Definitive Proxy
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant  x                 Filed by a Party other than the Registrant  ¨

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x   Definitive Proxy Statement
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Sourcefire, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

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LOGO

To the Stockholders of Sourcefire, Inc.:

You are cordially invited to attend a special meeting of the stockholders of Sourcefire, Inc., a Delaware corporation, which we refer to as Sourcefire, to be held on October 7, 2013 at the SpringHill Suites Columbia, 7055 Minstrel Way, Columbia, Maryland 21046, at 10:00 a.m. Eastern time. This proxy statement is first being mailed to stockholders of Sourcefire on or about September 10, 2013.

On July 22, 2013, we entered into an Agreement and Plan of Merger, by and among Cisco Systems, Inc., which we refer to as Cisco, Shasta Acquisition Corp. and Sourcefire, as it may be amended from time to time, which we refer to as the merger agreement, providing for the acquisition of Sourcefire by Cisco. The merger agreement was unanimously approved by our board of directors. At the special meeting, you will be asked to consider and vote upon a proposal to adopt the merger agreement and the other proposals described in the accompanying proxy statement. The merger agreement is attached as Annex A to the accompanying proxy statement. Only stockholders of record who held shares of Sourcefire common stock at the close of business on August 30, 2013 (which we refer to as the record date) will be entitled to notice of and to vote at the special meeting. You may vote your shares at the special meeting only if you are present in person or represented by proxy at the special meeting.

If our stockholders adopt the merger agreement and the merger contemplated by the merger agreement takes place, each outstanding share of Sourcefire common stock will be converted into the right to receive $76.00 in cash, without interest and subject to any applicable withholding tax (unless you have properly and validly demanded and perfected your statutory rights of appraisal with respect to the merger).

At the special meeting, you will also be asked to consider and vote upon a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement and a proposal to approve, on an advisory (non-binding) basis, the “golden parachute” compensation that our named executive officers will or may receive in connection with the merger and the agreements pursuant to which such compensation may be paid or become payable.

Our board of directors has unanimously determined that the merger agreement and the consummation of the transactions contemplated thereby, including the merger, are fair to, advisable and in the best interests of Sourcefire and our stockholders. Our board of directors unanimously recommends that stockholders vote “FOR” the adoption of the merger agreement; “FOR” the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies; and “FOR” the approval, on an advisory (non-binding) basis, of the “golden parachute” compensation arrangements that may be paid or become payable to our named executive officers in connection with the merger and the agreements pursuant to which such compensation may be paid or become payable.

Your vote is very important, regardless of the number of shares of Sourcefire common stock you own. The adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of Sourcefire common stock on the record date for the determination of stockholders entitled to vote at the special meeting. Whether or not you expect to attend the special meeting, please complete, date, sign and return the enclosed proxy card or voting instruction form (or submit your proxy or voting instructions by telephone or over the internet) as soon as possible to ensure that your shares are represented at the special meeting. Submitting your proxy or voting instructions promptly will help to ensure the presence of a quorum at the special meeting and will assist in reducing the expenses of additional proxy solicitation, but it will not prevent you from attending the special meeting and voting in person should you choose to do so. Please note that a failure to vote your shares in person at the special meeting or to submit a proxy or voting instructions has the same effect as a vote “AGAINST” the proposal to adopt the merger agreement.


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If your shares are held in “street name” by your broker, bank, trust or other nominee, your broker, bank, trust or other nominee will not be able to vote your shares of Sourcefire common stock without instructions from you. You should advise your broker, bank trust or other nominee how to vote your shares of Sourcefire common stock in accordance with the instructions provided by your broker, bank, trust or other nominee. The failure to instruct your broker, bank, trust or other nominee to vote your shares of Sourcefire common stock has the same effect as a vote “AGAINST” the proposal to adopt the merger agreement.

The accompanying proxy statement provides detailed information about the merger and the other business to be considered by stockholders at the special meeting. We encourage you to read carefully the entire document, including the annexes. You may also obtain more information about Sourcefire from the documents we have filed with the U.S. Securities and Exchange Commission.

On behalf of your board of directors, thank you for your continued support.

Sincerely,

 

LOGO

John C. Becker

Chief Executive Officer

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORS HAVE APPROVED OR DISAPPROVED THE TRANSACTIONS DESCRIBED HEREIN, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

This proxy statement is dated September 9, 2013.


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SOURCEFIRE, INC.

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON OCTOBER 7, 2013

 

TIME AND DATE    10:00 a.m., Eastern time, on October 7, 2013.
PLACE    SpringHill Suites Columbia, 7055 Minstrel Way, Columbia, Maryland 21046
PROPOSALS   

1.      Adoption of the Agreement and Plan of Merger, dated as of July 22, 2013, by and among Cisco Systems, Inc., Shasta Acquisition Corp. and Sourcefire, Inc., as such agreement may be amended from time to time, and as more fully described in the accompanying proxy statement (the “merger agreement”);

  

2.      Approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement; and

  

3.      Approval, on an advisory (non-binding) basis, of the “golden parachute” compensation arrangements that may be paid or become payable to our named executive officers in connection with the merger and the agreements pursuant to which such compensation may be paid or become payable.

RECORD DATE    August 30, 2013.
MEETING ADMISSION    You are entitled to attend the special meeting and any adjournment or postponement thereof only if you were a stockholder of record or a beneficial owner as of the close of business on August 30, 2013 or you hold a valid legal proxy for the special meeting. If your shares are held in a stock brokerage account or by a bank, broker, trust or other nominee (that is, in “street name”) rather than directly in your own name with our transfer agent, you are considered a beneficial owner of your shares, and, as a beneficial owner, you will need to provide proof of beneficial ownership on the record date for the determination of stockholders entitled to vote at the meeting in order to be admitted to the special meeting, such as a brokerage account statement showing that you owned Sourcefire common stock as of the record date, a voting instruction form provided by your bank, broker, trust or other nominee, or other similar evidence of ownership as of the record date, including a valid “legal proxy” from your bank, broker, trust or other nominee. You should also be prepared to present photo identification for admission. If you do not provide photo identification or comply with the other procedures outlined above upon request, you may not be admitted to the special meeting.
VOTING    Your vote is very important, regardless of the number of shares of Sourcefire common stock you own. The adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of Sourcefire common stock on the record date for the determination of stockholders entitled to vote at the special meeting. Voting requirements for the other proposals are described in the accompanying proxy statement. We encourage you to read the accompanying proxy statement in its entirety and to submit a proxy or voting instructions so that your shares will be represented and voted even if you do not attend the special meeting or any adjournment or postponement thereof. Holders of Sourcefire common stock who do not vote in favor of the adoption of the merger agreement and hold their shares of Sourcefire


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   common stock through the effective time of the merger are entitled to seek appraisal of the fair value of their shares under Delaware law in connection with the merger if they comply with the requirements of Delaware law explained starting on page 55 and Annex D of the accompanying proxy statement.
RECOMMENDATION    Our board of directors has unanimously determined that the merger agreement and the consummation of the transactions contemplated thereby, including the merger, are fair to, advisable and in the best interests of Sourcefire and you, the stockholders. Our board of directors unanimously recommends that you vote “FOR” the proposal to adopt the merger agreement (Proposal No. 1), “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies (Proposal No. 2) and “FOR” the proposal to approve, on an advisory (non-binding) basis, the “golden parachute” compensation arrangements that may be paid or become payable to our named executive officers in connection with the merger and the agreements pursuant to which such compensation may be paid or become payable (Proposal No. 3).

Information about how to submit a proxy or voting instructions is provided in the accompanying proxy statement and on the separate proxy card or voting instruction form you received with the accompanying proxy statement. If you have any questions, or need assistance voting your shares, please contact our proxy solicitor, D.F. King & Co., Inc. at (800) 967-4612 (toll free).

The accompanying proxy statement provides detailed information about the merger and the other business to be considered by stockholders at the special meeting. We encourage you to read carefully the entire document, including the annexes.

By Order of the Board of Directors,

 

LOGO

Douglas W. McNitt

Secretary and General Counsel

Columbia, MD

September 9, 2013

YOUR VOTE IS IMPORTANT. PLEASE SUBMIT YOUR PROXY OR VOTING INSTRUCTIONS FOR YOUR SHARES PROMPTLY, REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE SPECIAL MEETING.


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TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

Parties to the Merger (page 22)

     1   

The Merger (page 23)

     1   

The Special Meeting (page 18)

     2   

Treatment of Options, Restricted Stock Units and Restricted Stock Outstanding Under Our Stock Plans (page 65)

     3   

When the Merger Is Expected to Be Completed

     4   

Recommendation of Our Board of Directors as to the Merger; Reasons for the Merger (page 30)

     4   

Interests of Executive Officers and Directors in the Merger (page 42)

     4   

Other Agreements (page 81)

     4   

Opinion of Our Financial Advisor (page 36)

     5   

Financing the Merger (page 42)

     6   

Our Conduct of Business Pending the Merger (page 70)

     6   

Limitation on Considering Other Acquisition Proposals (page 73)

     6   

Conditions to the Merger (pages 59 and 78)

     7   

Termination (page 79)

     7   

Termination Fees and Expenses (page 80)

     8   

Regulatory Approvals (page 59)

     8   

Material U.S. Federal Income Tax Consequences to Stockholders (page 60)

     9   

Litigation Relating to the Merger (page 62)

     9   

Current Market Price of Sourcefire Common Stock

     9   

Appraisal Rights (page 55, Annex D)

     9   

Additional Information (page 92)

     10   

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING OF STOCKHOLDERS

     11   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     17   

INFORMATION ABOUT THE SPECIAL MEETING OF STOCKHOLDERS

     18   

Date, Time and Place of the Special Meeting of Stockholders

     18   

Purpose of the Special Meeting of Stockholders

     18   

Recommendation of Our Board of Directors

     18   

Record Date and Outstanding Shares

     18   

Quorum Requirement

     19   

Vote Required

     19   

Shares Held by Directors and Executive Officers

     20   

Voting Procedures

     20   

Attending and Voting at the Special Meeting of Stockholders

     20   

Proxies

     21   

Revocation of Proxies

     21   

Solicitation of Proxies

     21   

Questions and Additional Information

     21   

PARTIES TO THE MERGER

     22   

Sourcefire, Inc.

     22   

Cisco Systems, Inc.

     22   

Shasta Acquisition Corp.

     22   

PROPOSAL NO. 1 — ADOPTION OF THE MERGER AGREEMENT

     23   

Overview

     23   

Background of the Merger

     23   

Recommendation of Our Board of Directors as to the Merger; Reasons for the Merger

     30   

Prospective Financial Information

     33   

Opinion of Our Financial Advisor

     36   

Financing of the Merger

     42   


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     Page  

Interests of Executive Officers and Directors in the Merger

     42   

Appraisal Rights

     55   

Regulatory Approvals

     59   

Material U.S. Federal Income Tax Consequences of the Merger

     60   

Litigation Relating to the Merger

     62   

Delisting and Deregistration of Sourcefire’s Common Shares

     62   

The Merger Agreement

     63   

MARKET PRICE OF SOURCEFIRE COMMON STOCK

     81   

OTHER AGREEMENTS

     81   

The Voting Agreements

     81   

The Rights Agreement Amendment

     82   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     83   

PROPOSAL NO. 2 — ADJOURNMENT OF THE SPECIAL MEETING

     85   

Vote Required and Board of Directors Recommendation

     85   

PROPOSAL NO. 3 — ADVISORY VOTE REGARDING CERTAIN EXECUTIVE COMPENSATION

     86   

Golden Parachute Compensation

     86   

Advisory Vote on Golden Parachutes

     89   

OTHER MATTERS

     91   

Additional Proposals for the Special Meeting of Stockholders

     91   

2014 Stockholder Proposals and Nominations

     91   

Delivery of Documents to Stockholders Sharing an Address

     91   

WHERE YOU CAN FIND MORE INFORMATION

     92   

List of Annexes

 

Annex A      Agreement and Plan of Merger, dated as of July 22, 2013, by and among Cisco Systems, Inc., Shasta Acquisition Corp. and Sourcefire, Inc.
Annex B      Form of Voting Agreement
Annex C      Opinion of Qatalyst Partners LP, dated July 22, 2013
Annex D      Section 262 of the General Corporation Law of the State of Delaware


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SUMMARY

This summary, together with the “Questions and Answers About the Merger and the Special Meeting of Stockholders,” highlights selected information from this proxy statement and may not contain all of the information that is important to you. We urge you to read carefully the entire proxy statement, the annexes and the other documents to which we refer (including documents incorporated by reference) in order to fully understand the merger and the related transactions. See “Where You Can Find More Information” on page 92. Each item in this summary refers to the page of this proxy statement on which that subject is discussed in more detail. Except as otherwise specifically noted in this proxy statement, “Company,” “Sourcefire,” “we,” “our,” “us” and similar words in this proxy statement refer to Sourcefire, Inc. and its direct and indirect consolidated subsidiaries and references to “the board,” “the board of directors” or “our board of directors” refer to the board of directors of Sourcefire, Inc.

Parties to the Merger (page 22)

Sourcefire, Inc.

Sourcefire, Inc., a Delaware corporation, which we refer to as Sourcefire, delivers intelligent cybersecurity technologies. Our comprehensive portfolio of solutions enables a diverse customer base that includes commercial enterprises and government agencies to manage and minimize cybersecurity risks. From our industry-leading next-generation network security platform to our advanced malware protection, Sourcefire’s threat-centric approach provides customers with Agile Security® that delivers protection Before, During and After™ an attack. We also manage the security industry’s leading open source initiative, Snort®, an intrusion prevention technology that is incorporated into the software of our comprehensive Intrusion Detection and Prevention System. In addition to commercial and open source network security products, Sourcefire offers a variety of services to help customers install and support our solutions. Available services include Technical Support, Professional Services, Incident Response, Education & Certification, and our Vulnerability Research Team (VRT).

Cisco Systems, Inc.

Cisco Systems, Inc., a California corporation, which we refer to as Cisco, together with its subsidiaries, designs, manufactures, and sells Internet Protocol (IP) based networking and other products related to the communications and information technology (IT) industry and provides services associated with these products and their use. Cisco provides a broad line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Cisco’s products are designed to transform how people connect, communicate, and collaborate. Cisco’s products are utilized at enterprise businesses, public institutions, telecommunications companies and other service providers, commercial businesses, and personal residences. Cisco conducts its business globally and is organized into the following three geographic segments: The Americas; Europe, Middle East, and Africa; and Asia Pacific, Japan, and China.

Shasta Acquisition Corp.

Shasta Acquisition Corp., which we refer to as merger sub, is a Delaware corporation and wholly-owned subsidiary of Cisco that was formed solely for the purpose of consummating the merger described below and the other related transactions in connection with the merger.

The Merger (page 23)

On July 22, 2013, we entered into an Agreement and Plan of Merger, by and among Cisco Systems, Inc., Shasta Acquisition Corp. and Sourcefire, Inc., as it may be amended from time to time, which we refer to as the merger agreement, which provides that, among other things, at the time the certificate of merger is filed with the Secretary of State of the State of Delaware (or at such other time as may be mutually determined by us, Cisco and merger sub and set forth in the certificate of merger), merger sub will merge with and into Sourcefire, with Sourcefire surviving the merger as a wholly-owned subsidiary of Cisco, which we refer to as the merger.

 

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As a result of the merger, each share of Sourcefire common stock issued and outstanding immediately prior to the effective time of the merger, other than shares owned by Sourcefire, Cisco or merger sub and shares held by stockholders who are entitled to demand and properly demand their appraisal rights under Delaware law, will automatically be converted into the right to receive $76.00 in cash, which amount we refer to as the merger consideration, payable without any interest and less any required withholding taxes. After the merger is completed, you will no longer have any rights as a Sourcefire stockholder, other than the right to receive the merger consideration and subject to the rights described under “Proposal No. 1 — Adoption of the Merger Agreement — Appraisal Rights” beginning on page 55. As a result of the merger, Sourcefire will cease to be a publicly traded company and Cisco will own 100% of the equity of Sourcefire.

A copy of the merger agreement is included as Annex A to this proxy statement and is incorporated by reference into this proxy statement.

The Special Meeting (page 18)

Date, Time and Place

The special meeting will be held on October 7, 2013 at the SpringHill Suites Columbia, 7055 Minstrel Way, Columbia, Maryland 21046 at 10:00 a.m. Eastern time.

Purpose

You will be asked to vote on (1) a proposal to adopt the merger agreement, (2) a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement and (3) a proposal to approve, on an advisory (non-binding) basis, the “golden parachute” compensation that our named executive officers will or may receive in connection with the merger.

Record Date and Quorum

You are entitled to vote at the special meeting if you owned shares of Sourcefire common stock at the close of business on August 30, 2013, the record date for the determination of stockholders entitled to vote at the special meeting. You will have one vote for each share of Sourcefire common stock that you owned on the record date. As of the record date, there were shares of Sourcefire common stock issued and outstanding and entitled to vote at the special meeting. The presence in person or by proxy of the holders of a majority in voting power of the outstanding shares of Sourcefire common stock entitled to vote at the special meeting as of the close of business on the record date will constitute a quorum for the purposes of the special meeting.

Vote Required

The adoption of the merger agreement requires the affirmative vote of holders of a majority of the outstanding shares of Sourcefire common stock entitled to vote thereon. Approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies and the non-binding proposal regarding “golden parachute” compensation arrangements each require the affirmative vote of a majority of the votes cast on that proposal at the special meeting. Abstentions, failures to vote and “broker non-votes” will have the same effect as a vote “AGAINST” the proposal to adopt the merger agreement. Assuming a quorum is present at the special meeting, abstentions, failures to vote and “broker non-votes” will have no effect on the outcome of the adjournment proposal or the non-binding proposal regarding “golden parachute” compensation.

 

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Treatment of Options, Restricted Stock Units and Restricted Stock Outstanding Under Our Stock Plans (page 65)

At the effective time of the merger, all of our unexpired, unexercised and outstanding stock options (other than the stock options held by John Becker, our Chief Executive Officer and a director, that have performance-based vesting conditions), held by our employees who are employed as of the effective time of the merger, whether vested or unvested (collectively, “rollover options”), will be assumed by Cisco and converted into Cisco options. Rollover options will be exercisable for that number of whole shares of Cisco common stock equal to the product (rounded down to the next whole number of shares of Cisco common stock, with no cash being payable for any fractional share eliminated by such rounding) of the number of shares of our common stock that were issuable upon exercise of such rollover options immediately prior to the effective time of the merger and the exchange ratio set forth below. The per share exercise price for the shares of Cisco common stock issuable upon exercise of a rollover option will be equal to the quotient (rounded up to the next whole cent) obtained by dividing the exercise price per share of our common stock at which such rollover option was exercisable immediately prior to the effective time of the merger by the exchange ratio. The “exchange ratio” will equal $76.00 divided by the volume-weighted average sale price for a share of Cisco’s common stock as quoted on The NASDAQ Global Select Market, which we refer to as NASDAQ, for the ten consecutive trading days ending with the third trading day that precedes the closing date of the merger. The vesting schedules and other terms and conditions of the Cisco options (as such vesting schedules, terms and conditions may be amended or modified by agreements that we or Cisco enter into with the continuing employees before closing of the merger) will be the same as they were before being converted to Cisco options.

At the effective time of the merger, each of our unvested restricted stock unit (“RSU”) awards that is outstanding, held by our employees who are employed as of the effective time of the merger (collectively, “rollover RSUs”), will be assumed by Cisco and converted into Cisco RSUs. The vesting schedules and other terms and conditions of the Cisco RSUs (as such vesting schedules, terms and conditions may be amended or modified by agreements that we or Cisco enter into with the continuing employees before closing of the merger) will be the same as they were before being converted to Cisco RSUs, except that rollover RSUs will be settled by the issuance of that number of whole shares of Cisco’s common stock equal to the product (rounded down to the next whole number of shares of Cisco common stock, with no cash being payable for any fractional share eliminated by such rounding) of the number of shares of our common stock that were issuable upon settlement of such rollover RSU immediately prior to the effective time of the merger multiplied by the exchange ratio.

Prior to the effective time of the merger, our compensation committee will cause, contingent and effective as of immediately prior to the effective time of the merger, each of our unvested RSUs that are eligible for accelerated vesting as a result of satisfying applicable performance conditions (each, a “performance accelerated RSU”) to provide that the number of shares eligible for vesting acceleration on each performance measurement date shall instead vest on the annual anniversary of the original grant date of such performance accelerated RSU, subject to the holder of such performance accelerated RSU remaining employed by Sourcefire or Cisco, as applicable, on the applicable annual vesting date.

Our unvested stock options eligible for vesting as a result of satisfying applicable performance conditions (each, a “performance accelerated option”) held by Mr. Becker will accelerate in full on the closing date of the merger, and each performance accelerated option shall be converted into the right to receive an amount of cash, without interest, equal to (i) the number of shares of our common stock subject to such stock option multiplied by (ii) the remainder of (x) $76.00 less (y) the exercise price per share of such stock option in effect immediately prior to the effective time of the merger.

Immediately prior to the effective time of the merger, any outstanding shares of restricted stock held by non-employee members of our board of directors will become fully vested, and the holder thereof will be entitled to receive the merger consideration for each such restricted share of Company common stock.

 

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At the effective time of the merger, each of our stock options and each of our RSUs that are not rollover options or rollover RSUs will not be assumed by Cisco. At the effective time of the merger, each such vested stock option and vested RSU that has not yet been settled will be converted into and represent the right to receive (i) with respect to vested stock options, an amount of cash, without interest, equal to (A) the number of shares of our common stock subject to such vested stock option multiplied by (B) the remainder of (x) $76.00 less (y) the exercise price per share of such vested stock option; and (ii) with respect to any vested RSUs, an amount of cash, without interest, equal to (A) the number of shares of our common stock issuable upon settlement of such vested RSU multiplied by (B) $76.00.

The treatment of our stock options and RSUs held by our executives officers and directors is further discussed in “Proposal No. 1 — Adoption of the Merger Agreement — Interests of Executive Officers and Directors in the Merger” beginning on page 42.

When the Merger Is Expected to Be Completed

We currently expect to complete the merger in the fourth quarter of 2013. However, we cannot assure you when or if the merger will occur. We must first obtain the approval of Sourcefire stockholders of the proposal to adopt the merger agreement at the special meeting and the required regulatory approvals described below in “Proposal No. 1 — Adoption of the Merger Agreement — Regulatory Approvals” beginning on page 59.

Recommendation of Our Board of Directors as to the Merger; Reasons for the Merger (page 30)

Our board unanimously recommends that you, as a stockholder of the Company, vote “FOR” the proposal to adopt the merger agreement. For a description of the reasons considered by our board in approving the merger agreement and the merger, see “Proposal No. 1 — Adoption of the Merger Agreement — Recommendation of Our Board of Directors as to the Merger; Reasons for the Merger” beginning on page 30.

Other Agreements (page 81)

Under voting agreements dated July 22, 2013, certain Sourcefire directors who are beneficial owners of approximately 1.9% of Sourcefire’s outstanding shares of common stock have agreed, among other things, to vote their Sourcefire shares in favor of adoption of the merger agreement and against any proposal made in opposition to or in competition with the merger. A copy of the form of voting agreement is attached as Annex B to this proxy statement.

Pursuant to an amendment dated July 22, 2013, we amended our rights agreement with Continental Stock Transfer & Trust Co., as rights agent, dated as of October 30, 2008 (commonly known as a “poison pill”), which we refer to as the rights agreement, to provide that the rights set forth in the rights agreement will not be triggered by the merger or the acquisition by Cisco of shares of our common stock.

Interests of Executive Officers and Directors in the Merger (page 42)

In considering the recommendation of our board of directors, you should be aware that certain of our executive officers and directors have interests in the merger that may be different from, or in addition to, your interests as a stockholder. These interests include, among others:

 

   

certain of our executive officers (Thomas McDonough, our President and Chief Operating Officer, Martin Roesch, our Chief Technology Officer and John Negron, our Senior Vice President of Worldwide Sales) entered into employment agreements with Cisco in connection with the execution of the merger agreement, and certain other of our executive officers (Todd Headley, our Chief Financial Officer, Marc Solomon, our Chief Marketing Officer, Douglas McNitt, our General Counsel and Secretary, and Leslie Pendergrast, our Chief People Officer) entered into employment agreements with Cisco following the execution of the merger agreement, which provide for additional compensation and benefits;

 

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all of our executive officers have a right to severance payments and benefits, including accelerated vesting of stock-based awards, upon qualifying terminations of employment that occur either in connection with or following the merger under existing arrangements with Sourcefire or new employment agreements with Cisco; and

 

   

continued indemnification and liability insurance for directors and officers following completion of the merger.

In addition, under the terms of the merger agreement, all Sourcefire options (other than the performance-based options held by Mr. Becker) and RSUs that are outstanding immediately prior to the effective time of the merger and held by our employees who are employed as of the effective time of the merger, including our executive officers, will be assumed by Cisco and converted into stock options or RSUs for Cisco common stock having equivalent economic value. Each performance-based option held by Mr. Becker will vest in full on the closing date of the merger and Mr. Becker will receive an amount of cash as described above. Our compensation committee will cause, contingent and effective as of immediately prior to the effective time of the merger, each performance-based RSU held by our employees, including our executive officers, to provide that the number of shares eligible for vesting acceleration on each performance measurement date shall instead vest on the annual anniversary of the original grant date of such performance accelerated RSU, subject to the holder of such RSU remaining employed by Sourcefire or Cisco.

The employment agreement that we previously entered into with Mr. Becker remains in effect. Under Mr. Becker’s current employment agreement with us, Mr. Becker is entitled to certain severance payments and benefits, including accelerated vesting of options and RSUs, upon qualifying terminations of employment that occur in connection with or following the merger.

Immediately prior to the effective time of the merger, any outstanding shares of restricted stock held by our directors will become fully vested, and the holder thereof will be entitled to receive the merger consideration for each such restricted share of Company common stock.

Under our annual incentive plan, the performance goal for the performance period in which the merger takes place is deemed achieved as of the date immediately prior to the effective date of the merger and each participant’s target award is to be paid on the effective date of the merger, provided that the compensation committee, in its sole discretion, may eliminate or reduce the target award payable to any participant. The bonuses will not exceed the target bonuses that could be earned under the plan.

See “Proposal No. 1 — Adoption of the Merger Agreement — Interests of Executive Officers and Directors in the Merger” beginning on page 42 for additional information.

Opinion of Our Financial Advisor (page 36)

We retained Qatalyst Partners LP, which we refer to as Qatalyst Partners, to act as our financial advisor in connection with the merger. We selected Qatalyst Partners to act as our financial advisor based on Qatalyst Partners’ qualifications, expertise, reputation and knowledge of the business and affairs of Sourcefire and the industry in which it operates. At the meeting of our board of directors on July 22, 2013, Qatalyst Partners rendered its oral opinion that, as of such date and based upon and subject to the considerations, limitations, qualifications and other matters set forth therein, the consideration to be received by the holders of Sourcefire common stock (other than Cisco or any affiliates of Cisco) pursuant to the merger agreement was fair, from a financial point of view, to such holders.

 

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The full text of the written opinion of Qatalyst Partners, dated July 22, 2013, is attached as Annex C to this proxy statement and is incorporated into this proxy statement by reference. The opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations and qualifications of the review undertaken by Qatalyst Partners in rendering its opinion. You should read the opinion carefully in its entirety. Qatalyst Partners’ opinion was provided to Sourcefire’s board of directors and addressed only, as of the date of the opinion, the fairness, from a financial point of view, of the consideration to be received by the holders of our common stock (other than Cisco or any affiliates of Cisco) in the merger. It does not address any other aspect of the merger and does not constitute a recommendation as to how any of Sourcefire’s stockholders should vote with respect to the merger or any other matter. For a further discussion of Qatalyst Partners’ opinion, refer to the section entitled “Proposal No. 1— Adoption of the Merger Agreement — Opinion of Our Financial Advisor” beginning on page 36 of this proxy statement.

Financing the Merger (page 42)

Cisco has represented in the merger agreement that it will have sufficient funds to pay the merger consideration to our stockholders and satisfy its other obligations under the merger agreement and in connection with the transactions contemplated thereby.

Our Conduct of Business Pending the Merger (page 70)

We have agreed that prior to the effective time of the merger, we will, subject to certain exceptions: (a) carry on our business in the ordinary course in substantially the same manner as previously conducted, (b) use commercially reasonable efforts to pay or perform all debts, taxes and other obligations when due, collect accounts receivable when due and not extend credit outside of the ordinary course of business consistent with past practice, sell our products consistent with past practice, and preserve intact our current business organization and goodwill, keep available the services of our officers and key employees and preserve our relationships with customers, suppliers, distributors, licensors, licensees, and others having material business dealings with us, (c) use commercially reasonable efforts to assure that each of our material contracts entered into after the date of the merger agreement will not require any consent, waiver or novation or provide for any material change in the obligations of any party thereto in connection with the merger, (d) use commercially reasonable efforts to maintain leased premises in accordance with the terms of each applicable lease and (e) consult with Cisco regarding the defense or settlement of any material legal proceeding relating to the transactions contemplated by the merger agreement.

In addition, as described below and set forth in the merger agreement, we have agreed that, prior to the effective time of the merger, subject to certain exceptions, we will not take certain actions without the prior written consent of Cisco.

Limitation on Considering Other Acquisition Proposals (page 73)

The merger agreement restricts our ability to solicit or engage in discussions or negotiations with a third party regarding specified transactions involving Sourcefire. Notwithstanding these restrictions, prior to the time that Sourcefire stockholders adopt the merger agreement, our board of directors may respond to an unsolicited bona fide written acquisition proposal that our board of directors concludes in good faith (after consultation with its outside legal counsel and financial advisors) is, or would reasonably be expected to lead to an acquisition proposal superior to the merger with Cisco (as described under “Proposal No. 1 – Adoption of the Merger Agreement – Limitation on Considering Other Acquisition Proposals” beginning on page 73) by furnishing information with respect to Sourcefire or by entering into discussions with the party or parties making the acquisition proposal, so long as we comply with the terms of the merger agreement. In addition, prior to the time Sourcefire stockholders adopt the merger agreement, our board of directors may withdraw its recommendation of the merger agreement in connection with a superior proposal if it concludes in good faith (after consultation with its outside legal counsel) that in light of such superior proposal, the failure to change its recommendation would be inconsistent with its fiduciary duties to Sourcefire stockholders, so long as we comply with the terms of the

 

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merger agreement. Our board of directors may also withdraw its recommendation of the merger agreement prior to the time Sourcefire stockholders adopt the merger agreement in certain circumstances unrelated to an acquisition proposal if it concludes in good faith (after consultation with its outside legal counsel) that in light of an intervening event, the failure to do so would be inconsistent with its fiduciary duties to Sourcefire’s stockholders, so long as we comply with the terms of the merger agreement. In the event that Sourcefire terminates the merger agreement to accept a superior proposal and in other specified circumstances, Sourcefire may be required to pay to Cisco a termination fee as discussed below.

Conditions to the Merger (pages 59 and 78)

As more fully described in this proxy statement and in the merger agreement, the completion of the merger depends on a number of conditions being satisfied or, where legally permissible, waived. The conditions to Cisco’s obligations to complete the merger include, include, among others, the following:

 

   

adoption of the merger agreement by our stockholders at the special meeting;

 

   

the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, which we refer to as the HSR Act;

 

   

the absence of any order or restraint or applicable legal requirement prohibiting, making illegal or enjoining consummation of the merger;

 

   

continued accuracy of our representations and warranties in the merger agreement;

 

   

performance and compliance by us in all materials respects with all covenants and other agreements required to be performed and complied with by us under the merger agreement; and

 

   

we have not suffered a material adverse affect since the date of the merger agreement that is continuing.

See “Proposal No. 1 – Adoption of the Merger Agreement – Regulatory Approvals” and “Proposal No. 1 – Adoption of the Merger Agreement – The Merger Agreement – Conditions to the Merger” beginning on pages 59 and 78, respectively.

Termination (page 79)

The merger agreement may be terminated under certain circumstance at any time prior to the effective time:

 

   

by mutual written consent of Cisco and us;

 

   

by either Cisco or us if, subject to specified exceptions: (a) the merger has not been completed by December 31, 2013 (as such date may be extended, but no later than March 31, 2014 (the “End Date”)), (b) if any governmental entity has issued an order or taken any other action to enforce an applicable legal requirement having the effect of permanently restraining, enjoining or otherwise prohibiting the merger that is final and nonappealable, (c) if our stockholders do not adopt the merger agreement at the special meeting and, in our case, the failure to obtain stockholder approval is not proximately caused by any action or failure to act of us that constitutes a material breach of the merger agreement or (d) upon a breach of any covenant or agreement on the part of the other party set forth in the merger agreement, or if any representation or warranty of the other party has become inaccurate, in either case such that the closing conditions with respect to the other party regarding the accuracy of representations and warranties and compliance with covenants and agreements would not be satisfied as of the time of such breach or as of the time such representation or warranty has become inaccurate, following notice and an opportunity to cure such breach, if curable;

 

   

by Cisco, upon a “triggering event,” as discussed below in “Proposal No. 1 – Adoption of the Merger Agreement – The Merger Agreement – Termination Fees and Expenses” beginning on page 80; or

 

   

by us, prior to our stockholders’ adoption of the merger agreement, upon a change of recommendation for a superior proposal and following payment to Cisco of a termination fee of $60,000,000.

 

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Termination Fees and Expenses (page 80)

The merger agreement requires that we pay Cisco a termination fee of $60,000,000 in the event the merger agreement is terminated upon any of the following events:

 

   

Cisco terminates the merger agreement due to a triggering event;

 

   

we or Cisco terminate the merger agreement after our stockholders do not adopt the merger agreement at the special meeting following the occurrence of a triggering event;

 

   

we terminate the merger agreement upon a change of recommendation in connection with a superior proposal; or

 

   

we or Cisco terminate the merger agreement if the closing has not occurred by the “End Date” described above, or we or Cisco terminate the merger agreement after our stockholders do not adopt the merger agreement at the special meeting and, subject to certain limitations, an acquisition proposal has been publicly disclosed or otherwise exists when the merger agreement is terminated and within 12 months following termination, we are acquired or we enter into a contract providing for an acquisition that is subsequently consummated.

A “triggering event” includes any of the following events:

 

   

a change of recommendation by our board of directors in favor of the merger for any reason;

 

   

our failing to convene or hold the special meeting of our stockholders to adopt the merger agreement in accordance with the merger agreement;

 

   

our failing to include our board of directors’ recommendation in the proxy statement;

 

   

our breach of any of the provisions of the merger agreement related to the meeting of our stockholders or the nonsolicitation of acquisition proposals;

 

   

our board of directors approving or publicly recommending any acquisition proposal or us entering into any contract accepting any acquisition proposal;

 

   

our board of directors failing to reaffirm the board of directors recommendation within 10 business days after Cisco requests in writing such reaffirmation in response to an acquisition proposal meeting certain requirements; or

 

   

the commencement of a tender or exchange offer relating to our securities by a person unaffiliated with Cisco prior to the time we receive the approval of our stockholders and our failure to send to our stockholders a statement disclosing that we unconditionally recommend rejection of such tender or exchange offer and reaffirming our board of directors recommendation in favor of the merger.

Payment of the termination fee by us to Cisco will be deemed to be liquidated damages for all actual or purported breaches of the merger agreement and, after such payment has been made, we will have no further liability for any actual or purported breach.

In all cases other than the specified circumstances under which we will be required to pay the termination fee, the merger agreement provides that, regardless of whether the merger is consummated, all fees and expenses incurred by the parties in connection with the merger will be borne by the party incurring such fees and expenses.

Regulatory Approvals (page 59)

The HSR Act prohibits us from completing the merger until we have furnished certain information and materials to the Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade Commission and the required waiting period has expired or been terminated. Both parties have made the necessary filings and received notice of early termination of the waiting period on September 3, 2013. The merger is also subject to

 

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review by the governmental authorities of certain foreign jurisdictions under the antitrust or competition laws of those jurisdictions. Cisco and Sourcefire have made the requisite filings in such jurisdictions and have received clearance from all jurisdictions where filings were required. You should read “Proposal No. 1 — Adoption of the Merger Agreement — Regulatory Approvals” beginning on page 59 for a more complete discussion of the regulatory approvals required for the merger.

Material U.S. Federal Income Tax Consequences to Stockholders (page 60)

The merger will be a taxable transaction to U.S. holders and certain non-U.S. holders of Sourcefire common stock for U.S. federal income tax purposes.

You should read “Proposal No. 1 — Adoption of the Merger Agreement — Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 60 for a more complete discussion of the U.S. federal income tax consequences of the merger. Tax matters can be complicated, and the tax consequences of the merger to you will depend on your particular tax situation. You should consult your tax advisor to determine the tax consequences of the merger to you.

Litigation Relating to the Merger (page 62)

The following shareholder class action complaints have been filed in the Circuit Court for Howard County in the State of Maryland by individuals purporting to be stockholders of Sourcefire in connection with the merger: (1) a complaint filed on July 26, 2013 (the “July Complaint”), (2) a complaint filed on August 6, 2013 (the “August 6 Complaint”), (3) a complaint filed on August 9, 2013 (the “August 9 Complaint”), and (4) a complaint filed on August 16, 2013 (the “August 16 Complaint and, together with the July Complaint, the August 6 Complaint and the August 9 Complaint, the “Complaints”). Each Complaint was purportedly filed on behalf of the public shareholders of Sourcefire, and names as defendants, Sourcefire, each of our directors, merger sub, and Cisco. The Complaints generally allege, among other things, that by agreeing to sell the Company to Cisco pursuant to the merger agreement, Sourcefire’s directors breached their fiduciary duties by failing to maximize stockholder value in connection with such sale, by agreeing to deal protection devices and by putting their personal interests ahead of those of the stockholders. The Complaints also allege that Cisco and merger sub aided and abetted these alleged breaches of fiduciary duties. All of the claims have been removed to, and consolidated into a single action in, the United States District Court for the District of Maryland. On September 8, 2013, the parties to the consolidated action entered into a memorandum of understanding providing for a preliminary settlement, subject to court approval, of the action. Pursuant to this memorandum of understanding, Sourcefire included in this definitive proxy statement certain additional disclosures related to the merger. See “Proposal No. 1 — Adoption of the Merger Agreement — Litigation Relating to the Merger” beginning on page 62 for additional information.

Current Market Price of Sourcefire Common Stock

Our common stock is listed on NASDAQ under the trading symbol “FIRE”. On June 22, 2013, which was the last full trading day before we announced the transaction, our stock closed at $59.08. On September 6, 2013, which was the last trading day before the date of this proxy statement, our common stock closed at $75.76.

Appraisal Rights (page 55, Annex D)

Under Delaware law, holders of Sourcefire common stock who do not vote in favor of the adoption of the merger agreement, who properly demand appraisal rights and who otherwise comply with the requirements of Section 262 of the General Corporation Law of the State of Delaware, which we refer to as the DGCL, will be entitled to seek appraisal for, and obtain payment in cash for the judicially determined fair value of, their shares of Sourcefire common stock in lieu of receiving the merger consideration if the merger is completed, but only if they comply with all applicable requirements of Delaware law. This value could be more than, the same as, or less than the merger consideration. Any holder of Sourcefire common stock intending to exercise appraisal rights, among other things, must submit a written demand for appraisal to us prior to the vote on the proposal to adopt the merger agreement and must not vote or otherwise submit a proxy in favor of adoption of the merger

 

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agreement and must otherwise strictly comply with all of the procedures required by Delaware law. The relevant provisions of the DGCL are included as Annex D to this proxy statement and are incorporated by reference into this proxy statement. You are encouraged to read these provisions carefully and in their entirety. Moreover, due to the complexity of the procedures for exercising the right to seek appraisal, stockholders who are considering exercising such rights are encouraged to seek the advice of legal counsel. Failure to strictly comply with the provision of Delaware law will result in loss of the right of appraisal.

Additional Information (page 92)

You can find more information about Sourcefire in the periodic reports and other information we file with the U.S. Securities and Exchange Commission, which we refer to as the SEC. The information is available at the SEC’s public reference facilities and at the website maintained by the SEC at www.sec.gov. For a more detailed description of the additional information available, see “Where You Can Find More Information” beginning on page 92.

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER

AND THE SPECIAL MEETING OF STOCKHOLDERS

The following questions and answers address briefly some questions you may have regarding the special meeting and the proposed merger. These questions and answers may not address all questions that may be important to you as a stockholder of Sourcefire. Please refer to the more detailed information contained elsewhere in this proxy statement, including the annexes and the documents we refer to in this proxy statement.

 

Q: Why am I receiving this proxy statement?

 

A: You are receiving this proxy statement because you have been identified as a stockholder of Sourcefire as of the close of business on the record date for the determination of stockholders entitled to notice of the special meeting. This proxy statement contains important information about the merger and the special meeting of stockholders, and you should read this proxy statement carefully.

The Merger

 

Q: What is the proposed transaction for which I am being asked to vote?

 

A: You are being asked to vote on the adoption of the merger agreement. The merger agreement provides that at the effective time of the merger, merger sub will merge with and into Sourcefire, with Sourcefire surviving the merger as a wholly-owned subsidiary of Cisco. After the merger, Sourcefire will cease to be a publicly traded company and will be a wholly-owned subsidiary of Cisco. As a result, you will no longer have any rights as a Sourcefire stockholder, including but not limited to the fact that you will no longer have any interest in our future earnings or growth, if any. Following completion of the merger, shares of Sourcefire common stock will no longer be listed on NASDAQ and the registration of such shares under the Securities and Exchange Act of 1934, as amended, which we refer to as the Exchange Act, is expected to be terminated.

Please see “Proposal No. 1 — Adoption of the Merger Agreement — The Merger Agreement” beginning on page 63 for a more detailed description of the merger and the merger agreement. A copy of the merger agreement is attached to this proxy statement as Annex A.

 

Q: What happens if the merger is not completed?

 

A: If the merger agreement is not adopted by our stockholders, or if the merger is not completed for any other reason, our stockholders will not receive any payment for their Sourcefire common stock pursuant to the merger agreement. Instead, we will remain a public company and our common stock will continue to be registered under the Exchange Act and listed and traded on NASDAQ. Under specified circumstances, we may be required to pay Cisco a termination fee. See “Proposal No. 1 — Adoption of the Merger Agreement — The Merger Agreement — Termination Fees” beginning on page 80.

 

Q: Am I entitled to demand appraisal rights under the DGCL instead of receiving the merger consideration for my shares of Sourcefire common stock?

 

A: Yes. As a holder of Sourcefire common stock, you are entitled to demand appraisal rights under the DGCL in connection with the merger if you take certain actions and meet certain conditions. See “Proposal No. 1 — Adoption of the Merger Agreement — Appraisal Rights” beginning on page 55.

 

Q: When is the merger expected to be completed?

 

A: The parties to the merger agreement are working to complete the merger as quickly as possible. In order to complete the merger, the Company must obtain the stockholder approval described in this proxy statement and the other closing conditions under the merger agreement must be satisfied or waived. The parties to the merger agreement currently expect to complete the merger in the fourth quarter of 2013, although the Company cannot assure completion by any particular date, if at all. Because the merger is subject to a number of conditions, the exact timing of the merger cannot be determined at this time.

 

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The Special Meeting

 

Q: When and where is the special meeting?

 

A: The special meeting will be held on October 7, 2013 at the SpringHill Suites Columbia, 7055 Minstrel Way, Columbia, Maryland 21046, at 10:00 a.m., Eastern time.

 

Q: What other proposals are being presented at the special meeting?

 

A: In addition to the merger proposal, Sourcefire stockholders will be asked to vote on the following proposals at the special meeting:

 

   

approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement (Proposal No. 2); and

 

   

approval, on an advisory (non-binding) basis, of the “golden parachute” compensation arrangements that may be paid or become payable to our named executive officers in connection with the merger and the agreements pursuant to which such compensation may be paid or become payable (Proposal No. 3).

 

Q: How does Sourcefire’s board of directors recommend that I vote?

 

A: Our board of directors unanimously recommends that you vote your shares:

 

   

FOR” the adoption of the merger agreement (Proposal No. 1);

 

   

FOR” the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies (Proposal No. 2); and

 

   

FOR” the approval, on an advisory (non-binding) basis, of the “golden parachute” compensation arrangements that may be paid or become payable to our named executive officers in connection with the merger and the agreements pursuant to which such compensation may be paid or become payable (Proposal No. 3).

 

Q: Who is entitled to vote at the special meeting?

 

A: All stockholders of record as of the close of business on August 30, 2013, the record date for the determination of stockholders entitled to vote at the special meeting, are entitled to vote at the special meeting. On that date 31,597,374, shares of Sourcefire common stock were issued and outstanding.

As of the record date for the determination of stockholders entitled to vote at the special meeting, our executive officers and directors held an aggregate of 705,898 shares of Sourcefire common stock (excluding options and RSUs), which represented approximately 2.2% of all shares of Sourcefire common stock issued and outstanding on the record date.

 

Q: What vote is required to approve each proposal?

 

A: The adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of Sourcefire common stock on the record date for the determination of stockholders entitled to vote at the special meeting. If you do not submit a proxy or voting instructions or do not vote in person at the special meeting, or at any adjournment or postponement thereof, or if you “ABSTAIN” from voting on the proposal to adopt the merger agreement, the effect will be the same as a vote “AGAINST” the proposal to adopt the merger agreement. Pursuant to a Voting Agreement dated July 22, 2013, certain Sourcefire directors who are owners of approximately 1.9% of our outstanding shares of common stock have agreed to vote their Sourcefire shares in favor of adoption of the merger agreement and against any proposal made in opposition to or in competition with the merger.

Approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies and the non-binding proposal regarding “golden parachute” compensation

 

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arrangements each require the affirmative vote of a majority of the votes cast on that proposal at the special meeting. Assuming a quorum is present at the special meeting, abstentions, failures to vote and “broker non-votes” will have no effect on the outcome of each such proposal.

 

Q: Can I attend the special meeting? What do I need for admission?

 

A: You are entitled to attend the special meeting if you were a stockholder of record or a beneficial owner as of the close of business on August 30, 2013 (the record date) or you hold a valid legal proxy for the special meeting. If you are a stockholder of record, your name will be verified against the list of stockholders of record prior to your being admitted to the special meeting. If you are a beneficial owner, you will need to provide proof of beneficial ownership on the record date in order to be admitted to the special meeting, such as a brokerage account statement showing that you owned Sourcefire common stock as of the record date, a voting instruction form provided by your bank, broker, trust or other nominee, or other similar evidence of ownership as of the record date, including a valid “legal proxy” from your bank, broker, trust or other nominee. You should also be prepared to present photo identification for admission. If you do not provide photo identification or comply with the other procedures outlined above upon request, you may not be admitted to the special meeting.

 

Q: How can I vote my shares in person at the special meeting?

 

A: All stockholders of record and stockholders who hold their shares through a bank, broker, trust or other nominee, are invited to attend the special meeting and vote their shares in person.

If your shares of Sourcefire common stock are registered directly in your name with our transfer agent, Continental Stock Transfer and Trust Co., you are considered the stockholder of record with respect to those shares. If you are a stockholder of record as of the close of business on the record date for the determination of stockholders entitled to vote at the meeting, you have the right to vote your shares in person at the special meeting. If you choose to do so, you can vote at the special meeting using the written ballot that will be provided at the special meeting or you can complete, sign and date the enclosed proxy card you received with this proxy statement and submit it at the special meeting.

If your shares are held in a stock brokerage account or by a bank, broker, trust or other nominee (that is, in “street name”) rather than directly in your own name with our transfer agent, you are considered a beneficial owner of your shares and this proxy statement is being forwarded to you by your bank, broker, trust or other nominee. As a beneficial owner, you may attend the special meeting and vote your shares in person at the special meeting only if you obtain a “legal proxy” from the bank, broker, trust or other nominee that holds your shares giving you the right to vote such shares at the special meeting.

Even if you plan to attend the special meeting, we recommend that you submit your proxy or voting instructions in advance of the special meeting as described below so that your vote will be counted if you later decide not to attend the special meeting.

 

Q: How can I submit my proxy or voting instructions?

 

A: Whether you are a stockholder of record or a beneficial owner, you may direct how your shares are voted without attending the special meeting. If you are a stockholder of record, you may submit a proxy to direct how your shares are voted at the special meeting, or at any adjournment or postponement thereof. Your proxy can be submitted by mail by completing, signing and dating the proxy card you received with this proxy statement and then mailing it in the enclosed prepaid envelope. Stockholders of record may also submit a proxy over the internet or by telephone by following the instructions provided in the proxy card you received with this proxy statement. If you are a beneficial owner, you must submit voting instructions to your bank, broker, trust or other nominee in order to authorize how your shares are voted at the special meeting, or at any adjournment or postponement thereof. Please follow the instructions provided by your bank, broker, trust or other nominee.

 

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Submitting a proxy or voting instructions will not affect your right to vote in person should you decide to attend the special meeting, although beneficial owners must obtain a “legal proxy” from the bank, broker, trust or other nominee that holds their shares giving them the right to vote such shares at the special meeting in order to vote in person at the special meeting.

If you need assistance voting your shares, please contact our proxy solicitor, D.F. King & Co., Inc. at (800) 967-4612 (toll free).

 

Q: What does it mean if I received more than one set of proxy materials?

 

A: If you received more than one set of proxy materials, it means that you hold shares of Sourcefire common stock in more than one account. For example, you may own your shares in various forms, including jointly with your spouse, as trustee of a trust or as custodian for a minor. To ensure that all of your shares are voted, please provide a proxy or voting instructions for each account for which you received proxy materials.

 

Q: How will my shares be voted if I do not provide specific voting instructions in the proxy or voting instruction form I submit?

 

A: If you submit a proxy or voting instructions but do not indicate your specific voting instructions on one or more of the proposals to be presented at the special meeting, your shares will be voted as recommended by our board of directors on those proposals.

 

Q: What is the deadline for voting my shares?

 

A: If you are a stockholder of record, your proxy must be received by telephone or the internet by 11:59 p.m. Eastern time on October 6, 2013 in order for your shares to be voted at the special meeting. However, if you are a stockholder of record, you may instead mark, sign, date and return the enclosed proxy card, which must be received before the polls close at the special meeting, in order for your shares to be voted at the special meeting. If you are a beneficial owner, please read the voting instructions provided by your bank, broker, trust or other nominee for information on the deadline for voting your shares.

 

Q: What is a quorum?

 

A: The presence in person or by proxy of the holders of a majority in voting power of the outstanding shares of Sourcefire common stock entitled to vote at the special meeting as of the close of business on the record date will constitute a quorum for purposes of the special meeting, allowing business to be properly conducted at the meeting. Abstentions and “broker non-votes,” if any, are counted as present for the purpose of determining whether a quorum is present.

 

Q: Why am I being asked to cast a non-binding, advisory vote to approve the “golden parachute” compensation arrangements that certain Sourcefire executive officers will or may receive in connection with the merger?

 

A: In accordance with new rules adopted by the SEC in 2011, we are required to provide our stockholders with the opportunity to cast a non-binding, advisory vote on the compensation that will or may be payable to our named executive officers in connection with the merger.

 

Q: What will happen if our stockholders do not approve the “golden parachute” compensation arrangements at the special meeting?

 

A:

Approval of the “golden parachute” compensation arrangements payable under existing agreements that the named executive officers of Sourcefire will or may receive in connection with the merger is not a condition to completion of the merger. The vote with respect to the “golden parachute” compensation arrangements is an advisory vote and will not be binding on Cisco or us. Therefore, if the merger agreement is adopted by

 

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  our stockholders and completed, the “golden parachute” compensation arrangements will still be paid to our named executive officers as long as any other conditions applicable thereto are satisfied, regardless of the results of the vote.

 

Q: How will abstentions be counted?

 

A: Stockholders that abstain from voting on a particular proposal will not be counted as votes in favor of such proposal. Abstentions will have the same effect as votes “AGAINST” the proposal to adopt the merger agreement and will have no effect on the proposal to adjourn the special meeting, if necessary, to solicit additional proxies in the event there are not sufficient votes in favor of adoption of the merger agreement at the time of the special meeting or the proposal regarding “golden parachute” compensation arrangements.

 

Q: Why is my vote important?

 

A: If you do not submit a proxy or voting instructions or vote in person at the special meeting, it will be more difficult for us to obtain the necessary quorum to hold the special meeting. In addition, because the merger proposal must be approved by the holders of a majority of the outstanding shares of Sourcefire common stock on the record date for the special meeting, your failure to submit a proxy or voting instructions or to vote in person at the special meeting will have the same effect as a vote “AGAINST” Proposal No. 1, adoption of the merger agreement.

If you do not submit a proxy or voting instructions or do not vote in person at the special meeting, your shares will not be counted in determining the outcome of any of the other proposals at the special meeting.

 

Q: If my shares are held in “street name” by my broker, bank, trust or other nominee, will my broker, bank, trust or other nominee vote my shares for me if I do not submit voting instructions?

 

A: Shares held in “street name” by banks, brokers, trusts or other nominees who indicate on their proxies that they do not have discretionary authority to vote such shares as to a particular proposal will not be counted as votes in favor of such proposal. Such “broker non-votes” will have the same effect as votes “AGAINST” the proposal to adopt merger agreement and will have no effect on the proposal to adjourn the special meeting, if necessary, to solicit additional proxies in the event there are not sufficient votes in favor of adoption of the merger agreement at the time of the special meeting or the proposal regarding “golden parachute” compensation arrangements.

 

Q: May I change my vote after I have submitted my proxy or voting instructions?

 

A: Yes. If you are a stockholder of record, you may change your vote or revoke your proxy at any time before your proxy is voted at the special meeting by:

 

   

attending the meeting and voting in person;

 

   

delivering to the Secretary of Sourcefire an instrument revoking the proxy; or

 

   

properly delivering another proxy on a later date prior to 11:59 p.m. Eastern time on October 6, 2013, by using one of the methods described above under “How can I submit my proxy or voting instructions?”.

Attendance at the special meeting in and of itself, without voting in person at the meeting, will not cause your previously granted proxy to be revoked.

Please note that if you hold your shares in “street name” through a broker, bank, trust or other nominee and you have instructed your broker, bank, trust or other nominee to vote your shares, the above-described options for changing your vote do not apply, and instead, you must follow the instructions received from your broker, bank, trust or other nominee to change your vote.

 

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Q: What happens if I transfer my shares of common stock after the record date?

 

A: The record date for the determination of stockholders entitled to vote at the special meeting is earlier than the effective time of the merger. Therefore, transferors of shares of Sourcefire common stock after the record date but prior to the consummation of the merger will retain their right to vote at the special meeting, but the right to receive the merger consideration will transfer with the shares.

 

Q: Will any proxy solicitors be used in connection with the special meeting?

 

A: Yes. To assist in the solicitation of proxies, we have engaged D.F. King & Co., Inc.

 

Q: What do I need to do now?

 

A: We urge you to read carefully this proxy statement, including its annexes and the documents we refer to in this proxy statement, and then mail your completed, dated and signed proxy card or voting instruction form in the enclosed prepaid return envelope as soon as possible, or submit your proxy or voting instruction via the internet or by phone in accordance with the instructions included with this proxy statement and the enclosed proxy card or voting instruction form, so that your shares can be voted at the special meeting.

 

Q: Should I send in my stock certificates now?

 

A: No. If you hold certificates of Sourcefire common stock, you will be sent a letter of transmittal promptly after the completion of the merger, describing how you may exchange your shares of Sourcefire common stock for the merger consideration. Please do NOT return your stock certificate(s) with your proxy.

 

Q: Who can help answer my questions?

 

A: If you have any questions or need further assistance in voting your shares of Sourcefire common stock, or if you need additional copies of this proxy statement or the proxy card, please contact D.F. King & Co., Inc., our proxy solicitor, in writing at D.F. King & Co., Inc., 48 Wall Street, 22nd Floor, New York, NY 10005, or by telephone at (800) 967-4612 (banks and brokers call collect at (212) 269-5550).

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This proxy statement and the documents to which we refer you in this proxy statement contain “forward-looking statements” as that term is defined by the Private Securities Litigation Reform Act of 1995, we which we refer to as the Act, and the federal securities laws. Any statements that do not relate to historical or current facts or matters are forward-looking statements. Examples of forward-looking statements include information concerning possible or assumed future results of operations of Sourcefire, the expected completion and timing of the merger and other information relating to the merger. You can identify some of the forward-looking statements by the use of forward-looking words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “may” and other similar expressions, although not all forward-looking statements contain these identifying words.

In addition to other factors and matters contained or incorporated in this document, we believe the following factors could cause actual results to differ materially from those discussed in the forward-looking statements:

 

   

the inability to complete the merger due to the failure to obtain stockholder approval or failure to satisfy any other conditions to the completion of the merger, including receipt of required regulatory approvals;

 

   

business uncertainty and contractual restrictions during the pendency of the merger;

 

   

the amount of the costs, fees, expenses and charges related to the merger;

 

   

diversion of management’s attention from ongoing business concerns;

 

   

the effect of the announcement of the merger on our business, operating results and business relationships, including our ability to retain key employees;

 

   

the possible adverse effect on our business and the price of our common stock if the merger is not completed in a timely manner or at all; and

 

   

other risks and uncertainties applicable to our business set forth in our filings with the SEC. See “Where You Can Find More Information” beginning on page 92.

Forward-looking statements are based on the information currently available and are applicable only as of the date on which such statements were made. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements. You are urged to carefully review the disclosures we make in this proxy statement and the documents to which we refer you in this proxy statement concerning risks and other factors that may affect us, including those made in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on February 28, 2013, and updated in our subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements are qualified in their entirety by these cautionary statements, which are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. We caution you that any forward-looking statements made in this proxy statement or the documents to which we refer you in this proxy statement are not guarantees of future performance and that you should not place undue reliance on any of such forward-looking statements, which speak only as of the date of this document. There may be additional risks of which we are currently unaware or that we currently deem immaterial. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances, except as required by law.

 

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INFORMATION ABOUT THE SPECIAL MEETING OF STOCKHOLDERS

This section contains information about the special meeting of stockholders.

Together with this proxy statement, we are sending you a notice of special meeting of stockholders and a form of proxy that is being solicited by our board of directors for use at the special meeting. The information and instructions contained in this section are addressed to Sourcefire stockholders and all references to “you” or “stockholders” in this section and elsewhere in the proxy statement should be understood to be addressed to Sourcefire stockholders.

Date, Time and Place of the Special Meeting of Stockholders

This proxy statement is being furnished by our board of directors in connection with the solicitation of proxies from holders of Sourcefire common stock for use at the special meeting of stockholders to be held on October 7, 2013 at the SpringHill Suites Columbia, 7055 Minstrel Way, Columbia, Maryland 21046, at 10:00 a.m., Eastern time, and at any adjournment or postponement of the special meeting, if applicable.

Purpose of the Special Meeting of Stockholders

The following proposals will be considered and voted upon at the special meeting of stockholders:

 

   

adoption of the merger agreement, as such agreement may be amended (Proposal No. 1);

 

   

approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement (Proposal No. 2); and

 

   

approval, on an advisory (non-binding) basis of the “golden parachute” compensation arrangements that may be paid or become payable to our named executive officers in connection with the merger and the agreements pursuant to which such compensation may be paid or become payable (Proposal No. 3).

Recommendation of Our Board of Directors

Our board of directors has unanimously determined that the merger agreement and the consummation of the transactions contemplated thereby, including the merger, are fair to, advisable and in the best interests of Sourcefire and our stockholders and unanimously recommends that stockholders vote “FOR” Proposal No. 1, adoption of the merger agreement, “FOR” Proposal No. 2, approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies, and “FOR” Proposal No. 3, approval, on an advisory (non-binding) basis, of the “golden parachute” compensation arrangements that may be paid or become payable to our named executive officers in connection with the merger and the agreements pursuant to which such compensation may be paid or become payable.

For more information concerning the recommendation of our board of directors with respect to the merger, see “Proposal No. 1 — Adoption of the Merger Agreement — Recommendation of Our Board of Directors as to the Merger; Reasons for the Merger” beginning on page 30.

Record Date and Outstanding Shares

The record date for the determination of stockholders entitled to notice of and to vote at the special meeting of stockholders is August 30, 2013. Only stockholders of record of Sourcefire common stock as of the close of business on the record date will be entitled to notice of, and to vote at, the special meeting of stockholders and any adjournments or postponements thereof. At the close of business on the record date, there were 31,597,374 shares of Sourcefire common stock issued and outstanding.

 

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Quorum Requirement

The Company’s Sixth Amended and Restated Bylaws provide that the presence in person or by proxy of the holders of a majority in voting power of the outstanding shares of Sourcefire common stock entitled to vote at the special meeting as of the close of business on the record date will constitute a quorum for purposes of the special meeting. Your shares of Sourcefire common stock will be counted for purposes of determining whether a quorum exists for the special meeting if you return a signed and dated proxy card or voting instruction form, if you submit a proxy or voting instructions by telephone or over the internet or if you vote in person at the special meeting (and if you are a beneficial owner of shares of Sourcefire common stock and you have obtained a legal proxy from your broker, bank, trust or other nominee giving you the right to vote your shares at the special meeting), even if you “ABSTAIN” from voting on the proposals.

Votes for and against, abstentions and “broker non-votes” will be counted for purposes of determining the presence or absence of a quorum. A “broker non-vote” occurs when (i) your shares are held by a broker, bank, trust or other nominee (we refer to those organizations collectively as “broker”), in nominee name or otherwise, exercising fiduciary powers (typically referred to as being held in “street name”) and (ii) a broker submits a proxy card for your shares of Company common stock held in “street name,” but does not vote on a particular proposal because the broker has not received voting instructions from you and does not have the authority to vote on that matter without instructions. Brokers will not have authority to vote with respect to the proposal to adopt the merger agreement, the adjournment proposal or the non-binding compensation proposal.

If a quorum is not present at the special meeting of stockholders, we expect that the special meeting will be adjourned to a later date.

Vote Required

Each share of Sourcefire common stock outstanding on the record date will be entitled to one vote, in person or by proxy, on each proposal submitted for the vote of stockholders.

Proposal No. 1, adoption of the merger agreement, requires the affirmative vote of the holders of a majority of the outstanding shares of Sourcefire common stock on the record date. If you do not submit a proxy or voting instructions or do not vote in person at the special meeting, and hence have failed to vote, or if you “ABSTAIN” from voting on the adoption of the merger agreement, the effect will be the same as a vote “AGAINST” the adoption of the merger agreement.

Proposal No. 2, approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement, requires the affirmative vote of a majority of the votes cast on the matter by holders of our common stock present in person or represented by proxy at the special meeting. Assuming a quorum is present at the special meeting, abstentions, failures to vote and “broker non-votes” will have no effect on the outcome of the adjournment proposal.

Proposal No. 3, approval, on an advisory (non-binding) basis, of the “golden parachute” compensation arrangements that may be paid or become payable to our named executive officers in connection with the merger and the agreements pursuant to which such compensation may be paid or become payable, requires the affirmative vote of a majority of the votes cast on the matter by holders of our common stock present in person or represented by proxy at the special meeting. Assuming a quorum is present at the special meeting, abstentions, failures to vote and “broker non-votes” will have no effect on the outcome of the non-binding compensation proposal. This is an advisory vote only and will not be binding on the Company or the board.

 

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Shares Held by Directors and Executive Officers

As of the close of business on the record date, our directors and executive officers held and are entitled to vote at the special meeting 705,898 shares of our common stock (excluding options and RSUs), representing approximately 2.2% of the aggregate common stock issued and outstanding on that date.

Voting Procedures

Whether or not you plan to attend the special meeting and regardless of the number of shares you own, your careful consideration of, and vote on, the merger agreement is important and we encourage you to vote promptly.

If you are a stockholder with shares registered in your name, you may vote in person at the special meeting or by submitting a proxy using one of the following three methods:

 

   

Vote via the Internet. Go to the web address www.proxyvote.com and follow the instructions for internet voting shown on the proxy card mailed to you. If you vote via the internet, you should be aware that there may be incidental costs associated with electronic access, such as your usage charges from your internet access providers and telephone companies, for which you will be responsible.

 

   

Vote by Telephone. Dial (800) 690-6903 and follow the instructions for telephone voting shown on the proxy card mailed to you.

 

   

Vote by Proxy Card. If you do not wish to vote by the internet or by telephone, please complete, sign, date and mail the enclosed proxy card in the envelope provided. If you vote via the internet or by telephone, please do not mail your proxy card.

The internet and telephone voting procedures are designed to authenticate your identity and to allow you to vote your shares for the matters before our stockholders as described in this proxy statement and confirm that your voting instructions have been properly recorded.

Votes submitted by telephone or via the internet for the matters before our stockholders as described in the proxy statement must be received by 11:59 p.m., Eastern Time, on October 6, 2013. Votes submitted by proxy card must be received before the polls close at the special meeting, in order for your shares to be voted at the special meeting.

If you are a stockholder with shares held in “street name,” which means your shares are held in an account at a broker, bank, trust or other nominee, you must follow the instructions from your broker, bank, trust or other nominee in order to vote.

Attending and Voting at the Special Meeting of Stockholders

Only stockholders of record as of the close of business on the record date for the determination of stockholders entitled to vote at the special meeting, authorized proxy holders and our guests may attend the special meeting. If you are a stockholder of record as of the close of business on the record date and you attend the special meeting, you may vote in person by completing a ballot at the special meeting even if you already have signed, dated and returned a proxy card or submitted a proxy by telephone or over the internet. If your shares of common stock are held in the name of a bank, broker, trust or other nominee, you may not vote your shares of common stock in person at the special meeting unless you obtain a “legal proxy” from the record holder giving you the right to vote such shares of common stock. In addition, whether you are a stockholder of record or a beneficial owner, you must bring a form of personal photo identification with you in order to be admitted to the special meeting. We reserve the right to refuse admittance to anyone without proper proof of share ownership or proper photo identification.

 

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Proxies

Each copy of this proxy statement mailed to holders of Sourcefire common stock is accompanied by a proxy card or voting instruction form with instructions for authorizing how your shares are to be voted at the special meeting, or at any adjournment or postponement thereof. If you hold stock in your name as a stockholder of record, you may submit a proxy to instruct how your shares are to be voted at the special meeting by (a) completing, signing, dating and returning the enclosed proxy card, (b) calling the telephone number on your proxy card or (c) following the internet proxy submission instructions on your proxy card to ensure that your vote is counted at the special meeting, or at any adjournment or postponement thereof, regardless of whether you plan to attend the special meeting. Instructions for submitting a proxy by telephone or over the internet are printed on the proxy card. In order to submit a proxy via the internet, please have your proxy card available so you can input the required information from the card.

If you hold your Sourcefire common stock in street name through a bank, broker, trust or other nominee, you must submit voting instructions to your bank, broker, trust or nominee in accordance with the instructions you have received from your bank, broker, trust or other nominee.

All shares represented by valid proxies that are received through this solicitation, and that are not revoked, will be voted in accordance with the instructions on the proxy card. If you make no specification on your proxy card as to how you want your shares voted before signing and returning it, your proxy will be voted in accordance with the recommendation of our board of directors on each of the proposals indicated above.

Revocation of Proxies

Submitting a proxy on the enclosed form does not preclude a stockholder from voting in person at the special meeting. A stockholder of record may revoke a proxy by attending the meeting and voting in person, delivering to the Secretary of Sourcefire an instrument revoking the proxy, or properly delivering another proxy on a later date prior to 11:59 p.m. Eastern time on October 6, 2013, by mail, the internet or telephone. A stockholder of record may revoke a proxy by any of these methods, regardless of the method used to deliver the stockholder’s previous proxy. Attendance at the special meeting without voting will not itself revoke a proxy. If your shares of Company common stock are held in street name, you must contact your broker, bank, trust or other nominee to revoke your proxy.

Solicitation of Proxies

This proxy solicitation is being made by the Company on behalf of the board of directors and will be paid for by the Company. The Company’s directors and officers and employees may also solicit proxies by personal interview, mail, e-mail, telephone, facsimile or other means of communication. These persons will not be paid additional remuneration for their efforts. The Company has also retained D.F. King & Co., Inc. to assist in the solicitation of proxies for a fee of $12,500 plus the reimbursement of out-of-pocket expenses incurred on behalf of the Company.

Questions and Additional Information

If you have questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please call D.F. King & Co., Inc., our proxy solicitor, toll-free at (800) 967-4612 (banks and brokers call collect at (212) 269-5550).

Your vote is important. Please sign, date and return your proxy card or voting instruction form or submit your proxy and/or voting instructions by telephone or over the internet promptly.

 

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PARTIES TO THE MERGER

Sourcefire, Inc.

Sourcefire, Inc., a Delaware corporation, which we refer to as Sourcefire, delivers intelligent cybersecurity technologies. Our comprehensive portfolio of solutions enables a diverse customer base that includes commercial enterprises and government agencies to manage and minimize cybersecurity risks. From our industry-leading next-generation network security platform to our advanced malware protection, Sourcefire’s threat-centric approach provides customers with Agile Security® that delivers protection Before, During and After™ an attack. We also manage the security industry’s leading open source initiative, Snort®, an intrusion prevention technology that is incorporated into the software of our comprehensive Intrusion Detection and Prevention System. In addition to commercial and open source network security products, Sourcefire offers a variety of services to help customers install and support our solutions. Available services include Technical Support, Professional Services, Incident Response, Education & Certification, and our Vulnerability Research Team (VRT).

Sourcefire was incorporated in Delaware in December 2001, and the mailing address for its principal executive offices is 9770 Patuxent Woods Drive, Columbia, Maryland 21046. Its telephone number is (410) 290-1616. Sourcefire’s website is located at www.sourcefire.com.

Cisco Systems, Inc.

Cisco Systems, Inc., a California corporation, which we refer to as Cisco, together with its subsidiaries, designs, manufactures, and sells Internet Protocol (IP) based networking and other products related to the communications and information technology (IT) industry and provides services associated with these products and their use. Cisco provides a broad line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Cisco’s products are designed to transform how people connect, communicate, and collaborate. Cisco’s products are utilized at enterprise businesses, public institutions, telecommunications companies and other service providers, commercial businesses, and personal residences. Cisco conducts its business globally and is organized into the following three geographic segments: The Americas; Europe, Middle East, and Africa; and Asia Pacific, Japan, and China.

Cisco was incorporated in California in December 1984, and the mailing address for its principal executive offices is 170 West Tasman Drive, San Jose, California 95134-1706. Its telephone number is (408) 526-4000. Cisco’s website is located at www.cisco.com.

Shasta Acquisition Corp.

Shasta Acquisition Corp., which we refer to as merger sub, is a Delaware corporation and wholly-owned subsidiary of Cisco that was formed solely for the purpose of consummating the merger described below and the other related transactions in connection with the merger. Shasta Acquisition Corp. was incorporated on July 16, 2013 and has not conducted any business operations. The mailing address for its principal executive offices is 170 West Tasman Drive, San Jose, California 95134-1706. Its telephone number is (408) 526-4000.

 

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PROPOSAL NO. 1 — ADOPTION OF THE MERGER AGREEMENT

The following is a description of the material aspects of the merger, including the merger agreement. While we believe that the following description covers the material terms of the merger, the description may not contain all of the information that may be important to you. We encourage you to read carefully this entire proxy statement, including the merger agreement attached to this proxy statement as Annex A, for a more complete understanding of the merger.

Overview

The merger agreement, dated July 22, 2013, among Cisco, merger sub and Sourcefire provides for the merger of merger sub, a newly-formed, wholly-owned subsidiary of Cisco, with and into Sourcefire, with Sourcefire surviving the merger as a wholly-owned subsidiary of Cisco. Upon consummation of the merger, each share of Sourcefire common stock issued and outstanding, other than shares held by Sourcefire, Cisco or merger sub and shares held by stockholders who properly demand their appraisal rights under Delaware law, will automatically be converted into the right to receive the merger consideration.

Background of the Merger

Our senior management and our board of directors, in the ordinary course of business, review Sourcefire’s long-term strategic plan with the goal of maximizing stockholder value. As part of this ongoing process, we and our board of directors have periodically evaluated potential strategic opportunities relating to Sourcefire’s businesses and engaged in discussions with third parties. From time to time, members of our management team have discussed the marketplace and strategic landscape with outside financial advisors.

On January 21, 2013, Martin Roesch, then our interim chief executive officer, had a meeting with Chris Young, senior vice president of the security group at Cisco, to discuss the Company and our position in the security marketplace.

On February 27, 2013, in connection with an industry conference, and at Cisco’s request, we had preliminary discussions with Cisco regarding its interest in a potential commercial or strategic relationship with the Company.

On March 4, 2013, Cisco sent a draft confidentiality agreement to the Company, pursuant to which Cisco would be provided access to certain of the Company’s non-public information. We negotiated the terms of the confidentiality agreement with Cisco during the week that followed but were unable to come to agreement on certain terms, including a standstill provision.

On March 7, 2013, we sent a draft confidentiality agreement to a strategic party (whom we refer to as Strategic Party A) that was introduced to us by an outside financial advisor, pursuant to which Strategic Party A would be provided certain of the Company’s non-public information.

On March 11 and 12, 2013, members of our senior management team met with representatives of Cisco to discuss further a potential commercial or strategic relationship with the Company.

On March 14, 2013, our board of directors had a telephonic meeting, at which representatives from management were present. During the meeting, our board of directors discussed the status of our conversations with Cisco and Strategic Party A.

On April 8, 2013, John C. Becker, who had served on our board of directors since 2008, was appointed our chief executive officer, replacing our then interim chief executive officer, Mr. Roesch. Shortly thereafter, Mr. Becker had his initial discussions with Cisco concerning a potential strategic relationship with us.

 

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In mid-April 2013, at the direction of our senior management, an outside financial advisor to the Company contacted Strategic Party A to discuss its interest in a potential strategic transaction.

On April 15, 2013, a representative of Cisco contacted Mr. Becker to discuss Cisco’s interest in a potential strategic relationship with us. Further discussions between Cisco and Mr. Becker occurred on April 18, 2013.

On April 18, 2013, at the direction of our board of directors, we entered into a confidentiality agreement with Strategic Party A to provide Strategic Party A access to certain of our non-public information.

On April 24, 2013, our board of directors met with our senior management and reviewed the status of the strategic conversations with Cisco and Strategic Party A and the process for continuing those discussions.

On April 25, 2013, a representative of Cisco and Mr. Becker discussed a potential strategic relationship.

On April 29, 2013, Messrs. Becker and Roesch and other members of our senior management team met with representatives of Strategic Party A in Annapolis, Maryland, to discuss a potential commercial or strategic relationship with the Company.

On May 7, 2013, Mr. Becker and Todd Headley, our chief financial officer, met with Mr. Young and Derek Idemoto, now Cisco’s vice president of business development, to discuss Cisco’s interest in a potential strategic relationship.

On May 10, 2013, at the direction of our board of directors, we entered into a confidentiality agreement with Cisco to provide Cisco access to certain of our non-public information.

Also on May 10, 2013, members of our senior management team held a conference call with representatives of Strategic Party A to discuss Strategic Party A’s overall interest in a potential strategic discussion without identifying specific terms for a transaction.

On May 16 and 17, 2013, Messrs. Becker and Roesch and other members of our senior management team met with representatives of Cisco, including John Chambers, chairman and chief executive officer, Padmasree Warrior, chief technology and strategy officer, and Hilton Romanski, now Cisco’s senior vice president and head of business development, at Cisco’s offices in San Jose, California, to discuss our potential business relationship. At this meeting, members of Cisco’s senior management expressed an interest in a potential strategic transaction.

On May 19, 2013, Mr. Becker had discussions with representatives of Cisco, to follow up on the discussions that took place earlier in the week.

On May 23, 2013, we received a written indication of interest from Cisco, offering to acquire all of our outstanding shares of common stock at a price of $70.00 per share, which at the time represented a 27% premium over our last closing stock price. In connection with its indication of interest, Cisco requested that the Company agree to an exclusivity period during which the Company would be unable to pursue opportunities with other potential strategic partners.

On May 28, 2013, our board of directors had a telephonic meeting, at which representatives from management and Morrison & Foerster LLP (whom we refer to as Morrison & Foerster) were present. Morrison & Foerster reviewed with our board of directors the process for evaluating indications of interest as well as our board of directors’ fiduciary duties. Representatives from management provided an initial review of the major terms presented by the May 23, 2013 indication of interest from Cisco regarding a potential business combination, including Cisco’s request for exclusivity. Our board of directors discussed the indication of interest from Cisco, the engagement of a financial advisor and proposed continued preliminary discussions with other potential strategic partners.

 

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From May 29 to 31, 2013, Strategic Party A conducted an initial due diligence review with members of our senior management team.

From May 30 to June 3, 2013, representatives of Cisco and us held telephonic due diligence discussions.

On June 1, 2013, Mr. Becker had further discussions with Mr. Young regarding Cisco’s interest in a potential strategic transaction.

On June 6, 2013, our board of directors had a meeting, at which representatives from management, representatives of Qatalyst Partners and representatives of Morrison & Foerster, were present. Morrison & Foerster reviewed with our board of directors the process for evaluating indications of interest as well as our board of directors’ fiduciary duties. Our board of directors also discussed the qualifications and independence of Qatalyst Partners to serve as Sourcefire’s financial advisor in connection with our consideration of strategic opportunities. After the presentation and a discussion of the qualifications and independence of Qatalyst Partners, our board of directors determined to engage Qatalyst Partners as our financial advisor in connection with our consideration of strategic opportunities. Qatalyst Partners also presented to our board of directors information relating to possible strategic partners and the potential for a transaction with a financial acquirer. Qatalyst Partners expressed its view that, given the respective resources and acquisition strategies of other potential acquirers, Cisco and Strategic Party A would likely be the parties most capable of completing a transaction on financial terms and in a timeframe acceptable to the Company. Management informed our board of directors of the status of discussions with both parties, including Cisco’s request for exclusivity. Following the presentation by Qatalyst Partners and discussion, our board of directors believed that a transaction with financial parties was unlikely at the valuations that the board would be seeking from any counter-party. Our board of directors further concluded that the potential strategic fit was likely as great or greater with Cisco and Strategic Party A as compared to other potential strategic parties. Based on the discussion at the meeting, our board of directors determined that Cisco and Strategic Party A were the most likely counterparties for a strategic transaction at the present time. Our board of directors also concluded that the risks to our strategy, including providing competitive information to additional parties, and disruption to our operations and long-term value in the event a transaction with a strategic party was not consummated were greater than the likely benefit from expanding the list of potential acquirers who would be contacted. For these reasons, our board of directors instructed management and representatives of Qatalyst Partners to focus on Cisco and Strategic Party A, and not contact additional counterparties at that time. The board of directors also instructed management and representatives of Qatalyst Partners to encourage Cisco to improve on the terms of its proposal, including an increase in the offer price, and to continue to advance discussions with both Cisco and Strategic Party A.

On June 6, 2013, Strategic Party A informed the Company that it would not be in a position to determine whether there was a strategic fit until later in the month.

On June 7 and 11, 2013, 2013, representatives of Qatalyst Partners, pursuant to the board’s directive, requested that Cisco increase its offer price.

On June 13, 2013, at the direction of our board of directors and as part of continuing negotiations, representatives of Qatalyst Partners communicated to representatives of Cisco that our board of directors would consider accepting a proposed price of $85.00 per share.

Also on June 13, 2013, our board of directors held a telephonic meeting, at which management and representatives of Morrison & Foerster and representatives of Qatalyst Partners were present, to discuss the process for a strategic transaction. At the meeting, our board of directors discussed the interest from Cisco and Strategic Party A, including timing of further discussions with each party, strategy for engagement, and the next steps in the strategic process. Our board of directors reconsidered whether Cisco and Strategic Party A still remained the most likely counterparties for a strategic transaction. After discussion, including a discussion regarding potential additional strategic partners with representatives of Qatalyst Partners, our board of directors

 

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reaffirmed the decision to focus on Cisco and Strategic Party A and not expand the group of potential counterparties. Our board of directors authorized management to continue discussions with both Cisco and Strategic Party A.

On June 14, 2013, Mr. Becker contacted representatives of Strategic Party A in order to motivate Strategic Party A to make an offer by informing them that Sourcefire might soon be subject to an exclusivity period with another potential strategic partner. Representatives of Strategic Party A indicated that they would not be able to make an offer until Strategic Party A had conducted further due diligence and additional internal review.

On June 18, 2013, members of our senior management team and representatives of Qatalyst Partners met with representatives of Cisco at the offices of Morrison & Foerster in McLean, Virginia, as part of Cisco’s due diligence review.

Also on June 18, 2013, members of our senior management team held a conference call with representatives of Strategic Party A as part of Strategic Party A’s due diligence review.

On June 19, 2013, representatives of Qatalyst Partners discussed the potential transaction valuation, including aspects of the Projections (as described in “—Prospective Financial Information” beginning on page 33) and Cisco’s request for more information regarding the Projections, with Mr. Romanski.

On June 20, 2013, our board of directors had a telephonic meeting to review the status of the discussions with Cisco and Strategic Party A. Management and representatives from Morrison & Foerster and representatives of Qatalyst Partners were also present at the meeting. Management and representatives of Qatalyst Partners reported to our board of directors details of the discussions with Cisco and Strategic Party A and described the proposed timing of further discussions with each party and a strategy for engagement with Cisco and Strategic Party A. Our board of directors instructed management, representatives of Morrison & Foerster and representatives of Qatalyst Partners to continue to advance discussions with Cisco and Strategic Party A.

On June 20 and 21, 2013, Mr. Becker and other members of our management team met with representatives of Strategic Party A at the offices of Morrison & Foerster in McLean, Virginia, to discuss Strategic Party A’s continued interest in a possible strategic transaction with us.

On June 24, 2013, members of our management team met with representatives of Cisco in Raleigh, North Carolina, as part of Cisco’s due diligence review. Also on June 24, 2013, Mr. Headley and representatives of Qatalyst Partners held a conference call with representatives of Cisco as part of Cisco’s due diligence review.

On June 25 and 27, 2013, members of our senior management team and representatives of Strategic Party A met at the offices of Strategic Party A to continue discussions regarding Strategic Party A’s possible interest in a strategic transaction with us.

In late June, on several occasions, our representatives and Cisco discussed potential terms for a transaction, including the proposed price. Cisco reiterated throughout these discussions that it would only move forward if the Company were to agree to an exclusivity period.

On June 26, 2013, we received a revised written indication of interest from Cisco, offering to acquire all of our outstanding shares of common stock at a price of $75.50 per share, which at the time represented a 39% premium over our last closing stock price. Cisco indicated in its indication of interest that this would be its “best and final” offer and insisted that it would only move forward if the Company agreed to a 21-day exclusivity period.

On June 27, 2013, our board of directors met via teleconference, during which management reviewed with our board of directors the revised written indication of interest received from Cisco on June 26, 2013, with terms

 

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of a proposal more favorable to us, and informed the board that the terms of the proposal were contingent upon an exclusivity agreement being entered into between Cisco and us. Representatives of Qatalyst Partners reported to our board of directors that Cisco had indicated that the revised proposal was a “best and final” offer, and if we were to reject the offer, Cisco may disengage from the process and pursue other opportunities. Management also told our board of directors that Strategic Party A had been informed that we were considering exclusivity with another party. Representatives of Qatalyst Partners further indicated to our board that it had contacted Strategic Party A to request that it provide a proposal as soon as possible. Representatives of Morrison & Foerster briefed our board of directors on its fiduciary duties and obligations with respect to exploring strategic alternatives and representatives of Qatalyst Partners presented to our board of directors information regarding other selected transactions and other financial metrics, including a description of Cisco’s proposal. Our board of directors discussed the perceived relative levels of interest of Cisco and Strategic Party A, the consequences of agreeing to exclusive discussions with Cisco and the next steps in the strategic process. Our board of directors discussed the risk of competitive harm to us of including others in the existing process, the low likelihood that expanding the process would result in a superior bid on a timely basis, the risk of undermining the current proposal by expanding the process, and the potentially negative effect of expanding the process on our ongoing operations. Our board of directors determined that Cisco was unlikely to improve its “best and final” offer if we did not agree to enter into exclusivity and that we should negotiate an exclusivity agreement with Cisco. Accordingly, our board of directors authorized management and our advisors, pending a response from Strategic Party A regarding its ability to pursue a transaction, to request that Cisco increase its offer price in connection with our agreement to engage in strategic discussions with Cisco on an exclusive basis so that the parties could evaluate whether satisfactory terms could be agreed upon for a strategic transaction.

On June 28, 2013, members of our senior management team met with representatives of Strategic Party A at the offices of Strategic Party A as part of its due diligence review.

From June 28 to July 1, 2013, representatives from Qatalyst Partners discussed with Mr. Romanski the potential transaction valuation.

On July 2, 2013, Mr. Becker contacted representatives of Strategic Party A to determine if they were prepared to make an offer. Strategic Party A indicated that they would not be able to pursue a strategic transaction at that time.

Also on July 2, 2013, representatives of Qatalyst Partners contacted Cisco to discuss the Company’s willingness to consider entering into an exclusivity agreement with Cisco provided that Cisco improved the terms of its offer, including increasing the offer price. Later that day, Cisco agreed to raise its offer price to $76.00 per share, contingent on the Company entering into an exclusive negotiation period. Over the following two days the parties negotiated the terms of the exclusivity agreement and, on July 4, 2013, in connection with Cisco’s agreement to raise the offer price to $76.00 per share, we signed an exclusivity letter with Cisco, expiring on July 23, 2013.

On July 7, 2013, we received an initial draft of a merger agreement from Fenwick & West LLP (whom we refer to as Fenwick & West), counsel to Cisco. The initial draft proposed, among other things, that the Company would be required to pay a termination fee of 4% of the transaction consideration were it to terminate the merger agreement in certain circumstances.

On July 8, 9 and 10, 2013, members of our management team met with representatives of Cisco at the offices of Fenwick & West in San Francisco, California, as part of Cisco’s due diligence review.

On July 11, 2013, our board of directors held a telephonic meeting, at which management and representatives from Morrison & Foerster and representatives of Qatalyst Partners were present. During the meeting, management confirmed to our board of directors that as directed by the board, it had contacted Strategic Party A prior to entering into the exclusivity agreement with Cisco and that Strategic Party A had communicated

 

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that it was unable to pursue a strategic transaction with us at such time. Management provided our board of directors an update on our ongoing discussions with Cisco. Our board of directors discussed the interest from Cisco and the status of the process. Representatives of Morrison & Foerster provided an initial review of the major terms presented by the draft of the merger agreement provided by Cisco, including key terms and the proposed structure. During the meeting, representatives of Morrison & Foerster, representatives of Qatalyst Partners and our board of directors also discussed the possibility of requesting a “go-shop” period in the merger agreement. After considering the potential benefits and risks of making such a proposal, our board of directors determined instead to respond to Cisco’s termination fee proposal by including a bifurcated termination fee, pursuant to which the Company would be required to pay Cisco a termination fee of either 1% or 2% of the transaction value, depending, among other things, on when termination of the merger agreement occurred. Our board of directors instructed management, representatives of Morrison & Foerster and representatives of Qatalyst Partners to continue to engage in discussions with Cisco.

On July 12, 2013, Morrison & Foerster sent a revised draft of the merger agreement to Fenwick & West.

On July 12, 13 and 14, 2013, Mr. Becker and other members of our management team met with representatives of Cisco at the offices of Morrison & Foerster in McLean, Virginia, as part of Cisco’s due diligence review.

On July 14, 2013, we received initial drafts of the employment agreements for Messrs. Becker and Roesch. These employment agreements included, among other things, a benefits waiver, pursuant to which Messrs. Becker and Roesch were asked to waive their rights to severance and other benefits (including acceleration of vesting), and an equity agreement, pursuant to which Mr. Roesch was asked to agree to the imposition of new vesting restrictions on a portion of his vested Sourcefire options and vested Sourcefire shares.

On July 15, 2013 representatives of Morrison & Foerster and Fenwick & West participated in a telephone call to discuss certain key terms and structure of the proposed transaction.

On July 16, 2013, representatives of Morrison & Foerster and representatives of Fenwick & West continued to negotiate the terms of the merger agreement.

Also on July 16, 2013, our board of directors met via teleconference to discuss the status of negotiations and progress toward signing a potential strategic transaction with Cisco. Management and representatives of Morrison & Foerster were also present. Representatives of Morrison & Foerster provided our board of directors with an overview of the key terms of the merger agreement and the open issues. Management and our board of directors discussed the terms presented in the merger agreement. Our board of directors instructed management and representatives of Morrison & Foerster to continue to engage with Cisco to resolve the open issues and concerns.

Later on July 16, 2013, we received revised drafts of the merger agreement and voting agreement from Fenwick & West. In addition, on July 16, 2013, we received initial drafts of proposed employment agreements, including benefits waivers, for certain key employees and the following executive officers: Thomas McDonough, Todd Headley, Douglas McNitt and John Negron.

On July 18, 2013, our board of directors held a telephonic meeting, at which management and representatives from Morrison & Foerster and Qatalyst Partners were present. During the meeting, management reported on the status of negotiations with Cisco, the ongoing meetings between management and representatives of Cisco, and legal diligence matters. Representatives of Morrison & Foerster presented the key open issues in the merger agreement and our board of directors discussed such issues, among others, as the termination provisions and our rights to review unsolicited offers.

On July 19, 2013, representatives of Morrison & Foerster sent a revised draft of the merger agreement to Fenwick & West reflecting modifications requested by our board of directors.

 

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On July 20, 2013, representatives of Qatalyst Partners contacted Cisco to request that Cisco improve its offer, including a further increase in the offer price and improved terms for the transaction. Cisco indicated that it was not willing to increase the offer price.

On July 21, 2013, we received a revised draft of the merger agreement from Fenwick & West, including a termination fee of 2.5% of the transaction consideration.

Also on July 21, 2013, our board of directors met via teleconference to discuss the status of negotiations and progress toward signing a potential strategic transaction with Cisco. Management and representatives from Morrison & Foerster and representatives of Qatalyst Partners were also present. Representatives of Morrison & Foerster provided our board of directors with an overview of the key terms of the agreement and the remaining open issues not yet agreed upon. Morrison & Foerster also informed our board of directors that Cisco’s most recent draft of the merger agreement was purported to represent its “best and final” offer. Our board of directors discussed open issues in the merger agreement, including, among other things, the amount of the termination fee. Our board of directors instructed management, representatives of Morrison & Foerster and representatives of Qatalyst Partners to continue to engage with Cisco to resolve the open issues and concerns, including authorizing the proposal of a non-bifurcated termination fee in exchange for a lower termination fee amount than Cisco had proposed.

Later that day, Morrison & Foerster sent to Fenwick & West another draft of the merger agreement with revisions requested by our board of directors, including reducing the termination fee to approximately 2.2% of the transaction consideration, or $57 million.

On July 22, 2013, representatives of Fenwick & West and representatives of Morrison & Foerster continued to negotiate the remaining terms of the merger agreement. Later that day, Fenwick & West sent to Morrison & Foerster another draft of the merger agreement, which included a termination fee of $65 million, or approximately 2.5% of the transaction consideration.

On July 22, 2013, our board of directors met to consider and vote upon the proposed merger agreement with Cisco. At the meeting, representatives of Morrison & Foerster reviewed in detail with our board of directors the outcome of further negotiations and the terms of the final merger agreement. At various points during the meeting, at the request of our board, representatives of Qatalyst Partners briefly left the meeting to negotiate certain open points in the merger agreement with Cisco, which included a reduction of the termination fee to $60 million (approximately 2.3% of the transaction consideration).

Representatives of Qatalyst Partners then presented to our board of directors its financial analysis of the proposed transaction. Representatives of Qatalyst Partners then rendered to our board of directors its oral opinion, subsequently confirmed in writing, that as of July 22, 2013, and based upon and subject to the considerations, limitations, qualifications and other matters set forth therein, the consideration to be received by the holders of Sourcefire common stock (other than Cisco or any affiliates of Cisco) pursuant to the merger agreement was fair, from a financial point of view, to such holders. The full text of the opinion of Qatalyst Partners, dated July 22, 2013, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken by Qatalyst Partners in connection with rendering such opinion, is attached hereto as Annex C. Following such presentations, and after further review and discussion, our board of directors unanimously voted to approve the merger agreement and related matters and resolved to recommend that our stockholders adopt the merger agreement, which is attached hereto as Annex A.

Following the adjournment of the meeting of our board of directors on July 22, 2013, the parties signed the merger agreement. The signing of the merger agreement was publicly announced on July 23, 2013, prior to the opening of trading of our common stock on NASDAQ.

 

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Recommendation of Our Board of Directors as to the Merger; Reasons for the Merger

Reasons for the Merger

Our board of directors evaluated, with the assistance of its legal and financial advisors, the merger agreement and the transactions contemplated by the merger agreement, including the merger and, on July 22, 2013, unanimously determined that the merger agreement, the merger and the other transactions contemplated thereby, were fair, advisable and in the best interests of the Company and its stockholders, approved the merger agreement and the merger and recommends that you vote “FOR” adoption of the merger agreement.

The following is a summary of the material factors that supported its decision to make this recommendation:

 

   

Premium to Current and Historical Trading Prices of Shares. The board considered the current and historical market prices of the Company’s common stock, including the fact that the merger consideration of $76.00 per share represented a premium of approximately 29% to the closing price of the common stock on July 22, 2013 (the last full trading day before the announcement of the merger), approximately 26% over our all-time high share price on July 18, 2013 and approximately 51% over our average closing share price for the twelve-month period ended July 19, 2013.

 

   

The Company’s Operating and Financial Condition; Prospects. The board considered the current and historical financial condition, results of operations and business of Sourcefire, as well as the Company’s business plan and prospects, if it were to remain an independent company. Our board discussed the Company’s current business plan, including the risks associated with achieving and executing upon the plan, as well as the general risks of market conditions that could reduce the Company’s stock price. The board also considered the highly competitive and rapidly evolving environment in which the Company operates and is expected to operate in the future. The board considered that, if it did not proceed with the merger, the Company’s stockholders would continue to be subject to the risks and uncertainties of the Company’s financial plan, operations and prospects.

 

   

Available Alternatives; Results of Discussions with Third Parties. The board considered the possible alternatives to the acquisition by Cisco (including the possibility of being acquired in whole or in part by another company or financial acquirer, or continuing to operate as an independent entity, and the desirability and perceived risks of those alternatives), the range of potential benefits to the Company’s stockholders of these alternatives and the timing and the likelihood of accomplishing the goals of such alternatives, as well as the board’s assessment that none of these alternatives were reasonably likely to present superior opportunities for Sourcefire to create greater value for its stockholders, taking all factors into account, including risks of execution and consummation as well as business, competitive, industry and market risks. The board also considered the results of the process that the board had conducted in recent weeks, with the assistance of the Company’s management and its financial and legal advisors, to evaluate other potential strategic alternatives. The board also considered the ability of other bidders to make, and the likelihood that other bidders would make, a proposal that was reasonably likely to be consummated on a timely basis to acquire the Company at a higher price.

 

   

Cash Consideration; Certainty of Value; No Financing Condition. The board considered the form of consideration to be paid to the stockholders in the merger and the liquidity and certainty of the value of cash consideration compared to stock or other forms of consideration, as well as the fact that Cisco’s proposal was not subject to obtaining any outside financing. The board considered the business reputation of Cisco and the substantial financial resources of Cisco. The board believed these considerations supported the conclusion that a transaction with Cisco could be completed relatively quickly and in an orderly manner.

 

   

Financial Advisor’s Opinion and Related Analyses. The oral opinion of Qatalyst Partners delivered to the board on July 22, 2013, and subsequently confirmed by Qatalyst Partners’ written opinion to the board dated such date, to the effect that, as of such date and based upon and subject to the considerations, limitations, qualifications and other matters set forth therein, the consideration to be

 

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received by the holders of Sourcefire common stock (other than Cisco or any affiliates of Cisco) pursuant to the merger agreement was fair, from a financial point of view, to such holders, and Qatalyst Partners’ related financial analyses presented to the board in connection with the delivery of its oral opinion. You are urged to read Qatalyst Partners’ written opinion, which is set forth in its entirety in Annex C to this proxy statement, and the discussion of the opinion and Qatalyst Partners’ analyses in “Proposal No. 1 — Adoption of the Merger Agreement — Opinion of Our Financial Advisor” beginning on page 36.

 

   

Arm’s Length Negotiations; Consideration of Potential Conflicts of Interest. The board considered the fact that the financial and other terms and conditions of the merger agreement and the transactions contemplated by the merger agreement, including the number and nature of the conditions on Cisco’s obligations to consummate the merger, were the product of arm’s-length negotiations among the parties and were designed to provide more certainty that the merger would ultimately be consummated on a timely basis. The board also considered the interests of the Company’s Chief Executive Officer and certain other members of senior management in the merger, as more particularly described under “Proposal No. 1 — Adoption of the Merger Agreement — Interests of Executive Officers and Directors in the Merger” beginning on page 42.

 

   

Merger Structure; Limited Voting Agreements. The board considered the structure of the transaction as a merger, requiring approval by our stockholders, and that less than 2% of the vote was covered by voting agreements with Cisco to vote in favor of the transaction.

 

   

Closing Conditions. The board considered the reasonable likelihood of the consummation of the transactions contemplated by the merger agreement and that the Cisco’s obligations to close the merger would be subject to limited conditions, including the absence of a financing condition or vote of Cisco’s stockholders.

 

   

Ability to Respond to Certain Unsolicited Acquisition Proposals. The board considered that prior to the consummation of the merger, the Company would have the ability to respond to persons submitting a bona fide written proposal that the board concludes in good faith, after consultation with the Company’s outside legal counsel and financial advisor of national standing, constitutes or would reasonably be expected to lead to a superior proposal (as defined in the merger agreement), and which superior proposal was made after the date of the merger agreement and did not result from a breach of the nonsolicitation provisions of the merger agreement, to (i) enter into discussions with such person regarding the proposal and (ii) provide access to or furnish information with respect to the Company and its subsidiaries to such person and such person’s representatives pursuant to an acceptable confidentiality agreement.

 

   

Ability to Change Recommendation for an Unmatched Superior Proposal. The board considered the ability of our board to change its recommendation that our stockholders adopt the merger agreement if a superior proposal has been submitted to us, and Cisco has not, within four business days following notice, made a revised offer to acquire us that our board concludes in good faith, after consultation with the Company’s outside legal counsel and financial advisor of national standing, is at least as favorable to our stockholders as such superior proposal, and that the failure to change the board’s recommendation would be inconsistent with its fiduciary obligations to our stockholders.

 

   

Ability to Change Recommendation for an Intervening Event. The board considered the ability of our board to change its recommendation that our stockholders adopt the merger agreement if in light of material facts, events or circumstances that have developed since July 22, 2013, which were previously unknown by us and not reasonably foreseeable as of that date, and taking into account any changes in its offer that Cisco makes within four business days following notice, our board concludes in good faith that the failure to change the board’s recommendation would be inconsistent with its fiduciary obligations to our stockholders.

 

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Ability to Terminate Merger Agreement for a Superior Proposal. The board considered our ability to terminate the merger agreement in order to accept a superior proposal following a change in its recommendation as described above, and that upon such termination, the voting agreements with Cisco would also terminate so as not to impede the consummation of the superior proposal.

 

   

Reasonableness of Termination Fee. The board considered its right to terminate the merger agreement to accept a superior proposal is subject to payment of a termination fee of $60,000,000, or approximately 2.3% of the transaction consideration. The board considered this termination fee reasonable, in light of, among other things, the benefits of the merger to the Company’s stockholders and determined, upon the advice of outside counsel and our financial advisor, that such fees would not preclude competing offers and that the amount of such fee was within the range of termination fees payable in comparable transactions.

 

   

Availability of Appraisal Rights in the Merger. The availability of appraisal rights under Delaware law to holders of shares of Sourcefire common stock who do not vote in favor of the adoption of the merger agreement and comply with all of the required procedures under Delaware law, which provides those eligible stockholders with an opportunity to have a Delaware court determine the fair value of their shares, which may be more than, less than, or the same as the amount such stockholders would have received under the merger agreement.

In the course of reaching the determinations and decisions and making the recommendation described above, our board considered the following risks and potentially negative factors relating to the merger agreement, the merger and the other transactions contemplated thereby:

 

   

No Public Auction. The Company did not conduct a public auction process or otherwise solicit interest from third parties other than as described under “Proposal No. 1 — Adoption of the Merger Agreement — Background of the Merger,” considering the risks to the business of such an expanded process.

 

   

Failure to Complete Transaction. The risks and costs to Sourcefire if the merger is not consummated, including the diversion of the attention of the Company’s directors, executive officers and employees, the potential loss of employees, customers, suppliers and business partners, the incurrence of significant transaction costs and that the Company may, under certain circumstances, have to pay a termination fee to Cisco.

 

   

Cash Transaction; No Stockholder Participation in Future Growth. While the consummation of the merger gives the Company’s stockholders the opportunity to realize a significant premium over the prices at which our common stock was traded prior to the public announcement of the merger, because the merger consideration is cash, the consummation of the merger would prevent stockholders from participating in the possible future growth and profits of the Company.

 

   

Interests of the Company’s Executive Officers and Directors. The interests of the executive officers and directors of the Company in the merger, including the matters described under “Proposal No. 1 — Adoption of the Merger Agreement — Interests of Executive Officers and Directors in the Merger.”

 

   

No-Shop Restrictions. (i) The limited circumstances in which the Company may (a) solicit proposals or offers that constitute, or would reasonably be expected to lead to, acquisition proposals that may be superior to the merger, (b) enter into, continue, or otherwise participate in any discussions regarding acquisition proposals, or (c) agree to, accept, or recommend any acquisition proposals other than as described above with respect to superior proposals, (ii) the ability of Cisco to match a superior proposal, and (iii) the requirement that Sourcefire pay a termination fee to Cisco related to a termination of the merger agreement in connection with a superior proposal in the circumstances specified in the merger agreement.

 

   

Risks of Closing. The fact that there are conditions to Cisco’s obligations to close the merger, and the right of Cisco to terminate the merger agreement under specified circumstances.

 

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Taxable Consideration. The all-cash consideration to be received by the stockholders who are U.S. persons in the merger would be taxable to such stockholders who have a gain for U.S. federal income tax purposes.

 

   

Exclusive Negotiations. The exclusivity agreement, which Cisco requested as a condition to its willingness to negotiate a possible acquisition of Sourcefire, limited the board’s ability to assess the interest of other potential acquirers from July 4, 2013, the date the exclusivity agreement was executed, until July 22, 2013, the date the merger agreement was executed.

 

   

Interim Restrictions on Business Pending Completion of the Merger. The Company’s agreement that it will carry on its business in the ordinary course consistent with past practice and, subject to specified exceptions, will not take a number of actions related to the conduct of its business without the prior written consent of Cisco.

 

   

Voting Agreements. Our board considered that Messrs. Roesch and Becker, whose collective share ownership represents approximately 1.9% of Sourcefire’s outstanding common stock as of July 22, 2013, would be entering into voting agreements to vote in favor of adoption of the merger agreement.

This discussion of the information and factors considered by our board includes the material positive and negative factors considered by our board, but is not intended to be exhaustive and may not include all of the factors considered by our board. The board did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to its ultimate determination, and did not quantify or assign any relative or specific weights to the various factors that it considered in reaching its determination that the merger, the merger agreement and the other transactions contemplated by the merger agreement are fair to, advisable and in the best interests of the Company and its stockholders. Rather, our board conducted an overall analysis of the factors described above, including thorough discussion with, and questioning of, Company management and the Company’s outside advisors, and considered the factors overall to be favorable to, and to support, its determination and recommendation. In addition, individual members of our board may have given different weight to different factors. Our board based its ultimate decision on its business judgment that the benefits of the merger agreement and the merger to the Company’s stockholders outweigh the negative considerations. Our board determined that the merger agreement and the merger represent the best reasonably available alternative to maximize stockholder value.

Recommendation of the Board of Directors

Our board consists of eight directors. On July 22, 2013, on the basis of the factors described above, our board unanimously:

 

   

determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement, are fair to, advisable and in the best interests of the Company and its stockholders;

 

   

approved the merger agreement and the transactions contemplated thereby (including, without limitation, the merger); and

 

   

resolved to recommend that the Company’s stockholders vote to adopt the merger agreement.

The board unanimously recommends that you vote “FOR” the adoption of the merger agreement.

Prospective Financial Information

The Company’s management made available prospective financial information prepared by management concerning the Company to Qatalyst Partners for use in connection with the financial analyses performed by Qatalyst Partners in connection with delivering their written financial opinions to our board and to Cisco to assist Cisco with its due diligence review of the Company.

 

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The Company made available to Qatalyst Partners, in its capacity as financial advisor to the Company, certain unaudited prospective financial information prepared by the Company’s management concerning the Company and directed Qatalyst Partners to use these projections in connection with rendering its opinion. These projections do not take into account any circumstances or events occurring after the date they were prepared, including the transactions contemplated by the merger agreement or the announcement thereof. Further, these projections do not take into account the effect of any failure of the merger to occur and should not be viewed as accurate or continuing in that context.

The Company’s management provided the same projections, which we refer to as the Projections, to Qatalyst Partners, our board of directors and Cisco.

The summary of such information below is included solely to give stockholders access to the information that was made available and is not included in this proxy statement in order to influence any stockholder to make any investment decision with respect to the merger, including whether or not to seek appraisal rights with respect to the shares of Company common stock.

The Company does not as a matter of course make public projections as to future sales, earnings or other results beyond the current fiscal year. However, the management of the Company prepared the prospective financial information set forth below to assist the board in its evaluation of the merger and the other strategic alternatives available to the Company. The information was not prepared with a view toward public disclosure or with a view toward complying with the published guidelines of the SEC regarding projections or GAAP or the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of the Company’s management, was prepared on a reasonable basis, reflected the best estimates and judgments available to the Company’s management at the time and presented, to the best of the Company’s management’s knowledge and belief, the expected course of action and the expected future financial performance of the Company as of the date such information was prepared. However, this information is not fact and should not be relied upon as being necessarily indicative of future results.

The Projections reflect numerous estimates and assumptions made by the Company with respect to industry performance, general business, economic, regulatory, market and financial conditions and other future events, as well as matters specific to the Company’s business, all of which are difficult to predict and many of which are beyond the Company’s control. The material business and economic assumptions underlying the Projections were industry performance, static economic conditions and the projected financial performance of the Company. The Projections reflect subjective judgment in many respects and thus are susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. As such, the Projections constitute forward-looking information and are subject to risks and uncertainties that could cause actual results to differ materially from the results forecasted in the Projections, including, but not limited to, the Company’s performance, industry performance, general business and economic conditions, customer requirements, competition, adverse changes in applicable laws, regulations or rules, and the various risks set forth in the Company’s reports filed with the SEC. There can be no assurance that the Projections will be realized or that actual results will not be significantly higher or lower than forecast. The Projections cover multiple years and such information by its nature becomes less reliable with each successive year. In addition, the Projections will be affected by the Company’s ability to achieve strategic goals, objectives and targets over the applicable periods. The assumptions upon which the Projections were based necessarily involve judgments with respect to, among other things, future economic, competitive and regulatory conditions and financial market conditions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company’s control. The Projections reflect assumptions as to certain business decisions that are subject to change. The Projections cannot, therefore, be considered a guaranty of future operating results, and this information should not be relied on as such. The inclusion of the Projections should not be regarded as an indication that the Company and its financial advisors or anyone who received this information then considered, or now considers, them a reliable prediction of future events, and this information should not be relied upon as such. The inclusion of the Projections herein should not be deemed an admission or representation by the Company that they are viewed by

 

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the Company as material information of the Company, and in fact the Company views the Projections as non-material because of the inherent risks and uncertainties associated with such long-range forecasts. The inclusion of the Projections in this proxy statement should not be regarded as an indication that the Projections will be necessarily predictive of actual future events, and it should not be relied on as such. No representation is made by the Company or any other person to any stockholder of the Company regarding the Projections or the ultimate performance of the Company compared to such information. The Projections should be evaluated, if at all, in conjunction with the historical financial statements and other information regarding the Company contained in the Company’s public filings with the SEC. In light of the foregoing factors and the uncertainties inherent in the Projections, stockholders are cautioned not to place undue, if any, reliance on the Projections.

Neither the Company’s independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the Projections contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability.

Certain information set forth in the Projections are not prepared based on generally accepted accounting principles, which we refer to as non-GAAP financial measures. These non-GAAP financial measures are not calculated in accordance with, or a substitute for, financial measures calculated in accordance with, GAAP and may be different from non-GAAP financial measures used by other companies. Furthermore, there are limitations inherent in non-GAAP financial measures, in that they exclude a variety of charges and credits that are required to be included in a GAAP presentation. Accordingly, these non-GAAP financial measures should be considered together with, and not as an alternative to, GAAP basis financial measures.

Projections

 

     Q3-Q4
2013E
    As of and for the year ended December 31,  
       2013E     2014E     2015E     2016E     2017E  
           (US$ in millions, except per share amounts)  

Revenue

   $ 165      $ 286      $ 367      $ 462      $ 575      $ 705   

Adjusted operating income(1)

     35        51        67        91        126        169   

Cash taxes

     0        0        0        (11     (32     (42 )

Capital expenditures

     (7     (11 )     (15 )     (16     (17     (18 )

Depreciation and amortization

     (4     (7 )     (10 )     (13     (15     (18 )

Net change in working capital

     12        10        13        16        20        25   

 

(1) This non-GAAP measure represents income from operations excluding (i) stock-based compensation, which does not involve the expenditure of cash and (ii) amortization of acquisition-related intangible assets, which does not involve the expenditure of cash. A reconciliation of this non-GAAP financial measure to the GAAP financial measure most directly comparable is provided below.

Based on the foregoing, unlevered free cash flow was projected as set forth below:

 

     Q3-Q4
2013E
     As of and for the year ended December 31,  
        2013E      2014E      2015E      2016E      2017E  
            (US$ in millions)  

Unlevered free cash flow

   $ 44       $ 56       $ 75       $ 92       $ 113       $ 152   

 

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Set forth below are reconciliations of adjusted operating income to the most comparable GAAP financial measure based on financial information available to, or projected by, the Company (totals may not add due to rounding):

 

    Q3-Q4
2013E
    As of and for the year ended December 31,  
      2013E     2014E     2015E     2016E     2017E  
          (US$ in millions, except share and per share amounts)  

Reconciliation of adjusted operating income:

           

GAAP income from operations

  $ 19      $ 20      $ 32      $ 52      $ 84      $ 123   

Stock-based compensation expense

    16        30        34        38        42        46   

Amortization of acquisition-related intangible assets

           1        1        1                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating income

    35        51        67        91        126        169   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See “— Opinion of Our Financial Advisor” beginning on page 36 of this proxy statement for additional information regarding the use of the above prospective financial information.

THE COMPANY DOES NOT INTEND TO, AND DOES NOT UNDERTAKE ANY OBLIGATION TO, UPDATE OR REVISE, OR PUBLICLY DISCLOSE ANY UPDATE OR REVISION TO, SUCH FORECASTS TO REFLECT CIRCUMSTANCES OR EVENTS, INCLUDING UNANTICIPATED EVENTS, THAT MAY HAVE OCCURRED OR THAT MAY OCCUR AFTER THE PREPARATION THEREOF, EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING SUCH FORECASTS ARE SHOWN TO BE IN ERROR OR CHANGE, EXCEPT AS REQUIRED BY LAW.

Opinion of Our Financial Advisor

We retained Qatalyst Partners to act as financial advisor to our board of directors in connection with a potential transaction such as the merger and to evaluate whether the consideration to be received by the holders of our shares of common stock (other than Cisco or any affiliates of Cisco) pursuant to the merger agreement was fair, from a financial point of view, to such holders. We selected Qatalyst Partners to act as our financial advisor based on Qatalyst Partners’ qualifications, expertise, reputation and knowledge of the business and affairs of Sourcefire and the industry in which it operates. Qatalyst Partners has provided its written consent to the reproduction of the Qatalyst Partners’ opinion in this proxy statement. At the meeting of our board of directors on July 22, 2013, Qatalyst Partners rendered its oral opinion that, as of such date and based upon and subject to the considerations, limitations, qualifications and other matters set forth therein, the $76.00 per share cash consideration to be received by the holders of Sourcefire common stock (other than Cisco or any affiliates of Cisco) pursuant to the merger agreement was fair, from a financial point of view, to such holders. Qatalyst Partners delivered its written opinion, dated July 22, 2013 to our board of directors following the board meeting.

The full text of Qatalyst Partners’ written opinion, dated July 22, 2013, to our board of directors is attached hereto as Annex C and is incorporated by reference herein. The opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations and qualifications of the review undertaken by Qatalyst Partners in rendering its opinion. You should read the opinion carefully in its entirety. Qatalyst Partners’ opinion was provided to our board of directors and addresses only, as of the date of the opinion, the fairness, from a financial point of view, of the $76.00 per share cash consideration to be received by the holders of Sourcefire common stock (other than Cisco or any affiliates of Cisco) pursuant to the merger agreement, and it does not address any other aspect of the merger. It does not constitute a recommendation as to how any stockholder should vote with respect to the merger or any other matter and does not in any manner address the price at which Sourcefire common stock will trade at any time. The summary of Qatalyst Partners’ opinion set forth herein is qualified in its entirety by reference to the full text of the opinion.

 

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In arriving at its opinion, Qatalyst Partners reviewed the merger agreement, certain related documents and schedules and certain publicly available financial statements and other business and financial information of Sourcefire. Qatalyst Partners also reviewed certain forward-looking information prepared by the management of Sourcefire, including the Projections described above in “— Prospective Financial Information” beginning on page 33. Additionally, Qatalyst Partners discussed the past and current operations and financial condition and the prospects of Sourcefire with senior executives of Sourcefire. Qatalyst Partners also reviewed the historical market prices and trading activity for Sourcefire common stock and compared the financial performance of Sourcefire and the prices and trading activity of Sourcefire common stock with that of certain other selected publicly traded companies and their securities. In addition, Qatalyst Partners reviewed the financial terms, to the extent publicly available, of selected acquisition transactions and performed such other analyses, reviewed such other information and considered such other factors as Qatalyst Partners deemed appropriate.

In arriving at its opinion, Qatalyst Partners assumed and relied upon, without independent verification, the accuracy and completeness of the information that was publicly available or supplied or otherwise made available to, or discussed with, Qatalyst Partners by Sourcefire. With respect to the Projections, Qatalyst Partners was advised by the management of Sourcefire, and Qatalyst Partners assumed, that the Projections had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Sourcefire of the future financial performance of Sourcefire and other matters covered thereby. Qatalyst Partners assumed that the merger will be consummated in accordance with the terms set forth in the merger agreement, without any modification or delay. In addition, Qatalyst Partners assumed that in connection with the receipt of all the necessary approvals of the proposed merger, no delays, limitations, conditions or restrictions will be imposed that could have an adverse effect on Sourcefire or the contemplated benefits expected to be derived in the proposed merger. Qatalyst Partners did not make any independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of Sourcefire, nor was Qatalyst Partners furnished with any such evaluation or appraisal. In addition, Qatalyst Partners relied, without independent verification, upon the assessment of the management of Sourcefire as to the existing and future technology and products of Sourcefire and the risks associated with such technology and products. Qatalyst Partners’ opinion has been approved by Qatalyst Partners’ opinion committee in accordance with its customary practice.

Qatalyst Partners’ opinion is necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to it as of, the date of the opinion. Events occurring after the date of the opinion may affect Qatalyst Partners’ opinion and the assumptions used in preparing it, and Qatalyst Partners has not assumed any obligation to update, revise or reaffirm its opinion. Qatalyst Partners’ opinion does not address the underlying business decision of Sourcefire to engage in the merger, or the relative merits of the merger as compared to any strategic alternatives that may be available to Sourcefire. Qatalyst Partners’ opinion is limited to the fairness, from a financial point of view, of the $76.00 per share cash consideration to be received by the holders of Sourcefire common stock (other than Cisco or any affiliates of Cisco) pursuant to the merger agreement, and Qatalyst Partners expressed no opinion with respect to the fairness of the amount or nature of the compensation to any of Sourcefire’s officers, directors or employees, or any class of such persons, relative to such consideration.

The following is a brief summary of the material analyses performed by Qatalyst Partners in connection with its opinion dated July 22, 2013. The analyses and factors described below must be considered as a whole; considering any portion of such analyses or factors, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying Qatalyst Partners’ opinion. For purposes of its analyses, Qatalyst Partners utilized third-party research analysts’ projections, which we refer to as the “analyst projections,” and the Projections. Some of the summaries of the financial analyses include information presented in tabular format. The tables are not intended to stand alone, and in order to more fully understand the financial analyses used by Qatalyst Partners, the tables must be read together with the full text of each summary. Considering the data set forth below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Qatalyst Partners’ financial analyses.

 

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Illustrative Discounted Cash Flow Analysis

Qatalyst Partners performed an illustrative discounted cash flow analysis, which is designed to imply a potential, present value of Sourcefire by adding the net present value of the estimated future unlevered free cash flows, based on the Projections, to the net present value of a corresponding terminal value of Sourcefire. The unlevered free cash flows were calculated based on the Projections using Sourcefire’s projected adjusted operating income, cash taxes, capital expenditures, net change in working capital and depreciation and amortization, were approved by Sourcefire’s management and are set forth in the section entitled “— Prospective Financial Information.”

Qatalyst Partners’ analysis included the unlevered free cash flows of Sourcefire for the third and fourth quarters of calendar year 2013 through calendar year 2016 and calculated the terminal value at the end of 2016 by applying a range of multiples of 20.0x to 30.0x to Sourcefire’s calendar year 2017 estimated adjusted net operating profit after tax. These values were discounted to present values using an estimated weighted average cost of capital ranging from 9.5% to 11.5%. Qatalyst’s methodology for calculating the weighted average cost of capital for Sourcefire considered the historic and predicted volatility of Sourcefire’s common stock and that of selected companies, as well as market data for determining the risk-free rate and risk and size adjustments employed in the calculation. Qatalyst Partners applied a dilution factor of approximately 14% to reflect the dilution to current stockholders due to the effect of future equity compensation grants projected by Sourcefire’s management. Based on the calculations set forth above, this analysis implied a range of values for Sourcefire common stock of approximately $56.47 to $82.36 per share.

Selected Companies Analysis

Qatalyst Partners compared selected financial information and public market multiples for Sourcefire with publicly available information and public market multiples for selected companies. The companies used in this comparison included those companies listed below and were selected because they are publicly traded companies in the security and related industry or the enterprise networking and related industry or are companies in the software space that have growth characteristics and/or business models that are generally similar to those of Sourcefire.

Selected Security & Related

 

Company

   Enterprise Value/
CY2013E Revenue
   Enterprise Value/
CY2014E Revenue
   CY2013E
P/E/G (1)
   CY2014E
P/E/G (1)

Symantec Corporation

   2.3x    2.2x    1.5x    1.3x

Check Point Software Technologies, Ltd.

   5.7x    5.3x    1.6x    1.4x

Trend Micro Inc.

   2.7x    2.7x    4.9x    4.7x

Palo Alto Networks, Inc.

   7.9x    5.9x      

Fortinet Inc.

   4.5x    4.0x    2.2x    1.8x

Imperva Inc.

   8.7x    7.0x      

Proofpoint, Inc.

   5.9x    5.0x      

Qualys, Inc.

   4.1x    3.5x       2.7x

 

(1) P/E/G multiples that are greater than 5x, negative or not available are noted as dashes.

Selected Enterprise Networking & Related

 

Company

   Enterprise Value/
CY2013E Revenue
   Enterprise Value/
CY2014E Revenue
   CY2013E
P/E/G
   CY2014E
P/E/G

Cisco Systems, Inc.

   2.3x    2.1x    1.3x    1.2x

Juniper Networks, Inc.

   1.9x    1.8x    1.1x    1.0x

 

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Selected High Growth Software & Appliances

 

Company

   Enterprise Value/
CY2013E Revenue
   Enterprise Value/
CY2014E Revenue
   CY2013E
P/E/G
   CY2014E
P/E/G

VMware, Inc.

   5.2x    4.6x    1.1x    1.0x

Commvault Systems, Inc.

   6.7x    5.9x    2.2x    2.0x

Citrix Systems, Inc.

   3.8x    3.3x    1.3x    1.1x

Red Hat, Inc.

   5.7x    5.0x    1.6x    1.4x

Akamai Technologies, Inc.

   4.7x    4.1x    1.6x    1.4x

F5 Networks, Inc.

   3.6x    3.1x    1.2x    1.1x

SolarWinds, Inc.

   9.6x    7.7x    1.3x    1.1x

Riverbed Technology, Inc.

   2.7x    2.5x    1.0x    0.8x

Aruba Networks, Inc.

   3.1x    2.6x    2.2x    1.5x

Based upon research analyst consensus estimates for calendar years 2013 and 2014, and using the closing prices as of July 19, 2013 for shares of the selected companies, Qatalyst Partners calculated, among other things, the implied fully diluted enterprise value divided by the estimated consensus revenue for calendar years 2013 and 2014, which we refer to as the CY13E Revenue Multiples and CY14E Revenue Multiples, for each of the selected companies. The median CY13E Revenue Multiples among the selected security and related companies analyzed was 5.1x, among the selected enterprise networking and related companies analyzed was 2.1x, and among the selected high growth software and appliances companies analyzed was 4.7x. The CY13E Revenue Multiple for Sourcefire based on the analyst projections was 6.5x. The median CY14E Revenue Multiples among the selected security and related companies analyzed was 4.5x, among the selected enterprise networking and related companies analyzed was 2.0x, and among the selected high growth software and appliances companies analyzed was 4.1x. The CY14E Revenue Multiple for Sourcefire based on the analyst projections was 5.4x.

Based on an analysis of the CY13E Revenue Multiples and the CY14E Revenue Multiples for the selected companies, Qatalyst Partners selected representative ranges of 4.5x to 7.9x for the CY13E Revenue Multiple and 4.0x to 5.9x for the CY14E Revenue Multiple, and applied these ranges to Sourcefire’s estimated revenue for calendar years 2013 and 2014 based on the Projections and the analyst projections, respectively. Based on Sourcefire’s fully diluted shares (assuming treasury stock method), including common stock, restricted stock awards, restricted stock units and stock options as of June 30, 2013, as provided by Sourcefire management, this analysis implied a range of values for Sourcefire common stock of approximately $44.92 to $73.01 per share based on the Projections and approximately $43.93 to $71.28 per share based on the analyst projections.

Based upon research analyst consensus estimates for calendar years 2013 and 2014, and using the closing prices as of July 19, 2013 for shares of the selected companies, Qatalyst Partners calculated, among other things, the estimated price-to-earnings multiples divided by the estimated long-term growth rate for calendar years 2013 and 2014, which we refer to as the CY13E P/E/G Multiples and CY14E P/E/G Multiples. The median CY13E P/E/G Multiples among the selected security and related companies analyzed was 1.9x, among the selected enterprise networking and related companies analyzed was 1.2x, and among the selected high growth software and appliances companies analyzed was 1.3x. The CY13E P/E/G Multiple for Sourcefire based on the analyst projections was 2.8x. The median CY14E P/E/G Multiples among the selected security and related companies analyzed was 1.8x, among the selected enterprise networking and related companies analyzed was 1.1x, and among the selected high growth software and appliances companies analyzed was 1.1x. The CY14E P/E/G Multiple for Sourcefire based on the analyst projections was 2.3x.

Based on an analysis of the CY13E P/E/G Multiples and the CY14E P/E/G Multiples for the selected companies, Qatalyst Partners selected representative ranges of 2.0x to 2.5x for the CY13E P/E/G Multiple and 1.5x to 2.0x for the CY14E P/E/G Multiple. Qatalyst Partners applied these ranges to Sourcefire’s estimated long-term growth rate, based on analyst projections, and derived a reference range of implied price-to-earnings multiples for calendar years 2013 and 2014, which we refer to as the CY13E P/E Multiples and CY14E P/E Multiples, of 44.0x to 55.0x for the CY13E P/E Multiple and 33.0x to 44.0x for the CY14E P/E Multiple.

 

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Qatalyst Partners then applied these ranges to Sourcefire’s estimated earnings per share for calendar years 2013 and 2014 based on each of the Projections and the analyst projections. This analysis implied a range of values for Sourcefire common stock of approximately $44.45 to $60.13 per share based on the Projections and approximately $39.27 to $53.80 per share based on the analyst projections.

No company included in the selected companies analysis is identical to Sourcefire. In evaluating the selected companies, Qatalyst Partners made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters. Many of these matters are beyond the control of Sourcefire, such as the impact of competition on the business of Sourcefire and the industry in general, industry growth and the absence of any material adverse change in the financial condition and prospects of Sourcefire or the industry or in the financial markets in general, which could affect the public trading value of the companies. Mathematical analysis, such as determining the arithmetic median, is not in itself a meaningful method of using selected company data.

Selected Transactions Analysis

Qatalyst Partners compared nineteen selected transactions announced between July 2000 and May 2013 involving selected security and related transactions having a transaction value of greater than $500 million. These transactions are listed below:

 

Announcement Date

  

Target

  

Acquirer

   NTM
Revenue
Multiple (1)
     NTM P/E
Multiple (1)
 

5/20/13

   Websense Inc.    Vista Equity Partners, LLC      2.7x         27.5x   

3/13/12

   SonicWALL, Inc.    Dell Inc.      -         -   

12/9/11

   Blue Coat Systems Inc.    Thoma Bravo, LLC      2.0x         28.4x   

10/4/11

   Q1 Labs, Inc.    International Business Machines Corporation      -         -   

1/4/11

   SecureWorks, Inc.    Dell Inc.      -         -   

9/13/10

   ArcSight Inc.    Hewlett-Packard Company      5.9x         54.4x   

8/19/10

   McAfee, Inc.    Intel Corporation      3.1x         17.2x   

6/2/10

   SonicWALL, Inc.    Thoma Bravo, LLC      2.3x         24.4x   

5/19/10

   VeriSign, Inc. (Authentication Services Business)    Symantec Corporation      3.0x         -   

5/3/10

   Sophos, PLC    Apax Partners Holdings Ltd.      -         -   

10/8/08

   MessageLabs, Inc.    Symantec Corporation      4.0x         -   

7/9/07

   Postini, Inc.    Google Inc.      6.9x         -   

1/4/07

   IronPort Systems, Inc.    Cisco Systems, Inc.      -         -   

11/20/06

   Protect Data AB    Check Point Software Technologies, Ltd.      6.6x         33.5x   

3/5/07

   SafeNet, Inc.    Vector Capital      1.8x         24.0x   

8/23/06

   Internet Security Systems, Inc.    International Business Machines Corporation      3.0x         27.7x   

6/29/06

   RSA Security, Inc.    EMC Corporation      5.5x         41.8x   

2/6/04

   Netscreen Technologies, Inc.    Juniper Networks, Inc.      9.3x         64.6x   

7/27/00

   AXENT Technologies Inc.    Symantec Corporation      4.9x         54.9x   

 

(1) Multiples that are greater than 100x, negative or not available are noted as dashes.

For each of the transactions listed above, Qatalyst Partners reviewed, among other things, the implied fully diluted enterprise value of the target company as a multiple of next twelve months estimated revenue of the target company as reflected in Wall Street analyst research, certain publicly available financial statements, press releases and other research sources, which we refer to as the NTM Revenue Multiple. Based on the analysis of such metrics, analysis of the prior transactions and its professional judgment, Qatalyst Partners selected a

 

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representative range of 3.0x to 6.6x applied to Sourcefire’s next twelve months (ending March 31, 2014) estimated revenue reflected in the analyst projections. Based on the calculations set forth above and Sourcefire’s fully diluted shares (assuming treasury stock method), including Sourcefire common stock, restricted stock awards, restricted stock units and stock options as of June 30, 2013, as provided by Sourcefire management, this analysis implied a range of values for Sourcefire common stock of approximately $32.84 to $63.12 per share.

For each of the selected transactions, Qatalyst Partners also reviewed, among other things, the unaffected closing stock price paid per share of the target company as a multiple of next twelve months earnings per share of the target company as reflected in Wall Street analyst research, certain publicly available financial statements and press releases, which we refer to as the NTM P/E Multiple. Based on the analysis of such metrics, analysis of the prior transactions and its professional judgment, Qatalyst Partners selected a representative range of 41.8x to 54.4x applied to Sourcefire’s next twelve months (ending March 31, 2014) estimated earnings per share reflected in the analyst projections. Based on the calculations set forth above, this analysis implied a range of values for Sourcefire common stock of approximately $42.14 to $54.84 per share.

No company or transaction utilized in the selected transactions analysis is identical to Sourcefire or the merger. In evaluating the selected transactions, Qatalyst Partners made judgments and assumptions with regard to general business, market and financial conditions and other matters, many of which are beyond the control of Sourcefire, such as the impact of competition on the business of Sourcefire or the industry generally, industry growth and the absence of any material adverse change in the financial condition of Sourcefire or the industry or in the financial markets in general, which could affect the aggregate value of the transactions to which they are being compared. Because of the unique circumstances of each of these transactions and the merger, Qatalyst Partners cautioned against placing undue reliance on this information.

Miscellaneous

In connection with the review of the merger by our board of directors, Qatalyst Partners performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation of a financial opinion is a complex process and is not necessarily amenable to a partial analysis or summary description. In arriving at its opinion, Qatalyst Partners considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor it considered. Qatalyst Partners believes that selecting any portion of its analyses, without considering all analyses as a whole, could create a misleading or incomplete view of the process underlying its analyses and opinion. In addition, Qatalyst Partners may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. As a result, the ranges of valuations resulting from any particular analysis described above should not be taken to be Qatalyst Partners’ view of the actual value of Sourcefire. In performing its analyses, Qatalyst Partners made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Sourcefire. Any estimates contained in Qatalyst Partners’ analyses are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates.

Qatalyst Partners conducted the analyses described above solely as part of its analysis of the fairness, from a financial point of view, of the $76.00 per share cash consideration to be received by the holders of Sourcefire common stock (other than Cisco or any affiliates of Cisco) pursuant to the merger agreement, and in connection with the delivery of its opinion to our board of directors. These analyses do not purport to be appraisals or to reflect the price at which Sourcefire common stock might actually trade.

Qatalyst Partners’ opinion and its presentation to our board of directors was one of many factors considered by our board of directors in deciding to approve the merger agreement. Consequently, the analyses as described above should not be viewed as determinative of the opinion of our board of directors with respect to the consideration to be received by Sourcefire’s stockholders pursuant to the merger or of whether our board of

 

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directors would have been willing to agree to a different consideration. The consideration was determined through arm’s-length negotiations between Sourcefire and Cisco and was approved by our board of directors. Qatalyst Partners provided advice to Sourcefire during these negotiations. Qatalyst Partners did not, however, recommend any specific consideration to Sourcefire or that any specific consideration constituted the only appropriate consideration for the merger.

Qatalyst Partners provides investment banking and other services to a wide range of corporations and individuals, domestically and offshore, from which conflicting interests or duties may arise. In the ordinary course of these activities, affiliates of Qatalyst Partners may at any time hold long or short positions, and may trade or otherwise effect transactions in debt or equity securities or loans of Sourcefire, Cisco or certain of their respective affiliates. During the two year period prior to the date of Qatalyst Partners’ opinion, no material relationship existed between Qatalyst Partners or any of its affiliates and Sourcefire or Cisco or any of their respective affiliates pursuant to which compensation was received by Qatalyst Partners or its affiliates. However, Qatalyst Partners or its affiliates may in the future provide investment banking and other financial services to Sourcefire and Cisco or any of their respective affiliates for which it would expect to receive compensation.

Under the terms of its engagement letter, Qatalyst Partners provided Sourcefire with financial advisory services in connection with the merger for which it will be paid approximately $27 million, $250,000 of which was payable upon execution of such engagement letter and $4.0 million of which was payable upon delivery of its opinion, and the remaining portion of which will be paid upon, and subject to, consummation of the merger. Sourcefire has also agreed to reimburse Qatalyst Partners for its expenses incurred in performing its services. Sourcefire has also agreed to indemnify Qatalyst Partners and its affiliates, their respective members, directors, officers, partners, agents and employees and any person controlling Qatalyst Partners or any of its affiliates against certain liabilities, including liabilities under the federal securities law, and expenses related to or arising out of Qatalyst Partners’ engagement.

Financing the Merger

Cisco has represented in the merger agreement that it will have sufficient funds to pay the merger consideration to our stockholders and satisfy its other obligations under the merger agreement and in connection with the transactions contemplated thereby.

Interests of Executive Officers and Directors in the Merger

When considering the recommendation of our board of directors, you should be aware that the members of our board of directors and our executive officers (which include Messrs. John Becker, Thomas McDonough, Todd Headley, Martin Roesch, John Negron, Marc Solomon, and Douglas McNitt and Ms. Leslie Pendergrast) have interests in the merger other than their interests as Company stockholders generally, pursuant to certain agreements between such directors and executive officers and us and, in the case of all of the executive officers (other than Mr. Becker), pursuant to employment and related agreements with Cisco. These interests may be different from, or in conflict with, your interests as a Company stockholder. The members of our board of directors were aware of these additional interests, other than the terms of employment and related agreements with Cisco and us entered into subsequent to the execution of the merger agreement, and considered them, when they approved the merger agreement.

The Company Executive Change in Control Severance Plan

Each of our executive officers (other than Messrs. Becker and McNitt) is a participant in our executive change in control severance plan. In connection with the execution of the merger agreement, Messrs. McDonough, Roesch and Negron entered into employment and related agreements with Cisco and us pursuant to which they agreed to waive their rights under our executive change in control severance plan (including any rights they might have had to accelerated vesting of their equity awards either in connection with the merger or upon any subsequent event), as described below under the heading “New Agreements.” Following

 

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the execution of the merger agreement, Messrs. Headley and Solomon and Ms. Pendergrast entered into employment and related agreements with Cisco and us pursuant to which they also agreed to waive their rights under our executive change in control severance plan (including any rights they might have had to accelerated vesting of their equity awards either in connection with the merger or upon any subsequent event), as described below under the heading “New Agreements.”

Under our executive change in control severance plan, if a participant’s employment is terminated without “cause” (as defined in our executive change in control severance plan) during the period beginning on the date our board approves a change in control transaction (provided the change in control transaction is consummated) and ending within 12 months following consummation of the change in control transaction, or the participant terminates his or her employment for “good reason” (as defined in our executive change in control severance plan) within 12 months following consummation of a change in control transaction, then, in addition to earned but unpaid salary and bonus, accrued vacation pay and unreimbursed expense reimbursements, subject to signing an acceptable release in favor of us, the participant is entitled to receive severance continuation payments equal to 12 months of base salary and continuation of subsidized healthcare benefits for 12 months (or a shorter period, for continuation of healthcare benefits only, if the participant secures healthcare benefits from another employer within this period). In addition, all of the participant’s outstanding stock options vest, and 50% (or such lesser amount remaining unvested) of the number shares originally subject to each of the participant’s RSU awards vest. If consummated, the merger will be a change in control for purposes of our executive change in control severance plan.

The executive change in control severance plan also provides that, if excise taxes would be imposed on the executive officer pursuant to Section 4999 of the Code, the total payments and benefits will be reduced if the executive officer would be better off, on a net after-tax basis, reducing such amounts so that no portion of such total payments and benefits is subject to excises taxes pursuant to Section 4999 of the Code. If the executive officer would be better off, on a net after-tax basis, not reducing such amounts, the total payments and benefits will not be reduced and the executive officer will be subject to the excise taxes pursuant to Section 4999 of the Code and the Company’s ability to deduct a portion of such payments and benefits would be limited pursuant to Section 280G of the Code.

The executive change in control severance plan also provides that, in the case of any material breach by any executive officer of their proprietary information, inventions assignment and noncompetition agreement with us, we (and Cisco as our successor) have the right to cease any further payments to such executive officer, and also have the right to seek repayment of any payments made under the plan, including any severance and equity acceleration.

Employment Agreement with John Becker

Mr. Becker is party to an employment agreement with us pursuant to which, if his employment is terminated by us without “cause” or by Mr. Becker for “good reason” during the period beginning one month prior to and ending 13 months following the consummation of a change in control, then, in addition to earned but unpaid salary and bonus, accrued vacation pay and unreimbursed expense reimbursements, subject to Mr. Becker entering into and not revoking a release in the form attached to his employment agreement, Mr. Becker is entitled to receive: (a) a lump-sum severance payment equal to 1.5 times each of his base salary and target bonus; (b) continued participation in our health plan for 18 months either on a subsidized basis consistent with the level of subsidization prior to termination or Sourcefire providing payments in an amount equal to the portion of the premiums that would otherwise be subsidized by us; and (c) full and immediate vesting of each outstanding stock option award and RSU award made to Mr. Becker during his employment with us. The merger would constitute a change in control under Mr. Becker’s employment agreement.

Mr. Becker is also subject to a related noncompetition agreement and nonsolicitation agreement with us, which provides for restrictions during the one year period after his employment ends with respect to noncompetition and the two year period after his employment ends with respect to nonsolicitation.

 

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In addition, Mr. Becker’s employment agreement provides for a tax reimbursement and gross-up payment if excise taxes would be imposed on Mr. Becker pursuant to Section 4999 of the Code and where the total payments and benefits (including the value with respect to acceleration of vesting) exceed the “parachute amount” (which is defined as 299% of Mr. Becker’s “base amount,” as defined in Section 280G(b)(3) of the Code) by more than 4.6% of the parachute amount. If the total payments and benefits (including the value with respect to acceleration of vesting) exceed the “parachute amount” by an amount that is equal to or less than 4.6% of the parachute amount, such payments and benefits will be reduced so that no portion of the total payments and benefits is subject to excise taxes pursuant to Section 4999 of the Code.

It is possible that Mr. Becker may enter into new agreements with Cisco and us prior to the closing of the merger, in which case his rights would be determined under such new agreements.

Employment Agreement with Douglas McNitt

Mr. McNitt is party to an employment agreement and offer letter with us pursuant to which, if his employment is terminated by us without “cause” or by Mr. McNitt for “good reason” during the period beginning upon the announcement of a change of control or a corporate transaction (provided that such change of control or corporate transaction is consummated) and ending one year after the consummation of the change of control or corporate transaction, then, in addition to earned but unpaid salary and bonus, unreimbursed expense reimbursements and other payments required by applicable law, subject to Mr. McNitt entering into a release in the form attached to the employment agreement, Mr. McNitt is entitled to receive: (a) a lump-sum severance payment equal to his then applicable annual base salary plus his maximum annual bonus under our annual cash incentive bonus plan; (b) continued receipt of accident and health insurance for 12 months on a subsidized basis consistent with the level of subsidization prior to termination; and (c) accelerated vesting of 50% (or such lesser amount remaining unvested) of the number of shares or options initially subject to each outstanding option award and RSU award made to Mr. McNitt during his employment term. The merger would constitute a corporate transaction under Mr. McNitt’s employment agreement.

Following the execution of the merger agreement, Mr. McNitt entered into employment and related agreements with Cisco and us pursuant to which he agreed to waive his rights under his employment agreement and offer letter with us (including any rights he might have had to accelerated vesting of his equity awards either in connection with the merger or upon any subsequent event), as described below under the heading “New Agreements.”

Potential Delayed Payments

All such payments and benefits for all executive officers, other than accrued benefits, may be subject to a six-month delay in accordance with the requirements of Section 409A of the Code.

Non-Employee Directors

Our non-employee directors will be entitled to full acceleration of vesting for all shares of restricted stock that they hold immediately prior to the closing of the merger.

New Agreements

In connection with the execution of the merger agreement, each of Messrs. McDonough, Roesch and Negron entered into employment and related agreements with Cisco and us pursuant to which, contingent upon and effective as of the closing of the merger, they agreed to waive their rights under our executive change in control severance plan (including any rights they might have had to accelerated vesting of their equity awards either in connection with the merger or upon any subsequent event). Following the execution of the merger agreement, each of Messrs. Headley, Solomon and McNitt and Ms. Pendergrast entered into employment and related agreements with Cisco and us pursuant to which, contingent upon and effective as of the closing of the

 

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merger, each of Messrs. Headley and Solomon and Ms. Pendergrast also agreed to waive their rights under our executive change in control severance plan and Mr. McNitt agreed to waive his rights under his employment agreement and offer letter with us (including any rights they might have had to accelerated vesting of their equity awards either in connection with the merger or upon any subsequent event). If the merger is consummated, any rights to severance payments and benefits or accelerated vesting of equity awards upon qualifying terminations of employment will be determined pursuant to the new agreements these executive officers entered into with us and Cisco. The new agreements also provide for additional awards of RSUs to be granted to Messrs. Roesch, Negron, Solomon and McNitt, and certain other compensation and benefits for all of the executive officers, each of which is described below.

Terms of Cisco Employment Agreements

Each of Messrs. McDonough, Headley, Roesch, Negron, Solomon, and McNitt and Ms. Pendergrast has entered into an employment agreement with Cisco. These new employment agreements will take effect upon the closing of the merger and will become void if the merger is not consummated.

Titles. Under their respective employment agreements with Cisco, Mr. McDonough will serve as Vice President, Integration—Security Group, Mr. Headley will serve as Executive Advisor-Finance, Mr. Roesch will serve as Vice President, Chief Architect—Security Group, Mr. Negron will serve as Vice President, Sales, Mr. Solomon will serve as Vice President, Product Marketing, Mr. McNitt will serve as Senior Director, Legal and Ms. Pendergrast will serve as Human Resources Integration Executive.

Period of Employment. The employment agreements with Cisco provide for Messrs. Roesch, Negron, Solomon, and McNitt to remain employed by Cisco or a subsidiary for a period of at least two years following the closing of the merger and for Mr. McDonough to remain employed by Cisco or a subsidiary for at least 18 months following the closing of the merger. However, Cisco and the executives may continue the employment relationship for a longer period of time, or terminate the employment relationship at any time for any reason, subject to the obligations described below.

Period of Transitional Employment. Mr. Headley’s and Ms. Pendergrast’s employment agreements with Cisco provide for transitional employment periods, which we refer to as a “transitional employment period.” Mr. Headley’s transitional employment period is for six months following the closing of the merger and Ms. Pendergrast’s transitional employment period is for 12 months following the closing of the merger. Additionally, Ms. Pendergrast’s employment agreement provides for a further post-transitional employment period of up to an additional two months, which we refer to as the “post-transitional employment period,” following the conclusion of Ms. Pendergrast’s initial 12-month transitional employment period. However, Cisco and the executives may terminate the employment relationship at any time for any reason, subject to the obligations described below.

Termination Payments. Upon a termination of employment for any reason under the Cisco employment agreement, each executive officer would be entitled to receive his or her annual base salary earned through the date of termination, the value of all unused paid time off earned through that date, any bonus that has been earned but not yet paid, and any additional benefits the executive officer is entitled to under any then-applicable arrangements with Cisco or its affiliates (collectively, the “accrued compensation”). The Cisco employment agreements also provide for the payments and/or benefits described below if the executive officer’s employment is terminated by Cisco without “cause,” or by the executive officer with “good reason,” or, due to the executive officer’s death or “permanent disability,” with each of those terms having the meaning as defined in the respective Cisco employment agreement.

Under the employment agreements of Messrs. McDonough, Roesch, Negron, Solomon and McNitt with Cisco, if the executive officer’s employment is terminated by Cisco without “cause,” or the executive officer resigns for “good reason,” at any time prior to the first anniversary of the closing of the merger, then, in addition to the accrued compensation, provided that the executive officer executes a release of claims substantially in the

 

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form attached to his employment agreement, and satisfies all conditions to make such release effective within 60 days following such termination or resignation, he will be entitled to (i) a lump sum cash payment equal to (a) 12 months of his base salary, (b) the premiums required to continue his group health care coverage for 12 months following his termination under the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) which will be grossed-up to cover taxes, and (c) an additional amount equal to $340,000 for Mr. McDonough (which represents the first portion of his retention bonus, as described below), $1,250,000 for Mr. Roesch, $225,000 for Mr. Negron, $225,000 for Mr. Solomon and $465,000 for Mr. McNitt, (ii) the following accelerated benefits: (x) immediate vesting and ability to exercise 100% of his Cisco options that were assumed and converted from Sourcefire options in the merger and (y) with respect to Cisco RSUs that were assumed and converted from Sourcefire RSUs outstanding as of the date of the Cisco employment agreement, immediate vesting and settlement of that number of Cisco RSUs that represent the lesser of (A) 50% of the original number of shares subject to each award of Sourcefire RSUs (on a post-conversion basis), or (B) the remainder of unvested Cisco RSUs (together, the “standard acceleration benefits”), and (iii) in the case of Mr. Roesch only, full acceleration of vesting for all options and any merger consideration that Mr. Roesch agreed to subject to new vesting schedules (described below under the heading “Equity Agreement with Mr. Roesch”) (the “revested acceleration benefits”).

If Messrs. Roesch’s, Negron’s, Solomon’s or McNitt’s employment is terminated without “cause” or the executive officer resigns for “good reason” after the first anniversary of the closing of the merger, but on or prior to the second anniversary of the closing of the merger, then, in addition to the accrued compensation, the executive officer will be entitled to (i) a lump sum cash payment equal to 12 months of his base salary, plus the premiums required to continue his group health care coverage for 12 months following his termination, under the applicable provisions of COBRA (which will be grossed up to cover taxes), and (ii) in the case of Mr. Roesch only, (a) the standard acceleration benefits, and (b) the revested acceleration benefits; provided that the executive officer executes a release of claims substantially in the form attached to his employment agreement, and satisfies all conditions to make such release effective within 60 days following such termination or resignation.

Pursuant to the terms of his employment agreement with Cisco, if (a) Mr. McDonough’s employment is terminated without “cause” or he resigns for “good reason” after the first anniversary of the closing of the merger, but on or prior to the 18 month anniversary of the closing of the merger, then, in addition to the accrued compensation, he will be entitled to (i) a lump sum cash payment equal to 12 months of his base salary, plus the premiums required to continue his group health care coverage for 12 months following his termination, under the applicable provisions of COBRA (which will be grossed up to cover taxes), (ii) the standard acceleration benefits, and (iii) an additional amount equal to $560,000 (which represents the second portion of his retention bonus, as described below), or (b) Mr. McDonough’s employment is terminated without “cause” or he resigns for “good reason” after the 18 month anniversary of the closing of the merger, but on or prior to the 24 month anniversary of the closing of the merger, then, in addition to the accrued compensation, he will be entitled to a lump sum cash payment equal to 12 months of his base salary, plus the premiums required to continue his group health care coverage for 12 months following his termination, under the applicable provisions of COBRA (which will be grossed up to cover taxes); provided in each case that Mr. McDonough executes a release of claims substantially in the form attached to his employment agreement, and satisfies all conditions to make such release effective within 60 days following such termination or resignation.

Under Mr. Headley’s employment agreement with Cisco, if (a) at any time during his transitional employment period, Mr. Headley’s employment is terminated by Cisco without “cause” or Mr. Headley resigns for “good reason” or (b) Mr. Headley remains employed through his transitional employment period (in which case his employment will terminate on the last day of the employment transition period), then, in addition to the accrued compensation, provided Mr. Headley executes a release of claims substantially in the form attached to his employment agreement, and satisfies all conditions to make such release effective within 60 days following his termination or resignation, he will be entitled to (i) a lump sum cash payment equal to (A) 12 months of base salary, (B) the premiums required to continue group health care coverage for 12 months following his termination or resignation under the applicable provisions of COBRA, which will be grossed-up to cover taxes,

 

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and (C) his retention bonus (described below) of $360,000, (ii) the standard acceleration benefits, and (iii) outplacement services for up to two months.

Under Ms. Pendergrast’s employment agreement with Cisco, if (a) at any time during her transitional employment period, Ms. Pendergrast’s employment is terminated by Cisco without “cause” or Ms. Pendergrast resigns for “good reason,” (b) during her post-transitional employment, Ms. Pendergrast’s employment is terminated by her for any reason or by Cisco without “cause,” or (c) Ms. Pendergrast remains employed through her post-transitional employment period and does not accept continuing employment with Cisco (in which case her employment will terminate on the last day of the post-transitional employment period), then, in addition to the accrued compensation, provided Ms. Pendergrast executes a release of claims substantially in the form attached to her employment agreement, and satisfies all conditions to make such release effective within 60 days following her termination or resignation, she will be entitled to (i) a lump sum cash payment equal to (A) 12 months of base salary and (B) the premiums required to continue group health care coverage for 12 months following her termination under the applicable provisions of COBRA, which will be grossed-up to cover taxes, and (ii) outplacement services for up to two months. Additionally, Ms. Pendergrast would be entitled to payment of her retention bonus (described below) of $260,000 and the standard accelerated benefits if she remains employed through the last day of her initial 12-month transitional employment period or her employment is earlier terminated by Cisco without “cause” or by Ms. Pendergrast for “good reason,” provided she satisfies the general release requirements described above. Ms. Pendergrast also receives the outplacement services during her post-transitional employment period if she remains employed after her initial 12-month transitional employment period.

The payments and benefits under the employment agreements are in lieu of any severance payments or benefits the executive officers might otherwise be entitled to.

In addition to the foregoing payments and benefits, Messrs. Roesch’s, Negron’s, Solomon’s and McNitt’s employment agreements with Cisco provide that, prior to the second anniversary of the closing of the merger and subject to the execution of a release of claims and satisfaction of all conditions to make the release effective, if their employment is terminated due to death or “permanent disability,” Messrs. Negron, Solomon, and McNitt will become entitled to the standard acceleration benefits, and Mr. Roesch will become entitled to the standard acceleration benefits and the revested acceleration benefits. Mr. McDonough’s employment agreement with Cisco provides that if (i) he remains employed through the 18 month anniversary of the closing of the merger, or (ii) prior to the 18 month anniversary of the closing of the merger, his employment is terminated due to his death or “permanent disability,” subject, in either case, to the execution of a release of claims and satisfaction of all conditions to make the release effective, he will become entitled to the standard acceleration benefits. Mr. Headley’s employment agreement with Cisco provides that if, prior to the six month anniversary of the closing of the merger, his employment is terminated due to his death or “permanent disability,” subject, in either case, to the execution of a release of claims and satisfaction of all conditions to make the release effective, he will become entitled to his retention bonus payment of $360,000 and the standard acceleration benefits. Ms. Pendergrast’s employment agreement with Cisco provides that if, prior to the 12 month anniversary of the closing of the merger, her employment is terminated due to her death or “permanent disability,” subject, in either case, to the execution of a release of claims and satisfaction of all conditions to make the release effective, she will become entitled to the standard acceleration benefits.

Salaries and Target Bonus Opportunities. The executive officers initially will receive the following annual base salaries and, as applicable, target bonus opportunities, expressed as a percentage of salary: Mr. McDonough—$310,000 salary and 65% target bonus; Mr. Roesch—$300,000 salary and 65% target bonus; Mr. Negron—$300,000 salary and 65% target bonus; Mr. Solomon—$290,000 salary and 65% target bonus; Mr. McNitt—$275,000 salary and 35% target bonus; and Ms. Pendergrast—$260,000 salary and 35% target bonus. Mr. Headley will have a $360,000 salary but no target bonus opportunity. Messrs. McDonough, Roesch and Solomon will each participate in Cisco’s executive incentive plan, Mr. McNitt and Ms. Pendergrast will each participate in Cisco’s professional and leadership incentive plan, while Mr. Negron will continue to participate in Sourcefire’s sales compensation plan until the end of the 2013 calendar year.

 

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Bridging Bonuses. Under their employment agreements with Cisco, the executive officers are entitled to the following cash bridging bonuses to cover the overall change in total compensation earnings between what the executive officer could earn at Sourcefire and what the executive officer can earn at Cisco: Mr. McDonough—$92,250; Mr. Roesch—$60,000; Mr. Negron—$140,000; Mr. Solomon—$20,000; Mr. McNitt—$97,500; and Ms. Pendergrast—$49,000. Mr. Headley will not receive a bridging bonus. The bridging bonuses will be payable in eight equal payments within 30 days following the 3, 6, 9, 12, 15, 18, 21 and 24 monthly anniversaries of the closing of the merger for Mr. Solomon, payable in four equal payments within 30 days following the 6, 12, 18 and 24 monthly anniversaries of the closing of the merger for Messrs. Roesch, Negron and McNitt, payable in two equal payments within 30 days following the 6 and 12 month anniversaries of the closing of the merger for Ms. Pendergrast, and payable in 18 equal payments on the first payroll cycle following each of the monthly anniversaries of the closing of the merger for Mr. McDonough, subject to the executive officers’ employment through each payment date.

Retention Bonus. Under their employment agreements with Cisco, Messrs. McDonough and Headley and Ms. Pendergrast are also eligible for a retention bonus in the following amounts: Mr. McDonough—$900,000; Mr. Headley—$360,000; and Ms. Pendergrast—$260,000. If Mr. McDonough remains employed with Cisco or a subsidiary following the closing of the merger through (a) the 12 month anniversary of the closing of the merger, he will be entitled to $340,000, and (b) the 18 month anniversary of the closing of the merger, he will be entitled to $560,000, each payable on the first payroll period following the applicable anniversary. Mr. Headley and Ms. Pendergrast will each become entitled to their retention bonuses if they remain employed with Cisco or a subsidiary following the closing of the merger through the six month anniversary of the closing of the merger for Mr. Headley and the 12 month anniversary of the closing of the merger for Ms. Pendergrast, with each bonus payable on the first regular payroll period following the applicable anniversary.

Cisco Restricted Stock Unit Award. Under their employment agreements with Cisco, subject to approval by the compensation committee of the board of directors of Cisco, Messrs. Roesch, Negron, Solomon and McNitt will be awarded restricted stock units (a “new unit award”) for Cisco common stock in accordance with Cisco’s 2005 Stock Incentive Plan within 30 days following the closing of the merger. The new unit award will be for 25,000 shares of Cisco common stock for Mr. Roesch, 22,000 shares of Cisco common stock for Mr. Solomon, and 10,000 shares of Cisco common stock for each of Messrs. Negron and McNitt. Each new unit award will vest in equal annual installments over the first four anniversaries of the closing of the merger, subject to continued employment though each date. If the board of directors of Cisco does not approve the new unit award within 90 days following the closing of the merger, Mr. Roesch will instead receive a cash payment of $650,000, Mr. Solomon will instead receive a cash payment of $572,000 and each of Messrs. Negron and McNitt will instead receive a cash payment of $260,000, payable in equal annual installments over the first four anniversaries of the closing of the merger, subject to continued employment through each payment date.

Restricted Stock Unit Retention Bonus. Messrs. Roesch, Negron, Solomon, and McNitt also received a retention bonus award letter from us. Under each award letter, the executive officers will be entitled to a retention award of Sourcefire RSUs under our 2007 Stock Incentive Plan, equal to a number of shares having an approximate cash value of $5,000,000 for Mr. Roesch, $900,000 for each of Messrs. Negron and Solomon and $700,000 for Mr. McNitt. The awards are contingent upon and effective as of the closing of the merger, will vest in 25% increments annually on the first four anniversaries of the closing of the merger, subject to continuous employment with Cisco through each such date, and will not be subject to acceleration under any circumstances. Cisco will assume these awards upon the closing of the merger, and after the closing of the merger, the number of shares of Cisco common stock subject to the awards of RSUs will be converted in the same manner as other RSUs held by continuing employees.

Benefits Waiver. In connection with their employment agreements with Cisco, each executive officer who executed an employment agreement with Cisco, as described above, has also entered into benefits waivers with us pursuant to which the executive officer agreed to waive, contingent upon and effective as of the closing of the merger, any vesting acceleration with respect to any Sourcefire Options and Sourcefire RSUs that he or she

 

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would be entitled to in connection with the merger or a termination of employment. On the closing date of the merger, their Sourcefire Options and Sourcefire RSUs will be assumed by Cisco and exchanged for options and RSUs to acquire Cisco common stock, upon the same vesting and settlement terms and conditions in effect immediately prior to the merger. Pursuant to such benefit waivers, each executive officer also agreed to waive, contingent upon and effective as of the closing of the merger, any rights to severance under any employment agreement, plan or arrangement with us, including our executive change in control severance plan.

Noncompetition & Nonsolicitation Agreements. Each executive officer who executed an employment agreement with Cisco as described above has also executed a related noncompetition and nonsolicitation agreement, which provides that for a period of one year following the termination of employment of such executive officer, he or she will be subject to a restrictive covenant that generally prohibits him or her, in any capacity, directly or indirectly, from participating or engaging in the intrusion detection and prevention, firewall, next generation firewall, anti-malware, threat monitoring and reporting business anywhere in the world. In addition, for the same time period, such executive officer would be subject to a restrictive covenant which would prohibit him or her from soliciting any employee of Cisco or any of its subsidiaries or any employee or other service provider of Sourcefire and any of its subsidiaries who continues to provide services to Cisco or any of its subsidiaries following the closing of the merger. These Cisco noncompetition and nonsolicitation agreements replace their existing agreements with us that provide for similar restrictions during the one-year period after their employment ends.

Equity Agreement with Mr. Roesch

In connection with the employment agreement Mr. Roesch entered into with Cisco, Mr. Roesch also entered into an equity agreement with us, pursuant to which he agreed to place new vesting restrictions on all or a portion of his vested Sourcefire options and, potentially, a portion of the merger consideration he would otherwise receive for his vested Sourcefire shares of common stock.

Pursuant to the equity agreement, immediately prior to the closing date of the merger, vesting restrictions will be imposed on such number of Mr. Roesch’s vested Sourcefire options that are held immediately prior to the closing date of the merger (the “revested Sourcefire options”) and, potentially, a portion of the merger consideration he would otherwise receive for his vested Sourcefire shares that are held immediately prior to the closing date of the merger (the “revested Sourcefire shares”), such that 20% of the aggregate number of his Sourcefire shares, the aggregate number of his Sourcefire shares underlying Sourcefire options and the aggregate number of his Sourcefire shares underlying Sourcefire RSUs, outstanding as of the date Mr. Roesch entered into the equity agreement with us, will be unvested. The new vesting restrictions will first be imposed on Mr. Roesch’s vested Sourcefire options held immediately prior to the consummation of the merger. If Mr. Roesch does not hold enough vested Sourcefire options to achieve the required 20% threshold, vesting restrictions will then be imposed on the merger consideration that he would otherwise receive for his vested Sourcefire shares until the required 20% threshold is achieved.

Subject to Mr. Roesch’s continued provision of services to Cisco, (1) the Cisco options that he will be entitled to receive in exchange for his revested Sourcefire options (his “revested Cisco options”) will vest and become exercisable and (2) the unvested Cisco merger consideration, if any, that he will be entitled to receive in exchange for his revested Sourcefire shares, if any, (“revested Cisco merger consideration”) will vest in equal installments on each of the 24 monthly anniversaries of the closing date of the merger, such that his revested Cisco options and revested Cisco merger consideration will be fully vested on the second anniversary of the closing date of the merger. As described above, if Mr. Roesch is terminated without “cause” or resigns with “good reason”, or dies or becomes permanently disabled at any time prior to the second anniversary of the closing of the merger, 100% of the revested Cisco options and revested Cisco merger consideration will immediately vest, subject, in any case, to the execution of a release of claims and satisfaction of all conditions to make the release effective.

 

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Annual Bonuses

Pursuant to the terms of the merger agreement, the compensation committee of the Company’s board of directors is permitted to conclusively determine the annual cash incentive awards to be awarded under the Company’s executive annual incentive plan relating to the 2013 calendar year for employees who are employed at the Company or a subsidiary immediately prior to the closing of the merger, including the executive officers, and such awards shall be paid immediately prior to closing of the merger. Under our annual incentive plan, the performance goal for the performance period in which the merger takes place is deemed achieved as of the date immediately prior to the effective date of the merger and each participant’s target award is to be paid on the effective date of the merger, provided that the compensation committee, in its sole discretion, may eliminate or reduce the target award payable to any participant. The bonuses will not exceed the target bonuses that could be earned under the plan.

Compensation Summary

The following table is a summary of the information provided above and sets forth the following amounts:

 

   

the expected initial annual base salary each of our executive officers would have as an employee of Cisco;

 

   

the target bonus opportunity each of our executive officers would have as an employee of Cisco;

 

   

Messrs. McDonough’s and Headley’s and Ms. Pendergrast’s retention bonus opportunity;

 

   

Messrs. McDonough’s, Roesch’s, Negron’s, Solomon’s and McNitt’s and Ms. Pendergrast’s bridging allowance;

 

   

the value of new Sourcefire restricted stock units Messrs. Roesch, Negron, Solomon and McNitt would receive effective as of the closing of the merger; and

 

   

the estimated value of Cisco restricted stock units Messrs. Roesch, Negron, Solomon and McNitt would receive within 30 days following the closing of the merger.

 

Name of Executive Officer

   Annual Base
Salary ($)(1)
     Target
Bonus
($)(2)
     Bridging
Allowance ($)
     Retention
Bonus ($)
     Value of New
Sourcefire
Restricted
Stock Units
($)
     Estimated
Value of Cisco
Restricted
Stock Units($)(3)
 

John Becker

     460,000         460,000         0         0         0         0   

Thomas McDonough

     310,000         201,500         92,250         900,000         0         0   

Todd Headley

     360,000         0         0         360,000         0         0   

Martin Roesch

     300,000         195,000         60,000         0         5,000,000         582,750   

John Negron

     300,000         195,000         140,000         0         900,000         233,100   

Marc Solomon

     290,000         188,500         20,000         0         900,000         512,820   

Leslie Pendergrast

     260,000         91,000         49,000         260,000         0         0   

Douglas McNitt

     275,000         96,250         97,500         0         700,000         233,100   

 

(1) For Mr. Becker this represents his current salary with us. For Messrs. McDonough, Headley, Roesch, Negron, Solomon and McNitt and Ms. Pendergrast this represents his or her new salary pursuant to their new employment agreement with Cisco.
(2) For Mr. Becker this represents his current target bonus with us. For Messrs. McDonough, Roesch, Negron, Solomon and McNitt and Ms. Pendergrast this represents his or her new target bonus pursuant to their new employment agreement with Cisco.
(3) Messrs. Roesch, Negron, Solomon and McNitt will receive Cisco restricted stock units for 25,000, 10,000, 22,000 and 10,000 shares, respectively, following the closing of the merger. Value of these restricted stock units is calculated based on the closing price of Cisco’s common stock as reported on NASDAQ on August 30, 2013, which was $23.31.

 

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Estimated Payments and Benefits

Estimates of the total payments and benefits (including the value with respect to acceleration of vesting of equity awards, based on a $76.00 share value) that would be provided to our named executive officers—Messrs. Becker, McDonough, Headley, Roesch, Negron and Solomon—assuming the merger is consummated and each of the executive’s employment is terminated without cause or for good reason on August 30, 2013, is set forth in the table below under the heading “Golden Parachute Compensation.” We estimate that the aggregate severance payments and benefits that would be provided to our other executive officers—Mr. McNitt and Ms. Pendergrast—would be $870,180 and $648,630, respectively, and the aggregate value of accelerated vesting of equity awards held by Mr. McNitt and Ms. Pendergrast, based on a $76.00 share value, would be $1,457,420 and $1,770,707, respectively. Additional information regarding the outstanding equity awards held by our executive officers can be found in the discussion and tables under the heading “ Treatment of Options, Restricted Stock Units and Unvested Company Shares Held By Executive Officers and Directors.”

Treatment of Options, Restricted Stock Units and Unvested Company Shares Held By Executive Officers and Directors

Company Options. At the effective time of the merger, all of our unexpired, unexercised and outstanding stock options (other than the stock options held by Mr. Becker that have performance-based vesting conditions), held by our executive officers who are employed as of the effective time of the merger, whether vested or unvested (collectively, “rollover options”), will be assumed by Cisco and converted into Cisco options. Rollover options will be exercisable for that number of whole shares of Cisco common stock equal to the product (rounded down to the next whole number of shares of Cisco common stock, with no cash being payable for any fractional share eliminated by such rounding) of the number of shares of our common stock that were issuable upon exercise of such rollover options immediately prior to the effective time of the merger and the exchange ratio set forth below. The per share exercise price for the shares of Cisco common stock issuable upon exercise of a rollover option will be equal to the quotient (rounded up to the next whole cent) obtained by dividing the exercise price per share of our common stock at which such rollover option was exercisable immediately prior to the effective time of the merger by the exchange ratio. The vesting schedules and other terms and conditions of the Cisco options (as such vesting schedules, terms and conditions may be amended or modified by agreements that we and/or Cisco enter into with the continuing employees before closing of the merger) will be the same as they were before being converted to Cisco options.

The “exchange ratio” will equal $76.00 divided by the volume-weighted average sale price for a share of Cisco’s common stock as quoted on NASDAQ for the ten consecutive trading days ending with the third trading day that precedes the closing date of the merger.

Each of our unvested options held by Mr. Becker that are eligible for vesting as a result of satisfying applicable performance conditions will vest in full on the closing date of the merger and Mr. Becker will receive the “cash-out amount.” The “cash-out amount” means, with respect to these options held by Mr. Becker, an amount of cash, without interest, equal to (A) the number of shares of our common stock subject to such stock option multiplied by (B) the remainder of (x) $76.00 less (y) the exercise price per share of such stock option in effect immediately prior to the effective time of the merger.

Restricted Stock Units that Will Be Assumed by Cisco. At the effective time of the merger, each of our unvested restricted stock unit (“RSU”) awards held by our executive officers who are employed as of the effective time of the merger (collectively, “rollover RSUs”) will be assumed by Cisco and converted into Cisco RSUs. The vesting schedules and other terms and conditions of the Cisco RSUs (as such vesting schedules, terms and conditions may be amended or modified by agreements that we and/or Cisco enter into with the continuing employees before closing of the merger) will be the same as they were before being converted to Cisco RSUs, except that rollover RSUs will be settled by the issuance of that number of whole shares of Cisco’s common stock equal to the product (rounded down to the next whole number of shares of Cisco common stock, with no

 

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cash being payable for any fractional share eliminated by such rounding) of the number of shares of our common stock that were issuable upon settlement such rollover RSU immediately prior to the effective time of the merger multiplied by the “exchange ratio” (described above).

RSUs with Performance-Based Vesting Provisions. Prior to the effective time of the merger, our compensation committee will cause, contingent and effective as of immediately prior to the effective time of the merger, each of our unvested RSUs held by our executive officers that are eligible for accelerated vesting as a result of satisfying applicable performance conditions (each, a “performance accelerated RSU”) to provide that the number of shares eligible for vesting acceleration on each performance measurement date shall instead vest on the annual anniversary of the original grant date of such performance accelerated RSU, subject to the holder of such RSU remaining employed by us, or by one of our subsidiaries or Cisco, as applicable, on the applicable annual vesting date.

Restricted Stock. Immediately prior to the effective time of the merger, pursuant to the terms of the restricted stock award agreements, any outstanding shares of restricted stock will become fully vested, and the holder thereof will be entitled to receive the merger consideration for each such restricted share of Company common stock. Only our non-employee directors hold restricted stock.

The following table sets forth the number of shares of Sourcefire common stock subject to each of the Company’s executive officer’s and non-employee director’s, as applicable, vested and unvested stock options, unvested restricted stock units and restricted stock awards, as well as the approximate value of each of those awards. The dollar amounts set forth below are determined based on a per-share value of $76.00, which is the per-share merger consideration to be received by our stockholders. Other than as described below, the table does not include the grants to be made following August 30, 2013.

 

   

Vested

Company

Stock Options

   

Unvested
Company

Stock Options

   

Unvested

Company RSUs

    Company
Restricted
Stock(4)
 

Name

  Shares (#)     Value ($)     Shares (#)     Value ($)(2)     Shares (#)     Value ($)(3)     Shares (#)     Value ($)  

Executive Officers

               

John C. Becker

    —          —          270,000        5,821,201        130,000        9,880,000        —          —     

Thomas M. McDonough

    1,980        98,683        7,205        359,097        38,949        2,960,124        —          —     

Todd P. Headley

    10,995        547,991        7,205        359,097        50,596        3,845,296        —          —     

Martin F. Roesch(1)

    83,637        5,864,961        5,621        280,151        61,475        4,672,100        —          —     

John G. Negron(1)

    —          —          20,836        1,010,338        52,182        3,965,832        —          —     

Marc W. Solomon(1)

    6,248        334,412        18,402        990,811        47,932        3,642,832        —          —     

Leslie Pendergrast

    5,370        336,280        4,434        220,991        31,982        2,430,632        —          —     

Douglas W. McNitt(1)

    1,687        84,080        3,563        177,580        26,932        2,046,832        —          —     

Non-Employee Directors

               

Steven R. Polk

    —          —          —          —          —          —          2,390        181,640   

Michael Cristinziano

    —          —          —          —          —          —          2,390        181,640   

Tim A. Guleri

    —          —          —          —          —          —          2,390        181,640   

Kevin Klausmeyer

    —          —          —          —          —          —          4,508        342,608   

Charles E. Peters, Jr.

    —          —          —          —          —          —          4,906        372,856   

Arnold L. Punaro

    —          —          —          —          —          —          2,390        181,640   

 

(1) In addition, contingent upon and effective as of the closing of the merger, Messrs. Roesch, Negron, Solomon and McNitt will receive awards of Sourcefire RSUs under our 2007 Stock Incentive Plan, having approximate cash value of $5,000,000, $900,000, $900,000 and $700,000, respectively.
(2) The approximate value of each stock option reflects the number of options held by each executive officer, multiplied by the remainder of $76.00 minus the exercise price per share of each option.
(3) The approximate value of each restricted stock unit reflects the number of restricted stock units held by each executive officer, multiplied by $76.00.
(4) The total number of shares of restricted stock indicates the number of shares of restricted stock that will vest at the closing of the merger and the value each non-employee director will receive as a result of such acceleration.

 

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Assumed/Converted Stock Options and Restricted Stock Units. The table below sets forth, as of August 30, 2013, for each of our executive officers, the number of all such stock options and RSUs that will be assumed by Cisco and become stock options or RSUs, as the case may be, for Cisco common stock having equivalent economic value. Our non-employee directors do not hold any stock options or RSUs. For purposes of the table below, the exchange ratio is 3.100851102, which represents $76.00, divided by $24.5094 (which is the volume-weighted average sale price for a share of Cisco’s common stock as quoted on NASDAQ for the ten consecutive trading days ending with the third trading day that precedes August 30, 2013).

Stock Options and Restricted Stock Units To Be Assumed by Cisco

 

Name

   Total Number
of Company
Stock
Options at the
Closing (#)
     Total Number
of Cisco
Stock
Options after the
Closing (#)
     Total Number
of Company
RSUs at the
Closing (#)
     Total Number
of Cisco
RSUs after the
Closing (#)
 

Executive Officers

           

John C. Becker(1)

     130,000         403,110         130,000         403,110   

Thomas M. McDonough

     9,185         28,481         38,949         120,775   

Todd P. Headley

     18,200         56,435         50,596         156,890   

Martin F. Roesch(2)

     89,258         276,775         127,264         394,626   

John G. Negron(2)

     20,836         64,609         64,024         198,528   

Marc W. Solomon(2)

     24,650         76,435         59,774         185,350   

Leslie Pendergrast

     9,804         30,400         31,982         99,171   

Douglas W. McNitt(2)

     5,250         16,279         36,142         112,070   

 

(1) Mr. Becker also holds 140,000 performance-based options which will not be assumed by Cisco in the merger. Mr. Becker will receive a cash payment of approximately $3,018,400 for such options at closing.
(2) Includes an estimate of the number of Sourcefire RSUs that would be granted, contingent upon and effective as of the closing of the merger, to Messrs. Roesch, Negron, Solomon and McNitt under our 2007 Stock Incentive Plan, which are to have an approximate cash value of $5,000,000, $900,000, $900,000 and $700,000, respectively. We estimated the number of RSUs that would be granted (65,789 for Mr. Roesch, 11,842 for Mr. Negron, 11,842 for Mr. Solomon and 9,210 for Mr. McNitt) assuming the grant amounts were determined based on a $76.00 share price.

Insurance; Indemnification; Exculpation

The merger agreement provides that for six years after the effective time of the merger, the surviving corporation will maintain, to the extent commercially available, our directors’ and officers’ liability insurance in effect on the date of the merger agreement (or comparable substitutes for such insurance or a “tail” policy), for the benefit of those persons who were our directors and officers prior to the effective time of the merger for their acts and omissions occurring prior to the effective time of the merger. The surviving corporation’s obligation to provide this insurance coverage is subject to a cap on annual premiums equal to 300% of Sourcefire’s most recently paid annual premium for such insurance coverage. For more information, see “Proposal No. 1 — Adoption of the Merger Agreement — The Merger Agreement — Further Actions and Agreements — Indemnification of Officers and Directors” beginning on page 77.

Section 145 of the DGCL provides that a Delaware corporation may indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation or is or was serving at the request of such corporation as an officer, director, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement

 

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actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was illegal. A Delaware corporation may also indemnify any persons who are, or are threatened to be made, a party to any threatened, pending or completed action or suit by or in the right of the corporation by reason of the fact that such person was an officer, director, employee or agent of such corporation or is or was serving at the request of such corporation as an officer, director, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Expenses incurred by any officer or director in defending any such action, suit or proceeding in advance of its final disposition may be paid by the corporation upon receipt of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such officer or director is not entitled to be indemnified by the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses which such officer or director actually and reasonably has incurred. Our bylaws provide for the indemnification of our directors and officers to the maximum extent permitted under the law.

Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability for any:

 

   

transaction from which the director derives an improper personal benefit;

 

   

act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

   

unlawful payment of dividends or redemption of shares; or

 

   

breach of a director’s duty of loyalty to the corporation or its stockholders.

Our charter provides for such limitation of liability to the fullest extent permitted by the DGCL. In addition, we have entered into indemnity agreements with our officers and directors which provide, among other things, that we will indemnify such officer or director, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines and settlements he or she may be required to pay in actions or proceedings which he or she is or may be made a party by reason of his or her position as a director, officer or other agent of Sourcefire, and otherwise to the fullest extent permitted under Delaware law and our charter.

From and after the effective time of the merger until the sixth anniversary of the effective time of the merger, Cisco will assume, and will cause the surviving corporation to, fulfill and honor in all respects our obligations pursuant to any indemnification agreements with us made available to Cisco prior to the date of the merger agreement, our charter or our bylaws as in effect on the date of the merger agreement with respect to our officers’ and directors’ acts and omissions occurring prior to the effective time of the merger. From and after the effective time of the merger, such obligations shall be the joint and several obligations of Cisco and the surviving corporation. The merger agreement further provides that the charter and bylaws of the surviving corporation will contain advancement, exculpation and indemnification provisions that are at least as favorable in the aggregate to the applicable indemnified persons as those contained in the charter and bylaws of Sourcefire or its subsidiaries as of the date of the merger agreement, and those advancement, exculpation and indemnification provisions will not be amended, repealed or otherwise modified for a period of six years from the effective time of the merger in any manner that adversely affects the rights thereunder of the indemnified parties.

 

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Appraisal Rights

Under the DGCL, any holder of Sourcefire common stock who does not vote in favor of the adoption of the merger agreement, who properly demands appraisal of his, her or its shares and who otherwise complies with the requirements of Section 262 of the DGCL, which we refer to as Section 262, will be entitled to have the “fair value” of his, her or its shares (exclusive of any element of value arising from the accomplishment or expectation of the merger) judicially determined by the Delaware Court of Chancery and paid to the holder in cash (together with interest, if any) in the amount judicially determined by the Delaware Court of Chancery to be the fair value, provided that the holder strictly complies with the provisions of Section 262. The “fair value” of a holder’s shares of Sourcefire common stock as determined by the Delaware Court of Chancery may be more or less than, or the same as, the $76.00 per share that such holder is otherwise entitled to receive under the terms of the merger agreement if the merger is completed. These rights are known as appraisal rights. If a holder of shares of Sourcefire common stock fails to follow precisely any of the statutory requirements regarding appraisal rights, he, she or it will lose his, her or its appraisal rights.

The following discussion is not a complete statement of the law pertaining to appraisal rights under the DGCL, and is qualified in its entirety by the full text of Section 262, which is provided in its entirety as Annex D to this proxy statement. The following summary does not constitute any legal or other advice nor does it constitute a recommendation that stockholders exercise their appraisal rights under Section 262. All references in this summary to a “holder” or “stockholder” are to the record holder of the shares of Sourcefire common stock as to which appraisal rights are asserted. A person having a beneficial interest in shares of Sourcefire common stock held of record in the name of another person, such as a bank, broker, trust or other nominee, must act promptly to cause the record holder to follow properly the steps set forth in Section 262 and summarized below in a timely manner to perfect appraisal rights.

Under Section 262, where a merger agreement is to be submitted for adoption at a meeting of stockholders, as in the case of our special meeting, Sourcefire, not less than 20 days before the meeting, must notify each of its stockholders entitled to appraisal rights that appraisal rights are available and include in such notice a copy of Section 262. This proxy statement constitutes such notice and the applicable statutory provisions of the DGCL are attached to this proxy statement as Annex D, in compliance with the requirements of Section 262. Any stockholder who wishes to exercise appraisal rights or who wishes to preserve the right to do so should carefully review the following discussion and Annex D to this proxy statement. Failure to strictly comply with the procedures specified in Section 262 timely and properly will result in the loss of appraisal rights. Moreover, because of the complexity of demanding and perfecting appraisal of Sourcefire common stock, we believe that stockholders who consider exercising such appraisal rights should seek the advice of legal counsel.

Any holder of Sourcefire common stock wishing to exercise appraisal rights under Section 262 must satisfy each of the following conditions:

 

   

as more fully described below, the holder must deliver to us a written demand for appraisal of the holder’s shares of Sourcefire common stock before the vote on the adoption of the merger agreement at our special meeting, which demand will be sufficient if it reasonably informs us of the identity of the holder and the holder’s intention to demand the appraisal of the holder’s shares under the DGCL;

 

   

the holder must not vote the holder’s shares of Sourcefire common stock in favor of adoption of the merger agreement; a validly submitted proxy which does not contain voting instructions with respect to Proposal No. 1 will, unless revoked, be voted in favor of adoption of the merger agreement and it will constitute a waiver of the stockholder’s right of appraisal and nullify any previously delivered written demand. Therefore, a stockholder who submits a proxy and who wishes to exercise appraisal rights must vote against adoption of the merger agreement or abstain from voting on adoption of the merger agreement; and

 

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the holder must continuously hold the shares of Sourcefire common stock from the date of making the demand through the effective time of the merger; a stockholder who is the record holder of shares of Sourcefire common stock on the date the written demand for appraisal is made but who thereafter transfers those shares before the effective time of the merger will lose any right to appraisal in respect of those shares.

Neither voting (in person or by proxy) against, abstaining from voting on nor failing to vote on the proposal to adopt the merger agreement will constitute a written demand for appraisal within the meaning of Section 262. The written demand for appraisal must be in addition to and separate from any such proxy or vote.

If a holder of shares of Sourcefire common stock fails to comply with these conditions and the merger is completed, he, she or it will be entitled to receive payment for his, her or its shares of Sourcefire common stock as provided for in the merger agreement, but he, she or it will have no appraisal rights with respect to his, her or its shares of Sourcefire common stock.

Only a holder of record of shares of Sourcefire common stock is entitled to assert appraisal rights for the shares in that holder’s name. A demand for appraisal should be executed by or on behalf of the stockholder of record, fully and correctly, as the stockholder’s name appears on our stock records, and should specify the stockholder’s name and mailing address, the number of shares of Sourcefire common stock owned and that the stockholder intends to demand appraisal of the “fair value” of the stockholder’s common stock. If a stockholder of record transfers his, her or its shares of Sourcefire common stock prior to the effective time, he, she or it will lose any right to appraisal in respect of such shares. A proxy that is submitted and does not contain voting instructions will, unless revoked, be voted in favor of the proposal to adopt the merger agreement, and it will constitute a waiver of the stockholder’s right of appraisal and will nullify any previously written demand for appraisal. Therefore, a stockholder who submits a proxy and who wishes to exercise appraisal rights must either submit a proxy containing instructions to vote against the proposal to adopt the merger agreement or abstain from voting on the proposal to adopt the merger agreement. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of the demand should be made in that capacity. If the shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or on behalf of all joint owners. An authorized agent, including an agent for two or more joint owners, may execute a demand for appraisal on behalf of a stockholder; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, the agent is acting as agent for such owner or owners. A record holder such as a bank, broker or trust who holds shares as nominee for several beneficial owners may exercise appraisal rights with respect to the shares held for one or more beneficial owners while not exercising appraisal rights with respect to the shares held for one or more other beneficial owners. In such case, the written demand should set forth the number of shares as to which appraisal is sought, and where no number of shares is expressly mentioned the demand will be presumed to cover all shares held in the name of the record owner. Stockholders who hold their shares in bank, brokerage or trust accounts or other nominee forms and who wish to exercise appraisal rights are urged to consult with their banks, brokers, trusts or nominees to determine appropriate procedures for the making of a demand for appraisal by the nominee.

A stockholder who elects to exercise appraisal rights under Section 262 should mail or deliver a written demand to:

Sourcefire, Inc.

9770 Patuxent Woods Drive

Columbia, Maryland 21046

Attention: Secretary

Such demands must be delivered before the vote is taken to approve the proposal to adopt the merger agreement at the special meeting, and must be executed by, or on behalf of, the record holder of the shares of Sourcefire common stock. The demand must reasonably inform Sourcefire of the identity of the stockholder and

 

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the intention of the stockholder to demand appraisal of the “fair value” of his, her or its shares of Sourcefire common stock. A stockholder’s failure to make such written demand prior to the taking of the vote on the adoption of the merger agreement at the special meeting will constitute a waiver of appraisal rights.

Within 10 days after the effective time of the merger, we, as the surviving corporation, must send a notice as to the effectiveness of the merger to each former stockholder who has made a written demand for appraisal in accordance with Section 262 and who has not voted to adopt the merger agreement. Within 120 days after the effective time of the merger, but not thereafter, either we or any stockholder who has complied with the requirements of Section 262 and is entitled to appraisal rights under Section 262 may commence an appraisal proceeding by filing a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares of Sourcefire common stock held by all stockholders seeking appraisal of their shares. Upon the filing of any such petition by a stockholder, service of a copy of such petition shall be made upon the surviving corporation. We are under no obligation to and have no present intention to file a petition for appraisal, and stockholders seeking to exercise appraisal rights should not assume that we will file such a petition. Accordingly, stockholders who desire to have their shares appraised should initiate any petitions necessary for the perfection of their appraisal rights within the time periods and in the manner prescribed in Section 262. Inasmuch as we have no obligation to file such a petition, the failure of a stockholder to do so within the period specified could nullify the stockholder’s previous written demand for appraisal.

Within 120 days after the effective time of the merger, any stockholder who has complied with the provisions of Section 262 to that point in time will be entitled to receive from the surviving corporation, upon written request, a statement setting forth the aggregate number of shares not voted in favor of adoption of the merger agreement and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. The surviving corporation must mail that statement to the stockholder within 10 days after receipt of the request or within 10 days after expiration of the period for delivery of demands for appraisals under Section 262, whichever is later. A person who is the beneficial owner of shares of Sourcefire common stock held either in a voting trust or by a nominee on behalf of such person may, in such person’s own name, file a petition or may request from us the statement described in this paragraph.

A stockholder timely and duly filing a petition for appraisal with the Delaware Court of Chancery must deliver a copy of the petition to us. We will then be obligated within 20 days to file with the Delaware Register in Chancery a duly verified list containing the names and addresses of all stockholders who have demanded appraisal of their shares and with whom we have not reached agreements as to the value of their shares. After notice to those stockholders, as required by the Delaware Court of Chancery, the Delaware Court of Chancery is empowered to conduct a hearing on the petition to determine which stockholders have complied with Section 262 and who have become entitled to the appraisal rights provided by Section 262. The Register in Chancery, if so ordered by the Delaware Court of Chancery, will give notice of the time and place fixed for the hearing of such petition by registered or certified mail to us and to the stockholders shown on the list at the addresses stated therein. Such notice will also be given by one or more publications at least one week before the date of the hearing in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Delaware Court of Chancery deems advisable. The Delaware Court of Chancery may require stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings, and if any stockholder fails to comply with the requirement, the Delaware Court of Chancery may dismiss the proceedings as to that stockholder.

After the Delaware Court of Chancery determines the holders of Sourcefire common stock entitled to appraisal, the appraisal proceeding shall be conducted in accordance with the rules of the Delaware Court of Chancery, including any rules specifically governing appraisal proceedings. Through this proceeding, the Delaware Court of Chancery will determine the “fair value” of the shares of Sourcefire common stock as of the effective time of the merger after taking into account all relevant factors, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with interest, if any, to be paid upon the

 

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amount determined to be the fair value. When the fair value has been determined, the Delaware Court of Chancery will direct the payment of such value upon surrender by those stockholders of the certificates representing their shares of Sourcefire common stock. Unless the Delaware Court of Chancery in its discretion determines otherwise for good cause shown, interest from the effective time of the merger through the date of payment of the judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective time of the merger and the date of payment of the judgment. The costs of the action (which do not include attorneys’ fees and the fees and expenses of experts) may be determined by the Delaware Court of Chancery and taxed upon the parties as the Delaware Court of Chancery deems equitable. Upon application of a dissenting stockholder, the Delaware Court of Chancery may also order that all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts, be charged pro rata against the value of all of the shares entitled to appraisal. In the absence of such determination, each party bears its own expenses. If no petition for appraisal is filed within 120 days after the effective time of the merger, or if the stockholder otherwise fails to perfect, successfully withdraws or loses such holder’s right to appraisal, then the right of that stockholder to appraisal will cease and that stockholder’s shares will be deemed to have been converted at the effective time of the merger into the right to receive the $76.00 per share cash payment (without interest) pursuant to the merger agreement. A stockholder will fail to perfect, or effectively lose, the right to appraisal if, among other things, no petition for appraisal is filed within 120 days after the effective time of the merger. Stockholders considering seeking appraisal should be aware that the fair value of their shares as determined under Section 262 could be more than, the same as or less than the value of cash they would receive under the merger agreement if they did not seek appraisal of their shares. Neither Cisco nor we anticipate offering more than the applicable merger consideration to any stockholder exercising appraisal rights, and each of Cisco and us reserves the right to assert, in any appraisal proceeding, that for purposes of Section 262, the “fair value” of a share of Sourcefire common stock is less than the applicable merger consideration. The Delaware courts have stated that the methods which are generally considered acceptable in the financial community and otherwise admissible in court may be considered in the appraisal proceedings. In addition, the Delaware courts have decided that the statutory appraisal remedy, depending on factual circumstances, may or may not be a dissenting stockholder’s exclusive remedy. Stockholders should be aware that Qatalyst Partners opinion regarding fairness, is not an opinion as to fair value under Section 262.

In determining fair value, the Delaware Court of Chancery is to take into account all relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court” should be considered, and that “[f]air price obviously requires consideration of all relevant factors involving the value of a company.” The Delaware Supreme Court stated that, in making this determination of fair value, the court must consider “market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts which were known or which could be ascertained as of the date of the merger and which throw any light on future prospects of the merged corporation.” Section 262 provides that fair value is to be “exclusive of any element of value arising from the accomplishment or expectation of the merger.” In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a “narrow exclusion [that] does not encompass known elements of value,” but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Delaware Supreme Court stated that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.”

Any stockholder who has duly demanded an appraisal in compliance with Section 262 will not, after the effective time of the merger, be entitled to vote the shares subject to that demand for any purpose or be entitled to the payment of dividends or other distributions on those shares (except dividends or other distributions payable to holders of record of shares as of a record date before the effective time of the merger).

 

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At any time within 60 days after the effective time of the merger, any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party may withdraw his, her or its demand for appraisal and accept the merger consideration by delivering to the surviving corporation a written withdrawal of the stockholder’s demand for appraisal. However, any such attempt to withdraw made more than 60 days after the effective time of the merger will require written approval of the surviving corporation. No appraisal proceeding in the Delaware Court of Chancery will be dismissed as to any stockholder without the approval of the Delaware Court of Chancery, and such approval may be conditioned upon such terms as the Delaware Court of Chancery deems just; provided, however, that any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party may withdraw its demand for appraisal and accept the merger consideration offered pursuant to the merger agreement within 60 days after the effective time of the merger. If the surviving corporation does not approve a stockholder’s request to withdraw a demand for appraisal when that approval is required or, except with respect to a stockholder that withdraws its right to appraisal in accordance with the proviso in the immediately preceding sentence, if the Delaware Court of Chancery does not approve the dismissal of an appraisal proceeding, the stockholder would be entitled to receive only the appraised value determined in any such appraisal proceeding, which value could be more than, the same as or less than the value of the consideration being offered pursuant to the merger agreement.

This summary does not purport to be complete and is qualified in its entirety by reference to the full text of Section 262, a copy of which is attached to this proxy statement as Annex D and which is incorporated herein by reference.

Failure to strictly comply with all of the procedures set forth in Section 262 may result in the loss of a stockholder’s statutory appraisal rights. Consequently, any stockholder wishing to exercise appraisal rights is urged to consult legal counsel before attempting to exercise appraisal rights.

Regulatory Approvals

In connection with the merger, we are required to make certain filings with, and comply with certain laws of, various federal and state governmental agencies, including:

 

   

filing the certificate of merger with the Secretary of State of the State of Delaware in accordance with the DGCL after the adoption of the merger agreement by our stockholders and the satisfaction of all other conditions to the consummation of the merger contained in the merger agreement; and

 

   

complying with U.S. federal securities laws.

Under the HSR Act, and the related rules and regulations that have been issued by the U.S. Federal Trade Commission, which we refer to as the FTC, certain transactions having a value above specified thresholds may not be consummated until specified information and documentary material have been furnished to the FTC and the U.S. Department of Justice, which we refer to as the DOJ, and certain waiting period requirements have been satisfied. The requirements of the HSR Act apply to the acquisition of shares of Company common stock in the merger. Sourcefire and Cisco filed the notification and report forms under the HSR Act with the FTC and the Antitrust Division of the DOJ on August 2, 2013 and received notice of early termination of the waiting period on September 3, 2013. In addition, the antitrust and competition laws of certain foreign jurisdictions apply to the merger. Cisco and Sourcefire have made the requisite filings in such jurisdictions and have received clearance from all jurisdictions where filings were required.

At any time before or after consummation of the merger, notwithstanding the expiration or termination of required waiting periods and the receipt of any other required approvals, the Antitrust Division of the DOJ, the FTC or state or foreign antitrust and competition authorities could take such action under applicable antitrust or competition laws as each deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the merger or seeking divestiture or licensing of substantial assets and businesses, including assets and businesses of the Company and/or Cisco. Private parties may also seek to take legal action under the antitrust and competition laws under certain circumstances.

 

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Material U.S. Federal Income Tax Consequences of the Merger

The following is a summary of the material U.S. federal income tax consequences of the merger to “U.S. holders” and “non-U.S. holders” (each, as defined below) who receive cash pursuant to the merger in exchange for their shares of Sourcefire common stock. The discussion does not purport to consider all aspects of U.S. federal income taxation that might be relevant to holders of Sourcefire common stock. The discussion is based on the Code, applicable current and proposed U.S. Treasury regulations, judicial authority and administrative rulings and practice, all as in effect as of the date of this proxy statement and all of which are subject to change or varying interpretations, possibly with retroactive effect. Any change could alter the tax consequences of the merger to U.S. holders and non-U.S. holders.

This discussion applies only to U.S. holders and non-U.S. holders who beneficially own shares of Sourcefire common stock as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all aspects of U.S. federal income taxation that may be relevant to particular U.S. holders and non-U.S. holders of Sourcefire common stock in light of their particular circumstances, or that may apply to persons that are subject to special treatment under U.S. federal income tax laws (including, for example, insurance companies, tax-exempt organizations, financial institutions, broker-dealers, cooperatives, traders in securities who elect to mark their securities to market, mutual funds, regulated investment companies, real estate investment trusts, S corporations, persons subject to the alternative minimum tax, U.S. holders whose functional currency is not the U.S. dollar, persons who validly exercise appraisal rights, partnerships or other passthrough entities and persons holding shares of Sourcefire common stock through a partnership or other pass-through entity, persons who acquired shares of Sourcefire common stock in connection with the exercise of employee stock options or otherwise as compensation, U.S. expatriates, “passive foreign investment companies,” “controlled foreign corporations,” persons who hold shares of Sourcefire common stock as part of a hedge, straddle, constructive sale or conversion transaction and persons who hold any equity interest, directly or indirectly through constructive ownership or otherwise, in Cisco after the merger). This discussion does not address any aspect of state, local or foreign tax laws or U.S. federal tax laws other than U.S. federal income tax laws.

The summary set forth below is for general information purposes only. It is not intended to be, and should not be construed as, legal or tax advice to any particular beneficial owner of Sourcefire common stock. The summary is not intended to constitute a complete description of all tax consequences relating to the merger. Because individual circumstances may differ, each beneficial owner should consult its tax advisor regarding the applicability of the rules discussed below to the beneficial owner and the particular tax effects of the merger to the beneficial owner, including the application of state, local and foreign tax laws.

For purposes of this summary, a “U.S. holder” is a person that is a beneficial owner of shares of Sourcefire common stock and is for U.S. federal income tax purposes any of the following:

 

   

an individual who is a citizen or resident of the United States;

 

   

a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state of the United States or the District of Columbia;

 

   

an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

 

   

a trust if (a) a U.S. court is able to exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust; or (b) it has a valid election in place to be treated as a domestic trust for U.S. federal income tax purposes.

A “non-U.S. holder” is a beneficial owner of shares of Sourcefire common stock other than (i) a U.S. holder or (ii) any partnership or other entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes.

 

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If shares of Sourcefire common stock are held by a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes), the U.S. federal income tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. Partnerships that hold shares of Sourcefire common stock and partners in such partnerships are urged to consult their tax advisors regarding the tax consequences to them of the merger.

U.S. Holders. The receipt of cash for shares of Sourcefire common stock pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes. In general, a U.S. holder who exchanges shares of Sourcefire common stock for cash pursuant to the merger will recognize capital gain or loss equal to the difference, if any, between the amount of cash received in exchange for such shares and the U.S. holder’s adjusted tax basis in such shares. A U.S. holder’s adjusted tax basis will generally equal the holder’s purchase price for the shares. If a U.S. holder acquired different blocks of Sourcefire common stock at different times or different prices, such holder must determine its tax basis and holding period separately with respect to each block of Sourcefire common stock. Such gain or loss will be long-term capital gain or loss if the U.S. holder’s holding period for such shares is more than one year at the time of completion of the merger. Long-term capital gains for non-corporate U.S. holders, including individuals, are generally eligible for a reduced rate of U.S. federal income taxation. There are limitations on the deductibility of capital losses.

Cash payments made pursuant to the merger agreement will be reported to holders of Sourcefire common stock and the U.S. Internal Revenue Service to the extent required by the Code and applicable U.S. Treasury regulations. Under the Code, a U.S. holder of Sourcefire common stock (other than a non S corporation or other exempt recipient) may be subject, under certain circumstances, to information reporting on the cash received in the merger. Backup withholding of tax at the applicable statutory rate (currently 28%) also may apply with respect to the amount of cash received pursuant to the merger, unless the U.S. holder provides proof of an applicable exemption or a correct taxpayer identification number and otherwise complies with applicable requirements of the backup withholding rules. Backup withholding is not an additional tax. Any amount withheld under the backup withholding rules is generally applied as a credit to the U.S. federal income tax liability of the person subjected to backup withholding. If backup withholding results in an overpayment of such person’s U.S. federal income tax, a refund may be obtained, provided the required documents are timely filed with the U.S. Internal Revenue Service.

Non-U.S. Holders. Any gain realized on the receipt of cash pursuant to the merger by a non-U.S. holder generally will not be subject to U.S. federal income tax unless:

 

   

the gain is effectively connected with a trade or business of the non-U.S. holder in the United States (and, if required by an applicable U.S. income tax treaty, is attributable to a U.S. permanent establishment of the non-U.S. holder), in which case the non-U.S. holder generally will be subject to tax on such gain in the same manner as a U.S. holder and, if the non-U.S. holder is a foreign corporation, such corporation may be subject to an additional branch profits tax at the rate of 30% (or such lower rate as may be specified by an applicable U.S. income tax treaty); or

 

   

the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the merger, and certain other conditions are met, in which case the non-U.S. holder generally will be subject to a 30% tax on the non-U.S. holder’s net gain realized in the merger, which may be offset by U.S. source capital losses of the non-U.S. holder, if any; or

 

   

the non-U.S. holder owned (directly, indirectly or constructively) more than 5% of Sourcefire’s outstanding common stock at any time during the five years preceding the merger, and Sourcefire was a “United States real property holding corporation” for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the merger and the non-U.S. holder’s holding period with respect to Sourcefire common stock. Although there can be no assurances in this regard, Sourcefire does not believe that it is, or within the last five years has been, a “United States real property holding corporation” for U.S. federal income tax purposes.

 

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Cash received by non-U.S. holders pursuant to the merger also will be subject to information reporting, unless an exemption applies. Moreover, backup withholding of tax at the applicable statutory rate (currently 28%) may apply to cash received by a non-U.S. holder in the merger, unless the holder or other payee establishes an exemption and otherwise complies with the backup withholding rules. Backup withholding is not an additional tax. Any amount withheld under the backup withholding rules is generally applied as a credit to the U.S. federal income tax liability of the person subjected to backup withholding. If backup withholding results in an overpayment of such person’s U.S. federal income tax, a refund may be obtained, provided the required documents are timely filed with the Internal Revenue Service.

Litigation Relating to the Merger

The following shareholder class action complaints have been filed in the Circuit Court for Howard County in the State of Maryland by individuals purporting to be stockholders of Sourcefire in connection with the merger: (1) a complaint filed on July 26, 2013 (the “July Complaint”), (2) a complaint filed on August 6, 2013 (the “August 6 Complaint”), (3) a complaint filed on August 9, 2013 (the “August 9 Complaint”), and (4) a complaint filed on August 16, 2013 (the “August 16 Complaint and, together with the July Complaint, the August 6 Complaint and the August 9 Complaint, the “Complaints”). Each Complaint was purportedly filed on behalf of the public stockholders of Sourcefire, and names as defendants, Sourcefire, each of Sourcefire’s directors, merger sub, and Cisco. The Complaints generally allege, among other things, that by agreeing to sell the Company to Cisco pursuant to the merger agreement, Sourcefire’s directors breached their fiduciary duties by failing to maximize stockholder value in connection with such sale, by agreeing to deal protection devices and by putting their personal interests ahead of those of the stockholders. The Complaints also allege that Cisco and merger sub aided and abetted these alleged breaches of fiduciary duties. The plaintiffs in the Complaints seek various remedies, including class action status, an injunction preventing the completion of the merger, a declaration that the merger agreement is unlawful and unenforceable, rescission of any already implemented terms of the merger agreement, a declaration that the stockholders should not be asked to vote on the merger, and the payment of attorneys’ fees and expenses. All of the claims have been removed to, and consolidated into a single action in, the United States District Court for the District of Maryland.

On September 8, 2013, the parties to the litigation entered into a memorandum of understanding, which we refer to as the MOU, providing for a preliminary settlement of the action on behalf of the named plaintiffs and a class of the shareholders affected by the transaction, which we refer to as the Settlement. The Settlement is subject to, among other things, approval by the court, consummation of the merger, certain confirmatory discovery and entry into a final stipulation of settlement. The Settlement will be submitted to the United States District Court for the District of Maryland for approval. If approved by the United States District Court for the District of Maryland, the Settlement will resolve all of the allegations and claims asserted by the plaintiffs and the class against all defendants in connection with the merger and will further provide for the release and settlement by the class of the Company’s shareholders of all claims against all of the defendants and their affiliates in connection with the merger. As part of the MOU, all of the defendants deny all allegations of wrongdoing and deny that the disclosures made by the Company in the Company’s preliminary proxy statement on Schedule 14A as filed on August 12, 2013 were inadequate, but the Company has agreed to provide certain additional disclosures relating to the merger. The Settlement will not affect the form or amount of consideration to be paid to the Company’s shareholders in the merger.

Delisting and Deregistration of Sourcefire’s Common Shares

If the merger is completed, the shares of Sourcefire common stock will be delisted from NASDAQ and deregistered under the Exchange Act and shares of Sourcefire common stock will no longer be publicly traded, and Sourcefire will no longer be required to file reports with the SEC.

 

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The Merger Agreement

The following summary describes certain material provisions of the merger agreement. This summary is not complete and is qualified in its entirety by reference to the complete text of the merger agreement, which is attached to this proxy statement as Annex A and incorporated into this proxy statement by reference. We urge you to read carefully the merger agreement in its entirety because this summary may not contain all the information about the merger agreement that is important to you.

The merger agreement and the following description have been included to provide you with information regarding the terms of the merger agreement. It is not intended to provide any other factual information about Sourcefire or Cisco. Such information can be found elsewhere in this proxy statement and in the other public filings we and Cisco make with the SEC, which are available, without charge, at http://www.sec.gov.

The representations, warranties and covenants contained in the merger agreement were made for the purposes of the merger agreement and the benefit of the parties to the merger agreement and may have been used for the purposes of allocating contractual risk between the parties to the agreement instead of establishing these matters as facts. Moreover, because these representations and warranties were made as of certain dates indicated in the merger agreement, information concerning the subject matter of the representations and warranties may change after the date of the merger agreement. The representations and warranties and other provisions of the merger agreement should not be read alone, and you should read the information provided elsewhere in this proxy statement and in the documents incorporated by reference into this proxy statement for information regarding Sourcefire and its business. See “Where You Can Find More Information” beginning on page 92.

The Merger

Subject to the terms and conditions of the merger agreement and in accordance with Delaware law, at the effective time of the merger, merger sub, a wholly-owned subsidiary of Cisco and a party to the merger agreement, will merge with and into us. We will survive the merger as a wholly-owned subsidiary of Cisco and the separate corporate existence of merger sub will cease.

Effective Time; Closing

The merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware or at such later time as is agreed upon by Cisco and us and specified in the certificate of merger. The filing of the certificate of merger will occur at the closing, which will take place no later than the fifth business day after satisfaction or waiver of the conditions to the closing of the merger set forth in the merger agreement and described in this proxy statement, or at such other time as is agreed upon by Cisco and us. Although we expect to complete the merger as soon as possible following the special meeting of our stockholders, we cannot specify when or assure that we and Cisco will satisfy or waive all of the conditions to the closing of the merger.

Conversion and Surrender of Shares; Procedures for Payment

The conversion of each outstanding share of our common stock into the right to receive $76.00 per share in cash, without interest and less any applicable withholding taxes, will occur automatically at the effective time of the merger. On or prior to the closing date of the merger, Cisco will deposit with Computershare Inc., the exchange agent, the cash payable under the merger agreement. Promptly following the effective time of the merger, the exchange agent will send a letter of transmittal to each former Sourcefire stockholder of record. The letter of transmittal will contain instructions for obtaining cash in exchange for shares of our common stock.

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an appropriate agent’s message in the case of book-entry transfer of uncertificated shares, each holder of a certificate or uncertificated shares will be entitled to receive from the exchange agent, acting on behalf of Cisco, payment by check of $76.00 in cash (subject to applicable withholding) for each share surrendered, and those shares will be cancelled. Until surrendered, stock certificates and uncertificated shares will be deemed from and after the effective time of the merger to represent only the right to receive cash payable under the merger agreement. If a certificate has been lost, stolen or destroyed, the exchange agent will issue payment following receipt of an affidavit of that fact and, if required by Cisco or the exchange agent, an indemnity against claims with respect to the certificate. Any cash deposited with the exchange agent that has not been distributed within twelve months after the effective time in accordance with procedures summarized above will promptly be paid to Cisco. After such twelve-month period, former Sourcefire stockholders may look only to Cisco for payment of the merger consideration.

In the event of a transfer of ownership of our common stock that is not registered in our stock transfer books, the merger consideration for shares of our common stock so transferred may be paid to a person other than the person in whose name the surrendered certificate or uncertificated shares are registered if:

 

   

the certificate is properly endorsed and is otherwise in proper form for transfer, and

 

   

the person requesting such payment:

 

   

pays to Cisco or its designated agent any transfer or other taxes resulting from the payment of merger consideration to a person other than the registered holder of the certificate or uncertificated shares; or

 

   

establishes to the satisfaction of Cisco or its designated agent that such tax has been paid or is not payable.

No interest will be paid or will accrue on any cash payable in connection with the merger upon the surrender of stock certificates representing shares or uncertificated shares of our common stock. The cash paid or payable following conversion of shares of our common stock in the merger will be issued in full satisfaction of all rights relating to those shares of our common stock.

Appraisal Rights

Shares of our common stock issued and outstanding immediately prior to the effective time of the merger that are held by any holder who has demanded and not effectively withdrawn or lost appraisal rights to such shares will not be converted into the right to receive the merger consideration described above. Instead such holder will only be entitled to payment of the appraised value of such shares in accordance with the DGCL. At the effective time of the merger, all such shares will automatically be cancelled and will cease to exist or be outstanding, and each holder will cease to have any rights with respect to the shares, except for rights granted under Section 262 of the DGCL. In the event a holder withdraws or loses (through failure to perfect or otherwise) the right to appraisal under the DGCL, then the rights of such holder will be deemed to have been converted at the effective time of the merger into the right to receive the merger consideration described above. We are required to serve prompt notice to Cisco of any demands for appraisal that we receive, and Cisco has the right to participate in, at its own expense, all negotiations and proceedings with respect to demands for appraisal under the DGCL. We may not, without Cisco’s prior written consent or as otherwise required under the DGCL, voluntarily make any payment with respect to, or settle or offer to settle, any demands for appraisal.

These rights in general are discussed more fully under the section of this proxy statement entitled “Proposal No. 1. — Adoption of the Merger Agreement — Appraisal Rights.”

 

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Treatment of Options, Restricted Stock Units and Restricted Stock Outstanding Under Our Stock Plans

Stock Options that will be Assumed by Cisco. At the effective time of the merger, all of our unexpired, unexercised and outstanding stock options (other than the stock options held by our chief executive officer that have performance-based vesting conditions), held by our employees who are employed as of the effective time of the merger (such employees, the “continuing employees”), whether vested or unvested (collectively, “rollover options”), will be assumed by Cisco and converted into Cisco options. The vesting schedules and other terms and conditions of the Cisco options (as such vesting schedules, terms and conditions may be amended or modified by agreements that we and/or Cisco enter into with the continuing employees before closing of the merger) will be the same as they were before being converted to Cisco options, except that

 

   

rollover options will be exercisable for that number of whole shares of Cisco common stock equal to the product (rounded down to the next whole number of shares of Cisco common stock, with no cash being payable for any fractional share eliminated by such rounding) of the number of shares of our common stock that were issuable upon exercise of such rollover options immediately prior to the effective time of the merger and the “exchange ratio” set forth below;

 

   

the per share exercise price for the shares of Cisco common stock issuable upon exercise of a rollover option will be equal to the quotient (rounded up to the next whole cent) obtained by dividing the exercise price per share of our common stock at which such rollover option was exercisable immediately prior to the effective time of the merger by the exchange ratio;

 

   

no rollover option may be “early exercised,” which means rollover options may only be exercised once the vesting schedules applicable to the options and underlying shares have been satisfied; and

 

   

Cisco’s board of directors or one of its committees will succeed to the authority of our board of directors or one of its committees with respect to administration of these rollover options and each of our stock incentive plans.

The “exchange ratio” will equal $76.00 divided by the volume-weighted average sale price for a share of Cisco’s common stock as quoted on NASDAQ for the ten consecutive trading days ending with the third trading day that precedes the closing date of the merger.

Restricted Stock Units that Will Be Assumed by Cisco. At the effective time of the merger, each of our unvested restricted stock unit (“RSU”) awards held by continuing employees that is outstanding immediately prior to the effective time of the merger (collectively, “rollover RSUs”) will be assumed by Cisco and converted into Cisco RSUs. The vesting schedules and other terms and conditions of the Cisco RSUs (as such vesting schedules, terms and conditions may be amended or modified by agreements that we and/or Cisco enter into with the continuing employees before closing of the merger) will be the same as they were before being converted to Cisco RSUs, except that:

 

   

rollover RSUs will be settled by the issuance of that number of whole shares of Cisco’s common stock equal to the product (rounded down to the next whole number of shares of Cisco common stock, with no cash being payable for any fractional share eliminated by such rounding) of the number of shares of our common stock that were issuable upon settlement such rollover RSU immediately prior to the effective time of the merger multiplied by the “exchange ratio” (described above); and

 

   

Cisco’s board of directors (or one of its committees) will succeed to the authority of our board of directors (or one of its committees) with respect to administration of the rollover RSUs and our stock incentive plans.

RSUs with Performance-Based Vesting Provisions. Prior to the effective time of the merger, our compensation committee will cause, contingent and effective as of immediately prior to the effective time of the merger, each of our unvested RSUs that are eligible for accelerated vesting as a result of satisfying applicable performance conditions (each, a “performance accelerated RSU”) to provide that the number of shares eligible

 

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for vesting acceleration on each performance measurement date shall instead vest on the annual anniversary of the original grant date of such performance accelerated RSU, subject to the holder of such RSU remaining employed by us, or by one of our subsidiaries or Cisco, as applicable, on the applicable annual vesting date.

Options with Performance-Based Vesting Provisions. Prior to the effective time of the merger, our compensation committee will also cause, contingent and effective as of immediately prior to the effective time, each of our unvested stock options held by our chief executive officer that are eligible for vesting as a result of satisfying applicable performance conditions to vest in full on the closing date of the merger and our chief executive officer will receive the cash-out amount described below for each such stock option.

Options and RSUs that Will Not Be Assumed by Cisco. At the effective time of the merger, each of our stock options and each of our RSUs that are not rollover options or rollover RSUs will not be assumed by Cisco. At the effective time of the merger, each such vested stock option and vested RSU that has not yet been settled will be converted into and represent the right to receive the applicable cash-out amount (as defined below). This cash-out amount will be rounded to the nearest cent and computed after aggregating cash amounts for all vested stock options and vested RSUs represented by a particular grant. Unvested options and RSUs that are not rollover options or rollover RSUs and that do not vest in connection with a termination of employment at or before the effective time of the merger will be cancelled and extinguished at the effective time of the merger for no consideration.

Restricted Stock. Immediately prior to the effective time of the merger, pursuant to the terms of the restricted stock award agreements, any outstanding shares of restricted stock will become fully vested, and the holder thereof will be entitled to receive the merger consideration for each such restricted share of Company common stock. Only our non-employee directors hold restricted stock.

The “cash-out amount” means: (i) with respect to any of our stock options that is not a rollover option, an amount of cash, without interest, equal to (A) the number of shares of our common stock subject to such stock option multiplied by (B) the remainder of (x) $76.00 less (y) the exercise price per share of such stock option in effect immediately prior to the effective time of the merger; provided that if the exercise price per share of any of our stock options is equal to or greater than $76.00, the cash-out amount for such stock option shall be zero; and (ii) with respect to any of our RSUs that is not a rollover RSU, an amount of cash, without interest, equal to (A) the number of shares of our common stock issuable upon settlement of such restricted stock unit as of immediately prior to the effective time of the merger multiplied by (B) $76.00.

The treatment of our stock options, RSUs and restricted stock held by our executive officers and directors is further discussed in “— Interests of Executive Officers and Directors in the Merger.”

Withholding Rights

The cash otherwise payable to holders pursuant to the merger agreement will be reduced by such amounts as Cisco, the surviving corporation, their respective subsidiaries or the exchange agent are required to deduct and withhold under the Code or any other applicable law. Such withheld amounts will be treated for all purposes of this merger agreement as having been delivered and paid to the holders in respect of which such deduction and withholding was made.

Representations and Warranties

We made a number of representations and warranties to Cisco and merger sub relating to, among other things:

 

   

our corporate organization, subsidiaries and similar corporate matters;

 

   

our capital structure;

 

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the authorization, execution, delivery and enforceability of, and required consents, approvals, orders and authorizations of, and filings with, governmental authorities relating to, the merger agreement and related matters with respect to us;

 

   

documents and financial statements that we have filed with the SEC since January 1, 2010, lack of undisclosed liabilities, our compliance with the Sarbanes-Oxley Act of 2002 and other matters with respect to our internal controls and procedures, our compliance with listing standards of NASDAQ and our stock incentive grant practices;

 

   

in each case between March 31, 2013 and July 22, 2013:

 

   

we have conducted our business in all material respects in the ordinary course consistent with past practice;

 

   

there has not occurred a material adverse effect on us;

 

   

we have not sold, disposed of, transferred, acquired or licensed (outbound or inbound) any material intellectual property other than in the ordinary course of business consistent with past practice or pursuant to a standard outbound or inbound intellectual property agreement, or sold, disposed of, transferred or provided a copy of our source code (other than open source materials) other than to our source code authors, or sold, disposed of, transferred or provided a copy of any manufacturing specifications to any person other than supply chain providers;

 

   

there has not occurred any material changes in accounting methods or practices;

 

   

there has not occurred any dividends or other distributions, or redemptions or other acquisitions, of our securities;

 

   

there has not occurred any uncured material default under any of our material contracts;

 

   

there has not occurred any amendment or change to our charter or bylaws or equivalent organization or governing documents of any of our subsidiaries;

 

   

there has not occurred any increase in compensation or benefits for, new loans or extensions of existing loans to, or grants or provisions of severance or acceleration of vesting to, our directors, officers, employees or consultants (other than, as applicable, increases in the ordinary course of business consistent with past practice in the base salaries of employees in an amount that does not exceed 10% of such base salaries, advancement of expenses to employees in the ordinary course of business consistent with past practice or severance provided to non-officers in accordance with our employee severance policy in the ordinary course of business consistent with past practice or as required by applicable law);

 

   

there has not occurred the execution of any employment agreements (other than “at-will” offer letters for newly-hired employees and “at-will” service contractors, in each case, entered into in the ordinary course of business consistent with past practice) or extension of the term of any existing employment agreement or service contract (other than automatic extensions under existing employment agreements or service contracts);

 

   

there has not occurred any material change with respect to our senior management personnel, any termination of more than 10 employees at one time as part of a reduction in force, any labor dispute or any claim of unfair labor practices;

 

   

we have not incurred, created or assumed any encumbrance (other than as permitted by the merger agreement) on any of our material assets or properties or any material debts;

 

   

we have not incurred any liability to our directors or officers (other than liabilities to pay compensation or benefits in connection with services rendered in the ordinary course of business consistent with past practice);

 

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we have not made any deferral of payment of any account payable in excess of $1,000,000, or given any discount, accommodation or other concession to accelerate or induce the collection of any receivable, in each case, other than in the ordinary course of business consistent with past practice;

 

   

we have not made any material change in the manner in which we extend discounts, credits or warranties to any significant customer;

 

   

there has been no material damage, destruction or loss affecting our assets, property or business, whether or not covered by insurance; and

 

   

we have not commenced or settled any material litigation;

 

   

the absence of pending or threatened litigation or governmental investigations not disclosed in reports filed with the SEC and the absence of internal investigations;

 

   

the absence of any contract or order upon us that has or would reasonably be expected to prohibit or materially impair (i) our current or currently proposed business practice, (ii) any acquisition of material property by us or (iii) the conduct of our business;

 

   

our compliance with applicable laws, judgments and permits;

 

   

title to, and condition of, our properties and assets;

 

   

our intellectual property;

 

   

environmental matters with respect to our operations;

 

   

tax matters with respect to us;

 

   

our benefit plans, agreements and arrangements and matters relating to the Employee Retirement Income Security Act and other applicable employee and benefits laws;

 

   

affiliate transactions;

 

   

insurance matters;

 

   

our engagement of, and payment of fees to, brokers, investment bankers and financial advisors;

 

   

our significant customers and suppliers;

 

   

contracts material to us;

 

   

our compliance with export control laws;

 

   

the receipt by our board of directors of a fairness opinion from Qatalyst Partners;

 

   

the accuracy of information contained in, and the compliance as to form in all material respects of, this proxy statement; and

 

   

the absence of any representations or warranties by Cisco to us other than those contained in the merger agreement.

Most of our representations and warranties apply both to us and our subsidiaries. Our representations and warranties will expire at the effective time of the merger.

Cisco and merger sub made a number of representations and warranties to us in the merger agreement relating to, among other things:

 

   

their corporate organization and similar corporate matters;

 

   

the authorization, execution, delivery and enforceability of, and required consents, approvals, orders and authorizations of, and filings with governmental authorities relating to, the merger agreement and related matters with respect to Cisco and merger sub;

 

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Merger sub’s lack of prior operating activity;

 

   

their ownership of our common stock;

 

   

the accuracy of information supplied by Cisco and merger sub in connection with this proxy statement;

 

   

having sufficient funds for payments under the merger agreement; and

 

   

the absence of any representations or warranties by us to them other than those contained in the merger agreement.

The representations and warranties of Cisco and merger sub will expire at the effective time of the merger.

Material Adverse Effect

Several of our representations and warranties contained in the merger agreement are qualified by reference to whether the failure of such representation or warranty to be true would reasonably be expected to have a “material adverse effect” on us. The merger agreement provides that a “material adverse effect” means, when used in connection with us and our subsidiaries, taken as a whole, any change, event, occurrence, circumstance, condition or effect (each referred to as an “effect”) that, individually or taken together with all other effects, would or would reasonably be expected to be, or become, materially adverse to the condition (financial or otherwise), properties, assets (including intangible assets), business, operations or results of operations of us and our subsidiaries, taken as a whole, except to the extent that any such effect is proximately caused by:

 

   

changes in economic conditions, or financial, credit, foreign exchange, securities or capital markets in the United States or elsewhere in the world;

 

   

changes generally affecting the industry in which we operate (including changes in the use, adoption or non-adoption of industry standards); or

 

   

changes in applicable law or GAAP or accounting regulations or principles or interpretations thereof that apply to us;

 

   

national or international political conditions, any outbreak or escalation of hostilities, insurrection or war or acts of terrorism;

 

   

epidemics, quarantine restrictions, wildfires, earthquakes, hurricanes, tornadoes or other natural disasters or similar calamity or crisis;

 

   

changes in the trading volume or trading prices of our capital stock (provided that this exception will not apply to any underlying effect that may have caused such change in the trading volumes or prices);

 

   

any failure by us, in and of itself, to meet market revenue or earnings expectations, including revenue or earnings projections or predictions made by us (whether or not publicly announced) or securities or financial analysts, and any resulting analyst downgrades of our securities in and of themselves (provided that this exception will not apply to any underlying effect that may have cause such failure or such downgrades);

 

   

changes in our relationships with employees, customers, distributors, suppliers, vendors, licensors or other business partners as a result of the announcement or pendency of the merger agreement or the anticipated consummation of the merger;

 

   

any actions taken or failure to take action, in each case, which Cisco has expressly in writing approved, consented to or requested; or

 

   

any legal proceedings commenced or threatened by any of our current or former stockholders against us or our directors and officers relating to the merger agreement or the transactions contemplated by the merger agreement.

 

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The exceptions in the first five bullet points above will not apply to the extent that such changes disproportionately affect us and our subsidiaries, taken as a whole, as compared to other participants in our industry.

Conduct of Business Pending the Merger

Under the merger agreement, we have agreed that prior to the effective time of the merger, subject to certain exceptions, unless we obtain Cisco’s written consent or as necessary to comply with legal requirements, we will and will cause each of our subsidiaries to:

 

   

conduct our and their businesses in the usual, regular and ordinary course in substantially the same manner as currently conducted and in material compliance with all applicable legal requirements;

 

   

use commercially reasonable efforts to: (i) pay or perform, as applicable, all debt, taxes and other obligations when due and provide Cisco with copies of all material submissions to, and material correspondence with, tax authorities in connection with pending tax audits and disputes; (ii) collect accounts receivable when due and not extend credit outside of the ordinary course of business consistent with past practice; (iii) sell our products consistent with past practice; and (iv) preserve intact our present business organizations, keep available the services of our officers and key employees and preserve our relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with us;

 

   

use commercially reasonable efforts to assure that each of our material contracts entered into after the date of the merger agreement will not require any consent, waiver or novation or provide for any material change in the obligations of any party thereto in connection with, or terminate as a result of the consummation of, the merger;

 

   

use commercially reasonable efforts to maintain our leased premises in accordance with the terms of each applicable lease in all material respects; and

 

   

consult with Cisco regarding the defense or settlement of any material legal proceeding, including relating to the transactions contemplated by the merger agreement, to which we or any member our board of directors is a party, other than routine legal proceedings defended or settled in the ordinary course of business consistent with past practice.

In addition, we have also agreed that until the earlier of termination of the merger agreement or the effective time of the merger, subject to certain exceptions for actions taken in the ordinary course of business or below certain dollar thresholds, without Cisco’s written consent, unless necessary to comply with legal requirements, we will and will cause our subsidiaries to comply with specific restrictions relating to, among others:

 

   

amending our charter or bylaws or comparable organizational or governing documents;

 

   

declaring or paying any dividends or distributions on our common stock; splitting or reclassifying our common stock; or adopting any plan of liquidation or dissolution;

 

   

accelerating or amending the vesting or other terms of stock options or other stock-based awards, or authorizing cash payments in exchange for any stock options or stock awards;

 

   

(i) entering into any contract that would constitute a material contract if entered into prior to the date of the merger agreement, other than (A) entering into or renewing contracts for the sale or licensing of our products or maintenance or services of our products in the ordinary course of business consistent with past practice, (B) entering into contracts for the purchase of supplies or materials for our products in the ordinary course of business consistent with past practice, and (C) entering into non-exclusive reseller agreements terminable by us for convenience without any liability arising from such termination, (ii) violating, terminating (other than a scheduled term expiration) or waiving any of the material terms of any material contract, or (iii) amending or otherwise modifying any material contracts in such a way as to materially reduce the expected business or economic benefits thereof;

 

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issuing, delivering or selling any of our voting debt or shares of our capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire such shares or other convertible securities, other than (i) issuance pursuant to the exercise of our options or settlement of our RSUs, (ii) grants of up to 160,000 of our RSUs per calendar quarter, provided that (A) such grants may only be made to new employee hires below the level of vice president or senior director in share amounts consistent with past practices, (B) none of such grants provide for acceleration and (C) all of such grants shall vest 25% of the total number of shares on each of the first four anniversaries of the date of grant, (iii) issuance to participants in our 2007 Employee Stock Purchase Plan and (iv) share repurchases from former employees, non-employee directors and consultants in connection with any termination of service;

 

   

(i) terminating the employment, changing the title, office or position, or materially reducing the responsibilities of any of our employees at the level of senior director, vice president or above; or (ii) subject to exceptions specified in the merger agreement, hiring, or entering into, amending or extending the term of any employment or consulting agreement with, any officer, employee, consultant or independent contractor, or entering into any contract with a labor union or collective bargaining agreement (unless required by applicable legal requirements);

 

   

(i) making loans or capital contributions to, or investments in, any other person, other than our subsidiaries in the ordinary course of business consistent with past practice; or (ii) forgiving, discharging, amending or modifying in any material respect any outstanding loan;

 

   

(i) transferring, acquiring or licensing (outbound or inbound) any material rights to any intellectual property other than pursuant to a standard outbound or inbound intellectual property agreement and in the ordinary course of business consistent with past practice, (ii) transferring any of our source code (other than open source materials) to any person other than (A) providing access to our source code to authors of our source code consistent with past practice or (B) depositing our source code with an escrow agent in the ordinary course of business consistent with past practice, or (iii) transferring or providing a copy of any of our manufacturing specifications to any person other than to supply chain providers in the ordinary course of business consistent with past practice;

 

   

entering into any material contracts that limit our ability to freely conduct our business, such as contracts granting certain exclusive rights or “most favored nation” obligations on us;

 

   

selling, leasing, licensing or encumbering our assets that are material to our business, other than sales and non-exclusive licenses of our products and services in the ordinary course of business consistent with past practice;

 

   

incurring indebtedness other than ordinary trade payables;

 

   

entering into any operating lease requiring payments in excess of a $250,000 per annum or any leasing transaction of the type requiring to be capitalized in accordance with GAAP;

 

   

paying or discharging certain liabilities and obligations in excess of specified dollar amounts;

 

   

making capital expenditures that are more than 20% greater than the amounts set forth in our capital expenditures budget;

 

   

materially changing the amount of any insurance coverage;

 

   

adopting or amending in any material respect our benefit plans, or amending any compensation, benefit or award made under such plans, materially amending any deferred compensation plan or, subject to the exceptions specified in the merger agreement, pay any bonus or special remuneration to any employees or non-employee directors or consultants, or increase the salaries or fees of its employees or consultants (other than pursuant to pre-existing plans or contracts or salary increases for employees below the level of vice president or senior director in connection with annual performance reviews in amounts and at times consistent with past practice and not in excess of those used in the prior year);

 

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adding any members to our board of directors or our subsidiaries’ boards of directors;

 

   

granting, paying or entering into any plans or agreements for severance, retention or termination pay or the acceleration of vesting or other benefits, to any person, except as provided in preexisting plans or agreements or other exceptions specified in the merger agreement;

 

   

commencing a legal proceeding other than for (i) routine collection of accounts receivable, (ii) where we in good faith determine that failure to commence such legal proceeding would result in the material impairment of a valuable aspect of our business or (iii) breach of the merger agreement, or settling or agreeing to settle any pending or threatened legal proceeding or other dispute, other than any settlement that is covered under our insurance policy or solely involving payment less than $500,000;

 

   

acquiring, or agreeing to acquire, any business or any person or division thereof, or any assets, in each case, that are material, individually or in the aggregate, to us, or entering into any joint venture, strategic alliance or partnership, in each case, other than in the ordinary course bid/RFP teaming or similar relationship;

 

   

(i) making or changing any material election with respect to taxes; (ii) adopting or changing any accounting method with respect to taxes; (iii) filing any material tax return or amending any tax return; or (iv) taking certain other actions with respect to tax matters;

 

   

changing our accounting methods, except where required by GAAP;

 

   

failing to timely file any documents in substantially the form required to be filed by us with the SEC;

 

   

purchasing or selling any real property, or leasing any real property with lease payments in excess of $250,000 per annum for any such lease;

 

   

creating any encumbrance on our properties;

 

   

materially changing the practice by which we extend warranties, discounts or credits to customers generally, provided that this should not limit our ability to deviate from such practices in connection with negotiations undertaken in the ordinary course of business;

 

   

entering into any contracts in which any of our officers, directors, agents or other representatives has an interest that would constitute a material contract if entered into prior to the date of the merger agreement;

 

   

entering into or materially modifying any currency exchange, interest rate, commodities or other hedging, derivative or cash management arrangements other than in the ordinary course of business consistent with past practice;

 

   

entering into or materially modifying any contract for the joint development of any material product, technology or intellectual property by or for us;

 

   

entering into any contract to license or authorize any third party to manufacture or reproduce our products or technology, other than (i) any original design manufacturer contract entered into by us in the ordinary course of business consistent with past practice, following prior consultation with Cisco, that has a term of less than one year and is not otherwise material to our business, and (ii) any purchase order entered into under any contract that is in effect as of the date of the merger agreement that does not effect any material change to such contract;

 

   

entering into any contract relating to the membership or participation with any industry standards group in which we contribute and/or share in pooled patent rights;

 

   

entering into any joint marketing or marketing support contract, other than in the ordinary course of business consistent with past practice and not exceeding $1,000,000 per annum; and

 

   

agreeing to take any of the actions described in the previous bullet points.

 

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Limitation on Considering Other Acquisition Proposals

We have agreed that we will not, and will not permit any of our subsidiaries to, nor will we authorize or permit any of our or our subsidiaries’ officers, directors, affiliates or employees or any of our or their investment bankers, attorneys, accountants or other advisors or representatives to, directly or indirectly:

 

   

solicit, initiate, knowingly encourage, facilitate or induce any acquisition proposal or the making, submission or public announcement of any inquiry, indication of interest, proposal or offer that is or would reasonably be expected to lead to an acquisition proposal;

 

   

enter into, participate in, maintain or continue any communications or negotiations regarding, or furnish to any person any non-public information with respect to, or knowingly take any other action regarding, any inquiry, indication of interest, proposal or offer that constitutes, or would reasonably be expected to lead to, an acquisition proposal;

 

   

agree to, accept, approve, endorse or recommend any acquisition proposal;

 

   

enter into any agreement in principle, letter of intent, term sheet or any other agreement, understanding or contract (whether or not binding) relating to any acquisition proposal (other than an acceptable confidentiality agreement);

 

   

submit any acquisition proposal to the vote of our securityholders;

 

   

redeem any rights under our rights agreement (as described above) or amend, or take any other action with respect to, or make any determination under, our rights agreement in a manner that facilitates, or would reasonably be likely to facilitate, an acquisition proposal, or would reasonably be likely to inhibit or interfere with the consummation of the transactions contemplated by the merger agreement; or

 

   

approve any transaction, or any third party becoming an “interested stockholder,” under Section 203 of the DGCL.

We will, and will cause our subsidiaries to, enforce (and not waive) any rights under any confidentiality or non-disclosure agreements entered into in connection with an acquisition proposal.

An “acquisition proposal” means any agreement, offer, proposal or indication of interest (other than from Cisco or merger sub) or any public announcement of intention to enter into or make any of the same, relating to, or involving: (A) the acquisition or purchase by any person or group of more than 15% of our total outstanding voting securities or any tender or exchange offer that would result in any person beneficially owning 15% or more of our total outstanding voting securities, or any merger, consolidation, business combination or similar transaction involving us where our current stockholders would own less 85% of the outstanding voting securities of the surviving entity or its parent; (B) any sale, acquisition, disposition, mortgage, pledge or other transfer of 15% or more of our consolidated assets (other than in the ordinary course of business consistent with past practice); or (C) any liquidation or dissolution of Sourcefire.

An “acceptable confidentiality agreement” means a customary confidentiality agreement which (i) contains terms that are no less favorable in the aggregate to us than those contained in the confidentiality agreement that we entered into with Cisco, including nonsolicitation provisions, provided that an acceptable confidentiality agreement need not contain any “standstill” or similar covenant (i.e., a provision sometimes included in a confidentiality agreement prohibiting the party receiving the confidential information from pursuing an acquisition of the disclosing party, acquiring the disclosing party’s capital stock, or otherwise engaging in certain unilateral actions designed to effect a takeover of the disclosing party without its consent) and (ii) does not include any exclusive right to negotiate or any restriction on fulfilling our obligations under the merger agreement.

At any time prior to obtaining stockholder approval of the proposal to adopt the merger agreement, our board of directors may nevertheless in response to an unsolicited bona fide written acquisition proposal that is not otherwise obtained in violation of the restrictions set forth in the preceding bullet points and that our board of

 

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directors determines in good faith (after consultation with our outside legal counsel and financial advisor) is or would reasonably be expected to lead to a superior proposal:

 

   

enter into discussions with the person or group making the acquisition proposal; and

 

   

furnish to the person making the acquisition proposal non-public information with respect to us and our subsidiaries pursuant to an acceptable confidentiality agreement;

provided that:

 

   

neither Sourcefire, its subsidiaries or its representatives have violated in any material respects any of our obligations set forth in the merger agreement with respect to solicitation of alternative proposals;

 

   

prior to providing any person with material non-public information, we have first received an executed acceptable confidentiality agreement;

 

   

we have given Cisco advance written notice of our intent to take such actions; and

 

   

prior to or contemporaneously with providing any non-public information to any person, we have delivered or made available such non-public information to Cisco.

A “superior proposal” means an unsolicited, bona fide written offer submitted after the date of the merger agreement by a person or group to acquire, directly or indirectly, pursuant to a tender or exchange offer, merger, consolidation or other business combination, beneficial ownership of 50% or more of our outstanding voting securities or all or substantially all of our assets, in each case for consideration consisting exclusively of cash and/or publicly traded equity securities that our board of directors has concluded in good faith (following consultation with our outside legal counsel and financial advisor) taking into account, among other things, all legal, financial, regulatory, timing and other aspects of the offer, including conditions to consummation and the person making the offer, in each case as deemed relevant by our board of directors, (x) would be, if consummated, more favorable, from a financial point of view, to our stockholders than the terms of the merger agreement (after giving effect to any changes proposed by Cisco in response to the offer) and (y) is reasonably likely to be consummated on the terms proposed.

We have agreed to advise Cisco (orally and in writing) within 24 hours after receipt of any acquisition proposal, inquiry, indication of interest, proposal or offer that constitutes, or could reasonably be expected to lead to, an acquisition proposal, or any request for non-public information (including access to any of our properties, books or records) that could reasonably be expected to lead to an acquisition proposal, of the material terms and conditions of such acquisition proposal, inquiry, indication of interest, proposal, offer or request, of the identity of the person or group making any such acquisition proposal, inquiry, indication of interest, proposal, offer or request, and of any material changes to any such acquisition proposal, inquiry, indication of interest, proposal, offer or request.

Nothing in the merger agreement prevents our board of directors from withholding, withdrawing, qualifying, amending or modifying its recommendation to our stockholders to vote in favor of adoption of the merger agreement in connection with a superior proposal made to us, if:

 

   

our stockholders have not yet adopted the merger agreement at the special meeting;

 

   

we have complied in all material respects with our merger agreement obligations regarding the special meeting, our board of directors’ recommendation and nonsolicitation of alternative proposals;

 

   

such superior proposal is not withdrawn and continues to be a superior proposal;

 

   

we have provided at least four business days’ prior written notice to Cisco of the superior proposal and our board of directors’ intent to change its recommendation and the manner and timing in which it intends to do so, including the material terms and conditions of such superior proposal and the identity of the person or group submitting such superior proposal, and we have provided Cisco with unredacted copies of all proposed transaction agreements and any financial commitments relating thereto;

 

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if requested by Cisco, we have made our representatives available during the four-business day period following our required notice of a superior proposal to discuss and negotiate in good faith modifications to the merger agreement that would cause the applicable superior proposal to no longer be a superior proposal;

 

   

Cisco has not made a written, binding and irrevocable offer to us within four business days following receipt of our required notice of a superior proposal that our board of directors concludes in good faith (after consultation with our outside legal counsel and financial advisor) to be at least as favorable to our stockholders as such superior proposal; and

 

   

our board of directors has concluded in good faith (following consultation with our outside legal counsel) that, in light of such superior proposal and taking into account any modifications proposed by Cisco, the failure to change its recommendation would be inconsistent with its fiduciary obligations to our stockholders under applicable legal requirements.

In addition to our board of directors’ rights in connection with a superior proposal as described above, nothing in the merger agreement prevents our board of directors from withholding, withdrawing, qualifying, amending or modifying its recommendation to our stockholders to vote in favor of adoption of the merger agreement for a material fact, event or circumstance unrelated an acquisition proposal that developed since July 22, 2013 and which was previously unknown and not reasonably foreseeable as of such date if:

 

   

our stockholders have not yet adopted the merger agreement at the special meeting;

 

   

we have complied in all material respects with our merger agreement obligations regarding the special meeting, board recommendation and nonsolicitation of alternative proposals;

 

   

our board of directors has concluded in good faith (after consultation with our outside legal counsel) that, in light of such intervening event, the failure to change its recommendation would be inconsistent with its fiduciary obligations to our stockholders under applicable legal requirements;

 

   

we have provided at least four business days’ prior written notice to Cisco that our board of directors intends to change its recommendation and, if requested by Cisco, we have made our representatives available during the four-business day period following our required notice of an intended change of recommendation to discuss the facts and circumstances underlying the proposed change of recommendation, the reason for such proposed change and any modifications to the merger agreement that Cisco desires to propose to that would obviate the need for such change of recommendation; and

 

   

Cisco has not made a written, binding and irrevocable offer to us within four business days following receipt of our required notice of a proposed change of recommendation that our board of directors concludes in good faith (after consultation with our outside legal counsel and financial advisor) would obviate the need for such change of recommendation.

The merger agreement also provides that Sourcefire may grant a waiver or release under, or determine not to enforce, any standstill agreement in effect on the date of the merger agreement if its board of directors determines in good faith (after consultation with its outside legal counsel) that failure to grant such waiver or release or enforce such agreement would be inconsistent with its fiduciary duties under applicable law; provided that our stockholders have not yet adopted the merger agreement and we have complied in all material respects with our merger agreement obligations regarding the special meeting, our board of directors’ recommendation and nonsolicitation of alternative proposals.

Further Actions and Agreements

Sourcefire Stockholders’ Meeting. We have agreed to call and hold a stockholders’ meeting as promptly as reasonably practicable after the execution of the merger agreement for the sole purpose of voting upon the adoption of the merger agreement. We have agreed to use our commercially reasonable efforts to solicit from our stockholders proxies, and to take all other reasonable action necessary to secure the vote of our stockholders, in favor of adoption of the merger agreement.

 

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Access to Information. We have agreed to afford Cisco and its representatives with reasonable access to our properties, books, personnel and records, to provide certain financial and tax information to Cisco, to maintain the virtual data room established in connection with the merger agreement and provide Cisco access thereto and to provide other documents and information in our possession that Cisco may reasonably request prior to the closing of the merger.

Regulatory Approvals; Other Actions. The merger agreement obligates Cisco and us to use reasonable best efforts to obtain all consents and approvals required to be obtained to consummate the merger, including (i) making any filings required under the HSR Act or applicable foreign antitrust and competition laws as soon as is practicable, (ii) promptly supplying each other with any information or documents required for such filings, (iii) responding promptly to and complying with any information request relating to the merger agreement or such filings by any governmental entity that enforces or administers antitrust laws, and (iv) notifying each other promptly upon the receipt of any comments or requests from any governmental entity in connection with such filings, or any proposal by any governmental entity regarding the settlement of any investigation. In addition, we and Cisco have agreed to use reasonable best efforts to resolve any objections asserted by any governmental entity with respect to the transactions contemplated by the merger agreement under any applicable antitrust laws, and we and Cisco will take any and all of the following actions to the extent necessary to cause the expiration of the notice periods under the HSR Act or other antitrust laws: (i) entering into negotiations, (ii) providing information required by applicable legal requirements and (iii) substantially complying with any “second request” for information pursuant to antitrust laws.

If any legal proceeding is instituted (or threatened to be instituted) challenging the transactions contemplated by the merger agreement as violative of any antitrust law, the merger agreement provides that Cisco and we will consult with one another as to the appropriate response, provided that Cisco shall not have any obligation to litigate or contest any such legal proceeding or order resulting therefrom or make proposals, agreements or submit to antitrust orders providing for (A) the sale, license or other disposition or holding separate of any of our or Cisco’s assets, (B) the imposition of any restriction on Cisco’s ability to freely conduct their business or own such assets or (C) the holding separate of our shares of capital stock or any limitation on Cisco’s ability to exercise full rights of ownership of such shares.

As to matters other than regulatory approvals, we and Cisco have agreed to use reasonable best efforts take, or cause to be taken, all action and do, or cause to be done, all things reasonably necessary, appropriate or desirable to consummate and make effective the merger, including satisfying all closing conditions and executing and delivering any additional instruments necessary to consummate the merger.

In addition, we have agreed to use commercially reasonable efforts to obtain specified third party consents, waivers or approvals in connection with the consummation of the merger agreement.

Public Announcements. We have agreed to consult with Cisco before issuing any press release or otherwise making any public statements with respect to the merger agreement or the merger.

Employee Benefit Matters. The merger agreement provides that, as soon as reasonably practicable after the effective time of the merger, Cisco will ensure that the continuing employees will receive health and welfare benefits that in the aggregate are no less favorable than those provided to a similarly situated employee of Cisco. Except to the extent necessary to avoid duplication of benefits, Cisco will recognize the service of each continuing employee before the effective time of the merger as if such service had been performed with Cisco for all purposes under the vacation and severance plans maintained by Cisco after the effective time of the merger and for purposes of eligibility and vesting under all other employee benefit plans maintained by Cisco that the continuing employees may be eligible to participate in after the effective time of the merger. Cisco shall also assume Sourcefire’s obligations under our executive change in control severance plan, the executive retention plan, and any consulting, retirement or other compensation arrangement providing for the payment of severance as specified in the merger agreement.

 

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With respect to any welfare plan maintained by Cisco in which continuing employees are eligible to participate after the effective time of the merger, to the extent permitted by the relevant welfare plan, Cisco will waive all limitations as to preexisting conditions and exclusions with respect to participation and coverage requirements applicable to such employees to the extent such conditions and exclusions were satisfied or did not apply to such employees under the welfare plans maintained by Sourcefire prior to the effective time of the merger.

The merger agreement further provides that our compensation committee will be permitted to finally and conclusively determine annual cash incentive awards to be awarded under our leadership bonus plan and executive annual incentive plan relating to the 2013 calendar year for employees employed by us immediately prior to the closing of the merger, and such awards will be paid immediately prior to the closing of the merger; provided, that such awards shall not exceed the base target bonus amounts set forth in such plans.

The provisions of the merger agreement described in this Employee Benefit Matters section will apply only with respect to Sourcefire employees who are covered under our employee plans that are maintained primarily for the benefit of employees employed in the United States (including company employees regularly employed outside the United States to the extent they participate in our employee plans). With respect to Sourcefire employees who are not described in the preceding sentence, Cisco will comply with all applicable laws, directives and regulations relating to employees and employee benefits matters applicable to such employees.

Indemnification of Officers and Directors. The merger agreement provides that, from the effective time of the merger until the sixth anniversary of the effective time of the merger, the surviving corporation will, and Cisco will cause the surviving corporation to, maintain in effect, the existing policy of directors’ and officers’ liability insurance maintained by Sourcefire as of the date of the merger agreement (the “D&O Insurance”) or provide substitute policies of comparable coverage, including a “tail” insurance policy. However, the surviving corporation will not be required to pay annual premiums for the D&O Insurance (or for any substitute or “tail” policies) in excess of 300% of the most recently paid annual premium for the D&O Insurance, and if any future annual premiums for the D&O Insurance (or any substitute policies) exceed 300% of the most recently paid annual premium for the D&O Insurance, the surviving corporation will be entitled to reduce the amount of coverage of the D&O Insurance to the amount of coverage obtainable for a premium equal to 300% of such amount. In addition, we, in our sole discretion, may elect, by giving written notice to Cisco at least two business days prior to the effective time of the merger, to purchase, in lieu of the foregoing insurance, a comparable “tail” or “runoff” extension to the D&O Insurance for a period of six years after the effective time of the merger for a premium not to exceed 300% of the most recently paid annual premium for the D&O Insurance.

From and after the effective time of the merger until the sixth anniversary of the effective time of the merger, Cisco will assume, and will cause the surviving corporation to, fulfill and honor in all respects our obligations pursuant to any indemnification agreements with us made available to Cisco prior to the date of the merger agreement, our charter or our bylaws as in effect on the date of the merger agreement with respect to our officers’ and directors’ acts and omissions occurring prior to the effective time of the merger. From and after the effective time of the merger, such obligations shall be the joint and several obligations of Cisco and the surviving corporation. The merger agreement further provides that the charter and bylaws of the surviving corporation will contain advancement, exculpation and indemnification provisions that are at least as favorable in the aggregate to the applicable indemnified persons as those contained in the charter and bylaws of Sourcefire or its subsidiaries as of the date of the merger agreement, and those advancement, exculpation and indemnification provisions will not be amended, repealed or otherwise modified for a period of six years from the effective time of the merger in any manner that adversely affects the rights thereunder of the indemnified parties.

The rights to indemnification and exculpation by Sourcefire described above shall survive the consummation of the merger, are intended to benefit the present and former officers and directors of Sourcefire and its subsidiaries, shall be binding on all successors and assigns of the surviving corporation and Cisco, shall be enforceable by each present and former officers and directors of Sourcefire and its subsidiaries and may not be amended, altered or repealed after the effective time of the merger without the prior written consent of the affected person.

 

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Conditions to the Closing of the Merger

Each party’s obligation to effect the merger is subject to the satisfaction or waiver of various conditions, which include the following:

Cisco and we are obligated to effect the merger only if the following conditions have been satisfied or waived:

 

   

the merger agreement has been adopted by our stockholders at the special meeting;

 

   

no order (other than an antitrust order) issued by any governmental entity or other legal or regulatory restraint or prohibition preventing the consummation of the merger shall be in effect, and no applicable legal requirement (other than an antitrust law) shall have been enacted or deemed applicable to the merger that prohibits or makes illegal or enjoins the consummation of the merger; and

 

   

the waiting periods required under the HSR Act have expired or have been terminated.

Cisco will not be obligated to effect the merger unless the following conditions have been satisfied or waived by Cisco:

 

   

our representations and warranties in the merger agreement as to our corporate organization and the authorization, capitalization, execution, delivery and enforceability of the merger agreement are true and correct in all respects as of signing and closing, and as to the other matters are true and correct as of signing and closing, except where the circumstances causing the failure of such representations and warranties to be true and correct have not had, and would not reasonably be expected to have, a material adverse effect on us; provided, that with respect to our capitalization, this condition will be satisfied if our actual fully-diluted capitalization as of the measurement date provided in the merger agreement is not greater than our fully-diluted capitalization represented in the merger agreement by more than 1.0% of such fully-diluted capitalization as of the measurement date;

 

   

we have performed and complied in all material respects with all covenants and other agreements required to be performed and complied with by us under the merger agreement at or prior to the closing of the merger;

 

   

(i) no order has been issued by any court of competent jurisdiction located in the U.S., and no other applicable legal requirement has been enacted, entered, enforced or deemed applicable to the merger by a governmental entity located in the U.S. that is in effect and that (A) provides for an antitrust restraint or other injunction, restraint or material damages in connection with the merger, or (B) prevents or makes illegal the consummation of the merger, or causes the merger to be rescinded, and (ii) there are no pending legal proceedings brought by any governmental entity located in the U.S. seeking the foregoing;

 

   

(i) no order has been issued by any court of competent jurisdiction outside the U.S. and no other applicable legal requirement has been enacted, entered, enforced or deemed applicable to the merger by a governmental entity located outside the U.S. that is in effect and that (A) provides for an antitrust restraint or other injunction, restraint or material damages in connection with the merger, or (B) prevents or makes illegal, the consummation of the merger, or causes the merger to be rescinded, and (ii) there are no pending legal proceedings brought by any governmental entity located outside the U.S. seeking the foregoing, except, in each case, where such order, applicable legal requirement or legal proceeding would not materially impair our business or operations; and

 

   

we have not suffered a material adverse effect since the date of the merger agreement that is then continuing.

We will not be obligated to effect the merger unless the following conditions have been satisfied or waived:

 

   

Cisco’s representations and warranties in the merger agreement as to its corporate organization and the authorization, execution, delivery and enforceability of the merger agreement are true and correct in all

 

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respects as of signing and closing; and as to the other matters are true and correct as of signing and closing, except where the circumstances causing the failure of such representations and warranties to be true and correct have not had, and would not reasonably be expected to materially impede or delay Cisco’s ability to close the merger in accordance with the merger agreement and applicable law; and

 

   

each of Cisco and merger sub has performed and complied in all material respects with all covenants and other agreements required to be performed and complied with by Cisco and merger sub at or prior to the closing date of the merger.

Effect of Termination

If the merger agreement is terminated (as described below), the merger agreement will become void and there shall be no liability on the part of Cisco or us or our respective stockholders or representatives; provided that obligations for payment of the termination fee (as described below) and obligations related to the protection of our confidential information and general provisions in Article VIII of the merger agreement will remain in full force and effect and survive any termination of the agreement. In addition, termination shall not relieve any party to the merger agreement from liability in connection with any fraud or willful and material breach by such party with respect to its representations, warranties, covenants or other agreements in the merger agreement.

Termination of the Merger Agreement

Cisco and we can terminate the merger agreement under certain circumstances, including:

 

   

by mutual written consent;

 

   

by either Cisco or us, if the merger has not been completed by December 31, 2013, except that if the merger is not completed by such date because any applicable waiting period under the HSR Act or other antitrust or competition law, or other governmental approval that is required to complete the merger, is not obtained, terminated or expired, or because any order is in effect prohibiting the closing of the merger or because governmental actions seeking to restrain the closing of the merger are pending, but all other conditions have been satisfied, in which case either Cisco or we can terminate the merger agreement if the merger is not completed by March 31, 2014 (such date, as applicable, the “End Date”); provided, that in no event shall we or Cisco be permitted to terminate the merger agreement if the failure to consummate the merger by the End Date is principally caused by the material breach by such party of the merger agreement;

 

   

by either Cisco or us, if any governmental entity has issued an order or antitrust order arising under U.S. laws or taken any other action to enforce an applicable legal requirement or an applicable antitrust legal requirement arising under U.S. laws having the effect of permanently prohibiting the closing of the merger that is final and nonappealable;

 

   

by either Cisco or us, if our stockholders do not adopt the merger agreement at the special meeting and, in our case, the failure to obtain stockholder approval is not proximately caused by any action or failure to act of us that constitutes a material breach of the merger agreement;

 

   

by either Cisco or us, upon a breach of any covenant or agreement on the part of the other party set forth in the merger agreement, or if any representation or warranty of the other party has become inaccurate, in either case such that the closing conditions with respect to the other party regarding the accuracy representations and warranties and compliance with covenants and agreements would not be satisfied as of the time of such breach or as of the time such representation or warranty has become inaccurate, following notice and an opportunity to cure such breach, if curable;

 

   

by Cisco, upon a “triggering event” (as defined below); or

 

   

by us, prior to our stockholders’ adoption of the merger agreement, upon a change of recommendation for a superior proposal and following payment to Cisco of a termination fee of $60,000,000.

 

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Termination Fees and Expenses

The merger agreement requires that we pay Cisco a termination fee of $60,000,000 in the event the merger agreement is terminated upon any of the following events:

 

   

Cisco terminates due to a triggering event;

 

   

we or Cisco terminate the merger agreement after our stockholders do not adopt the merger agreement at the special meeting, following the occurrence of a triggering event;

 

   

we terminate the merger agreement upon a change of recommendation in connection with a superior proposal (following payment to Cisco of any termination fee due); or

 

   

we or Cisco terminates the merger agreement if the closing has not occurred by the End Date or we or Cisco terminates the merger agreement after our stockholders do not adopt the merger agreement at the special meeting, and (A) prior to such termination, either an acquisition proposal was publicly disclosed (or in the case of a termination due to the End Date, an acquisition proposal otherwise exists) and (B) within 12 months following the termination of the merger agreement, an acquisition involving more than 40% of our stock or assets is consummated or we enter into a contract providing for an acquisition that is subsequently consummated (even if consummated following such 12-month period).

A “triggering event” means (A) a change of recommendation by our board of directors in favor of the merger for any reason, (B) our failing to convene or hold the special meeting of our stockholders to adopt the merger agreement in accordance with the merger agreement, (C) our failing to include our board of directors’ recommendation in favor of the merger in this proxy statement, (D) our breach of any of the provisions of the merger agreement related to the meeting of our stockholders or the nonsolicitation of acquisition proposals in any material respect, (E) our board of directors approving or publicly recommending any acquisition proposal or us entering into any contract accepting any acquisition proposal, (F) our board of directors failing to reaffirm the board of directors recommendation within 10 business days after Cisco requests in writing such reaffirmation in response to an acquisition proposal which has been publicly announced or otherwise becomes publicly known or a material modification of an acquisition proposal, or (G) the commencement of a tender or exchange offer relating to our securities by a person unaffiliated with Cisco prior to the time we receive the approval of our stockholders and our failure to send to our stockholders pursuant to Rule 14e-2 promulgated under the Securities Act, within 10 business days after such tender or exchange offer is first published, sent or given, a statement disclosing that we unconditionally recommend rejection of such tender or exchange offer and reaffirming our board of directors recommendation in favor of the merger.

Payment of the termination fee by us to Cisco will be deemed to be liquidated damages for all actual or purported breaches of the merger agreement and, after such payment has been made, we will have no further liability for any actual or purported breach.

In all cases other than the specified circumstances under which we will be required to pay the termination fee, the merger agreement provides that, regardless of whether the merger is consummated, all fees and expenses incurred by the parties in connection with the merger will be borne by the party incurring such fees and expenses.

Extension, Waiver and Amendment of the Merger Agreement

We and Cisco may amend the merger agreement at any time prior to the closing of the merger. However, after stockholder adoption of the merger agreement has been obtained, no amendment can be made that would require approval by our stockholders without obtaining such further approval.

Either we or Cisco may extend the time for performance of any of the obligations or other acts of the other parties under the merger agreement, waive any inaccuracies in the other party’s representations and warranties and waive compliance with any of the agreements or conditions contained in the merger agreement.

 

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MARKET PRICE OF SOURCEFIRE COMMON STOCK

Sourcefire’s common stock is currently publicly traded on NASDAQ under the symbol “FIRE.” The following table sets forth the high and low sales prices of our common stock as reported by NASDAQ.

 

Fiscal Year

   High      Low  

2012:

     

First Quarter

   $ 50.47       $ 29.25   

Second Quarter

   $ 59.64       $ 45.06   

Third Quarter

   $ 57.98       $ 41.34   

Fourth Quarter

   $ 50.85       $ 40.68   

2013:

     

First Quarter

   $ 59.49       $ 39.50   

Second Quarter

   $ 59.46       $ 47.58   

Third Quarter (through September 6, 2013)

   $ 75.97       $ 54.44   

On July 22, 2013, the last full trading day prior to the announcement of the merger agreement, the high and low sales prices per share for our common stock as reported on NASDAQ were $60.04 and $58.93, respectively. On September 6, 2013, the most recent practicable trading day before this proxy statement was printed, the high and low sales prices per share for our common stock as reported on NASDAQ were $75.80 and $75.71, respectively. We had 15 stockholders of record at the close of business on August 30, 2013, the record date for the special meeting. The number of holders of record of our common stock does not reflect the number of beneficial holders whose shares are held by depositories, brokers, trusts or other nominees.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

The market price of our common stock is subject to fluctuation. As a result, stockholders are urged to obtain current market quotations before making any decision with respect to the merger. No assurance can be given concerning the market price for our common stock before the effective time.

OTHER AGREEMENTS

The Voting Agreements

As a condition and inducement to Cisco entering into the merger agreement, Martin Roesch and John Becker, two of our directors who own shares of our common stock, entered into a voting agreement with Cisco, dated July 22, 2013, pursuant to which each of the stockholders agreed, among other things, to vote the shares of Sourcefire’s common stock over which the stockholder exercises voting control in favor of the adoption of the merger agreement and against any proposal made in opposition to or in competition with the merger. As of August 30, 2013, the record date for the special meeting, these stockholders own approximately 1.9% of the issued and outstanding shares of our common stock. In connection with the execution and delivery of the voting agreements, Cisco did not pay these stockholders any consideration in addition to the consideration they may receive pursuant to the merger agreement in respect of their shares. A copy of the form of voting agreement is attached as Annex B to this proxy statement.

The voting agreements require each of the stockholders, among others things, to vote the subject shares in favor of:

 

   

approval of the merger and adoption of the merger agreement; and

 

   

any matter that could reasonably be expected to facilitate the merger (including any adjournment of the special meeting in order to solicit additional proxies in favor of approval of the merger and adoption of the merger agreement);

 

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and against any proposal, which we refer to as acquisition proposals, relating to:

 

   

any acquisition by another entity of more than a 15% interest in our total outstanding voting securities or any tender offer or exchange offer that if consummated would result in another entity beneficially owning 15% or more of our total outstanding voting securities, or any merger, consolidation, business combination or similar transaction involving us pursuant to which Sourcefire’s stockholders immediately preceding such transaction would hold securities representing less than 85% of the total outstanding voting power of the surviving or resulting entity of such transaction (or parent entity of such surviving or resulting entity);

 

   

any sale, acquisition, or disposition of more than 15% of our total assets in any single transaction or series of related transactions; or

 

   

the liquidation or dissolution of Sourcefire;

and against any other matter that would reasonably be expected to impede, interfere with, delay, postpone or adversely affect the merger or any of the transactions contemplated by the merger agreement in any material respect.

In addition, each stockholder subject to a voting agreement granted representatives of Cisco an irrevocable proxy to vote the stockholder’s shares of our common stock in favor of approval of the merger and adoption of the merger agreement and against any acquisition proposal.

Each stockholder subject to a voting agreement also agreed not to, directly or indirectly,

 

   

transfer, grant an option with respect to, sell, exchange, pledge or otherwise dispose of, or encumber, its shares;

 

   

enter into a swap or similar transaction that transfers the economic consequences of ownership of its shares; or

 

   

make any offer or enter into any agreement providing for any of the foregoing, other than transfers:

 

   

to any immediate family member;

 

   

to a trust for the benefit of such stockholder or any immediate family member for estate planning purposes;

 

   

to a charitable entity; or

 

   

in connection with or for the purpose of personal tax-planning;

provided that in each of the foregoing cases, the transferee agrees to be bound by the voting agreement.

Each stockholder agreed to waive and not to seek any appraisal rights in connection with the merger.

Each voting agreement and all obligations of the stockholder and Cisco under each voting agreement will automatically terminate upon the earlier to occur of:

 

   

the first business day following stockholder adoption of the merger agreement; and

 

   

the date and time of the termination of the merger agreement in accordance with its terms.

The Rights Agreement Amendment

Pursuant to an amendment dated July 22, 2013, we amended our rights agreement with Continental Stock Transfer & Trust Co., as rights agent, dated as of October 30, 2008. Pursuant to the rights agreement (commonly known as “poison pill”) our stockholders are entitled to buy shares of our junior preferred stock upon the occurrence of certain events, such as a takeover attempt the Company does not agree to. The amendment thereto entered into on July 22, 2013 provides that the rights set forth in the rights agreement will not be triggered by the merger, the merger agreement or the other transactions contemplated by the merger agreement.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership of our common stock as of August 30, 2013 by: (i) each of our directors and named executive officers; (ii) all of our executive officers and directors as a group; and (iii) all those known by us to be beneficial owners of more than five percent of our common stock.

Beneficial ownership of shares is determined under the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Except as indicated by footnote, and subject to applicable community property laws, we believe that each of the stockholders identified in the table possesses sole voting and investment power with respect to all shares of common stock indicated as beneficially owned by them. Shares of common stock subject to options currently exercisable and options exercisable within 60 days of August 30, 2013 are deemed outstanding for calculating the percentage of outstanding shares of the person holding these options or restricted stock units, but are not deemed outstanding for calculating the percentage of any other person. Applicable percentages are based on 31,597,374 shares outstanding on August 30, 2013, adjusted as required by rules promulgated by the SEC.

The business address for each director and executive officer is c/o Sourcefire, 9770 Patuxent Woods Drive, Columbia, Maryland 21046.

 

     Beneficial Ownership  

Beneficial Owner

   Number of
Shares
     Percent of
Total
 

Beneficial owners of 5% or more of the outstanding common stock:

     

The Vanguard Group, Inc. (1)

     1,801,168         5.7   

T. Rowe Price Associates, Inc. (2)

     1,914,862         6.1   

BlackRock, Inc. (3)

     2,918,077         9.2   

Named executive officers:

     

John C. Becker

     34,241         *   

Thomas M. McDonough (4)

     2,738         *   

Todd P. Headley (5)

     32,529         *   

Martin F. Roesch (6)

     634,035         2.0   

John G. Negron (7)

     2,083         *   

Marc W. Solomon (8)

     18,679         *   

Other directors and nominees:

     

Michael Cristinziano (9)

     15,865         *   

Tim A. Guleri (10)

     24,918         *   

Kevin M. Klausmeyer (11)

     4,508         *   

Charles E. Peters, Jr. (12)

     12,139         *   

Steven R. Polk (13)

     19,209         *   

Arnold L. Punaro (14)

     14,500         *   

All directors and executive officers as a group (14 persons) (15)

     823,343         2.6   

 

* Less than 1% beneficial ownership.
(1) Amount was reported on a Schedule 13G/A filed on February 12, 2013. The Vanguard Group, Inc., an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of 1,801,168 shares of common stock. The address of this holder is 100 Vanguard Boulevard, Malvern, PA 19355.
(2) Amount was reported on a Schedule 13G/A filed on January 10, 2013. T. Rowe Price Associates, Inc., an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of 1,914,862 shares of common stock. The address of this holder is 100 E. Pratt Street, Baltimore, Maryland 21202.

 

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(3)

Amount was reported on a Schedule 13G/A filed on January 31, 2013. BlackRock, Inc., through its affiliated funds, is the beneficial owner of 2,918,077 shares of common stock. The address of this holder is 40 East 52nd Street, New York, New York 10022.

(4) Includes options exercisable within 60 days to purchase 2,738 shares of common stock.
(5) Includes options exercisable within 60 days to purchase 11,753 shares of common stock.
(6) Includes options exercisable within 60 days to purchase 84,228 shares of common stock. Of the shares of common stock reported, 243,045 shares of common stock are held by The Martin F. Roesch 2010 Grantor Retained Annuity Trust, Martin F. Roesch, Trustee. Mr. Roesch has voting and investment control with respect to these shares.
(7) Includes options exercisable within 60 days to purchase 2,083 shares of common stock.
(8) Includes options exercisable within 60 days to purchase 8,744 shares of common stock.
(9) Includes 2,390 shares of common stock subject to repurchase by the Company; Mr. Cristinziano has voting power with respect to the shares subject to repurchase but does not have investment power with respect to such shares until such time as the Company’s repurchase option lapses.
(10) Includes 2,390 shares of common stock subject to repurchase by the Company; Mr. Guleri has voting power with respect to the shares subject to repurchase but does not have investment power with respect to such shares until such time as the Company’s repurchase option lapses. Also includes 22,528 shares held by the Guleri Family Trust UTD dated April 7, 1999. Mr. Guleri has voting and investment power with respect to these shares.
(11) Includes 4,508 shares subject to repurchase by the Company; Mr. Klausmeyer has voting power with respect to the shares subject to repurchase but does not have investment power with respect to such shares until such time as the Company’s repurchase option lapses.
(12) Includes 4,906 shares of common stock subject to repurchase by the Company; Mr. Peters has voting power with respect to the shares subject to repurchase but does not have investment power with respect to such shares until such time as the Company’s repurchase option lapses.
(13) Includes 2,390 shares of common stock subject to repurchase by the Company; Mr. Polk has voting power with respect to the shares subject to repurchase but does not have investment power with respect to such shares until such time as the Company’s repurchase option lapses.
(14) Includes 2,390 shares of common stock subject to repurchase by the Company; Mr. Punaro has voting power with respect to the shares subject to repurchase but does not have investment power with respect to such shares until such time as the Company’s repurchase option lapses.
(15) Includes options exercisable within 60 days to purchase 117,445 shares of common stock. Of the shares of common stock reported, 18,974 shares are subject to repurchase by the Company; the applicable director has voting power with respect to the shares subject to repurchase but does not have investment power with respect to such shares until such time as the Company’s repurchase option lapses.

 

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PROPOSAL NO. 2 — ADJOURNMENT OF THE SPECIAL MEETING

If there are insufficient votes at the time of the special meeting to approve Proposal No. 1, the adoption of the merger agreement, we may propose to adjourn the special meeting to solicit additional proxies. In that event, we may ask our stockholders to vote only upon the adjournment proposal and not upon the proposal to adopt the merger agreement.

We currently do not intend to propose adjournment of the special meeting if there are sufficient votes to approve the adoption of the merger agreement.

Vote Required and Board of Directors Recommendation

Approval of Proposal No. 2 requires the affirmative vote of a majority of the votes cast on that proposal at the special meeting. The vote on this Proposal No. 2 is a vote separate and apart from the vote on Proposal No. 1 to adopt the merger agreement. You may approve Proposal No. 1 and vote not to approve this Proposal No. 2 on adjournment of the special meeting and vice versa.

Our board of directors unanimously recommends that you vote “FOR” the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement.

 

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PROPOSAL NO. 3 — ADVISORY VOTE REGARDING CERTAIN EXECUTIVE COMPENSATION

Golden Parachute Compensation

The following table sets forth the information required by Item 402(t) of Regulation S-K regarding certain compensation which each of the Company’s named executive officers may receive that is based on or that otherwise relates to the merger. This compensation is referred to as “golden parachute” compensation. The “golden parachute” compensation payable to the Company’s named executive officers is subject to a non-binding advisory vote of the Company stockholders, as described under “Proposal No. 3 – Advisory Vote on Golden Parachutes” beginning on page 89.

At the effective time of the merger, all outstanding Company equity compensation awards held by our named executive officers will be converted into an equivalent equity award with respect to Cisco common stock, other than the stock options with performance-based vesting conditions that are held by Mr. Becker, which will vest and be cashed out at closing of the merger. Completion of the merger, by itself, will not result in immediate acceleration of any unvested equity awards other than the performance-based options held by Mr. Becker. The outstanding equity awards held by each named executive officer are eligible for “double-trigger” vesting (i.e., vesting is triggered upon the termination of an executive’s employment other than for cause or the executive’s resignation with good reason, in each case within specified periods either prior to or following the effective time of the merger), other than the performance-based options held by Mr. Becker, which are eligible for “single trigger” vesting upon completion of the merger. The periods during which these double-trigger benefits are available, and other material terms of the arrangements under which the named executive officers’ severance compensation and benefits and accelerated vesting of equity-based awards would be provided, are described under “Proposal No. 1 — Adoption of the Merger Agreement — Interests of Executive Officers and Directors in the Merger.”

Assuming the merger is completed and the named executive officers are terminated on August 30, 2013 in a qualifying termination of employment and are entitled to full benefits available under their respective employment and related agreements with us or their new employment agreements with Cisco, as applicable, we estimate that the executive officers would receive approximately the amounts set forth in the table below. The amounts shown in the equity column are based on a per share price of the Company’s common stock of $76.00. We also estimate that Mr. Becker would be entitled to the gross-up payment set forth in the table below.

All payments and benefits in the table below are subject to a “double trigger,” meaning they are only provided following a qualifying termination in connection with the merger, other than the accelerated vesting of options held by Mr. Becker that are eligible for vesting as a result of satisfying applicable performance conditions, and the payment of annual incentive awards in connection with the closing, as noted in footnotes to the table, which will occur in connection with the proposed merger without a qualifying termination, which we refer to as “single-trigger” benefits.

 

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Please note that the amounts indicated below are estimates based on multiple assumptions that may or may not actually occur, including assumptions described in this proxy statement. As a result, the actual amounts, if any, to be received by a named executive officer may differ from the amounts set forth below.

“Golden Parachute Compensation”

 

Name of

Executive Officer (5)

   Cash
($) (1)
     Equity
($) (2)
     Perquisites/
Benefits ($)  (3)
     Tax
Reimbursements

($) (4)
     Total
($) (6)
 

John Becker

     1,736,500         15,701,200         20,659         6,135,718         23,594,077   

Thomas McDonough

     779,250         2,320,657         48,019         0         3,147,926   

Todd Headley

     830,000         2,825,069         49,219         0         3,704,288   

Martin Roesch

     1,630,025         2,988,487         51,149         0         4,669,661   

John Negron

     657,919         4,152,254         48,019         0         4,858,192   

Marc Solomon

     592,000         3,752,652         51,149         0         4,395,801   

 

(1) The amounts include (a) the value of cash severance benefits under (i) the new employment agreements with Cisco for Messrs. McDonough, Headley, Roesch, Negron, and Solomon and (ii) the existing employment agreement with Sourcefire for Mr. Becker, as applicable, which represent “double trigger” benefits (i.e., requiring the occurrence of a qualifying termination of employment in addition to the completion of the merger) and payable in a cash lump sum upon a qualifying termination of employment following completion of the merger for Messrs. Becker, McDonough, Headley, Roesch, Negron and Solomon, and (b) the unpaid portion of each named executive officer’s target annual 2013 bonus, which is considered to be a “single trigger” benefit (i.e., conditioned solely on the occurrence of completion of the merger) and which is payable in a cash lump sum upon the completion of the merger, in each case, assuming base salaries and incentive targets remain unchanged from their current levels. The estimated amount of each benefit for each named executive officer is as follows:

 

   

Mr. Becker: (x) $1,380,000 for cash severance payable under Mr. Becker’s existing employment agreement with Sourcefire, which represents 1.5 times each of his base salary ($460,000) and target bonus ($460,000) and becomes payable upon a qualifying termination of employment within the period beginning one month prior to and ending 13 months following the completion of the merger; and (y) $356,500 for the unpaid 2013 annual bonus.

 

   

Mr. McDonough: (x) $650,000 for cash severance payable under Mr. McDonough’s new employment agreement with Cisco, which represents 12 months of base salary ($310,000) and becomes payable upon a qualifying termination of employment within two years following the completion of the merger, plus $340,000 (which represents the first portion of his retention bonus) and becomes payable upon a qualifying termination of employment within one year following the completion of the merger; and (y) $129,250 for the unpaid 2013 annual bonus.

 

   

Mr. Headley: (x) $720,000 for cash severance payable under Mr. Headley’s new employment agreement with Cisco, which represents 12 months of base salary ($360,000), plus $360,000 (which represents his retention bonus) and becomes payable upon a qualifying termination of employment within six months following completion of the merger or remaining employed through the date six months following the completion of the merger; and (y) $110,000 for the unpaid 2013 annual bonus.

 

   

Mr. Roesch: (x) $1,550,000 for cash severance payable under Mr. Roesch’s new employment agreement with Cisco, which represents 12 months of base salary ($300,000) and becomes payable upon a qualifying termination of employment within two years following the completion of the merger, plus an additional severance amount of $1,250,000 that becomes payable upon a qualifying termination of employment within one year following the completion of the merger; and (y) $80,025 for the unpaid 2013 annual bonus.

 

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Mr. Negron: (x) $525,000 for cash severance payable under Mr. Negron’s new employment agreement with Cisco, which represents 12 months of base salary ($300,000) and becomes payable upon a qualifying termination of employment within two years following of the merger, plus an additional severance amount of $225,000 that becomes payable upon a qualifying termination of employment within one year following the completion of the merger; and (y) $132,919 for the unpaid 2013 annual bonus.

 

   

Mr. Solomon: (x) $515,000 for cash severance payable under Mr. Solomon’s new employment agreement with Cisco, which represents 12 months of base salary ($290,000) and becomes payable upon a qualifying termination of employment within two years following the merger, plus an additional severance amount of $225,000, that becomes payable upon a qualifying termination of employment within one year following the completion of the merger; and (y) $77,000 for the unpaid 2013 annual bonus.

 

(2) Represents the value of the accelerated vesting of unvested options and restricted stock units for each named executive officer, which consist of the following:

 

   

Mr. Becker: 100% of his options that are eligible for vesting as a result of satisfying applicable performance conditions will vest in full on the closing date of the merger – a “single trigger” benefit of $3,018,400 – and all other unvested options and restricted stock units for Mr. Becker will vest upon a qualifying termination of employment within the period beginning one month prior to and ending 13 months following the completion of the merger – a “double trigger” benefit of $12,682,800.

 

   

Messrs. McDonough, Roesch, Negron and Solomon: all unvested options and 50% (or such lesser amount remaining unvested) of the number of shares originally subject to each grant of restricted stock units outstanding as of the date of the applicable Cisco employment agreement will vest upon a qualifying termination of employment within one year following the completion of the merger – each a “double trigger” benefit.

 

   

Mr. Headley: all unvested options and 50% (or such lesser amount remaining unvested) of the number of shares originally subject to each grant of restricted stock units will vest upon a qualifying termination of employment within six months following the completion of the merger or if Mr. Headley remains employed for six months following the completion of the merger – each a “double trigger” benefit.

 

(3) These amounts represent the value of the “double trigger” costs for outplacement services for two months for Mr. Headley only and payment of premiums as provided under the applicable arrangement for each named executive officer with respect to continued health and welfare benefits, which would be provided following a qualifying termination of employment (a) within six months following the completion of the merger for Mr. Headley, (b) within the period beginning one month prior to and ending 13 months following the completion of the merger for Mr. Becker, and (c) within two years following the completion of the merger for Messrs. McDonough, Roesch, Negron, and Solomon, as follows:

 

   

Mr. Becker: represents, under Mr. Becker’s employment agreement with Sourcefire, continued participation of Mr. Becker and his then-eligible dependents in the Company’s group health plan in which they were participating as of the date of termination for eighteen (18) months following such date, either on a subsidized basis consistent with the level of subsidization prior to termination or, if continuation of such subsidized benefits would violate Section 105(h) of the Code, with payments being provided to Mr. Becker in an amount equal to the portion of the premiums that would otherwise be subsidized. These amounts are based on the current benefit levels in effect with Sourcefire; therefore if the benefit levels are increased after the merger, actual payments to Mr. Becker may be greater than those provided for above.

 

   

Messrs. McDonough, Headley, Roesch, Negron, and Solomon: represents, under their respective new employment agreement with Cisco, the premiums required to continue group health care coverage for a period of twelve (12) months following the date of termination of the executive officer, under COBRA for the executive officer and his eligible dependents at the same level and for the same eligible dependents covered as of the termination date, which premiums will be “grossed up” to cover taxes.

 

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These payments are based on the highest potential aggregate rate as it is unknown which coverage plans each executive officer will elect upon commencement of employment with Cisco; therefore it is possible the actual payments to an executive officer may be less than those provided.

 

(4) Represents the amounts that may become payable to Mr. Becker to indemnify him for the impact of the excise taxes that may be due by reason of the application of Section 4999 of the Code. Such amounts will be payable if necessary to indemnify Mr. Becker for the impact of such excise taxes. These amounts are subject to change based on the effective time of the merger, date of termination of Mr. Becker’s employment, interest rates then in effect and certain other assumptions used in the calculation. They do not take into account the value of any noncompetition agreement or certain amounts that may be reasonable compensation either before or after the effective time of the merger, each of which may, in some cases, reduce the amount of the payments.

 

(5) John C. Burris, our former Chief Executive Officer, retired effective October 1, 2012. Consistent with Instruction 1 to Item 402(t)(2) of Regulation S-K, the table above shall be deemed to include John C. Burris with $0 in each column.

 

(6) The following table shows, for each named executive officer, the aggregate amounts which are “single trigger” or “double trigger” benefits. The amounts in the “Single Trigger” column represent the unpaid 2013 annual bonus amounts for the named executive officers and the value of the accelerated vesting of Mr. Becker’s performance-based options, while the “Double Trigger” column represents all other amounts to be received by the named executive officers.

 

Named Executive Officer    Single Trigger
($)
     Double Trigger
($)
 

John Becker

     3,374,900         20,219,177   

Thomas McDonough

     129,250         3,018,676   

Todd Headley

     110,000         3,594,288   

Martin Roesch

     80,025         4,589,636   

John Negron

     132,919         4,725,273   

Marc Solomon

     77,000         4,318,801   

Advisory Vote on Golden Parachutes

In accordance with Section 14A of the Exchange Act, we are providing our stockholders with the opportunity to cast an advisory (non-binding) vote on the compensation that may be paid or become payable to its named executive officers in connection with the proposed merger and the agreements pursuant to which such compensation may be paid or become payable. As required by those rules, we are asking our stockholders to vote on the adoption of the following resolution:

“RESOLVED, that the compensation that may be paid or become payable to Sourcefire’s named executive officers in connection with the proposed merger and the agreements or understandings pursuant to which such compensation may be paid or become payable, as disclosed in the table in the section of the proxy statement entitled “Proposal No. 3 –Advisory Vote Regarding Certain Executive Compensation” and the section of the proxy statement entitled “Proposal No. 1 — Adoption of the Merger Agreement — Interests of Executive Officers and Directors in the Merger,” are hereby APPROVED.”

The vote on executive compensation payable in connection with the proposed merger is a vote separate and apart from the vote to adopt the merger agreement. Accordingly, you may vote to approve the executive compensation and vote not to adopt the merger agreement and vice versa. Because the vote on executive compensation paid or that may become payable in connection with the merger is advisory only, it will not be binding on either Sourcefire or Cisco. Accordingly, because we are contractually obligated to pay the compensation, if the merger agreement is adopted and the merger is completed, the compensation will be payable, subject only to the conditions applicable thereto, regardless of the outcome of the non-binding advisory vote.

 

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The affirmative vote of a majority of the votes cast on the matter by holders of our common stock present, in person or represented by proxy, at the special meeting will be required to approve the non-binding advisory resolution on executive compensation payable to our named executive officers in connection with the merger. Abstentions will have the same effect as a vote “AGAINST” the proposal but the failure to vote your shares and “broker non-votes” will have no effect on the outcome of the proposal.

Our board of directors unanimously recommends that you vote “FOR” the approval, on an advisory (non-binding) basis, of the “golden parachute” compensation arrangements that may be paid or become payable to our named executive officers in connection with the merger and the agreements pursuant to which such compensation may be paid or become payable.

 

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OTHER MATTERS

Additional Proposals for the Special Meeting of Stockholders

No business may be transacted at the special meeting other than the matters set forth in this proxy statement.

2014 Stockholder Proposals and Nominations

If the merger is consummated, we will have no public stockholders and no public participation in any of our future stockholder meetings. If the merger is not consummated, stockholders will continue to participate in our annual meetings of stockholders and may submit proposals that they believe should be voted upon at the annual meetings or nominate persons for election to our board of directors.

In accordance with Rule 14a-8 of the Exchange Act stockholders who wish to present proposals for inclusion in the proxy materials prepared by the Company in connection with the 2014 Annual Meeting of Stockholders, which we anticipate holding on June 6, 2014 if the merger has not been completed, must submit their proposals so that they are received by the Company’s Secretary at Sourcefire, Inc., 9770 Patuxent Woods Drive, Columbia, Maryland 21046, no later than December 25, 2013. Under our Bylaws, proposals must be submitted no earlier than October 26, 2013. In the event the date of the 2014 Annual Meeting of Stockholders is advanced or delayed by more than 30 days from the anniversary of the 2013 Annual Meeting of the Stockholders, your proposal must be delivered to the Company’s Secretary at the address above by the later of (i) 90 days prior to the date of the 2014 Annual Meeting of Stockholders and (ii) 15 days following the first public announcement of the date of the 2014 Annual Meeting of Stockholders. Any such proposal must comply with the requirements of Rule 14a-8 promulgated under the Exchange Act, which lists the requirements for the inclusion of stockholder proposals in company-sponsored proxy materials.

Timely notice of any proposal, including a director nomination, that you intend to present at the 2014 Annual Meeting of Stockholders, but do not intend to have included in the proxy materials prepared by the Company in connection with the 2014 Annual Meeting of Stockholders, must be delivered in writing to the Company’s Secretary at the address above not less than 90 days prior to the date of the 2014 Annual Meeting of Stockholders. In addition, your notice must set forth the information required by our Bylaws with respect to each director nomination or other proposal that you intend to present at the 2014 Annual Meeting of Stockholders.

For more information, including the information required to be included in a stockholder proposal, please refer to our Bylaws, filed as exhibit 3.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2012, filed with the SEC on August 2, 2012.

Delivery of Documents to Stockholders Sharing an Address

The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for proxy statements and annual reports with respect to two or more stockholders sharing the same address by delivering a single set of annual meeting materials addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially means extra convenience for stockholders and cost savings for companies.

For this proxy statement, a number of brokers with account holders who are Sourcefire stockholders will be “householding” our proxy materials. A single proxy statement will be delivered to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that they will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in “householding” and would prefer to receive a separate copy of this proxy statement, or you desire to notify us that you wish to receive a separate copy of proxy materials in the future, please notify the Company. Direct your request by mail or telephone to the Company’s Secretary at Sourcefire, Inc., 9770 Patuxent Woods Drive, Columbia, Maryland 21046 or (410) 290-1616. Stockholders who currently receive multiple copies of the proxy statement and annual report at their addresses and would like to request “householding” of their communications should contact their brokers.

 

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WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Exchange Act. We file reports, proxy statements and other information with the SEC. You may read and copy these reports, proxy statements and other information at the SEC’s Public Reference Section at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet website, located at www.sec.gov, that contains reports, proxy statements and other information regarding companies and individuals that file electronically with the SEC.

You also may obtain free copies of the documents the Company files with the SEC by going to the “Investors Relations” section of our website at http://investor.sourcefire.com (the information available at our website address is not incorporated by reference into this report).

The information contained in this proxy statement speaks only as of the date indicated on the cover of this proxy statement unless the information specifically indicates that another date applies.

Statements contained in this proxy statement, or in any document incorporated in this proxy statement by reference, regarding the contents of any contract or other document, are not necessarily complete and each such statement is qualified in its entirety by reference to that contract or other document filed as an exhibit with the SEC. The SEC allows us to “incorporate by reference” information into this proxy statement. This means that we can disclose important information by referring to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this proxy statement. This proxy statement and the information that we later file with the SEC may update and supersede the information incorporated by reference. Similarly, the information that we later file with the SEC may update and supersede the information in this proxy statement. We also incorporate by reference into this proxy statement the following documents filed by us with the SEC under the Exchange Act:

 

   

Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC on February 28, 2013;

 

   

Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013 filed with the SEC on May 3, 2013;

 

   

Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 filed with the SEC on August 2, 2013;

 

   

Definitive Proxy Statement for the Company’s 2013 Annual Meeting, filed on April 24, 2013; and

 

   

Current Reports on Form 8-K filed with the SEC on April 8, 2013, June 6, 2013, July 23, 2013, July 24, 2013, July 29, 2013, August 7, 2013, August 14, 2013, August 15, 2013, September 3, 2013 and September 4, 2013.

To the extent that any Current Report on Form 8-K is incorporated herein by reference, such incorporation shall not include any information contained in such Current Report which is not, pursuant to the SEC’s rules, deemed to be “filed” with the Commission or subject to the liabilities of Section 18 of the Exchange Act. We undertake to provide without charge to each person to whom a copy of this proxy statement has been delivered, upon request, by first class mail or other equally prompt means, within one business day of receipt of the request, a copy of any or all of the documents incorporated by reference into this proxy statement, other than the exhibits to these documents, unless the exhibits are specifically incorporated by reference into the information that this proxy statement incorporates.

Requests for copies of our filings should be directed to Sourcefire, Inc., 9770 Patuxent Woods Drive, Columbia, Maryland 21046, Attention: Corporate Secretary, and should be made at least five business days before the date of the special meeting in order to receive them before the special meeting.

 

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The proxy statement does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is not lawful to make any offer or solicitation in that jurisdiction. The delivery of this proxy statement should not create an implication that there has been no change in our affairs since the date of this proxy statement or that the information herein is correct as of any later date.

You should rely only on the information contained in this proxy statement. We have not authorized anyone to provide you with information that is different from what is contained in this proxy statement. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where the solicitation of proxies is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this proxy statement does not extend to you. You should not assume that the information contained in this proxy statement is accurate as of any date other than the date of this proxy statement, unless the information specifically indicates that another date applies. The mailing of this proxy statement to our stockholders does not create any implication to the contrary.

 

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Annex A

Execution Version

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

CISCO SYSTEMS, INC.,

SHASTA ACQUISITION CORP.

AND

SOURCEFIRE, INC.

JULY 22, 2013


Table of Contents

TABLE OF CONTENTS

 

          Page  

ARTICLE I THE MERGER

     A-1   

1.1.

  

Certain Definitions

     A-1   

1.2.

  

The Merger

     A-7   

1.3.

  

Closing

     A-8   

1.4.

  

Effective Time

     A-8   

1.5.

  

Effect of the Merger

     A-8   

1.6.

  

Certificate of Incorporation; Bylaws

     A-8   

1.7.

  

Directors and Officers

     A-8   

1.8.

  

Effect on Company Capital Stock, Unvested Company Shares, Company Options and Company RSUs

     A-9   

1.9.

  

Surrender of Certificates

     A-10   

1.10.

  

No Further Ownership Rights in Company Capital Stock

     A-11   

1.11.

  

Lost, Stolen or Destroyed Certificates

     A-12   

1.12.

  

Withholding Rights

     A-12   

1.13.

  

Tax Consequences

     A-12   

1.14.

  

Taking of Necessary Action; Further Action

     A-12   

ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     A-12   

2.1.

  

Organization, Standing and Power; Subsidiaries

     A-13   

2.2.

  

Capital Structure

     A-14   

2.3.

  

Authority; Non-contravention

     A-15   

2.4.

  

SEC Filings; Financial Statements; Internal Controls

     A-17   

2.5.

  

Absence of Certain Changes

     A-19   

2.6.

  

Litigation

     A-21   

2.7.

  

Restrictions on Business Activities

     A-21   

2.8.

  

Compliance with Laws; Governmental Permits

     A-21   

2.9.

  

Title to Property and Assets

     A-22   

2.10.

  

Intellectual Property

     A-23   

2.11.

  

Environmental Matters

     A-28   

2.12.

  

Taxes

     A-29   

2.13.

  

Employee Benefit Plans and Employee Matters

     A-32   

2.14.

  

Interested Party Transactions

     A-37   

2.15.

  

Insurance

     A-37   

2.16.

  

Brokers’ and Advisors’ Fees

     A-37   

2.17.

  

Customers and Suppliers

     A-38   

2.18.

  

Material Contracts

     A-38   

2.19.

  

Export Control Laws

     A-41   

2.20.

  

Fairness Opinion

     A-42   

2.21.

  

Information Supplied

     A-42   

2.22.

  

No Additional Representations

     A-42   

ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB

     A-43   

3.1.

  

Organization, Standing and Power

     A-43   

3.2.

  

Authority; Non-contravention

     A-43   

3.3.

  

No Prior Sub Operations

     A-44   

3.4.

  

Stock Ownership

     A-44   

3.5.

  

Information Supplied

     A-44   

3.6.

  

Financing

     A-44   

3.7.

  

No Additional Representations

     A-44   

 

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ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME

     A-44   

4.1.

  

Conduct of Business of the Company and the Subsidiaries

     A-44   

4.2.

  

Restrictions on Conduct of Business of the Company and Subsidiaries

     A-45   

ARTICLE V ADDITIONAL AGREEMENTS

     A-50   

5.1.

  

Proxy Statement

     A-50   

5.2.

  

Company Stockholder Meeting; Board Recommendation

     A-50   

5.3.

  

No Solicitation; Acquisition Proposals

     A-51   

5.4.

  

Access to Information

     A-55   

5.5.

  

Confidentiality; Public Disclosure

     A-56   

5.6.

  

Regulatory Approvals

     A-56   

5.7.

  

Reasonable Best Efforts

     A-57   

5.8.

  

Third-Party Consents; Notices

     A-57   

5.9.

  

Notice of Certain Matters

     A-58   

5.10.

  

Employees and Contractors

     A-58   

5.11.

  

Assumption of Options, Restricted Stock Units and Related Matters

     A-60   

5.12.

  

Option and RSU Data

     A-61   

5.13.

  

Termination of Benefit Plans

     A-62   

5.14.

  

Indemnification

     A-62   

5.15.

  

Section 16 Matters

     A-63   

5.16.

  

Rights Agreement

     A-63   

5.17.

  

Takeover Statutes

     A-63   

5.18.

  

Certain Tax Certificates and Documents

     A-63   

5.19.

  

Director and Officer Resignations

     A-63   

ARTICLE VI CONDITIONS TO THE MERGER

     A-64   

6.1.

  

Conditions to Obligations of Each Party to Effect the Merger

     A-64   

6.2.

  

Additional Conditions to Obligations of the Company

     A-64   

6.3.

  

Additional Conditions to the Obligations of Parent and Sub

     A-64   

ARTICLE VII TERMINATION, AMENDMENT AND WAIVER

     A-66   

7.1.

  

Termination

     A-66   

7.2.

  

Effect of Termination

     A-67   

7.3.

  

Expenses and Termination Fees

     A-68   

7.4.

  

Amendment

     A-69   

7.5.

  

Extension; Waiver

     A-69   

ARTICLE VIII GENERAL PROVISIONS

     A-69   

8.1.

  

Non-Survival of Representations and Warranties

     A-69   

8.2.

  

Notices

     A-69   

8.3.

  

Interpretation

     A-70   

8.4.

  

Counterparts

     A-71   

8.5.

  

Entire Agreement; Parties in Interest

     A-71   

8.6.

  

Assignment

     A-71   

8.7.

  

Severability

     A-71   

8.8.

  

Remedies Cumulative; Specific Performance

     A-71   

8.9.

  

Governing Law

     A-72   

8.10.

  

Rules of Construction

     A-72   

8.11.

  

WAIVER OF JURY TRIAL

     A-72   

EXHIBITS

 

Exhibit A    -    Form of Voting Agreement and Irrevocable Proxy
Exhibit B    -    Form of Certificate of Merger
Exhibit C    -    Form of Bylaws

 

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AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER (this “Agreement”) is made and entered into as of July 22, 2013 (the “Agreement Date”), by and among Cisco Systems, Inc., a California corporation (“Parent”), Shasta Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Parent (“Sub”), and Sourcefire, Inc., a Delaware corporation (the “Company”).

RECITALS

A. The board of directors of the Company (the “Company Board”) and the boards of directors of Parent and Sub (or duly authorized committees thereof) have determined that it would be advisable to, and in the best interests of, their respective companies and the stockholders of their respective companies that Sub merge with and into the Company (the “Merger”), with the Company to survive the Merger and to become a wholly-owned subsidiary of Parent, on the terms and subject to the conditions set forth in this Agreement, and, in furtherance thereof, have approved and declared advisable the Merger, this Agreement and the other transactions contemplated by this Agreement.

B. Parent, Sub and the Company desire to set forth certain representations, warranties, covenants and other agreements in connection with the Merger as set forth herein.

C. Concurrently with the execution of this Agreement and as a material inducement to the willingness of Parent to enter into this Agreement, certain stockholders of the Company are entering into voting agreements and irrevocable proxies in substantially the form attached hereto as Exhibit A (the “Voting Agreements”).

D. Concurrently with the execution of this Agreement and as a material inducement to the willingness of Parent to enter into this Agreement, certain employees of the Company are entering into employment agreements, and the related Ancillary Agreements (collectively, the “Employment Offer Documents”), in each case to become effective upon the Closing.

NOW, THEREFORE, in consideration of 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, the parties hereto hereby agree as follows:

ARTICLE I

THE MERGER

1.1. Certain Definitions.

(a) As used in this Agreement, the following terms shall have the meanings indicated below.

Acceptable Confidentiality Agreement” means a customary confidentiality agreement (i) that contains provisions that are no less favorable in the aggregate to the Company than those contained in the Confidentiality Agreement, including with respect to the treatment of confidential information and the non-solicitation of the Company’s employees, provided that an Acceptable Confidentiality Agreement need not contain any “standstill” or similar covenant, and (ii) that does not include any provision for any exclusive right to negotiate with such Person or having the actual or purported effect of restricting the Company from fulfilling its obligations under this Agreement, including under Section 5.3.

Affiliate” has the meaning set forth in Rule 12b-2 promulgated under the Exchange Act.

Ancillary Agreements” means a Non-Competition Agreement, a Proprietary Information and Inventions Assignment Agreement, a Technology Transfer Assessment and an Arbitration Agreement, each to be entered

 

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Table of Contents

into with Parent, and a Benefits Waiver and an Equity Agreement (to the extent required by the applicable employment agreement), each to be entered into with the Company.

Antitrust Order” means any Order arising under Antitrust Laws.

Applicable Antitrust Legal Requirements” means with respect to any Person, any federal, state, foreign, local, municipal or other law, statute, constitution, resolution, ordinance, code, permit, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Entity that are designed to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade (collectively, “Antitrust Laws”), and any Antitrust Orders applicable to such Person or its subsidiaries, their business or any of their respective assets or properties.

Applicable Foreign Antitrust Notifications” means the pre-merger filings required by the laws of the jurisdictions listed on Schedule 5.6 of the Company Disclosure Letter.

Applicable Legal Requirements” means with respect to any Person, any federal, state, foreign, local, municipal or other law, statute, constitution, resolution, ordinance, code, permit, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Entity and any Orders applicable to such Person or its subsidiaries, their business or any of their respective assets or properties.

Benefits Waiver” means the applicable benefits waiver entered into by a Continuing Employee with the Company as of the Agreement Date or on or prior to the Closing Date.

Business” means the business of the Company and the Subsidiaries as currently conducted, including the design, development, manufacturing, reproduction, branding, marketing, advertising, promotion, licensing, sale, offer for sale, importation, distribution and/or provision of any and all Company Products.

Business Day” means a day (i) other than Saturday or Sunday and (ii) on which commercial banks are open for business in San Francisco, California and in Baltimore, Maryland.

Cash-Out Amount” means: (i) with respect to a Company Option that is not a Rollover Option, an amount of cash, without interest, equal to (A) the number of shares of Company Common Stock subject to such Company Option multiplied by (B) the Per Share Cash Amount less the exercise price per share of such Company Option in effect immediately prior to the Effective Time; provided that if the exercise price per share of a Company Option is equal to or greater than the Per Share Cash Amount, the Cash-Out Amount for such Company Option shall be zero; and (ii) with respect to a Company RSU that is not a Rollover RSU, an amount of cash, without interest, equal to (A) the number of shares of Company Common Stock issuable upon settlement of such Company RSU as of immediately prior to the Effective Time multiplied by (B) the Per Share Cash Amount.

Code” means the Internal Revenue Code of 1986, as amended.

Company Capital Stock” means the Company Common Stock and the Company Preferred Stock.

Company Common Stock” means the common stock, par value $0.001 per share, of the Company, including the associated Rights.

Company Debt” means all indebtedness of the Company and the Subsidiaries for borrowed money, whether current or funded, short- or long-term, secured or unsecured, direct or indirect, including any accrued and unpaid interest, fees, premiums and prepayment or termination penalties (including any penalties payable by the Company or the Subsidiaries in connection with the termination or prepayment in full of any Company Debt at or prior to the Closing), if any, measured as of the Closing, and including, without duplication, (i) any

 

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indebtedness evidenced by any bond, debenture, note, mortgage, indenture, letter of credit or other debt instrument or debt security, (ii) any indebtedness to any lender or creditor under credit facilities of the Company, (iii) any indebtedness for the deferred purchase price of property with respect to which the Company is liable contingently or otherwise, as obligor or otherwise, (iv) any cash overdrafts, (v) any amounts owing under any capitalized or synthetic leases, (vi) any drawn amounts under letter of credit arrangements and (vii) any liability of other Persons of the type described in clauses (i) through (vi) that the Company or any Subsidiary has guaranteed, that is recourse to the Company or any Subsidiary or any of their assets or that is otherwise the legal liability of the Company or any Subsidiary.

Company ESPP” means the Company’s Amended and Restated 2007 Employee Stock Purchase Plan.

Company Option Plans” means the stock option plans, programs, agreements or arrangements of the Company, collectively and as amended, including the Company’s 2002 Stock Incentive Plan and the Company’s 2007 Stock Incentive Plan.

Company Options” means options to purchase shares of Company Common Stock.

Company Preferred Stock” means the preferred stock, par value $0.001 per share, of the Company, including the Series A Junior Participating Preferred Stock reserved for issuance under the Rights Agreement.

Company RSUs” means restricted stock units granted under the Company Option Plans that are settled by issuance of shares of Company Common Stock.

Continuing Employees” means the employees and the consultant set forth on Schedule 1.1(a) of the Company Disclosure Letter of the Company or the Subsidiaries as of the Effective Time.

Contract” means any legally binding written, oral or other agreement, contract, subcontract, lease, binding understanding, obligation, promise, instrument, indenture, mortgage, note, option, guarantee, warranty, purchase order, license, sublicense, insurance policy, benefit plan, commitment or undertaking of any nature.

Delaware Law” means the General Corporation Law of the State of Delaware, as amended.

Dissenting Shares” means any shares of Company Capital Stock that are issued and outstanding immediately prior to the Effective Time and in respect of which appraisal rights shall have been properly demanded (and not withdrawn or lost) in accordance with Delaware Law in connection with the Merger.

Dissenting Stockholder” means any stockholder of the Company holding Dissenting Shares as of the Effective Time.

Encumbrance” means, with respect to any asset or security, any mortgage, deed of trust, lien, pledge, charge, security interest, title retention device, conditional sale or other security arrangement, collateral assignment, claim, charge, adverse claim of title, ownership or right to use, restriction or other encumbrance of any kind in respect of such asset or security (including any restriction on (i) the voting of any security or the transfer of any security or other asset, (ii) the receipt of any income derived from any asset, (iii) the use of any asset and (iv) the possession, exercise or transfer of any other attribute of ownership of any asset).

Equity Agreement” means the applicable equity agreement entered into by a Continuing Employee with the Company as of the Agreement Date or on or prior to the Closing Date.

Exchange Act” means the Securities Exchange Act of 1934, as amended, including the rules and regulations promulgated thereunder.

Exchange Ratio” means the quotient obtained by dividing the Per Share Cash Amount by the Parent Stock Price.

 

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GAAP” means United States generally accepted accounting principles applied on a consistent basis throughout the relevant periods.

Governmental Entity” means any supranational, national, state, municipal, local or foreign government, any court, tribunal, arbitrator, quasi-judicial or administrative agency, commission or other governmental official, authority or instrumentality, in each case whether domestic or foreign, any stock exchange or similar self-regulatory organization or any quasi-governmental or private body exercising any regulatory, Taxing or other governmental or quasi-governmental authority.

Group” has the meaning ascribed to such term under Section 13(d) of the Exchange Act.

HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

knowledge” means, with respect to the Company, the knowledge of any individual set forth on Schedule 1.1(b) of the Company Disclosure Letter with respect to a fact, circumstance, event or other matter after reasonable inquiry under the circumstances.

Legal Proceeding” means any private or governmental action, inquiry, claim, charge, complaint, demand, proceeding, suit, hearing, litigation, arbitration, mediation, audit or investigation, in each case whether civil, criminal, administrative, judicial or investigative, or any appeal therefrom.

Liabilities” means all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured, determined or determinable, asserted or unasserted, known or unknown, including those arising under any Applicable Legal Requirement, Order or Contract, regardless of whether the same would be required to be reflected on a balance sheet prepared in accordance with GAAP or disclosed in the notes thereto.

made available” means, with respect to any statement in this Agreement or the Company Disclosure Letter to the effect that any information, document or other material has been “made available” to Parent, that such information, document or material was: (i) made available for review by Parent and its Representatives in the virtual data room established in connection with this Agreement at least 24 hours prior to the execution of this Agreement, (ii) actually delivered (whether by physical or electronic delivery) to Parent or its Representatives at least 24 hours prior to the execution of this Agreement, or (iii) contained in unredacted form in the Company SEC Reports.

Material Adverse Effect” means with respect to the Company and its Subsidiaries, taken as a whole, any change, event, occurrence, circumstance, condition or effect (each, an “Effect”) that, individually or taken together with all other Effects, would, or would reasonably be expected to, be or become, materially adverse to the condition (financial or otherwise), properties, assets (including intangible assets), business, operations or results of operations of the Company and its Subsidiaries, taken as a whole, except to the extent that any such Effect is proximately caused by (A) changes in general economic conditions or financial, credit, foreign exchange, securities or capital markets, including any disruption thereof, in the United States or elsewhere in the world, (B) changes generally affecting the industry in which the Company and its Subsidiaries operates (including changes in the use, adoption or non-adoption of industry standards), (C) changes in Applicable Legal Requirements, or GAAP or other applicable accounting regulations or principles or interpretations thereof, that apply to the Company and its Subsidiaries, (D) national or international political conditions, any outbreak or escalation of hostilities, insurrection or war, or acts of terrorism, (E) epidemics, quarantine restrictions, wildfires, earthquakes, hurricanes, tornadoes, other natural disasters or similar calamity or crisis, (F) changes in the trading volume or trading prices of such entity’s capital stock in and of themselves (provided that such exception shall not apply to any underlying Effect that may have caused such change in the trading prices or volumes), (G) any failure, in and of itself, to meet market revenue or earnings expectations, including revenue or earnings projections or predictions made by the Company (whether or not publicly announced) or securities or financial analysts and any resulting analyst downgrades of the Company’s securities in and of themselves (provided that

 

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such exception shall not apply to any underlying Effect that may have caused such failure or such downgrades), (H) changes in the Company’s and its Subsidiaries’ relationships with employees, customers, distributors, suppliers, vendors, licensors or other business partners as a result of the announcement or pendency of this Agreement or the anticipated consummation of the Merger and the other transactions contemplated by this Agreement, (I) any actions taken or failure to take action, in each case, which Parent has expressly in writing approved, consented to or requested, or (J) any legal proceedings commenced or threatened by any of the current or former stockholders of the Company against the Company or its directors and officers relating to this Agreement or the transactions contemplated by this Agreement; provided that the exceptions in clauses (A) through (E) shall not apply to the extent that such changes disproportionately and adversely affect the Company and its Subsidiaries, taken as a whole, as compared to other participants in the industry in which the Company and its Subsidiaries operate.

Order” means any judgment, writ, decree, stipulation, determination, decision, legal or arbitration award, settlement or consent agreement, charge, ruling, injunction, restraining order or other order issued, promulgated or entered into by or with (or in the case of a settlement or consent agreement, subject to) any Governmental Entity, whether temporarily, preliminarily or permanently in effect.

Parent Common Stock” means the common stock, par value $0.001 per share, of Parent.

Parent Material Adverse Effect” means any Effect that would, or would reasonably be expected to, materially impede or delay Parent’s or Sub’s ability to consummate the transactions contemplated by this Agreement in accordance with its terms and Applicable Legal Requirements.

Parent Stock Price” means the volume-weighted average sale price for a share of Parent Common Stock as quoted on the NASDAQ Global Select Market for the 10 consecutive trading days ending with the trading day that is three trading days prior to the Closing Date.

Per Share Cash Amount” means $76.00 in cash per share of Company Common Stock.

Permitted Encumbrance” means (i) liens for current Taxes not yet due and payable or that are being contested in good faith (provided that reserves, established in accordance with GAAP, have been recorded on the Company Balance Sheet for any such contest that is material), (ii) statutory liens that are incurred in the ordinary course of business consistent with past practice and that are not yet due and payable or that are being contested in good faith (provided that reserves, established in accordance with GAAP, have been recorded on the Company Balance Sheet for any such contest that is material), (iii) such imperfections of title and non-monetary Encumbrances and other liens, in each case incurred in the ordinary course of business, that are not reasonably likely to materially detract from or interfere with the use of the properties subject thereto or affected thereby, or otherwise materially impair any business operations involving such properties, (iv) lien