2011, respectively, in research and development costs. We focus and modify
our research and development efforts based on the needs of users and changes in the marketplace. We are currently focusing our development efforts on improving or
adding the functionality to our offerings that are needed by enterprise customers or required for leading third-party applications upon which enterprise customers are
dependent. However, any upgrades and enhancements are offered on an if-and-when-available basis.
Our software engineers collaborate with open source software development teams working through open source communities such as the Fedora Project,
JBoss.org and GlusterFS. This involvement enables us to remain abreast of, and in some instances lead, certain technical advances, plans for development of new
features and timing of releases, as well as other information related to the management of open source projects.
Our software engineers make development contributions to many components comprising Red Hat software offerings, such as Red Hat Enterprise Linux, Red
Hat JBoss Middleware, Red Hat Enterprise Virtualization and Red Hat Storage Server, and provide leadership within the various open source communities across many
of the core components.
Our software development engineers perform extensive testing of Red Hat enterprise technologies. We use various industry methods of quality assurance testing
to help ensure that our enterprise technologies are ready for use by our customers when delivered. We also work closely with leading hardware and software vendors to
help ensure that their hardware and applications will operate effectively with Red Hat enterprise platforms.
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INTELLECTUAL PROPERTY
Most of our offerings, such as Red Hat Enterprise Linux and Red Hat JBoss Middleware, are built primarily from software components licensed to the general
public under various open source licenses. While some components are developed by our own employees, Red Hat obtains many components from software developed
and released by contributors to independent open source software development projects. Open source licenses grant licensees broad permissions to use, copy, modify
and redistribute the software. Certain open source licenses, such as the GPL, impose significant limits on a distributor’s ability to license derivative works under more
restrictive terms and generally require the distributor to disclose the source code of such works. The inclusion of software components governed by such licenses in our
offerings limits our ability to use traditional proprietary software licensing models for those offerings. As a result, while we have substantial copyright interests in our
software technologies, open source development and licensing practices may have the effect of limiting the value of our software copyright assets. Consequently, our
trademarks may represent our most valuable intellectual property.
We pursue registration of some of our trademarks in the United States and in other countries. We have registered the “Red Hat” and “JBoss” trademarks and the
Red Hat Shadowman logo in countries in North America, South America, Europe, Asia and Africa as well as in Australia.
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 cannot be certain that we will succeed in preventing such misappropriation of our trade names and trademarks. The laws of some foreign countries
do not protect or deter misappropriation of our trademark rights to the same extent as do the laws of the United States. In addition, while we engage in certain
enforcement activity, policing unauthorized use of our trademark rights is difficult, expensive and time consuming, and our efforts may be inadequate. The loss of any
material trademark or trade name could have a material adverse effect on our business, operating results and financial condition.
Red Hat also seeks patent protection of some of the innovative ideas of our software developers and other employees. Some of these inventions are applicable to
our current technologies, while others provide protection to new and other technologies. Moreover, our principal objectives in seeking patent protection are to provide a
measure of deterrence against the potential patent infringement claims of third parties and to a more limited extent to help ensure that new technologies and innovations
covered by our patents remain open. As part of Red Hat’s commitment to the open source community, we provide our Patent Promise, an undertaking, subject to certain
limitations, not to enforce our patent rights against users of open source software covered by certain open source licenses. This permits the development and distribution
of open source applications by third parties that could otherwise infringe on our patents. For these reasons, it is unlikely that our patents will, of themselves, provide us
substantial revenue. We are also a founding member and active participant, along with other industry leaders (including IBM, Philips and Sony) in the Open Invention
Network LLC, which acquires patents with the goal of promoting innovation in open source for the Linux platform.
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 property rights. See Item 3, “Legal Proceedings”. 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. Red Hat regularly commits to its subscription customers that
if portions of our enterprise offerings are found to infringe third-party intellectual property rights we will, at our expense and option: (i) obtain the right for the customer
to continue to use the offering consistent with their subscription agreement with us; (ii) modify the offering so that its use is non-infringing; or (iii) replace the
infringing component with a non-infringing component, and indemnify them against specific types of infringement claims. Although we cannot predict whether we will
need to satisfy these commitments and often have limitations on these commitments, satisfying these commitments could be costly and time-consuming and could
materially and adversely affect our business, operating results, financial condition and cash flows.
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We also generally enter into confidentiality and nondisclosure agreements with our employees and consultants and seek to control access to and distribution of
our confidential documentation and other proprietary information.
EMPLOYEES
As of February 28, 2013, Red Hat had approximately 5,600 employees. From time to time, we also employ independent contractors. Our employees are not
represented by any labor union and are not recognized under a collective bargaining agreement, and we have never experienced a work stoppage. We believe our
relations with our employees are generally good.
AVAILABLE INFORMATION
We maintain a website at www.redhat.com. We make available, free of charge on our website, our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (the “Securities Exchange Act”), as soon as reasonably practicable after we electronically file those reports with, or furnish them to, the Securities and
Exchange Commission (the “SEC”). We also similarly make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors
and 10% stockholders pursuant to Section 16 under the Securities Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by
those persons. We are not including the information contained at www.redhat.com, or at any other Internet address, as part of, or incorporating it by reference into, this
Annual Report on Form 10-K.
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ITEM 1A.
RISK FACTORS
Set forth below are certain risks and cautionary statements, which supplement other disclosures in this report. Please carefully consider the following risks and
cautionary statements. If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected.
RISKS RELATED TO BUSINESS UNCERTAINTY
The duration and extent of economic downturns, regional financial instability, and economic and market conditions generally could adversely affect our
business, financial condition, operating results and cash flows.
Economic weakness and uncertainty, tightened credit markets and constrained IT spending from time to time contribute to slowdowns in the technology
industry, as well as in the specific customer segments and geographic regions in which we operate, which may result in reduced demand and increased price
competition for our offerings. Our operating results in one or more geographic regions or customer segments may also be affected by uncertain or changing economic
conditions within that region or segment. Continuing uncertainty about future economic conditions may, among other things, negatively impact our current and
prospective customers and result in delays or reductions in technology purchases or lengthen our sales cycle. Adverse economic conditions also may negatively impact
our ability to obtain payment for outstanding debts owed to us by our customers or other parties with whom we do business. In addition, these conditions may impact
our investment portfolio, and we could determine that some of our investments have experienced an other-than-temporary decline in fair value, requiring an impairment
charge that could adversely impact our financial condition and operating results. Also, these conditions may make it more difficult to forecast operating results. If global
economic conditions, or economic conditions in the United States, Europe, Asia or in other key geographic regions or customer segments, remain uncertain or persist,
spread or deteriorate further, current and prospective customers may delay or reduce their IT spending, which could adversely affect our business, financial condition,
operating results and cash flows.
If we fail to continue to establish and maintain strategic relationships with industry-leading companies, we may not be able to attract and retain a larger
customer base.
Our success depends in part on our ability to continue to establish and maintain strategic relationships with industry-leading hardware manufacturers, software
vendors, cloud providers and enterprise solutions providers such as Amazon.com, Inc. (“Amazon”), Cisco Systems, Inc., Dell Inc., Fujitsu Limited, Hewlett-Packard
Co. (“HP”), International Business Machines Corporation (“IBM”), NEC Corporation, Oracle Corporation (“Oracle”), SAP AG and others. Many of these strategic
partners have engineered and certified that their products and services run on or with our offerings, and in some cases have built their products using our offerings. We
may not be able to maintain these relationships or replace them on attractive terms in the future. Some of our strategic partners offer competing products and services.
As a result of these factors, many of the companies with which we have strategic alliances may choose to pursue alternative technologies and develop alternative
products and services in addition to or in lieu of our offerings, 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 offerings effectively or continue to devote the resources necessary to provide
us with effective sales, marketing and technical support. As our agreements with strategic partners terminate or expire, we may be unable to renew or replace these
agreements on comparable terms, or at all.
We rely, to a significant degree, on indirect sales channels for the distribution of our offerings, and disruption within these channels could adversely affect our
business, financial condition, operating results and cash flows.
We use a variety of different indirect distribution methods for our offerings, including channel partners such as OEMs, distributors and resellers. A number of
these partners in turn distribute via their own networks of
17
Source: RED HAT INC, 10-K, April 25, 2013
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channel partners with whom we have no direct relationship. These relationships allow us to offer our technologies to a much larger customer base than we would
otherwise be able through our direct sales and marketing efforts.
We rely, to a significant degree, on each of our channel partners to select, screen and maintain relationships with its distribution network and to distribute our
offerings in a manner that is consistent with applicable regulatory requirements and Red Hat’s quality standards. Our channel partners may offer their own products and
services that are competitive with our offerings or may not distribute and market our offerings effectively. Moreover, our existing channel partner relationships do not,
and any future channel partner relationships may not, afford us any exclusive marketing or distribution rights. In addition, if a channel partner is acquired by a
competitor or its business units are reorganized or divested, our revenues derived from that partner may be adversely impacted.
Recruiting and retaining qualified channel partners and training them in the use of our enterprise technologies requires significant time and resources. If we fail
to devote sufficient resources to support and expand our network of channel partners, our business may be adversely affected. In addition, because we rely on channel
partners for the indirect distribution of our enterprise technologies, we may have little or no contact with the ultimate end-users of our technologies, thereby making it
more difficult for us to establish brand awareness, ensure proper delivery and installation of our software, support ongoing customer requirements, estimate end-user
demand, respond to evolving customer needs and obtain subscription renewals from end-users.
If our indirect distribution channel is disrupted, we may be required to devote more resources to distribute our offerings directly and support our customers,
which may not be as effective and could lead to higher costs, reduced revenue and growth that is slower than expected.
We have entered into and may continue to enter into or seek to enter into business combinations and acquisitions, which may be difficult to complete and
integrate, disrupt our business, divert management’s attention, adversely affect our business, financial condition, operating results and cash flows and dilute
stockholder value.
As part of our business strategy, we have in the past entered into business combinations and acquisitions, and we may continue to do so in the future. These
types of transactions can increase the expense of running our business and present significant challenges and risks, including:

Integrating the acquired business’ accounting, financial reporting, management, information and information security, human resource and other
administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;

Gathering full information regarding a business or technology prior to a transaction, including the identification and assessment of liabilities, claims or other
circumstances that could result in litigation or regulatory exposure, unfavorable accounting treatment, unexpected tax implications and other adverse effects
on our business;

Increased operating expenses related to the acquired business or technology;

Maintaining or establishing acceptable standards, controls, procedures and policies;

Disruption of our ongoing business and distraction of management;

Impairment of relationships with our employees, partners or customers as a result of any integration of new management and other personnel, products or
technology or as a result of the changes in the competitive landscape affected by the transaction;

Maintaining good relationships with customers or business partners of the acquired business;

Effective evaluation of talent at an acquired business or cultural challenges associated with integrating employees from the acquired business into our
organization;
18
Source: RED HAT INC, 10-K, April 25, 2013
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 Loss of key employees of the acquired business;

Incorporating and further developing acquired products or technology into our offerings and maintaining quality standards consistent with our brands;

Achieving the expected benefits of the transaction;

Expenses related to the transaction;

Claims and liabilities we may assume from the acquired business or technology, or that are otherwise related to the transaction;

Entering into new markets in which we have little or no experience or in which competitors may have stronger market positions;

Impairment of intangible assets and goodwill acquired in transactions; and

For foreign transactions, additional risks related to the integration of operations across different cultures and languages, and the economic, political,
compliance and regulatory risks associated with specific countries.
There can be no assurance that we will manage these challenges and risks successfully. Moreover, if we are not successful in completing transactions that we
have pursued or may pursue, our business may be adversely affected, and we may incur substantial expenses and divert significant management time and resources. In
addition, in pursuing and completing such transactions, we could use substantial portions of our available cash as all or a portion of the purchase price for these
transactions or as retention incentives to employees of the acquired business, or we may incur substantial debt. We could also issue additional securities as all or a
portion of the purchase price for these transactions or as retention incentives to employees of the acquired business, which could cause our stockholders to suffer
significant dilution. Any transaction may not generate additional revenue or profit for us, or may take longer to do so than expected, which may adversely affect our
business, financial condition, operating results and cash flows.
If we fail to effectively manage our growth, our business, financial condition, operating results and cash flows could be adversely affected.
We have expanded our operations rapidly in recent years. For example, our total revenue increased from $1.13 billion for the fiscal year ended February 29,
2012 to $1.33 billion for the fiscal year ended February 28, 2013. Moreover, the total number of our employees increased from over 4,500 as of February 29, 2012 to
approximately 5,600 as of February 28, 2013 and is expected to generally increase in the foreseeable future. In addition, we continue to explore ways to extend our
offerings and geographic reach. Our growth has placed and will likely continue to place a strain on our management systems, information systems, resources and
internal controls. Our ability to successfully provide our offerings and implement our business plan requires adequate information systems and resources, internal
controls and oversight from our senior management.
As we expand in international markets, these challenges increase as a result of the need to support a growing business in an environment of multiple languages,
cultures, customs, legal systems, dispute resolution systems, regulatory systems and commercial practices. As we grow, we must also continue to hire, train, supervise
and manage new employees. We may not be able to adequately screen and hire or adequately train, supervise and manage sufficient personnel or develop management,
or effectively manage and develop our controls and oversight functions and information systems to adequately manage our growth effectively. If we are unable to
effectively manage our growth, our business, financial condition, operating results and cash flows could be adversely affected.
Industry consolidation may lead to increased competition and may adversely affect our business, financial condition, operating results and cash flows.
There has been a trend of consolidation in the technology industry. We expect this trend to continue as companies attempt to strengthen or hold their market
positions in an evolving industry. For example, as the
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Source: RED HAT INC, 10-K, April 25, 2013
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computing, networking, storage, and software technologies that comprise the enterprise data center converge, many companies seek to position themselves as key or
single-source vendors providing end-to-end technology solutions for the data center. Also, some of our current and potential competitors have made acquisitions or
announced new strategic alliances designed to position them as a key or single-source vendor. As a result of these developments, we face greater competition, including
competition from entities that are among our key business partners. This increased competition could adversely affect our business, financial condition, operating results
and cash flows.
Because of the characteristics of open source software, there are few technology barriers to entry into the open source market by new competitors and it may
be relatively easy for competitors, some of which may have greater resources than we have, to enter our markets and compete with us.
One of the characteristics of open source software is that anyone may modify and redistribute the existing open source software and use it to compete with us.
Such competition can develop without the degree of overhead and lead time required by traditional proprietary software companies. It is possible for competitors with
greater resources than ours to develop their own open source solutions, potentially reducing the demand for, and putting price pressure on, our offerings. In addition,
some competitors make their open source software available for free download and use on an ad hoc basis or may position their open source software as a loss leader.
We cannot guarantee that we will be able to compete successfully against current and future competitors or that competitive pressure and/or the availability of open
source software will not result in price reductions, reduced operating margins and loss of market share, any one of which could adversely affect our business, financial
condition, operating results and cash flows.
We may not be able to continue to attract and retain capable management.
Our future success depends on the continued services and effectiveness of a number of key management personnel, including our CEO. The loss of these
individuals, particularly to a competitor, some of which may be in a position to offer greater compensation, could adversely affect our business or stock price.
Our ability to retain key management personnel or hire capable new management personnel as we grow may be challenged to the extent the technology sector
performs well and/or if companies with more generous compensation packages or greater perceived growth opportunities compete for the same personnel. In addition,
historically we have used share-based compensation as a key component of our compensation packages. Changes in the accounting for share-based compensation could
adversely affect our earnings or force us to use more cash compensation to attract and retain capable personnel. If the price of our common stock falls, the value of our
share-based awards to recipients is reduced. Such events, or if we are unable to secure shareholder approval for increases in the number of shares eligible for
share-based compensation grants, could adversely affect our ability to successfully attract and retain key management personnel. Effective succession planning is also
important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key management personnel could hinder our
strategic planning and execution.
We depend on our key non-management employees, the loss of which could adversely affect our business or diminish our brands.
Competition in our industry for qualified employees, especially technical employees, is intense and from time to time our competitors directly target our
employees. The loss of key employees could hinder our influence in open source projects and seriously impede our success. Moreover, the loss of these individuals,
particularly to a competitor, some of which may be in a position to offer greater compensation, and any resulting loss of customers could reduce our market share and
diminish our brands. We have from time to time in the past experienced, and we may experience in the future, difficulty in hiring and retaining highly skilled employees
with appropriate qualifications.
20
Source: RED HAT INC, 10-K, April 25, 2013
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A number of our key employees have become, or will become, vested in a significant amount of their equity compensation awards. Employees may be more
likely to leave us after a significant portion of their equity compensation awards fully vest, especially if the shares underlying the equity awards have significantly
appreciated in value. If we do not succeed in retaining and motivating our key employees and attracting new key personnel, our business, financial performance,
operating results and cash flows may be adversely affected.
Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and
collaboration fostered by our culture, and our business may be adversely affected.
We believe that a critical contributor to our success has been our corporate culture, which we believe fosters innovation, creativity and collaboration. As our
organization grows, and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain these
beneficial aspects of our corporate culture. If we are unable to maintain our corporate culture, we may find it difficult to attract and retain motivated employees.
Our subscription-based business model may encounter customer resistance or we may experience a decline in the demand for our offerings.
We provide Red Hat enterprise technologies under annual or multi-year subscriptions. A subscription generally entitles a customer to, among other things, a
specified level of support, as well as new versions of the software, security updates, fixes, functionality enhancements and upgrades to the technology, if and when
available, and compatibility with an ecosystem of certified hardware and software applications. While we believe this practice complies with the requirements of the
GNU General Public License, and while we have reviewed this practice with the Free Software Foundation, the organization that maintains and provides interpretations
of the GNU General Public License, we may still encounter customer resistance to this distribution model or customers may fail to honor the terms of our subscription
agreements. To the extent we are unsuccessful in promoting or defending this distribution model, our business, financial condition, operating results and cash flows
could be adversely affected.
In addition, our customers generally undertake a significant evaluation process that may result in a lengthy sales cycle. We spend substantial time, effort, and
money on our sales efforts, including developing and implementing appropriate go-to-market strategies and training our sales force and channel partners in order to
effectively market new offerings, without any assurance that our efforts will produce any sales. As technologies and the markets for our enterprise offerings change, our
subscription-based business model may no longer meet the needs of our customers. For example, a business model based on annual or multi-year subscriptions may no
longer be competitive in an environment where disruptive technologies (such as virtualization and cloud) enable customers to consume computing resources on an
hourly basis or for free.
An increased focus on developing and providing virtualization, storage and cloud computing offerings may require a greater focus on marketing more holistic
solutions, rather than individual offerings. Consequently, we may need to develop appropriate marketing and pricing strategies for our offerings, our customers’
purchasing decisions may become more complex and require additional levels of approval and the duration of sales cycles for our offerings may increase.
If we are unable to adapt our business model to changes in the marketplace, our business, financial condition, operating results and cash flows could be adversely
affected.
If our customers do not renew their subscription agreements with us, our business, financial results, operating results and cash flows may be adversely
affected.
Our customers may not renew their subscriptions after the expiration of their subscription agreements and in fact, some customers elect not to do so. In addition,
our customers may opt for a lower-priced edition of our
21
Source: RED HAT INC, 10-K, April 25, 2013
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offerings or for fewer subscriptions. We have limited historical data with respect to rates of customer subscription renewals, so we cannot accurately predict customer
renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our services and their
ability to continue their operations and spending levels. Government contracts could be subject to future funding that may affect the extension or termination of
programs and generally are subject to the right of the government to terminate for convenience or non-appropriation. If we experience a decline in the renewal rates for
our customers or they opt for lower-priced editions of our offerings or fewer subscriptions, our business, financial condition, operating results and cash flows may be
adversely affected.
If third-party enterprise hardware and software providers do not continue to make their products and services compatible with our offerings, our software
may cease to be competitive and our business, financial condition, operating results and cash flows may be adversely affected.
The competitive position of our offerings is dependent on their compatibility with products and services of third-party enterprise hardware and software
companies. To the extent that a software or hardware vendor might have or develop products and services that compete with ours, the vendor may have an incentive to
seek to limit the performance, functionality or compatibility of our offerings when used with one or more of the vendor’s offerings. In addition, these vendors may fail
to support or issue statements of compatibility or certification of our offerings when used with their offerings. We intend to encourage the development of additional
applications that operate on both current and new versions of our offerings by, among other means, attracting third-party developers to our offerings, providing open
source tools to create these applications and maintaining our existing developer relationships through marketing and technical support. We intend to encourage the
compatibility of our software with various third-party hardware and software offerings by maintaining and expanding our relationships, both business and technical,
with relevant independent hardware and software vendors. If we are not successful in achieving these goals, however, our offerings may not be competitive and our
business, financial condition, operating results and cash flows may be adversely affected.
If open source software programmers, most of whom we do not employ, do not continue to develop and enhance open source technologies, we may be unable
to develop new technologies, adequately enhance our existing technologies or meet customer requirements for innovation, quality and price.
We rely to a significant degree on a number of largely informal communities of independent open source software programmers to develop and enhance our
enterprise technologies. For example, Linus Torvalds, a prominent open source software developer, and a relatively small group of software engineers, many of whom
are not employed by us, are primarily responsible for the development and evolution of the Linux kernel, which is the heart of the Red Hat Enterprise Linux operating
system. If these groups of programmers fail to adequately further develop and enhance open source technologies, we would have to rely on other parties to develop and
enhance our offerings or we would need to develop and enhance our offerings with our own resources. We cannot predict whether further developments and
enhancements to these technologies would be available from reliable alternative sources. In either event, our development expenses could be increased and our
technology release and upgrade schedules could be delayed. Moreover, if third-party software programmers fail to adequately further develop and enhance open source
technologies, the development and adoption of these technologies could be stifled and our offerings could become less competitive. Delays in developing, completing
or delivering new or enhanced offerings could result in delayed or reduced revenue for those offerings and could also adversely affect customer acceptance of those
offerings.
Our continued success depends on our ability to adapt to a rapidly changing industry. Investment in new offerings, business strategies and initiatives could
disrupt our ongoing business and may present risks not originally contemplated.
We operate in highly competitive markets that are characterized by rapid technological change and frequent new product and service announcements. Our
continued success will depend on our ability to adapt to rapidly
22
Source: RED HAT INC, 10-K, April 25, 2013
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changing technologies, to adapt our offerings to evolving industry standards, to predict user preferences and industry changes and to improve the performance and
reliability of our offerings. Our failure to adapt to such changes could harm our business. In addition, the widespread adoption of other technological changes could
require substantial expenditures to modify or adapt our offerings or infrastructure. Delays in developing, completing or delivering new or enhanced offerings and
technologies could result in delayed or reduced revenue for those offerings and could also adversely affect customer acceptance of those offerings and technologies. The
success of new and enhanced offering introductions depends on several factors, including our ability to invest significant resources in research and development in order
to enhance our existing offerings and introduce new offerings in a timely manner, successfully promote the offerings, manage the risks associated with the offerings,
make sufficient resources available to support the offerings and address any quality or other defects in the early stages of introduction.
Moreover, we believe that our continued success depends on our investing in new business strategies or initiatives that complement our strategic direction and
technology road map. Such endeavors may involve significant risks and uncertainties, including distraction of management’s attention away from other business
operations, and insufficient revenue generation to offset liabilities and expenses undertaken with such strategies and initiatives. Because these endeavors may be
inherently risky, no assurance can be given that such endeavors will not adversely affect our business, financial condition, operating results and cash flows.
Our offerings may contain defects that may be costly to correct, delay market acceptance of our enterprise technologies and expose us to claims and litigation.
Despite our testing procedures, errors have been and may continue to be found in our offerings after deployment. This risk is increased by the fact that much of
the code in our offerings 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 and devote significant technical resources to analyze, correct, eliminate or work around them and may not be able to successfully do
so in a timely manner or at all. Errors and failures in our offerings could result in a loss of, or delay in, market acceptance of our enterprise technologies, loss of existing
or potential customers and delayed or lost revenue and could damage our reputation and our ability to convince enterprise users of the benefits of our technologies.
In addition, errors in our technologies could cause system failures, loss of data or other adverse effects for our customers who may assert warranty and other
claims for substantial damages against us. Although our agreements with our customers often contain provisions which seek to limit our exposure to potential product
liability claims, it is possible that these provisions may not be effective or enforceable under the laws of some jurisdictions. In addition, our insurance policies may not
adequately limit our exposure to this type of claim. These claims, even if unsuccessful, could be costly and time consuming to defend and could adversely affect our
business, financial conditions, operating results and cash flows.
Our virtualization, storage and cloud computing offerings are based on emerging technologies and business models, and the potential market for these
offerings remains uncertain.
Our virtualization, storage and cloud computing offerings are based on emerging technologies and business models, the success of which will depend on the
perceived technological and operational benefits and cost savings associated with the adoption of these technologies. The virtualization, storage and cloud computing
technologies are rapidly evolving. We expect competition to remain intense and, as with many emerging IT sectors, these technologies may be subject to a “first mover”
effect pursuant to which certain product offerings rapidly capture a significant portion of market share and developer attention. Moreover, we may make errors in
reacting to relevant business trends and predicting which technologies are successful or otherwise develop into industry standards.
Adoption of virtualization, storage and cloud computing offerings may occur more slowly or less pervasively than we expect and the revenue growth associated
with these offerings may be slower than currently
23
Source: RED HAT INC, 10-K, April 25, 2013
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expected. Moreover, even if virtualization, storage and cloud computing are adopted widely by enterprises, our offerings in these areas may not attract a sufficient
number of users or generate attractive financial results. We incur expenses associated with these offerings in advance of our ability to generate associated revenues.
Demand for our virtualization, storage and cloud computing offerings may unfavorably impact demand for our other products and services including software
subscriptions and related professional services. If the market for our virtualization, storage and cloud computing offerings fails to develop adequately it could have an
adverse affect on our business, financial condition, operating results and cash flows.
Our continued success depends on our ability to maintain and enhance strong brands.
We believe that the brand identities that we have developed have contributed significantly to the success of our business. We also believe that maintaining and
enhancing our brands is important to expanding our customer base and attracting talented employees. In order to maintain and enhance our brands, we may be required
to make substantial investments that may not be successful. Maintaining our brands will depend in part on our ability to remain a leader in open source technology and
our ability to continue to provide high-quality offerings. If we fail to promote and maintain our brands, or if we incur excessive costs in doing so, our business, financial
condition, operating results and cash flows may be adversely affected.
If our growth rate slows, our stock price could be adversely affected.
As the markets for our offerings mature and the scale of our business increases, our rate of revenue growth will likely be lower than the growth rates we
experienced in earlier periods. In addition, to the extent that the adoption of our offerings occurs more slowly or is less pervasive than we expect, our revenue growth
rates may slow or our revenue may decline, which could adversely affect our stock price.
Security breaches and data loss may expose us to liability, harm our reputation and adversely affect our business.
Our business involves the production and distribution of enterprise software technologies, as well as hosting applications. As part of our business we receive and
process information about our employees, customers and partners, and we may store and process (or contract with third parties to store and process) our customers’
data. While we take security and testing measures relating to our offerings and operations, those measures may not prevent security breaches and data loss that could
harm our business. Advances in computer capabilities, new discoveries in the field of cryptography, inadequate technology or facility security measures or other factors
may result in data loss or a compromise or breach of our systems and the data we store and process (or the systems and data stored and processed by third parties on our
behalf). These security measures may be breached or data lost as a result of actions by third parties or employee error or malfeasance. A party who is able to circumvent
security measures or exploit inadequacies in security measures, could, among other things, misappropriate proprietary information (including information about our
employees, customers and partners and our customers’ information), cause the loss or disclosure of some or all of this information, cause interruptions in our or our
customers’ operations or expose customers (and their customers) to computer viruses or other disruptions or vulnerabilities. A compromise to these systems could
remain undetected for an extended period of time, exacerbating the impact of that compromise. Actual or perceived vulnerabilities may lead to claims against us by
customers, partners or other third parties, which could be material. While our customer agreements typically contain provisions that seek to limit our liability, there is
no assurance these provisions will be enforceable and effective under applicable law. In addition, the cost and operational consequences of implementing further data
protection measures could be significant. Any loss of data or compromise of our systems or the data we store or process (or the systems and data stored and processed
by third parties on our behalf) could result in a loss of confidence in the security of our offerings, damage our reputation, lead to legal liability and adversely affect our
business, financial condition, operating results and cash flows.
24
Source: RED HAT INC, 10-K, April 25, 2013
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We are vulnerable to technology infrastructure failures, which could harm our reputation and adversely affect our business.
We rely on our technology infrastructure, and the technology infrastructure of third parties, for many functions, including selling our offerings, supporting our
partners, fulfilling orders and billing, collecting and making payments. This technology infrastructure may be vulnerable to damage or interruption from natural
disasters, power loss, telecommunication failures, terrorist attacks, computer intrusions and viruses, software errors, computer denial-of-service attacks and other
events. A significant number of the systems making up this infrastructure are not redundant, and our disaster recovery planning may not be sufficient for every
eventuality. This technology infrastructure may fail or be vulnerable to damage or interruption because of actions by third parties or employee error or malfeasance. We
do not carry business interruption insurance sufficient to protect us from all losses that may result from interruptions in our services as a result of technology
infrastructure failures or to cover all contingencies. Any interruption in the availability of our websites and on-line interactions with customers and partners would
create a large volume of questions and complaints that would need to be addressed by our support personnel. If our support personnel cannot meet this demand,
customer and partner satisfaction levels may fall, which in turn could cause additional claims, reduced revenue or loss of customers. Despite any precautions we may
take, such problems could result in, among other consequences, a loss of data, loss of confidence in the stability and reliability of our offerings, damage to our
reputation, legal liability, all of which may adversely affect our business, financial condition, operating results and cash flows interruptions.
A decline in or reprioritization of funding in the U.S. government budget or delays in the budget process could adversely affect our business, financial
condition, operating results and cash flows.
We derive, and expect to continue to derive, a portion of our revenue from U.S. government agencies. Government deficit reduction and austerity measures,
along with continued economic challenges, continue to place pressure on U.S. government spending. The termination of, or delayed or reduced funding for,
government-sponsored programs and contracts from which we derive revenue could adversely affect our business, financial condition, operating results and cash flows.
We may be unable to predict the future course of open source technology development, which could reduce the market appeal of our offerings, damage our
reputation and adversely affect our business, financial condition, operating results and cash flows.
We do not exercise control over many aspects of the development of open source technology. Different groups of open source software programmers compete
with one another to develop new technology. Typically, the technology developed by one group will become more widely used than that developed by others. If we
acquire or adopt new technology and incorporate it into our offerings but competing technology becomes more widely used or accepted, the market appeal of our
offerings may be reduced and that could harm our reputation, diminish our brands and adversely affect our business, financial condition, operating results and cash
flows.
We include software licensed from other parties in our offerings, the loss of which could increase our costs and delay availability of our offerings.
We utilize various types of software licensed from unaffiliated third parties in our offerings. Aspects of our business could be disrupted if any of the software we
license from others or functional equivalents of this software were no longer available to us, no longer offered to us on commercially reasonable terms or changed in
ways or included defects that made the third-party software unsuitable for our use. In these cases, we would be required to either redesign our technologies to function
with software available from other parties, develop these components ourselves or eliminate the functionality, which could result in increased costs, the need to mitigate
customer issues, delays in delivery of our offerings and the release of new offerings and limit the features available in our current or future offerings.
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Source: RED HAT INC, 10-K, April 25, 2013
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RISKS RELATED TO LEGAL UNCERTAINTY
If our technologies are found or alleged to infringe third-party intellectual property rights, we could be required to redesign our offerings, replace components
of our offerings, enter into license agreements with third parties and provide infringement indemnification.
We regularly commit to our subscription customers that if portions of our offerings are found to infringe any third-party intellectual property rights we will, at
our expense and option: (i) obtain the right for the customer to continue to use the technology consistent with their subscription agreement with us; (ii) modify the
technology so that it is non-infringing; or (iii) replace the infringing component with a non-infringing component, and indemnify them against specified infringement
claims. Although we cannot predict whether we will need to satisfy these commitments and often have limitations on these commitments, satisfying the commitments
could be costly and time consuming and could adversely affect our business, financial condition, operating results and cash flows. In addition, our insurance policies
would likely not adequately cover our exposure to this type of claim.
We are vulnerable to claims that our technologies infringe third-party intellectual property rights because our technologies are comprised of software
components, many of which are developed by numerous independent parties, and an adverse legal decision affecting our intellectual property could adversely
affect our business.
We are vulnerable to claims that our technologies infringe third-party intellectual property rights, including patent, copyright and trade secrets because our
technologies are comprised of software components, many of which are developed by numerous independent parties. Moreover, because the scope of software patent
protection is often not well defined or readily determinable, patent applications in the United States are not publicly disclosed at the time of filing, and the number of
software patents that are issued each year is significant and growing, among other concerns, we are unlikely to be able to assess adequately the relevance of patents to
our technologies, and may be unable to take appropriate responsive action, in a timely or economic manner. Our exposure to risks associated with the use of intellectual
property may increase as a result of acquisitions. In addition, third parties may make infringement and similar or related claims after we have acquired technology that
had not been asserted prior to our acquisition.
In the past, our technologies have been subject to intellectual property infringement claims. Some of these claims have been brought by entities that do not
design, manufacture, or distribute products or services or that acquire intellectual property like patents for the sole purpose of monetizing their acquired intellectual
property through asserting claims of infringement. As these entities do not have operating businesses of their own and therefore have limited risk of counterclaims for
damages or injunctive relief, it may be difficult to deter them from bringing intellectual property infringement claims. We expect to face the possibility of more
intellectual property infringement claims as our prominence increases, business activities expand, market share and revenues grow, the number of products and
competitors in our industry grows and the functionality of products in different portions of the industry overlap. We may not be able to accurately assess the risk related
to these suits, and we may be unable to accurately assess our level of exposure.
Defending patent and other intellectual property claims, even claims without significant merit, can be time consuming, costly and can divert the attention of
technical and management personnel. We may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that
favorable final outcomes will be obtained in all cases. We may decide to settle certain lawsuits and disputes on terms that are unfavorable to us. Similarly, if any
litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that may not be reversed upon appeal. The terms of such a
settlement or judgment may require us to cease offering certain of our technologies or pay substantial amounts to the other party. In addition, we may have to seek a
license to continue offering technologies found to be in violation of a third party’s rights, which may not be available on reasonable terms, or at all, and may
significantly increase our
26
Source: RED HAT INC, 10-K, April 25, 2013
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operating costs and expenses. As a result, we may also be required to develop alternative non-infringing technology or practices or discontinue the practices. The
development of alternative non-infringing technology or practices could require significant effort and expense or may not be feasible.
An adverse legal decision regarding the intellectual property in and to our technology and other offerings could adversely affect our business, financial
condition, operating results and cash flows. See “Legal Proceedings” for additional information.
Our activities, or the activities of our partners, may violate anti-corruption laws and regulations that apply to us.
In many foreign countries, particularly in certain developing economies, it is not uncommon to engage in business practices that are prohibited by regulations
that may apply to us, such as the U.S. Foreign Corrupt Practices Act and similar laws. Although we have policies and procedures designed to help promote compliance
with these laws, our employees, contractors, partners and agents, as well as those companies to which we outsource certain of our business operations, may take actions
in violation of our policies and procedures. Any violation of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our
employees, prohibitions on the conduct of our business, and damage to our reputation.
We could be prevented from selling or developing our software if the GNU General Public License and similar licenses under which our technologies are
developed and licensed are not enforceable or are modified so as to become incompatible with other open source licenses.
A number of our offerings, including Red Hat Enterprise Linux, have been developed and licensed under the GNU General Public License and similar open
source licenses. These licenses state that any program licensed under them may be liberally copied, modified and distributed. It is possible that a court would hold these
licenses to be unenforceable or that someone could assert a claim for proprietary rights in a program developed and distributed under them. Any ruling by a court that
these licenses are not enforceable, or that open source components of our offerings may not be liberally copied, modified or distributed, may have the effect of
preventing us from distributing or developing all or a portion of our offerings. In addition, licensors of open source software employed in our offerings may, from time
to time, modify the terms of their license agreements in such a manner that those license terms may no longer be compatible with other open source licenses in our
offerings or our end user license agreement, and thus could, among other consequences, prevent us from continuing to distribute the software code subject to the
modified license.
Our efforts to protect our trademarks may not be adequate to prevent third parties from misappropriating our intellectual property rights in our trademarks.
Our collection of trademarks is valuable and important to our business. The protective steps we have taken in the past have been, and may in the future continue
to be, inadequate to protect and deter misappropriation of our trademark rights. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce,
our trademark rights in a timely manner. We have registered some of our trademarks in countries in North America, South America, Europe, Asia, Africa and Australia
and have other trademark applications pending in various countries around the world. Effective trademark protection may not be available in every country in which we
offer or intend to distribute our offerings. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, or diminish the
value of our trademarks and other proprietary rights. Failure to adequately protect our trademark rights could damage or even destroy one or more of our brands 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.
27
Source: RED HAT INC, 10-K, April 25, 2013
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Efforts to assert intellectual property ownership rights in our technologies could impact our standing in the open source community, which could limit our
technology innovation capabilities and adversely affect our business.
When we undertake actions to protect and maintain ownership and control over our intellectual property, including patents, copyrights and trademark rights, our
standing in the open source community could be adversely affected, which in turn could limit our ability to continue to rely on this community, upon which we are
dependent, as a resource to help develop and improve our technologies and further our research and development efforts, and could adversely affect our business.
We are, and may become, involved in disputes and lawsuits that could adversely affect our business.
Lawsuits or legal proceedings may be commenced against us. These disputes and proceedings may involve significant expense and divert the attention of
management and other employees. If we do not prevail in these matters, we could be required to pay substantial damages or settlement costs, which could adversely
affect our business, financial condition, operating results and cash flows. See “Legal Proceedings” for additional information.
Our business is subject to a variety of U.S. and international laws regarding data privacy and protection.
Our business is subject to federal, state and international laws regarding privacy and protection of user data. We post, on our website, our privacy policies and
practices concerning the use and disclosure of user data. As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes
more likely. The introduction of new product and service offerings by us may cause new and different regulations to apply to our business. Increased regulation in the
area of data privacy and protection is expected, and laws and regulations applying to the solicitation, collection, processing, protection or use of information could affect
our ability to use and share data, or the adoption of our cloud offerings by customers.
It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines
and penalties, a governmental order could require that we change our data practices. Compliance with these regulations may involve significant costs or require changes
in business practices that result in reduced revenue. Noncompliance could result in penalties being imposed on us or orders that we cease conducting the noncompliant
activity.
Any failure by us to comply with our posted privacy policies or other federal, state or international privacy-related or data protection laws and regulations or a
requirement to change our data practices could have an adverse affect on our business, financial condition, operating results and cash flows.
If we fail to comply with our customer contracts or government contracting regulations, our business could be adversely affected.
Our contracts with our customers may include specialized performance requirements. In particular, our contracts with federal, state, provincial and local
governmental customers are subject to various procurements regulations, contract provisions and other requirements relating to their formation, administration and
performance. Any failure by us to comply with the specific provisions in our customer contracts or any violation of government contracting regulations could result in
the imposition of various civil and criminal penalties, which may include termination of contracts, forfeiture of profits, suspension of payments and, in the case of our
government contracts, fines and suspension from future government contracting. In addition, we may be subject to qui tam litigation, the process by which a private
individual sues or prosecutes on behalf of the government relating to government contracts and shares in the proceeds of any successful litigation or settlement, which
could include claims for up to treble damages. Further, any negative publicity related to our customer contracts or any proceedings surrounding them, regardless of its
accuracy, may damage our business and affect our ability to compete for new contracts. There is increased pressure for governments and their agencies, both
domestically
28
Source: RED HAT INC, 10-K, April 25, 2013
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and internationally, to reduce spending. If our customer contracts are terminated, if we are suspended from government work, or if our ability to compete for new
contracts is adversely affected, we could suffer an adverse effect on our business, financial condition, operating results and cash flows.
RISKS RELATED TO FINANCIAL UNCERTAINTY
Our quarterly and annual operating results may not be a reliable indicator of our future financial performance.
Due to the unpredictability of the technology spending environment, among other reasons, our revenue and operating results have fluctuated and may continue to
fluctuate. 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. Accordingly, we may not be able to adjust our spending quickly enough to protect our projected operating results for a quarter if our revenue in that quarter falls
short of our expectations. If, among other considerations, our future financial performance falls below the expectations of securities analysts or investors or we are
unable to increase or maintain profitability, the market price of our common stock may decline.
Our stock price has been volatile historically and may continue to be volatile. Further, the sale of our common stock by significant stockholders may cause the
price of our common stock to decrease.
The trading price of our common stock has been and may continue to be subject to wide fluctuations. Our stock price may fluctuate in response to a number of
events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors,
announcements relating to strategic decisions, announcements related to key personnel, customer purchase delays, service disruptions, changes in financial estimates
and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to us, news reports
relating to trends in our markets, general economic conditions and other risks listed herein.
In addition, several of our stockholders own significant portions of our common stock. If these stockholders were to sell all or a portion of their holdings of our
common stock, then the market price of our common stock could be negatively impacted. The effect of such sales, or of significant portions of our stock being offered
or made available for sale, could result in strong downward pressure on our stock price. Investors should be aware that they could experience significant short-term
volatility in our stock if such stockholders decide to sell all or a portion of their holdings of our common stock at once or within a short period of time.
We may lack the financial and operational resources needed to increase our market share and compete effectively.
We compete with a number of large and well-established companies that have significantly greater financial resources and name recognition, larger development
staffs and more extensive marketing and distribution capabilities. Some of these competitors also bundle hardware and software offerings, making it more difficult for
us to penetrate their customer bases. No assurance can be given that our efforts to compete effectively will be sufficient.
In the market for operating systems, we face significant competition from competitors which offer hardware-independent multi-user operating systems for Intel
platforms and/or Linux and UNIX-based operating systems, including HP, IBM, Microsoft Corporation (“Microsoft”), Oracle and Unisys Corporation. With respect to
Linux operating systems, our chief competitor has historically been Attachmate Corporation (“Attachmate”), with its SUSE brand of Linux. Canonical Ltd. and Oracle
also sell support for their versions of the Linux operating system. We also compete with freely available Linux distributions, such as Fedora, CentOS and Debian.
29
Source: RED HAT INC, 10-K, April 25, 2013
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In the market for middleware offerings, our competitors include, but are not limited to, IBM, Microsoft, Oracle and VMware, Inc. (“VMware”) all of which offer
portfolios of enterprise Java and non-Java middleware products. Our middleware offering is heavily dependent on the Java programming language, which is controlled
by Oracle.
In the market for virtualization our competitors include, but are not limited to, Attachmate, Citrix Systems, Inc. (“Citrix”), Microsoft, Oracle and VMware.
With respect to our storage offerings we compete with companies that provide software-based storage products, such as EMC Corporation and NetApp, Inc.
Public cloud providers such as Amazon and Rackspace Hosting, Inc. (“Rackspace”) also offer storage capabilities.
With our cloud technologies we compete with companies that provide tools for enterprises to create private clouds, such as Citrix, Microsoft and VMware, as
well as with companies that provide public clouds, such as Amazon, Google Inc., Microsoft and Rackspace.
With respect to our management offerings our competitors include Attachmate, BMC Software, Inc., CA, Inc., HP, IBM, Microsoft and Oracle, all of which
offer support for heterogeneous operating system environments, such as Linux, Solaris, AIX, HP-UX and Windows.
We face competition in the market for services related to the development, deployment and integration of enterprise technologies. Our competitors in the market
include Accenture plc, HP, IBM and Tata Consultancy Services Limited, as well as other technology consulting companies. Some of these competitors may be able to
leverage their existing service organizations and provide higher levels of support, consulting and training on a more cost-effective basis than we can.
We may lack the resources needed to compete successfully with our current competitors as well as potential new competitors. Moreover, we compete in certain
areas with our partners and potential partners, and this may adversely impact our relationship with an individual partner or a number of partners. Competitive pressures
could affect prices or demand for our offerings, resulting in reduced profit margins and loss of market opportunity. We may have to lower the prices of our offerings to
stay competitive, which could adversely affect our margins and financial condition. In addition, if our pricing and other factors are not sufficiently competitive, we may
lose market share. Industry consolidation may also effect competition by creating larger and potentially stronger competitors in the markets in which we compete,
which may adversely affect on our business.
We may not be able to meet the financial and operational challenges that we will encounter as our international operations, which represented approximately
43.3% of our total revenue for the fiscal year ended February 28, 2013, continue to expand.
Our international operations accounted for approximately 43.3% of total revenue for the fiscal year ended February 28, 2013. As we expand our international
operations, we may have difficulty managing and administering a globally dispersed business and we may need to expend additional funds to, among other activities,
reorganize our sales force and technical support services team, outsource or supplement general and administrative functions, staff key management positions, obtain
additional information technology infrastructure and successfully localize offerings for a significant number of international markets, which may adversely affect our
operating results.
Additional challenges associated with the conduct of our business overseas that may adversely affect our operating results include:

Fluctuations in exchange rates;

Pricing environments;
30
Source: RED HAT INC, 10-K, April 25, 2013
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 Longer payment cycles and less financial stability of customers;

Economic, political, compliance and regulatory risks associated with specific countries;

Difficulty selecting and monitoring channel partners outside of the United States;

Lower levels of availability or use of the Internet, through which our software is often delivered;

Difficulty protecting our intellectual property rights overseas due to, among other reasons, the uncertainty of laws and enforcement in certain
countries relating to the protection of intellectual property rights;

Difficulty in staffing, developing and managing foreign operations as a result of distance, language, legal, cultural and other differences;

Difficulty maintaining quality standards consistent with the our brands;

Export and import laws and regulations could prevent us from delivering our offerings into and from certain countries;

Public health risks and natural disasters, particularly in areas in which we have significant operations;

Limitations on the repatriation and investment of funds and foreign currency exchange restrictions;

Changes in import/export duties, quotas or other trade barriers could affect the competitive pricing of our offerings and reduce our market share in some
countries; and

Economic or political instability or terrorist acts in some international markets could adversely affect our business in those markets or result in the loss or
forfeiture of some foreign assets and the loss of sums spent developing and marketing those assets and the revenue associated with them.
Any failure by us to effectively manage the challenges associated with the international expansion of our operations could adversely affect our business,
financial condition, operating results and cash flows.
A substantial portion of our revenues is derived from our Red Hat Enterprise Linux platform.
During our fiscal year ended February 28, 2013, a substantial portion of our subscription revenues was derived from our Red Hat Enterprise Linux technologies.
Although we are continuing to develop other offerings, we expect that revenue from Red Hat Enterprise Linux will constitute a majority of our revenue for the
foreseeable future. Declines and variability in demand for Red Hat Enterprise Linux could occur as a result of:

competitive products and pricing;

failure to release new or enhanced versions of Red Hat Enterprise Linux on a timely basis, or at all;

technological change that we are unable to address with Red Hat Enterprise Linux; or

future economic conditions.
Additionally, as more customers and potential customers virtualize their data centers and move computing projects to cloud environments, demand for operating
systems such as Red Hat Enterprise Linux may decline. Due to the concentration of our revenues from Red Hat Enterprise Linux, our business, financial condition,
operating results and cash flows could be adversely affected by a decline in demand for Red Hat Enterprise Linux.
We may be subject to greater tax liabilities.
We are subject to income and other taxes in the U.S. and in numerous foreign jurisdictions. Our domestic and foreign tax liabilities are subject to the allocation
of revenue and expenses in different jurisdictions. Additionally, the amount of taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in
which we operate. Significant judgment is required in determining our worldwide provision for income taxes. In
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Source: RED HAT INC, 10-K, April 25, 2013
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the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly subject to audits by
tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from
our historical income tax provisions and accruals. The results of an audit or litigation could adversely affect our financial statements in the period or periods for which
that determination is made.
We earn a significant amount of our operating income from outside the U.S., and any repatriation of funds currently held in foreign jurisdictions may result in
higher effective tax rates for the company. In addition, there have been proposals to change U.S. tax laws that would significantly impact how U.S. multinational
corporations are taxed on foreign earnings. Although we cannot predict whether or in what form this proposed legislation may pass, if enacted it could adversely affect
our tax expense and cash flows.
Because we recognize revenue from subscriptions for our service over the term of the subscription, downturns or upturns in sales may not be immediately
reflected in our operating results.
We generally recognize subscription revenue from customers ratably over the term of their subscription agreements, which are generally 12 to 36 months. As a
result, much of the revenue we report in each quarter is deferred revenue from subscription agreements entered into during previous quarters. Consequently, a decline in
subscriptions in any one quarter will not necessarily be fully reflected in the revenue in that quarter and will negatively affect our revenue in future quarters. In addition,
we may be unable to adjust our cost structure to reflect this reduced revenue. Accordingly, the effect of significant downturns in sales and market acceptance of our
service, and potential changes in our rate of renewals, may not be fully reflected in our operating results until future periods. Our subscription model also makes it
difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable
subscription term.
If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.
Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate
the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances
indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization,
reduced future cash flow estimates and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements
during the period in which any impairment of our goodwill or amortizable intangible assets is determined which could adversely affect our operating results.
We may be exposed to potential risks if we do not have an effective system of disclosure controls or internal controls.
We must comply, on an on-going basis, with the requirements of the Sarbanes-Oxley Act of 2002, including those provisions that establish the requirements for
both management and auditors of public companies with respect to reporting on internal control over financial reporting. We cannot be certain that measures we have
taken, and will take, will be sufficient or timely completed to meet these requirements on an on-going basis, or that we will be able to implement and maintain adequate
disclosure controls and controls over our financial processes and reporting in the future, particularly in light of our rapid growth, international expansion and changes in
our offerings, which are expected to result in on-going changes to our control systems and areas of potential risk.
If we fail to maintain an effective system of disclosure controls or internal control over financial reporting, including satisfaction of the requirements of the
Sarbanes-Oxley Act, we may not be able to accurately or timely
32
Source: RED HAT INC, 10-K, April 25, 2013
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report on our financial results or adequately identify and reduce fraud. As a result, the financial position of our business could be adversely affected; current and
potential future shareholders could lose confidence in us and/or our reported financial results, which may cause a negative effect on our trading price; and we could be
exposed to litigation or regulatory proceedings, which may be costly or divert management attention.
Changes in accounting principles and guidance, or their interpretation, could result in unfavorable accounting charges or effects, including changes to
previously filed financial statements, which could cause our stock to decline.
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. These principles are subject to
interpretation by the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting principles and guidance. A change
in these principles or guidance, or in their interpretations, may have a significant effect on our reported results and may retroactively affect previously reported results.
Our investment portfolio is subject to credit and illiquidity risks and fluctuations in the market value of our investments and interest rates. These risks may
result in an impairment of or the loss of all or a portion of the value of our investments, an inability to sell our investments or a decline in interest income.
We maintain an investment portfolio of various holdings, types and maturities. Our portfolio as of February 28, 2013 consisted primarily of money market funds,
U.S. government and agency securities, German sovereign securities, certificates of deposit, corporate securities and equity securities. Although we follow an
established investment policy and seek to minimize the risks associated with our investments by investing primarily in investment grade, highly liquid securities and by
limiting the amounts invested with any one institution, type of security or issuer, we cannot give assurances that the assets in our investment portfolio will not lose value
or become impaired, or that our interest income will not decline.
A significant part of our investment portfolio consists of U.S. government and agency securities. If global credit and equity markets experience prolonged
periods of decline, or if there is a default or downgrade of U.S. government or agency debt, our investment portfolio may be adversely impacted and we could
determine that some of our investments have experienced an other-than-temporary decline in fair value, requiring impairment charges that could adversely affect our
financial condition and operating results.
Future fluctuations in economic and market conditions could adversely affect the market value of our investments, and we could record additional impairment
charges and lose some or all of the principal value of investments in our portfolio. A total loss of an investment or a significant decline in the value of our investment
portfolio could adversely affect our financial condition and operating results. For information regarding the sensitivity of and risks associated with the market value of
portfolio investments and interest rates, see “Quantitative and Qualitative Disclosures About Market Risk”.
Our investments in private companies are subject to risk of loss of investment capital. Some of these investments may have been made to further our strategic
objectives and support our key business initiatives. Our investments in private companies are inherently risky because the markets for the technologies they have under
development are typically in the early stages and may never materialize. We could lose the value of our entire investment in these companies.
We are subject to risks of currency fluctuations and related hedging operations.
A portion of our business is conducted in currencies other than the U.S. dollar. Changes in exchange rates among other currencies and the U.S. dollar will affect
our net revenue, operating expenses and operating margins. We cannot predict the impact of future exchange rate fluctuations. As we expand international
33
Source: RED HAT INC, 10-K, April 25, 2013
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operations, our exposure to exchange rate fluctuations increases. We use financial instruments, primarily forward purchase contracts, to economically hedge U.S. dollar
and other currency commitments arising from trade accounts receivable, trade accounts payable and fixed purchase obligations. If these hedging activities are not
successful or we change or reduce these hedging activities in the future, we may experience significant unexpected expenses from fluctuations in exchange rates. For
information regarding our hedging activity, see “Quantitative and Qualitative Disclosures About Market Risk”.
Natural disasters and geo-political events could adversely affect our business, financial condition, operating results and cash flows.
The occurrence of one or more epidemics, natural disasters or geo-political events, such as civil unrest or terrorist attacks, in a country in which we operate or in
which technology industry suppliers or our customers are located, could adversely affect our business, financial condition, operating results and cash flows. Such events
could result in physical damage to, or the complete loss of, one or more of our facilities, the lack of an adequate work force in a market, the inability of our associates to
reach or have transportation to our facilities directly affected by such events, the evacuation of the populace from areas in which our facilities are located, changes in the
purchasing patterns of our customers, the temporary or long-term disruption in the supply of computer hardware and related components, the disruption or delay in the
manufacture and transport of goods overseas, the disruption of utility services to our facilities or to suppliers, partners or customers, and disruption in our
communications with our customers.
34
Source: RED HAT INC, 10-K, April 25, 2013
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ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our headquarters is currently located in a subleased facility at 100 E. Davie Street, Raleigh, North Carolina. The building includes approximately 380,000 square
feet of office and retail space and an integrated parking deck. We entered into an agreement to sublease this building on December 27, 2011, and the sublease will
expire on August 23, 2035. The rental payments under the sublease are approximately $4.6 million annually until December 31, 2020 and approximately $3.8 million
annually thereafter until the end of the sublease. We will also be responsible for payment of taxes and all operating expenses relating to the subleased building (other
than certain expenses relating to the operation of the integrated parking deck and the retail portions of the building, which will be the responsibility of the tenants of
those portions of the building). Over the term of the sublease agreement, we will also receive certain rent credits and improvement allowances.
We lease another facility in Raleigh, North Carolina, which previously served as our headquarters and consists of approximately 120,000 square feet. In January
2002, we assumed this lease from an unrelated third-party. The lease, which has an original term of 20 years, will expire on June 10, 2020. We have an option to
terminate the lease early in June 2015. The annual rental expense under this lease is approximately $1.7 million. In March 2006, we assumed a second lease in Raleigh,
North Carolina for approximately 25,000 square feet, expanding our previous headquarters facilities. In 2007, 2008, 2009 and 2010, we acquired under this second lease
an additional 25,000 square feet, 10,000 square feet, 8,000 square feet and 5,500 square feet, respectively, further expanding our previous headquarters facilities. The
term for this second lease will expire on February 28, 2017, except that the 8,000 and 5,500 square feet portions of the second lease will expire on January 31, 2015 and
May 31, 2015, respectively. The annual rental expense under this second lease is approximately $1.8 million.
In connection with the transition to our current headquarters, beginning Oct. 1, 2012 we subleased approximately 72,000 square feet of our previous
headquarters facilities to a third party subtenant. Sublease income is approximately $1.3 million per year. The sublease term ends on the same day as Red Hat’s lease
term. We continue to market and pursue opportunities to sublease, assign or otherwise dispose of the lease relating to the remainder of our previous headquarters
facilities but can give no assurance that our efforts will be successful.
In addition to our headquarters, we have leased office facilities in over 30 countries and more than 80 locations. Significant locations in North America include
Atlanta, Georgia; Chicago, Illinois; Dallas, Texas; Mountain View, California; Toronto, Canada; Tyson’s Corner, Virginia and Westford, Massachusetts. Significant
locations in Latin America include Buenos Aires, Argentina; Mexico City, Mexico and Sao Paulo, Brazil. Significant locations in EMEA (Europe, Middle East and
Africa) include Barcelona, Spain; Brno, Czech Republic; Cork, Ireland; Farnborough, United Kingdom; Madrid, Spain; Munich, Germany; Puteaux, France; Ra’anana,
Israel and Stuttgart, Germany. Significant locations in Asia Pacific include Beijing, China; Brisbane, Australia; Melbourne, Australia; Bangalore, India; Mumbai, India;
New Delhi, India; Pune, India; Singapore; Seoul, South Korea; Sydney, Australia and Tokyo, Japan. We believe that in all material respects our properties have been
satisfactorily maintained, are in good condition and are suitable for our operations.
ITEM 3.
LEGAL PROCEEDINGS
The Company experiences routine litigation in the normal course of its business, including patent litigation. The Company presently believes that the outcome of
this routine litigation will not have a material adverse effect on its financial position, results of operations or cash flows.
ITEM 4.
MINE SAFETY DISCLOSURES
This Item is not applicable.
35
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
Our common stock trades on the New York Stock Exchange under the symbol “RHT”. The chart below sets forth the high and low sales information for each of
the quarters of the fiscal years ended February 28, 2013 and February 29, 2012.
FY 2013
Quarter
FY 2012
High
First
Second
Third
Fourth
$
$
$
$
62.75
59.49
60.00
57.10
Low
$
$
$
$
High
48.25
49.45
46.76
46.34
$
$
$
$
48.38
47.10
53.42
52.95
Low
$
$
$
$
38.47
31.77
35.65
39.19
Holders
As of April 18, 2013, we estimate that there were 1,496 registered stockholders of record of our common stock.
Dividends
We have never declared or paid any cash dividends on our common stock. We anticipate that our future earnings will be retained for the operation and expansion
of our business and do not anticipate paying cash dividends in the foreseeable future.
36
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
Stock Performance Graph
The following graph shows a comparison of cumulative total return (equal to dividends plus stock appreciation) during the period from February 29, 2008
through February 28, 2013 for:

Red Hat, Inc.;

a peer group consisting of Adobe Systems Incorporated, Akamai Technologies, Inc., Ansys, Inc., Autodesk, Inc., BMC, Cadence Design Systems, Inc.,
Citrix, Compuware Corporation, Jack Henry & Associates, Inc., Intuit Inc., Micros Systems, Inc., NetApp, Nuance Communications, Inc., Progress
Software Corporation, Salesforce.com, Inc., TIBCO Software, Inc., Verisign, Inc. and VMWare (the “Stock Performance Peer Group”); and

the S&P 500 Index.
We are required to provide a line-graph presentation comparing cumulative, five-year stockholder returns on an indexed basis with a broad equity market index
and either a published industry index or an index of peer companies selected by Red Hat. In our index of peer group companies, we have selected peer companies
considered to be peers for purposes of benchmarking executive compensation during the fiscal year ending February 28, 2013.
COMPARISON OF FIVE-YEAR CUMULATIVE
TOTAL RETURN AMONG RED HAT,
STOCK PERFORMANCE PEER GROUP AND S&P 500 INDEX
2/29/2008
RED HAT, INC.
PEER GROUP
S&P 500 INDEX
$
$
$
2/28/2009
100.00
100.00
100.00
$
$
$
76.68
54.19
56.71
2/28/2010
$
$
$
157.32
100.48
87.08
2/28/2011
$
$
$
231.52
153.03
106.76
2/29/2012
$
$
$
277.40
159.41
122.20
2/28/2013
$
$
$
284.97
154.34
127.28
Notes:

Assumes initial investment of $100.00 on February 29, 2008. Total return includes reinvestment of dividends.

The lines represent annual index levels derived from compounded daily returns that include all dividends.
37
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
 If the annual interval, based on the fiscal year-end, ends on a day that is not a trading day, the preceding trading day is used.

The information included under the heading “Stock Performance Graph” in Item 5 of this Annual Report on Form 10-K is “furnished” and not “filed” and
shall not be deemed to be “soliciting material” or subject to Rule 14A, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”) or otherwise subject to the limitations of that section, and shall not be deemed incorporated by reference in any
filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this report and
irrespective of any general incorporation by reference language in any such filing.

The stock price performance shown in the graph is not necessarily indicative of future price performance.
Issuer Purchases of Equity Securities
The table below sets forth information regarding the Company’s purchases of its common stock during its fourth fiscal quarter ended February 28, 2013:
Issuer Purchases of Equity Securities
Total Number
of Shares
Purchased
(1)
Period
December 1, 2012 – December 31, 2012
January 1, 2013 – January 31, 2013
Weighted
Average
Price Paid
per Share
Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs (2) (3)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (2)
307,971
$
48.72
307,971
$
200.1 million
174,914
$
53.59
94,499
$
195.1 million
284,854
$
55.30
284,854
$
179.3 million
767,739
$
52.27
687,324
$
179.3 million
February 1, 2013 – February 28, 2013
Total
(1)
During the three months ended February 28, 2013, the Company withheld an aggregate of 80,415 shares of common stock from employees to satisfy minimum
tax withholding obligations relating to the vesting of restricted share awards. These shares were not withheld pursuant to the program described in NOTE
2—Summary of Significant Accounting Policies to the Consolidated Financial Statements.
(2)
On March 28, 2012, the Company announced that its Board of Directors had authorized the repurchase of up to $300.0 million of Red Hat’s common
stock from time to time in open market or in privately negotiated transactions. The program commenced on April 1, 2012, and will expire on the
earlier of (i) March 31, 2014, or (ii) a determination by the Board of Directors, Chief Executive Officer or Chief Financial Officer to discontinue the
program. See NOTE 23—Subsequent Events to the Consolidated Financial Statements for a discussion of shares repurchased subsequent to February
28, 2013.
(3)
On April 15, 2013, the Company announced that its Board of Directors has authorized the repurchase of up to $300.0 million of Red Hat’s common stock from
time to time on the open market or in privately negotiated transactions. The new program, which replaced the previous repurchase program, commenced on April
16, 2013, and will expire on the earlier of (i) March 31, 2015, or (ii) a determination by the Board, Chief Executive Officer or Chief Financial Officer to
discontinue the program.
38
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
ITEM 6.
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for each of the Company’s fiscal years in the five-year period ended February 28, 2013. The selected
balance sheet data as of February 28, 2013 and February 29, 2012 and the selected statement of operations data for the fiscal years ended February 28,
2013, February 29, 2012 and February 28, 2011 are derived from our Consolidated Financial Statements contained in this Annual Report on Form 10-K and should be
read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein. The selected statement of operations data
for the fiscal years ended February 28, 2010 and February 28, 2009 and the selected balance sheet data as of February 28, 2011, February 28, 2010 and February 28,
2009, are derived from our Consolidated Financial Statements contained in the Annual Reports on Form 10-K for the years ended February 28, 2011 and February 28,
2010.
Year Ended
February 28,
2013
February 29,
February 28,
February 28,
2012
2011
2010
(in thousands, except per share data)
February 28,
2009
SELECTED STATEMENT OF OPERATIONS DATA
Revenue:
Subscriptions
Training and services
Total subscription and training and services
revenue
Gross profit
Income from operations
Interest income
Other income (expense), net
Net income
Basic net income per common share
Diluted net income per common share
Weighted average shares outstanding
Basic
Diluted
$
1,148,341
180,476
$
965,575
167,528
$
773,404
135,873
$
638,654
109,582
$
541,210
111,362
$
$
$
$
$
$
$
$
1,328,817
1,128,217
201,038
8,245
469
150,204
0.78
0.77
$
$
$
$
$
$
$
$
1,133,103
954,555
199,913
8,418
(322)
146,626
0.76
0.75
$
$
$
$
$
$
$
$
909,277
758,990
145,676
6,743
1,275
107,278
0.56
0.55
$
$
$
$
$
$
$
$
748,236
634,391
100,349
10,381
10,772
87,253
0.46
0.45
$
$
$
$
$
$
$
$
652,572
546,446
82,521
36,473
2,538
78,721
0.41
0.39
193,147
195,804
193,151
196,451
190,294
196,353
187,845
193,546
190,772
211,344
As of
February 28,
2013
February 29,
2012
February 28,
2011
(in thousands)
February 28,
2010
February 28,
2009
SELECTED BALANCE SHEET DATA
Total cash and investments in debt and equity securities
(available-for-sale, short- and long-term)
Working capital
Total assets
Stockholders’ equity
$
$
$
$
1,318,373
383,037
2,813,660
1,520,161
$
$
$
$
1,260,353
395,050
2,491,099
1,398,817
$
$
$
$
1,192,391
504,757
2,199,322
1,290,699
$
$
$
$
970,185
436,852
1,870,872
1,111,052
$
$
$
$
846,089
444,183
1,753,636
1,106,053
39
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading global provider of open source software solutions, using a community-powered approach to develop and offer reliable and high-performing
operating system, middleware, virtualization, storage and cloud technologies.
Open source software is an alternative to proprietary software and represents a different model for the development and licensing of commercial software code
than that typically used for proprietary software. Because open source software code is often freely shared, there are customarily no licensing fees for the use of open
source software. Therefore, we do not recognize revenue from the licensing of the code itself. We provide value to our customers through the development, aggregation,
integration, testing, certification, delivery, maintenance, enhancement and support of our Red Hat enterprise technologies, and by providing a level of performance,
reliability, scalability, flexibility, stability and security for the enterprise technologies we package and distribute. Moreover, because communities of developers not
employed by us assist with the creation of our open source offerings, opportunities for further innovation of our offerings are supplemented by these communities.
We primarily offer our enterprise technologies in the form of annual or multi-year subscriptions, and we recognize revenue over the period of the subscription
agreements with our customers. We market our offerings primarily to enterprise customers.
We have focused on introducing and gaining acceptance for Red Hat enterprise technologies that comprise our open source architecture. Our operating system,
Red Hat Enterprise Linux, has gained widespread ISV and IHV support. We have continued to build our open source architecture by expanding our enterprise operating
system and middleware offerings and introducing virtualization, storage, cloud and other offerings.
We derive our revenue and generate cash from customers primarily from two sources: (i) subscription revenue and (ii) training and services revenue. These
arrangements typically involve subscriptions to Red Hat enterprise technologies. Our revenue is affected by, among other factors, corporate, government and consumer
spending levels. In evaluating the performance of our business, we consider a number of factors, including total revenue, deferred revenue, operating income, operating
margin and cash flows from operations.
The arrangements with our customers that produce this revenue and cash are explained in further detail in NOTE 2—Summary of Significant Accounting
Policies to our Consolidated Financial Statements.
In our fiscal year ended February 28, 2013, we focused and expect in our fiscal year ending February 28, 2014 to continue to focus on, among other things,
generating (i) widespread adoption of Red Hat enterprise technologies by enterprise customers globally, (ii) increased revenue from our existing user base by renewing
existing subscriptions, converting users of free versions of our enterprise technologies to paying subscribers, providing additional value to our customers and growing
the number of open source enterprise technologies we offer, (iii) increased revenue by providing additional consulting and other targeted services and (iv) increased
revenue from strategic acquisitions and channel partner relationships, including distributors, OEMs, IHVs, ISVs, cloud computing providers, VARs and system
integrators, and from our own international expansion, among other means.
Revenue
For the year ended February 28, 2013, total revenue increased 17.3%, or $195.7 million, to $1.33 billion from $1.13 billion for the year ended February 29,
2012. Subscription revenue increased 18.9% or $182.8
40
Source: RED HAT INC, 10-K, April 25, 2013
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million, driven primarily by additional subscriptions related to our principal Red Hat Enterprise Linux technologies, which continue to gain broader market acceptance
in mission-critical areas of computing, and our expansion of sales channels and our geographic footprint. The increase is, in part, a result of the continued migration of
enterprises in industries such as financial services, government, technology and telecommunications to our open source solutions from proprietary technologies.
Training and services revenue increased 7.7% or $12.9 million for the year ended February 28, 2013 as compared to the year ended February 29, 2012. The increase is
driven primarily by customer interest in new products and technologies.
We believe our success is influenced by:

the extent to which we can expand the breadth and depth of our technology and service offerings;

our ability to enhance the value of subscriptions for Red Hat enterprise technologies through frequent and continuing innovations to these technologies
while maintaining stable platforms over multi-year periods;

our ability to generate increasing revenue from channel partner and other strategic relationships, including distributors, OEMs, IHVs, ISVs, cloud
computing providers, VARs and system integrators;

the acceptance and widespread deployment of open source technologies by enterprises and similar institutions, such as government agencies;

our ability to generate new and recurring subscription revenue for Red Hat enterprise technologies; and

our ability to provide customers with consulting and training services that generate additional revenue.
Deferred revenue, billings proxy and backlog
Deferred revenue
Our deferred revenue, current and long-term, balance at February 28, 2013 was $1.09 billion. Because of our subscription model and revenue recognition
policies, deferred revenue improves predictability of future revenue. For example, current deferred revenue provides a baseline for revenue to be recognized over the
next twelve months. Similarly, long-term deferred revenue provides a baseline for revenue to be recognized beyond twelve months. Total deferred revenue at
February 28, 2013 increased $143.2 million or 15.1% as compared to the balance at February 29, 2012 of $946.7 million.
The change in deferred revenue reported on our Consolidated Balance Sheets of $143.2 million differs from the $162.6 million change in deferred revenue we
reported on our Consolidated Statements of Cash Flows for the year ended February 28, 2013 due to changes in foreign currency exchange rates used to translate
deferred revenue balances from our foreign subsidiaries’ functional currency into U.S. dollars.
Billings proxy
We approximate our annual billings by aggregating revenue recognized on our Consolidated Statements of Operations with the change in total deferred revenue
reported on our Consolidated Statements of Cash Flows. We use the change in deferred revenue as reported on our Consolidated Statements of Cash Flows because the
amount has been adjusted for the impact of changes in foreign currency exchange rates used to translate deferred revenue balances from our foreign subsidiaries’
functional currencies into U.S. dollars.
Our billings proxy increased by 13.9% or $181.4 million to $1.49 billion for the year ended February 28, 2013 from $1.31 billion for the year ended
February 29, 2012.
Backlog
Our backlog as of February 28, 2013 totaled approximately $1.37 billion and includes amounts billed to customers and recognized as current and long-term
deferred revenue on our Consolidated Balance Sheet of
41
Source: RED HAT INC, 10-K, April 25, 2013
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$830.5 million and $259.5 million, respectively, plus the value of non-cancellable subscription and services agreements to be billed in the future and not reflected in our
financial results (“off-balance sheet backlog”) which was in excess of $280.0 million. Our off-balance sheet backlog as of February 29, 2012 was in excess of $200.0
million. The resulting increase in off-balance sheet backlog of 40.0% or $80.0 million for the year ended February 28, 2013 demonstrates increased customer
commitment to our technologies.
We report our off-balance sheet backlog as a conservative approximation, often describing the amount as “in excess of”, primarily because the value of
underlying contracts is derived from data not yet subjected to the complete application of our revenue recognition policies. We endeavor to derive the value of our
off-balance sheet backlog in a consistent manner year over year and therefore believe amounts are comparable.
Subscription revenue
Our enterprise technologies are sold under subscription agreements. These agreements typically have a one- or three-year subscription period. A subscription
generally entitles a customer to, among other things, a specified level of support, as well as new versions of the software, security updates, fixes, functionality
enhancements and upgrades to the technology, if and when available, and compatibility with an ecosystem of certified hardware and software applications. Our
customers have the ability to purchase higher levels of subscriptions that increase the level of support the customer is entitled to receive. Subscription revenue increased
sequentially for each quarter of fiscal 2013, 2012 and 2011 and is being driven primarily by the increased market acceptance and use of open source software by
enterprises and our expansion of sales channels and geographic footprint during these periods.
Revenue by geography
In the year ended February 28, 2013, approximately $574.9 million or 43.3% of our revenue was generated outside the United States compared to approximately
$510.5 million or 45.1% for the year ended February 29, 2012. Our international operations are expected to continue to grow as our international sales force and
channels become more mature and as we enter new locations or expand our presence in existing locations. As of February 28, 2013, we had offices in more than 80
locations throughout the world.
We operate our business in three geographic regions: the Americas (U.S., Latin America and Canada); EMEA (Europe, Middle East and Africa); and Asia
Pacific (principally Japan, Singapore, India, Australia, South Korea and China). Revenue generated by the Americas, EMEA and Asia Pacific for the three years ended
February 28, 2013 was as follows (in thousands):
Americas
Year ended February 28, 2013
Year ended February 29, 2012
Year ended February 28, 2011
$
$
$
855,214
716,033
583,795
EMEA
$
$
$
284,922
257,603
199,646
Asia Pacific
$
$
$
188,681
159,467
125,836
Total
$ 1,328,817
$ 1,133,103
$
909,277
Year-over-year revenue growth rates for our three geographical regions were as follows for the three years ended February 28, 2013:
Americas
Year ended February 28, 2013
Year ended February 29, 2012
Year ended February 28, 2011
19.4%
22.7%
23.0%
EMEA
10.6%
29.0%
18.7%
Asia Pacific
18.3%
26.7%
19.3%
Total
17.3%
24.6%
21.5%
Excluding the impact of changes in foreign currency exchange rates, revenue from the Americas, EMEA and Asia Pacific grew approximately 20.3%, 18.7% and
22.2%, respectively, for the year ended February 28, 2013. Excluding the impact of foreign currency exchange rates, total revenue grew 20.2% for the year ended
February 28, 2013.
42
Source: RED HAT INC, 10-K, April 25, 2013
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As we expand further within each region, we anticipate revenue growth rates to become more similar among our geographic regions due to the similarity of
products and services offered and the similarity in customer types or classes.
Gross profit margin
Gross profit margin increased to 84.9% for the year ended February 28, 2013 from 84.2% for the year ended February 29, 2012 as a result of both a product mix
shift to subscriptions and a slight increase in profit margins related to training and services. Gross profit margin on training and services revenue increased to 33.4% for
the year ended February 28, 2013 from 33.0% for the year ended February 29, 2012, primarily as a result of higher utilization rates for our consulting personnel and the
implementation of a contractual arrangement with a global training partner that provides certain training services on our behalf and bears a portion of the fixed cost of
providing such services, which makes our training expenses vary with demand.
Gross profit margin by geography
Gross profit margins generated by our geographic segments for the three years ended February 28, 2013 were as follows:
Americas
Year ended February 28, 2013
Year ended February 29, 2012
Year ended February 28, 2011
EMEA
84.9%
84.4%
83.6%
Asia Pacific
88.9%
87.7%
87.9%
83.9%
82.7%
82.2%
Total
84.9%
84.2%
83.5%
Regional year-over-year variations in gross profit margins are primarily due to slight product mix shifts between subscriptions and services.
As we continue to expand our sales and support services within our geographic segments, we expect gross profit margins to further converge over the long run
due to the similarity of products and services offered, similarity in production and distribution methods and the similarity in customer types or classes.
Income from operations
Operating income was 15.1% and 17.6% of total revenue for the year ended February 28, 2013 and February 29, 2012, respectively. The decrease in operating
income as a percentage of revenue is a result of the increase in operating expenses as a percent of revenue. Operating expenses as a percent of revenue increased to
69.8% for the year ended February 28, 2013 from 66.6% for the year ended February 29, 2012 resulting primarily from investments made in our sales and marketing
and research and development functions.
Income from operations by geography
Operating income as a percentage of revenue generated by our geographic segments for the three years ended February 28, 2013 was as follows:
Americas
Year ended February 28, 2013
Year ended February 29, 2012
Year ended February 28, 2011
(1)
21.2%
23.1%
19.9%
EMEA
25.4%
29.0%
29.6%
Asia Pacific
24.5%
24.7%
24.9%
Total (1)
15.1%
17.6%
16.0%
Total operating income as a percentage of revenue includes corporate (non-allocated) share-based compensation expense for the years ended February 28, 2013,
February 29, 2012 and February 28, 2011 of $98.7 million, $79.3 million and $60.6 million, respectively. For additional information, see NOTE 20—Segment
Reporting to our Consolidated Financial Statements.
43
Source: RED HAT INC, 10-K, April 25, 2013
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Operating margin for all of our geographic operating segments decreased for the year ended February 28, 2013 as compared to the year ended February 29, 2012
primarily as a result of the increase in operating expenses associated with increased investments in our sales and marketing and research and development functions.
Cash, cash equivalents, investments in debt and equity securities and cash flow from operations
Cash, cash equivalents and short-term and long-term available-for-sale investments in securities balances at February 28, 2013 totaled $1.32 billion. Cash
generated from operating activities for the year ended February 28, 2013 totaled $465.3 million, which represents an increase of 18.7% in operating cash flow as
compared to the year ended February 29, 2012. This increase is due to an increase in subscription and services revenues, billings and collections during the same period.
Our significant cash and investment balances give us a measure of flexibility to take advantage of opportunities such as acquisitions, increasing investment in
international areas and repurchasing our common stock.
Foreign currency exchange rates’ impact on results of operations
Approximately 43.3% of our revenue for the year ended February 28, 2013 was produced by sales outside the United States. We are exposed to significant risks
of foreign currency fluctuation primarily from receivables denominated in foreign currency and are subject to transaction gains and losses, which are recorded as a
component in determining net income. The statements of operations of our non-U.S. operations are translated into U.S. dollars at the average exchange rates for each
applicable month in a period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign-currency-denominated transactions
results in increased revenue and operating expenses from operations for our non-U.S. operations. Similarly, our revenue and operating expenses will decrease for our
non-U.S. operations if the U.S. dollar strengthens against foreign currencies.
Using the average foreign currency exchange rates from our prior fiscal year ended February 29, 2012, our revenue and operating expenses from non-U.S.
operations for the year ended February 28, 2013 would have been higher than we reported February 28, 2013 by approximately $32.9 million and $23.5 million,
respectively, which would have resulted in income from operations being higher by $9.4 million.
Business combinations
On December 21, 2012, we completed the acquisition of ManageIQ, Inc. (“ManageIQ”) for approximately $104.5 million in cash. ManageIQ is a provider of
enterprise cloud management and automation solutions that enable organizations to deploy, manage and optimize private clouds, public clouds and virtualized
infrastructures. As a result of the acquisition of ManageIQ, operating expenses increased by approximately $3.0 million for the year ended February 28, 2013.
During the year ended February 28, 2013, we acquired two businesses operating in the middleware space. These acquisitions include technologies that are
complementary to our JBoss Middleware technology. One acquisition, which included certain assets and related operations acquired from Polymita Technologies S.L.
(“Polymita”), closed on August 28, 2012. The second acquisition closed on September 7, 2012 and included certain assets and related operations acquired from
FuseSource, a division of Progress Software Corporation (“FuseSource”). Transaction fees related to these two acquisitions totaled approximately $1.0 million for the
year ended February 28, 2013 and are included in general and administrative expense on our Consolidated Statement of Operations for the year ended February 28,
2013. As a result of these two acquisitions, operating expenses increased by approximately $8.0 million for the year ended February 28, 2013.
On October 7, 2011, we acquired Gluster, Inc. (“Gluster”). Gluster develops, distributes and provides support for open-source, scale-out storage software. The
acquisition expands our enterprise software offerings to
44
Source: RED HAT INC, 10-K, April 25, 2013
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include management of unstructured data. Total consideration transferred as part of the acquisition was $137.2 million and includes cash consideration of $135.9
million and equity consideration related to assumed, nonvested employee share-based awards of $1.2 million. The total fair value, as of October 7, 2011, of all assumed
nonvested awards was $14.5 million, of which $1.2 million has been attributed to pre-acquisition employee services and accordingly has been recognized as
consideration transferred. The remaining $13.3 million of fair value will be recognized as compensation expense over the remaining vesting period.
For further discussion related to our acquisitions, See NOTE 3—Business Combinations to our Consolidated Financial Statements.
Facility exit costs
In December 2011, we entered into an agreement to sublease a building in downtown Raleigh, North Carolina in which our headquarters are currently located. In
connection with the transition to our new headquarters, we have endeavored to assign, sublease or otherwise dispose of our existing leases related to the two facilities
that previously constituted our headquarters in Raleigh, North Carolina.
In May 2012, we entered into a sublease agreement with an unrelated third-party to lease one of the two facilities that previously constituted our headquarters.
As a result, we have recognized a loss of $3.1 million for the year ended February 28, 2013 which represents the excess of our remaining obligation on the space over
the agreed sublease income.
We will continue to market the remaining facility for sublease. However, to the extent we are unable to sublease or otherwise dispose of such space and recover
the full amount of our remaining obligation, we will be required to recognize a loss at the date we cease using this facility, currently estimated to be May 2013. At that
time, our loss, net of deferred rent credits, with respect to the remaining facility is expected to be approximately $4.8 million.
Amortization of related leasehold improvements has been accelerated to coincide with our exit from the two facilities. This change in estimated useful life
resulted in incremental amortization expense of $2.9 million for the year ended February 28, 2013, and is included in general and administration expense on our
Consolidated Statement of Operations.
45
Source: RED HAT INC, 10-K, April 25, 2013
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CRITICAL ACCOUNTING ESTIMATES
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP). Our significant
accounting policies are disclosed in NOTE 2—Summary of Significant Accounting Policies to our Consolidated Financial Statements and describe our methods for
applying U.S. GAAP in areas such as revenue recognition, deferred selling costs, fair value measurements, and foreign currency translation among other areas deemed
significant. In applying certain significant accounting policies, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities,
revenues, and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, changes in the accounting estimates are reasonably likely to
occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these
estimates and actual results, our financial condition, results of operations or cash flows could be adversely affected. We base our estimates on past experience and other
assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type
as critical accounting estimates, which we discuss further below. Critical accounting estimates are applied in the following areas:

Revenue recognition;

Goodwill and other long-lived assets;

Share-based compensation;

Income taxes; and

Loss contingencies.
Revenue recognition
Application of accounting principles related to the measurement and recognition of revenue requires judgment. For example, in transactions that include multiple
elements, we must exercise judgment in determining whether adequate vendor-specific objective evidence (“VSOE”) of fair value exists for each undelivered element.
Changes to the elements in a transaction, the ability to identify VSOE for those elements, and changes in the fair value of the respective elements could materially
impact the amount of earned and unearned revenue.
In addition, complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine appropriate accounting,
including whether the deliverables specified in a multiple element transaction should be treated as separate units of accounting.
Goodwill and other long-lived assets
We make judgments about the recoverability of goodwill, identifiable intangible assets and other long-lived assets, including capitalized software purchased or
developed for internal-use. The assumptions and estimates used to determine recoverability of goodwill, identifiable intangible assets and other long-lived assets are
complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes
in our business strategy and our internal, multi-year forecasts for our subscription and services offerings which often include emerging technologies. Changes in any of
these various factors could materially impact our financial position, results of operations and or cash flows.
Share-based compensation
We are required to make estimates and assumptions with regards to the number of share-based awards that we expect will ultimately vest and the amount of tax
benefits we expect will ultimately be realized, among other things.
46
Source: RED HAT INC, 10-K, April 25, 2013
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Share-based awards expected to vest
We currently apply an estimated annual forfeiture rate of 10% to the service-based share awards we grant to our employees. Our estimated forfeiture rate is
based on recent historical experience as well as qualitative considerations about management’s expectations for attrition rates over the vesting periods. Actual attrition
rates could vary significantly from our expectations resulting in material quarterly adjustments to our financial results. During the year ended February 28, 2013 we
granted service-based share awards with a total fair value of $143.4 million to which we applied an estimated annual forfeiture rate of 10%.
With respect to performance-based awards that we grant to certain executive officers and senior management, we estimate the number of shares expected to vest
based primarily on our most current reported financial results relative to a defined peer group’s most recent reported financial results. Because past or current financial
trends may not be predictive of future financial performance, our estimate of the number of shares expected to vest may differ materially from the number of shares that
actually vest. The number of potential performance-based shares available to vest as of February 28, 2013 totaled 1.5 million, of which approximately 1.1 million shares
are expected to vest. If all of the potential performance-based shares were to vest, we would be required to recognize additional expense of approximately $4.4 million.
See NOTE 13—Share-based Awards to our Consolidated Financial Statements for further discussion related to awards outstanding and expected to vest.
Income tax benefits related to share-based awards
We recognize share-based compensation expense based on an award’s grant date fair value over the requisite service period. Because we do not know the actual
amount of tax benefits an award will generate until such award is exercised (or vested), we assume that the amount ultimately recognized for tax purposes will be the
same amount we recognized in our operating results, that is for “book” purposes. Consequently, our deferred tax asset related to shared-based compensation expense
which totaled $26.8 million as of February 28, 2013 is based on each qualifying award’s grant date fair value rather than the award’s to-be-determined exercise date
intrinsic value (or vesting date fair value).
Historically, the difference between the grant date fair value and the exercise date intrinsic value has been significant. As a result of such differences, for the
years ended February 28, 2013, February 29, 2012 and February 28, 2011, we realized excess tax benefits related to share-based awards totaling $34.2 million, $29.9
million and $42.3 million, respectively.
If the share price for our common stock were to depreciate for a sustained period of time we could be required to recognize a tax benefit shortfall. Such shortfalls
could have a material adverse effect on our cash flows and—to the extent such shortfalls accumulate in excess of approximately $159.0 million (our “APIC credit
pool”)—could materially, adversely impact our results of operations. For further discussion, see NOTE 2—Summary of Significant Accounting Policies, NOTE
11—Income Taxes and NOTE 13—Share-based Awards to our Consolidated Financial Statements.
Income taxes
As described in NOTE 2—Summary of Significant Accounting Policies to our Consolidated Financial Statements, we account for income taxes using the
liability method in which deferred tax assets or liabilities are recognized for the temporary differences between financial reporting and tax bases of our 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.
We continue to assess the realizability of our deferred tax assets, which primarily consist of share-based compensation expense deductions (described above), tax
credit carryforwards and deferred revenue. In assessing the realizability of these deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. As of February 28, 2013, deferred tax assets totaled
47
Source: RED HAT INC, 10-K, April 25, 2013
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$133.1 million, of which $0.7 million was offset by a valuation allowance. We continue to maintain a valuation allowance against our deferred tax assets with respect to
certain foreign net operating loss (“NOL”) carryforwards. For further discussion regarding deferred income taxes see NOTE 2—Summary of Significant Accounting
Policies and NOTE 11—Income Taxes to our Consolidated Financial Statements.
Because tax laws are complex and subject to different interpretations, significant judgment is required. As a result, we make certain estimates and assumptions in
(i) calculating our income tax expense, deferred tax assets and deferred tax liabilities, (ii) determining any valuation allowance recorded against deferred tax assets and
(iii) evaluating the amount of unrecognized tax benefits, as well as the interest and penalties related to such uncertain tax positions. Our estimates and assumptions may
differ significantly from tax benefits ultimately realized. For further discussion regarding uncertain tax positions see NOTE 11—Income Taxes to our Consolidated
Financial Statements.
Loss contingencies
We are subject to the possibility of various losses arising in the course of conducting our business, including losses related to legal proceedings and claims
brought against us. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount
of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred
and the amount of loss can be reasonably estimated.
Significant judgment is required in evaluating both the likelihood and the estimated amount of a potential loss. Until the final resolution of a matter, there may be
an exposure to loss in excess of the amount recorded, and such amount could be material. Should any of our estimates or assumptions change or prove to have been
incorrect, it could have a material impact on our business, financial condition, operating results or cash flows.
48
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RESULTS OF OPERATIONS
Years ended February 28, 2013 and February 29, 2012
The following table is a summary of our results of operations for the years ended February 28, 2013 and February 29, 2012 (in thousands):
Year Ended
February 28,
2013
Revenue:
Subscriptions
Training and services
Total subscription and training and services revenue
February 29,
2012
%
Change
$
1,148,341
180,476
$
965,575
167,528
$
182,766
12,948
18.9%
7.7
$
1,328,817
$
1,133,103
$
195,714
17.3%
Cost of subscription and training and services revenue:
Cost of subscriptions
As a % of subscription revenue
Cost of training and services
As a % of training and services revenue
80,340
7.0%
120,260
66.6%
Total cost of subscription and training and services revenue
As a % of total revenue
$
Total gross profit
$
Operating expense:
Sales and marketing
Research and development
General and administrative
Facility exit costs
200,600
15.1%
1,128,217
66,237
6.9%
112,311
67.0%
$
Income from operations
Interest income
Other income (expense), net
927,179
14,103
21.3
7,949
7.1
$
178,548
15.8%
$
22,052
12.4%
$
954,555
$
173,662
18.2%
514,554
263,150
146,333
3,142
Total operating expense
$
Change
419,635
208,662
126,345
—
$
201,038
8,245
469
754,642
94,919
54,488
19,988
3,142
$
199,913
8,418
(322)
172,537
1,125
(173)
791
22.6
26.1
15.8
100.0
22.9%
0.6
(2.1)
(245.7)
Income before provision for income taxes
Provision for income taxes
$
209,752
59,548
$
208,009
61,383
$
1,743
(1,835)
0.8%
(3.0)
Net income
$
150,204
$
146,626
$
3,578
2.4%
Gross profit margin—subscriptions
Gross profit margin—training and services
Gross profit margin
As a % of total revenue:
Subscription revenue
Training and services revenue
Sales and marketing expense
Research and development expense
General and administrative expense
Facility exit costs
Total operating expenses
Income from operations
Income before provision for income taxes
Net income
Effective income tax rate
93.0%
33.4%
84.9%
93.1%
33.0%
84.2%
86.4%
13.6%
38.7%
19.8%
11.0%
0.2%
69.8%
15.1%
15.8%
11.3%
28.4%
85.2%
14.8%
37.0%
18.4%
11.2%
—%
66.6%
17.6%
18.4%
12.9%
29.5%
49
Source: RED HAT INC, 10-K, April 25, 2013
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Revenue
Subscription revenue
Subscription revenue, which is primarily comprised of direct and indirect sales of Red Hat enterprise technologies, increased by 18.9%, or $182.8 million, to
$1.15 billion for the year ended February 28, 2013 from $965.6 million for the year ended February 29, 2012. The increase in subscription revenue is primarily due to
increases in volumes sold, including additional subscriptions attributable to geographic expansion, and continuing innovation, which attracts new customers and helps
to drive renewals from existing customers.
Training and services revenue
Training revenue includes fees paid by our customers for delivery of educational materials and instruction. Services revenue includes fees received from
customers for consulting services regarding our offerings, deployment of Red Hat enterprise technologies and for delivery of added functionality to Red Hat enterprise
technologies for our major customers and OEM partners. Total training and services revenue increased by 7.7%, or $12.9 million, to $180.5 million for the year ended
February 28, 2013 from $167.5 million for the year ended February 29, 2012. Training revenue increased 0.3% or $0.2 million. The modest increase in training is due to
an increase in on-line course participation which was partially offset by a decline in on-site class attendance as some enterprises reduced spending on discretionary
items such as training and related travel in response to an overall challenging economic environment. Our services revenue increased by 11.0% or $12.8 million as a
result of increased adoption of our technologies by enterprises. We expect services revenue to continue growing, though at a slower pace than subscription revenue as
we continue to expand our reach by enabling our channel partners to provide consulting services on our behalf. Combined training and services revenue as a percentage
of total revenue was 13.6% and 14.8% for the year ended February 28, 2013 and February 29, 2012, respectively.
Cost of revenue
Cost of subscription revenue
The cost of subscription revenue primarily consists of expenses we incur to support, distribute, manufacture and package Red Hat enterprise technologies. These
costs include labor related cost to provide technical support, security updates and fixes, as well as cost for fulfillment, physical media, literature, packaging and
shipping. Cost of subscription revenue increased by 21.3% or $14.1 million to $80.3 million for the year ended February 28, 2013 from $66.2 million for the year ended
February 29, 2012. Employee related expenses increased $8.3 million for the year ended February 28, 2013 as compared to the year ended February 29, 2012, due to the
expansion of our technical staff in order to meet the demands of our growing subscriber base for support, security updates and fixes. The remaining increase relates to
both increased amortization expense of $2.2 million related to technologies acquired either directly or as part of businesses acquired during the year ended February 28,
2013 and increased facilities costs of $2.0 million related to our growing support staff. As the number of open source technology subscriptions continues to increase, we
expect associated support cost will continue to increase, although we anticipate this will occur at an overall slower rate than that of subscription revenue growth due to
economies of scale. Gross profit margin on subscriptions was 93.0% and 93.1% for the years ended February 28, 2013 and February 29, 2012, respectively.
Cost of training and services revenue
Cost of training and services revenue is mainly comprised of personnel and third-party consulting costs for the design, development and delivery of custom
engineering, training courses and professional services provided to various types of customers. Cost of training and services revenue increased by 7.1% or $7.9 million
to $120.3 million for the year ended February 28, 2013 from $112.3 million for the year ended February 29, 2012. The cost to deliver training decreased 12.3% or $3.9
million to $27.5 million for the year ended February 28, 2013 compared to $31.4 million for the year ended February 29, 2012. Costs to deliver training decreased as a
50
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percentage of training revenue to 53.9% for the year ended February 28, 2013 from 61.6% for the year ended February 29, 2012 due to better utilization of both
instructors and classroom space as we transitioned from an on-site, employee-based, fixed-cost delivery model to a variable-cost delivery model with a global training
partner that provides training services on our behalf. Costs to deliver our services revenue increased by 14.6% or $11.8 million to $92.7 million for the year ended
February 28, 2013. The increase in costs to deliver services includes $7.8 million of increased employee related expenses, the majority of which are due to the
expansion of our professional consulting staff. As a result of such investment in staffing, profit margin from professional services decreased to 28.3% for the year ended
February 28, 2013 from 30.6% for the year ended February 29, 2012. Total costs to deliver training and services as a percentage of training and services revenue
decreased to 66.6% for the year ended February 28, 2013 from 67.0% for the year ended February 29, 2012.
Gross profit
Gross profit margin increased to 84.9% for the year ended February 28, 2013 from 84.2% for the year ended February 29, 2012 as a result of both a product mix
shift to subscriptions and a slight increase in profit margins related to training and services offerings. Subscription revenue as a percentage of total revenue increased to
86.4% for the year ended February 28, 2013 from 85.2% for the year ended February 29, 2012. Gross profit margin on training and services revenue increased to 33.4%
for the year ended February 28, 2013 from 33.0% for the year ended February 29, 2012, as a result of better utilization of training classes and consulting resources.
Operating expenses
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 trade shows. Sales and marketing expense increased by 22.6% or $94.9 million to $514.6 million for the year ended February 28, 2013
from $419.6 million for the year ended February 29, 2012. Selling costs increased $60.8 million or 18.5% for the year ended February 28, 2013 as compared to the year
ended February 29, 2012 and includes $46.9 million of additional employee and travel related expenses, the majority of which are attributable to the expansion of our
sales force from the prior year. Marketing costs grew $34.2 million or 37.3% for the year ended February 28, 2013 as compared to the year ended February 29, 2012.
The increase in marketing costs includes $13.9 million of employee related expenses, of which approximately $13.6 million relates to increased headcount to support
our expanding marketing efforts. The remaining increase in sales and marketing costs primarily relates to incremental advertising costs of $12.7 million and facility and
technology infrastructure enhancements which increased $10.5 million for the year ended February 28, 2013 as compared to the year ended February 29, 2012. As a
result of continued investments made in our sales and marketing functions, sales and marketing expense as a percentage of revenue increased to 38.7% for the year
ended February 28, 2013 from 37.0% for the year ended February 29, 2012.
Research and development
Research and development expense consists primarily of personnel and related costs for development of software technologies and systems management
offerings. Research and development expense increased by 26.1% or $54.5 million to $263.2 million for the year ended February 28, 2013 from $208.7 million for the
year ended February 29, 2012. Employee compensation increased by $41.1 million primarily from the expansion of our engineering group through both direct hires and
business acquisitions. The remaining increase in research and development costs relates primarily to process and technology infrastructure enhancements, which
increased $8.2 million. Research and development expense was 19.8% and 18.4% of total revenue for the year ended February 28, 2013 and February 29, 2012,
respectively.
51
Source: RED HAT INC, 10-K, April 25, 2013
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General and administrative
General and administrative expense consists primarily of personnel and related costs for general corporate functions, including information systems, finance,
accounting, legal, human resources and facilities expense. General and administrative expense increased by 15.8% or $20.0 million to $146.3 million for the year ended
February 28, 2013 from $126.3 million for the year ended February 29, 2012. The increase in general and administrative expenses results primarily from employee
related expenses which increased $6.4 million, of which the majority was due to additional headcount, and outside professional fees primarily related to data processing
systems upgrades, which increased $6.1 million. The remaining increase in general and administrative expense includes hardware and facility infrastructure upgrades of
$3.9 million and accelerated leasehold improvement expense of $2.9 million associated with the exit from one of our facilities in Raleigh, North Carolina. These
expense increases were partially offset by litigation-related expenses which were $2.3 million lower for the year ended February 28, 2013 as compared to the year
ended February 29, 2012. General and administrative expense decreased as a percentage of revenue to 11.0% for the year ended February 28, 2013 from 11.2% for the
year ended February 29, 2012.
Interest income
Interest income decreased by 2.1% or $0.2 million to $8.2 million for the year ended February 28, 2013 from $8.4 million for the year ended February 29, 2012.
The decrease in interest income for the year ended February 28, 2013 is attributable to prevailing lower yields on our investments.
Other income (expense), net
Other income (expense), net increased $0.8 million for the year ended February 28, 2013 as compared to the year ended February 29, 2012. The increase is
principally due to an investment gain realized during the year ended February 28, 2013.
Income taxes
During the years ended February 28, 2013 and February 29, 2012, we recorded $59.5 million and $61.4 million, respectively of income tax expense. Tax
expense for the year ended February 28, 2013 of $59.5 million resulted in an effective tax rate of 28.4%. Our effective tax rate of 28.4% differs from the U.S. federal
statutory rate of 35.0% primarily due to the foreign tax credit, foreign income taxed at different rates and the reenactment of the U.S. research tax credit. These tax
credits and foreign tax-rate differentials were partially offset by a deemed foreign dividend. The provision for income tax for the year ended February 28, 2013 consists
of $40.1 million of U.S. income tax expense and $19.4 million of foreign income tax expense.
During the year ended February 29, 2012, we recorded $61.4 million of income tax expense, which resulted in an annual effective tax rate of 29.5%. Our
effective tax rate of 29.5% differs from the U.S. federal statutory rate of 35.0% primarily due to foreign income taxed at different rates and foreign tax credits which
were partially offset by state income tax expense. The provision for income tax for the year ended February 29, 2012 consisted of $49.2 million of U.S. income tax
expense and $12.2 million of foreign income tax expense.
For further discussion regarding our income taxes see NOTE 11—Income Taxes to our Consolidated Financial Statements.
52
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
Years ended February 29, 2012 and February 28, 2011
The following table is a summary of our results of operations for the years ended February 29, 2012 and February 28, 2011 (in thousands):
Year Ended
February 29,
2012
Revenue:
Subscriptions
Training and services
Total subscription and training and services revenue
February 28,
2011
$
Change
%
Change
$
965,575
167,528
$
773,404
135,873
$
192,171
31,655
24.8%
23.3
$
1,133,103
$
909,277
$
223,826
24.6%
Cost of subscription and training and services revenue:
Cost of subscriptions
As a % of subscription revenue
Cost of training and services
As a % of training and services revenue
66,237
6.9%
112,311
67.0%
52,997
6.9%
97,290
71.6%
13,240
25.0
15,021
15.4
Total cost of subscription and training and services revenue
As a % of total revenue
$
178,548
15.8%
$
150,287
16.5%
$
28,261
18.8%
Total gross profit
$
954,555
$
758,990
$
195,565
25.8%
Operating expense:
Sales and marketing
Research and development
General and administrative
419,635
208,662
126,345
Total operating expense
$
Income from operations
Interest income
Other income (expense), net
754,642
327,408
171,253
114,653
$
199,913
8,418
(322)
92,227
37,409
11,692
613,314
$
145,676
6,743
1,275
141,328
54,237
1,675
(1,597)
28.2
21.8
10.2
23.0%
37.2
24.8
(125.3)
Income before provision for income taxes
Provision for income taxes
$
208,009
61,383
$
153,694
46,416
$
54,315
14,967
35.3%
32.2
Net income
$
146,626
$
107,278
$
39,348
36.7%
Gross profit margin—subscriptions
Gross profit margin—training and services
Gross profit margin
As a % of total revenue:
Subscription revenue
Training and services revenue
Sales and marketing expense
Research and development expense
General and administrative expense
Total operating expenses
Income from operations
Income before provision for income taxes
Net income
Effective income tax rate
93.1%
33.0%
84.2%
93.1%
28.4%
83.5%
85.2%
14.8%
37.0%
18.4%
11.2%
66.6%
17.6%
18.4%
12.9%
29.5%
85.1%
14.9%
36.0%
18.8%
12.6%
67.5%
16.0%
16.9%
11.8%
30.2%
53
Source: RED HAT INC, 10-K, April 25, 2013
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Revenue
Subscription revenue
Subscription revenue increased by 24.8%, or $192.2 million, to $965.6 million for the year ended February 29, 2012 from $773.4 million for the year ended
February 28, 2011. The increase in subscription revenue was primarily due to increases in volumes sold, including additional subscriptions attributable to geographic
expansion, and continuing innovation, which attracts new customers and helps to drive renewals from existing customers.
Training and services revenue
Total training and services revenue increased by 23.3%, or $31.7 million, to $167.5 million for the year ended February 29, 2012 from $135.9 million for the
year ended February 28, 2011. Training revenue increased 12.9% or $5.8 million as some enterprises began to increase overall spending on discretionary items such as
training and related travel in response to a better overall economic environment. Our services revenue increased by 28.5% or $25.9 million as a result of both a better
overall economic environment and increased subscription sales. Combined training and services revenue as a percentage of total revenue was 14.8% and 14.9% for the
year ended February 29, 2012 and February 28, 2011, respectively.
Cost of revenue
Cost of subscription revenue
Cost of subscription revenue increased by 25.0% or $13.2 million to $66.2 million for the year ended February 29, 2012 from $53.0 million for the year ended
February 28, 2011. Employee related expenses increased $10.1 million for the year ended February 29, 2012 as compared to the year ended February 28, 2011, and
included approximately $8.7 million related to the expansion of our technical staff to meet the demands of our growing subscriber base for support, security updates and
fixes. The remaining increase related primarily to increased facilities costs which increased by $1.8 million for the year ended February 29, 2012 as compared to the
year ended February 28, 2011. Gross profit margin on subscriptions was 93.1% for each of the years ended February 29, 2012 and February 28, 2011.
Cost of training and services revenue
Cost of training and services revenue increased by 15.4% or $15.0 million to $112.3 million for the year ended February 29, 2012 from $97.3 million for the
year ended February 28, 2011. The cost to deliver training decreased 2.8% or $0.9 million to $31.4 million for the year ended February 29, 2012 compared to $32.3
million for the year ended February 28, 2011. Costs to deliver training decreased as a percentage of training revenue to 61.6% for the year ended February 29, 2012
from 71.6% for the year ended February 28, 2011 due to better utilization of both instructors and class room space as we implemented a contractual arrangement with a
global training partner that provides certain training services on our behalf and bears a portion of the fixed cost of providing such services, which makes our training
expenses more variable with demand. Costs to deliver our services revenue increased by 24.5% or $15.9 million to $80.9 million for the year ended February 29, 2012.
The increase in costs to deliver services includes $10.8 million of increased employee related expenses, the majority of which were the result of expanding our
professional consulting staff. Increased employee related costs were partially offset by better resource utilization, which resulted in an increase in profit margin from
professional services to 30.6% for the year ended February 29, 2012 from 28.4% for the year ended February 28, 2011. Total costs to deliver training and services as a
percentage of training and services revenue decreased to 67.0% for the year ended February 29, 2012 from 71.6% for the year ended February 28, 2011.
54
Source: RED HAT INC, 10-K, April 25, 2013
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Gross profit
Gross profit margin increased to 84.2% for the year ended February 29, 2012 from 83.5% for the year ended February 28, 2011 as a result of both an overall
increase in profit margins related to training and services and a slight product mix shift to subscriptions. Gross profit margin on training and services revenue increased
to 33.0% for the year ended February 29, 2012 from 28.4% for the year ended February 28, 2011, as a result of better utilization of training classes and consulting
resources.
Operating expenses
Sales and marketing
Sales and marketing expense increased by 28.2% or $92.2 million to $419.6 million for the year ended February 29, 2012 from $327.4 million for the year ended
February 28, 2011. Selling costs increased $70.0 million or 27.1% for the year ended February 29, 2012 as compared to the year ended February 28, 2011 and included
$64.1 million of additional employee and travel related expenses, the majority of which were attributable to the expansion of our sales force from the prior year.
Marketing costs grew $22.2 million or 32.2% for the year ended February 29, 2012 as compared to the year ended February 28, 2011. The increase in marketing costs
includes $13.0 million of employee related expenses, of which approximately $8.2 million related to increased headcount to support our expanding marketing efforts.
The remaining increase in sales and marketing costs primarily related to incremental advertising costs and process and technology infrastructure enhancements which
increased $3.7 million and $6.4 million, respectively for the year ended February 29, 2012 as compared to the year ended February 28, 2011. As a result of continued
investments made in our sales and marketing functions, sales and marketing expense as a percentage of revenue increased to 37.0% for the year ended February 29,
2012 from 36.0% for the year ended February 28, 2011.
Research and development
Research and development expense increased by 21.8% or $37.4 million to $208.7 million for the year ended February 29, 2012 from $171.3 million for the year
ended February 28, 2011. Employee compensation increased by $30.9 million primarily from the expansion of our engineering group through direct hires. The
remaining increase in research and development costs related primarily to process and technology infrastructure enhancements, which increased $5.8 million. Research
and development expense was 18.4% and 18.8% of total revenue for the year ended February 29, 2012 and February 28, 2011, respectively.
General and administrative
General and administrative expense increased by 10.2% or $11.7 million to $126.3 million for the year ended February 29, 2012 from $114.7 million for the year
ended February 28, 2011. The increase in general and administrative expenses results primarily from employee related expenses which increased $16.9 million, of
which the majority was due to additional headcount. Outside professional fees related to process and technology infrastructure enhancements increased $3.1 million for
the year ended February 29, 2012 as we continued to invest in our corporate support functions and systems. Partially offsetting these expense increases was a reduction
in professional services expenses related to litigation which were $9.8 million lower for the year ended February 29, 2012 as compared to the year ended February 28,
2011. General and administrative expense decreased as a percentage of revenue to 11.2% for the year ended February 29, 2012 from 12.6% for the year ended
February 28, 2011.
Interest income
Interest income increased by 24.8% or $1.7 million to $8.4 million for the year ended February 29, 2012 from $6.7 million for the year ended February 28, 2011.
The increase in interest income for the year ended February 29, 2012 is attributable to both higher yields on our investments and an overall higher portfolio balance of
both short-term and long-term available-for-sale debt securities.
55
Source: RED HAT INC, 10-K, April 25, 2013
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Other income, net
Other income, net decreased $1.6 million for the year ended February 29, 2012 as compared to the year ended February 28, 2011. Gains realized from the sale of
our investments in available-for-sale equity securities totaled $1.9 million for the year ended February 29, 2012, which was $1.8 million lower than the $3.7 million of
gains realized from the sale of equity securities during the year ended February 28, 2011.
Income taxes
During the years ended February 29, 2012 and February 28, 2011, the Company recorded $61.4 million and $46.4 million, respectively of income tax expense.
Tax expense for the year ended February 29, 2012 of $61.4 million resulted in an effective tax rate of 29.5%. Our effective tax rate of 29.5% differed from the U.S.
federal statutory rate of 35.0% primarily due to foreign income taxed at different rates and foreign tax credits which were partially offset by state income tax expense.
The provision for income tax for the year ended February 29, 2012 consisted of $49.2 million of U.S. income tax expense and $12.2 million of foreign income tax
expense.
During the year ended February 28, 2011, we recorded $46.4 million of income tax expense, which resulted in an annual effective tax rate of 30.2%. Our annual
effective tax rate was 30.2%, which differs from the U.S. federal statutory rate of 35.0% primarily due to foreign income taxed at different rates and foreign tax credits
which were partially offset by state income tax expense. The provision for income tax for the year ended February 28, 2011 consisted of $35.7 million of U.S. income
tax expense and $10.7 million of foreign income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
We have historically derived a significant portion of our liquidity and operating capital from cash flows from operations as well as the sale of equity securities,
including private sales of preferred stock and the sale of common stock in our initial and follow-on public offerings, and the issuance of convertible debentures. At
February 28, 2013, we had total cash and investments of $1.32 billion, which was comprised of $487.1 million in cash and cash equivalents, $268.6 million of
short-term, available-for-sale fixed-income investments, $0.3 million of available-for-sale equity securities, $438.9 million of long-term, available-for-sale
fixed-income investments, and $123.5 million in deposit accounts with maturity dates greater than 30 days. This compares to total cash and investments of $1.26 billion
at February 29, 2012.
With $487.1 million in cash and cash equivalents on hand, we believe our cash and cash equivalent balances, together with our ability to generate additional cash
from operations, should be sufficient to satisfy our cash requirements for the next twelve months and for the foreseeable future. We generally intend to hold our short
and long-term investments in debt securities until their scheduled maturity dates. However, in the event that we liquidate these investments prior to their scheduled
maturities and there are adverse changes in market interest rates or the overall economic environment, we could be required to recognize a realized loss on those
investments when we liquidate. At February 28, 2013 and February 29, 2012, accumulated unrealized gains and losses on our available-for-sale debt securities totaled a
gain of $1.0 million and a loss of $1.2 million, respectively. At February 28, 2013 and February 29, 2012, accumulated unrealized gains related to our short-term equity
securities available for sale totaled $0.3 million and $1.2 million, respectively.
Year ended February 28, 2013
Cash flows—overview
At February 28, 2013, cash and cash equivalents totaled $487.1 million, a decrease of $62.1 million as compared to February 29, 2012. The decrease in cash and
cash equivalents for the year ended February 28, 2013
56
Source: RED HAT INC, 10-K, April 25, 2013
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is primarily the result of cash used in investing activities, including net purchases of available-for-sale debt securities of $134.1 million and cash used to acquire
FuseSource, Polymita and ManageIQ, which totaled $135.5 million, net of $0.2 million cash acquired. Also contributing to the overall decrease in cash was the
repurchase of 2.3 million shares of our common stock for $120.7 million and investments in facilities, information technology systems and patents which totaled $120.0
million. Partially offsetting cash used in investing and financing activities was cash provided by operating activities which totaled $465.3 million for the year ended
February 28, 2013. Net cash generated by operating activities and used for investing and financing activities is further described below.
Cash flows from operations
Cash provided by operations of $465.3 million during the year ended February 28, 2013 includes net income of $150.2 million, adjustments to exclude the
impact of non-cash revenues and expenses, which totaled a $170.9 million net source of cash, and changes in operating assets and liabilities, which totaled a $144.2
million net source of cash. Cash provided by changes in operating assets and liabilities for the year ended February 28, 2013 was primarily the result of an increase in
our deferred revenue, which generated operating cash flow of $162.6 million. The increase in deferred revenue is due to growth in billings as we generally bill our
customers in advance of subscription periods. Cash adjustments related to deferred income taxes of $39.8 million was primarily due to share-based compensation
deductions which were in excess of amounts originally recognized in our consolidated statements of operations. Excess tax benefits from share-based compensation,
which totaled $34.2 million, are considered a financing source of cash.
Cash flows from investing
Cash used in investing activities of $389.0 million for the year ended February 28, 2013 includes net purchases of available-for-sale debt securities of $134.1
million, investments in property and equipment of $85.7 million, primarily related to facilities and information technology infrastructure enhancements and investments
in other intangible assets, primarily patents, of $34.4 million. During the year ended February 28, 2013, we completed three business acquisitions, which included cash
consideration of $135.5 million, net of $0.2 million cash acquired. For further discussion regarding our business acquisitions, see NOTE 3—Business Combinations to
our Consolidated Financial Statements.
Cash flows from financing
Cash used in financing activities of $126.0 million for the year ended February 28, 2013 includes $120.7 million used to repurchase 2.3 million shares of our
common stock at an average price per share of $52.67, including transaction costs. Payments made in return for common shares received from employees to satisfy
employees’ minimum tax withholding obligations related to restricted share awards vesting during the year ended February 28, 2013 totaled $50.0 million. Partially
offsetting financing activities using cash were proceeds from excess tax benefits related to share-based employee compensation, which totaled $34.2 million and
proceeds from employees’ exercise of common stock options, which totaled $11.5 million. Payments on other borrowings totaled $1.0 million for the year ended
February 28, 2013.
Year ended February 29, 2012
Cash flows—overview
At February 29, 2012, cash and cash equivalents totaled $549.2 million, a decrease of $93.4 million as compared to February 28, 2011. The decrease in cash and
cash equivalents for the year ended February 29, 2012 was primarily the result of cash used in investing activities, including net purchases of available-for-sale debt
securities of $171.4 million and cash used to acquire all of the issued and outstanding shares of Gluster, which totaled $135.2 million, net of cash acquired. Also
contributing to the overall decrease in cash was the repurchase
57
Source: RED HAT INC, 10-K, April 25, 2013
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of 3.2 million shares of our common stock for $133.2 million. Partially offsetting cash used in investing and financing activities was cash provided by operating
activities which totaled $391.9 million for the year ended February 29, 2012. Net cash generated by operating activities and used for investing and financing activities is
further described below.
Cash flows from operations
Cash provided by operations of $391.9 million during the year ended February 29, 2012 included net income of $146.6 million, adjustments to exclude the
impact of non-cash revenues and expenses, which totaled a $151.7 million net source of cash, and changes in operating assets and liabilities, which totaled a $93.5
million net source of cash. Cash provided by changes in operating assets and liabilities for the year ended February 29, 2012 was primarily the result of an increase in
our deferred revenue, which generated operating cash flow of $176.9 million. The increase in deferred revenue is due to growth in billings as we generally bill our
customers in advance of subscription periods. Cash adjustments related to deferred income taxes of $45.7 million was primarily due to share-based compensation
deductions which were in excess of amounts originally recognized in our consolidated statements of operations. Excess tax benefits from share-based compensation,
which totaled $29.9 million, was considered a financing source of cash.
Cash flows from investing
Cash used in investing activities of $358.9 million for the year ended February 29, 2012 included net purchases of available-for-sale debt securities of $171.4
million, investments in property and equipment of $46.3 million, primarily related to process and information technology infrastructure enhancements and investments
in other intangible assets, primarily patents, of $5.3 million. On October 7, 2011, we acquired Gluster, which included cash consideration of $135.2 million, net of $0.7
million cash acquired. Gluster develops, distributes and provides support for open source storage software. For further discussion regarding our purchase of Gluster, see
NOTE 3—Business Combinations to our Consolidated Financial Statements.
Cash flows from financing
Cash used in financing activities of $123.8 million for the year ended February 29, 2012 included $133.2 million used to repurchase 3.2 million shares of our
common stock at an average price per share of $42.06, including transaction costs. Payments made in return for common shares received from employees to satisfy
employees’ minimum tax withholding obligations related to restricted share awards vesting during the year ended February 29, 2012 totaled $36.3 million. Partially
offsetting financing activities using cash were proceeds from excess tax benefits related to share-based employee compensation, which totaled $29.9 million and
proceeds from employees’ exercise of common stock options, which totaled $16.8 million. Payments on other borrowings totaled $1.1 million for the year ended
February 29, 2012.
Investments in debt and equity securities
Our investments are comprised primarily of debt securities that are classified as available for sale and recorded at their fair market values. At February 28, 2013
and February 29, 2012, the vast majority of our investments were priced with the assistance of pricing vendors. These pricing vendors use the most recent observable
market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs. In the event observable inputs are
not available, we assess other factors to determine the securities’ market value, including broker quotes or model valuations. Independent price verifications of all of our
holdings are performed by the pricing vendors, which we review. In the event a price fails a pre-established tolerance check, it is researched so that we can assess the
cause of the variance to determine what we believe is the appropriate fair market value.
58
Source: RED HAT INC, 10-K, April 25, 2013
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Capital requirements
We have experienced a substantial increase in our operating expenses since our inception in connection with the growth of our operations, the development of
our enterprise technologies, the expansion of our services operations and our acquisition activity. Our capital requirements during the year ending February 28, 2014
will depend on numerous factors, including the amount of resources we devote to:

funding the continued development of our enterprise technology offerings;

accelerating the development of our systems management offerings;

improving and extending our services and the technologies used to deliver these services to our customers and support our business;

pursuing strategic acquisitions and alliances;

investing in businesses, products and technologies; and

investing in enhancements to the systems we use to run our business and the expansion of our office facilities, including capital expenditures related to our
current headquarters facility discussed in Part I, Item 2 of this Form 10-K under the heading “Properties.”
We have utilized, and will continue from time to time to utilize, cash and investments to fund, among other potential uses, purchases of our common stock,
purchases of fixed assets, purchases of intellectual property and mergers and acquisitions. Given our historically strong operating cash flow and the $1.32 billion of cash
and investments held at February 28, 2013, we do not presently anticipate the need to raise cash to fund our operations, either through the sale of additional equity or
through the issuance of debt, in the foreseeable future. However, we may take advantage of favorable capital market situations that may arise from time to time to raise
additional capital.
We believe that cash flow from operations will continue to improve; however, there can be no assurances that we will improve our cash flow from operations
from the current rate or that such cash flows will be adequate to fund other investments or acquisitions that we may choose to make. We may choose to accelerate the
expansion of our business from our current plans, which may require us to raise additional funds through the sale of equity or debt securities or through other financing
means. There can be no assurances that any such financing would occur in amounts or on terms favorable to us, if at all.
As of February 28, 2013, our cash, cash equivalents and available-for-sale investment securities totaled $1.32 billion, of which $517.3 million was held outside
the U.S. Our intent is to reinvest the earnings of foreign subsidiaries indefinitely outside the U.S. to fund both organic growth and acquisitions. For further discussion
related to geographic segments, see NOTE 20—Segment Reporting to our Consolidated Financial Statements.
With 60.8% of our available cash, cash equivalents and available-for-sale investments, as of February 28, 2013, held within the U.S., we do not anticipate a need
to repatriate any foreign earnings for the foreseeable future. However, if cash held outside the U.S. were needed to fund our U.S. operations, under current tax law we
would be subject to additional taxes on the portion related to repatriated earnings of our foreign subsidiaries. As of February 28, 2013, undistributed foreign earnings
totaled $200.5 million. For further discussion, see NOTE 11—Income Taxes to our Consolidated Financial Statements.
Off-balance sheet arrangements
As of February 28, 2013 and February 29, 2012, we have no off-balance sheet financing arrangements and do not utilize any “structured debt”, “special purpose”
or similar unconsolidated entities for liquidity or financing purposes.
59
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
Contractual obligations
The following table summarizes our principal contractual obligations at February 28, 2013 (in thousands):
Less than
1 Year
Total
1-3 Years
More than
5 Years
3-5 Years
Operating lease obligations(1)
Purchase obligations
$ 189,301
—
$
28,630
—
$
47,015
—
$
30,933
—
$
82,723
—
Total
$ 189,301
$
28,630
$
47,015
$
30,933
$
82,723
(1)
Includes $11.7 million in commitments related to our previous headquarters facility and $62.7 million in commitments related to our current headquarters
facility. For additional information, see our discussion in Part I, Item 2 of this Form 10-K under the heading “Properties”. To the extent we cease to use any space
in our previous headquarters facility prior to the expiration of the lease term, we plan to sublease such space to a third party and anticipate that sublease income
would offset existing contractual obligations. However, to the extent we are unable to sublease or otherwise dispose of such space and recover the full amount of
our existing contractual obligation, we would be required to recognize a loss.
Obligations under contracts that we may cancel without significant penalty are not included in the table above. In addition, because we are unable to reasonably
estimate the timing of settlements and any future payments related to uncertain tax positions, such liabilities are not included in the above table. However, as of
February 28, 2013, we have recognized a total of $32.5 million related to such liabilities, which are included in Other long-term obligations on our Consolidated
Balance Sheet.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic
220)—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02), to require entities to provide information about
significant amounts reclassified out of accumulated other comprehensive income by component and their corresponding effect on net income. ASU 2013-02 is effective
for us in the first quarter of our fiscal year ending February 28, 2014. We not believe that this updated standard will have a significant impact on our consolidated
financial statements.
In July 2012, the FASB issued Accounting Standards Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350)—Testing Indefinite-Lived Intangible
Assets for Impairment (ASU 2012-02), to simplify how entities test intangibles with indefinite lives for impairment. ASU 2012-02 gives entities the option to first
assess qualitative factors to determine whether it is more likely than not that the fair value of an intangible asset is less than its carrying amount. If a greater than 50
percent likelihood exists that the fair value is less than the carrying amount then a quantitative impairment test as described in Subtopic 350-30 must be performed.
ASU 2012-02 is effective for us in the first quarter of our fiscal year ending February 28, 2014. We currently do not believe that this updated standard will have a
significant impact on our consolidated financial statements.
In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210)—Disclosures about Offsetting Assets and Liabilities
(ASU 2011-11), to require entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. ASU 2011-11
is effective for us in the first quarter of our fiscal year ending February 28, 2014. We currently do not believe that this updated standard will have a significant impact
on our consolidated financial statements.
60
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes, foreign currency exchange rate fluctuations and changes in the market value of our investments.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to
preserve principal and liquidity while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of
cash equivalents and short-term and long-term investments in a variety of fixed-income securities, including both government and corporate obligations and money
market funds. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in prevailing interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due
in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell
securities which have declined in market value due to changes in interest rates or perceived credit risk related to the securities’ issuers. A hypothetical one-half
percentage point change in interest rates, assuming a parallel shift of all interest rates, would result in a $3.9 million change in annual interest income derived from
investments in our portfolio as of February 28, 2013. For further discussion related to our investments as of February 28, 2013 and February 29, 2012, see NOTE
2—Summary of Significant Accounting Policies and NOTE 18—Assets and Liabilities Measured at Fair Value on a Recurring Basis to our Consolidated Financial
Statements.
Investment Risk
The fair market value of our investment portfolio is subject to interest rate risk. Based on a sensitivity analysis performed on this investment portfolio, a
hypothetical one percentage increase in interest rates, assuming a parallel shift of all interest rates, would result in an approximate $8.5 million decrease in the fair value
of our available-for-sale investment securities as of February 28, 2013. For further discussion related to our investments as of February 28, 2013 and February 29, 2012,
see NOTE 2—Summary of Significant Accounting Policies and NOTE 18—Assets and Liabilities Measured at Fair Value on a Recurring Basis to our Consolidated
Financial Statements.
Credit Risk
The fair market values of our investment portfolio and cash balances are exposed to counterparty credit risk. Accordingly, while we periodically review our
portfolio in an effort to mitigate counterparty risk, the principal values of our cash balances, money market accounts and investments in available-for-sale securities
could suffer a loss of value.
Foreign Currency Risk
Approximately 43.3% of our revenue for the year ended February 28, 2013 was produced by sales outside the United States. We are exposed to significant risks
of foreign currency fluctuation primarily from receivables denominated in foreign currency and are subject to transaction gains and losses, which are recorded as a
component in determining net income. The statements of operations of our non-U.S. operations are translated into U.S. dollars at the average exchange rates for each
applicable month in a period. Thus, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency statements results in
increased revenue and operating expenses for our non-U.S. operations. Similarly, our revenue and operating expenses for our non-U.S. operations decreases if the U.S.
dollar strengthens against foreign currencies.
Using the average foreign currency exchange rates from our prior fiscal year ended February 29, 2012, our revenue and operating expenses from non-U.S.
operations for the year ended February 28, 2013 would have been higher than we reported by approximately $32.9 million and $23.5 million, respectively, which would
have resulted in income from operations being higher by $9.4 million.
61
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Derivative Instruments
We transact business in various foreign countries and are, therefore, subject to risk of foreign currency exchange rate fluctuations. From time to time we enter
into forward contracts to economically hedge transactional exposure associated with commitments arising from trade accounts receivable, trade accounts payable and
fixed purchase obligations denominated in a currency other than the functional currency of the respective operating entity. All derivative instruments are recorded on
the Consolidated Balance Sheets at their respective fair market values in accordance with FASB ASC Section 815 (formerly referenced as Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities). The Company has elected not to prepare and maintain the
documentation required to qualify its forward contracts for hedge accounting treatment and, therefore, changes in fair value are recorded in the Consolidated Statements
of Operations. For further discussion related to our management of foreign currency risk see NOTE 10—Derivative Instruments to our Consolidated Financial
Statements.
The aggregate notional amount of outstanding forward contracts at February 28, 2013 was $65.5 million. The fair value of these outstanding contracts at
February 28, 2013 was a gross $0.3 million asset and a gross $0.2 million liability, and is recorded in Other current assets and Accounts payable and accrued expenses,
respectively on our Consolidated Balance Sheets. The forward contracts generally expire within three months of the period ended February 28, 2013. The forward
contracts will settle in Argentine pesos, Australian dollars, Chilean pesos, Czech koruna, Danish krone, Euros, Israeli shekels, Japanese yen, Korean won, Norwegian
krona, Singapore dollars, Swedish krona, Swiss francs, and U.S. dollars.
The aggregate notional amount of outstanding forward contracts at February 29, 2012 was $59.7 million. The fair value of these outstanding contracts at
February 29, 2012 was a gross $0.1 million asset and a gross $0.5 million liability, and is recorded in Other current assets and Accounts payable and accrued expenses,
respectively on our Consolidated Balance Sheets.
62
Source: RED HAT INC, 10-K, April 25, 2013
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Management on Internal Control Over Financial Reporting
64
Report of Independent Registered Public Accounting Firm
65
Financial Statements:
Consolidated Balance Sheets at February 28, 2013 and February 29, 2012
66
Consolidated Statements of Operations for the years ended February 28, 2013, February 29, 2012, and February 28, 2011
67
Consolidated Statements of Comprehensive Income for the years ended February 28, 2013, February 29, 2012, and February 28, 2011
68
Consolidated Statements of Stockholders’ Equity for the years ended February 28, 2013, February 29, 2012, and February 28, 2011
69
Consolidated Statements of Cash Flows for the years ended February 28, 2013, February 29, 2012, and February 28, 2011
70
Notes to Consolidated Financial Statements
71
63
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REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The
Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the
financial statements.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of the end of the period covered by this report
based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of the end of the period covered by this report.
Our independent registered public accounting firm, which has audited the financial statements included in Part II, Item 8 of this report, has also audited the
effectiveness of the Company’s internal control over financial reporting as of February 28, 2013, as stated in their attestation report on our internal control over
financial reporting, which is included below.
64
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Red Hat, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income, of stockholders’
equity and of cash flows present fairly, in all material respects, the financial position of Red Hat, Inc. and its subsidiaries at February 28, 2013 and February 29, 2012,
and the results of their operations and their cash flows for each of the three years in the period ended February 28, 2013 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of February 28, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Report of Management on Internal Control over
Financial Reporting appearing in Item 8. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial
reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included
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. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
April 25, 2013
65
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RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands—except share and per share amounts)
February 28,
2013
ASSETS
Current assets:
Cash and cash equivalents
Investments in available-for-sale securities, current
Accounts receivable, net of allowances for doubtful accounts of $1,339 and $1,877, respectively
Deferred tax assets, net
Prepaid expenses
Other current assets
Total current assets
Property and equipment, net of accumulated depreciation and amortization of $189,985 and $163,892, respectively
February 29,
2012
$
487,084
392,381
302,942
88,765
94,421
3,156
$
549,217
264,298
255,180
69,765
81,266
1,629
$
1,368,749
$
1,221,355
141,586
690,911
142,243
438,908
31,263
Goodwill
Identifiable intangibles, net
Investments in available-for-sale securities, long-term
Other assets, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses
Deferred revenue
Other current obligations
Total current liabilities
Long-term deferred revenue
Other long-term obligations
Commitments and contingencies (NOTES 14 and 15)
Stockholders’ equity:
Preferred stock, 5,000,000 shares authorized, none outstanding
Common stock, $0.0001 per share par value, 300,000,000 shares authorized, 229,210,961 and 226,553,435 shares
issued, 193,021,226 and 192,654,636 shares outstanding at February 28, 2013 and February 29, 2012,
respectively
92,065
591,563
100,638
446,838
38,640
$
2,813,660
$
2,491,099
$
154,202
830,486
1,024
$
114,078
711,408
819
$
985,712
259,466
48,321
$
826,305
235,328
30,649
—
—
23
1,802,899
541,880
Additional paid-in capital
Retained earnings
Treasury stock at cost, 36,189,735 and 33,898,799 shares at February 28, 2013 and February 29, 2012,
respectively
Accumulated other comprehensive loss
23
1,709,082
391,676
(816,674)
(7,967)
(696,012)
(5,952)
Total stockholders’ equity
$
1,520,161
$
1,398,817
Total liabilities and stockholders’ equity
$
2,813,660
$
2,491,099
The accompanying notes are an integral part of these consolidated financial statements.
66
Source: RED HAT INC, 10-K, April 25, 2013
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RED HAT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands—except per share amounts)
Year Ended
February 28,
2013
Revenue:
Subscriptions
Training and services
Total subscription and training and services revenue
February 29,
2012
$
1,148,341
180,476
$
965,575
167,528
$
773,404
135,873
$
1,328,817
$
1,133,103
$
909,277
Cost of subscription and training and services revenue:
Cost of subscriptions
Cost of training and services
80,340
120,260
Total cost of subscription and training and services revenue
February 28,
2011
66,237
112,311
52,997
97,290
$
200,600
$
178,548
$
150,287
Gross profit
Operating expense:
Sales and marketing
Research and development
General and administrative
Facility exit costs (NOTE 14)
$
1,128,217
$
954,555
$
758,990
Total operating expense
$
514,554
263,150
146,333
3,142
Income from operations
Interest income
Other income (expense), net
927,179
419,635
208,662
126,345
—
$
201,038
8,245
469
754,642
327,408
171,253
114,653
—
$
199,913
8,418
(322)
613,314
145,676
6,743
1,275
Income before provision for income taxes
Provision for income taxes
$
209,752
59,548
$
208,009
61,383
$
153,694
46,416
Net income
$
150,204
$
146,626
$
107,278
Basic net income per common share
$
0.78
$
0.76
$
0.56
Diluted net income per common share
$
0.77
$
0.75
$
0.55
Weighted average shares outstanding
Basic
Diluted
193,147
195,804
193,151
196,451
190,294
196,353
The accompanying notes are an integral part of these consolidated financial statements.
67
Source: RED HAT INC, 10-K, April 25, 2013
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RED HAT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Year Ended
February 28,
2013
Net income
Other comprehensive loss, net of tax:
Unrealized gain (loss) on securities during period
Reclassification for gain recognized during period
Foreign currency translation adjustment
$
Total other comprehensive loss, net of tax
Comprehensive income
$
150,204
February 29,
2012
$
146,626
February 28,
2011
$
107,278
1,592
(797)
(2,810)
557
(1,982)
(2,708)
720
(3,286)
(309)
(2,015)
(4,133)
(2,875)
148,189
$
142,493
$
104,403
The accompanying notes are an integral part of these consolidated financial statements.
68
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RED HAT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common Stock
Shares
Balance at February 28, 2010
Net income
Unrealized gain on investments in marketable
securities, net of tax
Reclassification for net gain recognized during
period
Foreign currency translation adjustment
Vest and exercise of share-based awards
Common stock repurchase
Share-based compensation expense
Tax benefits related to share-based awards
Minimum tax withholdings paid by the Company
on behalf of employees related to net
settlement of employee share-based awards
Balance at February 28, 2011
Net income
Unrealized gain on investments in marketable
securities, net of tax
Reclassification for net gain recognized during
period
Foreign currency translation adjustment
Vest and exercise of share-based awards
Common stock repurchase
Share-based compensation expense
Assumed employee share-based awards from
acquisitions
Tax benefits related to share-based awards
Minimum tax withholdings paid by the Company
on behalf of employees related to net
settlement of employee share-based awards
Balance at February 29, 2012
Net income
Unrealized gain on investments in marketable
securities, net of tax
Reclassification for net gain recognized during
period
Foreign currency translation adjustment
Vest and exercise of share-based awards
Common stock repurchase
Share-based compensation expense
Tax benefits related to share-based awards
Minimum tax withholdings paid by the Company
on behalf of employees related to net
settlement of employee share-based awards
Balance at February 28, 2013
215,161
—
Additional
Paid-In
Capital
Amount
$
22
—
$
1,444,848
—
Retained
Earnings
$
—
—
—
—
8,617
—
—
—
—
—
—
—
—
—
—
—
84,443
—
60,597
46,600
—
—
—
—
—
—
—
—
(26,250)
—
223,778
$
—
137,772
107,278
22
$
1,610,238
—
—
—
—
—
—
—
—
2,775
—
—
—
—
245,050
—
—
—
—
—
—
1,244
37,854
—
—
—
—
(36,332)
—
226,553
$
23
$
1,709,082
$
391,676
—
—
—
—
—
—
—
—
2,658
—
—
—
—
—
—
—
—
—
—
—
11,478
—
98,698
33,625
—
—
—
—
—
—
—
—
(49,984)
—
229,211
$
23
$
1,802,899
$
$
$
1,111,052
107,278
720
(3,286)
(309)
84,443
(90,146)
60,597
46,600
—
(26,250)
(1,819)
—
—
557
$
1,290,699
146,626
557
(1,982)
(2,708)
—
—
—
(1,982)
(2,708)
16,812
(133,220)
79,267
—
—
—
—
1,244
37,854
—
—
(36,332)
(696,012)
$
(5,952)
—
—
—
1,592
—
—
—
(120,662)
—
—
—
$
$
(3,286)
(309)
—
—
—
—
—
—
—
—
(133,220)
—
—
541,880
(562,792)
1,056
—
Total
Stockholders’
Equity
720
—
150,204
$
$
—
—
—
(90,146)
—
—
—
—
—
—
—
—
(472,646)
—
—
146,626
—
—
16,811
—
79,267
1
$
—
$
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
(816,674)
$
$
1,398,817
150,204
1,592
(797)
(2,810)
—
—
—
—
(797)
(2,810)
11,478
(120,662)
98,698
33,625
—
(49,984)
(7,967)
$
1,520,161
Note: No preferred stock was issued or outstanding during the three years ended February 28, 2013.
The accompanying notes are an integral part of these consolidated financial statements.
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RED HAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
February 28,
2013
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income taxes
Excess tax benefits from share-based payment arrangements
Share-based compensation expense
Net amortization of bond premium on debt securities available for sale
Other
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable
Prepaid expenses
Accounts payable and accrued expenses
Deferred revenue
Other
$
Net cash provided by operating activities
$
Cash flows from investing activities:
Purchase of investment in debt securities available for sale
Proceeds from sales and maturities of investment in debt securities available for sale
Acquisitions of businesses, net of cash acquired
Purchase of developed software and other intangible assets
Purchase of property and equipment
Other
Net cash used in investing activities
$
Cash flows from financing activities:
Excess tax benefits from share-based payment arrangements
Proceeds from exercise of common stock options
Purchase of treasury stock
Payments related to settlement of employee shared-based awards
Payments on other borrowings
150,204
February 29,
2012
$
146,626
$
107,278
62,341
39,849
(34,219)
98,698
6,889
(2,626)
51,372
45,702
(29,931)
79,267
6,518
(1,186)
47,997
33,848
(42,291)
60,597
6,372
(2,241)
(46,913)
(14,726)
40,196
162,574
3,030
(70,410)
(19,190)
5,986
176,855
274
(41,512)
(17,220)
23,162
112,724
2,034
465,297
$
391,883
$
290,748
(875,428)
(962,974)
(751,420)
741,301
(135,501)
(34,367)
(85,671)
617
791,585
(135,210)
(5,349)
(46,269)
(643)
770,860
(31,381)
(14,093)
(32,759)
3,938
(389,049)
$
(358,860)
34,219
11,478
(120,662)
(49,984)
(1,016)
Net cash provided by (used in) financing activities
February 28,
2011
$
29,931
16,812
(133,220)
(36,332)
(1,027)
(54,855)
42,291
84,443
(90,146)
(26,250)
(558)
$
(125,965)
$
(123,836)
$
9,780
Effect of foreign currency exchange rates on cash and cash equivalents
$
(12,416)
$
(2,600)
$
8,839
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
$
(62,133)
549,217
$
(93,413)
642,630
$
254,512
388,118
Cash and cash equivalents at end of year
$
487,084
$
549,217
$
642,630
Supplemental cash flow information:
Cash paid during the year for:
Interest
Income taxes
Non-cash investing and financing activities:
Fixed assets acquired under capital leases
$
$
50
14,863
$
$
45
12,381
$
$
122
8,121
$
1,137
$
1,746
$
—
The accompanying notes are an integral part of these consolidated financial statements.
70
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RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—Company
Red Hat, Inc., incorporated in Delaware, together with its subsidiaries (“Red Hat” or the “Company”) is a leading global provider of open source software
solutions, using a community-powered approach to develop and offer reliable and high-performing operating system, middleware, virtualization, storage and cloud
technologies.
Open source software is an alternative to proprietary software and represents a different model for the development and licensing of commercial software code
than that typically used for proprietary software. Because open source software code is often freely shared, there are customarily no licensing fees for the use of open
source software. Therefore, the Company does not recognize revenue from the licensing of the code itself. The Company provides value to its customers through the
development, aggregation, integration, testing, certification, delivery, maintenance, enhancement and support of its Red Hat enterprise technologies, and by providing a
level of performance, reliability, scalability, flexibility, stability and security for the enterprise technologies the Company packages and distributes. Moreover, because
communities of developers not employed by the Company assist with the creation of the Company’s open source offerings, opportunities for further innovation of the
Company’s offerings are supplemented by these communities.
The Company derives its revenue and generates cash from customers primarily from two sources: (i) subscription revenue and (ii) training and services revenue.
These arrangements typically involve subscriptions to Red Hat enterprise technologies. The arrangements with the Company’s customers that produce this revenue and
cash are explained in further detail in NOTE 2—Summary of Significant Accounting Policies.
NOTE 2—Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant
inter-company accounts and transactions are eliminated in consolidation. There are no significant foreign exchange restrictions on the Company’s foreign subsidiaries.
Certain reclassifications have been made to the prior years’ financial statements to conform to the current year’s presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 balance sheet dates and
the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from such estimates.
Revenue Recognition
The Company establishes persuasive evidence of a sales arrangement for each type of revenue transaction based on either a signed contract with the end
customer, a click-through contract on the Company’s website whereby the customer agrees to the Company’s standard subscription terms, signed or click-through
distribution contracts with original equipment manufacturers (“OEMs”) and other resellers, or, in the case of individual training seats, through receipt of payment which
indicates acceptance of the Company’s training agreement terms.
Subscription Revenue
Subscription revenue is comprised of direct and indirect sales of subscriptions relating to Red Hat enterprise technologies. Accounts receivable and deferred
revenue are recorded at the time a customer enters into a binding
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
subscription agreement for the purchase of a subscription, subscription services are made available to the customer and the customer is billed. The deferred revenue
amount is recognized as revenue ratably over the life of the subscription. Red Hat enterprise technologies are generally offered with either one or three-year base
subscription periods; the majority of the Company’s subscriptions have one-year terms. Under these subscription agreements, renewal rates are generally specified for
one or three-year renewal terms. Subscriptions generally entitle the end user to the technology itself and post-contract customer support (“PCS”), generally consisting of
varying levels of support services as well as access to security errata, fixes, functionality enhancements to the technology and upgrades to new versions of the
technologies, each on a when-and-if available basis, during the term of the subscription. The Company sells its offerings through two principal channels: (1) direct,
which includes sales by the Company’s sales force as well as web store sales, and (2) indirect, which includes distributors, resellers, systems integrators and OEMs. The
Company recognizes revenue from the sale of Red Hat enterprise technologies ratably over the period of the subscription beginning on the commencement date of the
subscription agreement.
Subscription arrangements with large enterprise customers often have contracts with multiple elements (e.g., software technology, support, training, consulting
and other services). The Company allocates revenue to each element of the arrangement based on vendor-specific objective evidence of each element’s fair value when
the Company can demonstrate sufficient evidence of the fair value of at least those elements that are undelivered. The fair value of each element in multiple element
arrangements is created by either (i) providing the customer with the ability during the term of the arrangement to renew that element at the same rate paid for the
element included in the initial term of the agreement or (ii) selling the element on a stand-alone basis.
Training and Services Revenue
Training and services revenue is comprised of revenue for consulting, engineering and customer training and education services. Consulting services consist of
time-based arrangements, and revenue is recognized as these services are performed. Engineering services represent revenue earned under fixed-fee arrangements with
the Company’s OEM partners and other customers to provide for significant modification and customization of Red Hat enterprise technologies. The Company
recognizes revenue for these fixed-fee engineering services using the percentage of completion basis of accounting, provided the Company has the ability to
make reliable estimates of progress towards completion, the fee for such services is fixed or determinable and collection of the resulting receivable is probable. Under
the percentage of completion method, earnings under the contract are recognized based on the progress toward completion as estimated using the ratio of labor hours
incurred to total expected project hours. Changes in estimates are recognized in the period in which they are known. Revenue for customer training and education
services is recognized on the dates the services are complete.
Deferred Selling Costs
Deferred commissions are the incremental costs that are directly associated with non-cancelable subscription contracts with customers and consist of sales
commissions paid to the Company’s sales force. The commissions are deferred and amortized over a period that approximates the period of the subscription term. The
commission payments are paid in full subsequent to the month in which the customer’s service commences. The deferred commission amounts are recoverable through
the future revenue streams under the non-cancelable customer contracts. In addition, the Company has the ability and intent under the commission plans with its sales
force to recover commissions previously paid to its sales force in the event that customers breach the terms of their subscription agreements and do not fully pay for
their subscription agreements. Deferred commissions are included in prepaid expenses on the accompanying Consolidated Balance Sheets. Amortization of deferred
commissions is included in sales and marketing expense in the accompanying Consolidated Statements of Operations.
72
Source: RED HAT INC, 10-K, April 25, 2013
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RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill and Other Long-Lived Assets
Goodwill
The Company tests goodwill for impairment annually. For the years ended February 28, 2013 and February 29, 2012, the Company applied its test for goodwill
impairment as permitted by ASU 2011-08 which allows the Company to first assess qualitative factors to determine whether it is “more likely than not” that the fair
value of a reporting unit is less than its carrying value. The outcome of these qualitative tests determines whether it is necessary for a company to perform the two-step
goodwill impairment test as required in years prior to the adoption of ASU 2011-08.
After considering such qualitative factors as macroeconomic conditions, actual or anticipated changes to cost factors (for example, selling and delivery), overall
financial performance and other Company-specific factors such as potential changes in strategy, the Company determined that it was not more likely than not that any
impairment to goodwill had occurred during the years ended February 28, 2013 and February 29, 2012. Consequently, the Company was not required to perform the
remaining two-step quantitative goodwill impairment test.
For the year ended February 28, 2011, the Company applied the then-required quantitative two-step goodwill impairment test. The two-step test begins with
identifying potential impairment. Potential impairment is identified if the fair value of the reporting unit to which the goodwill applies is less than the recognized or
“book” value of the related reporting unit, including the carrying value of goodwill. Where the book value of a reporting unit, including related goodwill is greater than
the reporting unit’s fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The Company performed its annual
goodwill impairment test during the fourth quarter of the year ended February 28, 2011 and, as a result, did not identify any potential impairment related to its goodwill.
Other long-lived assets
The Company evaluates the recoverability of its property and equipment and other long-lived assets whenever events or changes in circumstances indicate that
an impairment may have occurred. An impairment loss is recognized when the net book value of such assets exceeds the estimated future undiscounted cash flows
attributable to the assets or the business to which the assets relate. Impairment losses, if any, are measured as the amount by which the carrying value exceeds the fair
value of the assets.
As a result of the Company’s relocation of its corporate headquarters, the Company has accelerated the depreciation of the furniture and fixtures and leasehold
improvements balances of the two facilities being exited such that no net book value remains as of February 28, 2013. The incremental depreciation expense on the net
book values of these furniture and fixtures and leasehold improvements balances was $2.9 million for the year ended February 28, 2013 and is included in general and
administration expense on the Company’s Consolidated Statement of Operations. The Company’s facility exit costs are described further in NOTE 14—Commitments
and Contingencies.
Other than incremental depreciation associated with the facility exit, no significant impairment losses on the Company’s long-lived assets were identified for the
year ended February 28, 2013. For the years ended February 29, 2012 and February 28, 2011, no significant impairment losses related to the Company’s long-lived
assets were identified.
73
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash and Cash Equivalents
The Company considers highly liquid investments purchased with a maturity period of three months or less at the date of purchase to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s estimate of the
amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience. The
Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability.
All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company determines it is
probable the receivable will not be recovered. The Company does not have off-balance sheet credit exposure related to its customers. See NOTE 4—Accounts
Receivable for further discussion on accounts receivable balances.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for the purchase of an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for such asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure
fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company uses the following fair value
hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.
The Company’s investments are comprised primarily of debt securities that are classified as available for sale and recorded at their fair market values. Liquid
investments with effective maturities of three months or less from the balance sheet date (that is, time remaining on the day of purchase) are classified as cash
equivalents. Investments with remaining effective maturities of twelve months or less from the balance sheet date are classified as short-term investments. Investments
with remaining effective maturities of more than twelve months from the balance sheet date are classified as long-term investments. The Company’s Level 1 financial
instruments are valued using quoted prices in active markets for identical instruments. The Company’s Level 2 financial instruments, including derivative instruments,
are valued using quoted prices for identical instruments in less active markets or using other observable market inputs for comparable instruments.
Unrealized gains and temporary losses on investments classified as available for sale are included within accumulated other comprehensive income, net of any
related tax effect. Upon realization, such amounts are reclassified from accumulated other comprehensive income to other income, net. Realized gains and losses and
other than temporary impairments, if any, are reflected in the statements of operations as other income, net. The
74
Source: RED HAT INC, 10-K, April 25, 2013
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RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company does not recognize changes in the fair value of its investments in income unless a decline in value is considered other than temporary. The vast majority of the
Company’s investments are priced by pricing vendors. These pricing vendors use the most recent observable market information in pricing these securities or, if
specific prices are not available for these securities, use other observable inputs. In the event observable inputs are not available, the Company assesses other factors to
determine the security’s market value, including broker quotes or model valuations. Independent price verifications of all holdings are performed by pricing vendors
which are then reviewed by the Company. In the event a price fails a pre-established tolerance check, it is researched so that the Company can assess the cause of the
variance to determine what the Company believes is the appropriate fair market value. See NOTE 18—Assets and Liabilities Measured at Fair Value on a Recurring
Basis for further discussion on fair value measurements.
The Company minimizes its credit risk associated with investments by investing primarily in investment grade, liquid securities. The Company’s policy is
designed to limit exposures to any one issuer depending on credit quality. Periodic evaluations of the relative credit standing of those issuers are considered in the
Company’s investment strategy.
Internal Use Software
The Company capitalizes costs related to the development of internal use software for its website, enterprise resource planning system and systems management
applications. The Company amortizes the costs of computer software developed for internal use on a straight-line basis over an estimated useful life of five years. The
carrying value of internal use software is included in property and equipment on the Company’s Consolidated Balance Sheets.
Capitalized Software Costs
Capitalization of software development costs for products to be sold to third parties begins upon the establishment of technological feasibility and ceases when
the product is available for general release. 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, at February 28, 2013 and February 29, 2012, the Company had no internally developed capitalized software costs for products to be sold to
third parties.
Property and Equipment
Property and equipment is primarily comprised of furniture, computer equipment, computer software and leasehold improvements which are recorded at cost and
depreciated or amortized using the straight-line method over their estimated useful lives as follows: furniture and fixtures, seven years; computer equipment, three to
four years; computer software, five years; leasehold improvements, over the lesser of the estimated remaining useful life of the asset or the remaining term of the lease.
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 depreciated over the lesser of the estimated remaining useful life of the asset or the remaining term of the
lease.
Share-based Compensation
The Company measures share-based compensation cost at grant date, based on the estimated fair value of the award and recognizes the cost over the employee
requisite service period typically on a straight-line basis, net
75
Source: RED HAT INC, 10-K, April 25, 2013
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RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
of estimated forfeitures. The Company estimates the fair value of stock options using the Black-Scholes-Merton valuation model. The fair value of nonvested share
awards, nonvested share units and performance share units are measured at their underlying closing share price on the date of grant. The Company’s share-based
compensation is described further in NOTE 13—Share-based Awards.
Sales and Marketing Expenses
Sales and marketing expenses consist of costs, including salaries, sales commissions and related expenses, such as travel, of all personnel involved in the sales
and marketing process. Sales and marketing expenses also include costs of advertising, sales lead generation programs, cooperative marketing arrangements and trade
shows. Payments made to resellers or other customers are reported in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Section 605-50 Customer Payments and Incentives (formerly referenced as Emerging Issues Task Force Issue Number 01-09, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)) (“ASC 605-50”). All costs of advertising, to the extent allowable by
ASC 605-50, are expensed as incurred.
Advertising expense totaled $42.7 million, $29.2 million, and $25.5 million for the years ended February 28, 2013, February 29, 2012 and February 28, 2011,
respectively.
Research and Development Expenses
Research and development expenses include all direct costs, primarily salaries for Company personnel and outside consultants, related to the development of
new software products, significant enhancements to existing software products, and the portion of costs of development of internal use software required to be
expensed. Research and development costs are charged to operations as incurred with the exception of those software development costs that may qualify for
capitalization.
Income Taxes
The Company accounts for income taxes using the liability method in which deferred tax assets or liabilities are recognized 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 Company continues to assess the realizability of its deferred tax assets, which primarily consist of share-based compensation expense deductions, tax credit
carryforwards and deferred revenue. In assessing the realizability of these deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. The Company continues to maintain a valuation allowance against its deferred tax assets with respect to certain
foreign net operating loss (“NOL”) carryforwards.
With respect to foreign earnings, it is the Company’s policy to invest the earnings of foreign subsidiaries indefinitely outside the U.S. From time to time,
however, the Company may remit a portion of these earnings to the extent it incurs no additional U.S. tax and it is otherwise feasible.
Because tax laws are complex and subject to different interpretations, significant judgment is required. As a result, the Company makes certain estimates and
assumptions in (i) calculating its income tax expense, deferred tax assets and deferred tax liabilities, (ii) determining any valuation allowance recorded against deferred
tax assets and (iii) evaluating the amount of unrecognized tax benefits, as well as the interest and penalties related to
76
Source: RED HAT INC, 10-K, April 25, 2013
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RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
such uncertain tax positions. The Company’s estimates and assumptions may differ significantly from tax benefits ultimately realized. The Company’s income tax
expense and deferred taxes are described further in NOTE 11—Income Taxes.
Foreign Currency Translation
The Euro has been determined to be the primary functional currency for the Company’s European operations and local currencies have been determined to be the
functional currencies for the Company’s Asia Pacific and Latin American operations. Foreign exchange gains and losses, which result from the process of remeasuring
foreign currency transactions into the appropriate functional currency, are included in other income, net in the Company’s Consolidated Statements of Operations.
The impact of changes in foreign currency exchange rates resulting from the translation of foreign currency financial statements into U.S. dollars for financial
reporting purposes is included in other comprehensive income, which is a separate component of stockholders’ equity. Assets and liabilities are translated into U.S.
dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at average rates for the period.
Customers and Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, investments and trade
receivables. The Company primarily places its cash, cash equivalents and investments with high-credit quality financial institutions which invest predominantly in U.S.
government instruments, investment grade corporate bonds and certificates of deposit guaranteed by banks which are members of the Federal Deposit Insurance
Corporation. Cash deposits are primarily in financial institutions in the United States. However, cash for monthly operating costs of international operations are
deposited in banks outside the United States. See NOTE-20 Segment Reporting for further discussion related to cash balances held within the Company’s geographic
regions.
The Company performs credit evaluations to reduce credit risk and generally requires no collateral from its customers. Management estimates the allowance for
uncollectible accounts based on their historical experience and credit evaluation. The Company’s standard credit terms are net 30 days in North America, net 30 to 45
days in EMEA (Europe, Middle East and Africa) and Latin America, and range from net 30 to net 60 days in Asia Pacific.
Net Income Per Common Share
The Company computes basic net income per common share by dividing net income available to common stockholders by the weighted average number of
common shares outstanding. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares and dilutive
potential common share equivalents then outstanding. Potential common share equivalents consist of shares issuable upon the exercise of stock options or vesting of
share-based awards.
Segment Reporting
The Company is organized primarily on the basis of three geographic business units: the Americas (U.S., Latin America and Canada), EMEA (Europe, Middle
East and Africa) and Asia Pacific. These business units are aggregated into one reportable segment due to the similarity in nature of products and services provided,
financial performance economic characteristics (e.g., revenue growth and gross margin), methods of production and distribution and customer classes (e.g., distributors,
resellers and enterprise).
77
Source: RED HAT INC, 10-K, April 25, 2013
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RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company has offices in more than 80 locations around the world. The Company manages its international business on an Americas-wide, EMEA-wide and
Asia Pacific-wide basis. See NOTE 20—Segment Reporting for further discussion.
Recent Accounting Pronouncements
In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income (ASU 2013-02), to require entities to provide information about significant amounts reclassified out of accumulated other
comprehensive income by component and their corresponding effect on net income. ASU 2013-02 is effective for the Company in the first quarter of its fiscal year
ending February 28, 2014. The Company does not believe that this updated standard will have a significant impact on its consolidated financial statements.
In July 2012, the FASB issued Accounting Standards Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350)—Testing Indefinite-Lived Intangible
Assets for Impairment (ASU 2012-02), to simplify how entities test intangibles with indefinite lives for impairment. ASU 2012-02 gives entities the option to first
assess qualitative factors to determine whether it is more likely than not that the fair value of an intangible asset is less than its carrying amount. If a greater than 50
percent likelihood exists that the fair value is less than the carrying amount then a quantitative impairment test as described in Subtopic 350-30 must be performed.
ASU 2012-02 is effective for the Company in the first quarter of its fiscal year ending February 28, 2014. The Company does not believe that this updated standard will
have a significant impact on its consolidated financial statements.
In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210)—Disclosures about Offsetting Assets and Liabilities
(ASU 2011-11), to require entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. ASU 2011-11
is effective for the Company in the first quarter of its fiscal year ending February 28, 2014. The Company does not believe that this updated standard will have a
significant impact on its consolidated financial statements.
NOTE 3—Business Combinations
Acquisition of ManageIQ, Inc.
On December 21, 2012, the Company completed its acquisition of ManageIQ, Inc. (“ManageIQ”), a provider of enterprise cloud management and automation
solutions that enable organizations to deploy, manage and optimize private clouds, public clouds and virtualized infrastuctures. Under the terms of the purchase
agreement, the consideration transferred by the Company totaled $104.5 million. The Company incurred approximately $0.5 million in transaction costs including legal
and accounting fees relating to the acquisition. These costs have been expensed as incurred and included in general and administrative expense on the Consolidated
Statement of Operations for the year ended February 28, 2013.
78
Source: RED HAT INC, 10-K, April 25, 2013
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RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The table below represents the tangible and identifiable intangible assets and liabilities (in thousands) based on management’s preliminary assessment of the
acquisition date fair value of the assets acquired and liabilities assumed:
Total
Consideration
Allocated
Estimated identifiable intangible assets (see detail below)
Cash
Accounts receivable
Fixed assets
Deferred tax assets, net
Other assets
Accrued liabilities
Deferred revenue
Goodwill
$
Total consideration allocated
$
17,340
222
570
69
3,446
155
(262)
(132)
83,074
104,482
The following table summarizes the allocation of identifiable intangible assets resulting from the acquisition. For purposes of this allocation, the Company has
assessed a fair value of ManageIQ’s identifiable intangible assets related to developed technology, employee covenants not to compete, customer relationships and
tradenames and trademarks based on the net present value of the projected income stream of these identifiable intangible assets. The fair value of the identifiable
intangible assets is being amortized over the estimated useful life of each intangible asset on a straight-line basis which approximates the economic pattern of benefits
(in thousands):
Estimated
Life
(Years)
Amortization Expense Type
Developed technology
Employee covenants not to compete
Customer relationships
Tradenames and trademarks
Total identifiable intangible assets
Total
Cost of revenue
5
$ 13,500
Research and development
Sales and marketing
General and administrative
4
5
2
2,800
1,000
40
$ 17,340
Other acquisitions in fiscal 2013
During the year ended February 28, 2013, the Company entered into agreements to acquire two businesses operating in the middleware space. These acquisitions
include technologies that are complementary to the Company’s JBoss Middleware technology. One acquisition, which included certain assets and related operations
acquired from Polymita Technologies S.L. (“Polymita”), closed on August 28, 2012. The second acquisition closed on September 7, 2012 and included certain assets
and related operations acquired from FuseSource, a division of Progress Software Corporation (“FuseSource”). The total cash consideration for these two acquisitions
was $31.2 million. The total cash consideration transferred of $31.2 million has been allocated to the Company’s assets as follows: $17.5 million to goodwill, $13.2
million to identifiable intangible assets and the remaining $0.5 million to other current assets.
Transaction fees related to these two acquisitions totaled approximately $1.0 million for the year ended February 28, 2013 and are included in general and
administrative expense on the Company’s Consolidated Statement of Operations for the year ended February 28, 2013.
79
Source: RED HAT INC, 10-K, April 25, 2013
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RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Acquisition of Gluster, Inc.
On October 7, 2011, the Company completed its acquisition of all issued and outstanding shares of Gluster, Inc. (“Gluster”), a provider of scale-out, open source
storage solutions. The acquisition was intended to expand the Company’s enterprise software offerings to include management of unstructured data. Under the terms of
the purchase agreement, the consideration transferred by the Company totaled $137.2 million. The Company incurred approximately $0.5 million in transaction costs
including legal and accounting fees relating to the acquisition. These costs have been expensed as incurred and included in general and administrative expense on the
Consolidated Statement of Operations for the year ended February 29, 2012.
The total consideration transferred by the Company in connection with the acquisition is summarized in the following table (in thousands):
Total
Consideration
Transferred
Cash consideration paid to and/or on behalf of holders of Gluster stock and vested options
Fair value of unvested employee share-based awards assumed and attributed to pre-combination services (1)
$
135,906
1,244
Total
$
137,150
(1)
The total fair value, as of October 7, 2011, of all assumed nonvested share-based awards was $14.5 million, of which $1.2 million has been attributed to
pre-acquisition employee services and accordingly has been recognized as consideration transferred. The remaining $13.3 million of fair value will be recognized
as compensation expense over the remaining vesting period.
The table below represents the tangible and identifiable intangible assets and liabilities (in thousands) based on management’s assessment of the acquisition date
fair value of the assets acquired and liabilities assumed:
Total
Consideration
Allocated
Identifiable intangible assets (see detail below)
Cash
Accounts receivable
Fixed assets
Deferred tax assets, net
Other assets
Accrued liabilities
Deferred revenue
Goodwill
$
6,800
696
321
454
3,263
1,093
(1,872)
(321)
126,716
Total consideration allocated
$
137,150
80
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the allocation of identifiable intangible assets resulting from the acquisition. For purposes of this allocation, the Company has
assessed a fair value of Gluster identifiable intangible assets related to customer relationships and tradenames and trademarks based on the net present value of the
projected income stream of these identifiable intangible assets. The fair value of the identifiable intangible assets is being amortized over the estimated useful life of
each intangible asset on a straight-line basis which approximates the economic pattern of benefits (in thousands):
Estimated Life
(Years)
Amortization Expense Type
Customer relationships
Tradenames and trademarks
Sales and marketing
General and administrative
5
Indefinite
Total identifiable intangible assets
Total
$ 6,200
600
$ 6,800
Other acquisitions in fiscal 2011
On November 19, 2010, the Company acquired Makara, Inc. (“Makara”), a developer of deployment and management solutions for applications in the cloud.
The acquisition of Makara was intended to accelerate the development of the Company’s Platform-as-a-Service solution. The Company acquired Makara for cash
consideration of $31.4 million, net of $0.6 million of cash acquired. The net cash consideration transferred of $31.4 million has been allocated to the Company’s assets
as follows: $26.1 million to goodwill, $5.0 million to identifiable intangible assets and the remaining $0.3 million to current assets.
Pro forma consolidated financial information
The following unaudited pro forma consolidated financial information reflects the results of operations of the Company for the years ended February 28, 2013
and February 29, 2012 (in thousands, except per share amounts) as if the acquisitions of Gluster, Polymita, FuseSource and ManageIQ had closed on March 1, 2011,
after giving effect to certain purchase accounting adjustments. These pro forma results are not necessarily indicative of what the Company’s operating results would
have been had the acquisitions actually taken place at the beginning of the period.
Year ended
February 28, 2013
(unaudited)
Revenue
Net income and diluted net income
Basic net income per common share
Diluted net income per common share
$
$
$
1,329,780
136,459
0.71
0.70
Year ended
February 29, 2012
(unaudited)
$
1,134,679
125,387
0.65
0.64
$
$
Post-acquisition financial information
The following is a summary of revenue, operating expenses and operating loss for Polymita, FuseSource and ManageIQ that are included in the Company’s
Consolidated Statement of Operations for the year ended February 28, 2013 (in thousands):
Year ended
February 28, 2013
Revenue
Operating expenses
$
Operating loss
1,976
(10,735)
(8,759)
81
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Related party matters
Dr. Naren Gupta, a director of Red Hat since 2005, was a director of Gluster and is the Managing Director of Nexus Venture Partners (“Nexus”), a venture
capital fund that was a principal investor in Gluster. Nexus held approximately 36.4% percent of the shares of Gluster capital stock and vested options outstanding on
the closing date.
Dr. Gupta did not attend the meeting at which Red Hat’s Board of Directors (the “Board”) approved the transaction and recused himself from all Board
deliberations with respect to the transaction. The purchase price in the transaction was determined through arm’s-length negotiations between Red Hat and Gluster.
Goodwill and other business combinations
The Company completed its annual goodwill impairment test in February 2013. No goodwill impairment was deemed to have occurred. The following is a
summary of goodwill for the years ended February 28, 2013, February 29, 2012 and February 28, 2011 (in thousands):
Balance at February 28, 2010
Add: acquisition of Makara
Impact of foreign currency fluctuations
$ 438,749
24,681
243
Balance at February 28, 2011
Add: acquisition of Gluster
Add: adjustment to Makara purchase price for finalization of allocation
Impact of foreign currency fluctuations
$ 463,673
126,716
1,458
(284)
Balance at February 29, 2012
Add: acquisition of ManageIQ
Add: other acquisitions
Impact of foreign currency fluctuations and other adjustments
$ 591,563
83,074
17,462
(1,188)
Balance at February 28, 2013
$ 690,911
NOTE 4—Accounts Receivable
Accounts receivable are presented net of an allowance for doubtful accounts. Activity in the Company’s allowance for doubtful accounts for the years ended
February 28, 2013, February 29, 2012 and February 28, 2011 is presented in the following table (in thousands):
Balance at
beginning
of period
2011
2012
2013
(1)
$
$
$
2,295
1,379
1,877
Charged
to (recovery of)
expense
$
$
$
(260)
989
(102)
Adjustments (1)
$
$
$
(656)
(491)
(436)
Balance at
end of
period
$
$
$
1,379
1,877
1,339
Represents foreign currency translation adjustments and amounts written-off as uncollectible accounts receivable.
At February 28, 2013, no individual customer accounted for over 10% of the Company’s accounts receivable. At February 29, 2012, one individual customer
accounted for 10% of the Company’s accounts receivable.
82
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 5—Property and Equipment
The Company’s property and equipment is recorded at cost and consists of the following (in thousands):
February 28,
2013
February 29,
2012
Computer equipment
Software, including software developed for internal use
Furniture and fixtures
Leasehold improvements
$
127,741
126,116
19,271
58,443
$
104,718
95,999
15,214
40,026
Property and equipment
Less: accumulated depreciation
$
331,571
(189,985)
$
255,957
(163,892)
Property and equipment, net
$
141,586
$
92,065
The useful lives of property and equipment range from three to fifteen years. Leasehold improvements are amortized over the lesser of the useful life or lease
term. Depreciation expense recognized in the Company’s Consolidated Financial Statements for the years ended February 28, 2013, February 29, 2012 and
February 28, 2011 is summarized as follows (in thousands):
Year Ended
February 28,
2013
Total depreciation expense
$
Year Ended
February 29,
2012
38,818
$
Year Ended
February 28,
2011
31,623
$
29,036
NOTE 6—Identifiable Intangible Assets
Identifiable intangible assets consist primarily of purchased technologies, customer and reseller relationships, trademarks, copyrights and patents and covenants
not to compete which are amortized over the estimated useful life, generally on a straight-line basis, with the exception of customer and reseller relationships which are
generally amortized over the greater of straight-line or the related asset’s pattern of economic benefit. Useful lives range from three to ten years. As of February 28,
2013 and February 29, 2012, trademarks with an indefinite estimated useful life totaled $9.3 million and $9.5 million, respectively. The following is a summary of
identifiable intangible assets (in thousands):
February 28, 2013
Gross
Amount
February 29, 2012
Accumulated
Amortization
Net
Amount
Gross
Amount
Accumulated
Amortization
Net
Amount
Trademarks, copyrights and patents
Purchased technologies
Customer and reseller relationships
Covenants not to compete
$
94,020
79,201
89,959
10,516
$
(27,412)
(46,507)
(53,391)
(4,143)
$
66,608
32,694
36,568
6,373
$
62,851
58,781
83,478
3,473
$
(20,491)
(39,390)
(44,591)
(3,473)
$
42,360
19,391
38,887
—
Identifiable intangible assets
$
273,696
$
(131,453)
$
142,243
$
208,583
$
(107,945)
$
100,638
The balances in identifiable intangible assets as of February 28, 2013 include $30.6 million of identifiable intangible assets acquired as part of business
combinations completed during the year ended February 28, 2013. See NOTE 3—Business Combinations for further discussion related to business combinations.
Patents purchased from a related party during the year ended February 28, 2013 totaled $22.4 million. See NOTE 7—Other Assets, Net for further discussion.
83
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Amortization expense associated with identifiable intangible assets recognized in the Company’s Consolidated Financial Statements for the years ended
February 28, 2013, February 29, 2012 and February 28, 2011 is summarized as follows (in thousands):
Year Ended
February 28,
2013
Year Ended
February 29,
2012
Year Ended
February 28,
2011
Cost of revenue
Sales and marketing
Research and development
General and administrative
$
5,943
8,416
3,836
5,328
$
3,533
8,348
4,194
3,674
$
3,274
8,322
4,025
3,340
Total amortization expense
$
23,523
$
19,749
$
18,961
As of February 28, 2013, future amortization expense on existing intangibles is as follows (in thousands):
Amortization
Expense of
Intangible
Assets
Fiscal Year
2014
2015
2016
2017
2018
Thereafter
$
25,419
22,361
16,681
13,819
11,041
43,648
Total amortization expense
$
132,969
NOTE 7—Other Assets, Net
Other assets, net were comprised of the following (in thousands):
February 28,
2013
February 29,
2012
Equity-method investment
Cost-basis investments
Net non-current deferred tax assets (see NOTE 11—Income Taxes)
Security deposits and other
$
15,560
5,354
5,226
5,123
$
14,392
4,853
13,603
5,792
Other assets, net
$
31,263
$
38,640
The Company reviews its non-marketable cost-basis investments in equity securities for other than temporary declines in fair value based on prices recently paid
for shares in that company, as well as changes in market conditions. The carrying values are not necessarily representative of the amounts that the Company could
realize in a current transaction. During the years ended February 28, 2013, February 29, 2012 and February 28, 2011, no significant losses were recognized for equity
investments in other companies.
Equity-method investment represents the Company’s investment in Open Invention Network LLC (“OIN”) and the related share of OIN’s accumulated deficit.
The Company uses the equity method to account for its investment in OIN. The equity method requires the Company to increase or decrease the carrying amount of its
investment in OIN to reflect the Company’s pro rata share of OIN’s gains and losses, respectively, as part of Other income (expense), net.
84
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During the year ended February 28, 2013, the Company purchased patents for $22.4 million from OIN. The gain recognized by OIN related to the sale of these
patents has been excluded from the Company’s pro rata share of OIN’s gains and losses.
NOTE 8—Prepaid Expenses
Prepaid expenses include sales commissions, taxes and insurance. Sales commissions are the incremental costs that are directly associated with non-cancelable
subscription contracts with customers and consist of sales commissions paid to the Company’s sales force. The commissions are deferred and amortized over a period to
approximate the period of the subscription term. For further discussion on deferred commissions see NOTE 2—Summary of Significant Accounting Policies. Prepaid
expenses, including sales commissions, were comprised of the following (in thousands):
February 28,
2013
February 29,
2012
Deferred commissions
Professional services
Taxes
Insurance
Other
$
62,159
13,172
10,743
1,547
6,800
$
59,566
10,248
6,479
1,520
3,453
Prepaid expenses
$
94,421
$
81,266
NOTE 9—Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses were comprised of the following (in thousands):
February 28,
2013
February 29,
2012
Accounts payable
Accrued wages and other compensation related expenses
Accrued other trade payables
Accrued income and other taxes payable
Accrued other
$
27,096
72,912
38,595
15,111
488
$
6,881
72,380
23,765
10,189
863
Accounts payable and accrued expenses
$
154,202
$
114,078
NOTE 10—Derivative Instruments
The Company transacts business in various foreign countries and is, therefore, subject to risk of foreign currency exchange rate fluctuations. The Company from
time to time enters into forward contracts to economically hedge transactional exposure associated with commitments arising from trade accounts receivable, trade
accounts payable and fixed purchase obligations denominated in a currency other than the functional currency of the respective operating entity. All derivative
instruments are recorded on the Consolidated Balance Sheets at their respective fair market values. The Company has elected not to prepare and maintain the
documentation required to qualify its forward contracts for hedge accounting treatment and, therefore, changes in fair value are recorded in the Consolidated Statements
of Operations.
85
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The effects of derivative instruments on the Company’s Consolidated Financial Statements are as follows as of February 28, 2013 and for the year then ended (in
thousands):
Year Ended February 28, 2013
Location of Gain
Amount of Gain
(Loss) Recognized
(Loss) Recognized
in Income on
in Income on
Derivative
Derivative
As of February 28, 2013
Fair
Value
Balance Sheet Location
Assets—foreign currency forward contracts
not designated as hedges
Liabilities—foreign currency forward
contracts not designated as hedges
Other current assets
$
Accounts payable
and accrued
expenses
280
Notional
Value
$
(219)
TOTAL
$
61
$
36,214
Other income
(expense), net
29,328
Other income
(expense), net
65,542
$
1,309
(1,695)
$
(386)
The effects of derivative instruments on the Company’s Consolidated Financial Statements are as follows as of February 29, 2012 and for the year then ended (in
thousands):
Year Ended February 29, 2012
Location of Gain
Amount of Gain
(Loss) Recognized
(Loss) Recognized
in Income on
in Income on
Derivative
Derivative
As of February 29, 2012
Fair
Value
Balance Sheet Location
Assets—foreign currency forward contracts
not designated as hedges
Liabilities—foreign currency forward
contracts not designated as hedges
TOTAL
Other current assets
$
Accounts payable
and accrued
expenses
147
Notional
Value
$
(473)
$ (326)
$
24,450
Other income
(expense), net
35,263
Other income
(expense), net
59,713
$
1,518
(2,785)
$
(1,267)
NOTE 11—Income Taxes
The U.S. and foreign components of the Company’s income before provision for income taxes consisted of the following (in thousands):
February 28,
2013
February 29,
2012
February 28,
2011
U.S.
Foreign
$
130,560
79,192
$
147,148
60,861
$
109,044
44,650
Income before provision for income taxes
$
209,752
$
208,009
$
153,694
86
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The components of the Company’s provision for income taxes consisted of the following (in thousands):
February 28,
2013
Current:
Foreign
Federal
State
Current tax expense
Deferred:
Foreign
Federal
State
February 29,
2012
$
16,556
33,598
1,882
$
16,612
18,609
3,069
$
7,675
14,553
760
$
52,036
$
38,290
$
22,988
2,899
9,687
(5,074)
Deferred tax expense
Net provision for income taxes
February 28,
2011
(4,390)
27,483
—
3,037
16,810
3,581
$
7,512
$
23,093
$
23,428
$
59,548
$
61,383
$
46,416
Significant components of the Company’s deferred tax assets and liabilities at February 28, 2013 and February 29, 2012, consisted of the following (in
thousands):
February 28,
2013
Deferred tax assets:
Foreign net operating loss carryforwards
Domestic net operating loss carryforwards
Domestic credit carryforwards
Goodwill
Share-based compensation
Deferred revenue
Foreign deferred royalty expenses
Other
February 29,
2012
$
7,629
12,227
29,062
—
26,781
43,066
6,000
8,299
$
9,464
5,251
31,548
7,265
21,147
34,684
5,753
9,524
Total deferred tax assets
Valuation allowance for deferred tax assets
$
133,064
(659)
$
124,636
(3,641)
Total deferred tax assets, net of valuation allowance
$
132,405
$
120,995
Deferred tax liabilities:
Goodwill
Fixed and intangible assets
Compensation accruals
Other
—
25,607
8,695
3,325
2,971
23,905
9,124
8,132
Total deferred tax liabilities
$
44,132
$
37,627
Net deferred tax asset
$
88,273
$
83,368
87
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s gross and net deferred tax asset and liability positions at February 28, 2013 are as follows (in thousands):
Domestic
Deferred tax assets:
Current
Non-current
Deferred tax liabilities:
Current
Non-current
Foreign
Consolidated
83,661
1,146
6,069
5,229
89,730
6,375
509
6,864
456
3
965
6,867
Net deferred tax asset
77,434
10,839
88,273
Net current deferred tax asset
Net non-current deferred tax asset, recorded in Other assets, net
Net non-current deferred tax liability, recorded in Other long-term obligations
83,152
—
(5,718)
5,613
5,226
—
88,765
5,226
(5,718)
Net deferred tax asset
77,434
10,839
88,273
As of February 28, 2013, the Company continues to maintain a valuation allowance against its deferred tax assets with respect to certain foreign and state NOLs.
For the year ended February 28, 2013, the valuation allowance decreased by $3.0 million primarily as a result of utilization of foreign NOLs.
As of February 28, 2013, the Company had U.S. federal NOL carryforwards of $24.5 million and state NOL carryforwards of $119.5 million, of which $53.4
million consists of share-based compensation deductions in excess of the amounts expensed in the Company’s operating results. The resulting excess tax benefit will be
recognized as an increase to additional paid in capital when realized. The NOL carryforwards expire in varying amounts beginning in the fiscal year ending
February 28, 2014. As of February 28, 2013, the Company had U.S. research tax credit carryforwards of $48.6 million which expire in varying amounts beginning in
the fiscal year ending February 28, 2014.
Taxes computed at the statutory federal income tax rates are reconciled to the provision for income taxes for the years ended February 28, 2013, February 29,
2012 and February 28, 2011, respectively, as follows (in thousands):
February 28,
2013
Effective rate
Provision at federal statutory rate, 35%
State tax, net of federal tax benefit (1)
Foreign rate differential
Israel tax holiday (2)
Deemed foreign dividend
Nondeductible items
Research tax credit
Foreign tax credit
Other
$
Provision for income taxes
(1)
$
28.4 %
73,413
907
(7,034)
(1,806)
5,787
2,141
(5,348)
(7,852)
(660)
59,548
February 29,
2012
$
$
29.5 %
72,803
3,070
(7,631)
(1,447)
3,721
2,923
(2,357)
(10,830)
1,131
61,383
February 28,
2011
$
30.2 %
53,834
4,341
(5,280)
(2,671)
5,348
5,625
(3,690)
(11,357)
266
$
46,416
The Company amended its state income tax returns for prior years, which resulted in a reduction of state tax, net of federal tax benefit, of $3.4 million.
88
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(2)
The Company qualifies for a tax holiday in Israel which began during the fiscal year ended February 28, 2011 and is scheduled to terminate as of the fiscal year
ending February 29, 2020. The tax holiday provides for an exemption from income tax in the first two years, and for a reduced rate of taxation on income
generated in Israel for the subsequent eight years. The financial impact of this holiday for the year ended February 28, 2013 was a $1.8 million reduction in the
Company’s provision for income taxes, which increased the Company’s diluted earnings per share by $0.01.
The Company has not provided U.S. deferred taxes on the cumulative earnings of foreign subsidiaries that have been reinvested outside the U.S. indefinitely;
these earnings were $200.5 million at February 28, 2013. Determination of the deferred tax liability, if any, on these earnings reinvested indefinitely outside the U.S. is
not practicable because of available foreign tax credits. It is the Company’s policy to invest the earnings of foreign subsidiaries indefinitely outside the U.S. From time
to time, however, the Company may remit a portion of these earnings to the extent it does not incur additional U.S. tax and it is otherwise feasible. The Company has
provided U.S. income taxes on the earnings of certain foreign subsidiaries that are not considered as permanently reinvested outside the U.S. The U.S. income tax on
such earnings is completely offset by U.S. foreign tax credits.
Unrecognized tax benefits
The following table reconciles unrecognized tax benefits for the three years ended February 28, 2013 (in thousands):
Balance at February 28, 2010
Additions based on tax positions related to the current year
Additions based on tax positions related to prior years
Reductions related to change in effective tax rate
$ 43,374
3,782
2,292
(7,365)
Balance at February 28, 2011
Additions based on tax positions related to the current year
Additions based on tax positions related to prior years
Reductions related to settlements with tax authorities
Reductions related to changes in facts and circumstances
$ 42,083
2,066
531
(259)
(659)
Balance at February 29, 2012
Additions based on tax positions related to prior years
Additions based on tax positions related to the current year
Reductions related to changes in facts and circumstances
$ 43,762
2,122
2,576
(147)
Balance at February 28, 2013
$ 48,313
The Company’s unrecognized tax benefits as February 28, 2013 and February 29, 2012, which, if recognized, would affect the Company’s effective tax rate
were $45.3 million and $39.9 million, respectively.
It is the Company’s policy to recognize interest and penalties related to uncertain tax positions as income tax expense. Accrued interest and penalties related to
unrecognized tax benefits totaled $4.2 million and $3.5 million as of February 28, 2013 and February 29, 2012, respectively.
The results and timing of the resolution of tax audits is highly uncertain and the Company is unable to estimate the range of the possible changes to the balance
of unrecognized tax benefits. However, the Company does not anticipate that within the next 12 months that the total amount of unrecognized tax benefits will
significantly increase or decrease as a result of any such potential tax audit resolutions.
89
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The following table
summarizes the tax years in the Company’s major tax jurisdictions that remain subject to income tax examinations by tax authorities as of February 28, 2013. Due to
NOL carryforwards, in some cases the tax years continue to remain subject to examination with respect to such NOLs:
Years Subject to
Income Tax
Examination
Tax Jurisdiction
1994 – Present
1999 – Present
2008 – Present
2012 – Present
U.S. federal
North Carolina
Ireland
Japan (1)
(1)
The Company has been examined for income tax for years through February 28, 2011. A tax examination was concluded in fiscal 2012 with no significant
adjustments resulting. However, the statute of limitations remains open for five years.
The Company is currently undergoing an income tax examination by the U.S. Internal Revenue Service with respect to its fiscal year ended February 28, 2010.
The Company is also currently undergoing an income tax examination in India.
The Company believes it has adequately provided for any reasonably foreseeable outcomes related to tax audits.
NOTE 12—Common and Preferred Stock
Common Stock
The Company has authorized 300,000,000 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 preferred stock or any other outstanding stock ranking on liquidation senior to or on parity with the common stock.
The Company repurchased 2,290,936 shares, 3,167,413 shares and 2,921,275 shares of its common stock during the fiscal years ended February 28,
2013, February 29, 2012 and February 28, 2011, respectively, at an aggregate cost of $120.7 million, $133.2 million and $90.1 million, respectively. These amounts are
recorded as treasury stock on the Company’s Consolidated Balance Sheets.
Preferred Stock
At February 28, 2013, the Company has authorized 5,000,000 shares of preferred stock with a par value of $0.0001 per share. No shares of preferred stock were
outstanding as of February 28, 2013 or February 29, 2012.
NOTE 13—Share-based Awards
Overview
The Company’s 2004 Long-Term Incentive Plan, as amended and restated (the “2004 Plan”), provides for the granting of stock options, service-based share
awards and performance-based share awards, among other
90
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
awards. As of February 28, 2013, there were 23.6 million shares of common stock reserved for issuance under future share-based awards to be granted to any employee,
officer or director or consultant of the Company at terms and prices to be determined by the Board of Directors.
The following table summarizes share-based awards, by type, granted during the years ended February 28, 2013, February 29, 2012 and February 28, 2011:
Awards Granted
Year Ended
February 28, 2013
Shares and
Shares
Underlying
Awards
Awards Granted
Year Ended
February 29, 2012
Weighted
Average
Per Share
Award
Fair Value
Shares and
Shares
Underlying
Awards
Awards Granted
Year Ended
February 28, 2011
Weighted
Average
Per Share
Award
Fair Value
Weighted
Average
Per Share
Award
Fair Value
Shares and
Shares
Underlying
Awards
Stock options
Service-based shares and share units
Performance-based shares and share
units—Maximum
114,361
2,471,872
$
$
15.16
54.62
51,563
2,148,070
$
$
15.41
45.35
83,891
2,542,479
$
$
17.32
37.98
613,800
$
52.23
633,336
$
43.60
626,672
$
29.31
Total share-based awards
3,200,033
$
52.75
2,832,969
$
44.41
3,253,042
$
35.78
The following summarizes share-based compensation expense recognized in the Company’s Consolidated Financial Statements for the years ended February 28,
2013, February 29, 2012 and February 28, 2011 (in thousands):
Year Ended
February 28,
2013
Year Ended
February 29,
2012
Year Ended
February 28,
2011
Cost of revenue
Sales and marketing
Research and development
General and administrative
$
9,433
32,906
29,647
26,712
$
7,880
25,060
21,570
24,757
$
6,053
18,971
15,639
19,934
Total share-based compensation expense
$
98,698
$
79,267
$
60,597
Share-based compensation expense qualifying for capitalization was insignificant for each of the Company’s fiscal years ended February 28, 2013, February 29,
2012 and February 28, 2011. Accordingly, no share-based compensation expense was capitalized during these years.
Estimated annual forfeitures—An estimated forfeiture rate of 10.0% per annum, which approximates the Company’s historical rate, was applied to options and
service-based share awards. Awards are adjusted to actual forfeiture rates at vesting. The Company reassesses its estimated forfeiture rate annually or when new
information, including actual forfeitures, indicate a change is appropriate.
Stock Options
The 2004 Plan provides that the purchase price per share for each option shall not be less than the fair market value of the underlying share on the date of grant.
Options granted under the 2004 Plan to date include contract terms of five years and generally vest 25% upon completion of one full year of service and 6.25% on the
first day of each subsequent three-month period of service. The maximum contract term for an option granted under the 2004 Plan is seven years from the date of grant.
91
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The total fair value of stock options recognized in the Consolidated Financial Statements for the years ended February 28, 2013, February 29, 2012 and
February 28, 2011 was as follows (in thousands):
Year Ended
February 28,
2013
Total fair value of stock options recognized
$
Year Ended
February 29,
2012
2,791
$
Year Ended
February 28,
2011
3,104
$
6,038
The following table summarizes the activity for the Company’s stock options for the years ended February 28, 2013, February 29, 2012 and February 28, 2011:
Weighted Average
Exercise Price Per
Share
Shares Underlying
Options
Outstanding at February 28, 2010
9,224,309
Granted
Exercised
Forfeited
13.03
83,891
(7,071,001)
(207,711)
Outstanding at February 28, 2011
33.59
11.94
19.25
2,029,488
Granted
Exercised
Forfeited
Assumed (1)
$
16.88
51,563
(1,059,191)
(123,618)
204,911
Outstanding at February 29, 2012
45.08
15.87
17.16
1.13
1,103,153
Granted
Exercised
Forfeited
$
16.21
114,361
(735,086)
(29,741)
Outstanding at February 28, 2013
(1)
$
55.17
15.61
25.10
452,687
$
26.43
Amount represents partially vested options assumed as part of a business combination.
As described above, options are typically granted with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. No
options were granted by the Company during the three years ended February 28, 2013 with exercise prices less than the grant date fair value of the Company’s common
stock.
The following summarizes information, as of February 28, 2013, about the Company’s outstanding and exercisable stock options:
Options Outstanding
Exercise Prices
Number
Outstanding
Weighted
Average
Remaining
Contractual Life
Options Exercisable
Weighted
Average
Exercise Price
Number
Exercisable
Weighted
Average
Exercise Price
$0.00 – $10.00
$10.01 – $20.00
$20.01 – $30.00
$30.01 – $40.00
$40.01 and over
149,625
85,401
35,551
29,664
152,446
4.9
1.2
1.6
2.6
4.3
$
$
$
$
$
3.30
15.65
27.24
39.45
52.44
87,916
85,127
28,303
15,083
12,505
$
$
$
$
$
4.18
15.64
27.01
39.52
45.06
Total
452,687
3.6
$
26.43
228,934
$
15.83
92
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following summarizes the intrinsic value, as of February 28, 2013, of the Company’s outstanding, exercisable and expected to vest stock options:
Number of
Stock Options
Intrinsic Value of Stock Options
Outstanding
Exercisable
Expected to vest (assuming annual forfeiture rate of 10%)
Weighted Avera
ge
Remaining
Contractual Life
452,687
228,934
203,026
3.6
2.0
5.2
Intrinsic Value at
February 28, 2013
(in thousands)
$
$
$
11,527,364
8,010,217
3,641,216
The intrinsic value of stock options exercised during the years ended February 28, 2013, February 29, 2012 and February 28, 2011 was as follows (in
thousands):
Year Ended
February 28,
2013
Total intrinsic value of stock options exercised
$
29,598
Year Ended
February 29,
2012
$
31,736
Year Ended
February 28,
2011
$
161,796
As of February 28, 2013, compensation cost related to unvested stock options not yet recognized in the Company’s Consolidated Financial Statements totaled
$4.8 million. The weighted average period over which these unvested stock options are expected to be recognized is approximately 2.5 years.
The fair values of options granted during the years ended February 28, 2013, February 29, 2012 and February 28, 2011 were estimated on the date of grant using
the Black-Scholes-Merton option-pricing model based on the following weighted average assumptions:
Year Ended
February 28,
2013
Expected dividend yield
Risk-free interest rate
Expected volatility (1)
Expected life (in years) (2)
Weighted average fair value of options granted during the period
$
—%
0.41%
38.13%
3.27
15.16
Year Ended
February 29,
2012
$
—%
0.61%
47.91%
3.27
15.41
Year Ended
February 28,
2011
$
—%
0.70%
46.84%
3.27
17.32
(1)
The expected volatility rates for options granted during the years ended February 28, 2013, February 29, 2012 and February 28, 2011 were estimated based on an
approximate equal weighting of the historical volatility of the Company’s common stock over a period of approximately 3.27 years and the implied volatility of
publicly traded options for the Company’s common stock.
(2)
The expected term for options granted during the years ended February 28, 2013, February 29, 2012 and February 28, 2011 was determined based on the
Company’s historical exercise data. The Company reassesses its estimate of expected term annually or when new information indicates a change is appropriate.
Service-based Share Awards
Service-based share awards include nonvested shares, nonvested share units and deferred share units granted under the 2004 Plan. Nonvested shares and share
units generally vest, subject to continued service to the Company, 25% on the first anniversary of the date of grant and (i) 6.25% on the first day of each subsequent
three-month period for nonvested shares and (ii) 25% each year over a four-year period beginning on the date of grant for nonvested share units. Nonvested shares and
nonvested share units are generally amortized to expense on a straight-line basis over four years. Deferred share units are awarded to directors and generally vest within
one year when issued in lieu of annual share awards or immediately when issued in lieu of cash.
93
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The total fair value of service-based share awards recognized in the Company’s Consolidated Financial Statements for the three years ended February 28, 2013
was as follows (in thousands):
Year Ended
February 28,
2013
Total fair value of service-based awards recognized
$
76,460
Year Ended
February 29,
2012
$
Year Ended
February 28,
2011
61,818
$
44,050
The following table summarizes the activity for the Company’s service-based share awards for the years ended February 28, 2013, February 29, 2012 and
February 28, 2011:
Nonvested
Shares and
Share Units
Service-based share awards at February 28, 2010
5,784,926
Granted
Vested
Forfeited
$
21.03
2,542,479
(1,800,281)
(733,786)
Service-based share awards at February 28, 2011
37.98
20.43
21.52
5,793,338
Granted
Vested
Forfeited
Assumed (1)
$
28.60
2,148,070
(2,162,667)
(431,900)
139,798
Service-based share awards at February 29, 2012
45.35
25.78
32.22
43.34
5,486,639
Granted
Vested
Forfeited
$
36.36
2,471,872
(2,184,588)
(580,490)
Service-based share awards at February 28, 2013
(1)
Weighted Average
Grant-date
Fair Value
54.62
31.33
41.56
5,193,433
$
46.59
Amount represents partially vested share awards assumed as part of a business combination.
The following summarizes the intrinsic value, as of February 28, 2013, of the Company’s service-based awards outstanding and expected to vest:
Number of
Shares and
Share Units
Intrinsic Value of
Service-based Awards
Outstanding
Expected to vest (assuming annual forfeiture rate of 10%)
Weighted Average
Remaining
Vesting Period
5,193,433
4,379,416
Intrinsic Value at
February 28, 2013
(in thousands)
1.6
1.6
$
$
263,878
222,518
The intrinsic value of service-based awards vesting during the three years ended February 28, 2013 was as follows (in thousands):
Year Ended
February 28,
2013
Total intrinsic value of service-based awards vesting
$
118,299
Year Ended
February 29,
2012
$
96,536
Year Ended
February 28,
2011
$
70,493
94
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of February 28, 2013, compensation cost related to service-based share awards not yet recognized in the Company’s Consolidated Financial Statements
totaled $207.8 million. The weighted average period over which these nonvested awards are expected to be recognized is approximately 2.9 years.
Performance-based Share Awards
Under the 2004 Plan, certain executive officers and senior management were awarded a target number of performance share units (“PSUs”). The PSU payouts
are either based on (i) the Company’s financial performance (“performance condition”) or (ii) the performance of the Company’s common stock (“market condition”).
Set forth below are general descriptions of the two types of performance-based awards granted to certain members of senior management:
PSUs with Performance Conditions
Depending on the Company’s financial performance relative to the financial performance of specified peer companies, PSU grantees may earn up to 200% of the
target number of PSUs (the “Maximum PSUs”) over a performance period with three separate performance segments corresponding to three fiscal years of the
Company. Up to 25% of the Maximum PSUs may be earned in respect of the first performance segment; up to 50% of the Maximum PSUs may be earned in respect of
the second performance segment, less the amount earned in the first performance segment; and up to 100% of the Maximum PSUs may be earned in respect of the third
performance segment, less the amount earned in the first and second performance segments.
PSUs with Market Conditions
Depending on the performance of the Company’s common stock over a performance period of approximately three years, PSU grantees may earn up to 200% of
the target number of PSUs. The number of PSUs earned is determined based on a comparison of the performance of the Company’s stock price relative to the
performance of the stock price of specified peer companies during the performance period. Each grantee will receive a number of shares of common stock equal to the
number of PSUs earned in a single payout following the end of the performance period.
95
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the activity for the Company’s PSUs for the years ended February 28, 2013, February 29, 2012 and February 28, 2011:
Maximum
Shares
Underlying
Performance
Share Units
Activity
Outstanding at February 28, 2010
1,273,668
Granted
Vested
Forfeited
626,672
(451,725)
(18,610)
Outstanding at February 28, 2011
1,430,005
Granted
Vested
Forfeited
633,336
(337,734)
—
Outstanding at February 29, 2012
1,725,607
Granted
Vested
Forfeited
613,800
(634,384)
(200,353)
Outstanding at February 28, 2013
(1)
Weighted Average
Grant Date
Fair Value
1,504,670
$
20.94
$
$
29.31
21.35
21.00
$
24.48
$
$
43.60
23.98
—
$
31.60
$
$
$
52.23
23.62
32.81
$
43.22
Vested and forfeited amounts represent the actual number of shares vesting and forfeited during the year. Outstanding represents the remaining maximum
potential shares available to vest as of the period ended.
The total fair value of performance-based share awards recognized in the Company’s Consolidated Financial Statements for the three years ended February 28,
2013 was as follows (in thousands):
Year Ended
February 28,
2013
Total fair value of performance-based awards recognized
$
19,447
Year Ended
February 29,
2012
$
14,345
Year Ended
February 28,
2011
$
10,509
The total intrinsic value of performance-based share awards vesting during the three years ended February 28, 2013 was as follows (in thousands):
Year Ended
February 28,
2013
Total intrinsic value of performance-based awards vesting
$
37,872
Year Ended
February 29,
2012
$
16,032
Year Ended
February 28,
2011
$
13,904
As of February 28, 2013, the number of shares subject to PSU awards expected to vest was 1.1 million shares. Compensation expense related to PSUs expected
to vest but not yet recognized in the Consolidated Financial Statements totaled $18.8 million as of February 28, 2013. The weighted average period over which these
awards are expected to be recognized is approximately 2.1 years.
96
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 14—Commitments and Contingencies
Operating leases
As of February 28, 2013, the Company leased office space and certain equipment under various non-cancelable operating leases. Future minimum lease
payments required under the operating leases at February 28, 2013 are as follows (in thousands):
Operating
Leases
Fiscal Year
2014
2015
2016
2017
2018
Thereafter
$
28,630
25,316
21,699
18,117
12,816
82,723
Total minimum lease payments
$
189,301
Rent expense under operating leases for the fiscal years ended February 28, 2013, February 29, 2012 and February 28, 2011 is provided in the following table (in
thousands):
Year Ended
February 28,
2013
Total operating lease expense
$
26,830
Year Ended
February 29,
2012
$
24,434
Year Ended
February 28,
2011
$
22,973
Facility Exit Costs
In December 2011, the Company entered into an agreement to sublease a building in downtown Raleigh, North Carolina in which the Company’s headquarters
are currently located. In connection with the transition to the Company’s new headquarters, the Company has endeavored to assign, sublease or otherwise dispose of its
existing leases related to the two facilities that previously constituted the Company’s headquarters in Raleigh, North Carolina.
In May 2012, the Company entered into a sublease agreement with an unrelated third-party to lease one of the two facilities that previously constituted its
headquarters. As a result, the Company has recognized a loss of $3.1 million for the year ended February 28, 2013 which represents the excess of the Company’s
remaining obligation on the space over the agreed sublease income.
The Company will continue to market the remaining facility for sublease. However, to the extent the Company is unable to sublease or otherwise dispose of such
space and recover the full amount of its remaining obligation, it will be required to recognize a loss at the date the Company ceases using this facility, currently
estimated to be May 2013. At that time the Company’s loss, net of deferred rent credits, with respect to the remaining facility is expected to be approximately
$4.8 million.
Amortization of related leasehold improvements has been accelerated to coincide with the Company’s exit from the two facilities. This change in estimated
useful life resulted in incremental amortization expense of $2.9 million for the year ended February 28, 2013 and is included in general and administration expense on
the Company’s Consolidated Statement of Operations.
97
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Product Indemnification
The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party from losses arising in connection with the
Company’s services or products, or from losses arising in connection with certain events defined within a particular contract, which may include litigation or claims
relating to intellectual property infringement, certain losses arising from damage to property or injury to persons or other matters. In each of these circumstances,
payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically
allow the Company to challenge the other party’s claims. Further, the Company’s obligations under these agreements may in certain cases be limited in terms of time
and/or amount, and in some instances, the Company may have recourse against third-parties for certain payments made by the Company.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s
obligations and the facts and circumstances involved in each particular agreement. The Company does not record a liability for claims related to indemnification unless
the Company concludes that the likelihood of a material claim is probable and estimable. Payments pursuant to these indemnification claims during the year ended
February 28, 2013 were in the aggregate immaterial.
NOTE 15—Legal Proceedings
The Company experiences routine litigation in the normal course of its business, including patent litigation. The Company presently believes that the outcome of
this routine litigation will not have a material adverse effect on its financial position, results of operations or cash flows.
NOTE 16—Employee Benefit Plans
The Company provides retirement plans whereby participants may elect to contribute a portion of their annual compensation to the plans, after complying with
certain limitations. The Company has the option to make contributions to the plans and contributed to the plans for the years ended February 28, 2013, February 29,
2012 and February 28, 2011 as follows (in thousands):
Year Ended
February 28,
2013
Total contributions to employee benefit plans
$
14,695
Year Ended
February 29,
2012
$
11,377
Year Ended
February 28,
2011
$
8,683
NOTE 17—Share Repurchase Program
On March 28, 2012, the Company announced that its Board of Directors authorized the repurchase of up to $300.0 million of Red Hat’s common stock from
time to time on the open market or in privately negotiated transactions. As of February 28, 2013, the amount available under the program for the repurchase of the
Company’s common stock was $179.3 million. See NOTE 23—Subsequent Events for a discussion of shares repurchased subsequent to February 28, 2013 and the
Company’s new share repurchase program.
98
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)
NOTE 18—Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the composition and fair value hierarchy of the Company’s financial assets and liabilities at February 28, 2013 (in thousands):
Quoted Prices In
Active Markets
for Identical
Assets (Level 1)
As of
February 28,
2013
Assets:
Money markets (1)
Available-for-sale securities (1):
Interest-bearing deposits
Commercial paper
U.S. agency securities
Corporate securities
Foreign government securities
Equity securities (1)
Foreign currency derivatives (2)
Liabilities:
Foreign currency derivatives (3)
Total
(1)
(2)
(3)
$
143,680
$
$
—
—
—
—
—
274
—
123,518
54,483
359,993
312,691
26,869
274
280
1,021,569
$
143,954
—
Significant
Unobservable
Inputs (Level 3)
$
—
(219)
$
877,615
—
—
—
—
—
—
—
—
123,518
54,483
359,993
312,691
26,869
—
280
—
(219)
$
143,680
Significant
Other
Observable
Inputs (Level 2)
$
—
Included in either cash and cash equivalents or investments in debt and equity securities in the Company’s Consolidated Balance Sheet at February 28, 2013 in
addition to $296.9 million of cash.
Included in Other current assets in the Company’s Consolidated Balance Sheet at February 28, 2013.
Included in Accounts payable and accrued expenses in the Company’s Consolidated Balance Sheet at February 28, 2013.
The following table summarizes the composition and fair value hierarchy of the Company’s financial assets and liabilities at February 29, 2012 (in thousands):
Quoted Prices In
Active Markets
for Identical
Assets (Level 1)
As of
February 29,
2012
Assets:
Money markets (1)
Available-for-sale securities (1):
U.S. Treasury securities
Interest-bearing deposits
Commercial paper
U.S. agency securities
Municipal bonds
Corporate securities
Foreign government securities
Equity securities (1)
Foreign currency derivatives (2)
Liabilities:
Foreign currency derivatives (3)
Total
$
322,207
$
250
445
46,478
354,830
13,154
323,463
1,356
1,275
147
$
1,063,132
—
$
323,732
—
Significant
Unobservable
Inputs (Level 3)
$
—
445
46,478
354,830
13,154
323,463
1,356
—
147
250
—
—
—
—
—
—
1,275
—
(473)
$
322,207
Significant
Other
Observable
Inputs (Level 2)
—
—
—
—
—
—
—
—
—
—
(473)
$
739,400
—
$
—
99
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)
(1)
(2)
(3)
Included in either cash and cash equivalents or investments in debt and equity securities in the Company’s Consolidated Balance Sheet at February 29, 2012, in
addition to $196.9 million of cash.
Included in Other current assets in the Company’s Consolidated Balance Sheet at February 29, 2012.
Included in Accounts payable and accrued expenses in the Company’s Consolidated Balance Sheet at February 29, 2012.
The following table represents the Company’s investments measured at fair value as of February 28, 2013 (in thousands):
Balance Sheet Classification
Gross Unrealized
Amortized
Cost
Gains
Cash
Equivalent
Marketable
Securities
Aggregate
Fair Value
Losses(1)
Long-term
Marketable
Securities
Short-term
Marketable
Securities
Money markets
Interest-bearing deposits
Commercial paper
U.S. agency securities
Corporate securities
Foreign government securities
Equity securities
$
143,680
123,518
54,483
360,060
311,561
26,902
6
$
—
—
—
136
1,262
2
268
$
—
—
—
(203)
(132)
(35)
—
$
143,680
123,518
54,483
359,993
312,691
26,869
274
$
143,680
—
39,498
7,041
—
—
—
$
—
123,518
14,985
54,485
172,250
26,869
274
$
—
—
—
298,467
140,441
—
—
Total
$
1,020,210
$
1,668
$
(370)
$
1,021,508
$
190,219
$
392,381
$
438,908
(1)
As of February 28, 2013, there were less than $0.1 million of accumulated unrealized losses related to investments that have been in a continuous unrealized loss
position for 12 months or longer.
The following table summarizes the stated maturities of the Company’s investment in available-for-sale securities at February 28, 2013 (in thousands):
Less than
1 Year
Total
Maturity of short and long term available-for-sale securities
$ 831,015
$
392,107
2-3 Years
$
183,928
More than
5 Years
4-5 Years
$
254,980
$
—
100
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)
The following table represents the Company’s investments measured at fair value as of February 29, 2012 (in thousands):
Balance Sheet Classification
Cash
Equivalent
Marketable
Securities
Gross Unrealized
Amortized
Cost
Money markets
U.S. Treasury securities
Interest-bearing deposits
Commercial paper
U.S. agency securities
Municipal bonds
Corporate securities
Foreign government
securities
Equity securities
$
Total
$
(1)
322,207
250
445
46,475
354,758
13,103
324,832
Gains
$
1,063,454
Losses(1)
—
—
—
$
3
172
51
490
1,355
29
1,963
—
—
—
—
(100)
—
(1,859)
$
322,207
250
445
46,478
354,830
13,154
323,463
—
—
1
1,246
$
Aggregate
Fair Value
$
$
322,207
—
—
29,496
—
—
619
$
$
—
—
1,356
1,275
(1,959)
Short-term
Marketable
Securities
1,063,458
$
352,322
—
250
445
16,982
38,943
13,154
191,893
Long-term
Marketable
Securities
$
—
—
1,356
1,275
$
264,298
—
—
—
—
315,887
—
130,951
$
446,838
As of February 29, 2012, there were $0.1 million of accumulated unrealized losses related to investments that have been in a continuous unrealized loss position
for 12 months or longer.
NOTE 19—Earnings Per Share
The following table reconciles the numerators and denominators of the earnings per share calculation for the years ended February 28, 2013, February 29, 2012
and February 28, 2011 (in thousands, except per share amounts):
Year Ended
February 28,
2013
Net income, basic and diluted
$
Weighted average common shares outstanding
Incremental shares attributable to assumed vesting or exercise of outstanding equity award shares
Diluted shares
Diluted net income per share
150,204
Year Ended
February 29,
2012
$
146,626
Year Ended
February 28,
2011
$
107,278
193,147
193,151
190,294
2,657
3,300
6,059
195,804
196,451
196,353
$
0.77
$
0.75
$
0.55
The following share awards are not included in the computation of diluted earnings per share because the aggregate value of proceeds considered received upon
either exercise or vesting was greater than the average market price of the Company’s common stock during the related periods and the effect of including such share
awards in the computation would be anti-dilutive (in thousands):
Number of shares considered anti-dilutive for calculating diluted EPS
Year Ended
February 28,
2013
Year Ended
February 29,
2012
Year Ended
February 28,
2011
77
311
649
101
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 20—Segment Reporting
The following summarizes revenue from unaffiliated customers, income (loss) from operations, total cash, cash equivalents and available-for-sale investment
securities and total assets by geographic segment at and for the years ended February 28, 2013, February 29, 2012 and February 28, 2011 (in thousands):
Americas
Revenue from unaffiliated customers
Income (loss) from operations
Cash, cash equivalents and available-for-sale investment securities
Total assets
EMEA
Asia Pacific
Corporate(1)
Year Ended February 28, 2013
$
$
855,214
181,136
$
$
284,922
72,440
$
$
188,681
46,160
$
$
$
$
825,906
2,068,879
$
$
370,174
534,093
$
$
122,293
210,688
$
$
Total
—
(98,698)
$ 1,328,817
$
201,038
—
—
$ 1,318,373
$ 2,813,660
Year Ended February 29, 2012
Revenue from unaffiliated customers
Income (loss) from operations
Cash, cash equivalents and available-for-sale investment securities
Total assets
$ 716,033
$ 165,278
$ 887,256
$ 1,898,897
$
$
$
$
257,603
74,581
299,703
424,542
Revenue from unaffiliated customers
Income (loss) from operations
Cash, cash equivalents and available-for-sale investment securities
Total assets
$ 583,795
$ 115,783
$ 938,072
$ 1,737,946
$
$
$
$
199,646
59,147
220,563
329,455
$
$
$
$
159,467
39,321
73,394
167,660
$
$
$
$
—
(79,267)
—
—
$ 1,133,103
$ 199,913
$ 1,260,353
$ 2,491,099
—
(60,597)
—
—
$ 909,277
$ 145,676
$ 1,192,391
$ 2,199,322
Year Ended February 28, 2011
(1)
$
$
$
$
125,836
31,343
33,756
131,921
$
$
$
$
Amounts represent share-based compensation expense for each of the three fiscal years ended February 28, 2013, February 29, 2012 and February 28, 2011,
which was not allocated to geographic segments.
The following table lists, for the years ended February 28, 2013, February 29, 2012 and February 28, 2011, revenue from unaffiliated customers in the United
States, the Company’s country of domicile, and revenue from unaffiliated customers from foreign countries (in thousands):
Year Ended
February 28,
2013
Year Ended
February 29,
2012
Year Ended
February 28,
2011
United States, the Company’s country of domicile
Foreign
$
753,898
574,919
$
622,608
510,495
$
512,288
396,989
Total revenue from unaffiliated customers
$
1,328,817
$
1,133,103
$
909,277
There were no individual foreign countries in which the Company earned 10% or more of its revenue from unaffiliated customers.
For the year ended February 28, 2013, approximately 11% of the Company’s revenue was generated by the U.S. government and its agencies. For the years
ended February 29, 2012 and February 28, 2011, there were no individual customers from which the Company generated 10% or greater revenue.
102
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Total tangible long-lived assets located in the United States, the Company’s country of domicile, and similar tangible long-lived assets held outside the United
States are summarized in the following table for the years ended February 28, 2013, February 29, 2012 and February 28, 2011 (in thousands):
As of
February 28,
2013
As of
February 29,
2012
As of
February 28,
2011
United States, the Company’s country of domicile
Foreign
$
105,029
36,557
$
63,069
28,996
$
53,722
21,836
Total tangible long-lived assets
$
141,586
$
92,065
$
75,558
NOTE 21—Other Long-Term Obligations
Other long-term obligations were comprised of the following (in thousands):
February 28,
2013
February 29,
2012
Accrued income taxes
Deferred rent credits
Net non-current deferred tax liability
Other
$
32,530
9,299
5,718
774
$
24,670
5,006
—
973
Other long-term obligations
$
48,321
$
30,649
NOTE 22—Unaudited Quarterly Results
Below are unaudited condensed quarterly results for the year ended February 28, 2013:
Year Ended February 28, 2013
Unaudited
4th
Quarter
Revenue:
Subscriptions
Training and services
Total subscription and training and services revenue
Gross profit
Income from operations
Interest income
Other income (expense), net
Net income, basic and diluted
Net income per common share (1):
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
(1)
3rd
2nd
Quarter
Quarter
(in thousands, except per share data)
1st
Quarter
$
302,784
45,101
$
294,186
49,420
$
278,800
43,795
$
272,571
42,160
$
$
$
$
$
$
347,885
294,280
50,231
1,861
(32)
42,973
$
$
$
$
$
$
343,606
290,488
49,919
1,936
(730)
34,765
$
$
$
$
$
$
322,595
274,737
49,980
2,154
(656)
35,005
$
$
$
$
$
$
314,731
268,712
50,908
2,294
1,887
37,461
$
$
0.19
0.19
$
$
0.22
0.22
193,207
195,133
$
$
0.18
0.18
193,374
195,666
$
$
0.18
0.18
193,064
195,795
192,947
195,937
Earnings per common share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per common share information
may not equal the reported annual earnings per common share.
103
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
RED HAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Below are unaudited condensed quarterly results for the year ended February 29, 2012:
Year Ended February 29, 2012
Unaudited
4th
Quarter
Revenue:
Subscriptions
Training and services
Total subscription and training and services revenue
Gross profit
Income from operations
Interest income
Other income (expense), net
Net income, basic and diluted
Net income per common share (1):
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
(1)
3rd
2nd
Quarter
Quarter
(in thousands, except per share data)
1st
Quarter
$
255,167
41,844
$
246,538
43,488
$
238,337
42,983
$
225,533
39,213
$
$
$
$
$
$
297,011
252,738
48,504
2,280
(155)
35,968
$
$
$
$
$
$
290,026
244,837
53,572
2,075
(227)
38,240
$
$
$
$
$
$
281,320
234,681
52,478
2,127
326
39,968
$
$
$
$
$
$
264,746
222,299
45,359
1,936
(266)
32,450
$
$
0.21
0.20
$
$
$
$
0.19
0.18
193,117
195,879
$
$
0.20
0.19
193,393
196,468
192,937
196,171
0.17
0.17
193,155
196,287
Earnings per common share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per common share information
may not equal the reported annual earnings per common share.
NOTE 23—Subsequent Events
Since February 28, 2013, the Company has repurchased an aggregate of 3,648,575 shares of its common stock for $179.3 million. These repurchases were made
pursuant to the Company’s previously announced repurchase program and completed the repurchases authorized under such program. See NOTE 17—Share
Repurchase Program for further discussion of the repurchase program.
On April 15, 2013, the Company announced that its Board of Directors has authorized the repurchase of up to $300.0 million of Red Hat’s common stock from
time to time on the open market or in privately negotiated transactions. The new program, which replaced the previous repurchase program, commenced on April 16,
2013, and will expire on the earlier of (i) March 31, 2015, or (ii) a determination by the Board, Chief Executive Officer or Chief Financial Officer to discontinue the
program.
104
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with our accountants on accounting and financial disclosure matters.
ITEM 9A.
CONTROLS AND PROCEDURES
Role of Controls and Procedures
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) or our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the
control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of the controls
must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error and mistake. Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the
likelihood of future events. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Also projections of any evaluation of effectiveness of controls and procedures to future periods are subject to the risk that the controls and procedures may become
inadequate because of changes in conditions, or that the degree of compliance with the controls and procedures may have deteriorated.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of the
end of the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level.
Report of Management on Internal Control Over Financial Reporting
Report of Management on Internal Control Over Financial Reporting is set forth above under PART II, Item 8, “Financial Statements and Supplementary
Data—Report of Management on Internal Control Over Financial Reporting.”
Changes in Internal Control Over Financial Reporting
No changes in our internal control over financial reporting occurred during the fiscal quarter ended February 28, 2013 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
105
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We intend to file with the SEC a definitive proxy statement with respect to our Annual Meeting of Stockholders to be held on August 8, 2013 (the “2013 Annual
Meeting”). The information under the sections entitled “Item No. 1—Election of Directors”, “Corporate Governance and Board of Directors Information”,
“Compensation and Other Information Concerning Executive Officers” and “Other Matters” from the definitive proxy statement for the 2013 Annual Meeting, which is
to be filed with the SEC not later than 120 days after the close of our fiscal year ended February 28, 2013 (the “2013 Proxy Statement”), is hereby incorporated by
reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information under the sections entitled “Compensation and Other Information Concerning Executive Officers” and “Corporate Governance and Board of
Directors Information” from the 2013 Proxy Statement is hereby incorporated by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information under the sections entitled “Beneficial Ownership of Our Common Stock” and “Compensation and Other Information Concerning Executive
Officers” from the 2013 Proxy Statement is hereby incorporated by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information under the section entitled “Corporate Governance and Board of Directors Information” from the 2013 Proxy Statement is hereby incorporated
by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information under the section entitled “Item No. 2—Ratification of Selection of Independent Registered Public Accounting Firm” from the 2013 Proxy
Statement is hereby incorporated by reference.
106
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Report under “Item 8—Financial Statements and Supplementary Data”:
1. Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at February 28, 2013 and February 29, 2012
Consolidated Statements of Operations for the years ended February 28, 2013, February 29, 2012, and February 28, 2011
Consolidated Statements of Comprehensive Income for the years ended February 28, 2013, February 29, 2012, and February 28, 2011
65
66
67
68
Consolidated Statements of Stockholders’ Equity for the years ended February 28, 2013, February 29, 2012, and February 28, 2011
Consolidated Statements of Cash Flows for the years ended February 28, 2013, February 29, 2012, and February 28, 2011
Notes to Consolidated Financial Statements
69
70
71
2. Financial Statement Schedules:
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
3. List of Exhibits:
Exhibit No.
3.1
Description of Exhibits
Third Amended and Restated Certificate of Incorporation, as amended, of the registrant
3.2+
Amended and Restated By-Laws of the registrant dated April 21, 2010 (incorporated by reference to Exhibit 3.1 to the registrant’s Current
Report on Form 8-K filed with the SEC on April 26, 2010 (File no. 001-33162))
4.1+
Specimen certificate representing the common stock of the registrant (incorporated by reference to Exhibit 4.1 to the registrant’s Registration
Statement on Form S-1/A filed with the SEC on July 19, 1999 (File no. 333-80051))
4.2+
See Exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and By-Laws of the registrant defining the rights of holders of
common stock of the registrant
4.3+
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 to Exhibit 10.7 to the registrant’s Registration Statement on Form S-1 filed with
the SEC on June 4, 1999 (File no. 333-80051))
10.1+
GNU General Public License (incorporated by reference to Exhibit 10.13 to the registrant’s Registration Statement on Form S-1 filed with the
SEC on June 4, 1999 (File no. 333-80051))
107
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
Exhibit No.
Description of Exhibits
10.2+*
Red Hat, Inc. 1999 Stock Option and Incentive Plan, as Amended and Restated August 2, 2001 (incorporated by reference to Exhibit 10.4 to
the registrant’s Quarterly Report on Form 10-Q filed with the SEC on October 10, 2008 (File no. 001-33162))
10.3+*
Form of Non-Qualified Stock Option Agreement for Directors pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and
Restated (incorporated by reference to Exhibit 10.5 to the registrant’s Annual Report on Form 10-K filed with the SEC on April 29, 2011
(File no. 001-33162))
10.4+*
Form of Restricted Stock Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated
by reference to Exhibit 10.6 to the registrant’s Annual Report on Form 10-K filed with the SEC on April 29, 2011 (File no. 001-33162))
10.5+*
Form of Non-Qualified Stock Option Agreement pursuant to the Red Hat, Inc. 1999 Stock Option and Incentive Plan, as amended
(incorporated by reference to Exhibit 10.7 to the registrant’s Annual Report on Form 10-K filed with the SEC on April 29, 2011 (File no.
001-33162))
10.6+*
Form of Incentive Stock Option Agreement pursuant to the Red Hat, Inc. 1999 Stock Option and Incentive Plan, as amended (incorporated by
reference to Exhibit 10.8 to the registrant’s Annual Report on Form 10-K filed with the SEC on April 29, 2011 (File no. 001-33162))
10.7-+
Limited Liability Company Agreement of Open Inventions Network LLC dated November 8, 2005 (incorporated by reference to Exhibit 10.9
to the registrant’s Annual Report on Form 10-K filed with the SEC on April 29, 2011 (File no. 001-33162))
10.8+*
Form of Restricted Stock Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated
by reference to Exhibit 10.10 to the registrant’s Annual Report on Form 10-K filed with the SEC on April 29, 2011 (File no. 001-33162))
10.9+*
10.10+*
Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 10.1 to the registrant’s
Quarterly Report on Form 10-Q filed with the SEC on October 10, 2008 (File no. 001-33162))
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.10 to the registrant’s Annual Report on Form 10-K filed with the
SEC on April 25, 2012 (File no. 001-33162))
10.11+*
Form of Restricted Stock Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated
by reference to Exhibit 10.11 to the registrant’s Annual Report on Form 10-K filed with the SEC on April 25, 2012 (File no. 001-33162))
10.12+*
Letter Agreement dated May 10, 2012, between Red Hat, Inc. and Arun Oberoi (incorporated by reference to Exhibit 10.3 to the registrant’s
Quarterly Report on Form 10-Q filed with the SEC on July 6, 2012 (File no. 001-33162))
10.13+*
Form of Amendment to Equity Awards pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (incorporated
by reference to Exhibit 10.13 to the registrant’s Annual Report on Form 10-K filed with the SEC on April 25, 2012 (File no. 001-33162))
10.14+*
Senior Management Change in Control Severance Policy (incorporated by reference to Exhibit 10.14 to the registrant’s Annual Report on
Form 10-K filed with the SEC on April 25, 2012 (File no. 001-33162))
108
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
Exhibit No.
Description of Exhibits
10.15*
Executive Variable Compensation Plan
10.16*
Form of Restricted Stock Unit Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated
(Non-Executive, U.S. Participants)
10.17*
Form of Restricted Stock Unit Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated
(Non-Executive, Non U.S. Participants)
10.18*
Executive Employment Agreement, dated December 19, 2007, between Red Hat, Inc. and James M. Whitehurst
10.19*
Form of Director Deferred Stock Unit Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated
10.20+*
Form of Director Deferred Stock Unit Agreement (Vested) pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and
Restated (incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on July 10, 2008
(File no. 001-33162))
10.21+*
Form of Director Deferred Stock Unit Agreement (With Vesting) pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended
and Restated (incorporated by reference to Exhibit 10.3 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on July 10,
2008 (File no. 001-33162))
10.22+*
Form of Director Restricted Stock Unit Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated
(incorporated by reference to Exhibit 10.4 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on July 10, 2008
(File no. 001-33162))
10.23+*
Senior Management Severance Plan (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report filed on Form 8-K with the
SEC on December 29, 2008 (File no. 001-33162))
10.24+*
Form of Executive Agreement by and between Red Hat, Inc. and each Plan Participant (incorporated by reference to Exhibit 10.2 to the
registrant’s Current Report filed on Form 8-K with the SEC on December 29, 2008 (File no. 001-33162))
10.25+*
Form of Amendment to Equity Awards with Independent Directors (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly
Report filed on Form 10-Q with the SEC on January 9, 2009 (File no. 001-33162))
10.26+*
Letter Agreement dated December 23, 2008 between Red Hat, Inc. and James M. Whitehurst amending the Executive Employment
Agreement between the parties dated December 19, 2007 (incorporated by reference to Exhibit 10.4 to the registrant’s Quarterly Report
filed on Form 10-Q with the SEC on January 9, 2009 (File no. 001-33162))
10.27+*
Employee Inventions Assignment and Restrictive Obligations Agreement dated January 1, 2008 between Red Hat, Inc. and James M.
Whitehurst (incorporated by reference to Exhibit 10.5 to the registrant’s Quarterly Report filed on Form 10-Q with the SEC on January 9,
2009 (File no. 001-33162))
10.28+*
10.29+*
Peer Group for Fiscal Year 2013 Performance Share Units (incorporated by reference to Exhibit 99.2 to the registrant’s Current Report on
Form 8-K filed with the SEC on May 30, 2012
(File no. 001-33162))
Clawback Policy of Red Hat, Inc. adopted May 13, 2009 (incorporated by reference to Exhibit 99.3 to the registrant’s Current Report filed on
Form 8-K with the SEC on May 19, 2009 (File no. 001-33162))
109
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
Table of Contents
Exhibit No.
Description of Exhibits
10.30+*
Form of Performance Share Unit Agreement (Fiscal Year 2010-SPP Form) adopted June 23, 2009 (incorporated by reference to Exhibit 99.1
to the registrant’s Current Report filed on Form 8-K with the SEC on June 29, 2009 (File no. 001-33162))
10.31+*
2006 Performance Compensation Plan as Amended and Restated Effective June 19, 2008 (incorporated by reference to Exhibit 10.1 to the
registrant’s Quarterly Report filed on Form 10-Q with the SEC on July 10, 2009 (File no. 001-33162))
10.32+*
Red Hat, Inc. Stock Ownership Policy for Directors and Senior Executives, amended and restated as of March 21, 2011 (incorporated by
reference to Exhibit 99.1 to the registrant’s Current Report filed on Form 8-K with the SEC on March 25, 2011 (File no. 001-33162))
10.33+*
Form of Performance Share Unit Agreement (Fiscal Year 2011 Operating Performance Form) adopted May 19, 2010 (incorporated by
reference to Exhibit 99.2 to the registrant’s Current Report filed on Form 8-K with the SEC on May 25, 2010 (File no. 001-33162))
10.34+*
Form of Performance Share Unit Agreement (Fiscal Year 2011 Share Price Performance Form) adopted May 19, 2010 (incorporated by
reference to Exhibit 99.3 to the registrant’s Current Report on Form 8-K filed with the SEC on May 25, 2010 (File no. 001-33162))
10.35+*
Form of Performance Restricted Stock Agreement adopted May 19, 2010 (incorporated by reference to Exhibit 99.4 to the registrant’s
Current Report on Form 8-K filed with the SEC on May 25, 2010 (File no. 001-33162))
10.36+*
Form of Restricted Stock Unit Agreement (Non-Executive Participants) pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as
Amended and Restated, adopted August 11, 2010 (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report filed on
Form 10-Q with the SEC on October 8, 2010 (File no. 001-33162))
10.37+*
Executive Base Salaries and Target Award Amounts under Red Hat, Inc.’s Executive Variable Compensation Plan for the Fiscal Year
Ending February 29, 2012 (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K filed with the SEC on
May 27, 2011 (File no. 001-33162)).
10.38+*
Executive Base Salaries and Target Award Amounts under Red Hat, Inc.’s Executive Variable Compensation Plan for the Fiscal Year
Ending February 28, 2013 (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K filed with the SEC on
May 30, 2012 (File no. 001-33162))
10.39+*
Form of Performance Share Unit Agreement (Operating Performance Form) adopted May 25, 2011 (incorporated by reference to Exhibit
99.2 to the registrant’s Current Report filed on Form 8-K with the SEC on May 27, 2011 (File no. 001-33162)).
10.40+*
Form of Performance Share Unit Agreement (Stock Price Performance Form) adopted May 25, 2011 (incorporated by reference to Exhibit
99.3 to the registrant’s Current Report on Form 8-K filed with the SEC on May 27, 2011 (File no. 001-33162)).
10.41+*
Peer Group for Fiscal Year 2012 Performance Share Units (incorporated by reference to Exhibit 99.4 to the registrant’s Current Report on
Form 8-K filed with the SEC on May 27, 2011 (File no. 001-33162)).
10.42+*
Red Hat, Inc. 2011 Performance Compensation Plan (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form
8-K filed with the SEC on August 16, 2011 (File no. 001-33162))
110
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
Exhibit No.
Description of Exhibits
10.43+*
Letter Agreement, dated as of December 27, 2011, by and between Alex Pinchev and Red Hat, Inc. (incorporated by reference to Exhibit
10.43 to the registrant’s Annual Report on Form 10-K filed with the SEC on April 25, 2012 (File no. 001-33162))
10.44+
Sublease Agreement, dated as of December 27, 2011, by and between Carolina Power & Light Company, a North Carolina corporation, d/b/a
Progress Energy Carolinas, Inc. and Red Hat, Inc. (incorporated by reference to Exhibit 10.44 to the registrant’s Annual Report on
Form 10-K filed with the SEC on April 25, 2012 (File no. 001-33162))
10.45+*
Red Hat, Inc. 2010 Non-Employee Director Compensation Plan, as amended and restated effective January 1, 2012 (incorporated by reference
to Exhibit 10.45 to the registrant’s Annual Report on Form 10-K filed with the SEC on April 25, 2012 (File no. 001-33162))
10.46+*
Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated Effective August 9, 2012 (incorporated by reference to Exhibit 10.1
to the registrant’s Quarterly Report on Form 10-Q filed with the SEC on October 5, 2012 (File no. 001-33162))
10.47
21.1
Subsidiaries of Red Hat, Inc.
23.1
Consent of PricewaterhouseCoopers LLP
31.1
Certification of the registrant’s Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the registrant’s Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of the registrant’s principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350
101.INS
*
+
-
Agreement and Plan of Merger, dated December 19, 2012, by and among Red Hat, Inc., a Delaware corporation, ManageIQ, Inc., a Delaware
corporation, Salta Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Red Hat, Inc., and Shareholder
Representative Services LLC, the representative of the holders of ManageIQ equity interests
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Indicates a management contract or compensatory plan, contract or arrangement.
Previously filed.
Indicates confidential treatment as to certain portions of this exhibit have been requested or granted. Omitted portions have been filed separately with the SEC.
111
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
RED HAT, INC.
By:
/S/ JAMES M. WHITEHURST
James M. Whitehurst
President and Chief Executive Officer
Date: April 25, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature
/S/ JAMES M. WHITEHURST
James M. Whitehurst
/S/ CHARLES E. PETERS, JR.
Charles E. Peters, Jr.
/S/ MARK E. COOK
Mark E. Cook
/S/ SOHAIB ABBASI
Title
Date
President, Chief Executive Officer and Director (principal
executive officer)
April 25, 2013
Executive Vice President and Chief Financial Officer
(principal financial officer)
April 25, 2013
Vice President Finance and Controller (principal accounting
officer)
April 25, 2013
Director
April 25, 2013
Director
April 25, 2013
Director
April 25, 2013
Director
April 25, 2013
Director
April 25, 2013
Director
April 25, 2013
Director
April 25, 2013
Chairman of the Board of Directors
April 25, 2013
Sohaib Abbasi
/S/ W. STEVE ALBRECHT
W. Steve Albrecht
/S/ JEFFREY J. CLARKE
Jeffrey J. Clarke
/S/ MARYE ANNE FOX
Marye Anne Fox
/S/ NARENDRA K. GUPTA
Narendra K. Gupta
/S/ WILLIAM S. KAISER
William S. Kaiser
/S/ DONALD H. LIVINGSTONE
Donald H. Livingstone
/S/ HENRY HUGH SHELTON
Henry Hugh Shelton
Source: RED HAT INC, 10-K, April 25, 2013
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Table of Contents
Exhibit Index
Exhibit No.
3.1
Exhibit
Third Amended and Restated Certificate of Incorporation, as amended, of the registrant
10.15
Executive Variable Compensation Plan
10.16
Form of Restricted Stock Unit Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (Non-Executive,
U.S. Participants)
10.17
Form of Restricted Stock Unit Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated (Non-Executive,
Non U.S. Participants)
10.18
Executive Employment Agreement, dated December 19, 2007, between Red Hat, Inc. and James M. Whitehurst
10.19
Form of Director Deferred Stock Unit Agreement pursuant to the Red Hat, Inc. 2004 Long-Term Incentive Plan, as Amended and Restated
10.47
Agreement and Plan of Merger, dated December 19, 2012, by and among Red Hat, Inc., a Delaware corporation, ManageIQ, Inc., a Delaware
corporation, Salta Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Red Hat, Inc., and Shareholder Representative
Services LLC, the representative of the holders of ManageIQ equity interests
21.1
Subsidiaries of Red Hat, Inc.
23.1
Consent of PricewaterhouseCoopers LLP
31.1
Certification of the registrant’s Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the registrant’s Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15(d)-14(a) under the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of the registrant’s principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
113
Source: RED HAT INC, 10-K, April 25, 2013
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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.
Source: RED HAT INC, 10-K, April 25, 2013
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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.
-2-
Source: RED HAT INC, 10-K, April 25, 2013
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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 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.
-3-
Source: RED HAT INC, 10-K, April 25, 2013
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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
-4-
Source: RED HAT INC, 10-K, April 25, 2013
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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,
-5-
Source: RED HAT INC, 10-K, April 25, 2013
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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 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.
-6-
Source: RED HAT INC, 10-K, April 25, 2013
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(b) FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion of the Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction
multiplied by the then effective Series A Conversion Price, Series B Conversion Price or Series C Conversion Price.
(c) MECHANICS OF CONVERSION.
(i) In order for a holder of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock to convert its shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of
Preferred Stock, at the office of the transfer agent for the Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer
agent), together with written notice (a “Conversion Notice”) that such holder elects to convert all or any number of the shares of the Series A Preferred Stock, Series
B Preferred Stock or Series C Preferred Stock represented by such certificate or certificates. The Conversion Notice shall state such holder’s name or the names of
the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly
executed by the registered holder or his or its attorney duly authorized in writing. The date of receipt of such certificates and Conversion Notice by the transfer agent
(or by the Corporation if the Corporation serves as its own transfer agent) shall be the conversion date (“Conversion Date”). The Corporation shall, as soon as
practicable after the Conversion Date, issue and deliver at such office to such holder of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock, or to his or its nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in
lieu of any fraction of a share.
(ii) The Corporation shall at all times when the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be outstanding, reserve
and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all
outstanding Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. Before taking any action which would cause an adjustment reducing the
Series A Conversion Price, Series B Conversion Price or Series C Conversion Price below the then par value of the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, the Corporation will take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such
adjusted Series A Conversion Price, Series B Conversion Price or Series C Conversion Price.
-7-
Source: RED HAT INC, 10-K, April 25, 2013
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(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.
-8-
Source: RED HAT INC, 10-K, April 25, 2013
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(D) “SERIES C ORIGINAL ISSUE DATE” shall mean the date on which the first share of Series C Preferred Stock was issued.
(E) “CONVERTIBLE SECURITIES” shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or
exchangeable for Common Stock.
(F) “ADDITIONAL SHARES OF COMMON STOCK” shall mean all shares of Common Stock issued (or, pursuant to Subsection 4(d)(iii) below, deemed
to be issued) by the Corporation after the Series C Original Issue Date, other than:
(I) shares of Common Stock issued or issuable upon conversion of any shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock;
(II) shares of Common Stock issued or issuable upon conversion of any Convertible Securities (other than shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock) or exercise of any warrants outstanding on the Series C Original Issue Date;
(III) shares of Common Stock issued or issuable as a dividend or distribution on Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock;
(IV) shares of Common Stock issued or issuable by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that is
covered by Subsection 4(e) or 4(f) below;
(V) up to 3,717,400 shares of Common Stock (including issuances prior to the Series C Original Issue Date) (subject to appropriate adjustment in the event
of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), plus such additional number of shares of Common Stock as
may be approved by the Board of Directors of the Corporation and by a majority of the members of the Board of Directors who are not employees of the
Company or any of its subsidiaries, issued or issuable to employees or directors of, or consultants to, the Corporation pursuant to employer stock option plans;
(VI) securities issued pursuant to any equipment leasing arrangement or debt financing from a bank or similar financial institution approved by the Board of
Directors of the Corporation and by a majority of the members of the Board of Directors who are not employees of the Corporation or any of its subsidiaries; or
(VII) securities issued in connection with strategic transactions approved by the Board of Directors of the Corporation and by a majority of the members of
the Board of Directors who are not employees of the Corporation or any of its subsidiaries involving the Company and other entities, including (a) joint ventures,
manufacturing, marketing or distribution arrangements or (b) technology transfer or development arrangements.
-9-
Source: RED HAT INC, 10-K, April 25, 2013
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(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.
-10-
Source: RED HAT INC, 10-K, April 25, 2013
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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;
-11-
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
(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
-12-
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
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
-13-
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
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 Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such
Convertible Securities, by
-14-
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
(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
-15-
Source: RED HAT INC, 10-K, April 25, 2013
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(2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution;
provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the
Series A Conversion Price, Series B Conversion Price and Series C Conversion Price each shall be recomputed accordingly as of the close of business on such record
date and thereafter the Series A Conversion Price, Series B Conversion Price and Series C Conversion Price, as the case may be, shall be adjusted pursuant to this
paragraph as of the time of actual payment of such dividends or distributions; and provided further, however, that no such adjustment shall be made if the holders of
Series A Preferred Stock, the holders of the Series B Preferred Stock and the holders of the Series C Preferred Stock simultaneously receive (i) a dividend or other
distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock had been converted into Common Stock on the date of such event or (ii) a dividend or other
distribution of shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock which are convertible, as of the date of such event, into such
number of shares of Common Stock as is equal to the number of additional shares of Common Stock being issued with respect to each share of Common Stock in such
dividend or distribution.
(g) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the event the Corporation at any time or from time to time after the Series C
Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution
payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of the Series A
Preferred Stock, the holders of the Series B Preferred Stock and the holders of Series C Preferred Stock shall receive upon conversion thereof in addition to the
number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had the Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock, as the case may be, been converted into Common Stock on the date of such event and had they thereafter, during
the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, giving
application to all adjustments called for during such period under this paragraph with respect to the rights of the holders of the Series A Preferred Stock, the rights of
the holders of the Series B Preferred Stock and the rights of the holders of the Series C Preferred Stock, as the case may be; and provided further, however, that no
such adjustment shall be made if the holders of Series A Preferred Stock, the holders of the Series B Preferred Stock and the holders of the Series C Preferred Stock, as
the case may be, simultaneously receive a dividend or other distribution of such securities in an amount equal to the amount of such securities as they would have
received if all outstanding shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, as the case may be, had been converted into
Common Stock on the date of such event.
-16-
Source: RED HAT INC, 10-K, April 25, 2013
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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 Stock, the holders of the
Series B Preferred Stock and the holders of the Series C Preferred Stock against impairment.
-17-
Source: RED HAT INC, 10-K, April 25, 2013
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(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
-18-
Source: RED HAT INC, 10-K, April 25, 2013
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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
-19-
Source: RED HAT INC, 10-K, April 25, 2013
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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
-20-
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
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.
Maximum
Portion of Shares of Series of
Preferred Stock To Be Redeemed
Mandatory
Redemption Date
February 25, 2004
February 25, 2005
February 25, 2006
33%
50%
All shares of Series
The Corporation shall provide notice of its receipt of Redemption Request, specifying the time, manner and place of redemption and the Mandatory Redemption Price
(a “Redemption Notice”), by first class or registered mail, postage prepaid, to each holder of record of Series A Preferred Stock, to each holder of Series B Preferred
Stock and to each holder of Series C Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the
Corporation, if it serves as its own transfer agent), not less than 45 days prior to the applicable Mandatory Redemption Date. Each holder of Series A Preferred Stock,
each holder of Series B Preferred Stock and each holder of Series C Preferred Stock (other than a holder who has made the Redemption Request) may elect to become a
Requesting Holder on such Mandatory Redemption Date by so indicating in a written notice mailed to the Company, by first class or registered mail, postage prepaid, at
least 30 days prior to the applicable Mandatory Redemption Date. Except as provided in Section 6(b) below, each Requesting Holder shall surrender to the Corporation
on the applicable Mandatory Redemption Date the certificate(s) representing the shares to be redeemed on such date, in the manner and at the place designated in the
Redemption Notice. Thereupon, the Mandatory Redemption Price shall be paid to the order of each such Requesting Holder and each certificate surrendered for
redemption shall be cancelled.
(b) If the funds of the Corporation legally available for redemption of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock on any
Mandatory Redemption Date are insufficient to redeem the number of shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
required under this Section 6 to be redeemed on such date from Requesting Holders, those funds which are legally available will be used to redeem the maximum
possible number of each such shares ratably on the basis of the number of each such series which would be redeemed on such date if the funds of the Corporation
legally available therefor had been sufficient to redeem all shares required to be redeemed on such date. At any time thereafter when additional funds of the
Corporation
-21-
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
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;
-22-
Source: RED HAT INC, 10-K, April 25, 2013
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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 class, shall be required to adopt, amend or repeal any provision of the by-laws of the
Corporation.
-23-
Source: RED HAT INC, 10-K, April 25, 2013
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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
-24-
Source: RED HAT INC, 10-K, April 25, 2013
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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.
-25-
Source: RED HAT INC, 10-K, April 25, 2013
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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.
-26-
Source: RED HAT INC, 10-K, April 25, 2013
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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]
-27-
Source: RED HAT INC, 10-K, April 25, 2013
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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:
Title:
Robert F. Young
Chief Executive Officer
[SEAL]
Attest:
By:
/s/ David Shumannfang
David Shumannfang
Secretary
-28-
Source: RED HAT INC, 10-K, April 25, 2013
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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 resolution 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 Delaware General Corporation Law.
THIRD: That said amendment was duly adopted in accordance with the provisions of Sections 242 and 228 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the undersigned has executed, signed and acknowledged this Certificate of Amendment this 8th day of August, 2001.
RED HAT, INC.
/s/ Mark H. Webbink
Mark H. Webbink
Senior Vice President and
General Counsel
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 8/13/2001
010394706-2945436
Source: RED HAT INC, 10-K, April 25, 2013
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Exhibit A
FOURTH. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 305,000,000 shares, consisting of 300,000,000
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 and 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
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.
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, preference, 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
Source: RED HAT INC, 10-K, April 25, 2013
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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.”
Source: RED HAT INC, 10-K, April 25, 2013
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Exhibit 10.15
Executive Variable Compensation Plan
Red Hat, Inc.’s Executive Variable Compensation Plan (the “Plan”) is set forth below.
I.
PURPOSE
The Plan has been designed to motivate and reward key management employees whose efforts impact the performance of Red Hat, Inc. (the “Company”) and its
subsidiaries through the achievement of pre-established financial and individual objectives.
Performance under the Plan is measured during the performance period (the Company’s fiscal year) and payments under the Plan are made following the end of the
performance period.
II.
ELIGIBILITY
Officers and key management employees may be eligible to participate in the Plan, upon the recommendation by the Chief Executive Officer of the Company and
approval by the Compensation Committee (“Committee”). An employee who is eligible to participate in any other cash incentive plan of the Company, other than the
Company’s 2006 Performance Compensation Plan (the “2006 PCP”), is not eligible to participate in this Plan. This Plan is a component plan of the 2006 PCP with
respect to employees who participate in the 2006 PCP.
III.
AWARD CRITERIA
The Committee must approve the Company performance objectives and individual objectives that are used to determine awards paid under this Plan as well as the
percentage of each to be used in determining awards. Individual objectives must be determined in writing and discussed with each of the Plan participants during the
first half of the performance period and upon conclusion of the performance period.
IV.
TARGET AWARDS
A Target Award payment is established for each eligible participant. Target Awards remain fixed even if the participant’s base pay in effect at the beginning or the
conclusion of the performance period changes. Pro rata amounts are provided for participants hired or terminated during the fiscal year. Generally, the participants
receive the Target Award when performance under the Plan meets the pre-established performance objectives.
Payouts under the Plan will be in accordance with the Plan and the mechanism established by the Committee for determining payouts. The weight applied to each
component of an award will be determined by the Committee and may vary for each participant.
The Target Award represents the expected level of performance which results in a payment equal to 100% of the Target Award. The maximum award under the Plan is
limited to 200% of the Target Award, and the threshold award under the Plan is limited to 25% of the Target Award. In no event may the amount of an award under
the Plan to an employee exceed the limit on grants prescribed by the Committee and the 2006 PCP.
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
V.
FINANCIAL OBJECTIVES
Attainment of the financial objectives of the Plan is measured based on actual results versus Plan targets. Payouts are expressed as a percentage of the Target Award
for each participant versus actual levels of financial performance. If actual results are between stated percentages, interpolations of payout percentages are to be
applied.
VI.
INDIVIDUAL OBJECTIVES
The Committee shall approve the use of individual objectives as part of the participant’s performance criteria under the Plan. The use of individual objectives is
subject to the following requirements:
•
The CEO may present recommendations regarding the determination of individual objectives and the level of achievement following the
performance period to the Committee, subject to the approval of the Committee.
•
Individual objectives should be specifically identified and communicated at the same time financial objectives are determined, unless the
Committee determines otherwise.
VII. ALTERNATIVE CALCULATIONS
There may be circumstances under which the financial performance of the Company does not generate an award under the Plan. The nature and scope of the
Company’s operations are such that at times unanticipated economic and market conditions may render pre-established financial objectives unattainable in any given
performance period. If, in the opinion of the Committee, such circumstances should arise, then bonus payments not to exceed 50% of the Target Award may be paid.
VIII. MODIFICATIONS
If, during a performance period, there has occurred or should occur, in the opinion of the Committee, a significant beneficial or adverse change in economic
conditions, the indicators of growth or recession in the Company’s business segments, the nature of the operations of the Company, or applicable laws, regulations or
accounting practices, or other matters which were not anticipated by the Committee when it approved objectives for the performance period and which, in the
Committee’s judgment, had, have, or are expected to have a substantial positive or negative effect on the performance of the Company as a whole, the Committee may
modify or revise the financial performance objectives for the performance period in such a manner as it may deem appropriate in its sole judgment. By way of
illustration, and not limitation, such significant changes might result from sales of assets, or mergers, acquisitions, divestitures, or spin-offs.
IX.
PAYMENT
Any awards generated under the Plan must be approved by the Committee. The Committee, in its discretion, subject to the last paragraph of this Article IX, may make
payment of a bonus under the Plan in an amount that is higher or lower than the amount calculated on the basis of the financial and individual objectives of the award;
provided, however, that the maximum bonus payable to a participant under the Plan shall not exceed 200% of such participant’s Target Award. Any awards generated
during the performance period will be paid no later than the fifteenth day of the third month following the end of the fiscal year of the Company in which the
applicable performance period ends, subject to prior notification and approval by the Committee.
Participants hired during the fiscal year will receive a prorated bonus based upon the actual date of hire. Employees terminating prior to the payout date are not eligible
for payment of any award under this Plan unless termination is due to retirement or economic reduction in force. In
Source: RED HAT INC, 10-K, April 25, 2013
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such cases, any bonus payments will be prorated to the date of termination and determined on the basis of bonuses actually paid to similarly situated employees.
This Plan is a component plan of the 2006 PCP with respect to employees who participate in the 2006 PCP. In no event may the amount of an award under the Plan to
an employee participating in the 2006 PCP exceed the limit on grants prescribed by the Committee and the 2006 PCP.
Source: RED HAT INC, 10-K, April 25, 2013
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Exhibit 10.16
RED HAT, INC.
Red Hat, Inc. 2004 Long-Term Incentive Plan, as amended
Restricted Stock Unit Agreement
(Non-Executive US Participants)
Cover Sheet
This Restricted Stock Unit Agreement (the “Agreement”) evidences the grant by Red Hat, Inc., a Delaware corporation (the “Company”), on the date of grant set forth
below (the “Grant Date”) to the person named below (the “Participant”) of a Restricted Stock Unit Award (the “Award”) covering the number of restricted stock units
(each, an “RSU”) listed below, each representing the right to receive the value of one share of the Company’s common stock, $.0001 par value per share, with a vesting
start date (the “Vesting Start Date”) listed below, such Award to be subject to the terms and conditions specified in the Red Hat, Inc. 2004 Long-Term Incentive Plan, as
amended (the “Plan”), and in the attached Exhibit A and Appendix A , thereto.
Participant Name:
Grant Date:
Vesting Start Date:
Number of RSUs:
PARTICIPANT
RED HAT, INC.
1801 Varsity Drive
Raleigh, North Carolina 27606
Name:
Name:
Title:
By accepting this Award, the Participant hereby (i) acknowledges that a copy of the Plan and a copy of the Plan prospectus have been delivered to the Participant
and additional copies thereof are available upon request from the Company’s Equity Compensation Department and can also be accessed electronically,
(ii) acknowledges receipt of a copy of this Cover Sheet and Exhibit A and Appendix A thereto (collectively, the “Agreement”) and accepts the Award subject to
all the terms and conditions of the Plan and the Agreement, (iii) represents that the Participant has read and understands the terms and conditions of the Plan, Plan
prospectus and Agreement, and (iv) acknowledges that there may be tax consequences due to the Award and that the Participant should consult a tax advisor to
determine his or her actual tax consequences. The Participant must accept this Award electronically pursuant to the online acceptance procedure established
by the Company within thirty (30) days; otherwise, the Company may, in its sole discretion, rescind the Award in its entirety.
Source: RED HAT INC, 10-K, April 25, 2013
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EXHIBIT A
RED HAT, INC.
Red Hat, Inc. 2004 Long-Term Incentive Plan, as amended
Restricted Stock Unit Agreement
(Non-Executive Participants)
Terms and Conditions
1. Grant of RSUs.
The RSUs, each representing the right to receive the value of one share of common stock, $0.0001 par value, of the Company (“Common Stock”), as provided
herein, is granted pursuant to and is subject to and governed by the Plan, and, unless otherwise defined in this Agreement, capitalized terms used herein shall have the
same meaning as in the Plan. The shares of Common Stock that are issuable upon the vesting of the RSUs are referred to in this Agreement as “Shares.” The RSUs
shall be granted to the Participant without payment of consideration (other than continuing services (as described in Section 2 below)).
2. Vesting.
(a) All of the RSUs shall be unvested on the Grant Date. For purposes of this Agreement, RSUs that have not vested as of any particular time in
accordance with this Section 2 are referred to as “Unvested RSUs.”
(b) For so long as the Participant maintains continuous service to the Company or one of its Affiliates as an Employee or Director (a “Business
Relationship”) throughout the period beginning on the Grant Date and ending on the vesting date set forth below, the RSUs shall become vested according to the
schedule set forth below, subject to Sections 3 and 10 hereof:
Vesting Date
Number of RSUs That First
Vest on Such Date
[As determined by the Compensation Committee]
3. Cessation of Business Relationship. If the Participant’s Business Relationship ceases for any reason, including death, all Unvested RSUs on the date of such
cessation will be forfeited. The Participant’s Business Relationship shall be deemed to have ceased on the last day of active service to the Company or an Affiliate and
shall not be extended by any notice of termination period. For purposes hereof, a Business Relationship shall not be considered as having ceased during any bona fide
leave of
2
Source: RED HAT INC, 10-K, April 25, 2013
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absence if such leave of absence has been approved in writing by the Company; in the event of such leave of absence, vesting of the RSUs shall be suspended (and the
vesting dates shall be extended by a period equal to the period of the leave of absence) except for any leave under which the Participant has a legal right to return to
employment or such other leave as determined by the Company or unless contrary to applicable local law. The vesting of the RSUs shall not be affected by any change
in the type of Business Relationship the Participant has with or among the Company and its Affiliates so long as the Participant continuously maintains a Business
Relationship.
4. Payment.
(a) Within 60 days following the vesting date of any RSUs pursuant to Sections 2 or 10 and upon the satisfaction of all other applicable conditions as to
the RSUs, but in no event later than the 15th day of the third month of the year following the later of the calendar year or the Company’s taxable year, in each case, in
which the RSUs vest, the Company shall distribute to the Participant the Shares represented by RSUs that vested on such vesting date, reduced by the number of Shares
(if any) that are withheld from the Award for the payment of Tax-Related Items (as defined in Section 11 hereof); provided, however, that the Shares may be distributed
following the date contemplated in this Section 4(a) to the extent permitted under Section 409A of the Code without the payment becoming subject to, and being treated
as “nonqualified deferred compensation” within the meaning of, Section 409A of the Code (such as where the Company reasonably anticipates that the payment will
violate federal securities laws or other applicable laws). Payment of any vested RSUs shall be made in whole Shares only and any fractional Shares shall be rounded up.
(b) The Company shall not be obligated to issue Shares to the Participant upon the vesting of any RSUs (or otherwise) unless the issuance and delivery of
such Shares shall comply with all relevant provisions of law and other legal requirements including, without limitation, any applicable federal, state or foreign securities
laws, any applicable Tax-Related Items and the requirements of any stock exchange upon which Shares may be listed.
(c) Anything in the foregoing to the contrary notwithstanding, RSUs granted under this Agreement may be suspended, delayed or otherwise deferred for
any of the reasons contemplated in Sections 3 and 4 only to the extent such suspension, delay or deferral is permitted under U.S. Treas. Reg. §§1.409A-2(b)(7),
1.409A-1(b)(4)(ii) or successor provisions, or as otherwise permitted under Section 409A of the Code.
5. Option of Company to Deliver Cash.
Notwithstanding any of the other provisions of this Agreement, at the time any RSU vests, the Company may elect, in the sole discretion of the Committee, to
deliver to the Participant in lieu of the Shares represented by RSUs that vested on such vesting date an equivalent amount of cash (determined by reference to the
closing price of the Shares on the principal exchange on which the Shares trade on the applicable vesting date or if such date is not a trading date, on the next
preceding trading date). Such payments shall be made no later than the deadline set forth in Section 4(a) hereof. If the Company elects to deliver cash to the
Participant, the Company is authorized to retain such amount as is sufficient to satisfy the withholding of Tax-Related Items (as defined in Section 11 hereof).
3
Source: RED HAT INC, 10-K, April 25, 2013
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6. Restrictions on Transfer.
(a) The Participant shall not sell, assign, transfer, pledge, hypothecate or otherwise encumber or dispose of any RSUs, either voluntarily or by operation
of law. Any attempt to dispose of any RSUs in contravention of the above restriction shall be null and void and without effect.
(b) The Company shall not be required (i) to transfer on its books any of the RSUs which have been transferred in violation of any of the provisions set
forth herein or (ii) to treat as the owner of such RSUs any transferee to whom such RSUs have been transferred in violation of any of the provisions contained herein.
7. No Obligation to Continue Business Relationship. Neither the Plan, this Agreement, nor the grant of the RSUs imposes any obligation on the Company or its
Affiliates to have or continue a Business Relationship with the Participant.
8. No Rights as Stockholder. The RSUs represent an unfunded, unsecured promise by the Company to deliver Shares or the value thereof upon vesting of the
RSUs. The Participant shall have no rights as a shareholder with respect to the Shares underlying the RSUs. The Participant shall have no right to vote or receive
dividends with respect to any Shares underlying the RSUs or receive dividends unless and until such Shares are distributed to the Participant or converted into
Restricted Stock as provided in Appendix A.
9. Adjustments for Capital Changes. The Plan contains provisions covering the treatment of RSUs in a number of contingencies such as stock splits and mergers.
Provisions in the Plan for such adjustments are hereby made applicable hereunder and are incorporated herein by reference.
10. Change in Control. Provisions regarding a Change in Control are set forth in Appendix A.
11. Withholding Taxes.
(a) Regardless of any action the Company and/or the Affiliate employing the Participant (the “Employer”) take with respect to any or all income tax
(including U.S. federal, state and local tax and/or non-U.S. tax), social insurance, payroll tax or other tax-related items (“Tax-Related Items”), the Participant hereby
acknowledges that the ultimate liability for all Tax-Related Items legally due by the Participant with respect to the Participant’s Award of RSUs, vesting of the RSUs, or
the issuance of Shares (or payment of cash) in settlement of vested RSUs is and remains the Participant’s responsibility and that the Company and/or the Employer
(i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the RSUs, including the award of the
RSUs, the vesting of the RSUs, the issuance of Shares (or payment of cash) in settlement of the RSUs, the subsequent sale of Shares acquired at vesting and the receipt
of any dividends and or Dividend Equivalents; and (ii) do not commit to structure the terms of the Award or any aspect of the RSUs to reduce or eliminate the
Participant’s liability for Tax-Related Items.
(b) Prior to the relevant tax withholding event, as applicable, the Participant shall pay or make adequate arrangements satisfactory to the Company and/or
the Employer to satisfy all
4
Source: RED HAT INC, 10-K, April 25, 2013
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withholding obligations of the Company and/or the Employer with respect to Tax-Related Items. In this regard, the Participant hereby authorizes the Company and/or
the Employer, in their sole discretion and without any notice to or authorization by the Participant, to withhold from the Shares being distributed under this Award upon
vesting that number of whole Shares the fair market value of which (determined by reference to the closing price of the Common Stock on the principal exchange on
which the Common Stock trades on the date the withholding obligation arises, or if such date is not a trading date, on the next preceding trading date) is equal to the
aggregate withholding obligation as determined by the Company and/or Employer with respect to such Award, provided that the Company only withholds the number
of Shares necessary to satisfy the minimum withholding amount. If the Company satisfies the withholding obligation for Tax-Related Items by withholding a number of
Shares being distributed under the Award as described above, the Participant hereby acknowledges that the Participant is deemed to have been issued the full number of
Shares subject to the Award of RSUs, notwithstanding that a number of the Shares is held back solely for the purpose of paying the Tax-Related Items due as a result of
the Award, vesting and/or settlement of the RSUs. In the event the Tax-Related Items withholding obligation would result in a fractional number of Shares to be
withheld by the Company, such number of Shares to be withheld shall be rounded up to the next nearest number of whole Shares. If, due to rounding of Shares, the
value of the number of Shares retained by the Company pursuant to this provision is more than the amount required to be withheld, then the Company may pay such
excess amount to the relevant tax authority as additional withholding with respect to the Participant.
(c) Alternatively, or in addition, the Company may, (a) only to the extent and in the manner permitted by all applicable securities laws, including making
any necessary securities registration or taking any other necessary actions, sell, or instruct the broker whom it has selected for this purpose to sell, the Shares to be
issued upon the vesting or settlement, as applicable, of the Participant’s RSUs to meet the withholding obligation for Tax-Related Items, and/or (b) withhold all
applicable Tax-Related Items legally payable by Participant from Participant’s wages or other cash compensation paid to Participant by the Company and/or the
Employer.
(d) Finally, the Participant hereby acknowledges that the Participant is required to pay to the Employer any amount of Tax-Related Items that the
Employer may be required to withhold as a result of the Participant’s Award of RSUs, vesting of the RSUs, or the issuance of Shares (or payment of cash) in settlement
of vested RSUs that cannot be satisfied by the means previously described. The Participant hereby acknowledges that the Company may refuse to deliver the Shares in
settlement of the vested RSUs to the Participant if the Participant fails to comply with the Participant’s obligations in connection with the Tax-Related Items as
described in this Section 11. The Participant shall have no further rights with respect to any Shares that are retained by the Company pursuant to this provision, and
under no circumstances will the Company be required to issue any fractional Shares.
(e) The Participant has reviewed and understands the tax obligations as set forth in this Agreement and understands that the Company is not providing
any tax advice and that the Participant should consult with Participant’s own tax advisors on the U.S. federal, state, foreign and local tax and non-U.S. tax consequences
of this investment and the transactions contemplated by this Agreement.
5
Source: RED HAT INC, 10-K, April 25, 2013
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12. Nature of Grant. In accepting the RSUs, Participant acknowledges that: (a) the grant of the RSUs is voluntary and occasional and does not create any
contractual or other right to receive future grants of RSUs, or benefits in lieu of RSUs even if RSUs have been granted repeatedly in the past; (b) all decisions
with respect to future awards of RSUs, if any, will be at the sole discretion of the Company; (c) the future value of the underlying Shares is unknown and cannot
be predicted with certainty; (d) in consideration of the award of RSUs, no claim or entitlement to compensation or damages shall arise from termination of the
RSUs or any diminution in value of the RSUs or Shares received when the RSUs vest resulting from the Participant’s termination of employment by the
Company or any Affiliate (for any reason whatsoever and whether or not in breach of local employment laws), and Participant irrevocably releases the Company
and/or the Affiliate from any such claim that may arise; (e) in the event of involuntary termination of Participant’s employment (whether or not in breach of local
employment laws), Participant’s right to receive RSUs and vest under the Plan, if any, will terminate effective as of the date that Participant is no longer actively
employed and will not be extended by any notice period mandated under local law or contract, and the Company shall have the exclusive discretion to determine
when Participant is no longer actively employed for purposes of the RSUs; (f) the Company is not providing any tax, legal or financial advice, nor is the
Company making any recommendations regarding Participant’s participation in the Plan, or Participant’s acquisition or sale of the underlying Shares; and
(g) Participant is hereby advised to consult with his or her own personal tax, legal and financial advisors regarding Participant’s participation in the Plan before
taking any action related to the Plan.
13. 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 Participant, to the address set forth on the cover sheet or at the most recent address shown on the records of the Company, and if to the Company, to
the Company’s principal office, attention of the Corporate Secretary.
(b) Entire Agreement; Modification. This Agreement (including the cover sheet) and the Plan constitutes the entire agreement between the parties relative
to the subject matter hereof, and supersedes all other communications between the parties relating to the subject matter of this Agreement. This Agreement may be
modified, amended or rescinded by the Committee as it shall deem advisable, subject to any requirement for shareholder approval imposed by applicable law or other
applicable rules, including, without limitation, the rules of the stock exchange on which the Shares are listed. If the Committee determines that the Award terms could
result in adverse tax consequences to the Participant, the Committee may amend this Agreement without the consent of the Participant in order to minimize or eliminate
such tax treatment.
(c) Plan Governs. This Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this
Agreement and one or more provisions of the Plan, the provisions of the Plan will govern.
(d) 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.
6
Source: RED HAT INC, 10-K, April 25, 2013
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(e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the heirs, legatees, distributees, executors and
administrators of the Participant and the successors and assigns of the Company.
(f) Participant’s Acceptance. The Participant is urged to read this Agreement carefully and to consult with his or her own legal counsel regarding the
terms and consequences of this Agreement and the legal and binding effect of this Agreement. By virtue of his or her acceptance of this Agreement, the Participant is
deemed to have accepted and agreed to all of the terms and conditions of this Award and the provisions of the Plan, including as binding, conclusive and final all
decisions or interpretations of the Committee upon any questions arising under the Plan or this Award.
(g) Section 409A. This Agreement, the RSUs and payments made pursuant to this Agreement are intended to comply with or qualify for an exemption
from the requirements of Section 409A of the Code (“Section 409A”) and shall be construed consistently therewith and shall be interpreted in a manner consistent with
that intention. Terms defined in the Agreement shall have the meanings given such terms under Section 409A if and to the extent required to comply with
Section 409A. Notwithstanding any other provision of this Agreement, the Company reserves the right, to the extent the Company deems necessary or advisable, in its
sole discretion, to unilaterally amend the Plan and/or this Agreement to ensure that all RSUs are awarded in a manner that qualifies for exemption from or complies
with Section 409A, provided, however, that the Company makes no undertaking to preclude Section 409A from applying to this RSU award. Any payments described
in this Section 13(g) that are due within the “short term deferral period” as defined in Section 409A shall not be treated as deferred compensation unless applicable law
requires otherwise. If and to the extent any portion of any payment, compensation or other benefit provided to the Participant in connection with his employment
termination is determined to constitute “nonqualified deferred compensation” within the meaning of Section 409A and the Participant is a specified employee as defined
in Section 409A(2)(B)(i) of the Code, as determined by the Company in accordance with its procedures, by which determination the Participant hereby agrees that he is
bound, such portion of the payment, compensation or other benefit shall not be paid before the day that is six months plus one day after the date of separation from
service (as determined under Section 409A (the “New Payment Date”)), except as Section 409A may then permit. The aggregate of any payments that otherwise would
have been paid to the Participant during the period between the date of separation from service and the New Payment Date shall be paid to the Participant in a lump sum
on such New Payment Date, and any remaining payments will be paid on their original schedule. Notwithstanding the foregoing, the Company, its Affiliates, Directors,
Officers and Agents shall have no liability to a Participant, or any other party, if the Award that is intended to be exempt from, or compliant with, Section 409A is not
so exempt or compliant, or for any action taken by the Committee.
(h) Governing Law/Choice of Venue. This Agreement shall be governed by and interpreted in accordance with the laws of the state of Delaware, without
giving effect to the principles of the conflicts of laws thereof. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties,
evidenced by this Award or the Agreement, the parties hereby submit to and consent to the exclusive jurisdiction of the State of North Carolina and agree that such
litigation shall be conducted only in the courts of Wake County, North Carolina, or the federal courts for the United States for the Tenth District of North Carolina, and
no other courts, where this Award is made and/or to be performed.
7
Source: RED HAT INC, 10-K, April 25, 2013
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(i) Administrator Authority. The Committee will have the power to interpret the Plan and this Agreement and to adopt such rules for the
administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to,
the determination of whether or not any RSUs have vested). All actions taken and all interpretations and determinations made by the Committee in good
faith will be final and binding upon Participant, the Company and all other interested persons.
8
Source: RED HAT INC, 10-K, April 25, 2013
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APPENDIX A
Restricted Stock Unit Agreement
(Non-Executive Participants)
(a) Notwithstanding anything contained herein to the contrary, if (i) this Agreement is continued, assumed, converted or substituted for immediately following a Change
in Control and (ii) within one year after a Change in Control the Participant’s Business Relationship is terminated by the Company or its successor without Good Cause
(as defined below), all of the RSUs shall be treated as vested and Shares or the value thereof upon vesting shall be delivered in accordance with Sections 4 and 5 hereof.
Furthermore and notwithstanding anything contained herein to the contrary, if this Agreement is not continued, assumed, converted or substituted for immediately
following the Change in Control, the Participant shall receive a lump sum cash payment within 30 days after the Change in Control in an amount equal to the amount
that would have been delivered in accordance with Section 5 hereof had the RSUs fully vested upon the Change in Control.
(b) For purposes of paragraph (a) hereof, this Agreement shall be considered to be continued, assumed, converted or substituted for:
i.
if there is no change in the number of outstanding shares of Common Stock of the Company and the Change in Control does not result from the
consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction, and there are no
changes to the terms and conditions of this Agreement that materially and adversely affect this Agreement; or
ii.
if there is a change in the number of such outstanding shares of Common Stock of the Company and/or the Change in Control does result from the
consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction:
A.
the RSUs and Shares deliverable pursuant to the RSUs are adjusted (x) if the shares of Common Stock of the Company are exchanged
solely for the common stock of the Parent Corporation or, if there is no Parent Corporation, the Surviving Corporation (as such terms are
defined in subparagraph C of the definition of “Change in Control” of this Appendix A) in a manner which is not materially less favorable
than the adjustments made in such transaction to the other outstanding shares of Common Stock of the Company, or (y) otherwise, based
on the ratio on the day immediately prior to the date of the Change in Control of the fair market value of one share of common stock of the
Parent Corporation or, if there is no Parent Corporation, the Surviving Corporation, to the Fair Market Value of one share of Common
Stock of the Company;
Source: RED HAT INC, 10-K, April 25, 2013
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B.
if applicable, the RSUs are converted into an award pursuant to which the common stock of the Parent Corporation or, if there is no Parent
Corporation, the Surviving Corporation (as such terms are defined in subparagraph C of the definition of “Change in Control” of this
Appendix A ) are deliverable; and
C.
there are no other changes to the terms and conditions of this grant that materially and adversely affect this grant.
(c) For purposes of this Agreement, the following terms shall have the assigned meanings:
i.
“Change in Control” means the occurrence of any one of the following events:
A.
individuals who, on the Grant Date, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority
of the Board, provided that any person becoming a director subsequent to the initial public offering whose election or nomination for
election was approved by a vote of at least a majority of the directors then on the Board (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination)
shall be an Incumbent Director; provided , however , that no individual initially elected or nominated as a director of the Company as a
result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of
proxies by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;
B.
any “person” (as such term is defined in the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or
becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company
representing 35% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of
the Board (the “Company Voting Securities”); provided , however , that the event described in this paragraph (ii) shall not be deemed to
be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any Subsidiary, (B) by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities
pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction, as defined in paragraph (C) below, or (E) by any
person of Company Voting Securities from the Company, if a majority of the Incumbent Board approves in advance the acquisition of
beneficial ownership of 35% or more of Company Voting Securities by such person;
10
Source: RED HAT INC, 10-K, April 25, 2013
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C.
the consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction involving
the Company or any of its subsidiaries that requires the approval of the Company’s stockholders, whether for such transaction or the
issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (A) more
than 40% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if
applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to
elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by Company Voting Securities that were outstanding
immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities
were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same
proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business
Combination, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation
or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 35% or more of the total voting power of the
outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving
Corporation) and (C) at least half of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation,
the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s
approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all
of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non - Qualifying Transaction”);
D.
the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or the consummation of a sale of all
or substantially all of the Company’s assets; or
E.
the occurrence of any other event that the Board determines by a duly approved resolution constitutes a Change in Control.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 35% of
the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities
outstanding; provided , that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that
increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.
11
Source: RED HAT INC, 10-K, April 25, 2013
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ii.
“Good Cause” means conduct involving one or more of the following
A.
the conviction of Participant, or plea of nolo contendere by the Participant to, a felony;
B.
the willful misconduct by Participant resulting in material harm to the Company;
C.
fraud, embezzlement, theft or dishonesty by Participant against the Company or any Subsidiary or repeated and continued failure to
perform Participant’s duties with the Company after written notice of such failure to perform resulting in any case in material harm to the
Company; or;
D.
the Participant’s material breach of any term of confidentiality and/or non-competition agreements.
12
Source: RED HAT INC, 10-K, April 25, 2013
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Exhibit 10.17
RED HAT, INC.
Red Hat, Inc. 2004 Long-Term Incentive Plan, as amended
Restricted Stock Unit Agreement
(Non-Executive, Non-U.S. Participants)
Cover Sheet
This Restricted Stock Unit Agreement (the “Agreement”) evidences the grant by Red Hat, Inc., a Delaware corporation (the “Company”), on the date set forth below
(the “Grant Date”) to the person named below (the “Participant”) of a Restricted Stock Unit Award (the “Award”) covering the number of restricted stock units (each,
an “RSU”) listed below, each representing the right to receive the value of one share of the Company’s common stock, $.0001 par value per share, with a vesting start
date (the “Vesting Start Date”) listed below, such Award to be subject to the terms and conditions specified in the Red Hat, Inc. 2004 Long-Term Incentive Plan, as
amended (the “Plan”), and in the attached Exhibit A and Appendix A , thereto.
Participant Name:
Grant Date:
Vesting Start Date:
Number of RSUs:
PARTICIPANT:
RED HAT, INC.
1801 Varsity Drive
Raleigh, North Carolina 27606
Name
Name:
Title:
By accepting this Award, the Participant hereby (i) acknowledges that a copy of the Plan and a copy of the Plan prospectus have been delivered to the Participant and
additional copies thereof are available upon request from the Company’s Equity Compensation Department and can also be accessed electronically, (ii) acknowledges
receipt of a copy of this Cover Sheet and Exhibit A and Appendix A thereto (collectively, the “Agreement”) and accepts the Award subject to all the terms and
conditions of the Plan and the Agreement, (iii) represents that the Participant has read and understands the terms and conditions of the Plan, Plan prospectus and
Agreement, and (iv) acknowledges that there may be tax consequences due to the Award and that the Participant should consult a tax advisor to determine his or her
actual tax consequences. The Participant must accept this Award electronically pursuant to the online acceptance procedure established by the Company
within thirty (30) days; otherwise, the Company may, in its sole discretion, rescind the Award in its entirety.
Source: RED HAT INC, 10-K, April 25, 2013
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EXHIBIT A
RED HAT, INC.
Red Hat, Inc. 2004 Long-Term Incentive Plan, as amended
Restricted Stock Unit Agreement
(Non-Executive, Non-U.S. Participants)
Terms and Conditions
1. Grant of RSUs.
The RSUs, each representing the right to receive the value of one share of common stock, $0.0001 par value, of the Company (“Common Stock”), as
provided herein, is granted pursuant to and is subject to and governed by the Plan and, unless otherwise defined in this Agreement, capitalized terms used herein shall
have the same meaning as in the Plan. The shares of Common Stock that are issuable upon the vesting of the RSUs are referred to in this Agreement as “Shares.” The
RSUs shall be granted to the Participant without payment of consideration (other than continuing services (as described in Section 2 below)).
2. Vesting.
(a) All of the RSUs shall be unvested on the Grant Date. For purposes of this Agreement, RSUs that have not vested as of any particular time in
accordance with this Section 2 are referred to as “Unvested RSUs.”
(b) For so long as the Participant maintains continuous service to the Company or one of its Affiliates as an Employee or Director (a “Business
Relationship”) throughout the period beginning on the Grant Date and ending on the vesting date set forth below, the RSUs shall become vested according to the
schedule set forth below, subject to Sections 3 and 10 hereof:
Vesting Date
Number of RSUs That First
Vest on Such Date
[As determined by the Compensation Committee]
3. Cessation of Business Relationship. If the Participant’s Business Relationship ceases for any reason, including death, all Unvested RSUs on the date of such
cessation will be forfeited. The Participant’s Business Relationship shall be deemed to have ceased on the last day of active service to the Company or an Affiliate and
shall not be extended by any notice of termination period ( i.e. , garden leave, etc.). For purposes hereof, a Business Relationship shall not be considered as having
ceased during any bona fide leave of absence if such leave of absence has been approved in writing by the Company; in the event of such leave of absence, vesting of
the RSUs shall be suspended (and the vesting dates shall be extended by a period
1
Source: RED HAT INC, 10-K, April 25, 2013
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equal to the period of the leave of absence) except for any leave under which the Participant has a legal right to return to employment or such other leave as determined
by the Company or unless contrary to applicable local law. The vesting of the RSUs shall not be affected by any change in the type of Business Relationship the
Participant has with or among the Company and its Affiliates so long as the Participant continuously maintains a Business Relationship.
4. Payment.
(a) Within 60 days following the vesting date of any RSUs pursuant to Sections 2 or 10 and upon the satisfaction of all other applicable conditions as to
the RSUs, but in no event later than the 15th day of the third month of the year following the later of the calendar year or the Company’s taxable year, in each case, in
which the RSUs vest, the Company shall distribute to the Participant the Shares represented by RSUs that vested on such vesting date, reduced by the number of Shares
(if any) that are withheld from the Award for the payment of Tax-Related Items (as defined in Section 11 hereof); provided, however, that the Shares may be distributed
following the date contemplated in this Section 4(a) to the extent permitted under Section 409A of the Code without the payment becoming subject to, and being treated
as “nonqualified deferred compensation” within the meaning of, Section 409A of the Code (such as where the Company reasonably anticipates that the payment will
violate federal securities laws or other applicable laws). Payment of any vested RSUs shall be made in whole Shares only and any fractional Shares shall be rounded up.
(b) The Company shall not be obligated to issue Shares to the Participant upon the vesting of any RSUs (or otherwise) unless the issuance and delivery of
such Shares shall comply with all relevant provisions of law and other legal requirements including, without limitation, any applicable federal, state or foreign securities
laws, any applicable Tax-Related Items and the requirements of any stock exchange upon which Shares may be listed.
(c) Anything in the foregoing to the contrary notwithstanding, RSUs granted under this Agreement may be suspended, delayed or otherwise deferred for
any of the reasons contemplated in Sections 3 and 4 only to the extent such suspension, delay or deferral is permitted under U.S. Treas. Reg. §§ 1.409A-2(b)(7),
1.409A-1(b)(4)(ii) or successor provisions, or as otherwise permitted under Section 409A of the Code.
5. Option of Company to Deliver Cash. Notwithstanding any of the other provisions of this Agreement, at the time any RSU vests, the Company may elect, in
the sole discretion of the Committee, to deliver to the Participant in lieu of the Shares represented by RSUs that vested on such vesting date an equivalent amount of
cash (determined by reference to the closing price of the Shares on the principal exchange on which the Shares trade on the applicable vesting date or if such date is not
a trading date, on the next preceding trading date). Such payments shall be made no later than the deadline set forth in Section 4(a) hereof. If the Company elects to
deliver cash to the Participant, the Company is authorized to retain such amount as is sufficient to satisfy the withholding of Tax-Related Items (as defined in Section 11
hereof).
2
Source: RED HAT INC, 10-K, April 25, 2013
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6. Restrictions on Transfer.
(a) The Participant shall not sell, assign, transfer, pledge, hypothecate or otherwise encumber or dispose of any RSUs, either voluntarily or by operation
of law. Any attempt to dispose of any RSUs in contravention of the above restriction shall be null and void and without effect.
(b) The Company shall not be required (i) to transfer on its books any of the RSUs which have been transferred in violation of any of the provisions set
forth herein or (ii) to treat as the owner of such RSUs any transferee to whom such RSUs have been transferred in violation of any of the provisions contained herein.
7. No Obligation to Continue Business Relationship. Neither the Plan, this Agreement, nor the grant of the RSUs imposes any obligation on the Company or its
Affiliates to have or continue a Business Relationship with the Participant.
8. No Rights as Stockholder. The RSUs represent an unfunded, unsecured promise by the Company to deliver Shares or the value thereof upon vesting of the
RSUs. The Participant shall have no rights as a shareholder with respect to the Shares underlying the RSUs. The Participant shall have no right to vote or receive
dividends with respect to any Shares underlying the RSUs or receive dividends unless and until such Shares are distributed to the Participant or converted into
Restricted Stock as provided in Appendix A.
9. Adjustments for Capital Changes. The Plan contains provisions covering the treatment of RSUs in a number of contingencies such as stock splits and mergers.
Provisions in the Plan for such adjustments are hereby made applicable hereunder and are incorporated herein by reference.
10. Change in Control. Provisions regarding a Change in Control are set forth in Appendix A.
11. Withholding Taxes.
(a) Regardless of any action the Company and/or the Affiliate employing the Participant (the “Employer”) take with respect to any or all income tax
(including U.S. federal, state and local tax and/or non-U.S. tax), social insurance, payroll tax or other tax-related items (“Tax-Related Items”), the Participant hereby
acknowledges that the ultimate liability for all Tax-Related Items legally due by the Participant with respect to the Participant’s Award of RSUs, vesting of the RSUs, or
the issuance of Shares (or payment of cash) in settlement of vested RSUs is and remains the Participant’s responsibility and that the Company and/or the Employer
(i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the RSUs, including the award of the
RSUs, the vesting of the RSUs, the issuance of Shares (or payment of cash) in settlement of the RSUs, the subsequent sale of Shares acquired at vesting and the receipt
of any dividends and or Dividend Equivalents; and (ii) do not commit to structure the terms of the Award or any aspect of the RSUs to reduce or eliminate the
Participant’s liability for Tax-Related Items.
3
Source: RED HAT INC, 10-K, April 25, 2013
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(b) Prior to the relevant tax withholding event, as applicable, the Participant shall pay or make adequate arrangements satisfactory to the
Company and/or the Employer to satisfy all withholding obligations of the Company and/or the Employer with respect to Tax-Related Items. In this
regard, the Participant hereby authorizes the Company and/or the Employer, in their sole discretion and without any notice to or authorization by the
Participant, to withhold from the Shares being distributed under this Award upon vesting that number of whole Shares the fair market value of which
(determined by reference to the closing price of the Common Stock on the principal exchange on which the Common Stock trades on the date the
withholding obligation arises, or if such date is not a trading date, on the next preceding trading date) is equal to the aggregate withholding obligation as
determined by the Company and/or Employer with respect to such Award, provided that the Company only withholds the number of Shares necessary to
satisfy the minimum withholding amount. If the Company satisfies the withholding obligation for Tax-Related Items by withholding a number of Shares
being distributed under the Award as described above, the Participant hereby acknowledges that the Participant is deemed to have been issued the full
number of Shares subject to the Award of RSUs, notwithstanding that a number of the Shares is held back solely for the purpose of paying the
Tax-Related Items due as a result of the Award, vesting and/or settlement of the RSUs. In the event the Tax-Related Items withholding obligation would
result in a fractional number of Shares to be withheld by the Company, such number of Shares to be withheld shall be rounded up to the next nearest
number of whole Shares. If, due to rounding of Shares, the value of the number of Shares retained by the Company pursuant to this provision is more than
the amount required to be withheld, then the Company may pay such excess amount to the relevant tax authority as additional withholding with respect to
the Participant.
(c) Alternatively, or in addition, the Company may (a) only to the extent and in the manner permitted by all applicable securities laws, including making
any necessary securities registration or taking any other necessary actions, sell, or instruct the broker whom it has selected for this purpose to sell the Shares to be issued
upon the vesting or settlement, as applicable, of the Participant’s RSUs to meet the withholding obligation for Tax-Related Items, and/or (b) withhold all applicable
Tax-Related Items legally payable by Participant from Participant’s wages or other cash compensation paid to Participant by the Company and/or the Employer.
(d) Finally, the Participant hereby acknowledges that the Participant is required to pay to the Employer any amount of Tax-Related Items that the
Employer may be required to withhold as a result of the Participant’s Award of RSUs, vesting of the RSUs, or the issuance of Shares (or payment of cash) in settlement
of vested RSUs that cannot be satisfied by the means previously described. The Participant hereby acknowledges that the Company may refuse to deliver the Shares in
settlement of the vested RSUs to the Participant if the Participant fails to comply with the Participant’s obligations in connection with the Tax-Related Items as
described in this Section 11. The Participant shall have no further rights with respect to any Shares that are retained by the Company pursuant to this provision, and
under no circumstances will the Company be required to issue any fractional Shares.
(e) The Participant has reviewed and understands the tax obligations as set forth in this Agreement and understands that the Company is not providing
any tax advice and that the Participant should consult with Participant’s own tax advisors on the U.S. federal, state, foreign and local tax and non-U.S. tax consequences
of this investment and the transactions contemplated by this Agreement.
4
Source: RED HAT INC, 10-K, April 25, 2013
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12. Nature of Grant. In accepting the RSUs, Participant acknowledges that: (a) the grant of the RSUs is voluntary and occasional and does not create any
contractual or other right to receive future grants of RSUs, or benefits in lieu of RSUs even if RSUs have been granted repeatedly in the past; (b) all decisions
with respect to future awards of RSUs, if any, will be at the sole discretion of the Company; (c) Participant’s participation in the Plan is voluntary; (d) RSUs are
extraordinary items that do not constitute regular compensation for services rendered to the Company or any Affiliate, and that are outside the scope of
Participant’s employment contract, if any; (e) RSUs are not part of normal or expected compensation or salary for any purposes, including, but not limited to,
calculating any severance, resignation, redundancy or end of service payments, bonuses, long-service awards, pension or retirement or welfare benefits or similar
payments and in no event should be considered as compensation for, or relating in any way to, past services for the Company or any Affiliate; (f) the future value
of the underlying Shares is unknown and cannot be predicted with certainty; (g) in consideration of the award of RSUs, no claim or entitlement to compensation
or damages shall arise from termination of the RSUs or any diminution in value of the RSUs or Shares received when the RSUs vest resulting from termination
of employment by the Company or any Affiliate (for any reason whatsoever and whether or not in breach of local labor laws), and Participant irrevocably
releases the Company and/or the Affiliate from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent
jurisdiction to have arisen, then, by signing this Agreement, Participant shall be deemed irrevocably to have waived his or her entitlement to pursue such claim;
(h) in the event of involuntary termination of Participant’s employment (whether or not in breach of local labor laws), Participant’s right to receive RSUs and
vest under the Plan, if any, will terminate effective as of the date that Participant is no longer actively employed and will not be extended by any notice period
mandated under local law ( e.g. , active employment would not include a period of “garden leave” or similar period pursuant to local law), and the Company shall
have the exclusive discretion to determine when Participant is no longer actively employed for purposes of the RSUs; (i) the Company is not providing any tax,
legal or financial advice, nor is the Company making any recommendations regarding Participant’s participation in the Plan, or Participant’s acquisition or sale of
the underlying Shares; and (j) Participant is hereby advised to consult with his or her own personal tax, legal and financial advisors regarding Participant’s
participation in the Plan before taking any action related to the Plan.
13. Data Privacy. Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of Participant’s
personal data as described in this Agreement by and among, as applicable, the Employer, the Company, and any Affiliate for the exclusive purpose of implementing,
administering and managing Participant’s participation in the Plan.
Participant understands that the Company and the Employer may hold certain personal information about Participant, including, but not limited to, Participant’s name,
home address and telephone number, e-mail address, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of
stock or directorships held in the Company or any Affiliate, details of all RSUs or any other entitlement to Shares of stock
5
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
awarded, canceled, exercised, vested, unvested or outstanding in Participant’s favor, for the exclusive purpose of implementing, administering and managing the Plan
(“Personal Data”). Participant understands that Personal Data may be transferred to any third parties assisting in the implementation, administration and management of
the Plan, that these recipients may be located in Participant’s country, or elsewhere, and that the recipient’s country may have different data privacy laws and
protections than Participant’s country. Participant understands that he or she may request a list with the names and addresses of any potential recipients of the Personal
Data by contacting Participant’s local human resources representative. Participant authorizes the recipients to receive, possess, use, retain and transfer the Personal
Data, in electronic or other form, for the purposes of implementing, administering and managing Participant’s participation in the Plan, including any requisite transfer
of such Personal Data as may be required to a broker or other third party with whom Participant may elect to deposit any Shares received upon vesting of the RSUs.
Participant understands that Personal Data will be held only as long as is necessary to implement, administer and manage Participant’s participation in the Plan.
Participant understands that he or she may, at any time, view Personal Data, request additional information about the storage and processing of Personal Data, require
any necessary amendments to Personal Data or refuse or withdraw the consents herein, without cost, by contacting in writing Participant’s local human resources
representative. Participant understands that refusal or withdrawal of consent may affect Participant’s ability to realize benefits from the RSUs. For more information on
the consequences of Participant’s refusal to consent or withdrawal of consent, Participant understands that he or she may contact his or her local human resources
representative.
14. 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 Participant, to the address set forth on the cover sheet or at the most recent address shown on the records of the Company, and if to the Company, to
the Company’s principal office, attention of the Corporate Secretary.
(b) Entire Agreement; Modification. This Agreement (including the cover sheet) and the Plan constitutes the entire agreement between the parties relative
to the subject matter hereof, and supersedes all other communications between the parties relating to the subject matter of this Agreement. This Agreement may be
modified, amended or rescinded by the Committee as it shall deem advisable, subject to any requirement for shareholder approval imposed by applicable law or other
applicable rules, including, without limitation, the rules of the stock exchange on which the Shares are listed. If the Committee determines that the Award terms could
result in adverse tax consequences to the Participant, the Committee may amend this Agreement without the consent of the Participant in order to minimize or eliminate
such tax treatment.
(c) Plan Governs. This Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this
Agreement and one or more provisions of the Plan, the provisions of the Plan will govern.
6
Source: RED HAT INC, 10-K, April 25, 2013
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(d) 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.
(e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the heirs, legatees, distributees, executors and
administrators of the Participant and the successors and assigns of the Company.
(f) Participant’s Acceptance. The Participant is urged to read this Agreement carefully and to consult with his or her own legal counsel regarding the
terms and consequences of this Agreement and the legal and binding effect of this Agreement. By virtue of his or her acceptance of this Agreement, the Participant is
deemed to have accepted and agreed to all of the terms and conditions of this Award and the provisions of the Plan, including as binding, conclusive and final all
decisions or interpretations of the Committee upon any questions arising under the Plan or this Award.
(g) Section 409A. This Agreement, the RSUs and payments made pursuant to this Agreement are intended to comply with or qualify for an exemption
from the requirements of Section 409A of the Code (“Section 409A”) and shall be construed consistently therewith and shall be interpreted in a manner consistent with
that intention. Terms defined in the Agreement shall have the meanings given such terms under Section 409A if and to the extent required to comply with
Section 409A. Notwithstanding any other provision of this Agreement, the Company reserves the right, to the extent the Company deems necessary or advisable, in its
sole discretion, to unilaterally amend the Plan and/or this Agreement to ensure that all RSUs are awarded in a manner that qualifies for exemption from or complies
with Section 409A, provided, however, that the Company makes no undertaking to preclude Section 409A from applying to this RSU award. Any payments described
in this Section 13(g) that are due within the “short term deferral period” as defined in Section 409A shall not be treated as deferred compensation unless applicable law
requires otherwise. If and to the extent any portion of any payment, compensation or other benefit provided to the Participant in connection with his employment
termination is determined to constitute “nonqualified deferred compensation” within the meaning of Section 409A and the Participant is a specified employee as defined
in Section 409A(2)(B)(i) of the Code, as determined by the Company in accordance with its procedures, by which determination the Participant hereby agrees that he is
bound, such portion of the payment, compensation or other benefit shall not be paid before the day that is six months plus one day after the date of separation from
service (as determined under Section 409A (the “New Payment Date”)), except as Section 409A may then permit. The aggregate of any payments that otherwise would
have been paid to the Participant during the period between the date of separation from service and the New Payment Date shall be paid to the Participant in a lump sum
on such New Payment Date, and any remaining payments will be paid on their original schedule. Notwithstanding the foregoing, the Company, its Affiliates, Directors,
Officers and Agents shall have no liability to a Participant, or any other party, if the Award that is intended to be exempt from, or compliant with, Section 409A is not
so exempt or compliant, or for any action taken by the Committee.
7
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
(h) Language. If Participant has received this Agreement, or any other document related to the Plan or this Award translated into a language
other than English, and if the translated version is different than the English version, the English version will control.
(i) Electronic Delivery. The Company may, in its sole discretion, decide (a) to deliver by electronic means any documents related to the RSUs granted
under the Plan, Participant’s participation in the Plan, or future Awards that may be granted under the Plan or (b) to request by electronic means Participant’s consent to
participate in the Plan. Participant hereby consents to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an
on-line or electronic system established and maintained by the Company or any third party designated by the Company.
(j) Governing Law/Choice of Venue. This Agreement shall be governed by and interpreted in accordance with the laws of the state of Delaware, without
giving effect to the principles of the conflicts of laws thereof. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties
evidenced by this Award or the Agreement, the parties hereby submit to and consent to the exclusive jurisdiction of the State of North Carolina and agree that such
litigation shall be conducted only in the courts of Wake County, North Carolina, or the federal courts for the United States for the Tenth District of North Carolina, and
no other courts, where this Award is made and/or to be performed.
(k) Administrator Authority. The Committee will have the power to interpret the Plan and this Agreement and to adopt such rules for the administration,
interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to, the determination of whether
or not any RSUs have vested). All actions taken and all interpretations and determinations made by the Committee in good faith will be final and binding upon
Participant, the Company and all other interested persons.
8
Source: RED HAT INC, 10-K, April 25, 2013
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APPENDIX A
Restricted Stock Unit Agreement
(Non-Executive Participants)
(a) Notwithstanding anything contained herein to the contrary, if (i) this Agreement is continued, assumed, converted or substituted for immediately following a Change
in Control and (ii) within one year after a Change in Control the Participant’s Business Relationship is terminated by the Company or its successor without Good Cause
(as defined below), all of the RSUs shall be treated as vested and Shares or the value thereof upon vesting shall be delivered in accordance with Sections 4 and 5 hereof.
Furthermore and notwithstanding anything contained herein to the contrary, if this Agreement is not continued, assumed, converted or substituted for immediately
following the Change in Control, the Participant shall receive a lump sum cash payment within 30 days after the Change in Control in an amount equal to the amount
that would have been delivered in accordance with Section 5 hereof had the RSUs fully vested upon the Change in Control.
(b) For purposes of paragraph (a) hereof, this Agreement shall be considered to be continued, assumed, converted or substituted for:
i.
if there is no change in the number of outstanding shares of Common Stock of the Company and the Change in Control does not result from the
consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction, and there are no
changes to the terms and conditions of this Agreement that materially and adversely affect this Agreement; or
ii.
if there is a change in the number of such outstanding shares of Common Stock of the Company and/or the Change in Control does result from the
consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction:
A.
the RSUs and Shares deliverable pursuant to the RSUs are adjusted (x) if the shares of Common Stock of the Company are exchanged
solely for the common stock of the Parent Corporation or, if there is no Parent Corporation, the Surviving Corporation (as such terms are
defined in subparagraph C of the definition of “Change in Control” of this Appendix A) in a manner which is not materially less favorable
than the adjustments made in such transaction to the other outstanding shares of Common Stock of the Company, or (y) otherwise, based
on the ratio on the day immediately prior to the date of the Change in Control of the fair market value of one share of common stock of the
Parent Corporation or, if there is no Parent Corporation, the Surviving Corporation, to the Fair Market Value of one share of Common
Stock of the Company;
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
B.
if applicable, the RSUs are converted into an award pursuant to which the common stock of the Parent Corporation or, if there is no Parent
Corporation, the Surviving Corporation (as such terms are defined in subparagraph C of the definition of “Change in Control” of this
Appendix A) are deliverable; and
C.
there are no other changes to the terms and conditions of this grant that materially and adversely affect this grant.
(c) For purposes of this Agreement the following terms shall have the assigned meanings:
i.
“Change in Control” means the occurrence of any one of the following events:
A.
individuals who, on the Grant Date, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority
of the Board, provided that any person becoming a director subsequent to the initial public offering whose election or nomination for
election was approved by a vote of at least a majority of the directors then on the Board (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination)
shall be an Incumbent Director; provided , however , that no individual initially elected or nominated as a director of the Company as a
result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of
proxies by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;
B.
any “person” (as such term is defined in the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or
becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company
representing 35% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of
the Board (the “Company Voting Securities”); provided , however , that the event described in this paragraph (ii) shall not be deemed to
be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any Subsidiary, (B) by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities
pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction, as defined in paragraph (C) below, or (E) by any
person of Company Voting Securities from the Company, if a majority of the Incumbent Board approves in advance the acquisition of
beneficial ownership of 35% or more of Company Voting Securities by such person;
10
Source: RED HAT INC, 10-K, April 25, 2013
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C.
the consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction involving
the Company or any of its subsidiaries that requires the approval of the Company’s stockholders, whether for such transaction or the
issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (A) more
than 40% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if
applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to
elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by Company Voting Securities that were outstanding
immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities
were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same
proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business
Combination, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation
or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 35% or more of the total voting power of the
outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving
Corporation) and (C) at least half of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation,
the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s
approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all
of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non - Qualifying Transaction”);
D.
the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or the consummation of a sale of all
or substantially all of the Company’s assets; or
E.
the occurrence of any other event that the Board determines by a duly approved resolution constitutes a Change in Control.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 35% of
the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities
outstanding; provided , that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that
increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.
11
Source: RED HAT INC, 10-K, April 25, 2013
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ii.
“Good Cause” means conduct involving one or more of the following:
A.
the conviction of Participant, or plea of nolo contendere by the Participant to, a felony;
B.
the willful misconduct by Participant resulting in material harm to the Company;
C.
fraud, embezzlement, theft or dishonesty by Participant against the Company or any Subsidiary or repeated and continued failure to
perform Participant’s duties with the Company after written notice of such failure to perform resulting in any case in material harm to the
Company; or
D.
the Participant’s material breach of any term of confidentiality and/or non-competition agreements.
12
Source: RED HAT INC, 10-K, April 25, 2013
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APPENDIX B
APPENDIX B
RESTRICTED STOCK UNIT AGREEMENT
SPECIAL PROVISIONS FOR PARTICIPANTS OUTSIDE THE UNITED STATES
This Appendix B, which is part of the Restricted Stock Unit Agreement (the “Agreement”), includes additional terms and conditions that govern the Award granted to
the Participant if the Participant resides in one of the countries listed herein. Capitalized terms used but not defined herein shall have the same meanings assigned to
them in the Plan and the Agreement.
This Appendix B also includes information regarding exchange controls and certain other issues of which the Participant should be aware with respect to the
Participant’s participation in the Plan. The information is based on the securities, exchange control and other laws in effect in the respective countries as of September
2007. However, such laws are often complex and change frequently. As a result, the Company strongly recommends that the Participant not rely on the information
noted herein as the only source of information relating to the consequences of the Participant’s participation in the Plan because the information may be out of date at
the time the Participant acquires Shares or sells Shares acquired under the Plan.
In addition, the information is general in nature and may not apply to the Participant’s particular situation and the Company is not in a position to assure the Participant
of any particular result. Accordingly, the Participant is advised to seek appropriate professional advice as to how the relevant laws in the Participant’s country may
apply to the Participant’s situation.
Finally, if the Participant is a citizen or resident of a country other than the one in which the Participant is currently working, the information contained herein may not
be applicable to the Participant.
Argentina
Type of Offering
Neither the RSUs nor the underlying Shares shall be publicly offered or listed on any stock exchange in Argentina. The offer is private and not subject to the
supervision of any Argentine governmental authority.
Exchange Control Information
By accepting the Award, the Participant agrees to comply with any and all Argentine currency exchange restrictions, approvals and reporting requirements in
connection with the Award.
In the event that the Participant transfers proceeds in excess of US$2,000,000 from the sale of Shares into Argentina in a single month, the Participant will be required
to place 30% of any proceeds in excess of US$2,000,000 in a non-interest bearing dollar denominated mandatory deposit account for a holding period of 365 days.
13
Source: RED HAT INC, 10-K, April 25, 2013
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APPENDIX B
Labor Law Acknowledgment
Any benefits awarded under the Plan accrue no more frequently than on an annual basis. In addition, by accepting the Award, Participant acknowledges that the grant is
made by the Company on behalf of Participant’s local employer.
Australia
Award Payable Only in Shares
Notwithstanding any discretion in the Plan or any terms to the contrary in the Agreement, the Award does not provide any right for the Participant to receive a cash
payment and shall be paid in Shares only.
Exchange Control Information
Exchange control reporting is required for cash transactions exceeding AUD10,000 and for international fund transfers. The Australian bank assisting with the
transaction will file the report for the Participant. If there is no Australian bank involved in the transfer, the Participant will have to file the report.
Securities Law Information
If the Participant acquires Shares under the Plan and offers the Shares for sale to a person or entity resident in Australia, the offer may be subject to disclosure
requirements under Australian law.
Brazil
Compliance with Law
By accepting the Award, the Participant agrees to comply with applicable Brazilian law when the RSUs vest and when any Shares acquired under the Plan are sold. The
Participant also agrees to report and pay any and all tax resulting from the vesting of the RSUs, the sale of Shares and the receipt of any dividends.
Exchange Control Information
If the Participant holds assets and rights outside Brazil with an aggregate value exceeding US$100,000, the Participant will be required to prepare and submit to the
Central Bank of Brazil an annual declaration of such assets and rights. Assets and rights that must be reported include: (i) bank deposits; (ii) loans; (iii) financing
transactions; (iv) leases; (v) direct investments; (vi) portfolio investments, including Shares acquired upon vesting of the RSUs; (vii) financial derivative investments;
and (viii) other investments such as real estate. The dollar threshold for required reporting is subject to change on an annual basis.
14
Source: RED HAT INC, 10-K, April 25, 2013
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APPENDIX B
Canada
Consent to Receive Information in English for Quebec Participants
If Participant is a resident of Quebec, by accepting this RSU, Participant hereby provides his or her consent to receive Plan information in English. Specifically,
Participant acknowledges as follows:
The parties acknowledge that it is their express wish that the present Agreement, as well as all documents, notices and legal proceedings entered into, given or instituted
pursuant hereto or relating directly or indirectly hereto, be drawn up in English.
Les parties reconnaissent avoir exigé la rédaction en anglais de la présente convention, ainsi que de tous documents exécutés, avis donnés et procédures judiciaries
intentées, directement ou indirectement, relativement à ou suite à la présente convention.
Securities Law Information
The Participant is permitted to sell Shares acquired in settlement of the Restricted Stock Units through the designated broker appointed under the Plan provided the
resale of Shares acquired in settlement of the Restricted Stock Units takes place outside of Canada through facilities of a stock exchange on which the Shares are listed.
The Shares are currently listed on the New York Stock Exchange market in the United States.
Czech Republic
No country-specific terms apply.
Germany
Exchange Control Information
Cross-border payments in excess of €12,500 must be reported monthly. If the Participant uses a German bank to transfer a cross border payment in excess of €12,500 in
connection with the Participant’s participation in the Plan, the bank will make the report.
India
Exchange Control Information
The Participant must repatriate the proceeds from the sale of Shares and any dividends received in relation to the Shares to India within a reasonable time of receipt.
The Participant must maintain the foreign inward remittance certificate received from the bank where the foreign currency is deposited in the event that the Reserve
Bank of India or the Employer requests proof of repatriation.
15
Source: RED HAT INC, 10-K, April 25, 2013
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APPENDIX B
Ireland
Restriction on Type of Shares Issued to Directors
If the Participant is a director of an Irish Affiliate, the Award will be paid in newly issued Shares only. In no event will the Award be paid in treasury Shares. This
restriction also applies to a shadow director of the Irish Affiliate ( i.e. , an individual who is not on the board of directors of the Irish Affiliate but who has sufficient
control so that the board of directors of the Irish Affiliate acts in accordance with the “directions or instructions” of the individual).
Labor Law Acknowledgment
By accepting the Award, the Participant acknowledges that the Participant understands and agrees that the benefits received under the Plan will not be taken into
account for any redundancy or unfair dismissal claim.
Director Notification Information
If the Participant is a director or secretary of an Irish Affiliate, the Participant must notify the Irish Affiliate in writing within five business days of the Participant
receiving or disposing of an interest ( e.g. , RSUs, Shares) in the Company, or within five business days of the Participant becoming aware of the event giving rise to the
notification requirement, or within five business days of the Participant becoming a director if such an interest exists at the time. This notification requirement also
applies to a shadow director of the Irish Affiliate, as described above.
Japan
No country-specific terms apply.
Korea
Exchange Control Information
If the Participant realizes US$500,000 or more from the sale of Shares acquired in settlement of the RSUs, the Participant will be required to repatriate the sale proceeds
back to Korea within eighteen months of the sale.
Netherlands
Labor Law Acknowledgment
By accepting the Award, the Participant acknowledges that: (i) the Award is intended as an incentive for the Participant to remain employed with the Employer and is
not intended as remuneration for labor performed; (ii) the Award is not intended to replace any pension rights or compensation; and (iii) in the case of a merger,
take-over or transfer of liability, the benefits granted under the Plan will not transfer automatically to another corporation.
16
Source: RED HAT INC, 10-K, April 25, 2013
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APPENDIX B
Securities Law Information
The Participant should be aware of the Dutch insider trading rules which may impact the sale of Shares under the Plan. In particular, the Participant may be prohibited
from effecting certain Share transactions if the Participant has insider information regarding the Company.
By accepting the Award and participating in the Plan, the Participant acknowledges having read and understood this Securities Law Information and acknowledges that
it is the Participant’s responsibility to comply with the following Dutch insider trading rules:
Prohibition Against Insider Trading
Under Article 46 of the Act on the Supervision of the Securities Trade 1995, anyone who has “inside information” related to the Company is prohibited from
effectuating a transaction in securities in or from the Netherlands. “Inside information” is knowledge of a detail concerning the issuer to which the securities relate that
is not public and which, if published, would reasonably be expected to affect the stock price, regardless of the development of the price. The insider could be any
employee of the Company or its Dutch affiliate in the Netherlands who has inside information as described above.
Given the broad scope of the definition of inside information, certain employees of the Company working at its Dutch affiliate in the Netherlands (including the
Participant) may have inside information and, thus, would be prohibited from effectuating a transaction in securities in the Netherlands at a time when the Participant
had such inside information.
Singapore
Securities Law Notification
The Award under the Plan is being made on a private basis and is, therefore, exempt from registration in Singapore.
Director Notification
If the Participant is a director, associate director or shadow director of a Singapore Affiliate of the Company, the Participant is subject to certain notification
requirements under the Singapore Companies Act. Among these requirements is an obligation to notify the Singapore Affiliate in writing when the Participant receives
an interest (e.g., RSUs, Shares) in the Company or any related companies. Please contact the Company to obtain a copy of the notification form. In addition, the
Participant must notify the Singapore Affiliate when the Participant sells Shares of the Company or any related company (including when the Participant sells Shares
acquired pursuant to this award). These notifications must be made within two days of acquiring or disposing of any interest in the Company or any related company. In
addition, a notification must be made of the Participant’s interests in the Company or any related company within two days of becoming a director, associate director or
shadow director.
17
Source: RED HAT INC, 10-K, April 25, 2013
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APPENDIX B
Spain
Labor Law Acknowledgement
By accepting the Award, the Participant acknowledges that he or she consents to participation in the Plan and has received a copy of the Plan and the Agreement. The
Participant understands that the Company has unilaterally, gratuitously and discretionally decided to grant RSUs under the Plan to individuals who may be employees
of the Company or its Affiliates throughout the world. The decision is a limited decision that is entered into upon the express assumption and condition that the grant
will not bind the Company or any of its Affiliates. Consequently, the Participant understands that the RSUs are granted on the assumption and condition that the RSUs
or the Shares acquired pursuant to the Award shall not become a part of any employment contract (either with the Company or any of its Affiliates) and shall not be
considered a mandatory benefit, salary for any purposes (including severance compensation) or any other right whatsoever. In addition, the Participant understands that
this award would not be made to the Participant but for the assumptions and conditions referred to above; thus, the Participant acknowledges and freely accepts that
should any or all of the assumptions be mistaken or should any of the conditions not be met for any reason, then any grant of RSUs shall be null and void.
Exchange Control Information
The Participant must declare the acquisition of Shares to the Direccion General de Política Comercial y de Inversiones Extranjeras (the “DGPCIE”) of the Ministerio
de Economia for statistical purposes. The Participant must also declare ownership of any Shares with the Directorate of Foreign Transactions each January while the
Shares are owned. In addition, if the Participant wishes to import the ownership title of Shares ( i.e. , Share certificates) into Spain, the Participant must declare the
importation of such securities to the DGPCIE.
When receiving foreign currency payments derived from the ownership of Shares (i.e., dividends or sale proceeds), the Participant must inform the financial institution
receiving the payment of the basis upon which such payment is made. The Participant will need to provide the institution with the following information: (i) the
Participant’s name, address, and fiscal identification number; (ii) the name and corporate domicile of the Company; (iii) the amount of the payment; (iv) the currency
used; (v) the country of origin; (vi) the reasons for the payment; and (vii) further information that may be required.
Securities Law Notice
The grant of RSUs and the Shares issued pursuant to the award are considered a private placement outside of the scope of Spanish laws on public offerings and
issuances.
Sweden
No country-specific terms apply.
18
Source: RED HAT INC, 10-K, April 25, 2013
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APPENDIX B
Switzerland
No country-specific terms apply.
Taiwan
Exchange Control Information
The Participant may acquire and remit foreign currency (including proceeds from the sale of Shares of the Company) into Taiwan up to US$5,000,000 per year.
There is no need to aggregate all remittances into Taiwan when calculating the limitation. If the transaction amount is TWD$500,000 or more in a single transaction, the
Participant must submit a Foreign Exchange Transaction Form and also provide supporting documentation to the satisfaction of the remitting bank.
United Kingdom
Tax Withholding Obligations
The following supplements the Withholding Taxes paragraph of the Agreement:
If payment or withholding of the income tax due is not made within 90 days of the event giving rise to the Tax-Related Items (the “Due Date”) or such other period
specified in Section 222(1)(c) of the U.K. Income Tax (Earnings and Pensions) Act 2003, the amount of any uncollected Tax-Related Items shall constitute a loan owed
by the Participant to the Employer, effective on the Due Date. The Participant agrees that the loan will bear interest at the then-current HM Revenue and Customs
Official Rate, it will be immediately due and repayable, and the Company or the Employer may recover it at any time thereafter by any of the means referred to in the
Agreement. Notwithstanding the foregoing, if the Participant is an “Officer” (as defined in Rule 16a-1(f) of the U.S. Securities Exchange Act of 1934), the terms of this
provision will not apply to the Participant. In the event that Tax-Related Items are not collected from or paid by an Officer by the Due Date, the amount of any
uncollected Tax-Related Items may constitute a benefit to the Participant on which additional income tax and National Insurance Contributions may be payable. The
Participant agrees that the Company and/or the Employer may collect any income tax and National Insurance Contributions due on this additional benefit from the
Officer by any of the means set forth in the Agreement.
19
Source: RED HAT INC, 10-K, April 25, 2013
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Exhibit 10.18
RED HAT, INC.
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made effective as of December 19, 2007 by and between Red Hat, Inc., a Delaware corporation with its offices at 1801
Varsity Drive, Raleigh, North Carolina 27606 (the “Company”), and James M. Whitehurst, an individual (“Executive”). Together the Company and Executive shall be
referred to herein as the “Parties.”
The following terms of employment are agreed to by the Parties:
1. Engagement. Commencing on January 1, 2008 (“Effective Date”), the Company shall employ Executive as President and Chief Executive Officer of the
Company. Executive shall report solely and directly to the Board of Directors of the Company (the “Board”). Executive shall have responsibilities, duties and
authorities as specified by the Board from time to time, which will generally be commensurate with chief executive officers of public entities of similar size and
character, and shall be the chief external representative of the Company. For so long as Executive remains President and Chief Executive Officer of the Company, the
Board will nominate Executive to the Board and, if elected, Executive shall serve in such capacity without additional consideration. Executive will at all times comply
with all policies of the Company then in effect.
2. Commitment. During and throughout the Employment Term (as defined in Section 3 below), Executive will devote substantially all of his full working time
and attention to the Company. During the Employment Term, Executive shall not engage in any employment, occupation, consulting or other activity for direct or
indirect financial remuneration unless approved by the Board; provided, however, that Executive may (i) serve in any capacity with any professional, community,
industry, civic (including governmental boards), educational or charitable organization and (ii) subject to the Company’s policies applicable to all employees, make
investments in other businesses and manage his and his family’s personal investments and legal affairs; provided that any such activities described in (i) or (ii) above do
not materially interfere with the discharge of Executive’s duties as the President and Chief Executive Officer of the Company. Executive shall perform his services
under this Agreement primarily through a division of time spent at the Company’s headquarters in Raleigh, North Carolina and the Company’s offices in Westford,
Massachusetts.
3. Employment Term. Executive’s employment with the Company pursuant to this Agreement shall begin on the Effective Date and shall continue until his
employment terminates (such employment period being referred to herein as the “Employment Term”).
4. Cash and Stock Compensation.
4.1 Base Salary. During his employment hereunder, Executive shall be entitled to receive a base salary (“Base Salary”) at a rate of seven hundred thousand
dollars ($700,000) on an annualized basis. The Company shall pay Executive’s Base Salary periodically in arrears not less frequently than monthly in accordance with
the Company’s regular payroll practices as in effect from time to time. The Board will review Executive’s Base Salary no less frequently than annually. If increased, the
increased Base Salary shall become the Base Salary for all purposes of this Agreement, and shall never be decreased.
4.2 Incentive Bonus. Executive, upon meeting the applicable performance criteria established following the process set forth below in the sole judgment of the
Company’s Compensation Committee of the Board (“Compensation Committee”), shall be eligible to receive an annual incentive target bonus for a given fiscal year of
the Company in an amount equal to 100% of Executive’s Base Salary in effect at the beginning of such fiscal year (“Target Bonus”). For performance exceeding such
applicable performance criteria in the sole judgment of the Compensation Committee, Executive shall be eligible to receive an annual incentive bonus for a given fiscal
year of the Company in an amount in excess of the Target Bonus but not in excess of 200% of Executive’s Base
1
Source: RED HAT INC, 10-K, April 25, 2013
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Salary in effect at the beginning of such fiscal year, which amount shall be determined by the Compensation Committee in its sole discretion. The performance criteria
that Executive must substantially and timely achieve by the end of the relevant fiscal year in order to receive his Target Bonus shall be those selected by the
Compensation Committee under the Company’s Executive Variable Compensation Plan, or a successor cash incentive compensation plan (“EVC Plan”), for the
relevant fiscal year. In the event that all such performance criteria for a given fiscal year have not been achieved, the Compensation Committee in its sole discretion
may award a partial bonus (or no bonus) based upon the degree to which the specified performance criteria were successfully completed, the relative importance of
those completed and any other factor that the Compensation Committee may deem relevant. Except for the Company’s 2008 fiscal year and as otherwise provided
herein, any bonus described in this Section 4.2 will be paid according and subject to the terms of the EVC Plan under which it was awarded. Notwithstanding any other
provision of this Section 4.2, for the Company’s 2008 fiscal year ending February 29, 2008, Executive’s incentive bonus pursuant to this Section 4.2 shall be equal to
the Target Bonus set forth above, prorated for the portion of the Company’s fiscal year during which Executive performed services for the Company under this
Agreement.
4.3 Compensatory Stock Awards.
A. Grant of Compensatory Stock Awards. As soon as administratively practicable on or following the Effective Date, but in any event no later than 10 days after
the Effective Date, Executive shall be granted an option to purchase 500,000 shares of the Company’s no par common stock (“Common Stock”) and 175,000 shares of
restricted stock under the Company’s 2004 Long-Term Incentive Plan (the “Stock Plan”). Any option granted to Executive in connection with the commencement of his
employment shall have a per share exercise price equal to 100% of the closing fair market value of the Company’s common stock as traded on the New York Stock
Exchange on the date of grant, shall vest in equal amounts on an annual basis over a four year period following the date of grant, and otherwise (except as expressly
provided in Section 6 below) shall contain the same terms and conditions as the Company’s standard form of non-qualified stock option agreement adopted for use
under the Stock Plan. Any grant of restricted stock made to Executive in connection with the commencement of his employment shall vest in equal amounts on an
annual basis over a four year period following the date of grant and otherwise (except as expressly provided in Section 6 below) shall contain the same terms and
conditions as the Company’s standard form of restricted stock agreement, as applicable, adopted for use under the Stock Plan. The Compensation Committee will
consider the grant of additional compensatory stock awards to Executive no less frequently than annually.
5. Employee Benefits.
5.1 Employee Welfare and Retirement Plans. Executive shall, to the extent eligible, be entitled to participate at a level commensurate with his position in all
employee welfare benefit and retirement plans and programs provided by the Company to its executives in accordance with the terms thereof as in effect from time to
time. Such plans and programs currently include, without limitation, the 401(k) Plan, and the group term life insurance, comprehensive health, major medical, dental
and disability plans.
5.2 Business Expenses. Upon submission of appropriate documentation in accordance with its policies in effect from time to time, the Company shall promptly
pay to or reimburse Executive for all reasonable business expenses which Executive incurs in performing his duties under this Agreement, including, but not limited to,
travel, entertainment, professional dues and subscriptions, so long as such expenses are reimbursable under the Company’s policies in effect from time to time.
5.3 Relocation Expenses. Upon submission of appropriate documentation in accordance with its policies in effect from time to time, the Company shall pay or
reimburse Executive for (i) all reasonable expenses which Executive incurs in connection with relocating Executive’s family and his principal residence from the
Atlanta, Georgia area (“Relocation Expenses”) and (ii) a full tax gross-up of the Relocation Expenses that are subject to federal, state and/or local tax (the “Relocation
Gross-Up”); provided that the total amount of the Relocation
2
Source: RED HAT INC, 10-K, April 25, 2013
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Expenses and the Relocation Gross-Up shall not exceed one hundred fifty thousand dollars ($150,000). If Executive has been unable to sell his current principal
residence in the Atlanta, Georgia area within a commercially reasonable period of time, which time shall be determined by mutual agreement between Executive and
the Company, then the Company shall provide Executive with an additional one hundred fifty thousand dollars ($150,000). The manner in which relocation expenses
are incurred and reimbursed is intended to be exempt from the application of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”).
5.4 Paid Time Off. Executive shall be entitled to paid time off in accordance with the standard written policies of the Company with regard to executives, but in
no event less than twenty (20) days per calendar year (prorated for any calendar year in which Executive is not performing services for the Company for the entire year)
in addition to Company holidays. Unused vacation days with respect to any calendar year shall be carried over into the next calendar year in accordance with the
standard written policy of the Company.
6. Termination of Employment.
6.1 General. Subject in each case to the provisions of this Section 6, nothing in this Agreement shall interfere with or limit in any way the right of the Company
to terminate Executive’s employment at any time, for any reason or no reason, with or without notice, and nothing in this Agreement shall confer on Executive any right
to continue in the employ of the Company. If Executive’s employment terminates due to death or for any other reason or for no reason, he will be entitled to receive (in
addition to any compensation and benefits he is entitled to receive under Section 6.2 through 6.6 below): (i) any earned but unpaid Base Salary, (ii) any earned but
unpaid annual incentive bonus, (iii) unreimbursed business expenses in accordance with the Company’s policies for which expenses Executive has provided appropriate
documentation, (iv) a lump sum cash amount equal to the value of his unused vacation days in accordance with the standard written policy of the Company, and (v) any
amounts or benefits to which Executive is then entitled under the terms of the benefit plans then sponsored by the Company in accordance with their terms.
Notwithstanding any other provision in this Agreement to the contrary, any severance benefits to which Executive may be entitled shall be provided exclusively through
the terms of this Section 6 of this Agreement.
6.2 Termination Without Cause, Voluntary Termination with Good Reason.
A. General. If, during the Employment Term, Executive’s employment is terminated by the Company without Cause (defined below), or Executive voluntarily
resigns from the Company for Good Reason (defined below), Executive shall be entitled to the following severance benefits:
(1) Base Salary, Incentive Bonus, and Benefits. The Company shall pay to Executive in cash an amount equal to the sum of (x) 150% of Executive’s then
current annualized Base Salary and (y) a prorated portion (prorated for the portion of the Company’s fiscal year during which Executive performed services for the
Company under this Agreement) of Executive’s then current Target Bonus (based on the Base Salary in effect on the date of Executive’s termination of employment).
Such amounts shall be in equal installments over an eighteen (18) month period following the Effective Release Date (as defined below) in accordance with the
Company’s standard payroll policies and procedures and in a manner not inconsistent with Section 6.6 hereof.
The Company shall also pay the full cost of the health care premiums otherwise payable by Executive upon his election of health care continuation coverage for
himself and his qualified beneficiaries as provided under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) for a period of no longer than 18
months following Executive’s termination of employment. The receipt of any severance benefits provided for under this Agreement or otherwise shall be dependent
upon Executive’s delivery to the Company an effective general release of claims in a form substantially in the form attached hereto as Exhibit A, with such future
changes as may be reasonably determined by the Company in order to reflect changes in applicable law, within thirty (30) days of the date of Executive’s termination of
employment (or such longer period as may be required by
3
Source: RED HAT INC, 10-K, April 25, 2013
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applicable law), and shall be paid or commence no later than thirty (30) days thereafter. The date on which Executive’s release of claims becomes effective shall be
referred to as the “Effective Release Date.” The receipt of any severance benefits hereunder shall also be dependent upon Executive’s compliance with the terms of the
Company’s form of Employee Inventions Assignment and Restrictive Obligations Agreement, which agreement was signed by Executive in connection with the
commencement of his employment, as such agreement may be amended from time to time.
(2) Stock Awards. That portion of any stock award previously granted to Executive by the Company during the Employment Term which is still outstanding but
unvested on Executive’s date of termination of employment and which would otherwise have vested during the subsequent eighteen (18) month period had
Executive’s employment continued for an additional 18 months, will immediately vest as of Executive’s Effective Release Date. In addition, Executive’s right to
exercise any outstanding stock option shall end on the earlier of the first anniversary of the date of Executive’s termination of employment or the expiration of the
option’s maximum term, which provision shall be reflected in the terms of any stock option agreement issued to Executive by the Company. Any sale of Company
stock by Executive shall continue to conform to the Company’s Insider Trading Policy, as now in existence and as hereinafter amended, for so long as Executive is
providing services for the Company and for 180 days thereafter.
B. No Mitigation/No Offset. Executive shall not be required to seek other employment or otherwise mitigate the value of any severance benefits contemplated by
this Agreement, nor shall any such benefits be reduced by any earnings or benefits that Executive may receive from any other source. The amounts payable hereunder
shall not be subject to setoff, counterclaim, recoupment, defense or other right which the Company may have against Executive or others. Notwithstanding any other
provision of this Agreement, any sum or sums paid under this Agreement shall be in lieu of any amounts to which Executive may otherwise be entitled under the terms
of any severance plan, policy, program, agreement or other arrangement sponsored by the Company or an affiliate of the Company.
6.3 Termination for Cause, Voluntary Resignation Without Good Reason.
A. General. If, during the Employment Term, Executive’s employment is terminated by the Company for Cause, or Executive voluntarily resigns from his
employment hereunder other than for Good Reason, Executive shall be entitled only to payment of his Base Salary through and including the date of termination of his
employment. Executive shall have no further right to receive any other compensation or benefits after such termination or resignation of employment, except as
determined in accordance with the terms of the employee benefit plans or programs of the Company or as required by law.
B. Cause. Termination for “Cause” shall mean termination of Executive’s employment because of:
(1) the failure by Executive either (a) to materially perform his duties with the Company or (b) to materially comply with the terms of the Company’s form of
Employee Inventions Assignment and Restrictive Obligations Agreement signed by Executive (other than any such failure resulting from (i) his incapacity due to
physical or mental impairment or (ii) such factors as are outside Executive’s control, including, but not limited to, economic downturns, litigation against the
Company, or natural disasters), unless any such failure is corrected within thirty (30) days following written notice by the Board that specifically identifies the manner
in which the Board believes Executive has substantially failed to materially perform his duties; or
(2) the gross or willful misconduct by Executive with regard to the Company or any employee of the Company that is materially injurious to the Company or
such employee; or
(3) the conviction of Executive, or plea of guilty or nolo contendere by Executive, to a crime classified as a felony.
4
Source: RED HAT INC, 10-K, April 25, 2013
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C. Good Reason. For the purposes of this Agreement “Good Reason” means, the occurrence, without the express written consent of Executive, of any of
the following events: (i) either (a) any material reduction or diminution (except temporarily during any period of disability) in Executive’s titles or positions
assured in Section 1 under this Agreement, or (b) any material diminution in Executive’s authority, duties or responsibilities with the Company or the addition of
any titles, duties and responsibilities, in either case that are materially inconsistent with his authority, title, duties and responsibilities as Chief Executive Officer
of the Company; provided, however, that any changes in Executive’s titles, positions, authority, duties or responsibilities due to the fact that the Company or its
successor becomes a privately held company or a division or subsidiary of a publicly traded company shall not constitute “Good Reason” so long as Executive
continues as the chief executive of the business of the Company substantially as conducted immediately prior to the time that the Company becomes privately
held, a division or a subsidiary, as the case may be, and there is no material diminution in Executive’s authority, duties or responsibilities (other than the fact that
he is no longer the chief executive of a publicly traded company); (ii) a breach by the Company of any material provision of this Agreement, including, but not
limited to, any reduction (other than a reduction (not to exceed ten percent (10%) that applies, in substantially equal percentages, to all officers (within the
meaning of Section 16 of the Securities Exchange Act of 1934, as amended, of the Company)) in Executive’s Base Salary; (iii) the failure of the Company to
obtain and deliver to Executive a satisfactory written agreement from any successor to the Company to assume and agree to perform this Agreement in
accordance with Section 9.4; (iv) the failure to nominate or re-nominate Executive to the Board during the Employment Term or the removal of Executive from
the Board without Cause or as a result of a stockholder election in connection with an actual or threatened proxy contest relating to the election of directors to the
Company, in either case only during such period in which a class of the Company’s equity securities is actively traded on an established public securities trading
market; or (v) the Company relocating Executive’s principal office outside of the metropolitan area to which Executive relocates under Section 5.3. No
termination of Executive’s employment by Executive for Good Reason for which any severance benefits shall become payable pursuant to Sections 6.2 or 6.5
shall be effective unless the following provisions of this Section 6.3(C) shall have been complied with. Executive shall give written notice to the Company of his
intention to terminate his employment for Good Reason, which notice shall (i) state in detail the particular circumstances that constitute the grounds on which the
proposed termination for Good Reason is based and (ii) be given no later than 90 days after the first occurrence of such circumstances. The Company shall have
30 days after receiving such notice in which to cure such grounds. If the Company fails to cure such grounds within such 30-day period, Executive’s employment
with the Company shall thereupon terminate for Good Reason.
6.4 Death or Disability. Executive’s employment hereunder shall terminate immediately upon his death, or if the Board, based upon appropriate medical
evidence, determines Executive has become physically or mentally incapacitated so as to render him incapable of performing his usual and customary duties as
President and Chief Executive Officer of the Company for a continuous period in excess of one hundred eighty (180) days.
6.5 Special Provisions for Certain Terminations in Connection with a Change of Control.
A. General. If, during the Employment Term, either (x) Executive’s employment is terminated by the Company without Cause (defined above) either within 3
months prior to or upon or within 24 months following the occurrence of a Change of Control (as defined below), or (y) Executive voluntarily resigns from the
Company for Good Reason (defined above) upon or within 24 months following the occurrence of a Change of Control, Executive shall be entitled to the following
severance benefits:
(1) Base Salary, Incentive Bonus, and Benefits. The Company shall pay Executive in cash a lump sum amount equal to the sum of the following: (1) 200% of
Executive’s then current annualized Base Salary, (2) 200% of Executive’s then current Target Bonus (based on the Base Salary in effect on the date of Executive’s
termination of employment), and (3) a prorated portion (prorated for the portion of the Company’s fiscal year during which Executive performed services for the
Company under this Agreement) of Executive’s Target Bonus for the fiscal year in which Executive’s termination of employment may occur.
5
Source: RED HAT INC, 10-K, April 25, 2013
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The Company shall also pay the full cost of the health care premiums otherwise payable by Executive upon his election of health care continuation coverage for
himself and his qualified beneficiaries as provided under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) for a period of no longer than 24
months following Executive’s termination of employment. Finally the Company shall pay the premiums for term life insurance in the same amount of death benefit
protection that Executive enjoyed under Company-provided life insurance coverage on the date of his termination of employment for a period of 24 months following
such date of termination of employment. Executive understands and agrees that the Company shall be under no obligation to provide Executive with either group
health coverage or life insurance except to the extent required by law and that its obligations under this Agreement are limited solely to the payment of premium costs
as described herein. The receipt of any severance benefits provided for under this Agreement or otherwise shall be dependent upon Executive’s delivery to the
Company an effective general release of claims in a form satisfactory to the Company within thirty (30) days of the date of Executive’s termination of employment (or
such longer period as may be required by applicable law), and shall be paid or commence no later than thirty (30) days thereafter.
(2) Stock Awards. Any stock award previously granted to Executive by the Company during the Employment Term which is still outstanding but unvested on
Executive’s date of termination of employment will immediately vest as of Executive’s Effective Release Date.
B. No Mitigation/No Offset. Executive shall not be required to seek other employment or otherwise mitigate the value of any severance benefits contemplated by
this Agreement, nor shall any such benefits be reduced by any earnings or benefits that Executive may receive from any other source. The amounts payable hereunder
shall not be subject to setoff, counterclaim, recoupment, defense or other right which the Company may have against Executive or others. Notwithstanding any other
provision of this Agreement, any sum or sums paid under this Agreement shall be in lieu of any amounts to which Executive may otherwise be entitled under the terms
of any severance plan, policy, program, agreement or other arrangement sponsored by the Company or an affiliate of the Company.
C. Change of Control. For the purpose of this Agreement, “Change of Control” is defined as:
(1) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the “beneficial owner” (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 35% or more of the total voting power represented by the
Company’s then outstanding voting securities (“Company Voting Securities”); provided , however , that the event described in this Section 6.5(C)(1) shall not be
deemed to be a Change of Control by virtue of any of the following acquisitions: (a) by the Company or any subsidiary of the Company, (b) by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, (c) by any underwriter temporarily holding securities pursuant to an
offering of such securities, or (d) by any person of Company Voting Securities from the Company, if a majority of the Incumbent Directors approve in advance the
acquisition of beneficial ownership of 35% or more of Company Voting Securities by such person; or
(2) A change in the composition of the Board occurring within any two-year period as a result of which fewer than a majority of the directors are Incumbent
Directors. “Incumbent Directors” shall mean directors who either (i) are directors of the Company as of the date hereof, or (ii) are elected, or nominated for election, to
the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination, but, in the case of clause (ii), was not
elected or nominated in connection with an actual or threatened proxy contest relating to the election of directors to the Company (any person elected to the Board
after being nominated as provided in clause (ii) shall then be considered an Incumbent Director); or
(3) The consummation of a merger, consolidation or similar transaction involving the Company with any other business entity in which the voting securities of
the Company outstanding immediately prior thereto would not continue to represent (either by remaining outstanding or by being converted into voting
6
Source: RED HAT INC, 10-K, April 25, 2013
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securities of the surviving entity or its parent, as the case may be) at least 50% of the total voting power represented by the voting securities of the Company or such
surviving entity or its parent, as the case may be, outstanding immediately after such merger, consolidation or similar transaction and such voting power among the
holders thereof is in substantially the same proportion as the voting power of such securities among the holders thereof immediately prior to the transaction; or
(4) The consummation of the sale, lease, disposition or similar transfer by the Company of all or substantially all of the Company’s assets (“Asset Sale”); or
(5) The approval by the stockholders of the Company of a plan of complete liquidation or dissolution of the Company.
Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 35% of
the Company Voting Securities as a result of the repurchase or other reacquisition of Company Voting Securities by the Company which reduces the number of
Company Voting Securities outstanding; provided , that if after such acquisition by the Company such person becomes the beneficial owner of additional Company
Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company
shall then occur. Furthermore, notwithstanding any other provision in this Section 6.5, any transaction defined in Section 6.5(C)(1) through (5) above that does not
constitute a “change in the ownership or effective control” of the Company, or “change in the ownership of a substantial portion of the assets” of the Company within
the meaning of Treasury Regulations 1.409A-3(a)(4) and 1.409A-3(i)(5) shall not be treated as a Change of Control. Executive understands that the Company has
commenced the process of reviewing its various compensatory plans, agreements, programs, policies and arrangements for compliance with Section 409A of the Code
and Executive hereby agrees that the Company may unilaterally amend the definition of “Change of Control” in this Section 6.5 in a manner recommended by its
counsel with the intent of complying with the requirements of Section 409A of the Code.
6.6 Effect of Section 409A of the Code. Notwithstanding anything to the contrary in this Agreement, if, upon the advice of its counsel, the Company determines
that any payments or benefits to be provided to Executive pursuant to this Section 6 are or may become subject to the additional tax under Section 409A(a)(1)(B) of the
Code or any other taxes or penalties imposed under Section 409A of the Code (“409A Taxes”) as applicable at the time such payments and benefits are otherwise
required under this Agreement, then such payments or benefits shall be delayed until the date that is six months after the date of Executive’s “separation from service”
(as such term is defined under Section 409A of the Code) with the Company, or such shorter period that, in the opinion of such counsel, is sufficient to avoid the
imposition of 409A Taxes (the “Payments Delay Period”). The Company and Executive agree to cooperate in good faith so that Executive will not be taxed under
Section 409A of the Code.
7. “Golden Parachute” Excise Tax.
7.1 Gross-up Payment. In the event that Executive shall become entitled to payments and/or benefits provided by this Agreement or any other amounts in the
nature of compensation (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions
result in a change of ownership or effective control covered by Section 280G(b)(2) of the Code or any person affiliated with the Company or such person) as a result of
such change in ownership or effective control (collectively the “Company Payments”), and such Company Payments will be subject to the tax imposed by Section 4999
of the Code and any similar tax that may hereafter be imposed by any other taxing authority (the “Excise Tax”), the Company shall pay to Executive at the time
specified in Section 7.4 below an additional amount (the “Gross-up Payment”) such that the net amount retained by Executive, after deduction of any Excise Tax on the
Company Payments and any other tax upon the Gross-up Payment provided for by this Section 7.1, but before deduction for any tax (other than the Excise Tax) on the
Company Payments, shall be equal to the Company Payments.
7
Source: RED HAT INC, 10-K, April 25, 2013
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7.2 Determination of Excise Tax Payments. For purposes of determining whether any of the Company Payments and Gross-up Payments (collectively
the “Total Payments”) will be subject to the Excise Tax and the amount of such Excise Tax, the calculations called for by Section 280G of the Code and the
regulations promulgated thereunder shall be completed by the Company’s independent certified public accountants appointed prior to any change in ownership
(as defined under Section 280G(b)(2) of the Code) or tax counsel selected by the Company (the “Accountants”). The Company shall pay the costs incurred by the
Accountants in completing such calculations and providing any written conclusions or analysis to the Company and Executive. Absent manifest error, any
determinations or conclusions reached by the Accountants shall be binding, final and conclusive upon the Company and Executive.
7.3 Adjustment of Gross-Up Payments. For purposes of determining the amount of the Gross-up Payment, Executive shall be deemed to pay U.S. federal
income taxes at the highest marginal rate of U.S. federal income taxation in the calendar year in which the Gross-up Payment is to be made and state and local income
taxes at the highest marginal rate of taxation in the state and locality of Executive’s residence for the calendar year in which the Company Payments are to be made, net
of the maximum reduction in U.S. federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year. In the event that the
Excise Tax is subsequently determined by the Accountants to be less than the amount taken into account hereunder at the time the Gross-up Payment is made,
Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior Gross-up Payment
attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and any other tax imposed on the portion of the Gross-up
Payment being repaid by Executive if such repayment results in a reduction in Excise Tax or a tax deduction), plus interest on the amount of such repayment at the rate
provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Gross-up Payment to be refunded to the Company has
been paid to any tax authority, repayment thereof (and related amounts) shall not be required until actual refund or credit of such portion has been made to Executive,
and interest payable to the Company shall not exceed the interest received or credited to Executive by such tax authority for the period it held such portion. Executive
and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expense thereof) if Executive’s claim for refund or
credit is denied.
In the event that the Excise Tax is later determined by the Accountant or the Internal Revenue Service to exceed the amount taken into account hereunder at the
time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment),
the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) at the time that
the amount of such excess is finally determined.
7.4 Payment Date. The Gross-up Payment or portion thereof provided for in Section 7.3 shall be paid not later than the thirtieth (30th) day following an event
occurring which subjects Executive to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined
on or before such day, the Company shall pay to Executive on such day an estimate, as determined in good faith by the Accountants, of the minimum amount of such
payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code), subject to further payments
pursuant to Section 7.3 hereof, as soon as the amount thereof can reasonably be determined, but in no event later than the ninetieth (90th) day after the occurrence of the
event subjecting Executive to the Excise Tax. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due,
such excess shall constitute a payment by the Company to Executive, payable on the fifth (5th) day after demand by the Company (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code).
7.5 IRS Controversy. In the event of any controversy with the Internal Revenue Service (or other taxing authority) with regard to the Excise Tax, Executive shall
permit the Company to control issues related to the Excise Tax (at its expense), provided that such issues do not potentially materially adversely affect Executive, but
Executive shall control any other issues. In the event the issues are interrelated, Executive and the Company shall in good faith cooperate so as not to jeopardize
resolution of either issue, but if the parties cannot agree
8
Source: RED HAT INC, 10-K, April 25, 2013
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Executive shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated
income taxes, Executive shall permit the representative of the Company to accompany Executive, and Executive and Executive’s representative shall cooperate with the
Company and its representative.
7.6 Copies of Communications. The Company and Executive shall promptly deliver to each other copies of any written communications, and summaries of any
verbal communications, with any taxing authority regarding the Excise Tax covered by this Section 7.
8. Liability Insurance.
8.1 Coverage. The Company shall cover Executive under directors and officers liability insurance both during and, while potential liability exists, after the
Employment Term in the same amount and to the same extent, if any, as the Company covers its other officers and directors.
8.2 Indemnification. The Company shall during and after the Employment Term indemnify and hold harmless Executive to the extent set forth in that
Indemnification Agreement entered into by and between the Company and Executive in connection with the commencement of Executive’s employment, as such
agreement may be amended from time to time.
9. Miscellaneous.
9.1 Payment of Legal Fees. The Company shall pay Executive’s reasonable legal fees and costs associated with entering into this Agreement, such fees and
costs to not exceed $20,000 and to be itemized to the extent they exceed $4,000. All such fees and costs shall be incurred in 2007, submitted to the Company no later
than January 1, 2008 and paid by the Company no later than March 15, 2008.
9.2 Notices. All notices or communications hereunder shall be in writing, addressed as follows:
To the Company:
Red Hat, Inc.
1801 Varsity Drive
Raleigh, North Carolina 27606
ATTN: Board of Directors
and
General Counsel
Red Hat, Inc.
1801 Varsity Drive
Raleigh, North Carolina 27606
To Executive at the address most recently provided to the Company and located in the Company’s books and records.
All such notices shall be conclusively deemed to be received and shall be effective, (i) if sent by hand delivery or courier, upon receipt, (ii) if sent by telecopy or
facsimile transmission, upon confirmation of receipt by the sender of such transmission, or (iii) if sent by registered or certified mail, on the fifth day after the day on
which such notice is mailed. Each party shall promptly notify the other of any change in its notification address, and until such notice is received, each party is entitled
to rely on the address in this Agreement or the last revised address actually supplied by the other party.
9
Source: RED HAT INC, 10-K, April 25, 2013
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9.3 Severability. Each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. Moreover, if any of the provisions contained in
this Agreement is determined by a court of competent jurisdiction to be unenforceable because it is excessively broad in scope, whether as to duration, activity,
geographic application, subject or otherwise, it shall be construed, by limiting or reducing it to the extent legally permitted, so as to be enforceable to the extent
compatible with then applicable law in order to achieve the intent of the Parties.
9.4 Assignment. This Agreement shall be binding upon and inure to the benefit of (a) the heirs, beneficiaries, executors and legal representatives of Executive
upon Executive’s death and (b) any successor of the Company, provided that any successor shall within ten (10) days of such assumption deliver to Executive a written
assumption in a form reasonably acceptable to Executive. Any such successor of the Company shall be deemed substituted for the Company under the terms of this
Agreement for all purposes. As used herein, “successor” shall mean any person, firm, corporation or other business entity which at any time, whether by purchase,
merger or otherwise, directly or indirectly acquires all or substantially all of the assets or business of the Company.
Notwithstanding such assignment, the Company shall remain, with such successor, jointly and severally liable for all of its obligations hereunder. This
Agreement may not otherwise be assigned by the Company.
None of the rights of Executive to receive any form of compensation payable pursuant to this Agreement shall be assignable or transferable except through a
testamentary disposition or by the laws of descent and distribution upon the death of Executive or as provided in Section 9.8 hereof. Any attempted assignment,
transfer, conveyance or other disposition (other than as aforesaid) of any interest in the rights of Executive to receive any form of compensation hereunder shall be null
and void; provided, however, that notwithstanding the foregoing, Executive shall be allowed to transfer vested shares subject to stock options or the vested portion of
other equity awards consistent with the rules for transfers to “family members” as defined in Securities Act Form S-8. Any attempted assignment, transfer, conveyance
or other disposition (other than as aforesaid) of any interest in the rights of Executive to receive any form of compensation hereunder shall be null and void.
9.5 Arbitration of Disputes.
A. Arbitration. In the event that the parties hereto have any dispute under this Agreement, the parties shall first attempt in good faith amicably to settle the matter
by mutual negotiations or mediation. If such negotiations are unsuccessful, the parties agree that all disputes that may arise between them arising out of, relating to, or
in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof shall be settled by binding arbitration to be
held in Raleigh, North Carolina, or such other location agreed by the parties hereto, in accordance with the National Rules for the Resolution of Employment Disputes
then in effect of the American Arbitration Association. The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator
shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator’s decision in any court having jurisdiction.
B. Governing Law. The arbitrators shall apply North Carolina law to the merits of dispute or claim, without reference to rules of conflicts of law. Executive and
the Company hereby expressly consent to the personal jurisdiction of the state and federal courts located in North Carolina for any action or proceeding arising from or
relating to this Agreement or relating to any arbitration in which the parties are participants.
C. Costs and Fees of Arbitration. Executive shall pay the initial arbitration filing (not to exceed $200), and the Company shall pay the remaining costs and
expenses of such arbitration (unless Executive requests that each party pay one-half of the costs and expenses of such arbitration or unless otherwise required by law).
Unless otherwise required by law or pursuant to an award by the arbitrator, the Company and Executive shall each pay
10
Source: RED HAT INC, 10-K, April 25, 2013
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separately its counsel fees and expenses. Notwithstanding the foregoing, the arbitrator may, but need not, award the prevailing party in any dispute its or his legal fees
and expenses; provided, however, that if Executive prevails with respect to a dispute that arises after the occurrence of a Change of Control, then the Company shall pay
all of his fees and expenses (including reasonable attorneys’ fees) which Executive incurred with respect to the dispute.
9.6 No Oral Modification, Cancellation or Discharge. This Agreement may only be amended, canceled or discharged in writing signed by Executive and the
Company’s General Counsel or any other executive officer of the Company (other than Executive) duly authorized either by the Board or the Compensation Committee.
9.7 Survivorship. The respective rights and obligations of Company and Executive hereunder shall survive any termination of Executive upon his employment
to the extent necessary to the intended preservation of such rights and obligations.
9.8 Beneficiaries. Executive shall be entitled, to the extent permitted under any applicable law, to select and change the beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder upon his death by giving the Company written notice thereof in a manner consistent with the terms of any applicable
plan documents. If Executive dies, severance then due or other amounts due hereunder shall be paid to his designated beneficiary or beneficiaries or, if none are
designated or none survive Executive, his estate.
9.9 Withholding. The Company shall be entitled to withhold, or cause to be withheld, any amount of federal, state, city or other withholding taxes or other
amounts either required by law or authorized by Executive with respect to payments made to Executive in connection with his employment hereunder.
9.10 Governing Law. This Agreement shall be construed, interpreted, and governed in accordance with the laws of North Carolina without reference to rules
relating to conflict of law.
9.11 Entire Agreement. This Agreement and any documents referred to herein represent the entire agreement of the parties and shall supersede any and all
previous contracts, arrangements or understandings between the Company and Executive.
9.12 Counterparts. This Agreement may be executed in two or more counterparts each of which shall be legally binding and enforceable.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and Executive has hereunto set his hand, as of the day and year first
above written, to be effective as of the Effective Date.
EXECUTIVE:
By:
RED HAT, INC.
/s/ James M. Whitehurst
/s/ Michael R. Cunningham
By:
Michael R. Cunningham
Its:
General Counsel
James M. Whitehurst
11
Source: RED HAT INC, 10-K, April 25, 2013
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Exhibit A
General Release of Claims
1. In further consideration for the payments, benefits and undertakings described in that Executive Employment Agreement entered into between Red Hat, Inc.
and Executive to which this General Release of Claims is an exhibit (“Employment Agreement”), provided by the Company to Executive, which Executive agrees are
in addition to any amounts or benefits to which he would otherwise be entitled under the terms of his Employment Agreement or any other agreement or terms of
employment with the Company, to the fullest extent permitted by law, Executive, individually and on behalf of his attorneys, representatives, successors, and assigns,
does hereby completely release and forever discharge the Company, its affiliated and subsidiary corporations, and its and their shareholders, directors, officers and all
other representatives, agents, employees, successors and assigns, from all claims, rights, demands, actions, obligations, and causes of action of any and every kind,
nature and character, known or unknown, which Executive may now have, or has ever had, against them arising from, or in any way connected with, the employment
relationship between the parties, any actions during the relationship, or the termination thereof. This release covers all statutory, common law, constitutional and other
claims, including but not limited to, all claims for wrongful discharge in violation of public policy, breach of contract, express or implied, breach of covenant of good
faith and fair dealing, intentional or negligent infliction of emotional distress, intentional or negligent misrepresentation, discrimination, any tort, personal injury, or
violation of statute including but not limited to Title VII of the Civil Rights Act and the Americans with Disabilities Act, which Executive may now have, or has ever
had. The parties agree that any past or future claims for money damages, loss of compensation, earnings and benefits, including but not limited to stock entitlements,
both past and future (except as provided in this Agreement), medical expenses, attorneys’ fees and costs, reinstatement and other equitable relief, are all released by this
Agreement.
2. Executive intends that this release of claims cover all claims, whether or not known to Executive. Executive further recognizes the risk that, subsequent to the
execution of this release, Executive may incur loss, damage or injury which Executive attributes to the claims encompassed by this release. Executive expressly
assumes this risk by signing this release and voluntarily and specifically waives any rights conferred by California Civil Code section 1542 which provides as follows:
A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor which if known by him or her must have
materially affected his or her settlement with the debtor.
Executive also hereby waives any rights under the laws of the State of North Carolina, the Commonwealth of Massachusetts, the State of Georgia or any other
jurisdiction which Executive may otherwise possess that are comparable to those set forth under California Civil Code section 1542.
3. Executive acknowledges that he has been given at least 21 days in which to review and consider this release, although Executive is free to execute this release
at any time within that 21-day period. Executive acknowledges that he has been advised to consult with an attorney about this release. Executive also acknowledges his
understanding that if Executive signs this release, Executive will have an additional 7 days from the date that Executive signs this release to revoke that acceptance,
which Executive may effect by means of a written notice sent to the General Counsel of the Company at the Company’s corporate headquarters. If this 7-day period
expires without a timely revocation, Executive acknowledges and agrees that this release will become final and effective on the eighth day following the date of
Executive’s signature, which eighth day will be the effective date of this release.
4. However, Executive is not releasing any of the following: (1) any rights to indemnification from the Company whether pursuant to the Employment
Agreement, any other agreement, the Company’s bylaws, applicable law or otherwise, (2) any claims regarding any payments or benefits due to Executive in
connection with his termination of employment under the Employment Agreement, (3) claims for benefits under any health,
12
Source: RED HAT INC, 10-K, April 25, 2013
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disability, retirement, life insurance or similar employee benefit plan of the Company according to the terms of such benefit plan, or (4) any claims related to
Executive’s rights to health care continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”).
5. To the fullest extent permitted by law, any dispute regarding the scope of this general release shall be determined by an arbitrator under the procedures set
forth in the arbitration clause in the Employment Agreement. Neither this release itself nor the furnishing of the consideration for this release shall be deemed or
construed as an admission of liability or wrongdoing of any kind by the Company.
6. To the fullest extent permitted by law, at no time subsequent to the execution of this release will Executive pursue, or cause or knowingly permit the
prosecution, in any state, federal or foreign court, or before any local, state, federal or foreign administrative agency, or any other tribunal, any charge, claim or action
of any kind, nature and character whatsoever, known or unknown, which he may now have, has ever had, or may in the future have against the Company and/or any
officer, director, employee or agent of the Company, which is based in whole or in part on any matter covered by this release. Executive represents and warrants that
there has been no assignment or other transfer of any interest in any claim by Executive that is covered by this release.
7. Executive acknowledges and agrees that his execution of this release is supported by independent and adequate consideration in the form of payments and/or
benefits from the Company to which Executive would not have become entitled if he had not signed this release.
IN WITNESS WHEREOF, Executive has duly executed this release as of the day and year set forth below.
Dated:
, 20
James M. Whitehurst
13
Source: RED HAT INC, 10-K, April 25, 2013
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Exhibit 10.19
RED HAT, INC.
Red Hat, Inc. 2004 Long-Term Incentive Plan, as amended
Form of Director Deferred Stock Unit Agreement (Vested)
Cover Sheet
This Agreement evidences the grant by Red Hat, Inc., a Delaware corporation (the “Company”), on the date set forth below (the “Grant Date”) to the person named
below (the “Director” or “Participant”) of a Deferred Stock Unit Award (the “Award”) of the number of deferred stock units listed below (the “Deferred Stock Units”).
Each unit represents the right to receive one share of the Company’s common stock, $.0001 par value per share (“Common Stock”). This Award is subject to the terms
and conditions specified in the Red Hat, Inc. 2004 Long-Term Incentive Plan, as amended (the “Plan”) and in the Agreement, consisting of this Cover Sheet, the
attached Exhibit A and Appendix A thereto.
Director Name:
Grant Date:
Number of Deferred Stock Units:
RED HAT, INC.
1801 Varsity Drive
Raleigh, North Carolina 27606
(Director Signature)
By:
Name:
Title:
By accepting this Award, the Director hereby (i) acknowledges that a copy of the Plan and a copy of the Plan prospectus have been delivered to the Director and
additional copies thereof are available upon request from the Company’s Equity Compensation Department and can also be accessed electronically, (ii) acknowledges
receipt of a copy of this Cover Sheet, and Exhibit A and Appendix A thereto (collectively, the “Agreement”) and accepts the Award subject to all the terms and
conditions of the Plan and the Agreement; (iii) represents that the Director has read and understands the Plan, the Plan prospectus and the Agreement, and
(iv) acknowledges that there are tax consequences related to the Award and that the Director should consult a tax advisor to determine his or her actual tax
consequences. The Director must accept this Award electronically, within thirty (30) days following notification of the grant, pursuant to the online
acceptance procedure established by the Company; otherwise, the Company may, in its sole discretion, rescind the Award in its entirety.
Source: RED HAT INC, 10-K, April 25, 2013
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EXHIBIT A
RED HAT, INC.
Red Hat, Inc. 2004 Long-Term Incentive Plan, as amended
Director Deferred Stock Unit Agreement (Vested)
Terms and Conditions
1.
Grant of Deferred Stock Units.
The Award is granted pursuant to and is subject to and governed by the Plan and the terms of this Agreement. Unless otherwise defined in this Agreement,
capitalized terms used herein shall have the same meaning as in the Plan. The Shares of Common Stock that are issuable after the Deferred Stock Units have been
earned are referred to in this Agreement as “Shares.” The Deferred Stock Units shall be granted to the Participant without payment of consideration (other than
continuing services).
2.
Deferred Stock Unit Account.
The Company shall credit to a bookkeeping account (the “Account”) maintained by the Company for the Participant’s benefit the Deferred Stock Units, each of
which shall be deemed to be the equivalent of one Share.
Whenever any cash dividends are declared on the Shares, on the date such dividend is paid, the Company will credit to the Account of the Participant a number
of additional Deferred Stock Units equal to the result of dividing (i) the product of the total number of Deferred Stock Units credited to the Participant’s Account on the
record date for such dividend and the per share amount of such dividend by (ii) the Fair Market Value of one Share, on the date such dividend is paid by the Company
to the holders of Shares. The Participant shall have no other rights as a shareholder with respect to the Shares underlying the Deferred Stock Units.
3.
Vesting.
The Deferred Stock Units shall be fully vested as of the Grant Date.
4.
Payment of the Account.
The Company shall make a payment to the Participant in Shares as provided in Section 5 with respect to the number of Deferred Stock Units then credited to the
Participant’s Account on the date of the Director’s cessation of services as a director, or if earlier, the Director’s death, disability (as defined in Section 409A of the
Code (“Section 409A”)), or upon a Change in Control (as defined in Appendix A ) provided that such Change in Control is a permissible distribution event under
Section 409A(a)(2)(A)(v) (the “Payment Date”).
5.
Form of Payment.
Payments pursuant to Section 4 shall be made in Shares equal to the number of Deferred Stock Units in the Participant’s Account on the Payment Date. Such
payment shall be made as soon as practicable, but not later than 90 days, after the Payment Date.
6.
Beneficiary.
In the event of the Participant’s death prior to payment of the Deferred Stock Units credited to the Participant’s Account, payment shall be made to the last
person or persons designated by the Participant in writing prior to the Participant’s death (“Beneficiary”) or, if no such Beneficiary survives the Participant, such
payment shall be made to the Participant’s estate.
2
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
7.
Source of Payments.
The Participant’s right to receive payment under this Agreement shall be an unfunded entitlement and shall be an unsecured claim against the general assets of
the Company. The Participant has only the status of a general unsecured creditor hereunder, and this Agreement constitutes only a promise by the Company to pay the
value of the Account on any required payment date.
8.
Restrictions on Transfer.
(a) The Participant shall not sell, assign, transfer, pledge, hypothecate or otherwise encumber or dispose of any Deferred Stock Units, either voluntarily or by
operation of law. Any attempt to dispose of any Deferred Stock Units in contravention of the above restriction shall be null and void and without effect.
(b) The Company shall not be required (i) to transfer on its books any of the Deferred Stock Units which have been transferred in violation of any of the
provisions set forth herein or (ii) to treat as the owner of such Deferred Stock Units any transferee to whom such Deferred Stock Units have been transferred in violation
of any of the provisions contained herein.
9.
Adjustments for Capital Changes.
The Plan contains provisions covering the treatment of Deferred Stock Units in a number of contingencies such as stock split and mergers. Provisions in the Plan
for such adjustments are hereby made applicable hereunder and are incorporated herein by reference.
10.
Change in Control.
Provisions regarding a Change in Control are set forth on Appendix A.
11.
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 Director, at the most recent address shown on the records of the Company, and if to the Company, to the Company’s principal office, attention of the
Corporate Secretary.
(b) Entire Agreement; Modification. This Agreement (including the cover sheet) and the Plan constitute the entire agreement between the parties relative to the
subject matter hereof, and supersede all communications between the parties relating to the subject matter of this Agreement. This Agreement may be modified,
amended or rescinded by the Committee as it shall deem advisable, subject to any requirement for shareholder approval imposed by applicable law or other applicable
rules, including, without limitation, the rules of the stock exchange on which the Shares are listed. If the Committee determines that the Award terms could result in
adverse tax consequences to the Participant, the Committee may amend this Agreement without the consent of the Participant in order to minimize or eliminate such tax
treatment.
(c) Plan Governs. This Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this
Agreement and one or more provisions of the Plan, the provisions of the Plan will govern.
(d) Severability.
any other provision.
The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of
(e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the heirs, legatees, distributees, executors and administrators of
the Participant and the successors and assigns of the Company.
3
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
(f) Participant’s Acceptance. The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations
regarding Participant’s participation in the Plan, receipt of this Deferred Stock Unit Agreement or Participant’s acquisition or sale of the underlying Shares. The
Participant is urged to read this Agreement carefully and to consult with his or her own personal tax, legal and financial advisors regarding the terms and
consequences of this Agreement and the legal and binding effect of this Agreement. By virtue of his or her acceptance of this Agreement, the Participant is
deemed to have accepted and agreed to all of the terms and conditions of this Award and the provisions of the Plan, including as binding, conclusive and final all
decisions or interpretations of the Committee upon any questions arising under the Plan or this Award.
(g) Section 409A. This Agreement and the Deferred Stock Units are intended to comply with the requirements of Section 409A and shall be construed
consistently therewith and shall be interpreted in a manner consistent with that intention. Terms defined in the Agreement shall have the meanings given such terms
under Section 409A if and to the extent required to comply with Section 409A. Notwithstanding any other provision of this Agreement, the Committee reserves the
right, to the extent the Committee deems necessary or advisable, in its sole discretion, to unilaterally amend the Plan and/or this Agreement to ensure that all Deferred
Stock Units are awarded and administered in a manner that complies with Section 409A. If and to the extent any portion of any payment, compensation or other benefit
provided to the Participant in connection with termination of service is determined to constitute “nonqualified deferred compensation” within the meaning of
Section 409A and the Participant is a specified employee as defined in Section 409A(a)(2)(B)(i) of the Code, as determined by the Company in accordance with its
procedures, by which determination the Participant hereby agrees that he is bound, such portion of the payment, compensation or other benefit shall not be paid before
the day that is six months plus one day after the date of separation from service (as determined under Section 409A (the “New Payment Date”)), except as Section 409A
may then permit. The aggregate of any payments that otherwise would have been paid to the Participant during the period between the date of separation from service
and the New Payment Date shall be paid to the Participant in a lump sum on such New Payment Date, and any remaining payments will be paid on their original
schedule. Notwithstanding the foregoing, the Company, its Affiliates, Directors, Officers and Agents shall have no liability to the Participant, or any other party, if an
Award that is intended to be compliant with Section 409A is not so compliant, or for any action taken by the Committee.
(h) Governing Law/Choice of Venue. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware, without
giving effect to the principles of the conflicts of laws thereof. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties,
evidenced by this Award or the Agreement, the parties hereby submit to and consent to the exclusive jurisdiction of the State of North Carolina and agree that such
litigation shall be conducted only in the courts of Wake County, North Carolina, or the federal courts for the United States for the Tenth District of North Carolina, and
no other courts, where this Award is made and/or to be performed.
(i) Administrator Authority. The Committee will have the power to interpret the Plan and this Agreement and to adopt such rules for the administration,
interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to, the determination of whether
or not any Deferred Stock Units have been earned). All actions taken and all interpretations and determinations made by the Committee in good faith will be final and
binding upon Participant, the Company and all other interested persons.
4
Source: RED HAT INC, 10-K, April 25, 2013
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APPENDIX A
For purposes of this Agreement, the following terms shall have the assigned meanings:
“Change in Control” means the occurrence of any one of the following events:
(i) individuals who, on the Grant Date, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board,
provided that any person becoming a director subsequent to the initial public offering whose election or nomination for election was approved by a vote of at least a
majority of the Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee
for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a
director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of
proxies by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;
(ii) any “person” (as such term is defined in the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial
owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power
of the Company’s then outstanding securities eligible to vote for the election of the Board (the “Company Voting Securities”); provided, however, that the event
described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any Subsidiary,
(B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities
pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction, as defined in paragraph (iii) below, or (E) by any person of Company Voting
Securities from the Company, if a majority of the Incumbent Board approves in advance the acquisition of beneficial ownership of 35% or more of Company Voting
Securities by such person;
(iii) the consummation of a merger, consolidation, statutory share exchange, reorganization or similar form of corporate transaction involving the Company or
any of its subsidiaries that requires the approval of the Company’s stockholders, whether for such transaction or the issuance of securities in the transaction (a “Business
Combination”), unless immediately following such Business Combination: (A) more than 40% of the total voting power of (x) the corporation resulting from such
Business Combination (the “Surviving Corporation”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of
the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by Company Voting Securities that were
outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted
pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company
Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan (or related trust)
sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 35% or more of the total
voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
and (C) at least half of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the
consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such
Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying
Transaction”);
(iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or the consummation of a sale of all or substantially
all of the Company’s assets; or
(v) the occurrence of any other event that the Board determines by a duly approved resolution constitutes a Change in Control.
5
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 35% of the
Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities
outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases
the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.
6
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
Exhibit 10.47
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
RED HAT, INC.,
SALTA ACQUISITION CORPORATION,
MANAGEIQ, INC.
AND
SHAREHOLDER REPRESENTATIVE SERVICES LLC, AS THE HOLDER AGENT
Dated as of December 19, 2012
Source: RED HAT INC, 10-K, April 25, 2013
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TABLE OF CONTENTS
Page
ARTICLE I THE MERGER
1
.
1 The Merger
1
.
2 The Closing
1
.
3 Actions at the Closing
1
.
4 Additional Action
1
.
5 Calculation of Merger Consideration and Conversion of Shares
1
.
6 Working Capital Adjustment
1
.
7 Dissenting Shares
1
.
8 Options and Warrants
1
.
9 Escrow; Holder Agent Fund
1
.
1
0 Certificate of Incorporation and Bylaws
1
.
1
1 No Further Rights
1
.
1
2 Closing of Transfer Books
1
.
1
3 Exchange of Securities
1
.
1
4 Holder Agent
1
.
1
5 Withholding
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY
2
.
1 Organization, Qualification and Corporate Power
2
.
2 Capitalization
2
.
3 Authorization of Transaction
2
.
4 Noncontravention
2
.
5 Subsidiaries
2
.
6 Financial Statements
2
. Absence of Certain Changes
Source: RED HAT INC, 10-K, April 25, 2013
1
1
2
2
2
2
5
8
9
10
11
11
11
11
12
14
15
15
15
17
18
18
18
19
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
7
2
.
8 Undisclosed Liabilities
19
.
9 Tax Matters
20
.
1
0 Assets
23
.
1
1 Owned Real Property
23
.
1
2 Leases
23
.
1
3 Intellectual Property
24
.
1
4 Inventory
30
.
1
5 Contracts
30
.
1
6 Accounts Receivable
32
.
1
7 Powers of Attorney
32
.
1
8 Insurance
32
.
1
9 Litigation
32
.
2
0 Warranties
32
.
2
1 Employees
33
.
2
2 Employee Benefits
34
.
2
3 Environmental Matters
37
.
2
4 Legal Compliance
37
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
i
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
2
.
2
5
Customers and Suppliers
38
.
2
6
Permits
39
.
2
7
Government Contracts
39
.
2
8
Certain Relationships
40
.
2
9
Brokers’ Fees
41
.
3
0
Books and Records
41
.
3
1
Information
41
2
2
2
2
2
2
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER AND THE MERGER SUB
3
.
1 Organization and Corporate Power
3
.
2 Authorization of Transaction
3
.
3 Noncontravention
3
.
4 Available Funds
3
.
5 Litigation
41
ARTICLE IV COVENANTS
4
.
1 Closing Efforts
4
.
2 Governmental and Third-Party Notices and Consents
4
.
3 Stockholder Approval
4
.
4 Operation of Business
4
.
5 Access to Information
4
.
6 Notice of Breaches
4
.
7 Exclusivity
4
.
8 Expenses
4
.
9 FIRPTA Tax Certificate
4
.
1
0 Director and Officer Indemnification
42
Source: RED HAT INC, 10-K, April 25, 2013
41
41
42
42
42
42
42
43
44
46
46
46
48
48
48
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
4
.
1
1
Certain Tax Matters
49
.
1
2
4
Repayment of Company Debt
50
ARTICLE V CONDITIONS TO CLOSING
5
.
1 Conditions to Each Party’s Obligations
5
.
2 Conditions to Obligations of the Buyer
5
.
3 Conditions to Obligations of the Company
50
ARTICLE VI SURVIVAL AND INDEMNIFICATION
6
.
1 Survival
6
.
2 Indemnification by the Indemnifying Securityholders
6
.
3 Indemnification Claims
6
.
4 Limitations
6
.
5 Treatment of Indemnity Payments
6
.
6 No Circular Recovery
53
ARTICLE VII TERMINATION
7
.
1 Termination of Agreement:
7
.
2 Effect of Termination
59
50
50
52
53
54
55
57
58
58
59
60
ii
Source: RED HAT INC, 10-K, April 25, 2013
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ARTICLE VIII DEFINITIONS
8
.
1 Certain Definitions
8
.
2 Certain Rules of Construction
60
ARTICLE IX MISCELLANEOUS
9
.
1 Press Releases and Announcements
9
.
2 No Third Party Beneficiaries
9
.
3 Entire Agreement
9
.
4 Succession and Assignment
9
.
5 Counterparts and Facsimile Signature
9
.
6 Headings
9
.
7 Notices
9
.
8 Governing Law
9
.
9 Amendments and Waivers
9
.
1
0 Severability
9
.
1
1 Submission to Jurisdiction
9
.
1
2 WAIVER OF TRIAL BY JURY
9
.
1
3 Specific Performance
76
60
75
76
76
76
76
76
76
77
78
78
79
79
79
79
EXHIBITS:
Exhibit A Exhibit B Exhibit C Exhibit D Exhibit E Exhibit F -
Form of Non-Competition Agreement
Form of Escrow Agreement
Form of Warrant Termination Agreement
Form of Founder Warrant Agreement
Form of Letter of Transmittal
Form of IPO Note Termination and Release Agreement
iii
Source: RED HAT INC, 10-K, April 25, 2013
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this “Agreement”), is entered into as of December 19, 2012, by and among Red Hat, Inc., a Delaware corporation (the “
Buyer ”), Salta Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of the Buyer (the “ Merger Sub ”), ManageIQ, Inc. a Delaware
corporation (the “ Company ”) and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the holder agent (the “
Holder Agent ”). Capitalized terms that are used in this Agreement but not otherwise defined in this Agreement shall have the respective meanings ascribed to them in
Article VIII .
RECITALS
A. The respective Board of Directors of the Buyer, Merger Sub and the Company have each determined that it is advisable and in the best interests of their
respective corporation and the stockholders thereof that the Company be acquired by the Buyer, through the merger of the Merger Sub with and into the Company, with
the Company surviving the merger as a wholly owned subsidiary of the Buyer (the “ Merger ”). In furtherance thereof, the respective Boards of Directors of the Buyer,
Merger Sub and the Company have approved the Merger and this Agreement upon the terms and subject to the conditions set forth herein. Pursuant to the Merger, all
issued and outstanding shares of the Company’s capital stock will be converted into the right to receive merger consideration as set forth herein.
B. As a condition and an inducement to the willingness of the Buyer and the Merger Sub to enter into this Agreement: (i) certain employees of the Company
have entered into retention agreements with the Buyer, subject only, as a condition subsequent, to the occurrence of the Effective Time and (ii) certain stockholders of
the Company have entered into Non-Competition Agreements substantially in the form attached hereto as Exhibit A (the “ Non-Competition Agreements ”), subject
only, as a condition subsequent, to the occurrence of the Effective Time.
NOW THEREFORE, in consideration of the premises, and the representations, warranties, covenants and other agreements contained herein, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the Parties, and intending to be legally bound, the Parties hereby
agree as follows:
AGREEMENT
ARTICLE I
THE MERGER
1.1 The Merger. Upon and subject to the terms and conditions of this Agreement, at the Effective Time pursuant to the General Corporation Law of the State of
Delaware (the “ DGCL ”), the Merger Sub shall merge with and into the Company. From and after the Effective Time, the separate corporate existence of the Merger
Sub shall cease and the Company shall continue as the Surviving Corporation. The Merger shall have the effects set forth in Section 259 of the DGCL.
1
Source: RED HAT INC, 10-K, April 25, 2013
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1.2 The Closing. The Closing shall take place at the offices of Wilmer Cutler Pickering Hale and Dorr LLP, 950 Page Mill Road, Palo Alto, California
94304, commencing at 12:00 p.m. Eastern time on the Closing Date or at such other time and place as the Parties hereto shall mutually agree.
1.3 Actions at the Closing. At the Closing: (i) the Company shall deliver to the Buyer and Merger Sub each of the certificates, instruments and documents
referred to in Section 5.2 ; (ii) the Buyer and the Merger Sub shall deliver to the Company each of the certificates and instruments referred to in Section 5.3 ; (iii) the
Buyer shall cause a certificate of merger conforming to the requirements of the DGCL and executed in accordance with the relevant provisions of the DGCL (the “
Certificate of Merger ”) to be filed with the Secretary of State of the State of Delaware; (iv) the Buyer shall pay (by wire transfer) to the Payment Agent an aggregate
amount in cash representing (A) the portion of the Merger Consideration payable at the Closing to the holders of Company Shares (in accordance with Section 1.5 ),
(B) the Warrant Consideration payable at Closing (in accordance with Section 1.8 ) and (C) the portion of the Merger Consideration payable to satisfy and discharge the
IPO Notes, in each case after giving effect to the deposit of (x) the Escrow Amount with the Escrow Agent and (y) the Holder Agent Fund Amount in the Holder Agent
Fund; (v) the Buyer shall deliver to the Company’s payroll provider or the Payment Agent (as applicable and in accordance with the Merger Consideration Allocation
Spreadsheet) the Option Consideration payable at Closing (in accordance with Section 1.8 ) after giving effect to the deposit of (a) the Escrow Amount with the
Escrow Agent and (b) the Holder Agent Fund Amount in the Holder Agent Fund; (vi) the Buyer or the Payment Agent, on behalf of the Company, shall pay the
Company Holder Transaction Costs and any Indebtedness (other than the IPO Notes) of the Company in accordance with a certificate of the chief executive officer of
the Company delivered to the Buyer at least two (2) days prior to Closing, certifying as to the Company Holder Transaction Costs and the Indebtedness of the Company
(including the IPO Notes) as of the Closing (such certificate shall be deemed a representation and warranty of the Company for purposes of Article VI of this
Agreement) and the Merger Consideration Allocation Spreadsheet; (vii) Buyer shall deposit, or shall cause the Payment Agent to deposit, with the Escrow Agent an
aggregate of Sixteen Million Five Hundred Thousand Dollars ($16,500,000) representing the Escrow Amount in accordance with Section 1.9 ; and (viii) Buyer shall
deposit, or cause the Payment Agent to deposit, an aggregate of $150,000 representing the Holder Agent Fund Amount into an account designated by the Holder Agent
in a written notice delivered to Buyer at least two (2) days prior to the Closing Date.
1.4 Additional Action. The Surviving Corporation may, at any time after the Effective Time, take any action, including executing and delivering any document,
in the name and on behalf of either the Company or Merger Sub, in order to consummate the transactions contemplated by this Agreement.
1.5 Calculation of Merger Consideration and Conversion of Shares. Notwithstanding anything to the contrary in this Agreement, in no event shall the Buyer,
pursuant to this
2
Source: RED HAT INC, 10-K, April 25, 2013
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Agreement, the Ancillary Agreements or otherwise in connection with the Merger Agreement, the Merger or the transactions contemplated hereby or thereby, be
required to pay to the Company Holders in respect of such Company Holders’ equity interests, in the aggregate, more than the Merger Consideration. At the Effective
Time, by virtue of the Merger and without any action on the part of any Party or any holder of Company Shares, each Company Share issued and outstanding
immediately prior to the Effective Time (other than Dissenting Shares and Company Shares held in the Company’s treasury) shall be cancelled and converted into, and
represent the right to receive, the portion of the Merger Consideration as set forth in the Company’s Amended and Restated Certificate of Incorporation as in effect on
the date hereof as described in this Section 1.5 , in each case without any interest thereon and subject to the provisions of Sections 1.6 , 1.9 and 1.15 . The Merger
Consideration shall be allocated among and be payable to the Company Holders as set forth in Section 1.8 and as follows:
(a) Series A-2 Preferred Stock. First, prior and in preference to any payment of Merger Consideration to the holders of Series A-1 Preferred Stock, Series
A Preferred Stock or Common Shares or any payment of the Option Consideration or Warrant Consideration, the holders of Series A-2 Preferred Stock shall be entitled
to receive an amount in cash per such share equal to the Series A-2 Preference Amount, without any interest thereon and subject to the provisions of Sections 1.6 ,
1.9 and 1.15 .
(b) Series A-1 Preferred Stock and Series A Preferred Stock. Second, after payment, or setting aside for payment, to the holders of Series A-2 Preferred
Stock, the full amount specified in Section 1.5(a) and prior and in preference to any payment of Merger Consideration to the holders of Common Shares or any
payment of the Option Consideration or Warrant Consideration, the holders of Series A-1 Preferred Stock and Series A Preferred Stock shall, on a pari passu basis,
be entitled to receive an amount in cash per such share equal to the Series A-1 Preference Amount and the Series A Preference Amount, respectively, in each case
without any interest thereon and subject to the provisions of Sections 1.6 , 1.9 and 1.15 .
(c) Common Shares. Third, after payment, or setting aside for payment, to the holders of Series A-2 Preferred Stock, Series A-1 Preferred Stock and
Series A Preferred Stock, the full amounts specified in Section 1.5(a) and Section 1.5(b) , respectively, the holders of Common Shares shall be entitled to receive an
amount in cash per Common Share equal to the Per Common Share Amount, without any interest thereon and subject to the provisions of Sections 1.6 , 1.9 and
1.15 .
(d) Residual Amount. Fourth, after payment, or setting aside for payment, to the holders of Series A-2 Preferred Stock, Series A-1 Preferred Stock, Series
A Preferred Stock, Common Shares, Options and Warrants, the full amounts specified in Section 1.5(a) , Section 1.5(b) , Section 1.5(c) and Section 1.8 ,
respectively, the holders of Preferred Shares and Common Shares shall receive an amount in cash per Preferred Share or Common Share, calculated on as as-converted
to Common Share basis, equal to the Per Share Residual Amount, without any interest thereon and subject to the provisions of Sections 1.6 , 1.9 and 1.15 .
(e) Treasury Shares. Each Company Share held in the Company’s treasury immediately prior to the Effective Time and each Company Share owned
beneficially by the Buyer or the Merger Sub shall be cancelled and retired without payment of any consideration therefor.
3
Source: RED HAT INC, 10-K, April 25, 2013
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(f) Merger Sub Shares. Each share of common stock, $0.00001 par value per share, of the Merger Sub issued and outstanding immediately
prior to the Effective Time shall be converted into and thereafter evidence one (1) share of common stock, $0.00001 par value per share, of the Surviving
Corporation.
(g) Definitions.
(i) “Aggregate Common Share Preference Amount” means the product, in dollars, obtained by multiplying (i) the sum of (A) the number of
Common Shares outstanding immediately prior to the Effective Time, (B) the total number of Common Shares issuable upon exercise of all Options outstanding
immediately prior to the Effective Time and (C) the total number of Warrant Shares, as of immediately prior to the Effective Time by (ii) the Per Common Share
Amount.
(ii) “Aggregate Option Exercise Price” means the sum of the series of products obtained by multiplying the exercise price of each Option by
the number of shares underlying such Option.
(iii) “Aggregate Series A Preference Amount” means the product, in dollars, obtained by multiplying (a) the total number of issued and
outstanding shares of Series A Preferred Stock as of immediately prior to the Effective Time by (b) the Series A Preference Amount.
(iv) “Aggregate Series A-1 Preference Amount” means the product, in dollars, obtained by multiplying (a) the total number of issued and
outstanding shares of Series A-1 Preferred Stock as of immediately prior to the Effective Time by (b) the Series A-1 Preference Amount.
(v) “Aggregate Series A-2 Preference Amount” means the product, in dollars, obtained by multiplying (a) the total number of issued and
outstanding shares of Series A-2 Preferred Stock as of immediately prior to the Effective Time by (b) the Series A-2 Preference Amount.
(vi) “Aggregate Warrant Exercise Price” means the aggregate exercise price payable pursuant to the terms of the Warrants upon exercise of
the Warrants for all of the Warrant Shares.
(vii) “Merger Consideration” means (i) One Hundred Five Million Dollars ($105,000,000),minus (ii) the sum of (A) the Closing Date AWC
Deficiency (if any), (B) the Company Holder Transaction Costs and (C) any Indebtedness of the Company, plus (iii) the Closing Date AWC Excess (if any). For the
avoidance of doubt, the Option Consideration and the Warrant Consideration are components of, and included in, the Merger Consideration.
4
Source: RED HAT INC, 10-K, April 25, 2013
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(viii) “Per Common Share Amount” means the quotient obtained by dividing (i) the Aggregate Series A-2 Preference
Amount plus the Aggregate Series A-1 Preference Amount plus the Aggregate Series A Preference Amount, by (ii) the sum of (A) the
number of Common Shares outstanding immediately prior to the Effective Time, (B) the number of Common Shares issuable upon exercise of all
Options outstanding immediately prior to the Effective Time and (C) the total number of Warrant Shares.
(ix) “Per Share Residual Amount” means the quotient obtained by dividing (i) the Merger Consideration plus the Aggregate Option Exercise
Price plus the Aggregate Warrant Exercise Price minus the Aggregate Series A-2 Preference Amount minus the Aggregate Series A-1 Preference Amount
minus the Aggregate Series A Preference Amount minus the Aggregate Common Share Preference Amount, by (ii) the sum of (A) the number of Common Shares
outstanding immediately prior to the Effective Time, (B) the number of Common Shares issuable upon conversion (in accordance with the Company’s Amended and
Restated Certificate of Incorporation) of all Preferred Shares issued and outstanding immediately prior to the Effective Time, (C) the total number of Common Shares
issuable upon exercise of all Options outstanding immediately prior to the Effective Time and (D) the total number of Warrant Shares.
(x) “Series A Preference Amount” means, with respect to each share of Series A Preferred Stock outstanding immediately prior to the
Effective Time, an amount equal to $1.00.
(xi) “Series A-1 Preference Amount” means, with respect to each share of Series A-1 Preferred Stock outstanding immediately prior to the
Effective Time, an amount equal to $2.00.
(xii) “Series A-2 Preference Amount” means, with respect to each share of Series A-2 Preferred Stock outstanding immediately prior to the
Effective Time, an amount equal to $1.00.
1.6 Working Capital Adjustment. The Merger Consideration shall be subject to adjustment as follows:
(a) At least five (5) days prior to the Closing Date, the Company shall deliver to the Buyer a certificate in the form set forth on Schedule 1.6(a) (the “
Adjusted Working Capital Certificate ”) executed by the Chief Executive Officer and Chief Financial Officer of the Company that sets forth (i) the Company’s good
faith estimate of the Adjusted Working Capital (the “ Estimated Adjusted Working Capital ”) calculated in accordance with the Estimated Closing Balance Sheet,
which shall include reasonably detailed supporting information in the form set forth on Schedule 1.6(a) ; and (ii) a balance sheet of the Company reflecting the
Company’s good faith estimate of the assets and liabilities of the Company as of the close of business on the Closing Date prepared in accordance with GAAP on a
consistent basis with the Financial Statements (except that such balance sheet may exclude footnotes) and, to the extent not inconsistent with GAAP, prior
methodologies and procedures of the Company (the “ Estimated Closing Balance Sheet ”).
5
Source: RED HAT INC, 10-K, April 25, 2013
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(b) If (i) the Estimated Adjusted Working Capital isless than One Hundred Ninety Seven Thousand Three Hundred Eighty Two Dollars
($197,382) (such difference, the “ Closing Date AWC Deficiency ”), then the Merger Consideration shall be reduced by an amount equal to such Closing
Date AWC Deficiency. If the Estimated Adjusted Working Capital exceeds One Hundred Ninety Seven Thousand Three Hundred Eighty Two Dollars
($197,382) (such excess, the “ Closing Date AWC Excess ”), then the Merger Consideration shall be increased by an amount equal to such Closing Date
AWC Excess.
(c) Within sixty (60) days following the Closing, the Buyer shall deliver to the Holder Agent a certificate in the form set forth on Schedule 1.6(c) (the “
Draft Adjusted Working Capital Certificate ”) executed on behalf of the Buyer by an officer of the Buyer that sets forth (i) the Buyer’s good faith calculation of the
Adjusted Working Capital (the “ Draft Adjusted Working Capital ”) calculated in accordance with the Draft Closing Balance Sheet (as defined below), which shall
include reasonably detailed supporting information in the form set forth on Schedule 1.6(c) ; and (ii) a balance sheet of the Company reflecting the Buyer’s good faith
calculation of the assets and liabilities of the Company as of the close of business on the Closing Date prepared in accordance with GAAP on a consistent basis with the
Financial Statements (except that such balance sheet may exclude footnotes) and, to the extent not inconsistent with GAAP, prior methodologies and procedures of the
Company (the “ Draft Closing Balance Sheet ”). If there are no such adjustments by the Buyer, or if the Buyer fails to deliver the Draft Adjusted Working Capital
Certificate and Draft Closing Balance Sheet within sixty (60) days following the Closing, then the Draft Adjusted Working Capital and the Draft Closing Balance Sheet
shall be the same as the Estimated Adjusted Working Capital and the Estimated Closing Balance Sheet, respectively. The Buyer shall promptly provide the Holder
Agent with reasonable access to the personnel of the Surviving Corporation and the Buyer, and to the Buyer’s representatives, in each case who were involved in the
preparation of the Draft Adjusted Working Capital Certificate and the Draft Closing Balance Sheet, and to such books and records reasonably related to the Draft
Adjusted Working Capital Certificate and the Draft Closing Balance Sheet that the Holder Agent may reasonably request. Such access shall be at reasonable times,
upon reasonable prior notice, subject to reasonable security precautions and in a manner so as not to interfere with the normal business operations of the Buyer and
subject to any confidentiality restrictions to which the Buyer, the Surviving Corporation or their respective personnel or representatives are subject. The Holder Agent
shall deliver to the Buyer, on or before the date that is thirty (30) days following the delivery of the Draft Adjusted Working Capital and the Draft Closing Balance
Sheet (the “ AWC Objection Deadline Date ”), either a notice indicating that the Holder Agent accepts the Draft Closing Balance Sheet and the Draft Adjusted
Working Capital or a detailed statement describing its objections (if any) to the Draft Closing Balance Sheet and the Draft Adjusted Working Capital (the “ AWC
Objection Statement ”). If the Holder Agent delivers to the Buyer a notice accepting the Draft Closing Balance Sheet and Draft Adjusted Working Capital, or the
Holder Agent does not deliver the AWC Objection Statement by the AWC Objection Deadline Date, then, effective as of the earlier of the date of delivery of such
notice of acceptance or as of the 5:00 pm Eastern time on the AWC Objection Deadline Date, the Draft Closing Balance Sheet and the Draft Adjusted Working Capital
delivered by the Buyer pursuant to this Section 1.6(c) shall be the Final Closing Balance Sheet and the Final Adjusted Working Capital. If the Holder Agent timely
delivers the AWC Objection Statement, such objections shall be resolved as follows:
(i) The Buyer and the Holder Agent shall first use Reasonable Best Efforts to resolve such objections set forth in the AWC Objection Statement.
6
Source: RED HAT INC, 10-K, April 25, 2013
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(ii) If the Buyer and the Holder Agent do not reach a resolution of all objections set forth in the AWC Objection Statement
within thirty (30) days after delivery of such AWC Objection Statement, then the Buyer and the Holder Agent shall, within fifteen (15) days
following the expiration of such thirty (30)-day period, engage the Accountant, pursuant to an engagement agreement executed by the Buyer, the
Holder Agent and the Accountant, to resolve any remaining objections set forth in the AWC Objection Statement (the “ AWC Unresolved
Objections ”).
(iii) The Buyer and the Holder Agent shall jointly submit to the Accountant, within five (5) days after the date of the engagement of the
Accountant (as evidenced by the date of the engagement agreement), a copy of the Draft Closing Balance Sheet, the Draft Adjusted Working Capital, a copy of the
AWC Objection Statement, and a statement setting forth the resolution of any objections agreed to by the Buyer and the Holder Agent. Each of the Buyer and the
Holder Agent shall submit to the Accountant (with a copy delivered to the other Party on the same day), within thirty (30) days after the date of the engagement of the
Accountant, a memorandum (which may include supporting exhibits) setting forth their respective positions on the AWC Unresolved Objections. Each of the Buyer and
the Holder Agent may (but shall not be required to) submit to the Accountant (with a copy delivered to the other Party on the same day), within forty five (45) days after
the date of the engagement of the Accountant, a memorandum responding to the initial memorandum submitted to the Accountant by the other Party. Unless requested
by the Accountant in writing, neither the Buyer nor the Holder Agent may present any additional information or arguments not previously set forth in such initial
memorandum or response memorandum to the Accountant, either orally or in writing.
(iv) Within sixty (60) days after the date of its engagement hereunder, the Accountant shall determine whether the objections set forth in AWC
Objection Statement are valid and shall provide a determination which shall include a consolidated balance sheet, comprised of the Draft Closing Balance Sheet and the
calculation of Draft Adjusted Working Capital, in each case as adjusted pursuant to any resolutions to objections agreed upon by the Buyer and the Holder Agent and
pursuant to the Accountant’s resolution of the AWC Unresolved Objections. Such adjusted Draft Closing Balance Sheet and such adjusted Draft Adjusted Working
Capital shall be deemed to be the Final Closing Balance Sheet and Final Adjusted Working Capital.
(v) The resolution by the Accountant of the AWC Unresolved Objections shall be conclusive and binding upon the Buyer, the Company, the
Company Holders and the Holder Agent. The Parties (including the Company on behalf of the Company Holders) agree that the procedures set forth in this Section 1.6
for resolving disputes with respect to the Draft Closing Balance Sheet and Draft Adjusted Working Capital shall be the sole and exclusive method for resolving any
such disputes; provided that this provision shall not prohibit the Buyer or the Holder Agent from instituting litigation to enforce the ruling of the Accountant.
(vi) The fees and expenses of the Accountant shall be borne by the Buyer, on the one hand, and the Holder Agent (on behalf of the Company
Holders and from the Holder Agent Fund), on the other hand, in inverse proportion as they may prevail on the matters set forth in the AWC Unresolved Objections
which proportionate allocation shall be calculated on an aggregate basis based on the relative dollar values of the amounts in dispute and shall be determined by the
Accountant at the time the determination of the Accountant is rendered on the merits of the matters submitted.
7
Source: RED HAT INC, 10-K, April 25, 2013
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(d) If the Final Adjusted Working Capital as derived from the Final Closing Balance Sheet isless than the Estimated Adjusted Working
Capital as derived from the Estimated Closing Balance Sheet, then the Merger Consideration shall be reduced by an amount equal to such deficiency
(represented as a positive number) (such amount, the “ Final AWC Deficiency ”) and the Buyer and the Holder Agent shall, not more than five (5) days
following the date on which the Final Adjusted Working Capital is determined pursuant to this Section 1.6 , deliver joint written instructions to the
Escrow Agent authorizing the Escrow Agent to deliver to the Buyer, an amount from the then-available Escrow Fund equal to the Final AWC Deficiency.
(e) If the Final Adjusted Working Capital as derived from the Final Closing Balance Sheetis equal to the Estimated Adjusted Working Capital as derived
from the Estimated Closing Balance Sheet, then no adjustment to the Merger Consideration shall be required.
(f) If the Final Adjusted Working Capital as derived from the Final Closing Balance Sheetexceeds the Estimated Adjusted Working Capital as derived
from the Estimated Closing Balance Sheet, then the Merger Consideration shall be increased by an amount equal to such excess (such amount, the “ Final AWC Excess
”) and, not more than five (5) days after the date on which the Final Adjusted Working Capital is determined pursuant to this Section 1.6 , (i) the Buyer shall promptly
deliver that portion of the Final AWC Excess that is payable to Company Stockholders and the holders of the Warrants to the Payment Agent for distribution to such
holders and (ii) the Buyer shall promptly pay to the holders of Options that portion of the Final AWC Excess that is payable to holders of Options. Such payments shall
be allocated in the same manner as set forth in Section 1.5 and Section 1.8 .
1.7 Dissenting Shares.
(a) Dissenting Shares shall not be converted into or represent the right to receive the Merger Consideration unless the Company Stockholder holding such
Dissenting Shares shall have forfeited his, her or its right to appraisal under the DGCL or properly withdrawn his, her or its demand for appraisal. If such Company
Stockholder has so forfeited or withdrawn his, her or its right to appraisal of Dissenting Shares, then, (i) as of the occurrence of such event, such holder’s Dissenting
Shares shall cease to be Dissenting Shares and shall be converted into and represent the right to receive the Merger Consideration payable in respect of such Company
Shares pursuant to Section 1.5 , and (ii) promptly following the occurrence of such event, the Buyer or the Surviving Corporation shall deliver to such Company
Stockholder a payment representing the portion of the Merger Consideration to which such holder is entitled pursuant to Section 1.5 , subject to the provisions of
Section 1.9 and Section 1.13 .
(b) Prior to the Effective Time, the Company shall give the Buyer (i) prompt written notice of any written demands for appraisal of any Company Shares,
withdrawals of such demands, and any other documents and instruments that relate to such demands received by the Company and (ii) the opportunity to direct all
negotiations and proceedings with respect to demands for appraisal under the DGCL. Following the Effective Time, the Buyer shall give the Holder Agent prompt
notice of any written demands for appraisal of any Company Shares, withdrawals of such demands, and any other documents and instruments that relate to such
demands received by the Surviving Corporation. The Company shall not, except with the prior written consent of the Buyer, make any payment with respect to any
demands for appraisal of Company Shares or offer to settle or settle any such demands prior to the Effective Time.
8
Source: RED HAT INC, 10-K, April 25, 2013
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1.8 Options and Warrants.
(a) Prior to the Effective Time, the Company shall take all actions required to accelerate the vesting of each outstanding Option such that all shares
underlying each such Option shall be fully vested immediately prior to the Effective Time.
(b) The holder of each Option shall be entitled to receive the Option Consideration (without any interest thereon and subject to the provisions of
Sections 1.6 , 1.9 and 1.15 ) with respect to each such Option, and at the Effective Time the holder of each such Option shall have no further rights with respect
thereto other than the payment of the applicable Option Consideration. The Option Consideration shall be paid as soon as reasonably practicable following the Effective
Time.
(c) Prior to the Effective Time, the Company shall enter into an agreement in substantially the form attached as Exhibit C (the “ Warrant Termination
Agreement ”) with each holder of a Warrant providing for, among other things, the termination of such Warrant, effective as of the Effective Time, in exchange for the
payment of the Warrant Consideration. At the Effective Time, each holder of a Warrant that has executed and delivered a Warrant Termination Agreement shall be
entitled to receive the Warrant Consideration (without any interest thereon and subject to the provisions of Sections 1.6 , 1.9 and 1.15 ) with respect to such
Warrants. The Warrants will expire and be cancelled by their terms at the Effective Time and no holder of the Warrants shall have any further rights with respect thereto
other than the payment of the applicable Warrant Consideration (without any interest thereon and subject to the provisions of Sections 1.6 , 1.9 and 1.15 ) pursuant
to the terms of the Warrant Termination Agreement.
(d) Prior to the Effective Time, Joseph Fitzgerald and Oleg Barenboim shall together enter into agreements in substantially the form attached as Exhibit
D (the “ Founder Warrant Agreement ”) with each holder of a Founder Warrant providing for the exercise of such Founder Warrant, effective immediately prior to,
and contingent upon the occurrence of, the Effective Time. Any outstanding Founder Warrant which is not subject to a Founder Warrant Agreement or has otherwise
been exercised prior to the Effective Time will expire and be cancelled by its terms at the Effective Time and no holder of the Warrants shall have any further rights
with respect thereto.
9
Source: RED HAT INC, 10-K, April 25, 2013
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1.9 Escrow; Holder Agent Fund.
(a) On the Closing Date, the Buyer shall deposit Sixteen Million Five Hundred Thousand Dollars ($16,500,000) of the Merger Consideration otherwise
payable to the Company Holders pursuant to Section 1.5 and Section 1.8 (the “ Escrow Amount ”) with the Escrow Agent. The Escrow Amount and any interest
earned thereon, is referred to herein as the “ Escrow Fund ” and is established for the purpose of securing the indemnification rights of the Indemnified Parties and the
indemnification obligations of the Indemnifying Securityholders pursuant to this Agreement. The Escrow Fund shall be held by the Escrow Agent pursuant to the terms
of Article VI and the Escrow Agreement. The Escrow Fund shall be held as a trust fund and shall not be subject to any lien, attachment, trustee process or any other
judicial process of any creditor of any Person, and shall be held and disbursed solely for the purposes and in accordance with the terms of this Agreement and the
Escrow Agreement. Subject to the restrictions and limitations set forth in Article VI and the Escrow Agreement, at 11:59 p.m. Eastern Time on the date that is
twenty-four (24) months following the Closing Date, the Available Escrow Fund shall be released to the Company Holders. Except as otherwise required pursuant to a
determination within the meaning of Section 1313(a) of the Code, the Buyer shall be treated as the owner of the Escrow Fund for all income tax purposes until such
amounts, if any, are distributed to the Company Holders.
(b) The adoption of this Agreement and the approval of the Merger by the Company Stockholders shall constitute approval of the Escrow Fund and of all
of the arrangements relating thereto, including the placement of the Escrow Amount into escrow.
(c) On the Closing Date, Buyer shall deposit One Hundred Fifty Thousand Dollars ($150,000) of the Merger Consideration otherwise payable to
Company Holders pursuant to Section 1.5 (the “ Holder Agent Fund Amount ”) into a segregated account designated by the Holder Agent in a written notice delivered
to Buyer at least two (2) days prior to the Closing Date. The Holder Agent Fund Amount is referred to herein as the “ Holder Agent Fund ” and is established solely to
be used by the Holder Agent to pay any fees, costs or other expenses it may incur in performing its duties or exercising its rights under this Agreement and the Escrow
Agreement. The Holder Agent Fund shall be held for the benefit of the Company Holders and shall not be subject to any lien, attachment, trustee process or any other
judicial process of any creditor of any Person. The Company Holders will not receive any interest or earnings on the Holder Agent Fund and such Company Holders
irrevocably transfer and assign to the Holder Agent any ownership right that they may otherwise have had in any such interest or earnings. The Holder Agent will not be
liable for any loss of principal of the Holder Agent Fund other than as a result of its gross negligence or willful misconduct. As soon as practicable following the release
in full of the Escrow Fund, the Holder Agent shall distribute the balance of the Holder Agent Fund to the Company Holders. For Tax purposes, the Holder Agent Fund
will be treated as having been received and voluntarily set aside by the Company Holders at the time of Closing, and the Company Holders shall be treated as the
owners of the Holder Agent Fund for all income tax purposes.
10
Source: RED HAT INC, 10-K, April 25, 2013
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1.10 Certificate of Incorporation and Bylaws.
(a) The Certificate of Incorporation of the Surviving Corporation immediately following the Effective Time shall be the same as the Certificate of
Incorporation of Merger Sub immediately prior to the Effective Time, except that (i) the name of the corporation set forth therein shall be changed to the name of the
Company and (ii) the identity of the incorporator shall be deleted.
(b) The Bylaws of the Surviving Corporation immediately following the Effective Time shall be the same as the Bylaws of Merger Sub immediately
prior to the Effective Time, except that the name of the corporation set forth therein shall be changed to the name of the Company.
1.11 No Further Rights. From and after the Effective Time, no Company Shares shall be deemed to be outstanding and holders of certificates formerly
representing Company Shares shall cease to have any rights with respect thereto except as expressly provided herein or by applicable Law.
1.12 Closing of Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed and no transfer or issuance of Company Shares,
Options or Warrants shall thereafter be made. If, after the Effective Time, certificates formerly representing Company Shares or agreements representing Warrants are
presented to the Buyer or the Surviving Corporation, they shall be cancelled and converted in accordance with Section 1.5 and Section 1.8 , subject to Section 1.9
and Section 1.13 and subject further to applicable Law in the case of Dissenting Shares.
1.13 Exchange of Securities.
(a) Prior to the Effective Time, the Buyer shall appoint American Stock Transfer & Trust Company, LLC as the payment agent (the “ Payment Agent ”)
to effect the payment of the Merger Consideration in exchange for certificates (as applicable) representing the Company Shares issued and outstanding immediately
prior to the Effective Time (the “ Company Certificates ”) and Warrants. The Buyer shall deliver to the Payment Agent, in trust for the benefit of holders of Company
Certificates and Warrants (subject to each such holder of a Warrant executing and delivering to the Company a Warrant Termination Agreement), cash in the amount of
the portion of the Merger Consideration payable to Company Stockholders and holders of Warrants as of the Closing Date. Promptly following the Effective Time, the
Buyer shall cause the Payment Agent to send a notice and a letter of transmittal in the form attached hereto as Exhibit E to each holder of a Company Certificate or
Warrant advising such holder of the effectiveness of the Merger and the procedure for surrendering to the Payment Agent such Company Certificate or Warrant in
exchange for the portion of the Merger Consideration payable to such holder pursuant to Sections 1.5 and 1.8 , as applicable. Each holder of a Company Certificate
or Warrant, upon proper surrender thereof to the Payment Agent in accordance with the instructions in such notice, shall be entitled to receive in exchange therefor
(subject to the provisions of Section 1.7 and the withholding of all applicable taxes required to be withheld) the cash amount payable pursuant to Section 1.5 and
Section 1.8 , as applicable. Until properly surrendered, each Company Certificate and Warrant shall be deemed for all purposes to evidence only the right to receive the
cash amount payable pursuant to Section 1.5 (other than
11
Source: RED HAT INC, 10-K, April 25, 2013
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with respect to Dissenting Shares) and Section 1.8, as applicable. Holders of Company Certificates or Warrants shall not be entitled to receive payment of any amount
until such Company Certificates or Warrants are properly surrendered.
(b) If any payment is to be made to or in the name of a Person other than the Person in whose name the Company Certificate or Warrant surrendered in
exchange therefor is registered, it shall be a condition to such payment that (i) the Company Certificate or Warrant so surrendered shall be transferable, and shall be
properly assigned, endorsed or accompanied by appropriate stock powers or assignment certificate, (ii) such transfer shall otherwise be proper, and (iii) the Person
requesting such transfer shall pay to the Payment Agent any transfer or other Taxes payable by reason of the foregoing or establish to the satisfaction of the Payment
Agent and the Buyer that such Taxes have been paid or are not required to be paid. Notwithstanding the foregoing, neither the Payment Agent nor any Party shall be
liable to a holder of Company Shares or Warrants for any amount payable to such holder pursuant to Section 1.5 and Section 1.8 , as applicable, that is delivered to
a public official pursuant to applicable abandoned property, escheat or similar Laws.
(c) In the event any Company Certificate or Warrant shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Company Certificate or Warrant to be lost, stolen or destroyed, the Buyer shall pay, or cause the Payment Agent to pay, in exchange for such lost, stolen
or destroyed Company Certificate or Warrant the amount payable in exchange therefor pursuant to Section 1.5 and Section 1.8 , as applicable. The Buyer may, in its
discretion and as a condition precedent to the payment thereof, require the owner of such lost, stolen or destroyed Company Certificate or Warrant to deliver to the
Buyer a bond in such sum as the Buyer may reasonably direct as indemnity against any claim that may be made against the Buyer with respect to the Company
Certificate or Warrant alleged to have been lost, stolen or destroyed.
1.14 Holder Agent.
(a) As more fully set forth in this Section 1.14 and in order to efficiently administer (i) the determination of the Merger Consideration adjustment
pursuant to Section 1.6 and (ii) the defense and/or settlement of any claims for which the Indemnifying Securityholders may be required to indemnify the
Indemnified Parties pursuant to Article VI hereof, the Company Holders by their adoption of this Agreement, or by participating in the Merger and receiving the
benefits thereof, including the right to receive the consideration payable in connection with the Merger, designate Shareholder Representative Services LLC as the
Holder Agent.
(b) The Company Holders hereby authorize the Holder Agent (i) to make all decisions relating to the determination of the Merger Consideration and any
of the Merger Consideration adjustments, (ii) to take all action necessary in connection with the waiver of any condition to the obligations of the Company and/or the
Company Holders to consummate the transactions contemplated hereby, or the defense and/or settlement of any claims for which the Indemnifying Securityholders may
be required to indemnify the Indemnified Parties pursuant to Article VI hereof, (iii) to give and receive all notices required to be given under the Agreement, and
(iv) to take any and all additional action as is contemplated to be taken by or on behalf of the Company Holders by the terms of this Agreement.
12
Source: RED HAT INC, 10-K, April 25, 2013
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(c) In the event that the Holder Agent becomes unable to perform its responsibilities hereunder or resigns from such position, the Company
Stockholders holding, prior to the Closing, a majority in interest of the outstanding Company Shares (on an as converted to common basis) shall select
another representative to fill such vacancy and such substituted representative shall be deemed to be the Holder Agent for all purposes of this Agreement.
(d) All decisions and actions by the Holder Agent, including any agreement between the Holder Agent and the Buyer relating to the determination of the
Merger Consideration, any Merger Consideration adjustments, or the defense or settlement of any claims for which the Indemnifying Securityholders may be required
to indemnify the Indemnified Parties pursuant to Article VI hereof, shall be binding upon all of the Company Holders, and no Company Holder shall have the right to
object, dissent, protest or otherwise contest the same.
(e) By voting in favor of the approval of the Merger and the adoption of this Agreement, or participating in the Merger and receiving the benefits thereof,
including the right to receive the consideration payable in connection with the Merger, the Company Holders agree that:
(i) the Buyer shall be able to rely conclusively on the instructions and decisions of the Holder Agent as to the determination of the Merger
Consideration, any Merger Consideration adjustments pursuant to this Agreement, or the settlement of any claims for indemnification by the Indemnified Parties
pursuant to Article VI hereof or any other actions required to be taken by the Holder Agent hereunder, and no Company Holder shall have any cause of action against
the Buyer or the Surviving Corporation for any action taken by the Buyer or the Surviving Corporation in reliance upon the written instructions of the Holder Agent;
(ii) all actions, decisions and instructions of the Holder Agent under this Agreement or any of the Ancillary Agreements shall be conclusive and
binding upon all of the Company Holders and no Company Holder shall have any cause of action against the Holder Agent for any action taken or omitted, decision
made or instruction given by the Holder Agent in connection with this Agreement, except for fraud, gross negligence or willful misconduct by the Holder Agent;
(iii) the provisions of this Section 1.14 are independent and severable, are irrevocable and coupled with an interest and shall be enforceable
notwithstanding any rights or remedies that any Company Holder may have in connection with the transactions contemplated by this Agreement;
(iv) remedies available at law for any breach of the provisions of this Section 1.14 are inadequate; therefore, the Buyer, the Company and the
Surviving Corporation shall be entitled to temporary and permanent injunctive relief without the necessity of proving damages if the Buyer, the Company or the
Surviving Corporation brings an action to enforce the provisions of this Section 1.14 ; and
(v) the provisions of this Section 1.14 shall be binding upon the executors, heirs, legal representatives and successors of each Company Holder,
and any references in this Agreement to a Company Holder or the Company Holders shall mean and include the successors to the Company Holders’ rights, whether
pursuant to testamentary disposition, the laws of descent and distribution or otherwise.
13
Source: RED HAT INC, 10-K, April 25, 2013
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(f) The Holder Agent shall incur no Liability to the Company Holders with respect to any action taken or suffered by it in reliance upon any
notice, direction, instruction, consent, statement or other documents believed by him to be genuinely and duly authorized, nor for other action or inaction
except his own willful misconduct or gross negligence. The Holder Agent may, in all questions arising under the Escrow Agreement, rely on the advice of
counsel and the Holder Agent shall not be liable to the Company Holders for anything done, omitted or suffered in good faith by the Holder Agent based
on such advice.
(g) All fees and expenses incurred by the Holder Agent shall be paid by the Company Holders in proportion to their Pro Rata Portion. The Company
Holders will indemnify, defend and hold harmless the Holder Agent from and against any and all loss, liability, damage, claim, penalty, fine, forfeiture, action, or
expense (including the fees and expenses of counsel and experts and their staffs and all expense of document location, duplication and shipment) (collectively, “ Losses
”) arising out of or in connection with the Holder Agent’s execution and performance of this Agreement and the Escrow Agreement, in each case as such Loss is
suffered or incurred; provided , that in the event that any such Loss is finally adjudicated to have been primarily caused by the fraud, gross negligence or willful
misconduct of the Holder Agent, the Holder Agent will reimburse the Company Holders the amount of such indemnified Loss attributable to such fraud, gross
negligence or willful misconduct. If not paid directly to the Holder Agent by the Company Holders, any such Losses may be recovered by the Holder Agent from the
Holder Agent Fund; provided , that while this Section 1.14(g) allows the Holder Agent to be paid from the Holder Agent Fund, this does not relieve the Company
Holders from their obligation to promptly pay such Losses as they are suffered or incurred, nor does it prevent the Holder Agent from seeking any remedies available to
it at law or otherwise. The Company Holders acknowledge and agree that the foregoing indemnities will survive the resignation or removal of the Holder Agent or the
termination of this Agreement.
1.15 Withholding. The Buyer and the Payment Agent shall be entitled to deduct and withhold from the amounts otherwise payable by them pursuant to this
Agreement to any Person, including any payments to the Escrow Agent and payments under the Escrow Agreement, any amounts required by applicable Law to be
deducted and withheld by the Buyer or the Payment Agent with respect to the making of such payment, and to collect any necessary Tax forms, including Forms W-8 or
W-9, as applicable, or any similar information, from the Company Holders and any other recipients of payments hereunder. Any amounts so deducted and withheld and
remitted shall be treated for all purposes under this Agreement as an amount paid to the Person to whom the payment from which such amount was withheld was made.
14
Source: RED HAT INC, 10-K, April 25, 2013
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer that, except as set forth in the Company Disclosure Letter, the statements contained in this Article II are
true and correct as of the date of this Agreement and will be true and correct as of the Closing as though made as of the Closing, except to the extent such
representations and warranties are specifically made as of a particular date or period (in which case such representations and warranties will be true and correct as of
such date or period). The Company Disclosure Letter shall be arranged in sections and subsections corresponding to the numbered and lettered sections and subsections
contained in this Article II . The disclosures in any section or subsection of the Company Disclosure Letter shall qualify other sections and subsections in this Article
II only to the extent it is reasonably apparent from a reading of the disclosure that such disclosure is applicable to such other sections and subsections.
2.1 Organization, Qualification and Corporate Power. The Company is a corporation duly incorporated, validly existing and in corporate and tax good standing
under the Laws of the State of Delaware. The Company is duly qualified to conduct business and is in corporate and tax good standing under the Laws of each
jurisdiction listed in Section 2.1 of the Company Disclosure Letter , which jurisdictions constitute the only jurisdictions in which the nature of the Company’s
businesses or the ownership or leasing of its properties requires such qualification, except for those United States jurisdictions in which the failure to be so qualified or
in good standing, individually or in the aggregate, has not had and would not reasonably be expected to have a Company Material Adverse Effect. The Company has all
requisite corporate power and authority to carry on the businesses in which it is engaged and to own and use the properties owned and used by it. The Company has
made available to the Buyer complete and accurate copies of its Amended and Restated Certificate of Incorporation and Bylaws of the Company. The Company is not
in default under or in violation of any provision of its Amended and Restated Certificate of Incorporation or Bylaws.
2.2 Capitalization.
(a) The authorized capital stock of the Company consists of (i) 30,000,000 Common Shares, of which, as of the date of this Agreement, 7,749,530 shares
were issued and outstanding and no shares were held in the treasury of the Company, and (ii) 12,642,500 Preferred Shares, of which (A) 5,500,000 shares have been
designated as Series A Preferred Stock, of which, as of the date of this Agreement, 5,002,000 shares were issued and outstanding and were convertible into 5,002,000
Common Shares, (B) 1,312,500 shares have been designated as Series A-1 Preferred Stock, of which, as of the date of this Agreement, 1,000,495 shares were issued
and outstanding and were convertible into 2,000,990 Common Shares and (C) 5,830,000 shares have been designated as Series A-2 Preferred Stock, of which, as of the
date of this Agreement, 5,135,000 shares were issued and outstanding and were convertible into 5,135,000 Common Shares. Other than shares reserved for issuance
upon conversion of outstanding Preferred Shares as described above or exercise of Options or Warrants as set forth below, no Company Shares, Options, warrants or
other securities convertible or exchangeable for equity securities of the Company will be issued prior to the Effective Time.
15
Source: RED HAT INC, 10-K, April 25, 2013
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(b) Section 2.2(b) of the Company Disclosure Letter sets forth a complete and accurate list, as of the date of this Agreement, of the holders
of capital stock of the Company, showing the number of shares of capital stock, and the class or series of such shares, held by each stockholder of the
Company, and for securities other than Common Shares, the number of Common Shares (if any) into which such shares are convertible. Section 2.2(b) of
the Company Disclosure Letter also sets forth all outstanding Company Shares that are otherwise subject to a repurchase or redemption right, indicating
the name of the applicable stockholder, the vesting schedule (including any acceleration provisions with respect thereto), and the repurchase price payable
by the Company. All of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are, and were
when issued, fully paid and nonassessable. All of the shares of capital stock of the Company ever issued by the Company have been offered, issued and
sold by the Company in compliance with all applicable federal, state and foreign securities Laws.
(c) Section 2.2(c) of the Company Disclosure Letter sets forth a complete and accurate list, as of the date of this Agreement of: (i) all Company Stock
Plans, indicating for each Company Stock Plan the number of Common Shares issued to date under such Company Stock Plan, the number of Common Shares subject
to outstanding options under such Company Stock Plan and the number of Common Shares reserved for future issuance under such Company Stock Plan; (ii) all holders
of outstanding Options, indicating with respect to each Option (A) the Company Stock Plan under which it was granted, (B) the number of Common Shares subject to
such Option, the exercise price, the date of grant, the vesting schedule (including any acceleration provisions with respect thereto), (C) whether such Option is currently
held by an employee or non-employee of the Company, (D) the termination date (if any) of any employee and non-employee of the Company and any such Option, and
(E) the classification of such option as an incentive stock option or a nonqualified stock option and (iii) all holders of outstanding warrants, indicating with respect to
each warrant the agreement or other document under which it was granted, the number of shares of capital stock and the class or series of such shares subject to such
warrant, the exercise price, the date of issuance and the expiration date thereof. On and after November 5, 2012, the Company has not granted or issued any Options or
other securities that are convertible or exchangeable, directly or indirectly, into equity securities of the Company. The Company has made available to the Buyer
complete and accurate copies of all Company Stock Plans and forms of all stock option agreements evidencing all Options and forms of all warrant agreements
evidencing all Warrants. All Options were granted with an exercise price that was at least equal to the fair market value of the Common Shares on the date of grant of
such Option. The Company has not adjusted the exercise price of any Option. The Company’s past and current stock option grant practices complied with the terms of
the applicable Company Stock Plan and applicable Laws.
(d) Concurrently with the execution and delivery of this Agreement, the Company has delivered to the Buyer a complete and accurate spreadsheet in a
form reasonably acceptable to the Buyer and the Escrow Agent, specifying the information set forth on Schedule 2.2(d) (the “ Merger Consideration Allocation
Spreadsheet ”). When all of the Merger
16
Source: RED HAT INC, 10-K, April 25, 2013
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Consideration is distributed in accordance with Section 1.5, Section 1.8 and the Merger Consideration Allocation Spreadsheet, each holder of Company Shares, Options
and Warrants shall have received the portion of the Merger Consideration, if any, to which the holder of such Company Shares, Options and Warrants is entitled under
and in accordance with the rights (including liquidation rights) and privileges set forth in the Company’s Amended and Restated Certificate of Incorporation, the
applicable Company Stock Plan and the applicable Warrant agreement, as applicable.
(e) No equity security of the Company or subscription, warrant, option, convertible security or other right (contingent or otherwise) to purchase or
acquire any shares of capital stock of the Company is authorized or outstanding. The Company has no obligation (contingent or otherwise) to issue any subscription,
warrant, option, convertible security or other such right, or to issue or distribute to holders of any shares of its capital stock any evidences of Indebtedness or assets of
the Company. The Company has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of its capital stock or any interest therein
or to pay any dividend or to make any other distribution in respect thereof. All repurchases, redemptions or other acquisitions of Company Shares, other capital stock or
other equity securities of the Company undertaken by the Company at any time have complied with all applicable Laws and have not violated the Amended and
Restated Certificate of Incorporation or Bylaws of the Company (or other equivalent corporate governing documents) then in place or any other restriction contained in
any Contract to which the Company or any of its Affiliates is or was at such time a party. No Person has claimed or threatened to claim that such Person’s Company
Shares, other capital stock or other equity interests in the Company have been wrongfully repurchased, redeemed or acquired by the Company or that any cancellation,
repurchase, redemption or acquisition by the Company of its Company Shares or other equity interests violated applicable Law. There are no outstanding or authorized
grants of equity or equity-related compensation with respect to the Company which have not otherwise been embodied in written agreements with the grantee thereof
which have been made available to the Buyer.
(f) There is no agreement, written or oral, between the Company and any holder of its securities, or, to the Company’s knowledge, between or among any
holders of its securities, relating to the sale or transfer (including agreements relating to rights of first refusal, co-sale rights or “drag-along” rights), registration under
the Securities Act, or voting, of the capital stock of the Company.
(g) Other than the holders of shares of capital stock of the Company and except set forth on Section 2.2(g) of the Company Disclosure Letter , no Person
has claimed or threatened to claim that such Person has or is entitled to: (i) shares of the Company’s capital stock or any other equity or other ownership interest in the
Company, (ii) any rights of an owner of an equity interest in the Company, including any option, preemptive rights or rights to notice or to vote or (iii) any rights under
the Amended and Restated Certificate of Incorporation or Bylaws of the Company.
2.3 Authorization of Transaction. The Company has all requisite power and authority to execute and deliver this Agreement and each Ancillary Agreement (to
which it is a party) and
17
Source: RED HAT INC, 10-K, April 25, 2013
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to perform its obligations hereunder and thereunder. The execution and delivery by the Company of this Agreement and the Ancillary Agreements (to which it is a
party), the consummation by the Company of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action
on the part of the Company. Without limiting the generality of the foregoing, the Board of Directors of the Company, at a meeting duly called and held, by the
unanimous vote of all directors, (i) determined that the Merger is fair to and in the best interests of the Company and its stockholders, (ii) approved this Agreement in
accordance with the provisions of the DGCL, and (iii) directed that this Agreement and the Merger be submitted to the stockholders of the Company for their adoption
and approval and recommended that the stockholders of the Company vote in favor of the adoption of this Agreement and the approval of the Merger and the other
transactions contemplated by this Agreement. This Agreement and the Ancillary Agreements (to which the Company is a party) have been duly and validly executed
and delivered by the Company and constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their respective
terms, subject, in each instance, to (x) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar Laws of general applicability relating to or
affecting creditors’ rights and relief of debtors generally and to (y) general equity principles, regardless of whether such enforceability is considered in a Legal
Proceeding at law or in equity ((x) and (y) of this Section 2.3 , collectively, the “ Bankruptcy and Equity Exception ”).
2.4 Noncontravention. Other than the filing of the Certificate of Merger as required by the DGCL, and the delivery of notices set forth in Section 2.4 of the
Company Disclosure Letter which have been made or will be made promptly following the Effective Time, neither the execution and delivery by the Company of this
Agreement or the Ancillary Agreements (to which it is a party), nor the consummation by the Company or the Company Holders of the transactions contemplated
hereby or thereby, will (a) conflict with or violate any provision of the Amended and Restated Certificate of Incorporation or Bylaws of the Company, (b) require on the
part of the Company any notice to or filing with, or any permit, authorization, consent or approval of, any Governmental Entity, (c) conflict with, result in a breach of,
constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of obligations under, create in any party the right to terminate,
modify or cancel, or require any notice, consent or waiver under, any Contract to which the Company is a party or by which the Company is bound or to which any of
its assets is subject, (d) result in the imposition of any Security Interest upon the Company Shares, the Options, the Warrants or any of the respective assets of the
Company or (e) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any of its properties or assets.
2.5 Subsidiaries. The Company has not had, and currently does not have any Subsidiaries. The Company does not control directly or indirectly or have any direct
or indirect equity participation or similar interest in any corporation, partnership, limited liability company, joint venture, trust or other business association or entity.
2.6 Financial Statements.
(a) The Company has made the Financial Statements available to the Buyer. The Financial Statements have been prepared in accordance with GAAP
applied on a consistent
18
Source: RED HAT INC, 10-K, April 25, 2013
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basis throughout the periods covered thereby and fairly present the financial condition, results of operations and cash flows of the Company as of the respective dates
thereof and for the periods referred to therein and are consistent with the books and records of the Company; provided , however , that the Financial Statements
referred to in clause (b) of the definition of such term are subject to normal recurring year-end adjustments, which will not be material, taken as a whole, in amount or
effect, and do not include footnotes. Since the beginning of the period covered by the Financial Statements, there has been no change in any accounting policies,
principles, methods or practices, including any change with respect to reserves (whether for bad debts, contingent Liabilities or otherwise), of the Company. No audit
firm has ever declined or indicated its inability to issue an opinion with respect to any financial statements of the Company.
(b) The Company has at all times since January 1, 2009 (i) made and kept materially accurate books and records and (ii) maintained, enforced and
complied with internal accounting controls that have provided reasonable assurance that (A) transactions are (and have been) executed in accordance with
management’s authorization, (B) transactions are (and have been) recorded as necessary to permit preparation of the Company’s financial statements and to maintain
accountability for its assets, (C) access to the Company’s assets is (and has been) permitted only in accordance with management’s authorization, and (D) the reported
accountability for the Company’s assets is (and has been) compared with existing assets at reasonable intervals. During the periods covered by the Financial Statements,
there has been (i) no significant deficiency or material weakness in the design or operation of the Company’s internal controls over financial reporting adversely
affected the Company’s ability to record, process, summarize and report financial information during any of the periods covered by the Financial Statements, (ii) no
fraud, whether or not material, involving any member of the Company’s Board of Directors or management or any other employee of the Company who has a
significant role in the Company’s internal control over financial reporting and (iii) no claim or allegation regarding any of the foregoing.
2.7 Absence of Certain Changes. Since the Most Recent Balance Sheet Date, (i) the Company has not entered into any transaction which is not in the usual and
ordinary course of business consistent with past practice, (ii) there has occurred no event or development which, individually or in the aggregate, has had, or would
reasonably be expected to have in the future, a Company Material Adverse Effect, and (iii) the Company has not taken any of the actions set forth in paragraphs (a)
through (p) of Section 4.4 .
2.8 Undisclosed Liabilities. The Company has no Liabilities except for (a) Liabilities shown on the Most Recent Balance Sheet and the Final Adjusted Working
Capital, (b) Liabilities which have arisen since the Most Recent Balance Sheet Date in the Ordinary Course of Business which are not material in amount, and
(c) contractual and other Liabilities incurred in the Ordinary Course of Business which are not required by GAAP to be reflected on a balance sheet and which are in an
amount less than five thousand dollars ($5,000) individually and twenty-five thousand dollars ($25,000) in the aggregate.
19
Source: RED HAT INC, 10-K, April 25, 2013
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2.9 Tax Matters.
(a) The Company has properly filed on a timely basis all Tax Returns that it was required to file, and all such Tax Returns were true, correct and
complete. The Company has never been a member of a group of corporations with which it has filed (or been required to file) consolidated, combined or unitary Tax
Returns. The Company has paid on a timely basis all Taxes that were due and payable. The unpaid Taxes of the Company for Tax periods through the Most Recent
Balance Sheet Date do not exceed the accruals and reserves for Taxes (excluding accruals and reserves for deferred Taxes established to reflect timing differences
between book and Tax income) set forth on the Most Recent Balance Sheet and all unpaid Taxes of the Company for all Tax periods commencing after the Most Recent
Balance Sheet Date arose in the Ordinary Course of Business. The Company (i) has no actual or potential Liability under Treasury Regulations Section 1.1502-6 (or any
comparable or similar provision of applicable Law), as a transferee or successor, pursuant to any contractual obligation, or otherwise for any Taxes of any Person other
than the Company or (ii) is a party to or bound by any Tax indemnity, Tax sharing, Tax allocation or similar agreement. All Taxes that the Company was required by
Law to withhold or collect have been duly withheld or collected and, to the extent required, have been properly paid to the appropriate Governmental Entity, and the
Company has complied with all information reporting and backup withholding requirements, including the maintenance of required records with respect thereto, in
connection with amounts paid to any employee, independent contractor, creditor, or other third party.
(b) The Company has made available to the Buyer (i) complete and correct copies of all Tax Returns of the Company relating to Taxes for all taxable
periods for which the applicable statute of limitations has not yet expired, (ii) complete and correct copies of all private letter rulings, revenue agent reports, information
document requests, notices of proposed deficiencies, deficiency notices, protests, petitions, closing agreements, settlement agreements, pending ruling requests and any
similar documents submitted by, received by, or agreed to by or on behalf of the Company relating to Taxes for all taxable periods for which the statute of limitations
has not yet expired, and (iii) complete and correct copies of all material agreements, rulings, settlements, or other Tax documents with or from any Governmental Entity
relating to Tax incentives of the Company. No examination or audit or other action of or relating to any Tax Return of the Company by any Governmental Entity is
currently in progress or, to the knowledge of the Company, threatened or contemplated. No deficiencies for Taxes of the Company have been claimed, proposed or
assessed by any Governmental Entity. The Company has not been informed by any jurisdiction that the jurisdiction believes that the Company was required to file any
Tax Return that was not filed or is subject to Tax in such jurisdiction. The Company has not (x) waived any statute of limitations with respect to Taxes or agreed to
extend the period for assessment or collection of any Taxes, (y) requested any extension of time within which to file any Tax Return, which Tax Return has not yet been
filed, or (z) executed or filed any power of attorney with any taxing authority, which is still in effect.
(c) The Company has not made any payment, is not obligated to make any payment, and is not a party to any agreement, contract, arrangement or plan
that could obligate it to make any payment that may be treated as an “excess parachute payment” under Section 280G of the Code (without regard to Sections
280G(b)(4) and 280G(b)(5) of the Code).
20
Source: RED HAT INC, 10-K, April 25, 2013
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(d) The Company (i) has not been required to make a basis reduction pursuant to former Treasury Regulation Section 1.1502-20(b) or
Treasury Regulation Section 1.337(d)-2(b), (ii) is not and has not been required to redetermine or reduce basis pursuant to Treasury Regulation
Section 1.1502-36(b) or (c) or reduce any attributes under Treasury Regulation Section 1.1502-36(d), and (iii) has not incurred (or been allocated) any
dual consolidated loss within the meaning of Section 1503 of the Code.
(e) None of the assets of the Company is “tax-exempt use property” within the meaning of Section 168(h) of the Code or directly or indirectly secures
any debt the interest on which is tax exempt under Section 103(a) of the Code.
(f) There are no adjustments under Section 481 of the Code (or any similar adjustments under any provision of the Code or the corresponding foreign,
state or local Tax Laws) that are required to be taken into account by the Company in any period (or portion thereof) ending after the Closing Date by reason of a
change in method of accounting in any taxable period ending on or before the Closing Date or as a result of the consummation of the transactions contemplated by this
Agreement.
(g) There is no limitation on the utilization by the Company of its net operating losses, built-in losses, Tax credits, or similar items under Sections 382,
383 or 384 of the Code or comparable provisions of foreign, state or local Law (other than any such limitation arising as a result of the consummation of the
transactions contemplated by this Agreement).
(h) The Company (i) is not a “consenting corporation” within the meaning of former Section 341(f) of the Code, and none of the assets of the Company
is subject to an election under former Section 341(f) of the Code or (ii) has not been a United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code.
(i) The Company has not distributed to its stockholders or security holders stock or securities of a controlled corporation, nor has stock or securities of
the Company been distributed, in a transaction to which Section 355 of the Code applies (i) in the two (2) years prior to the date of this Agreement or (ii) in a
distribution that could otherwise constitute part of a “plan” or “series of related transactions” (within the meaning of Section 355(e) of the Code) that includes the
transactions contemplated by this Agreement.
(j) The Company does not own any interest in an entity that is characterized as a partnership for federal income Tax purposes or is party to any joint
venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes.
(k) Section 2.9(k) of the Company Disclosure Letter sets forth each jurisdiction (other than United States federal) in which the Company currently files
or has in the past filed a Tax Return and each jurisdiction that has sent notices or communications of any kind requesting information relating to the Company’s nexus
with such jurisdiction. Section 2.9(k) of the Company Disclosure Letter lists all Tax Returns (and their respective due dates without regard to extensions) required to
be filed by the Company for periods beginning before the Closing Date that will not be filed on or before the Closing Date.
21
Source: RED HAT INC, 10-K, April 25, 2013
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(l) The Company is not a stockholder of (i) a “controlled foreign corporation” as defined in Section 957 of the Code (or any similar
provision of foreign, state or local Law) or (ii) a “passive foreign investment company” within the meaning of Section 1297 of the Code.
(m) The Company has no, and has never had, a permanent establishment in any foreign country as defined in any applicable Tax treaty or convention
between the United States and such foreign country.
(n) The Company has not incurred (or been allocated) an “overall foreign loss” as defined in Section 904(f)(2) of the Code which has not been previously
recaptured in full as provided in Sections 904(f)(1) and/or 904(f)(3) of the Code.
(o) The Company is not a party to a gain recognition agreement under Section 367 of the Code.
(p) The Company will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any period (or any
portion thereof) ending after the Closing Date as a result of any (i) deferred intercompany gain or any excess loss account described in Treasury Regulations under
Section 1502 of the Code (or any corresponding provision of state, local or foreign Tax Law), (ii) closing agreement as described in Section 7121 of the Code (or any
corresponding or similar provision of state, local or foreign Tax Law) executed on or prior to the Closing Date, (iii) installment sale or other open transaction
disposition made on or prior to the Closing Date, (iv) prepaid amount received on or prior to the Closing Date, or (v) any election made pursuant to Section 108(i) of the
Code on or prior to the Closing Date.
(q) There are no Security Interests with respect to Taxes upon any of the assets or properties of the Company, other than with respect to Taxes not yet due
and payable.
(r) Section 2.9(r) of the Company Disclosure Letter sets forth a complete and accurate list of all transfer pricing or similar agreements to which the
Company is a party or by which any of its assets are bound. All related party transactions involving the Company have been conducted at arm’s length in compliance
with Section 482 of the Code and the Treasury Regulations promulgated thereunder and any comparable provisions of any other Tax Law. The Company has
maintained documentation (including any applicable transfer pricing studies) in connection with any related party transactions in accordance with Sections 482 and
6662 of the Code and the Treasury Regulations promulgated thereunder and any comparable provisions of any other Tax Law.
(s) The Company has never made a “check-the-box” election under Section 7701 of the Code.
(t) The Company has not engaged in any “reportable transaction” as set forth in Treasury Regulation Section 1.6011-4(b) or “listed transaction” as set
forth in Treasury
22
Source: RED HAT INC, 10-K, April 25, 2013
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Regulation Section 301.6111-2(b)(2) or any analogous provision of state or local Law. The Company has disclosed on its federal income Tax Returns all positions taken
therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662 of the Code.
2.10 Assets.
(a) The Company is the true and lawful owner, and has good title to, all of the assets (tangible or intangible) purported to be owned by the Company, free
and clear of all Security Interests. The Company has valid, legal, binding and enforceable leases (other than Leases which are addressed by Section 2.12 ) for all assets
(tangible or intangible) purported to be leased by the Company, subject to the Bankruptcy and Equity Exception. Section 2.10(a) of the Company Disclosure Letter
lists all leases for assets (tangible and intangible) of the Company. The Company owns or leases tangible assets sufficient for the conduct of its businesses as presently
conducted and as presently proposed to be conducted. Each tangible asset is free from material defects, is in good operating condition and repair (subject to normal wear
and tear).
(b) Section 2.10(b) of the Company Disclosure Letter lists individually (i) all fixed assets (within the meaning of GAAP) of the Company, indicating
cost, accumulated book depreciation (if any) and the net book value of each such fixed asset as of the Most Recent Balance Sheet Date, and (ii) all other assets of a
tangible nature (other than inventories) of the Company.
(c) The Company has not planned, and is not in need of material capital expenditures, during the twelve (12) month period following the date of this
Agreement.
(d) The provisions of this Section 2.10 shall be deemed to exclude all matters covered by the provisions of Section 2.13.
2.11 Owned Real Property. The Company has no Owned Real Property.
2.12 Leases. Section 2.12 of the Company Disclosure Letter lists all Leases and lists the location of the real property covered by such Lease, the term of such
Lease, any extension and expansion options, any security deposit and the rent payable thereunder. The Company has made available to Buyer complete and accurate
copies of the Leases. With respect to each Lease:
(a) such Lease is legal, valid, binding, enforceable and in full force and effect subject to the Bankruptcy and Equity Exception;
(b) such Lease will continue to be legal, valid, binding, enforceable and in full force and effect immediately following the Closing in accordance with the
terms thereof as in effect immediately prior to the Closing subject to the Bankruptcy and Equity Exception;
(c) neither the Company nor, to the knowledge of the Company, any other party, is in breach or violation of, or default under, any such Lease, and no
event has occurred, is pending or, to the knowledge of the Company, is threatened, which, after the giving of notice, with lapse of time, or otherwise, would constitute a
breach or default by the Company or, to the knowledge of the Company, any other party under such Lease;
23
Source: RED HAT INC, 10-K, April 25, 2013
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(d) there are no disputes, oral agreements or forbearance programs in effect as to such Lease;
(e) the Company has not assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the leasehold or subleasehold; and
(f) the Company has no knowledge of any Security Interest, easement, covenant or other restriction applicable to the real property subject to such Lease
which would reasonably be expected to materially impair the current uses or the occupancy by the Company of the property subject thereto.
2.13 Intellectual Property.
(a) Section 2.13(a) of the Company Disclosure Letter lists all Company Registrations, in each case specifying the applicable filing or registration number,
title, jurisdiction in which filing was made or from which registration issued, date of filing or issuance, names of all current applicant(s) and registered owner(s), as
applicable or, in the case of Company Registrations that are rights in domain names (“ Company Domain Names ”), in each case enumerating specifically the online
registrar, names of the owner of such domain names set forth with the applicable registrar and the dates of expiration of each of such domain names with the applicable
registrar. All assignments of Company Registrations to the Company have been properly executed and, to the extent applicable Law requires recordation of such
assignments, recorded. All assignments of Company Domain Names to the Company have been properly filed with the applicable online registrar. To the knowledge of
the Company, (i) all Company Registrations are valid and enforceable, (ii) all issuance, renewal, maintenance and other payments that are or have become due with
respect to the Company Registrations have been timely paid by or on behalf of the Company, (iii) there are no material defects of form in the preparation or filing of the
Company Registrations, (iv) and all applications in the Company Registrations are being diligently prosecuted. The Company has made available to the Buyer a copy of
each pending application in the Company Registrations.
(b) There are no proceedings or actions before any Governmental Entity, including any inventorship challenge, opposition or nullity proceeding,
reexamination, reissue or interference declared, pending, commenced or provoked, or to the knowledge of the Company threatened, with respect to any Patent Rights
included in the Company Registrations. There are no proceedings or actions before any Governmental Entity, including any ownership challenges, oppositions,
interferences, or cancellation proceedings declared, pending, commenced or provoked, or to the Company’s knowledge threatened, with respect to any Trademark
included in the Company Registrations. The Company has complied with its duty of candor and disclosure to the United States Patent and Trademark Office and any
similar foreign Governmental Entities with respect to all patent and trademark applications filed by or on behalf of the Company and has made no material
misrepresentation in such applications, including without limitation any improper claim of small entity status. The Company has no knowledge of any information that
would preclude the Company from having clear title to the Company Registrations or that would materially and adversely affect the validity or enforceability of any
Company Registrations.
24
Source: RED HAT INC, 10-K, April 25, 2013
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(c) Each item of Company Owned Intellectual Property will be owned by the Surviving Corporation and available for use by the Surviving
Corporation immediately following the Closing on substantially identical terms and conditions as it was immediately prior to the Closing. Each item of
Company Licensed Intellectual Property will be available for use by the Surviving Corporation immediately following the Closing on substantially
identical terms and conditions as it was immediately prior to the Closing. The Company is the sole and exclusive owner of all Company Owned
Intellectual Property, free and clear of any Security Interests. The Company Intellectual Property constitutes all Intellectual Property necessary to conduct
the Company’s business in all material respects in the manner currently conducted and, to the Company’s knowledge, as currently contemplated to be
conducted by the Company.
(d) Section 2.13(d)(1) of the Company Disclosure Letter lists all Software included in the Customer Offerings or Internal Systems and material
Documentation related thereto in which the Company claims sole and exclusive ownership of the copyright. Section 2.13(d)(2) of the Company Disclosure Letter
lists all third parties that have contributed or developed Company Source Code and the agreement(s) pursuant to which such third party contributed or developed such
Company Source Code and the Company has made available to the Buyer a copy of each such agreement. For each item listed in Section 2.13(d)(1) of the Company
Disclosure Letter , the Company has identified the location where the source code tree and Documentation is maintained by the Company or by any third party pursuant
to an agreement with the Company and the Company has made available to the Buyer a copy of each such agreement. Each Person who has contributed to the
development of the Software or Documentation included in the Customer Offerings or Internal Systems (solely with respect to Internal Systems that are listed in
Section 2.13(d)(1) of the Company Disclosure Letter ) has irrevocably assigned to the Company all rights, title and interest to such Software and Documentation
pursuant to an agreement made available to the Buyer.
The Company has taken reasonable measures to protect the Intellectual Property in each item of Company Owned Intellectual Property, and has done so in a
manner consistent with its obligations under all Open Source Licenses and other licenses under which the Company obtained a license to Company Licensed
Intellectual Property, and (except with respect to Customer Offerings distributed under an Open Source License) has taken reasonable measures to maintain in
confidence all trade secrets and confidential information comprising a part thereof. The Company has complied in all material respects with all applicable Privacy Laws
and contractual requirements pertaining to information privacy and security. The Company has made available to the Buyer copies of all privacy and security policies
adopted by the Company in connection with its operations. The Company has taken commercially reasonable steps to protect and maintain the confidential nature of all
personal information provided to the Company in accordance with its applicable privacy and security policies. No complaint, claim or notice relating to improper
collection, use or disclosure of, or breach in the security of, any such information has been made or, to the knowledge of the Company, threatened against the Company.
The Company is not subject to any contractual requirements, privacy policies or other material legal obligations that, following the Closing, would prohibit the Buyer
from receiving
25
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
and using all such personal information collected by the Company. To the knowledge of the Company, there has been no: (i) unauthorized disclosure of any third party
proprietary or confidential information in the possession, custody or control of the Company, (ii) breach of the Company’s security procedures wherein confidential or
proprietary information has been disclosed to a third party. The Company has complied with all applicable Open Source Licenses pertaining to Software Exploited in
Customer Offerings or in Internal Systems and other licenses under which the Company obtained a license to Company Licensed Intellectual Property pertaining to
Software Exploited in Customer Offerings or in Internal Systems. No complaint, claim or notice relating to compliance with any Open Source License or other license
under which the Company obtained a license to Company Licensed Intellectual Property has been made or, to the knowledge of the Company, threatened against the
Company.
(e) The Company has used commercially reasonable efforts to monitor the quality of all goods and services marketed, distributed, made available, sold,
licensed, provided or delivered under each of its Trademarks and has maintained quality control measures adequate to ensure that no Trademarks that it has licensed to
others shall be deemed to be abandoned.
(f) None of (i) the Customer Offerings or the Exploitation thereof by the Company, or by any reseller, distributor, customer or user thereof in a manner
authorized by the Company, (ii) the Internal Systems or the Exploitation thereof by the Company or (iii) the other business activities of the Company, has infringed,
violated or constituted a misappropriation of, or does or will (when Exploited or undertaken after the Closing by the Surviving Corporation or the Buyer in the same
manner as Exploited or undertaken by the Company prior to the Closing) infringe, violate, or constitute a misappropriation of, directly or indirectly, any Intellectual
Property of any third party. Section 2.13(f) of the Company Disclosure Letter lists any complaint, claim or notice, or threat of any of the foregoing (including any
notification that a license under any patent is or may be required), received by the Company alleging any such infringement, violation or misappropriation and any
request or demand for indemnification, defense or reimbursement received by the Company from any reseller, distributor, customer, user or any other third party with
respect to Intellectual Property; and the Company has made available to the Buyer copies of all such complaints, claims, notices, requests, demands or threats, as well as
any legal opinions, studies, market surveys and analyses relating to any alleged or potential infringement, violation or misappropriation.
(g) To the knowledge of the Company, no Person is infringing, violating or misappropriating any Company Owned Intellectual Property or any Company
Licensed Intellectual Property that is exclusively licensed to the Company. The Company has made available to the Buyer copies of all written correspondence,
analyses, legal opinions, complaints, claims, notices, demands or threats concerning the infringement, violation or misappropriation of any Company Owned
Intellectual Property or any Company Licensed Intellectual Property that is exclusively licensed to the Company.
(h) Section 2.13(h)(1)(i) of the Company Disclosure Letter identifies each license, covenant or other agreement (other than agreements licensing
Customer Offerings using the Company’s standard form of software license agreement set forth in Section 2.13(h)(1)(ii) of the Company Disclosure Letter without
material modification) pursuant to which the Company
26
Source: RED HAT INC, 10-K, April 25, 2013
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has assigned, transferred, licensed, distributed or otherwise granted any right or access to any Person, or covenanted not to assert any right, with respect to any past,
existing or future Company Intellectual Property. The Company has not agreed to indemnify any Person against any infringement, violation or misappropriation of any
Intellectual Property (except pursuant to agreements licensing Customer Offerings using the Company’s standard form of software license agreement set forth in
Section 2.13(h)(1)(ii) of the Company Disclosure Letter without material modification). The Company has made available to the Buyer a copy of each license,
covenant or agreement identified in Section 2.13(h)(1) and (2) of the Company Disclosure Letter . The Company is not a member of or party to any patent pool,
industry standards body, Open Source Materials development project, trade association or other organization pursuant to which the Company is obligated to license any
past, existing or future Intellectual Property to any Person. For each item set forth in Section 2.13(h)(3) of the Company Disclosure Letter , the Company has made
available to the Buyer a copy of all relevant rules, obligations, or contractual commitments.
(i) Section 2.13(i)(1) of the Company Disclosure Letter identifies (i) each item of Company Licensed Intellectual Property and the agreement, license,
grant, assignment or other contract or instrument pursuant to which the Company Exploits such item (excluding currently available, off-the-shelf software programs that
are part of the Internal Systems and are licensed by the Company pursuant to “shrink wrap” or “click through” licenses, in either case the total fees associated with
which are less than $5,000 in the aggregate), and the Customer Offering to which such item pertains, if any, and (ii) each agreement, license, grant, assignment or other
contract or instrument pursuant to which the Company has obtained any joint or sole ownership interest in or to each item of Company Owned Intellectual Property.
With the exception of the items disclosed in Section 2.13(i)(1) of the Company Disclosure Letter , no third party inventions, methods, services, materials, processes,
Software or Documentation are included in or required to Exploit the Customer Offerings or Internal Systems. None of the (i) Customer Offerings or (ii) Internal
Systems (solely with respect to (A) Internal Systems listed in Section 2.13(d) of the Company Disclosure Letter and (B) material Internal Systems) includes
“shareware”, “freeware” or other Software or other material that was obtained by the Company from third parties other than pursuant to the license agreements listed in
Section 2.13(i)(1) of the Company Disclosure Letter . Other than as set forth in Section 2.13(i)(2) of the Company Disclosure Letter , the Company does not have any
obligation to pay any royalty or other payment to any Person relating to the Exploitation of any Customer Offering.
(j) The Company has not licensed, distributed or disclosed, and knows of no distribution or disclosure by others (including its employees and contractors)
of, the source code for any Proprietary Software or of other confidential information constituting, embodied in or pertaining to such Proprietary Software (“ Company
Source Code ”) to any Person, except pursuant to an agreement listed in Section 2.13(j) of the Company Disclosure Letter . No event has occurred, and no
circumstance or condition exists, that (with or without notice or lapse of time, or both) will, or would reasonably be expected to, nor will the consummation of the
transactions contemplated hereby, result in the license, distribution or disclosure of such Company Source Code by the Company, any escrow agent or other Person to
any third party.
27
Source: RED HAT INC, 10-K, April 25, 2013
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(k) All of the Software and Documentation comprising, incorporated in or bundled with the Customer Offerings or Internal Systems listed
in Section 2.13(d) of the Company Disclosure Letter (other than Software and Documentation listed on Section 2.13(i) or 2.13(l) of the Company
Disclosure Letter and currently-available, off-the-shelf software programs that are part of the Internal Systems and are licensed by the Company pursuant
to “shrink wrap” or “click through” licenses, in either case the total fees associated with which are less than $5,000 in the aggregate) have been designed,
authored, tested and debugged by (i) regular employees of the Company within the scope of their employment; or (ii) independent contractors of the
Company who have executed valid and binding agreements expressly assigning all right, title and interest in and to such materials to the Company,
waiving or agreeing not to assert their non-assignable rights (including moral rights) in favor of the Company, and who have no residual claim to such
materials. All right, title and interest in and to such materials obtained by the Company through such assignments and waivers are assignable and
sublicensable (through any number of tiers) by the Company.
(l) Section 2.13(l)(1) of the Company Disclosure Letter lists all third party Open Source Materials and other Company Licensed Intellectual Property (“
Third Party Materials ”) that are embodied in, distributed with, required for the use of, referenced in or called to by the Customer Offerings, and describes the manner
in which such Third Party Materials have been utilized, including whether and how the Third Party Materials have been modified and/or distributed by the Company,
and identifies the license agreement applicable to each item of Third Party Materials. Except as disclosed in Section 2.13(l)(1) of the Company Disclosure Letter , the
Company has not (i) incorporated Third Party Materials into, or combined Third Party Materials with, the Customer Offerings; or (ii) distributed Third Party Materials
in conjunction with any other software developed or distributed by the Company. Except as disclosed in Section 2.13(l)(2) of the Company Disclosure Letter , the
Company has not used Third Party Materials in a manner that creates, or purports to create, obligations for the Company with respect to the Customer Offerings or
grants, or purport to grant, to any third party, any rights or immunities with respect to Intellectual Property (including using any Open Source Materials that require, as a
condition of Exploitation of such Open Source Materials, that other Software incorporated into, derived from or distributed with such Open Source Materials be
(a) disclosed or distributed in source code form, (b) licensed for the purpose of making derivative works, or (c) redistributable at no charge or minimal charge), and the
use of the Customer Offerings does not require use of any Third Party Materials that would create (or purport to create) any such obligations or grant (or purport to
grant) any such rights or immunities.
(m) Each employee and each independent contractor of the Company has, prior to performing any services for the Company, executed a valid and
binding written agreement expressly assigning to the Company all right, title and interest in and to any ideas, materials, information, inventions (whether or not
patentable), and works of authorship invented, created, developed, conceived and/or reduced to practice during the term of such employee’s employment or such
independent contractor’s work for the Company, and all Intellectual Property therein, and has waived or agreed not to assert all non-assignable rights (including moral
rights) in favor of the Company, and who have no residual claim to such materials.
28
Source: RED HAT INC, 10-K, April 25, 2013
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(n) The Customer Offerings are free from significant defects in design, workmanship and materials and conform in all material respects
with all representations, warranties and other obligations of the Company relating thereto contained in all Contracts between the Company and resellers,
distributors, customers and users of the Customer Offerings. The Customer Offerings do not contain any disabling device (including “time bombs”), virus,
worm, back door, Trojan horse or other disruptive or malicious code that may, or is intended to, impair their intended performance or otherwise permit
unauthorized access to, hamper, delete or damage any computer system, software, network or data. None of the Internal Systems contain or are affected by
any disabling device (including “time bombs”), virus, worm, back door, Trojan horse or other disruptive or malicious code that may, or is intended to,
impair their intended performance or otherwise permit unauthorized access to, hamper, delete or damage any computer system, software, network or data.
The Company has not received any warranty claims, contractual terminations or requests for settlement or refund due to the failure of the Customer
Offerings to meet their specifications or otherwise to satisfy end user needs, comply with any applicable written promises or warranties or for harm or
damage to any third party. Section 2.13(n) of the Company Disclosure Letter lists all significant bugs or other defects (including material failures to
conform to the written Documentation or specifications therefor) in the Customer Offerings of which the Company has knowledge.
(o) The Company has never sought, applied for or received any support, funding, resources or assistance from any Governmental Entity or
quasi-governmental agency or funding source in connection with the Exploitation of the Customer Offerings, the Internal Systems or any facilities or equipment or
personnel used in connection therewith. No third party, including any academic or governmental organization, possesses rights to the Company Owned Intellectual
Property (other than rights under Open Source Licenses with respect to Customer Offerings distributed under such Open Source Licenses), which, if exercised, would
allow such third party to sell, license, distribute or otherwise commercially exploit products or services using, incorporating or infringing such Company Owned
Intellectual Property.
(p) Neither the Company nor, to the Company’s knowledge, any of its stockholders, is or has ever been a member or promoter of, or a contributor to, any
industry standards body or similar organization that could compel the Company to grant or offer, or result in the Company granting or offering, to any third party any
license, covenant or right to any Company Owned Intellectual Property.
(q) Neither this Agreement nor the transactions contemplated by this Agreement, including the assignment to the Buyer by operation of law or otherwise
of any agreements to which the Company is a party, will cause: (i) the Buyer, the Company or any Buyer Affiliate to grant to any third party any right to or with respect
to any Intellectual Property owned by, or licensed to, any of the Buyer, any Buyer Affiliate or the Company; (ii) the Buyer, any Buyer Affiliate or the Company to be
obligated to pay any royalties or other license fees with respect to Intellectual Property, Software or other technology in excess of those payable by the Company in the
absence of this Agreement or the transactions contemplated hereby; or (iii) Buyer, any Buyer Affiliate or the Company to become subject to a non-competition or
similar business restriction that it was not restricted by prior to the date of this Agreement.
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Source: RED HAT INC, 10-K, April 25, 2013
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2.14 Inventory. The Company does not maintain inventory that would be required to be included on a consolidated balance sheet of the Company
prepared in accordance with GAAP.
2.15 Contracts.
(a) Section 2.15(a) of the Company Disclosure Letter lists the following Contracts to which the Company is a party, or by which it is bound, as of the
date of this Agreement:
(i) any Contract (or group of related Contracts) for the lease of personal property from or to third parties providing for lease payments in excess
of ten thousand dollars ($10,000) per annum or having a remaining term longer than twelve (12) months;
(ii) any Contract (or group of related Contracts) for the purchase or sale of products or for the furnishing or receipt of services (A) which calls
for performance over a period of more than one year, (B) which requires the Company to pay or otherwise give consideration of more than the sum of twenty five
thousand dollars ($25,000) over the term of the contract, (C) which cannot be canceled without payment or penalty in excess of five thousand dollars ($5,000), (D) in
which the Company has granted manufacturing rights, “most favored nation” pricing provisions or marketing or distribution rights relating to any products, services or
territory or has agreed to purchase a minimum quantity of goods or services or has agreed to purchase goods or services exclusively from a certain party, (E) which does
not limit the aggregate Liability of the Company to the aggregate amount paid to the Company pursuant to such Contract, (F) that requires either party to be liable for or
pay liquidated or similar damages or (G) which does not explicitly exclude the payment of consequential damages;
(iii) any Contract concerning the establishment or operation of a partnership, joint venture or limited liability company;
(iv) any Contract (or group of related Contracts) under which it has created, incurred, assumed or guaranteed (or may create, incur, assume or
guarantee) Indebtedness (including capitalized lease obligations) or under which it has imposed (or may impose) a Security Interest on any assets (tangible or
intangible) of the Company;
(v) any Contract for the disposition of any significant portion of the assets or business of the Company (other than sales of products in the
Ordinary Course of Business) or any Contract for the acquisition of the assets or business of any other entity (other than purchases of inventory or components in the
Ordinary Course of Business);
(vi) any Contract that purports to impose non-solicitation or noncompetition restrictions on the Company (including employees of the
Company) or in favor of the Company;
(vii) any settlement, separation or similar Contract;
(viii) any Software escrow or similar Contract;
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Source: RED HAT INC, 10-K, April 25, 2013
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(ix) any employment or consulting Contract (excluding offer letters in the Company’ standard form with non-management
employees that are terminable at will and do not provide severance, retention or change of control benefits);
(x) any agency, reseller, distribution or similar Contract;
(xi) any Contract involving any current officer, director or stockholder of the Company or any Affiliate thereof;
(xii) any Contract under which the consequences of a default or termination would reasonably be expected to have a Company Material Adverse
Effect;
(xiii) any Contract which contains any provisions requiring the Company to indemnify any other party (excluding indemnities contained in
Contracts for the purchase, sale or license of products entered into in the Ordinary Course of Business) (copies of which have been made available to the Buyer);
(xiv) any Contract with any Governmental Entity or any educational institution;
(xv) any broker, dealer, distributor, manufacturer’s representative, agent or sales promotion Contract;
(xvi) any Contract that purports on its face to bind any Affiliate of the Company in any way, including but not limited to, prohibiting such
Affiliate from engaging in any business that they would have otherwise been permitted to engage in;
(xvii) any Contract that could reasonably be expected to have the effect of prohibiting or impairing the conduct of the business of the Company
or the Buyer or any of its Affiliates as currently conducted and currently proposed to be conducted;
(xviii) any Contract under which the Company is restricted from selling, licensing or otherwise distributing any of its technology or products, or
providing services to, customers or potential customers or any class of customers, in any geographic area, during any period of time or any segment of the market or
line of business; and
(xix) any other Contract (or group of related Contracts) either involving more than twenty five thousand dollars ($25,000) or not entered into in
the Ordinary Course of Business.
(b) The Company has made available to the Buyer a complete and accurate copy of each Contract listed in Section 2.13 or Section 2.15 of the Company
Disclosure Letter . With respect to each Contract so listed: (i) the Contract is legal, valid, binding and enforceable and in full force and effect subject to the Bankruptcy
and Equity Exception; (ii) the Contract will continue to be legal, valid, binding and enforceable and in full force and effect immediately following the Closing in
accordance with the terms thereof as in effect immediately prior to the Closing subject to the Bankruptcy and Equity Exception; and (iii) neither the Company nor, to
31
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
the knowledge of the Company, any other party, is in breach or violation of, or default under, any such Contract, and no event has occurred, is pending or, to the
knowledge of the Company, is threatened, which, after the giving of notice, with lapse of time, or otherwise, would constitute a material breach or default by the
Company or, to the knowledge of the Company, any other party under such Contract.
2.16 Accounts Receivable. All accounts receivable of the Company reflected on the Most Recent Balance Sheet (other than those paid since such date) are valid
receivables subject to no setoffs or counterclaims and are current and collectible (within ninety (90) days after the date on which it first became due and payable), net of
the applicable reserve for bad debts on the Most Recent Balance Sheet. A complete and accurate list of the accounts receivable reflected on the Most Recent Balance
Sheet, showing the aging thereof, is included in Section 2.16 of the Company Disclosure Letter . All accounts receivable of the Company that have arisen since the
Most Recent Balance Sheet Date are valid receivables subject to no setoffs or counterclaims and are collectible (within ninety (90) days after the date on which it first
became due and payable), net of a reserve for bad debts in an amount proportionate to the reserve shown on the Most Recent Balance Sheet. The Company has not
received any written notice from an account debtor stating that any account receivable is subject to any contest, claim or set-off by such account debtor.
2.17 Powers of Attorney. There are no outstanding powers of attorney executed on behalf of the Company.
2.18 Insurance. Section 2.18 of the Company Disclosure Letter lists each insurance policy (including fire, theft, casualty, comprehensive general liability,
workers compensation, business interruption, environmental, product liability and automobile insurance policies and bond and surety arrangements) to which the
Company is a party, all of which are in full force and effect. There is no material claim pending under any such policy as to which coverage has been questioned, denied
or disputed by the underwriter of such policy. All premiums due and payable under all such policies have been paid, the Company is not liable for retroactive premiums
or similar payments, and the Company is otherwise in compliance in all material respects with the terms of such policies. The Company has no knowledge of any
threatened termination of, or premium increase with respect to, any such policy. Each such policy will continue to be enforceable and in full force and effect
immediately following the Closing in accordance with the terms thereof as in effect immediately prior to the Closing.
2.19 Litigation. There is no Legal Proceeding which is pending or has been threatened in writing against the Company. There are no judgments, orders or
decrees outstanding against the Company.
2.20 Warranties. No product or service manufactured, sold, leased, licensed or delivered by the Company is subject to any guaranty, warranty, right of return,
right of credit or other indemnity other than the applicable standard terms and conditions of sale, or lease or license of the Company, which are set forth in
Section 2.20 of the Company Disclosure Letter . Section 2.20 of the Company Disclosure Letter sets forth the aggregate expenses incurred by the Company in
fulfilling their obligations under their guaranty, warranty, right of return and
32
Source: RED HAT INC, 10-K, April 25, 2013
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indemnity provisions during each of the fiscal years and the interim period covered by the Financial Statements; and, to the knowledge of the Company there is no
reason why such expenses be in excess of $25,000 in the twelve (12) month period following the Closing Date.
2.21 Employees.
(a) Section 2.21(a) of the Company Disclosure Letter contains a list of all employees of the Company, along with the position and the annual rate of
compensation (and the portions thereof attributable to salary, bonus, commission and other compensation respectively) of each such employee. All accruals for, or
commitments (whether oral or written) to pay, bonuses, commissions or similar payments to employees of the Company for the current or prior fiscal year are
accurately reflected on the Financial Statements or are set forth on Section 2.21(a) of the Company Disclosure Letter . Each current and past employee and
independent contractor of the Company has entered into a confidentiality and assignment of inventions agreement with the Company, a copy of which has been made
available to Buyer. Section 2.21(a) of the Company Disclosure Letter contains a list of all employees of the Company who are a party to a non-competition and/or
non-solicitation agreement with the Company; copies of such agreements have previously been made available to the Buyer. All of the Contracts referenced in the two
preceding sentences will continue to be legal, valid, binding and enforceable and in full force and effect immediately following the Closing in accordance with the terms
thereof as in effect immediately prior to the Closing.
(b) The Company is not a party to or bound by any collective bargaining agreement, nor has it experienced any strikes, grievances, claims of unfair labor
practices or other collective bargaining disputes. The Company has no knowledge of any organizational effort made or threatened by or on behalf of any labor union
with respect to employees of the Company.
(c) The Company has not breached or violated in any material respect any (i) Law respecting employment and employment practices, terms and
conditions of employment and wages and hours, including any such Law respecting employment discrimination, employee classification, workers’ compensation,
family and medical leave, the Immigration Reform and Control Act and occupational safety and health requirements, or (ii) employment agreement; and no claims,
controversies, investigations, audits or suits are pending or, to the Company’s knowledge, threatened, with respect to such Laws, regulations, or agreements, either by a
private individual or by any Governmental Entity. All employees of the Company who are employed in the United States are employed on an at-will basis. To the
knowledge of the Company, no key employee or group of employees has any plans to terminate employment with the Company.
(d) The Company has properly classified all of its service providers as either employees or independent contractors and with respect to employees as
either exempt or non-exempt employees under applicable Law. The Company has withheld and paid to the appropriate Governmental Entities all amounts required to be
withheld from compensation paid to their employees and no claim has been made against the Company or, to the knowledge of the Company, is currently threatened for
any arrears of Taxes, penalties or other sums for failure to withhold and pay applicable Taxes. There is no claim against the Company with respect to
33
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
payment of wages, salary or overtime pay that has been asserted or is now pending or, to the Company’s knowledge, threatened by any current or former employees or
independent contractors of the Company. All Persons who have performed services for the Company while classified as independent contractors have satisfied the
requirements of Law to be so classified, and the Company has fully and accurately reported such independent contractor’s compensation on IRS Forms 1099 or other
applicable Tax forms for independent contractors when required to do so.
(e) Section 2.21(e) of the Company Disclosure Letter sets forth a true, correct and complete list of all employees of the Company working in the United
States who are not citizens or permanent residents of the United States, and indicates the immigration status of each individual and the date work authorization is
scheduled to expire. All other Persons employed by the Company in the United States are citizens or permanent residents. Section 2.21(e) of the Company Disclosure
Letter sets forth a true, correct and complete list and description of all expatriate Contracts that the Company has in effect with any employee, as well as all
employment contracts and independent contractor arrangements covering any individuals providing services outside the United States. Each employee of the Company
working in a country other than one of which such employee is a national has a valid work permit or visa enabling him or her to work lawfully in the country in which
such individual is employed.
(f) Section 2.21(f) of the Company Disclosure Letter sets forth the policy of the Company with respect to accrued vacation (including carryover limits),
accrued sick time, earned time off and the amount of such liabilities as of November 30, 2012.
(g) No employee or independent contractor of the Company is eligible to receive any payment or benefit (including acceleration of vesting) as a result of
the transaction contemplated herein.
(h) There are no amounts or commitments (whether oral or in writing) of compensation outstanding (including bonuses, vacation pay and other liabilities
accrued through the date hereof) to any employee or former employee of the Company (other than accrued amounts representing salary entitlements due for the current
pay period or for the reimbursement of legitimate business expenses).
2.22 Employee Benefits. With respect, as applicable, to Benefit Plans and Benefit Arrangements:
(a) Section 2.22(a) of the Company Disclosure Letter contains a true, correct and complete list of all Company Benefit Plans and Company Benefit
Arrangements. The Company has made available to Buyer true, complete and correct copies of the following documents with respect to each Company Benefit Plan and
Company Benefit Arrangement, to the extent applicable: (i) all plan or arrangement documents, and the most recent written descriptions of all non-written agreements
relating to any such plan or arrangement; (ii) the most recent Form 5500 or other comparable documents and any attached financial statements and those for any period
commencing on or after December 31, 2007 and any related actuarial reports; (iii) summary plan descriptions, summaries of material modifications, and any
34
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
prospectuses that describe the Company Benefit Plans or Company Benefit Arrangements; (iv) all reports received since December 31, 2008 from any Governmental
Entity, third-party administrators, actuaries, investment managers, consultants or other independent contractors (other than individual account records or participant
statements) or prepared by employees of the Company; (v) all notices the Internal Revenue Service (“ IRS ”), Department of Labor, or any other Governmental Entity
issued pertaining to any Company Benefit Plan or any Company Benefit Arrangement; and (vi) employee manuals or handbooks containing personnel or employee
relations policies.
(b) The Company has no Qualified Plans currently in operation. Each Company Benefit Plan and each Company Benefit Arrangement has been
maintained in accordance with its constituent documents and with all applicable provisions of applicable Laws, including federal and state securities Laws and any
reporting and disclosure requirements; with respect to each Company Benefit Plan, no transactions prohibited by Code Section 4975 or ERISA Section 406 and no
breaches of fiduciary duty described in ERISA Section 404 have occurred; and no act or omission has occurred and no condition exists with respect to any Benefit Plan
or Benefit Arrangement that could reasonably be expected to subject the Company to (i) any fine, penalty, tax or Liability of any kind imposed under ERISA or the
Code or similar applicable state Law or (ii) any contractual indemnification or contribution obligation protecting any fiduciary, insurer or service provider with respect
to any Benefit Plan or Benefit Arrangement.
(c) Neither the Company nor any of its ERISA Affiliates has ever maintained, sponsored or been required to contribute or had any Liability with respect
to any plan subject to Title IV of ERISA.
(d) Each Company Benefit Plan and Company Benefit Arrangement is amendable and terminable unilaterally and with no further expense by the
Company (other than for benefits accrued through the date of termination or amendment and reasonable administrative expenses related thereto) and no Company
Benefit Plan, Company Benefit Arrangement, plan documentation or agreement, summary plan description or other written communication distributed generally to
employees by its terms prohibits the Company or any successor from amending or terminating any such plans or arrangements. The investment vehicles used to fund
the Company Benefit Plans and Company Benefit Arrangements may be changed at any time without incurring a material sales charge, surrender fee or other similar
expense.
(e) There are no pending claims (other than routine benefit claims and proceedings with respect to qualified domestic relations orders) or lawsuits that
have been asserted or instituted by, against or relating to, any Company Benefit Plans or Company Benefit Arrangements (including any such claim or lawsuit against
any fiduciary of any such Company Benefit Plan or Company Benefit Arrangement), nor is there any basis for any such claim or lawsuit. No Company Benefit Plans or
Company Benefit Arrangements are or have been under audit or examination (nor has notice been received of a potential audit or examination) by any Governmental
Entity (including the IRS and the Department of Labor). No voluntary or required corrections procedures are in progress, under internal or governmental review, or
contemplated, and no corrections procedures have been filed with any Governmental Entity since December 31, 2007.
35
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
(f) No Company Benefit Plan or Company Benefit Arrangement or other Contract, plan or arrangement covering any one or more
individuals contains any provision or is subject to any Law that, as a result of the transactions or upon related, concurrent, or subsequent employment
termination, would (i) increase, accelerate or vest equity or any other compensation or benefit, (ii) require severance, termination or retention payments,
(iii) provide any term of employment or compensation guaranty (including salary, commissions or bonuses); (iii) trigger any Liabilities, (iii) forgive any
Indebtedness, (iv) require or provide any payment or compensation subject to Section 280G of the Code (and no such payment or compensation has
previously been made), (v) promise or provide any tax gross ups or indemnification, whether under Sections 280G or 409A of the Code or otherwise, or
(vi) measure any values of benefits on the basis of any of the transactions contemplated hereby. No stockholder, equity owner, employee, officer, manager
or director of the Company, and none of their respective Affiliates, has been promised or paid any bonus or incentive compensation related to the
transactions contemplated hereby.
(g) The Company has paid all amounts it is required to pay as contributions to the Company Benefit Plans and Company Benefit Arrangements as of the
date of this Agreement; all benefits accrued under any unfunded Company Benefit Plan or Company Benefit Arrangement will have been paid, accrued or otherwise
adequately reserved in accordance with GAAP on a consistent basis with the Financial Statements as of the date of the Draft Closing Balance Sheet; the assets of each
Company Benefit Plan that is funded are reported at their fair market value on the books and records of such Company Benefit Plan; no Company Benefit Plan that is
subject to Part 4 of Title I of ERISA has assets that include securities issued by the Company or any ERISA Affiliate.
(h) All group health plans of the Company and its ERISA Affiliates comply in all material respects with the requirements of COBRA, Code
Section 5000, the Patient Protection and Affordable Care Act (“ PPACA ”), the Health Insurance Portability and Accountability Act, and any other comparable
domestic or foreign Laws; the Company does not provide benefits through a voluntary employee beneficiary association as defined in Code Section 501(c)(9); the
Company has no Liability under or with respect to COBRA for its own actions or omissions or those of any predecessor other than to provide health care continuation
coverage to qualified beneficiaries; and no employee, director or manager, or former employee, director or manager (or beneficiary of any of the foregoing) of the
Company is entitled to receive any welfare benefits, including death or medical benefits (whether or not insured) beyond retirement or other termination of
employment, other than as applicable Law or the terms of the Qualified Plan requires, and there have been no written or oral commitments inconsistent with the
foregoing. Each medical plan subject to PPACA is grandfathered.
(i) Each Company Benefit Plan or Company Benefit Arrangement that is a “nonqualified deferred compensation plan” (as defined in Code
Section 409A(d)(1)) has been operated since December 31, 2004 in compliance with then applicable guidance under Code Section 409A and has been documented in
accordance with Code Section 409A since January 1,
36
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
2009. No stock option or stock appreciation right granted by the Company had an exercise or measurement price that was or may have been less than the fair market
value of the underlying common stock or equity units (as the case may be) as of the date such option or right was granted, or has any feature for the deferral of
compensation other than the deferral of recognition of income until the later of exercise or disposition of such option or right. The Company has made available to the
Buyer all valuation or similar reports pertaining to the valuation of the Common Shares or other equity interests of the Company.
(j) There is no corporate-owned life insurance (COLI), split-dollar life insurance policy or any other life insurance policy on the life of any employee of
the Company as to which the Company has any obligation, Liability, claim, or ownership interest.
2.23 Environmental Matters.
(a) The Company has complied in all material respects with all applicable Environmental Laws. There is no pending or, to the knowledge of the
Company, threatened civil or criminal litigation, written notice of violation, formal administrative proceeding, or written information request alleging potential liability
of the Company by any Governmental Entity, relating to any Environmental Law involving the Company.
(b) Except as would not reasonably be expected to result in Liability to the Company, the Company has not released any Materials of Environmental
Concern into the environment.
(c) The Company is not a party to or bound by any court order, administrative order, or consent order between the Company and any Governmental
Entity entered into in connection with any legal obligation or Liability arising under any Environmental Law.
(d) To the Company’s knowledge, there are no environmental site assessments (whether in hard copy or electronic form) relating to premises currently or
previously owned or operated by the Company.
(e) The Company has not received any written notice alleging Liability of the Company relating to any solid or hazardous waste transporter or treatment,
storage or disposal facility that has been used by the Company.
2.24 Legal Compliance.
(a) The Company is currently conducting, and has at all times conducted, its business in compliance in all material respects with all applicable Laws. The
Company is currently conducting, and has at all times since its inception conducted, its business in compliance with and not in violation of any export control, trade
embargo or anti-boycott provisions of any applicable Law and of any export license, registration or approval. The Company has not received any written notice or
communication from any Governmental Entity alleging noncompliance with any applicable Law.
37
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
(b) The Company and its directors, officers, consultants, agents and employees have at all times fully complied with, and are currently in
full compliance with, the UK Bribery Act of 2010, the Foreign Corrupt Practices Act of 1977 (“ FCPA ”) and any similar applicable Law and any other
Laws dealing with bribery, extortion, and kickbacks, and Laws governing the offering or giving of gifts and gratuities or Anything of Value to commercial
business partners or Public Officials (collectively, the “ Anti-Corruption Laws ”).
(c) Neither the Company, nor, to the knowledge of the Company, any director, officer, employee, agent, distributor, consultant, Affiliate, or other Person
acting on behalf of the Company, has taken any action, either directly or indirectly, that would result in a violation of the Anti-Corruption Laws, including making,
offering, authorizing, or promising any payment, contribution, gift, entertainment, bribe, rebate, kickback, or Anything of Value, regardless of form or amount, to any
Public Official. The Company and its directors, officers, consultants, agents and employees have not, directly or indirectly, offered, promised, paid, authorized or given
money or Anything of Value, directly or indirectly, to any Public Official for the purpose of: (A) influencing any act or decision of a Public Official; (B) inducing a
Public Official to do or omit to do an act in violation of a lawful duty; (C) securing any improper business advantage; or (D) inducing the Public Official to influence
the act or decision of a Governmental Entity, in order to obtain or retain business, or direct business to, any Person, to obtain a competitive advantage, to receive
favorable treatment in obtaining or retaining business, or to compensate for favorable treatment already secured. Neither the Company, nor any director, officer,
employee, agent, distributor, consultant, affiliate, or other Person acting on behalf of the Company has offered, paid, promised or authorized the payment or gift of
Anything of Value to any Person, while knowing or being aware of a likelihood that such money or thing of value would be offered, paid, given or promised, to any
Public Official or any commercial business partner for any purpose described in the immediately preceding sentence.
(d) Neither the Company, nor, to the knowledge of the Company, any director, officer, employee, agent, distributor, consultant, affiliate, or other Person
acting on behalf of the Company, is, or has been, under administrative, civil, or criminal investigation, indictment, information, suspension, debarment, or audit (other
than a routine contract audit) by any party, in connection with alleged or possible violations of the Anti-Corruption Laws. Neither the Company, nor, to the knowledge
of the Company, any director, officer, employee, agent, distributor, consultant, affiliate, or other Person acting on behalf of the Company, has received notice from, or
made a voluntary disclosure to, the U.S. Department of Justice or the U.S. Securities and Exchange Commission regarding alleged or possible violations of the
Anti-Corruption Laws.
(e) The Parties agree that the only representations and warranties relating to compliance with Anti-Corruption Laws or export control Laws are set forth
in this Section 2.24 .
2.25 Customers and Suppliers. Section 2.25 of the Company Disclosure Letter sets forth a list of (i) each of the Company’s top twenty-five (25) customers for
each of the last two (2) full fiscal years and the interim period from the end of the last full fiscal year to the Most Recent Balance Sheet Date and the amount of net
revenue accounted for by each such customer during each such period and (ii) each of the Company’s suppliers to which the total amount paid
38
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
by the Company to such supplier exceeded twenty five thousand dollars ($25,000) for either of the last two (2) full fiscal years or the interim period from the end of the
last full fiscal year to the Most Recent Balance Sheet Date and the amount paid to such supplier during each such period and (iii) each supplier that is as of the date of
this Agreement the sole supplier of any material product or service to the Company and the amount paid to such supplier during each such period. No such customer or
supplier has indicated within the past year that it will stop, or decrease the rate of, buying products or services or supplying products or services, as applicable, to the
Company. No unfilled customer order or commitment obligating the Company to process, manufacture or deliver products or perform services will result in a loss to the
Company upon completion of performance.
2.26 Permits. Section 2.26 of the Company Disclosure Letter sets forth a list of all material Permits that are issued to or held by (and are material to) the
Company. Such listed Permits are the only Permits that are required for the Company to conduct its business as presently conducted and as proposed to be conducted,
other than Permits, the absence of which, individually and in the aggregate, are not material to the business or financial position or results of operations of the
Company. Each such Permit is in full force and effect; the Company is in compliance with the terms of each such Permit; and, to the knowledge of the Company, no
suspension or cancellation of such Permit is threatened. Each such Permit will continue in full force and effect immediately following the Closing.
2.27 Government Contracts.
(a) Section 2.27 of the Company Disclosure Letter lists each Government Contract or Bid to which the Company is a party. The Company has made
available to the Buyer complete and accurate copies of each such Government Contract or Bid. With respect to each Government Contract or Bid to which the
Company is a party, (A) the Company has complied with all terms and conditions; and (B) no money due to the Company has been, or has threatened to be withheld or
set off, or if previously paid, refunded or recouped.
(b) The Company has not been and it not now being, audited or investigated by any Governmental Entity, or an inspector general, auditor or other Person
with a similar function of any Governmental Entity nor, to the Company’s knowledge, has such audit or investigation been threatened.
(c) Within the past five (5) years, the Company has not received from a party to a Government Contract any written stop work order for which work has
not resumed, cure notice, show cause notice or notice of termination concerning a Government Contract.
(d) No Governmental Entity, prime contractor, subcontractor or third party has asserted any claim, dispute or any other action for relief with respect to
any Government Contract. The Company has not asserted any claim or any other action for relief nor has it initiated any dispute proceeding directly or indirectly against
any Governmental Entity, prime contractor, subcontractor or other third party concerning any Government Contract.
39
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
(e) The Company has not received any written notice of, and to the knowledge of the Company, none of its directors, officers or employees
is or for the last three years has been under, any administrative, civil or criminal investigation by any Governmental Entity relating to any alleged
irregularity, misstatement or omission arising under or relating to any Government Contract. The Company has no knowledge of any irregularity,
misstatement or omission arising under or relating to any Government Contract.
(f) Neither the Company, nor, to the knowledge of the Company, any of its officers, directors, employees or Affiliates, is or for the last five years has
been suspended or debarred from doing business by any Governmental Entity or declared nonresponsible or ineligible for government contracting; no suspension or
debarment action has been commenced against the Company or, to the knowledge of the Company, any of its officers, directors, employees or Affiliates; and, to the
knowledge of the Company, there are no facts or circumstances which would reasonably be expected to result in a suspension or debarment proceeding or a finding of
nonresponsibility. The Company has not conducted or initiated any internal investigation or made a voluntary disclosure to any Governmental Entity, and to the
knowledge of the Company, there has been no conduct that could lead to the imposition of criminal, civil, administrative or contractual liability for fraud, false claims
or false certifications that would warrant such an investigation or disclosure.
(g) To the knowledge of the Company, the Company has not submitted to any Governmental Entity any inaccurate, untruthful, or misleading cost or
pricing data, certification, Bid, proposal, report, claim, or other information relating to a Government Contract.
(h) No Bid bond remains outstanding relating to any Government Contract.
(i) Each of the Government Contracts to which the Company is a party has been issued, awarded or novated to the Company in the name of the
Company.
2.28 Certain Relationships. No employee or Affiliate of the Company or any Immediate Family Member of any such employee or Affiliate (i) owns any property
or right, tangible or intangible, which is used in the business of the Company, (ii) has any claim or cause of action against the Company, or (iii) owes any money to, or
is owed any money by, the Company (other than compensation as an employee of the Company paid in the Ordinary Course of Business). To the Company’s
knowledge, there are no Contracts by or among any Affiliates or employees of the Company or any Immediate Family Member of any such Affiliate or employee for
the sale, acquisition, assignment or other transfer or disposition, issuance, proxy, pledge, voting or otherwise of any securities of the Company. Section 2.28 of the
Company Disclosure Letter describes any commercial transactions or relationships between the Company and any employee or Affiliate thereof or Immediate Family
Member of such employee or Affiliate which occurred or have existed since the beginning of the time period covered by the Financial Statements (other than the
payment of compensation to employees paid in the Ordinary Course of Business).
40
Source: RED HAT INC, 10-K, April 25, 2013
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
2.29 Brokers’ Fees. The Company has no Liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement.
2.30 Books and Records. The minute books and other similar records of the Company contain complete and accurate records of all actions taken at any meetings
of the Company’s stockholders, Board of Directors or any committee thereof and of all written consents executed in lieu of the holding of any such meeting. The books
and records of the Company accurately reflect in all material respects the assets, Liabilities, business, financial condition and results of operations of the Company and
have been maintained in accordance with good business and bookkeeping practices. Section 2.30 of the Company Disclosure Letter contains a list of all bank
accounts and safe deposit boxes of the Company and the names of Persons having signature authority with respect thereto or access thereto.
2.31 Information. The Company has made available to the Buyer all information requested by the Buyer pursuant to written requests made in connection with
the transactions contemplated by this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
THE BUYER AND THE MERGER SUB
Each of the Buyer and Merger Sub represents and warrants to the Company that the statements contained in this Article III are true and correct as of the date of
this Agreement and will be true and correct as of the Closing as though made as of the Closing, except to the extent such representations and warranties are specifically
made as of a particular date (in which case such representations and warranties will be true and correct as of such date).
3.1 Organization and Corporate Power. Each of the Buyer and the Merger Sub is a corporation duly organized, validly existing and in good standing under the
Laws of the State of Delaware. Each of the Buyer and the Merger Sub has all requisite corporate power and authority to carry on its respective business in which it is
engaged and to own and use the properties owned and used by it.
3.2 Authorization of Transaction. Each of the Buyer and the Merger Sub has all requisite power and authority to execute and deliver this Agreement and the
Ancillary Agreements (to which it is a party) and to perform its obligations hereunder and thereunder. The execution and delivery by the Buyer and the Merger Sub of
this Agreement and the Ancillary Agreements (to which each of them is a party) and the consummation by the Buyer and the Merger Sub of the transactions
contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of the Buyer and the Merger Sub, respectively.
This Agreement has been duly and validly executed and delivered by the Buyer and the Merger Sub and constitutes a valid and binding obligation of the Buyer and the
Merger Sub, enforceable against them in accordance with its terms.
41
Source: RED HAT INC, 10-K, April 25, 2013
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3.3 Noncontravention. Neither the execution and delivery by the Buyer and the Merger Sub of this Agreement or the Ancillary Agreements to which it is a
party, nor the consummation by the Buyer and the Merger Sub of the transactions contemplated hereby or thereby, will (a) conflict with or violate any provision
of the organizational documents of the Buyer or the Merger Sub, (b) require on the part of the Buyer or the Merger Sub any notice to or filing with, or any
permit, authorization, consent or approval of, any Governmental Entity, (c) conflict with, result in a breach of, constitute (with or without due notice or lapse of
time or both) a default under, result in the acceleration of obligations under, create in any party the right to terminate, modify or cancel, or require any notice,
consent or waiver under, any Contract to which the Buyer or the Merger Sub is a party or by which the Buyer or the Merger Sub is bound or to which any of their
respective assets is subject, or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Buyer or the Merger Sub or any of their
respective properties or assets.
3.4 Available Funds. The Buyer has, or has available to it, and will have at the Closing, all funds necessary to satisfy all of the Buyer’s obligations under this
Agreement.
3.5 Litigation. There is no Legal Proceeding that is pending or has been threatened in writing against the Buyer or the Merger Sub that seeks to prevent the
Buyer or the Merger Sub from consummating the transactions contemplated by this Agreement or the Ancillary Agreements (to which each of them is a party).
ARTICLE IV
COVENANTS
4.1 Closing Efforts. Each of the Parties shall use its Reasonable Best Efforts to take all actions and to do all things necessary, proper or advisable to
(i) consummate the transactions contemplated by this Agreement on or before December 31, 2012 and (ii) if the transactions contemplated by this Agreement are not
consummated on or before December 31, 2012, to consummate the transactions contemplated by this Agreement prior to a termination of this Agreement in accordance
with Article VII , in each case including using its Reasonable Best Efforts to cause (i) its representations and warranties to remain true and correct in all material
respects through the Closing Date, and (ii) the conditions to the obligations of the other Parties to consummate the transactions contemplated by this Agreement to be
satisfied. In addition, the Company shall use its Reasonable Best Efforts to obtain an executed IPO Note and Termination and Release Agreement from each holder of
an IPO Note.
4.2 Governmental and Third-Party Notices and Consents.
(a) Each Party shall use its Reasonable Best Efforts to obtain, at its expense, all waivers, permits, consents, approvals or other authorizations from
Governmental Entities, and to effect all registrations, filings and notices with or to Governmental Entities, as may be required for such Party to consummate the
transactions contemplated by this Agreement and to otherwise comply with all applicable Laws in connection with the consummation of the transactions contemplated
by this Agreement.
(b) The Company shall use its Reasonable Best Efforts to obtain, at its expense, all such waivers, consents or approvals from third parties, and to give all
such notices to third parties, as are required to be listed in the Company Disclosure Letter.
42
Source: RED HAT INC, 10-K, April 25, 2013
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4.3 Stockholder Approval.
(a) The Company shall use its Reasonable Best Efforts to obtain, immediately following the execution and delivery of this Agreement, the Requisite
Stockholder Approval, either at a special meeting of stockholders or pursuant to a written stockholder consent, all in accordance with the applicable requirements of the
DGCL. In connection with such special meeting of stockholders or written stockholder consent, the Company shall provide to its stockholders (promptly after the date
hereof) the Disclosure Statement, which shall include (A) a summary of the Merger and this Agreement (which summary shall include a summary of the terms relating
to the indemnification obligations of the Company Holders, the escrow arrangements and the authority of the Holder Agent, and a statement that the adoption of this
Agreement by the stockholders of the Company shall constitute approval of such terms), and (B) a statement that appraisal or dissenters’ rights are available for the
Company Shares pursuant to Section 262 of the DGCL and a correct and complete copy of such Section 262. The Buyer agrees to reasonably cooperate with the
Company in the preparation of the Disclosure Statement. The Company agrees not to distribute the Disclosure Statement until the Buyer has had a reasonable
opportunity to review and comment on the Disclosure Statement and the Disclosure Statement has been approved by the Buyer (which approval may not be
unreasonably withheld, conditioned or delayed). If the Requisite Stockholder Approval is obtained by means of a written consent, the Company shall send, pursuant to
Sections 228 and 262(d) of the DGCL, a written notice to all stockholders of the Company that did not execute such written consent informing them that this Agreement
and the Merger were adopted and approved by the stockholders of the Company and that appraisal rights are available for their Company Shares pursuant to
Section 262 of the DGCL (which notice shall include a correct and complete copy of such Section 262), and shall promptly inform the Buyer of the date on which such
notice was sent. The Company, acting through its Board of Directors, shall include in the Disclosure Statement the unanimous recommendation of its Board of
Directors that the stockholders of the Company vote in favor of the adoption of this Agreement and the approval of the Merger.
(b) Concurrently with the distribution of the Disclosure Statement, the Company shall submit to a stockholder vote the right of any “disqualified
individual” (as defined in Section 280G(c) of the Code) to receive any and all payments (or other benefits) that could reasonably be characterized as “parachute
payments” under Section 280G(b) of the Code, in a manner that satisfies the stockholder approval requirements of Section 280G(b)(5)(B) of the Code and the Treasury
Regulations promulgated thereunder (the “ 280G Disclosure Statement ”). Consistent with the requirements of Section 280G(b)(5)(B) and the Treasury Regulations,
such vote shall establish the “disqualified individual’s” right to the payment, benefit or other compensation and the Company shall obtain any required waivers or
consents from the disqualified individual prior to the vote. In addition, the Company shall provide adequate disclosure to all stockholders of all material facts
concerning all payments that, but for such vote, could reasonably be characterized as “parachute payments” to a “disqualified individual” under Section 280G of the
Code in a manner that satisfies Section 280G(b)(5)(B)(ii) of the Code and
43
Source: RED HAT INC, 10-K, April 25, 2013
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the Treasury Regulations promulgated thereunder. The vote set forth in this Section 4.3(b) is referred to herein as the “280G Vote”. At least five (5) business days prior
to soliciting the 280G Vote and providing such required disclosure, the Company shall submit to the Buyer and its counsel for its reasonable review and approval
(which approval may not be unreasonably withheld, conditioned or delayed) all documentation related to the 280G Vote. The Buyer and its counsel shall be provided
copies of all documents executed by the Company Stockholders and disqualified individuals in connection with the 280G Vote.
4.4 Operation of Business. Except as required by this Agreement, during the period from the date of this Agreement until the earlier of the Closing or a
termination of this Agreement pursuant to Article VII , the Company shall conduct its operations in the Ordinary Course of Business and in compliance with all
applicable Laws and, to the extent consistent therewith, use its Reasonable Best Efforts to preserve intact its current business organization, keep its physical assets in
good working condition, keep available the services of its current officers and employees and preserve its relationships with customers, suppliers and others having
business dealings with it to the end that its goodwill and ongoing business shall not be impaired in any material respect. Without limiting the generality of the foregoing,
during the period from the date of this Agreement until the Closing, the Company shall not, except as required by this Agreement or with the prior written consent of
the Buyer:
(a) issue or sell any stock or other securities of the Company or any options, warrants or rights to acquire any such stock or other securities (except
pursuant to the exercise of Options or Warrants outstanding on the date hereof), or amend any of the terms of (including the vesting of) any Options or restricted stock
or Warrants, or other equity compensation agreements, or repurchase or redeem any stock or other securities of the Company (except from former employees, directors
or consultants in accordance with agreements providing for the repurchase of shares at their original issuance price in connection with any termination of employment
with or services to the Company);
(b) split, combine or reclassify any shares of its capital stock; or declare, set aside or pay any dividend or other distribution (whether in cash, stock or
property or any combination thereof) in respect of its capital stock;
(c) create, incur or assume any Indebtedness (including obligations in respect of capital leases); assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations of any other Person or entity; or make any loans, advances or capital contributions to, or
investments in, any other Person or entity;
(d) enter into, adopt, amend, or terminate any Benefit Plan or Benefit Arrangement or any employment or severance agreement or arrangement of the
type described in Section 2.22(f) or (except for normal increases in the Ordinary Course of Business for employees who are not Affiliates) increase in any manner the
compensation or fringe benefits of, or materially modify the employment terms of, its directors, officers or employees, generally or individually, or pay any bonus or
other benefit to its directors, officers or employees (except for existing payment obligations listed in Section 2.22(a) of the Company Disclosure Letter ) or hire any
new officers or, other than in the Ordinary Course of Business, any new employees or grant
44
Source: RED HAT INC, 10-K, April 25, 2013
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any awards under any bonus, incentive, equity, performance, or other compensation plan or arrangement or take any action to fund or in any other way secure the
payment of compensation or benefits under any Company Benefit Plan or Company Benefit Arrangement;
(e) acquire, sell, lease, license or dispose of any assets or property, other than licenses of Customer Offerings in the Ordinary Course of Business using
the Company’s standard form of software license agreement made available to the Buyer;
(f) mortgage or pledge any of its property or assets or subject any such property or assets to any Security Interest;
(g) discharge or satisfy any Security Interest or pay any obligation or Liability other than in the Ordinary Course of Business;
(h) amend its charter, bylaws or other organizational documents;
(i) change its accounting methods, principles or practices, except insofar as may be required by a generally applicable change in GAAP;
(j) make or change any Tax election, change an annual accounting period, file any amended Tax Return, enter into any closing agreement, waive or
extend any statute of limitations with respect to Taxes, settle or compromise any Tax liability, claim or assessment, surrender any right to claim a refund of Taxes, or
take any other similar action relating to the filing of any Tax Return or the payment of any Tax;
(k) enter into, amend, terminate, take or omit to take any action that would constitute a violation of or default under, or waive any rights under, any
contract or agreement of a nature required to be listed in Section 2.12, Section 2.13 or Section 2.15 of the Company Disclosure Letter ;
(l) make prior to the Closing, or commit to prior to or following the Closing, any capital expenditure in excess of ten thousand dollars ($10,000) per item
or fifty thousand dollars ($50,000) in the aggregate;
(m) institute or settle any Legal Proceeding;
(n) shorten or lengthen the customary payment cycles for any of its payables or receivables;
(o) take any action or fail to take any action permitted by this Agreement that would result in (i) any of the representations and warranties of the
Company set forth in this Agreement becoming untrue or (ii) any of the conditions to the Closing set forth in Article V not being satisfied; or
(p) agree in writing or otherwise to take any of the foregoing actions.
45
Source: RED HAT INC, 10-K, April 25, 2013
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4.5 Access to Information. From the date of this Agreement until the earlier of the Closing or a termination of this Agreement pursuant to Article VII , the
Company shall permit representatives of the Buyer to have full access (at all reasonable times, upon reasonable prior notice, subject to reasonable security
precautions and in a manner so as not to interfere with the normal business operations of the Company) to all premises, properties, financial, tax and accounting
records (including the work papers of the Company’s independent accountants), contracts, other records and documents, and personnel, of or pertaining to the
Company.
4.6 Notice of Breaches.
(a) From the date of this Agreement until the earlier of the Closing or a termination of this Agreement pursuant to Article VII, the Company shall
promptly deliver to the Buyer supplemental information concerning events or circumstances occurring subsequent to the date hereof which would render any
representation, warranty or statement of the Company in this Agreement or the Company Disclosure Letter inaccurate or incomplete in any material respect at any time
after the date of this Agreement until the Closing. No such supplemental information shall be deemed to avoid or cure any misrepresentation or breach of warranty or
constitute an amendment of any representation, warranty or statement in this Agreement or the Company Disclosure Letter.
(b) From the date of this Agreement until earlier of the Closing or a termination of this Agreement pursuant to Article VII, the Buyer shall promptly
deliver to the Company supplemental information concerning events or circumstances occurring subsequent to the date hereof which would render any representation or
warranty of the Buyer in this Agreement inaccurate or incomplete in any material respect at any time after the date of this Agreement until the Closing. No such
supplemental information shall be deemed to avoid or cure any misrepresentation or breach of warranty or constitute an amendment of any representation or warranty in
this Agreement.
4.7 Exclusivity.
(a) From and after the date hereof, until the earlier of the Closing or the termination of this Agreement in accordance with Article VII (the “ Exclusive
Period ”), the Company shall not (i) authorize, direct or permit any of its or their respective directors, officers, affiliates, employees, attorneys, accountants, investment
bankers or advisors (“ Representatives ”) or finders, brokers, representatives or other agents or intermediaries (“ Other Intermediaries ”), or authorize, direct or cause
any other Company Holder (other than Representatives and Other Intermediaries) (an “ Other Company Stockholder ”), to take any action to directly or indirectly
solicit, initiate, seek, encourage, facilitate, approve, endorse, recommend or respond to any inquiry, proposal, or offer (whether formal or informal, written, oral or
otherwise) from, or participate in any discussions or negotiations with, any third party regarding any (A) direct or indirect acquisition or sale of the Company in whole
or in part, (B) merger, consolidation, reorganization, recapitalization, liquidation, dissolution or other business combination or extraordinary corporate transaction
involving the Company, (C) acquisition, disposition or listing on any securities exchange of any portion of the stock or voting power of the Company (whether by sale,
assignment, issuance, proxy, pledge, encumbrance or otherwise,
46
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other than the issuance of shares of Company capital stock upon exercise or conversion of options, warrants or other equity-based securities issued prior to the date of
this Agreement), or (D) acquisition or disposition of any material asset or material portion of the assets of the Company (whether by sale, assignment, option, license,
pledge, encumbrance, or otherwise, other than bona fide sales and nonexclusive licenses of products to customers in the Ordinary Course of Business) (any such
transaction described in clauses (A), (B), (C) or (D) of this Section 4.7(a)(i) being a “ Third Party Acquisition ”); (ii) furnish any non-public information
concerning the business, properties or assets of the Company or division of the Company to any other Person (other than the Buyer and its Representatives); or
(iii) engage in discussions or negotiations with any Person (other than the Buyer and its Representatives) concerning any Third Party Acquisition. The Company agrees
that any such discussions or negotiations in progress as of the date of this Agreement shall be immediately terminated and that in no event shall the Company approve,
accept or enter into an agreement concerning any Third Party Acquisition during the Exclusive Period. During the Exclusive Period, the Company shall not authorize,
direct or permit any of its or their respective Representatives or Other Intermediaries or authorize, direct or cause any Other Company Stockholder to continue or
participate in any negotiations or discussions with any Person for the purpose of effecting an acquisition of, joint venture with or strategic investment in any other
Person or business. Notwithstanding the foregoing, before the Requisite Stockholder Approval has been obtained, the Company may furnish non-public information
concerning the business, properties or assets of the Company to another Person and may engage in discussions or negotiations with such Person, if (x) the Company
receives a proposal that constitutes, or is reasonably expected by the Board of Directors to lead to, a Superior Proposal, (y) the Company first executes with such Person
a confidentiality agreement with terms no less favorable to the Company, and no less restrictive to such Person, than those contained in that certain Confidentiality
Agreement between the Company and the Buyer dated October 16, 2012, as amended, and (z) the Board of Directors concludes, in good faith after consultation with the
Company’s outside legal counsel, that the fiduciary duties of the Board of Directors require the Company to engage in such discussions. Notwithstanding anything to
the contrary herein, the Board of Directors may modify and/or withdraw any recommendation to the stockholders with respect to adoption and approval of the Merger
pursuant to Section 4.3(a) in response to a Superior Proposal that did not result from or arise in connection with a breach of this Section 4.7 , if the Board of
Directors concludes, in good faith, after consultation with the Company’s outside legal counsel, that failure to take such action would or would be reasonably likely to
be a breach of its fiduciary duties to the Company’s stockholders under applicable Law. Notwithstanding the foregoing, if the Company makes a determination under
the final sentence of Section 4.7(a) above that it is permitted to furnish non-public information and/or engage in discussions or negotiations with another Person, the
Company shall (i) immediately notify the Buyer in writing of such determination and the basis therefor prior to engaging in any such discussions or negotiations (and
thereafter keep the Buyer informed, on a reasonably current basis, of the status of such discussions or negotiations and the terms being discussed or negotiated), and
(ii) immediately furnish a copy of such information to the Buyer promptly after furnishing such information to such other Person.
(b) If the Company receives any inquiry, proposal or offer of the nature described in Section 4.7(a), the Company shall, within four (4) hours after such
receipt, notify the Buyer of such inquiry, proposal or offer, including the identity of the other party and the terms of such inquiry, proposal or offer.
47
Source: RED HAT INC, 10-K, April 25, 2013
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4.8 Expenses. Except as otherwise expressly set forth herein, each of the Parties shall bear its own costs and expenses (including legal and accounting fees
and expenses) incurred in connection with this Agreement, the Ancillary Agreements and the transactions contemplated hereby and thereby.
4.9 FIRPTA Tax Certificate. Prior to the Closing, the Company shall deliver or cause to be delivered to the Buyer a certification that the Company Shares and
the Warrants are not United States real property interests as defined in Section 897(c) of the Code together with a notice to the IRS, in accordance with the Treasury
Regulations under Sections 897 and 1445 of the Code. If the Company has not provided the certification and notice described above to the Buyer on or before the
Closing Date, the Buyer shall be permitted to withhold from the payments to be paid pursuant to this Agreement any required withholding Tax under Section 1445 of
the Code.
4.10 Director and Officer Indemnification.
(a) During the period commencing as of the Effective Time and ending on the sixth (6th) anniversary of the Effective Time:
(i) to the fullest extent permitted by applicable Law, the Surviving Corporation shall, and the Buyer shall cause the Surviving Corporation to,
fulfill and honor in all respects the obligations of the Company pursuant to each indemnification agreement that is set forth on Schedule 4.10 .
(ii) provided that that the Company shall have paid all premiums for any directors’ and officers’ insurance tail policy prior to the Closing, the
Surviving Corporation shall not, and the Buyer shall cause the Surviving Corporation not to, terminate or amend any tail policy of directors’ and officers’ insurance
purchased by the Company prior to the date hereof and made available to the Buyer prior to the date hereof.
(iii) the Buyer shall cause the certificate of incorporation and bylaws of the Surviving Corporation to contain provisions with respect to
exculpation and indemnification and advancement of expenses that are at least as favorable (taken as a whole) to the Company Indemnified Parties as those contained in
the Amended and Restated Certification of Incorporation or Bylaws of the Company (as in effect on the date of this Agreement), which provisions will not be amended,
repealed or otherwise modified in any matter that would materially and adversely affect the rights thereunder of Company Indemnified Parties.
(b) This Section 4.10 shall survive the consummation of the Merger and the Effective Time, and shall be binding on the Buyer, the Surviving Corporation
and their respective successors and assigns.
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4.11 Certain Tax Matters.
(a) Transfer Taxes. The Indemnifying Securityholders shall be responsible for the payment of any transfer, sales, use, stamp, conveyance, value added,
recording, registration, documentary, filing and other non-income Taxes and administrative fees (including any notary fees) (collectively, “ Transfer Taxes ”) arising
in connection with the consummation of the transactions contemplated by this Agreement. Each Company Holder will file all necessary Tax Returns and other
documentation applicable to such Company Holder with respect to all such Transfer Taxes and, if required by applicable Law, the Buyer will join in the execution of
any such Tax Returns and other documentation.
(b) Tax Indemnification by the Indemnifying Securityholders. The Indemnifying Securityholders shall, severally and not jointly, indemnify and hold
harmless the Buyer, the Company, any Subsidiary, and any successors thereto or Affiliates thereof in respect of and against (i) the failure to perform any covenant or
agreement set forth in this Section 4.11 , and (ii) without duplication, the following Taxes to the extent such Taxes are not accounted for in determining Final Adjusted
Working Capital: (A) any and all Taxes due and payable by the Company for any taxable period that ends (or is deemed pursuant to Section 4.11(c) to end) on or
before the Closing Date; (B) any Taxes for which the Company has any liability under Treasury Regulations Section 1.1502-6 or under any comparable or similar
provision of state, local or foreign Laws as a result of being a member of an affiliated, consolidated, combined, unitary or similar group on or prior to the Closing Date;
(C) any liability of the Company for Taxes of another Person as transferee or successor, pursuant to any contractual obligation or otherwise, which Tax is related to the
operations of the Company on or prior to the Closing Date or an event or transaction occurring before the Closing; and (D) any Transfer Taxes arising in connection
with the consummation of the transactions contemplated by this Agreement whether levied on the Buyer, the Company or any of their respective Affiliates.
(c) Allocation of Certain Taxes.
(i) If the Company is permitted, but not required, under applicable federal, state, local or foreign Tax Laws to treat the Closing Date as the last
day of a taxable period, such day shall be treated as the last day of a taxable period. If the Company is not permitted to treat the Closing Date as the last day of a taxable
period, then any taxable period that begins before and ends after the Closing Date shall be deemed to be two separate taxable periods consisting of (A) one taxable
period ending on the Closing Date and (B) another taxable period beginning the day after the Closing Date and ending at the end of the taxable period.
(ii) The portion of Taxes for a taxable period beginning on or before and ending after the Closing Date allocable to the portion of such period
ending on the Closing Date shall be deemed to equal (i) in the case of Taxes that (x) are based upon or related to income or receipts or (y) are imposed in connection
with any sale or other transfer or assignment of property, other than Transfer Taxes described in Section 4.11(a) , the amount which would be payable if the taxable
year ended with the Closing Date, and (ii) in the case of other Taxes imposed on a periodic basis (including property Taxes), the amount of such Taxes for the entire
period multiplied by a fraction the numerator of which is the number of calendar days in the period ending with the Closing Date and the denominator of which is the
number of calendar days in the entire period. For purposes of computing the Taxes attributable to the two portions of
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a taxable period pursuant to this Section 4.11(c)(ii), the amount of any item that is taken into account only once for each taxable period (e.g., the benefit of graduated
tax rates, exemption amounts, etc.) shall be allocated between the two portions of the period in proportion to the number of days in each portion.
(d) Termination of Tax-Sharing Agreements. All Tax sharing agreements or similar arrangements with respect to or involving the Company shall be
terminated prior to the Closing Date and, after the Closing Date, the Buyer and its Affiliates shall not be bound thereby or have any liability thereunder for amounts due
in respect of periods ending on or before the Closing Date.
(e) Scope of Section 4.11. Any claim by any Party relating to a breach by another Party of their obligations under this Section 4.11 shall be pursued in
accordance with the procedures for indemnification claims, and shall otherwise be subject to the terms and conditions, set forth in Article VI . Notwithstanding the
foregoing or any other term or condition of Article VI , to the extent there is any inconsistency between the terms of Article VI and this Section 4.11 with respect
to Taxes, the provisions of Section 4.11 shall govern.
4.12 Repayment of Company Debt. At or prior to the Closing, the Company shall have taken all actions necessary for the repayment or prepayment of all
Indebtedness existing as of the Closing, including the preparation of all documentation and the provision of all endorsements required or reasonably necessary therefor,
and arranging for the release of all liens, financing statements or other security interests relating thereto (including taking all actions necessary such that UCC-2 or
UCC-3 termination statements, as applicable, have been filed with respect to any UCC-1 financing statement filed in respect of the Company’s assets).
ARTICLE V
CONDITIONS TO CLOSING
5.1 Conditions to Each Party’s Obligations. The respective obligations of each Party to consummate the transactions contemplated by this Agreement are subject
to the satisfaction of the following conditions:
(a) the Requisite Stockholder Approval shall have been obtained; and
(b) no Governmental Entity shall have enacted, issued, promulgated or enforced any applicable Law, and no applicable Law, shall make, or have the
effect of making, the consummation of the Merger illegal.
5.2 Conditions to Obligations of the Buyer. The obligation of the Buyer to consummate the transactions completed by this Agreement is subject to the
satisfaction (or waiver by the Buyer) of the following additional conditions:
(a) the Company shall have obtained at its own expense (and shall have provided copies thereof to the Buyer) all of the terminations, waivers, releases,
permits, consents, approvals or other authorizations, and effected all of the registrations, filings and notices, in each case as set forth in Schedule 5.2(a) , all of which
shall be in full force and effect;
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(b) the representations and warranties of the Company set forth in this Agreement shall be true and correct as of the date of this Agreement
and shall be true and correct in all material respects as of the Closing Date as though made on and as of the Closing Date (other than any such
representations and warranties expressly made as of another date, which shall be true and correct as of such other date);
(c) the Company shall have performed or complied with in all respects its agreements and covenants required to be performed or complied with under
this Agreement as of or prior to the Closing;
(d) no Legal Proceeding shall be pending or threatened wherein an unfavorable judgment, order, decree, stipulation or injunction would (i) prevent
consummation of the transactions contemplated by this Agreement, or (ii) cause the transactions contemplated by this Agreement to be rescinded following
consummation, and no such judgment, order, decree, stipulation or injunction shall be in effect;
(e) no Legal Proceeding that was not filed, instituted or otherwise in effect on the date hereof shall have been filed or otherwise instituted, or threatened
in writing, against the Company;
(f) the Company shall have delivered the Company Compliance Certificate to the Buyer;
(g) the Buyer shall have received copies of the resignations, effective as of the Closing, of each director and officer of the Company and (other than any
such resignations which the Buyer designates, by written notice to the Company, as unnecessary);
(h) each of the Persons listed on Schedule 5.2(h) shall have executed and delivered to the Company a Non-Competition Agreement, and each such
Non-Competition Agreement shall be in full force and effect, subject only, as a condition subsequent, to the occurrence of the Effective Time;
(i) (A) each of the Persons listed on Schedule 5.2(i)(1) and (B) at least 80% of the Persons listed on Schedule 5.2(i)(2), in each case shall have executed
and delivered to the Buyer a retention agreement and shall be employed by the Company as of the Closing Date, and each such retention agreement shall be in full force
and effect, subject only, as a condition subsequent, to the occurrence of the Effective Time;
(j) the Company and the Holder Agent shall have executed and delivered the Escrow Agreement to the Buyer, and Escrow Agreement shall be in full
force and effect, subject only, as a condition subsequent, to the occurrence of the Effective Time;
(k) the 280G Vote shall have occurred;
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(l) demands for appraisal rights pursuant to Section 262 of the DGCL shall not have been made and not effectively withdrawn or forfeited
prior to the Effective Time by holders of more than two percent (2%) of the number of outstanding Common Shares as of the Effective Time (calculated
after giving effect to the conversion of all of the issued and outstanding Preferred Shares into Common Shares);
(m) no Company Material Adverse Effect shall have occurred, and no event or circumstance shall have occurred or arisen that could reasonably be
expected to result in a Company Material Adverse Effect;
(n) each holder of a Warrant shall have executed and delivered a Warrant Termination Agreement and each such Warrant Termination Agreement shall
be in full force and effect, subject only, as a condition subsequent, to the occurrence of the Effective Time;
(o) the vesting of each Option and all other unvested equity securities shall have been accelerated such that all shares underlying such Option or equity
security shall be fully vested prior to the Effective Time and all actions required or advisable for the cancellation of all Options and the termination of each Stock Plan
at the Effective Time shall have been taken;
(p) holders of a majority of the outstanding principal amount of the IPO Notes shall have executed and delivered an IPO Note Termination and Release
Agreement and each such IPO Note Termination and Release Agreement shall be in full force and effect, subject only, as a condition subsequent, to the occurrence of
the Effective Time;
(q) each holder of a Founder Warrant shall have executed and delivered a Founder Termination Agreement and each such Founder Warrant Agreement
shall be in full force and effect, subject only, as a condition subsequent, to the occurrence of the Effective Time;
(r) the Buyer shall have received such other certificates, instruments and documents as it shall reasonably request in connection with the Closing
(including certificates of good standing of the Company in its jurisdiction of organization and each of the jurisdictions in which it is qualified, certified charter
documents, certificates as to the incumbency of officers and the adoption of authorizing resolutions, copies of releases or termination of liens, financing statements or
other security interests with respect to Indebtedness); and
(s) the matters set forth in Schedule 5.2(s).
5.3 Conditions to Obligations of the Company. The obligation of the Company to consummate the transactions contemplated by this Agreement is subject to the
satisfaction of the following additional conditions:
(a) the representations and warranties of the Buyer and the Merger Sub set forth in this Agreement shall be true and correct as of the date of this
Agreement and shall be true and correct in all material respects as of the Closing Date as though made on and as of the Closing Date (other than representations and
warranties expressly made as of another date, which shall be true and correct as of such other date);
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(b) the Buyer shall have performed or complied with in all material respects its agreements and covenants required to be performed or
complied with under this Agreement as of or prior to the Closing;
(c) no Legal Proceeding shall be pending or threatened in writing wherein an unfavorable judgment, order, decree, stipulation or injunction would
(i) prevent consummation of the transactions contemplated by this Agreement or (ii) cause the transactions contemplated by this Agreement to be rescinded following
consummation, and no such judgment, order, decree, stipulation or injunction shall be in effect;
(d) the Buyer shall have executed and delivered the Escrow Agreement to the Company, and the Escrow Agreement shall be in full force and effect,
subject only, as a condition subsequent, to the occurrence of the Effective Time; and
(e) the Buyer shall have delivered the Buyer Compliance Certificate to the Company.
ARTICLE VI
SURVIVAL AND INDEMNIFICATION
6.1 Survival.
(a) All representations and warranties of the Company shall (a) survive the Closing and (b) shall expire at 11:59 p.m. Eastern time on the date that is
twenty-four (24) months following the Closing Date, except as otherwise provided in this Section 6.1 and except that the representations and warranties set forth in
Section 2.1 (Organization, Qualification and Corporate Power), Section 2.2 (Capitalization), Section 2.3 (Authorization of Transaction) and Section 2.30
(Broker’s Fees) shall survive the Closing without limitation. If an Indemnified Party delivers to the Holder Agent, before expiration of a representation or warranty, a
Claim Notice based upon a breach of such representation or warranty, then the applicable representation or warranty shall survive until, but only for purposes of, the
resolution of any claims arising from or related to the matter covered by such Claim Notice. If the Legal Proceeding or claim with respect to which a Claim Notice has
been given is definitively withdrawn or resolved in favor of the Indemnified Party, the Indemnified Party shall promptly so notify the Holder Agent; and if the
Indemnified Party has delivered a copy of the Claim Notice to the Escrow Agent and funds have been retained in the Escrow Fund after the Termination Date (as
defined in the Escrow Agreement) with respect to such Claim Notice, the Holder Agent and the Indemnified Party shall promptly deliver to the Escrow Agent a written
notice executed by both parties instructing the Escrow Agent to disburse such retained funds to the Indemnifying Securityholders in accordance with the terms of the
Escrow Agreement. The rights to indemnification set forth in this Article VI shall not be affected by (i) any investigation conducted by or on behalf of an
Indemnified Party or any knowledge acquired (or capable of being acquired) by an Indemnified Party, whether before or after the date of this Agreement or the Closing
Date or (ii) any waiver by an Indemnified Party of any closing condition.
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(b) All covenants and agreements of the Company shall survive the Closing and shall continue in effect in accordance with their terms.
(c) The indemnification obligations of the Indemnifying Securityholders set forth in Sections 6.2 (c)-(i), inclusive, shall survive indefinitely.
6.2 Indemnification by the Indemnifying Securityholders. The Indemnifying Securityholders shall, severally (in accordance with each such Indemnifying
Securityholder’s Pro Rata Portion) and not jointly, indemnify the Indemnified Parties in respect of, and hold the Indemnified Parties harmless against, any and all
Damages paid, incurred, sustained or suffered by any Indemnified Party resulting from, relating to or constituting:
(a) any breach of any representation or warranty of the Company contained in this Agreement or the Company Disclosure Letter, either when made as of
the date of this Agreement or immediately prior to the Closing as though made immediately prior to the Closing, or in any of the Ancillary Agreements to which the
Company or the Surviving Corporation is a party, or in any certificate or instrument delivered by the Company to the Buyer pursuant to this Agreement;
(b) any breach or nonperformance of or noncompliance with any covenant, agreement or other obligation of the Company contained in or arising out of
this Agreement or any of the other Ancillary Agreement to which the Company or Surviving Corporation is a party;
(c) any failure of any Company Holder to have good and valid title to the issued and outstanding Company Shares or issued and outstanding Warrants
issued in the name of such Company Holder, free and clear of all Security Interests;
(d) any Indebtedness of the Company and Company Holder Transaction Costs to the extent not (i) reflected in the adjustments to the Merger
Consideration pursuant to Section 1.5 or (ii) paid by the Company prior to the Closing;
(e) any claim by a stockholder of the Company, former stockholder of the Company, current or former holder of any other equity interests of the
Company, or any other Person, seeking to assert, or based upon (i) ownership or rights to ownership of equity interests in the Company; (ii) any rights of an
equityholder, including any option, preemptive rights or rights to notice or to vote (other than the right to receive the Merger Consideration pursuant to this Agreement
and the Merger Consideration Allocation Spreadsheet); (iii) any ownership rights under the governing documents of the Company, or any other Contract between any
Person and the Company; (iv) any repurchase, redemption or other acquisition by the Company of any Company Shares or other equity interests in the Company or
(v) any claim that the Company Shares were wrongfully purchased by the Buyer or that the Buyer failed to purchase any equity interest of the Company;
(f) any breaches by the Holder Agent of the covenants and agreements of the Holder Agent contained in this Agreement following the Closing Date;
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(g) any claims or Damages arising from, relating to or in connection with appraisal rights made by holders of Company Shares under the
DGCL to the extent that the Damages exceed the amount that such holders of Company Shares would have otherwise received under this Agreement;
(h) any Final AWC Deficiency; and
(i) any matter referred to on Schedule 6.2(i).
The Buyer, the Company and the Indemnifying Securityholders acknowledge and agree that such Damages, if any, would relate to unresolved contingencies existing at
the Closing, which if resolved prior to the Closing would have led to a reduction in the aggregate consideration to be paid to the Company Holders.
6.3 Indemnification Claims.
(a) An Indemnified Party shall give written notification to the Holder Agent of the commencement of any Third Party Action. Such notification shall be
given within thirty (30) days after receipt by the Indemnified Party of notice of such Third Party Action, and shall describe in reasonable detail (to the extent known by
the Indemnified Party) the facts constituting the basis for such Third Party Action and the amount of the claimed Damages; provided , however , that no delay or
failure on the part of the Indemnified Party in so notifying the Holder Agent shall relieve the Indemnifying Securityholders of any liability or obligation hereunder
except to the extent of any Damages caused by or arising out of such delay or failure. Within thirty (30) days after delivery of such notification, the Holder Agent may,
upon written notice thereof to the Indemnified Party, assume the control of the defense of such Third Party Action with counsel reasonably satisfactory to the
Indemnified Party; provided that the Holder Agent may only assume the control of such defense if (A) the Holder Agent acknowledges in writing to the Indemnified
Party that any Damages that may be assessed against the Indemnified Party in connection with such Third Party Action constitute Damages for which the Indemnified
Party shall be indemnified pursuant to this Article VI , (B) the Third Party Action is asserted by a Person other than a Governmental Entity and is solely for monetary
damages (and not for punitive, exemplary or similar damages, treble damages or other damages in excess of actual damages), and does not seek a declaratory judgment,
injunctive relief or specific performance, (C) the Person asserting a Third Party Action is not a customer, supplier or strategic partner of any Indemnified Party, (D) the
total amount of Damages that may be awarded with respect to such claims does not exceed the then Available Escrow Fund and (E) the Third Party Action does not
involve Taxes, infringement, violation or misappropriation of Intellectual Property or criminal Liability. If the Holder Agent does not, or is not permitted under the
terms hereof to, so assume control of the defense of a Third Party Action, the Indemnified Party shall control such defense. The Non-controlling Party may participate
in such defense at its own expense. The Controlling Party shall keep the Non-controlling Party advised of the status of such Third Party Action and the defense thereof
and shall consider in good faith recommendations made by the Non-controlling Party with respect thereto. The Non-controlling Party shall furnish the Controlling Party
with such information as it may have with respect to such Third Party Action (including copies of any summons, complaint or other pleading which may have been
served on
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such party and any written claim, demand, invoice, billing or other document evidencing or asserting the same) and shall otherwise cooperate with and assist the
Controlling Party in the defense of such Third Party Action. The fees and expenses of counsel to the Indemnified Party with respect to a Third Party Action shall be
considered Damages for purposes of this Agreement if (i) the Indemnified Party controls the defense of such Third Party Action pursuant to the terms of this
Section 6.3(a) or (ii) the Holder Agent assumes control of such defense and the Indemnified Party reasonably concludes that the Indemnifying Securityholders and the
Indemnified Party have conflicting interests or different defenses available with respect to such Third Party Action. Neither the Holder Agent nor the Indemnifying
Securityholders shall agree to any settlement of, or the entry of any judgment arising from, any Third Party Action without the prior written consent of the Indemnified
Party which consent shall not be unreasonably withheld, conditioned or delayed. The Indemnified Party shall be entitled to agree to any settlement of, or the entry of
any judgment arising from, any such Third Party Action in its sole discretion; provided, however that the Holder Agent shall be entitled to dispute (x) that such Third
Party Action constituted a claim for which an Indemnified Party is entitled to indemnification pursuant to this Article VI and/or (y) the amount of indemnifiable
Damages subject to such Third Party Action.
(b) In order to seek indemnification under this Article VI, an Indemnified Party shall deliver a Claim Notice to the Holder Agent. If the Indemnified Party
is the Buyer, the Buyer shall deliver a copy of the Claim Notice to the Escrow Agent.
(c) Within thirty (30) days after delivery of a Claim Notice, the Holder Agent shall deliver to the Indemnified Party a Response, in which the Holder
Agent shall: (i) agree that the Indemnified Party is entitled to receive all of the Claimed Amount (in which case, subject to Section 6.4(c) , the Holder Agent and the
Indemnified Party shall deliver to the Escrow Agent, within three (3) days following the delivery of the Response, a written notice executed by the Holder Agent and
the Indemnified Party instructing the Escrow Agent to disburse the Claimed Amount from the Escrow Fund to the Buyer), (ii) agree that the Indemnified Party is
entitled to receive the Agreed Amount (in which case, subject to Section 6.4(c) , the Holder Agent and the Indemnified Party shall deliver to the Escrow Agent, within
three (3) days following the delivery of the Response, a written notice executed by the Holder Agent and the Indemnified Party instructing the Escrow Agent to disburse
the Agreed Amount from the Escrow Fund to the Buyer) or (iii) dispute that the Indemnified Party is entitled to receive any of the Claimed Amount.
(d) During the thirty (30)-day period following the delivery of a Response that reflects a Dispute, the Holder Agent and the Indemnified Party shall use
good faith efforts to resolve the Dispute.
(e) Notwithstanding the other provisions of this Section 6.3, if a third party asserts (other than by means of a lawsuit) that an Indemnified Party is liable
to such third party for a monetary or other obligation which may constitute or result in Damages for which such Indemnified Party may be entitled to indemnification
pursuant to this Article VI , and such Indemnified Party reasonably determines that it has a valid business reason to fulfill such obligation, then (i) such Indemnified
Party shall be entitled to satisfy such obligation, without
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prior notice to or consent from the Holder Agent or the Indemnifying Securityholders, (ii) such Indemnified Party may subsequently make a claim for indemnification
in accordance with the provisions of this Article VI , and (iii) such Indemnified Party shall be reimbursed, in accordance with the provisions of this Article VI , for
any such Damages for which it is entitled to indemnification pursuant to this Article VI (subject to the right of the Holder Agent to dispute the Indemnified Party’s
entitlement to indemnification, or the amount for which it is entitled to indemnification, under the terms of this Article VI ).
6.4 Limitations.
(a) Except as otherwise set forth herein, the aggregate Liability of the Indemnifying Securityholders for Damages under Section 6.2(a) shall not exceed
the Escrow Fund; provided that the limitation set forth in this Section 6.4(a) shall not apply to (i) any claim pursuant to Section 6.2(a) relating to a breach of the
representations and warranties set forth in Section 2.1 (Organization, Qualification and Corporate Power), Section 2.2 (Capitalization), Section 2.3
(Authorization of Transaction) or Section 2.30 (Broker’s Fees) (collectively, the “ Excepted Representations ”).
(b) Except as otherwise set forth herein, no Indemnifying Securityholder shall be obligated to indemnify the Indemnified Parties for Damages under
Section 6.2(a) unless and until the total amount of such Damages exceeds Fifty Thousand Dollars ($50,000) (the “ Threshold ”), at which point the Indemnifying
Securityholders shall be obligated to indemnify the Indemnified Parties for all Damages in excess of the Threshold; provided that the limitations set forth in this
Section 6.4(b) shall not apply to any claim pursuant to Section 6.2(a) relating to a breach of the Excepted Representations. Subsequent to determining the existence
of a breach of any representation or warranty, solely for purposes of calculating the amount of Damages pursuant to this Article VI (and not for purposes for
determining whether a breach has occurred), all representations and warranties of the Company set forth in Article II shall be construed as if the terms “material” or
“in all material respects” and any reference to “Company Material Adverse Effect” (and variations thereof) were omitted.
(c) Any payments required to be made to an Indemnified Party pursuant to claims for indemnification hereunder with respect to Excepted
Representations shall be made first by resort to the Escrow Fund, and second, if the balance of the Escrow Fund is insufficient to satisfy the entire amount of payments
to be made to an Indemnified Party in respect of such Excepted Representations, by seeking recourse to each Indemnifying Securityholder, severally and not jointly in
accordance with each Indemnifying Securityholder’s Pro Rata Portion.
(d) All Damages recovered by the Indemnified Parties from the Escrow Fund shall be allocated among the Indemnifying Securityholders in accordance
with their Pro Rata Portion of the Escrow Fund. Notwithstanding anything to the contrary herein, except for claims for intentional misrepresentation, willful misconduct
or fraud, no Indemnifying Securityholder shall be liable for more than the aggregate amount of Merger Consideration to be paid to such Indemnifying Securityholder
(assuming the full amount of Merger Consideration (including all amounts held in the Escrow Fund) is actually paid to such Indemnifying Securityholder) pursuant to
this Agreement.
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(e) No Indemnifying Securityholder shall have any right of contribution against the Company or the Surviving Corporation with respect to
any breach of any of the Company’s representations, warranties, covenants or agreements.
(f) After the Closing, except with respect to (i) any breach or nonperformance of or noncompliance with any covenant, agreement or other obligation
contained (A) in this Agreement that occurs or occurred on or prior to the Closing or (B) in Article VI , (ii) any claim or liability based on, related to or arising out of,
or in connection with fraud, willful misconduct or intentional misrepresentation or (iii) the equitable remedies set forth in Section 9.13 , the rights of the Indemnified
Parties under this Article VI and the Escrow Agreement (as limited by the provisions of this Article VI ) shall be the sole and exclusive remedy of the Indemnified
Parties; provided , however nothing herein shall be construed to limit the remedies available to, or the amount of Damages recoverable by, the Buyer for breach of
any of the Ancillary Agreements by any of the parties thereto other than the Company or, solely in their capacity as Company Stockholders or holders of Options or
Warrants, the Indemnifying Securityholders.
(g) Notwithstanding anything in this Agreement to the contrary, no Indemnifying Party shall have any indemnification obligations under this Article VI ,
or shall otherwise liable, for the fraud or intentional misrepresentation of another Indemnifying Party of which such Indemnifying Party did not have, or should not have
had, knowledge.
(h) The amount of any Damages payable by the Indemnifying Securityholders pursuant to this Article VI shall be reduced by the amount of any
insurance proceeds actually received by the Indemnified Party with respect to the Damages (net of any insurance premium increases or other costs incurred by the
Indemnified Party in respect of such insurance proceeds); provided that nothing set forth in this Section 6.4(h) shall require the Indemnified Party to make an
insurance claim with respect to such Damages.
(i) Notwithstanding anything to the contrary herein, (i) an Indemnified Party may not assert multiple claims under Section 6.2 in order to recover
duplicative Damages in respect of a single set of facts or circumstances and (ii) to the extent an amount has been accurately and completely reflected in the calculation
of Adjusted Working Capital or accurately and completely included in the Company Holder Transaction Expenses, such amount shall not also be the basis for an
indemnification claim hereunder.
6.5 Treatment of Indemnity Payments. Any payments made to an Indemnified Party pursuant to this Agreement or the Escrow Agreement shall be treated as an
adjustment to the Merger Consideration for Tax purposes to the extent permitted by Law.
6.6 No Circular Recovery. Each Indemnifying Securityholder agrees that it will not make any claim against the Buyer, the Company or the Surviving
Corporation by reason of the fact that such Indemnifying Securityholder was a controlling person, director, employee or other representative of the Company or was
serving as such for another Person at the request of the Buyer or the Company (whether such claim is for Damages of any kind or otherwise and whether such claim is
pursuant to any statute, governing documents, contract or other agreement or otherwise) with respect to any claim brought by an Indemnified Party against any
Indemnifying
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Securityholder relating to this Agreement or any of the transactions contemplated hereby or the facts and circumstances underlying such claim. With respect to any
Legal Proceeding brought by an Indemnified Party against any Indemnifying Securityholder relating to this Agreement and any of the transactions contemplated hereby,
each Indemnifying Securityholder expressly waives any right of subrogation, contribution, advancement, indemnification or other claim against the Company with
respect to any amounts owed by such Indemnifying Securityholder (including by virtue of a payment out of the Escrow Fund) pursuant to this Article VI .
ARTICLE VII
TERMINATION
7.1 Termination of Agreement. The Parties may terminate this Agreement prior to the Closing (whether before or after Requisite Stockholder Approval), as
provided below upon the occurrence of any of the events set forth in clauses (a) through (g):
(a) The Parties may terminate this Agreement by mutual written consent.
(b) The Buyer may terminate this Agreement by giving written notice to the Company in the event the Company is in breach of any representation,
warranty or covenant contained in this Agreement, and such breach (i) individually or in combination with any other such breach, would cause the conditions set forth
in clauses (b) or (c) of Section 5.2 not to be satisfied and (ii) is not cured within ten (10) days following delivery by the Buyer to the Company of written notice of
such breach.
(c) The Company may terminate this Agreement by giving written notice to the Buyer in the event the Buyer or Merger Sub is in breach of any
representation, warranty or covenant contained in this Agreement, and such breach (i) individually or in combination with any other such breach, would cause the
conditions set forth in clauses (a) or (b) of Section 5.3 not to be satisfied and (ii) is not cured within ten (10) days following delivery by the Company to the Buyer of
written notice of such breach.
(d) The Buyer may terminate this Agreement by giving written notice to the Company at any time after the stockholders of the Company have voted on
whether to adopt this Agreement and to approve the Merger and other transactions contemplated hereby in the event the Requisite Stockholder Approval is not
obtained.
(e) The Buyer may terminate this Agreement by giving written notice to the Company if stockholder written consents sufficient to constitute the
Requisite Stockholder Approval have not been executed and delivered to the Buyer and have not been filed with the Secretary of the Company within eight (8) hours
after the execution and delivery of this Agreement.
(f) The Buyer may terminate this Agreement by giving written notice to the Company if the Closing shall not have occurred on or before January 31,
2013, by reason of the failure of any condition precedent under Section 5.1 or 5.2 (unless the failure results primarily from a breach by the Buyer or Merger Sub of
any representation, warranty or covenant contained in this Agreement).
(g) The Company may terminate this Agreement by giving written notice to the Buyer if the Closing shall not have occurred on or before January 31,
2013, by reason of the failure of any condition precedent under Section 5.1 or 5.3 (unless the failure results primarily from a breach by the Company of any
representation, warranty or covenant contained in this Agreement).
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7.2 Effect of Termination. If any Party terminates this Agreement pursuant to Section 7.1, all obligations of the Parties (except for the obligations set forth
in Article IX ) hereunder shall terminate, and except as otherwise provided herein, no Party shall have any further liability or obligation to any other Party.
ARTICLE VIII
DEFINITIONS
8.1 Certain Definitions. For purposes of this Agreement, each of the terms set forth below has the meaning set forth immediately following such term.
“280G Disclosure Statement” has the meaning set forth in Section 4.3(b).
“280G Vote” has the meaning set forth in Section 4.3(b).
“Accountant” means KPMG LLP.
“Adjusted Working Capital” means, with respect to the Company on the Closing Date, (i) current assets,minus (ii) the sum of (A) long term deferred revenue,
plus (B) current Liabilities. Adjusted Working Capital shall be calculated (A) without giving effect, and without regard, to the transactions contemplated by this
Agreement, and (B) in accordance with GAAP on a consistent basis with the Financial Statements (except to the extent that the specific provisions contained herein for
calculating Adjusted Working Capital deviate from the procedures and methodologies of GAAP). Adjusted Working Capital shall be calculated without regard to
Company Holder Transaction Costs to the extent that such Company Holder Transaction Costs are paid prior to or concurrently with the Closing. Schedule 8.1(a)
sets forth the Company’s calculation of the Adjusted Working Capital as of September 30, 2012.
“Adjusted Working Capital Certificate” has the meaning set forth in Section 1.6(a).
“Affiliate” means any affiliate, as defined in Rule 12b-2 under the Securities Exchange Act of 1934.
“Aggregate Common Share Preference Amount” has the meaning set forth in Section 1.5(g)(i).
“Aggregate Series A Preference Amount” has the meaning set forth in Section 1.5(g)(iii).
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“Aggregate Series A-1 Preference Amount” has the meaning set forth in Section 1.5(g)(iv).
“Aggregate Series A-2 Preference Amount” has the meaning set forth in Section 1.5(g)(v).
“Aggregate Option Exercise Price” has the meaning set forth in Section 1.5(g)(ii).
“Agreed Amount” means part, but not all, of the Claimed Amount.
“Ancillary Agreements” means the Non-Competition Agreements, the Escrow Agreement, the Warrant Termination Agreement, the Founder Warrant
Agreement and the IPO Note Termination Agreement.
“Anti-Corruption Laws” has the meaning set forth in Section 2.24(b).
“Antitrust Law” means any federal, state, provincial or foreign Law designed to prohibit, restrict or regulate actions for the purpose or effect of monopolization
or restraint of trade.
“Anything of Value” means cash or a cash equivalents; discounts or rebates; gifts; use of materials, facilities or equipment; entertainment; drinks; meals;
transportation; lodging; and charitable or political contributions.
“Available Escrow Fund” means, at any time, the amount then remaining in the Escrow Fund less the amount of all Damages or potential Damages identified in
any unresolved Claim Notice.
“AWC Objection Deadline Date” has the meaning set forth in Section 1.6(c).
“AWC Objection Statement” has the meaning set forth in Section 1.6(c).
“AWC Unresolved Objections” has the meaning set forth in Section 1.6(c)(ii).
“Bankruptcy and Equity Exception” has the meaning set forth in Section 2.3.
“Benefit Arrangement” means any benefit arrangement, obligation, custom or practice, whether or not legally enforceable, to provide benefits, other than salary
or under a Benefit Plan, as compensation for services rendered, including employment or consulting agreements, severance agreements or pay policies, stay or retention
bonuses or compensation, executive or incentive compensation programs or arrangements, incentive programs or arrangements, sick leave, vacation pay, plant closing
benefits, patent award programs, salary continuation for disability, consulting, or other compensation arrangements, workers’ compensation, retirement, deferred
compensation, bonus, stock option or purchase plans or programs, hospitalization, medical insurance, life insurance, tuition reimbursement or scholarship programs,
employee discount programs, meals, travel, or vehicle allowances, any plans subject to Section 125 of the Code and any plans providing benefits or payments in the
event of a change of control, change in ownership or effective control, or sale of a substantial portion (including all or substantially all) of the assets of any business or
portion thereof.
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
“Benefit Plan” has the meaning given in ERISA Section 3(3), together with plans or arrangements that would be so defined if they were not (i) otherwise
exempt from ERISA by that or another section, (ii) maintained outside the United States or (iii) individually negotiated or applicable only to one Person.
“Bid” means any outstanding quotation, bid or proposal by the Company which, if accepted or awarded, would lead to a contract with a Governmental Entity or
a prime contractor or higher tier subcontractor to a Governmental Entity, for the development, manufacturing, distribution, sale, licensing, provision or delivery by the
Company of any product or service.
“Buyer” has the meaning set forth in the first paragraph of this Agreement.
“Buyer Common Stock” means the common stock, $0.001 par value per share, of Buyer.
“Buyer Compliance Certificate” means a certificate to the effect that each of the conditions specified in clauses (a) through (c) (insofar as clause (c) relates to
Legal Proceedings involving the Buyer) of Section 5.3 is satisfied in all respects.
“CERCLA” means the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended.
“Certificate of Merger” has the meaning set forth in Section 1.3.
“Claim Notice” means written notification which contains (i) a description of the Damages paid, incurred, sustained, accrued or reasonably expected (or claimed
by a third party) to be paid, incurred, sustained, accrued by the Indemnified Party and the Claimed Amount of such Damages, to the extent then known, (ii) a statement
that the Indemnified Party is entitled to indemnification under Article VI for such Damages and a reasonable explanation of the basis therefor, and (iii) a demand for
payment in the amount of such Damages.
“Claimed Amount” means the amount of any Damages paid, incurred, sustained or accrued, or reasonably expected to be paid, incurred, sustained or accrued, by
the Indemnified Party.
“Closing” means the closing of the transactions contemplated by this Agreement.
“Closing Date” means the date on which the conditions set forth in Article V are satisfied or waived by the applicable Parties and the Closing occurs.
“Closing Date AWC Deficiency” has the meaning set forth in Section 1.6(b).
“Closing Date AWC Excess” has the meaning set forth in Section 1.6(b).
“COBRA” means Part 6 of Title I of ERISA, as amended.
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
“Code” means the Internal Revenue Code of 1986, as amended.
“Common Shares” means the shares of common stock, $0.00001 par value per share, of the Company.
“Company” has the meaning set forth in the first paragraph of this Agreement.
“Company Benefit Arrangement” means any Benefit Arrangement sponsored or maintained by the Company, or with respect to which or which the Company
has or may have any current or future Liability, in each case with respect to any present or former directors, managers, employees, officers, agents or service providers
of the Company.
“Company Benefit Plan” means any Benefit Plan for which the Company is or has been the “plan sponsor” (as defined in Section 3(16)(B) of ERISA) or any
Benefit Plan the Company maintains or has previously maintained or to which it is obligated to make payments or has or may have any current or future Liability, in
each case with respect to any present or former employees of the Company.
“Company Certificates” has the meaning set forth in Section 1.13(a).
“Company Compliance Certificate” means a certificate to the effect that each of the conditions specified in clauses (a) through (e), (k), (m), (o) and (s) (insofar
as clauses (d) and (e) relate to Legal Proceedings involving the Company) of Section 5.2 is satisfied in all respects.
“Company Domain Names” has the meaning set forth in Section 2.13(a).
“Company Disclosure Letter” means the Disclosure Letter delivered by the Company to Buyer on the date hereof.
“Company Holders” means the holders of Common Shares, Preferred Shares, the Warrants and/or Options, in each case outstanding immediately prior to the
Effective Time.
“Company Holder Transaction Costs” means (i) the fees and expenses of the Company’s and the Company Holders’ investment banking, financial, legal,
accounting and other advisers paid or incurred in connection with this Agreement, the negotiations related thereto and the transactions contemplated thereby, including
an aggregate of $2,000,000 payable to the Company’s acquisition advisor, (ii) all costs, fees and any other expenses associated with the terminations, releases, consents
and approvals set forth in Schedule 5.2(a) , (iii) fifty percent (50%) of the fees of the Escrow Agent, (iv) any bonuses, severance payments or similar payments made
in connection with the transactions contemplated by this Agreement, including the amounts set forth in Schedule 8.1(b) (including the employer portion of any
payroll taxes attributable to such payments) and (v) the employer portion of any payroll taxes attributable to any payments of Option Consideration.
“Company Indemnified Parties” shall mean the current officers and directors of the Company and each other Person who is or was a director or officer of the
Company at or at any time prior to the Effective Time.
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
“Company Intellectual Property” shall mean the Company Owned Intellectual Property and the Company Licensed Intellectual Property.
“Company Licensed Intellectual Property” shall mean all Intellectual Property that is licensed to the Company by any third party.
“Company Material Adverse Effect” means any material adverse change, event, circumstance or development with respect to, or material adverse effect on,
(a) the business, assets, Liabilities, capitalization, operations, condition (financial or other), or results of operations of the Company, or (b) the ability of the Buyer to
operate the business of the Company immediately after the Closing; provided that none of the following shall constitute or be considered in determining whether a
Company Material Adverse Effect shall have occurred: (i) changes caused by the pendency or public announcement (or resulting from the consummation) of this
Agreement or any of the transactions contemplated hereby, including the response or reaction of customers, vendors, suppliers, licensors, strategic partners, investors or
employees of the Company to this Agreement and the transactions contemplated hereby; (ii) changes generally affecting any of the economies in which the Company
conducts business (except to the extent that such changes have a materially disproportionate effect on the Company), (iii) changes affecting the industries generally in
which the Company conducts business (except to the extent that such changes have a materially disproportionate effect on the Company); (iv) changes in legal or
regulatory conditions, including changes or proposed changes in Laws applicable to the Company or any of its properties, assets or liabilities, or in applicable
accounting or tax regulations or principles or interpretations thereof, including GAAP; (v) national, international or any regional political or social conditions, including
the results of any primary or general elections, any acts of terrorism or war, any outbreak or escalation of hostilities, whether or not pursuant to the declaration of an
emergency or war, any earthquakes, floods, hurricanes, tropical storms, fires or other natural disasters or any national or international calamity, in each case whether or
not involving the United States; or (vi) any failure to meet, in and of itself, any projections, forecasts, budgets or revenue or earnings predictions for any period. For the
avoidance of doubt, the Parties agree that the terms “material”, “materially” or “materiality” as used in this Agreement with an initial lower case “m” shall have their
respective customary and ordinary meanings, without regard to the meaning ascribed to Company Material Adverse Effect.
“Company Owned Intellectual Property” shall mean all Intellectual Property owned or purported to be owned by the Company, in whole or in part.
“Company Registered Intellectual Property” means all Intellectual Property Registrations owned or purported to be owned by the Company, in whole or in part.
“Company Registrations” shall mean Intellectual Property Registrations that are registered or filed in the name of or assigned to the Company, alone or jointly
with others.
“Company Shares” means the Common Shares and the Preferred Shares, together.
“Company Source Code” has the meaning set forth in Section 2.13(j).
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
“Company Stock Plan” means the Company’s Amended and Restated 2006 Stock Option Plan, as amended to date, and all other stock option plans and
stock or equity-related plans of the Company.
“Company Stockholders” means the stockholders of record of the Company immediately prior to the Effective Time.
“Continuing Employee” has the meaning set forth in Section 4.10(b).
“Continuing Foreign Employee” has the meaning set forth in Section 4.10(b).
“Continuing U.S. Employee” has the meaning set forth in Section 4.10(a).
“Contract” means any legally binding written or oral agreement, contract, subcontract, lease, instrument, note, warranty, purchase order, license, sublicense, or
other legally binding commitment.
“Controlling Party” means the party controlling the defense of any Third Party Action.
“Customer Offerings” (a) the products (including Software and Documentation) that the Company (i) currently develops, manufactures, markets, distributes,
makes available, sells or licenses to third parties, or (ii) has developed, manufactured, marketed, distributed, made available, sold or licensed to third parties within the
previous five (5) years, or (iii) currently plans to develop, manufacture, market, distribute, make available, sell or license to third parties in the future and (b) the
services that the Company (x) currently provides or makes available to third parties, or (y) has provided or made available to third parties within the previous five
(5) years, or (z) currently plans to provide or make available to third parties in the future. A true and complete list of all Customer Offerings as of the date hereof is set
forth in Section 2.13(d) of the Company Disclosure Letter .
“Damages” means any and all debts, obligations and other Liabilities, diminution in fair market value, judgments, defaults, monetary damages, fines, fees,
penalties, interest obligations, Taxes, charges, assessments, deficiencies, and all expenses (including expenses of investigation, defense, prosecution and settlement of
claims, court costs, fees, expenses and costs of attorneys, accountants, investigators, financial advisors and experts, and other expenses of litigation, arbitration or other
dispute resolution proceedings) in connection with any action or proceeding, Third Party Action, or other claim or dispute (including any claim or dispute relating to
any right or asserted right under this Agreement, including an indemnification claim under Article VI , or any of the Ancillary Agreements against any party hereto or
thereto or otherwise) (including amounts paid in settlement, interest, court costs), plus any interest that may accrue on any of the foregoing.
“DGCL” has the meaning set forth in Section 1.1.
“Disclosure Statement” means a written information statement containing the information prescribed by Section 4.3(a).
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
“Dispute” means the dispute resulting if the Holder Agent in a Response disputes the Indemnifying Securityholders’ Liability for all or part of the
Claimed Amount.
“Dissenting Shares” means Company Shares held as of the Effective Time by a Company Stockholder who has not voted such Company Shares in favor of the
adoption of this Agreement and with respect to which appraisal shall have been duly demanded and perfected in accordance with Section 262 of the DGCL and not
effectively withdrawn or forfeited prior to the Effective Time.
“Draft Adjusted Working Capital” has the meaning set forth in Section 1.6(c).
“Draft Adjusted Working Capital Certificate” has the meaning set forth in Section 1.6(c).
“Draft Closing Balance Sheet” has the meaning set forth in Section 1.6(c).
“Documentation” means printed, visual or electronic materials, reports, white papers, documentation, specifications, designs, flow charts, code listings,
instructions, user manuals, frequently asked questions, release notes, recall notices, error logs, diagnostic reports, marketing materials, packaging, labeling, service
manuals and other information describing the use, operation, installation, configuration, features, functionality, pricing, marketing or correction of a product, whether or
not provided to end users.
“Effective Time” means the time at which the Surviving Corporation files the Certificate of Merger with the Secretary of State of the State of Delaware.
“Environmental Law” means any applicable U.S. and foreign, federal, state or local Law, statute, rule, order, directive, judgment, Permit or regulation or the
common law relating to the environment, occupational health and safety, or exposure of Persons or property to Materials of Environmental Concern, including any
statute, regulation, binding administrative decision or order pertaining to: (i) the presence of or the treatment, storage, disposal, generation, transportation, handling,
distribution, manufacture, processing, use, import, export, labeling, recycling, registration, investigation or remediation of Materials of Environmental Concern or
documentation related to the foregoing; (ii) air, water and noise pollution; (iii) groundwater and soil contamination; (iv) the release, threatened release, or accidental
release into the environment, the workplace or other areas of Materials of Environmental Concern, including emissions, discharges, injections, spills, escapes or
dumping of Materials of Environmental Concern; (v) transfer of interests in or control of real property which may be contaminated; (vi) community or worker
right-to-know disclosures with respect to Materials of Environmental Concern; (vii) the protection of wild life, marine life and wetlands, and endangered and threatened
species; (viii) storage tanks, vessels, containers, abandoned or discarded barrels and other closed receptacles; and (ix) health and safety of employees and other Persons
as it relates to exposures to Materials of Environmental Control. As used above, the term “release” has the meaning set forth in CERCLA.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
“ERISA Affiliate” means any entity that is, or at any applicable time was, a member of (1) a controlled group of corporations (as defined in
Section 414(b) of the Code), (2) a group of trades or businesses under common control (as defined in Section 414(c) of the Code), or (3) an affiliated service
group (as defined under Section 414(m) of the Code or the regulations under Section 414(o) of the Code), any of which includes or included the Company.
“Escrow Agent” means American Stock Transfer & Trust Company, LLC.
“Escrow Agreement” means the escrow agreement between the Buyer, the Holder Agent and the Escrow Agent in the form attached hereto as Exhibit D .
“Escrow Amount” has the meaning set forth in Section 1.9(a).
“Escrow Fund” has the meaning set forth in Section 1.9(a).
“Estimated Adjusted Working Capital” has the meaning set forth in Section 1.6(a).
“Estimated Closing Balance Sheet” has the meaning set forth in Section 1.6(a).
“Excepted Representations” has the meaning set forth in Section 6.4(a).
“Exclusive Period” has the meaning set forth in Section 4.7(a).
“Exploit” means develop, design, test, modify, make, use, sell, have made, used and sold, import, reproduce, market, distribute, commercialize, support,
maintain, correct and/or create derivative works of.
“FCPA” has the meaning set forth in Section 2.24(b).
“Final Adjusted Working Capital” shall mean the final Adjusted Working Capital determined pursuant to the procedures set forth in Section 1.6 .
“Final AWC Deficiency” has the meaning set forth in Section 1.6(d).
“Final AWC Excess” has the meaning set forth in Section 1.6(f).
“Final Closing Balance Sheet” shall mean the final balance sheet determined pursuant to the procedures set forth in Section 1.6.
“Financial Statements” means:
(a) the audited balance sheets of the Company as of January 31, 2012, 2011 and 2010 and the related audited statements of income, changes in
stockholders’ equity and cash flows of the Company for the fiscal years ended January 31, 2012, 2011 and 2010, which have been audited by the Company’s
independent public accountant, together with the notes thereto and the report of the Company’s independent public accountant; and
(b) the Most Recent Balance Sheet and the related unaudited statements of income, changes in stockholders’ equity and cash flows for the eight
(8) months ended as of the Most Recent Balance Sheet Date together with any notes thereto.
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
“Founder Warrant” means the warrants to purchase outstanding Common Shares directly from Joseph Fitzgerald and Oleg Barenboim pursuant to the
warrants set forth on Schedule 8.1(c) .
“Founder Warrant Agreement” has the meaning set forth in Section 1.8(h).
“GAAP” means United States generally accepted accounting principles as of the date hereof.
“Government Contract” shall mean any prime contract, subcontract, purchase or delivery order, Bid, change order or other commitment of any kind between the
Company and (i) any Governmental Entity, (ii) any prime contractor to a Governmental Entity; or (iii) any subcontractor with respect to any contract described in clause
(i) or (ii)
“Governmental Entity” means any government, any governmental, administrative or regulatory authority, authority, commission, board, agency, party, peoples’
committee, ministry, department, instrumentality, bureau or political subdivision and any court, tribunal or judicial or arbitral body (whether U.S., European Union or
any other multinational, supranational, national, federal, state or local authority or, in the case of an arbitral body, whether governmental, public or private).
“Holder Agent” has the meaning set forth in the Section 1.14(a).
“Holder Agent Fund Amount” has the meaning set forth in Section 1.9(c).
“Holder Agent Fund” means the fund established pursuant to Section 1.9(c) which shall consist at the Closing of One Hundred Fifty Thousand Dollars
($150,000) paid by Buyer to a designated account at the Closing pursuant to Section 1.9(c) .
“Immediate Family Member” means child, step-child, grandchild, parent, stepparent, grandparent, spouse, sibling, niece, nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships.
“Indebtedness” means (a) indebtedness for borrowed money, (b) indebtedness secured by any Security Interests on owned property, whether or not the
indebtedness secured has been assumed, (c) indebtedness evidenced by notes, bonds, debentures or similar instruments, (d) capital leases, (e) letters of credit and
(f) guarantees with respect to Liabilities of a type described in any of clauses (a) through (e) above.
“Indemnified Parties” means the Buyer and its Subsidiaries and their respective directors, officers, employees, and Representatives prior to the Closing and the
Buyer, the Surviving Corporation and their respective Subsidiaries and their respective directors, officers, employees, and Representatives following the Closing.
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
“Indemnifying Securityholders” shall mean the Company Stockholders receiving the Merger Consideration pursuant to Section 1.5 and the holders of
Options and the Warrants receiving the Merger Consideration pursuant to Section 1.8 .
“Intellectual Property” shall mean the following subsisting throughout the world and under the Law of any jurisdiction:
(a) Patent Rights;
(b) Trademarks and all goodwill in the Trademarks;
(c) copyrights, designs, data and database rights and registrations and applications for registration thereof, including moral rights of authors;
(d) mask works and registrations and applications for registration thereof and any other rights in semiconductor topologies;
(e) inventions, invention disclosures, statutory invention registrations, trade secrets and confidential business information, know-how, manufacturing and
product processes and techniques, research and development information, financial, marketing and business data, pricing and cost information, business and marketing
plans and customer and supplier lists and information, whether patentable or nonpatentable, whether copyrightable or noncopyrightable and whether or not reduced to
practice; and
(f) other proprietary rights relating to any of the foregoing (including remedies against infringement thereof and rights of protection of interest therein).
“Intellectual Property Registrations” means Patent Rights, registered Trademarks (including Internet domain name registrations), registered copyrights and
designs, mask work registrations and any registrations or applications for Intellectual Property of any kind.
“Internal Systems” shall mean the Software and Documentation and the computer, communications and network systems (both desktop and enterprise-wide used
by the Company in its business or operations, including to develop, manufacture, fabricate, assemble, provide, distribute, support, maintain or test the Customer
Offerings, whether located on the premises of the Company, remote or virtual. All Internal Systems that are material to the business of the Company are listed and
described in Section 2.13(d) of the Company Disclosure Letter .
“IPO Notes” means the Company’s Subordinated Convertible Promissory Notes due March 2014 in the aggregate original principal amount of $4,755,000.
“IPO Note Termination and Release Agreement” means a Note Termination and Release Agreement between the Company and each holder of an IPO Note in
the form attached hereto as Exhibit F .
“IPO Warrants” mean the warrants to purchase the Company’s Common Stock issued together with the IPO Notes to the purchasers thereof
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
“IRS” has the meaning set forth in Section 2.22(a).
“knowledge” or “to the knowledge of” means the actual knowledge of Albion Fitzgerald, Jeff Fitzgerald, Oleg Barenboim, Robert Anderson, Thomas Anderson
and/or Jeff Biunno, in each case after due inquiry.
“Law” means any applicable U.S. and foreign federal, state, national, provincial, local and municipal law (including common law), statute, ordinance, code, rule,
order, regulation, directive or other legal or administrative requirement enacted, entered, promulgated or issued by any Governmental Entity. Any reference to any
federal, state, national provincial, local, municipal, foreign or other law shall be deemed also to refer to all rules and regulations promulgated thereunder (including
rules and regulations of the Securities and Exchange Commission and state securities regulators), unless the context requires otherwise.
“Lease” means any lease or sublease pursuant to which the Company leases or subleases from another Person any real property.
“Legal Proceeding” means any action, suit, proceeding, claim, arbitration or investigation before any Governmental Entity or before any arbitrator.
“Liabilities” means any direct or indirect liability, indebtedness, guaranty, endorsement, claim, loss, damage, deficiency, cost, expense, obligation or
responsibility, whether accrued, absolute, contingent, mature, non-mature or otherwise and whether known or unknown, fixed or unfixed, choate or inchoate, liquidated
or unliquidated, secured or unsecured.
“Losses” has the meaning set forth in Section 1.14(g).
“Materials of Environmental Concern” means any: pollutants, contaminants or hazardous substances (as such terms are defined under CERCLA), pesticides (as
such term is defined under the Federal Insecticide, Fungicide and Rodenticide Act), solid wastes and hazardous wastes (as such terms are defined under the Resource
Conservation and Recovery Act), chemicals, other hazardous, radioactive or toxic materials, oil, petroleum and petroleum products (and fractions thereof), biohazards
and medical wastes, or any other material (or article containing such material) listed or subject to regulation under any Law, Environmental Law, order, Permit, or
directive due to its potential, directly or indirectly, to harm the environment or the health of humans or other living beings.
“Merger” means the merger of the Merger Sub with and into the Company in accordance with the terms of this Agreement.
“Merger Consideration” has the meaning set forth in Section 1.5(g)(vii).
“Merger Consideration Allocation Spreadsheet” has the meaning set forth in Section 2.2(d).
“Merger Sub” has the meaning set forth in the first paragraph of this Agreement.
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
“Most Recent Balance Sheet” means the unaudited balance sheet of the Company as of the Most Recent Balance Sheet Date.
“Most Recent Balance Sheet Date” means September 30, 2012.
“Non-Competition Agreement” means the non-competition agreement in the form attached hereto as Exhibit A.
“Non-controlling Party” means the party not controlling the defense of any Third Party Action.
“Open Source License” means any license approved by the Open Source Initiative as an open source license (http://www.opensource.org/licenses) or otherwise
substantially satisfying the Open Source Definition as set forth on http://www.opensource.org/docs/osd, or listed by the Free Software Foundation as a “free software”
license in its list of licenses at http://www.gnu.org/licenses/license-list.html or otherwise substantially satisfying the Free Software Definition as set forth at
http://www.gnu.org/philosophy/free-sw.html.
“Open Source Materials” shall mean all Software, Documentation or other material that is distributed as “free software”, “open source software”, “free” or
“open” content, or under an Open Source License.
“Option” means each option to purchase or acquire securities of the Company under any Company Stock Plan.
“Option Consideration” means an amount in cash equal to the product of (i) (A) the Per Common Share Amount, plus (B) the Per Share Residual Amount,
minus (C) the exercise price per share of such Option, multiplied by (ii) the number of Common Shares subject to such Option.
“Other Intermediaries” has the meaning set forth in Section 4.7(a).
“Other Company Stockholder” has the meaning set forth in Section 4.7(a).
“Ordinary Course of Business” means the ordinary course of business of the Company consistent with past practice.
“Owned Real Property” means each item of real property owned by the Company.
“Parties” the Buyer, the Merger Sub, the Company and the Holder Agent.
“Patent Rights” means all patents, patent applications, utility models, design registrations and certificates of invention and other Governmental Entity grants for
the protection of inventions or industrial designs (including all related continuations, continuations-in-part, divisionals, reissues and reexaminations).
“Payment Agent” has the meaning set forth in Section 1.14(a).
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“Per Common Share Amount” has the meaning set forth in Section 1.5(g)(viii).
“Per Share Residual Amount” has the meaning set forth in Section 1.5(g)(ix).
“Permits” means all permits, licenses, registrations, certificates, orders, approvals, franchises, variances and similar rights issued by or obtained from any
Governmental Entity (including those issued or required under Environmental Laws and those relating to the occupancy or use of owned or leased real property).
“Person” means any: (i) individual, (ii) corporation, general partnership, limited partnership, limited liability partnership, trust, company (including any limited
liability company or joint stock company) or other organization or entity, or (iii) any Governmental Entity.
“PPACA” means the Patient Protection and Affordable Care Act.
“Preferred Shares” means, collectively, the shares of Series A Preferred Stock, Series A-1 Preferred Stock and Series A-2 Preferred Stock.
“Privacy Laws” means any Law related to the protection, privacy and security of sensitive personal information and data, including the Gramm-Leach-Bliley
Act and the European Union Data Protection Directive.
“Proprietary Software” means any Software owned by the Company that has not been distributed or otherwise made available under an Open Source License.
“Pro Rata Portion” means with respect to any Indemnifying Securityholder, the percentage specified under the column heading “Pro Rata Portion” on the Merger
Allocation Spreadsheet which shall have been determined by dividing the aggregate amount of Merger Consideration that such Indemnifying Securityholder will
receive pursuant to this Agreement (which amount shall be set forth on the Merger Allocation Spreadsheet) by the aggregate Merger Consideration payable to all
Indemnifying Securityholders.
“Public Official” means (i) officers and employees of Governmental Entities, regardless of decision-making ability or rank; (ii) officers and employees of
companies owned or controlled by a Governmental Entity, even where the company seems like a commercial company (such as state-owned companies); (iii) officers
and employees of public international organizations (such as the World Bank, and the United Nations); (iv) representatives and people acting in official capacities for
governments, state-owned or controlled companies, and public international organizations; and (v) political parties and officials and candidates for political office.
“Qualified Plan” means any Company Benefit Plan that meets, purports to meet or is intended to meet the requirements of Section 401(a) of the Code, including
any previously terminated plan.
“Reasonable Best Efforts” means best efforts, to the extent commercially reasonable.
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“Representatives” has the meaning set forth in Section 4.7(a).
“Requisite Stockholder Approval” means the affirmative vote of (i) the holders of at least a majority of the outstanding Company Shares (on an as-converted to
common stock basis) voting together as a single class and (ii) the holders of at least a majority of the outstanding shares of Preferred Stock (on an as-converted to
common stock basis) voting together as a single class, in each case to adopt the Merger Agreement and approve the transactions contemplated by the Merger
Agreement, including the Merger.
“Response” means a written response containing the information provided for in Section 6.3(c).
“Securities Act” means the Securities Act of 1933, as amended.
“Security Interest” means any mortgage, pledge, security interest, encumbrance, charge or other lien (whether arising by contract or by operation of Law), other
than (i) mechanic’s, materialmen’s, and similar liens, (ii) liens arising under worker’s compensation, unemployment insurance, social security, retirement, and similar
legislation and (iii) liens on goods in transit incurred pursuant to documentary letters of credit, in each case arising in the Ordinary Course of Business and not material
to the Company.
“Series A Preference Amount” has the meaning set forth in Section 1.5(g)(x).
“Series A-1 Preference Amount” has the meaning set forth in Section 1.5(g)(xi).
“Series A-2 Preference Amount” has the meaning set forth in Section 1.5(g)(xii)
“Series A Preferred Stock” means the Series A Preferred Stock, $0.00001 par value per share, of the Company.
“Series A-1 Preferred Stock” means the Series A-1 Preferred Stock, $0.00001 par value per share, of the Company.
“Series A-2 Preferred Stock” means the Series A-2 Preferred Stock, $0.00001 par value per share, of the Company.
“Software” shall mean computer software code, applications, utilities, development tools, diagnostics, databases and embedded systems, whether in source code,
interpreted code or object code form.
“Subsidiary,” with respect to any Party, means any corporation, partnership, trust, limited liability company or other non-corporate business enterprise in which
such Party (or another Subsidiary of such Party) holds stock or other ownership interests representing (a) more than fifty percent (50%) of the voting power of all
outstanding stock or ownership interests of such entity or (b) the right to receive more than fifty percent (50%) of the net assets of such entity available for distribution
to the holders of outstanding stock or ownership interests upon a liquidation or dissolution of such entity.
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
“Superior Proposal” means an unsolicited bona fide written proposal made after the date hereof to acquire (whether by way of merger, consolidation,
share exchange, stock purchase or asset purchase or otherwise) all of the outstanding capital stock or all or substantially all of the assets of the Company, which
satisfies each of the following conditions: (A) such proposal is subject only to customary conditions (which may include the termination of this Agreement, but
which may not include any financing condition), (B) the Board of Directors of the Company concludes in good faith, after consultation with its outside legal
counsel and financial advisors, that such offer would likely be consummated if the Company were to accept it, and (C) the Board of Directors of the Company
concludes in good faith, after consultation with its outside financial advisors, that such offer would, if consummated, constitute a transaction which is more
favorable, from a financial point of view, to the stockholders of the Company than the Merger.
“Surviving Corporation” means the Company, as the surviving corporation in the Merger, for time periods from and after the Effective Time.
“Taxes” means all taxes, charges, fees, duties, contributions, levies or other similar assessments or Liabilities, including income, gross receipts, corporation, ad
valorem, premium, value-added, net worth, capital stock, capital gains, documentary, recapture, alternative or add-on minimum, disability, registration, recording,
excise, real property, personal property, sales, use, transfer, withholding, employment, unemployment, insurance, social security, national insurance, business license,
business organization, environmental, workers compensation, payroll, profits, license, lease, service, service use, severance, stamp, occupation, escheat, windfall
profits, customs, duties, franchise, estimated and other taxes of any kind whatsoever imposed by the United States of America or any state, local or foreign government,
or any agency thereof, or other political subdivision of the United States or any such government, and any interest, fines, penalties, assessments or additions to tax
resulting from, attributable to or incurred in connection with any tax or any contest or dispute thereof.
“Tax Returns” means all reports, returns (including information returns), declarations, or statements relating to Taxes, including any schedule or attachment
thereto and any related or supporting workpapers or information with respect to any of the foregoing, including any amendment thereof filed with or submitted to any
Governmental Entity in connection with the determination, assessment, collection or payment of Taxes or in connection with the administration, implementation or
enforcement of or compliance with any legal requirement relating to any Tax, and including, for the avoidance of doubt, the Report of the Foreign Bank and Financial
Accounts (Treasury Department Form TDF 90-22.1).
“Third Party Acquisition” has the meaning set forth in Section 4.7(a).
“Third Party Action” means any suit or proceeding by a Person or entity other than (and unaffiliated with) Buyer or the Company, which would reasonably be
expected to result in a claim for indemnification pursuant to Article VI .
“Third Party Materials” has the meaning set forth in Section 2.13(l).
“Threshold” has the meaning set forth in Section 6.4(b).
74
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
“Trademarks” means all registered trademarks and service marks, logos, Internet domain names, social media names (including Twitter handles and
Facebook and LinkedIn account names or IDs) and associated accounts and pages, corporate names and doing business designations and all registrations and
applications for registration of the foregoing, common law trademarks and service marks and trade dress.
“Transfer Taxes” has the meaning set forth in Section 4.11(a)(iv).
“Warrants” means the warrants to purchase Common Shares issued by the Company and as set forth on Schedule 8.1(d).
“Warrant Consideration” means an amount in cash equal to the product of (i) (A) the Per Common Share Amount, plus (B) the Per Share Residual Amount,
minus (C) the exercise price per share pursuant to the applicable Warrant, multiplied by (ii) the number of Warrant Shares subject to the applicable Warrant.
“Warrant Shares” means the Common Shares issuable upon exercise of the applicable Warrants.
“Warrant Termination Agreement” has the meaning set forth in Section 1.8(c).
8.2 Certain Rules of Construction.
(a) Unless the context of this Agreement otherwise requires, (i) words of either gender or the neuter include the other gender and the neuter, (ii) words
using the singular number also include the plural number and words using the plural number also include the singular number, (iii) the terms “hereof,” “herein,”
“hereby” and derivative or similar words refer to this entire Agreement as a whole and not to any particular Article, Section or other subdivision, (iv) the terms
“Article” or “Section” or other subdivision refer to the specified Article, Section or other subdivision of the body of this Agreement, (v) the word “include” shall be
deemed to be followed by the phrase “but are not limited to”, the word “includes” shall be deemed to be followed by the phrase “but is not limited to”, and the word
“including” shall be deemed to be followed by the phrase “but not limited to”, (vi) when a reference is made in this Agreement to Exhibits, such reference shall be to an
Exhibit to this Agreement unless otherwise indicated, (vii) when a statement herein with respect to a particular matter is qualified by the phrase “in all material
respects,” materiality shall be determined solely by reference to, and solely within the context of, the specified matter and not with respect to the entirety of this
Agreement or the entirety of the transactions contemplated hereby, (viii) the terms “third party” or “third parties” refers to Persons other than the Buyer, the Company
and the Holder Agent, (ix) “made available” shall mean that the document being made reference to was included (at least three (3) business days prior to the date
hereof) in the Company’s electronic data room to which the Buyer and its representatives have been provided access and (x) all references to a breach of a
representation or warranty shall mean a breach of or inaccuracy in, such representation or warranty or an omission from the disclosure set forth in the Company
Disclosure Letter related to such representation or warranty. All accounting terms used herein and not expressly defined herein shall have the meanings given to them
under GAAP.
(b) The language used in this Agreement shall be deemed to be the language chosen by the Parties to express their mutual intent, and no rule of strict
construction shall be applied against any Party.
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ARTICLE IX
MISCELLANEOUS
9.1 Press Releases and Announcements. Neither the Company nor the Holder Agent shall issue any press release or public announcement relating to the subject
matter of this Agreement without the prior written approval of the Buyer. No press release issued by any Party shall disclose the financial terms of this Agreement
without the mutual consent of the Buyer and the Holder Agent; provided, however that the Buyer shall be entitled to publicly disclose this Agreement or any provision
hereof if, in the reasonable determination of the Buyer, such disclosure is required by applicable Law.
9.2 No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors
and permitted assigns; provided , however , that the provisions of Section 4.10 concerning indemnification are intended for the benefit of the individuals specified
therein, and any such individual shall have and may assert all of the rights of the Company under this Agreement in the event any such individual suffers loss or damage
as a result of any breach by the Buyer of such provisions
9.3 Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior
understandings, agreements or representations by or among the Parties, written or oral, with respect to the subject matter hereof; provided that the Confidentiality
Agreement, dated as of March 9, 2012 between the Buyer and the Company shall remain in effect in accordance with its terms.
9.4 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and
permitted assigns. No Party may assign any of its rights or delegate any of its performance obligations hereunder without the prior written approval of the other Parties;
provided that the Buyer may assign its rights, interests and obligations hereunder to an Affiliate of the Buyer. Any purported assignment of rights or delegation of
performance obligations in violation of this Section 9.4 is void.
9.5 Counterparts and Facsimile Signature. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. This Agreement may be executed by facsimile signature.
9.6 Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.
76
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9.7 Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim or other
communication hereunder shall be deemed duly delivered four business days after it is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent for next business day delivery via a reputable nationwide overnight courier service, in each case to the intended
recipient as set forth below:
If to the Company:
Copy to (which shall not constitute notice):
Prior to the Closing:
Prior to the Closing:
ManageIQ, Inc.
One International Blvd.
Mahwah, NJ 07495
Attn: Albion Fitzgerald
Facsimile:
Email: [email protected]
Garvey Schubert Barer
1191 Second Avenue, Suite 1800
Seattle, WA 98101
Attention: Peter B. Cancelmo
Facsimile: (206) 464-0125
Email: [email protected]
Following the Closing:
Following the Closing:
Red Hat, Inc.
1801 Varsity Drive
Raleigh, NC 27606
Attn: Chief Financial Officer
Facsimile: 919-754-3703
Email: [email protected]
Red Hat, Inc.
1801 Varsity Drive
Raleigh, NC 27606
Attn: General Counsel
Facsimile: 919-754-3704
Email: [email protected]
If to Buyer or Merger Sub:
Copy to (which shall not constitute notice):
Red Hat, Inc.
1801 Varsity Drive
Raleigh, NC 27606
Attn: Chief Financial Officer
Facsimile: 919-754-3703
Email: [email protected]
Red Hat, Inc.
1801 Varsity Drive
Raleigh, NC 27606
Attn: General Counsel
Facsimile: 919-754-3704
Email: [email protected]
Wilmer Cutler Pickering Hale and Dorr LLP
950 Page Mill Road
Palo Alto, CA 94303
Attn: Mark Borden and Joe Wyatt
Facsimile: 650-858-6100
Email:[email protected]; [email protected]
77
Source: RED HAT INC, 10-K, April 25, 2013
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If to the Holder Agent:
Copy to (which shall not constitute notice):
Shareholder Representative Services LLC
1614 15th Street, Suite 200
Denver, CO 80202
Attention: Managing Director
Email: [email protected]
Facsimile: (303) 623-0294
Telephone: (303) 648-4085
Garvey Schubert Barer
1191 Second Avenue, Suite 1800
Seattle, WA 98101
Attention: Peter B. Cancelmo
Facsimile: (206) 464-0125
Email: [email protected]
Any Party may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited
courier, messenger service, telecopy, ordinary mail or electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have
been duly given unless and until it actually is received by the party for whom it is intended. Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth.
9.8 Governing Law. All Legal Proceedings and other matters arising out of or in connection with or relating to this Agreement and the transactions contemplated
hereby (including its interpretation, construction, performance and enforcement) shall be governed by and construed in accordance with the internal Laws of the State of
Delaware without giving effect to any choice or conflict of Law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the
application of Laws of any jurisdictions other than those of the State of Delaware.
9.9 Amendments and Waivers. The Parties may mutually amend any provision of this Agreement at any time prior to the Closing; provided, however , that any
amendment effected subsequent to the Requisite Stockholder Approval shall be subject to any restrictions contained in the DGCL. No amendment of any provision of
this Agreement shall be valid unless the same shall be in writing and signed by all of the Parties. No waiver of any right or remedy hereunder shall be valid unless the
same shall be in writing and signed by the Party giving such waiver. No waiver by any Party with respect to any default, misrepresentation or breach of warranty or
covenant hereunder shall be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or affect in any way
any rights arising by virtue of any prior or subsequent such occurrence. Without limiting the generality of the foregoing, no amendment, supplement or update after the
date of this Agreement shall be made to the Company Disclosure Letter without the express written consent of Buyer, and no
78
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use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
amendment, supplement or update made or delivered (or purporting to be made or delivered) after the date of this Agreement without such consent shall have any effect
on any of the rights or obligations of the Company or Buyer.
9.10 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or
enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other
jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the Parties agree that the
court making the determination of invalidity or unenforceability shall have the power to limit the term or provision, to delete specific words or phrases, or to replace any
invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or
unenforceable term or provision, and this Agreement shall be enforceable as so modified.
9.11 Submission to Jurisdiction. Each Party (a) submits to the jurisdiction of the Court of Chancery of the State of Delaware (or only if the Court of Chancery
declined to accept jurisdiction over a particular matter, any federal court sitting in the State of Delaware) in any action or proceeding arising out of or relating to this
Agreement (including any action or proceeding for the enforcement of any arbitral award made in connection with any arbitration of a Dispute hereunder), (b) agrees
that all claims in respect of such action or proceeding may be heard and determined in any such court, (c) waives any claim of inconvenient forum or other challenge to
venue in such court, (d) agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court and (e) waives any right it may have
to a trial by jury with respect to any action or proceeding arising out of or relating to this Agreement. Each Party agrees to accept service of any summons, complaint or
other initial pleading made in the manner provided for the giving of notices in Section 9.7 , provided that nothing in this Section 9.11 shall affect the right of any
Party to serve such summons, complaint or other initial pleading in any other manner permitted by Law.
9.12 WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, IN ANY LEGAL PROCEEDING ARISING HEREFROM,
THE PARTIES HERETO CONSENT TO TRIAL WITHOUT A JURY IN ANY LEGAL PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY
HERETO OR ITS SUCCESSORS AGAINST ANY OTHER PARTY HERETO OR ITS SUCCESSORS IN RESPECT OF ANY MATTER ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT, REGARDLESS OF THE FORM OF LEGAL PROCEEDING.
9.13 Specific Performance. Each Party acknowledges and agrees that the other Party would be damaged imminently and irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached for which monetary damages and other legal remedies
would not be adequate. Accordingly, each Party agrees that, in addition to any other remedies which may be available to such Party, the other Party is entitled to seek an
injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any
Legal Proceeding instituted in any court of the United States or any state
79
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or jurisdiction thereof having jurisdiction over the Parties and the matter; provided, however, that the Buyer shall be entitled to enforce specifically this Agreement and
the terms and provisions hereof, without the requirement of obtaining, furnishing or posting a bond, in the event that the conditions in Section 5.2 have been satisfied
and the Buyer has satisfied all of the conditions set forth in Section 5.3 , but the Company refuses to consummate the transactions to be consummated at the Closing
for any reason, in which case the Company will not and it will cause its Representatives not to assert as a defense to such action that monetary damages or another
remedy at law would be adequate.
80
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IN WITNESS WHEREOF, the Parties have executed this Agreement and Plan of Merger as of the date first above written.
RED HAT, INC.
By:
/s/ Charles E. Peters, Jr.
Name:
Title:
Charles E. Peters, Jr.
Executive Vice President and Chief Financial Officer
SALTA ACQUISITION CORPORATION
By:
/s/ Paul Argiry
Name:
Title:
Paul Argiry
President and Treasurer
SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER
Source: RED HAT INC, 10-K, April 25, 2013
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IN WITNESS WHEREOF, the Parties have executed this Agreement and Plan of Merger as of the date first above written.
MANAGEIQ, INC.
By:
/s/ Albion Fitzgerald
Name:
Title:
Albion Fitzgerald
Chief Executive Officer
SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER
Source: RED HAT INC, 10-K, April 25, 2013
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IN WITNESS WHEREOF, the Parties have executed this Agreement and Plan of Merger as of the date first above written.
SHAREHOLDER REPRESENTATIVE SERVICES LLC,
solely in its capacity as the Holder Agent
By:
/s/ W. Paul Koenig
Name:
W. Paul Koenig
Title:
Managing Director
SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER
Source: RED HAT INC, 10-K, April 25, 2013
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Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
The following is a list that includes our subsidiaries as of February 28, 2013
Entity Name
Jurisdiction
Gluster, Inc.
Gluster Software India Pvt. Ltd.
Makara, Inc.
ManageIQ, Inc.
Qumranet, Inc.
Red Hat (Switzerland) Sàrl
Red Hat AB
Red Hat ApS
Red Hat Asia Pacific Pte Ltd
Red Hat Asia Pacific Pty Ltd
Red Hat B.V.
Red Hat, bvba
Red Hat Brasil Limitada
Red Hat Canada Limited
Red Hat Chile Limitada
Red Hat Colombia S.A.S
Red Hat Czech, s.r.o.
Red Hat de Argentina SA
Red Hat France SARL
Red Hat FZ-LLC
Red Hat GmbH
Red Hat India Pvt. Ltd.
Red Hat Israel Ltd.
Red Hat KK
Red Hat Limited
Red Hat Middleware LLC
Red Hat New Zealand Limited
Red Hat Poland sp.zo.o
Red Hat Professional Consulting, Inc.
Red Hat S.L.
Red Hat S.R.L.
Red Hat S de RL de CV
Red Hat SA I, LLC
Red Hat SA II, LLC
Red Hat Software (Beijing) Co., Ltd.
Red Hat Software Services (India) Pvt. Ltd.
Red Hat UK Limited
RH Financial Holdings, Inc.
RH Subsidiary, Inc.
Round Pond
RP EMEA Holdings I, LLC
RP EMEA Holdings II, LLC
RP EMEA Partners
Varsity Gateway LLC
Varsity Gateway, Inc.
Delaware, USA
India - Bangalore
Delaware, USA
Delaware, USA
Delaware, USA
Switzerland
Sweden
Denmark
Singapore
Australia
Netherlands
Belgium
Brazil
Canada
Chile
Colombia
Czech Republic
Argentina
France
United Arab Emirates - Dubai
Germany
India - Mumbai
Israel
Japan
Ireland
Delaware, USA
New Zealand
Poland
Georgia, USA
Spain
Italy
Mexico
Delaware, USA
Delaware, USA
China
India - Pune
United Kingdom
Delaware, USA
Delaware, USA
Ireland
Delaware, USA
Delaware, USA
Delaware, USA
Delaware, USA
Delaware, USA
Source: RED HAT INC, 10-K, April 25, 2013
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-184088, 333-178332, 333-153680, 333-137904,
333-135273, 333-121507, 333-112557, 333-71912, 333-59306, 333-55968, 333-45980, 333-45042, 333-37884, 333-96163, 333-88159 and 333-171021) and Form S-3
(No. 333-135323) of Red Hat, Inc. of our report dated April 25, 2013 relating to the financial statements and the effectiveness of internal control over financial
reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
April 25, 2013
Source: RED HAT INC, 10-K, April 25, 2013
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EXHIBIT 31.1
CERTIFICATION OF JAMES M. WHITEHURST, PRESIDENT AND
CHIEF EXECUTIVE OFFICER, PURSUANT TO RULE 13a-14(a)/RULE 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, James M. Whitehurst, certify that:
1. I have reviewed this Annual Report on Form 10-K of Red Hat, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: April 25, 2013
By:
/S/ JAMES M. WHITEHURST
James M. Whitehurst
President and Chief Executive Officer
(Principal Executive Officer)
Source: RED HAT INC, 10-K, April 25, 2013
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The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any
use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
EXHIBIT 31.2
CERTIFICATION OF CHARLES E. PETERS, JR., EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER, PURSUANT TO RULE 13a-14(a)/RULE 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Charles E. Peters, Jr., certify that:
1. I have reviewed this Annual Report on Form 10-K of Red Hat, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: April 25, 2013
By:
/S/ CHARLES E. PETERS, JR.
Charles E. Peters, Jr.
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Source: RED HAT INC, 10-K, April 25, 2013
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The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any
use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
EXHIBIT 32.1
CERTIFICATIONS OF JAMES M. WHITEHURST, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, AND CHARLES E. PETERS, JR., EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER, PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, for the purposes of section 1350 of chapter 63 of title 18 of the United States Code, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Red Hat, Inc. (“Red Hat”), that, to his knowledge, the Annual Report of Red Hat on Form 10-K for
the year ended February 28, 2013 (the “Report”), as filed with the Securities and Exchange Commission, fully complies with the requirements of Section13(a) of the
Securities and Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of Red Hat.
Date: April 25, 2013
By:
/S/ JAMES M. WHITEHURST
James M. Whitehurst
President and Chief Executive Officer
(Principal Executive Officer)
Date: April 25, 2013
By:
/S/ CHARLES E. PETERS, JR.
Charles E. Peters, Jr.
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Source: RED HAT INC, 10-K, April 25, 2013
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The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any
use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
Source: RED HAT INC, 10-K, April 25, 2013
Powered by Morningstar Document Research.
The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any
use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.