Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1/A Pre-Effective Amendment to Registration Statement 205 1.01M
(General Form)
2: EX-1.1 Underwriting Agreement 21 109K
3: EX-5.1 Opinion re: Legality 1 10K
5: EX-10.23 Material Contract 43 138K
6: EX-10.24 Material Contract 12 48K
7: EX-10.25 Material Contract 50 175K
8: EX-10.26 Material Contract 16 55K
9: EX-10.27 Material Contract 11 32K
10: EX-10.28 Material Contract 49 191K
11: EX-10.29 Material Contract 10 44K
12: EX-10.30 Material Contract 11 47K
4: EX-10.3A Material Contract 1 9K
13: EX-21.1 Subsidiaries of the Registrant 1 7K
14: EX-23.2 Consent of Experts or Counsel 1 7K
15: EX-23.3 Consent of Experts or Counsel 1 7K
16: EX-23.4 Consent of Experts or Counsel 1 7K
17: EX-23.5 Consent of Experts or Counsel 1 8K
18: EX-23.6 Consent of Experts or Counsel 1 7K
19: EX-23.7 Consent of Experts or Counsel 1 7K
20: EX-27.1 Financial Data Schedule (Pre-XBRL) 2 14K
S-1/A — Pre-Effective Amendment to Registration Statement (General Form)
Document Table of Contents
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 2000
REGISTRATION NO. 333-37346
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LINEO, INC.
(Name of issuer in its charter)
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DELAWARE 7371 87-0617792
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
390 SOUTH 400 WEST
LINDON, UTAH 84042
(801) 426-5001
(Address and telephone number of principal executive offices
and principal place of business)
BRYAN W. SPARKS
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
390 SOUTH 400 WEST
LINDON, UTAH 84042
(801) 426-5001
(Name, address and telephone number of agent for service)
--------------------------
COPIES OF ALL COMMUNICATIONS TO BE SENT TO:
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LAURA A. BERTIN, ESQ. LAURIE A. SMILEY, ESQ.
MICHAEL J. ERICKSON, ESQ. REED W. TOPHAM, ESQ.
MARK F. WORTHINGTON, ESQ. MARC S. MARCHIEL, ESQ.
Summit Law Group, PLLC Stoel Rives LLP
1505 Westlake Avenue North, Suite 300 600 University Street, Suite 3600
Seattle, Washington 98109 Seattle, Washington 98101
(206) 281-9881 (206) 624-0900
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED OCTOBER 13, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Shares
[LOGO]
Common Stock
-----------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $ and $ per share. We have applied to list our common
stock on The Nasdaq Stock Market's National Market under the symbol "LNEO."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotment of shares.
Investing in the common stock involves risks. See "Risk Factors" on page 8.
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Underwriting
Price to Discounts and Proceeds to
Public Commissions Lineo
------------------- ------------------- -------------------
Per Share............................................ $ $ $
Total................................................ $ $ $
Delivery of the shares of common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Lehman Brothers
Dain Rauscher Wessels
Wit SoundView
The date of this prospectus is , 2000.
INSIDE FRONT COVER
Text: "Embed Linux Software Anywhere-TM-"
"Lineo-TM-"
"The Embedded Linux Solutions Company-TM-"
Pictures: Ball with "Lineo" printed on it surrounded by pictures of a
cellular telephone, automobile, soda pop vending machine, router
handheld device, server and automated robot
GATEFOLD
Text: "Embed Linux Software Anywhere-TM-"
"Lineo-TM-"
"The Embedded Linux Solutions Company-TM-"
Picture: Horizontal oval diagram with a ball with "Lineo" printed on it in
the middle surrounded by six "pie" sections containing pictures of
a house, retail environment, traffic, industrial automation device,
cellular telephone and modem cord, with the following text:
"Internet Infrastructure
- Network traffic routers
- Modems
- Switches
Home Automation
- "Smart" appliances
- Security systems
- Residential communications systems
Retail Business Products
- Credit card readers
- Point-of-Sale terminals
- Hand-held scanners
Transportation Systems
- Automotive systems
- Radar controls
- Global positioning systems
Real Time Systems
- Military systems
- Industrial automation
- Medical solutions
- Multimedia
Consumer Devices
- Cellular phones
- Internet set-top boxes
- Personal digital assistants
- Entertainment systems
- Printers/scanners"
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 8
SPECIAL NOTE ABOUT FORWARD-LOOKING
STATEMENTS.......................... 18
USE OF PROCEEDS....................... 18
DIVIDEND POLICY....................... 18
CAPITALIZATION........................ 19
DILUTION.............................. 20
SELECTED ACTUAL AND PRO FORMA
FINANCIAL DATA...................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 24
BUSINESS.............................. 36
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PAGE
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MANAGEMENT............................ 47
RELATED-PARTY TRANSACTIONS............ 55
PRINCIPAL STOCKHOLDERS................ 58
DESCRIPTION OF CAPITAL STOCK.......... 61
SHARES ELIGIBLE FOR FUTURE SALE....... 64
UNDERWRITING.......................... 66
NOTICE TO CANADIAN RESIDENTS.......... 68
LEGAL MATTERS......................... 69
EXPERTS............................... 70
WHERE TO FIND ADDITIONAL DOCUMENTS.... 70
INDEX TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS... P-1
INDEX TO FINANCIAL STATEMENTS......... F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY BE ACCURATE ONLY
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION THAT WE PRESENT MORE FULLY
ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY.
LINEO, INC.
We provide a broad range of operating system products and services for use
in devices and systems containing embedded, or hidden, microprocessors. We do so
through a combination of our experience with embedded operating systems,
expertise in Linux operating systems and involvement in the open source
community. An operating system provides the main control program of a computer
or electronic device, and microprocessors are small electronic circuits that
control the functions of the computer or electronic device. Products and systems
containing embedded microprocessors, ranging from small industrial components to
handheld consumer devices to large networking infrastructure equipment, require
customized operating systems to communicate operating instructions between the
microprocessor and related hardware and software components. These operating
systems must be stable and adaptable to performance, memory and storage capacity
limitations.
We develop embedded Linux operating systems that are reliable, easy to use
and able to perform complex functions for use by microprocessor companies and
original equipment manufacturers in their products and systems. We also provide
software tools and services to enable our customers to quickly and
cost-effectively design, develop and integrate their own embedded Linux
operating systems. Customers of our Linux products and services consist of
original equipment manufacturers such as Analog Devices, Inc., Bast, Inc., CIS
Technology, Inc., DaiShin Information & Communications Co., MiTAC International
Corp, Samsung Electronics Co., Ltd. and Samsung Electro-Mechanics Co., Ltd. We
also have entered into strategic relationships with microprocessor companies
such as Hitachi, Ltd. and Metrowerks Corp., a subsidiary of Motorola, Inc., to
modify and adapt our products for use with their microprocessors and to further
promote our offerings with their customers.
Rapid advancements in microprocessor technology have dramatically increased
the type and capabilities of products and systems that enable organizations and
individuals to collaborate, access information and conduct business more
effectively. These advancements have created demand for robust, reliable and
powerful embedded operating systems. Historically, most companies that require
embedded operating systems for their products and systems have either used
internal resources to develop their own or have purchased or licensed operating
systems that are owned by, or proprietary to, third parties.
Open source operating systems have emerged as an alternative to internally
developed and third-party proprietary operating systems. The term open source
generally applies to software that is freely accessible by the public and can be
copied, modified and distributed with few restrictions. Popular open source
software is continuously maintained and improved by worldwide communities of
developers who share information, code and suggestions, primarily over the
Internet. Linux has emerged as the leading open source operating system,
enjoying acceptance by both commercial and academic communities due to its high
performance and stability, low cost and broad developer support. Until recently,
the growth in the use of Linux operating systems has primarily been in the
server and desktop computer markets. Microprocessor companies are now promoting,
and original equipment manufacturers are now adopting, Linux in the embedded
systems market. However, many of these companies and manufacturers have limited
experience working with Linux and may lack developers with the specialized
skills and relationships in the open source community necessary to identify and
take advantage of the many enhancements to Linux that are continuously under
development.
We have enhanced and extended open source Linux with new technologies and
advancements to enable embedded systems developers to use Linux in a wide range
of highly customized embedded products and systems. Our products include Embedix
Linux, Embedix RealTime, Embedix Software
3
Development Kit, Embedix UI, Embedix mClinux, Lineo High Availability Clustering
and NETtel. Embedix Linux, a combination of open source Linux and internally
developed technologies, is a Linux-based operating system that is designed
specifically for embedded products and systems. Embedix RealTime is software
designed to provide Embedix Linux with predetermined response time, or real
time, capabilities. Embedix Software Development Kit is a package of our
proprietary software and open source development tools designed to help systems
developers accelerate the design, development, error detection and correction,
and maintenance of embedded Linux operating systems in their products and
systems. Embedix UI is our compact, Linux-based Web browser designed for
products and systems that interact with the Internet and contain embedded
microprocessors. Embedix mClinux is a version of Embedix Linux designed
specifically for the requirements of very small microprocessors, commonly
referred to as microcontrollers. Lineo High Availability Clustering is software
and hardware that provides continuous operation, or high availability,
capabilities. These features enable Linux to perform in environments where
failure rates and associated downtime must be very low, such as high speed
telephone switches. NETtel is our integrated hardware/software system that
provides secure communications over the Internet for small offices and homes. In
addition, we provide comprehensive professional Embedix Services to our embedded
systems customers, including customized engineering, education and technical
support services.
Our objective is to become the leading provider of embedded operating system
products and services. We intend to enhance our technology leadership by
developing additional technologies internally and by acquiring proprietary
technologies or other companies. We are currently implementing this strategy and
have acquired six companies with technologies complementary to our own. We
intend to continue developing strategic relationships with microprocessor
companies and original equipment manufacturers to promote our offerings and plan
our future product development. We plan to continue expanding sales efforts
internationally by growing our internal sales force and through additional
strategic acquisitions. We will also continue to enhance our operating system
products by incorporating additional software products of independent software
vendors.
We began operations as a part of Caldera, Inc. in July 1996. We were
incorporated as a separate entity in the State of Utah in August 1998 as Caldera
Thin Clients, Inc., changed our name to Lineo, Inc. in July 1999 and
reincorporated in the State of Delaware in January 2000. Our principal executive
offices are located at 390 South 400 West, Lindon, Utah 84042, and our telephone
number is (801) 426-5001. Our World Wide Web address is www.lineo.com.
Information on our Web site does not constitute a part of this prospectus.
--------------
LINEO-TM-, LINEO PARTNER CONNECT-TM-, the Lineo logo, EMBEDIX-TM-,
mCLINUX-TM- and TARGET WIZARD-TM- are our trademarks. We will continue to pursue
registration of these and other marks. This prospectus also contains trademarks
and trade names of other companies.
4
THE OFFERING
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Common stock offered...................... shares
Common stock to be outstanding after this
offering................................ shares
Use of proceeds........................... For general corporate purposes. See "Use of Proceeds" on
page 18 for a more complete description of our planned
use of the proceeds from this offering.
Proposed Nasdaq National Market Symbol.... LNEO
The outstanding share information is based on our shares outstanding as of
July 31, 2000. This information excludes:
- 3,705,034 shares of our common stock issuable upon the exercise of stock
options outstanding as of July 31, 2000, at a weighted average exercise
price of $2.88 per share;
- 1,266,110 shares of our common stock issuable upon exercise of stock
options granted subsequent to July 31, 2000 through October 10, 2000, net
of forfeitures, at a weighted average exercise price of $5.60 per share;
- 2,000,000 shares of our common stock issuable upon exercise of a stock
warrant issued on October 2, 2000, at an exercise price of $6.00 per
share;
- 1,358,545 shares of our common stock reserved for future issuance under
our stock option plan as of October 10, 2000; and
- 2,000,000 shares of our common stock reserved for future issuance under
our employee stock purchase plan.
--------------
Unless otherwise indicated, all information contained in this prospectus:
- assumes conversion of all outstanding shares of our convertible preferred
stock into 16,763,813 shares of our common stock upon completion of this
offering; and
- assumes the underwriters' over-allotment option is not exercised.
5
SUMMARY ACTUAL AND PRO FORMA FINANCIAL DATA
The following financial data should be read in conjunction with "Selected
Actual and Pro Forma Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Unaudited Pro Forma
Condensed Consolidated Financial Statements and related Notes and our
Consolidated Financial Statements and related Notes included elsewhere in this
prospectus.
Our actual operating results for the nine months ended July 31, 2000
include, for the period from their respective acquisition dates through
July 31, 2000, the operating results of Zentropic Computing, LLC, which we
acquired on April 3, 2000; United System Engineers, Inc., Fireplug Computers,
Inc., Inup, S.A. and Moreton Bay Ventures Pty, Ltd., each of which we acquired
effective May 1, 2000; and RT-Control Inc., which we acquired on May 12, 2000.
The pro forma statement of operations data for the fiscal year ended
October 31, 1999 and the nine months ended July 31, 2000:
- give effect to our acquisitions of Zentropic, United System, Fireplug,
Inup, Moreton Bay and RT-Control as if they had occurred on November 1,
1998; and
- reflect the amortization of goodwill and other intangibles related to the
acquisitions, as well as adjustments for acquired in-process research and
development in connection with the acquisitions and the elimination of
intercompany transactions.
The pro forma balance sheet data as of July 31, 2000 give effect to the
conversion of all outstanding shares of our convertible preferred stock into
16,763,813 shares of our common stock upon completion of this offering.
The pro forma as adjusted balance sheet data as of July 31, 2000 give effect
to the pro forma adjustment, as well as to the receipt of the proceeds from this
offering, after deducting estimated underwriting discounts and commissions and
estimated offering expenses.
The pro forma financial data are presented for illustrative purposes only
and are not necessarily indicative of the operating results or financial
position that would have resulted if these acquisitions had been in effect
during the periods presented or of future operating results.
6
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FISCAL YEAR ENDED OCTOBER 31,
PERIOD FROM --------------------------------------------
JULY 23, 1996 1999
(INCEPTION) TO ----------------------
OCTOBER 31, 1996 1997 1998 ACTUAL PRO FORMA
----------------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue....................... $ 62 $ 945 $ 1,376 $ 2,801 $ 4,640
Cost of revenue............... 67 247 361 185 1,380
Gross margin.................. (5) 698 1,015 2,616 3,260
Loss from operations.......... (49) (827) (2,005) (891) (9,849)
Net loss...................... (61) (877) (2,186) (1,054) (10,068)
Basic and diluted net loss per
common share................ $(0.00) $(0.05) $ (0.12) $ (0.06) $ (0.48)
Basic and diluted weighted
average common shares
outstanding................. 18,000 18,000 18,000 18,000 21,079
Basic and diluted supplemental
pro forma net loss per
common share................ $ (0.45)
Basic and diluted supplemental
pro forma weighted average
common shares outstanding... 22,592
NINE MONTHS ENDED JULY 31,
---------------------------------------
2000
-------------------------
1999 ACTUAL PRO FORMA
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue....................... $ 1,373 $ 3,878 $ 4,941
Cost of revenue............... 143 844 1,597
Gross margin.................. 1,230 3,034 3,344
Loss from operations.......... (1,282) (14,508) (16,906)
Net loss...................... (1,365) (14,055) (16,429)
Basic and diluted net loss per
common share................ $ (0.08) $ (0.69) $ (0.74)
Basic and diluted weighted
average common shares
outstanding................. 18,000 20,268 22,146
Basic and diluted supplemental
pro forma net loss per
common share................ $ (0.52)
Basic and diluted supplemental
pro forma weighted average
common shares outstanding... 31,611
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JULY 31, 2000
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN
THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $25,121 $25,121 $
Working capital............................................. 23,875 23,875
Total assets................................................ 54,815 54,815
Long-term liabilities....................................... 556 556
Total stockholders' equity.................................. 50,468 50,468
7
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. ANY OF THE
FOLLOWING RISKS COULD HARM OUR BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION AND COULD RESULT IN A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS RELATED TO OUR OPERATIONS
OUR LIMITED OPERATING HISTORY AND THE RECENT FOCUS OF OUR BUSINESS STRATEGY ON
LINUX-BASED PRODUCTS MAKES THE EVALUATION OF OUR BUSINESS DIFFICULT.
We began operations as a separate entity in September 1998 and consequently
have only a limited operating history on which you can rely in evaluating an
investment in our company. Moreover, prior to January 1999, our business focused
on our embedded disk operating system, DR DOS. In January 1999, we began
focusing our strategy on developing embedded operating systems based on Linux
and other open source technologies. In January 2000, we released the first
commercial version of our embedded Linux operating system. Before January 2000,
substantially all of our revenue was generated from sales of DR DOS. We expect
to generate substantially all of our future revenue from sales of our
Linux-based operating systems and related products and services. As a result, we
believe that our financial history may not be indicative of our future
performance.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE.
We have incurred losses since our inception. At July 31, 2000, we had an
accumulated deficit of $20.2 million. We expect to continue to incur losses for
at least the next 15 months as we incur significant expenses developing our
products, hiring and training employees and building awareness of our brand. If
our revenue declines or grows at a slower rate than we anticipate, or if our
expenses exceed our expectations or cannot be adjusted to respond to slower
revenue growth, we may fail to achieve or sustain profitability or generate
positive cash flow within our expected timeframe, if at all.
WE EXPANDED OUR OPERATIONS RAPIDLY AND MUST THEREFORE IMPLEMENT APPROPRIATE
SYSTEMS, PROCEDURES AND CONTROLS, OR WE MAY NOT BE ABLE TO OFFER OUR SERVICES
AND GROW OUR BUSINESS AS CURRENTLY ANTICIPATED.
Our ability to offer our products and services and grow our business as
currently anticipated requires an effective planning and management process.
Since July 1999, we have rapidly increased the size of our operations, growing
from 27 employees as of July 31, 1999 to 265 employees as of October 10, 2000.
Moreover, as a result of our acquisitions we have expanded the scope and size of
our business operations. This growth has placed, and we expect that any future
growth we experience will continue to place, a strain on our management, systems
and resources. Our key personnel have limited experience managing this type of
growth. To manage growth effectively, we will need to continue to implement or
update our operational and financial systems, procedures and controls. Any
failure to manage this growth could harm our business.
WE EXPECT TO ENGAGE IN FUTURE ACQUISITIONS, WHICH COULD HARM OUR OPERATING
RESULTS, DILUTE OUR STOCKHOLDERS AND CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT
LIABILITIES.
In light of the fragmented nature of the Linux industry and ongoing demand
for additional open source software developers, we expect to continue to make
investments in or acquire complementary companies, products or technologies. If
we acquire a company, we could have difficulty integrating that company's
technologies or products into our operations or integrating and retaining its
key personnel. These difficulties could disrupt our ongoing business, distract
our management and employees and increase our expenses. Furthermore, we may
issue equity securities to pay for any future acquisitions,
8
which could be dilutive to our existing stockholders. We may also incur debt,
assume contingent liabilities or incur charges associated with amortization of
goodwill and other assets in connection with future acquisitions, which could
harm our operating results.
BECAUSE A RELATIVELY SMALL NUMBER OF CUSTOMERS HAVE HISTORICALLY ACCOUNTED FOR A
SUBSTANTIAL PORTION OF OUR REVENUE, OUR REVENUE MAY DECREASE IF WE LOSE ANY OF
OUR SIGNIFICANT CUSTOMERS.
Historically, a relatively small number of customers have accounted for a
substantial portion of our total revenue. In the fiscal year ended October 31,
1999, our three largest customers accounted for 48% of our total revenue, with
Sun Microsystems, Inc. accounting for 23%, Brooktrout Inc. accounting for 13%
and Symbol Technologies, Inc. accounting for 12%. In the nine months ended
July 31, 2000, our ten largest customers accounted for 59% of our total revenue,
with DaiShin accounting for 18%. We anticipate that sales of our products and
services to relatively few customers will continue to account for a significant
portion of our total revenue. We generally do not enter into long-term purchase
commitments with our significant customers. Therefore, these customers could
cease purchasing our products and services with limited notice and with little
or no penalty.
WE MAY EXPERIENCE QUARTERLY FLUCTUATIONS IN OUR REVENUE AND RESULTS OF
OPERATIONS, WHICH COULD RESULT IN VOLATILITY IN OUR STOCK PRICE.
Our quarterly revenue and results of operations may vary in the future due
to a number of factors. Many of these factors are as a result of our operating
in the new industry of delivering Linux products and services and are generally
outside of our control. Factors that may affect our quarterly results include:
- our ability to forecast revenue accurately, which is constrained by our
limited operating experience selling our embedded Linux-based products and
services;
- acceptance of Linux as a viable embedded operating system alternative to
other competing operating systems;
- the development and maintenance of our strategic relationships with
microprocessor companies and original equipment manufacturers and
independent software vendors;
- the development, introduction, competitive pricing and market acceptance
of our products and services as well as those of our competitors; and
- our ability to manage our anticipated growth and expansion.
If our quarterly operating results fluctuate due to these or any other factors,
we may not meet the expectations of public market analysts or investors, and the
price of our common stock could decline.
RISKS RELATED TO LINUX AND OUR INTELLECTUAL PROPERTY
WE COULD BE PREVENTED FROM SELLING OR DEVELOPING OUR PRODUCTS IF THE GNU GENERAL
PUBLIC LICENSE AND SIMILAR LICENSES ARE NOT ENFORCEABLE OR IF WE ARE DEEMED TO
BE IN VIOLATION OF THESE LICENSES.
The Linux-based components of our products have been developed and licensed
under the GNU General Public License and similar licenses. These licenses state
that any program licensed under them may be liberally copied, used, modified and
distributed freely, so long as all modifications are also freely made available
and licensed under the same conditions. We know of no instance in which a party
has challenged the validity of these licenses or in which these licenses have
been interpreted in a legal proceeding. To date, compliance with these licenses
has been voluntary. It is possible that a court would hold one or more of these
licenses to be unenforceable. Any ruling by a court that these licenses are not
enforceable, or that the Linux operating system may not be liberally copied,
modified or distributed freely, would have the effect of preventing us from
selling or developing our Linux products and
9
services, unless we are able to negotiate a license to use the software. Any
licenses could be expensive, which could impair our ability to price our
offerings competitively.
Moreover, it is possible that a party may argue that the GNU General Public
License places restrictions on the types of fees that can be charged in
connection with the distribution and licensing of derivative Linux programs.
Because some of our products include both open source and proprietary
technologies, we charge our customers a fee to license our products from us.
Although we have neither solicited nor received an opinion of counsel regarding
the applicability of the licensing restrictions of the GNU General Public
License to our business and the fees that we charge, it is possible that these
fees could be deemed to be a violation of the GNU General Public License, which
could result in the termination of this license. Without this license, we could
be subject to claims for infringement of copyrights and other intellectual
property rights covered by the GNU General Public License, which could subject
us to damages claims and adversely impact our ability to market our existing and
future Linux-based products.
IF THE LINUX OPERATING SYSTEM DOES NOT CONTINUE TO GAIN MARKET ACCEPTANCE, WE
MAY NOT BE ABLE TO GENERATE REVENUE AND OUR BUSINESS COULD FAIL.
We expect that substantially all of our future revenue will be derived from
sales of Linux-based embedded operating systems and related products and
professional services. The Linux operating system has only recently begun to
gain broad market acceptance, and its use has been mostly limited to computer
network file servers, desktop computers, software used to run various components
of the Internet and scientific research environments. Our success depends on the
continued and increased rate of adoption of Linux in these and other markets,
and especially the market for embedded operating systems. Our success also
depends on the continued development of Linux-compatible products, applications
and utilities. If this adoption and development does not occur, our business
will suffer. Moreover, if multiple and competing incompatible versions of Linux
are developed, customers may become less likely to purchase Linux products, and
our sales could suffer.
OUR BUSINESS STRATEGY, WHICH RELIES ON A COMBINATION OF OPEN SOURCE SOFTWARE AND
PROPRIETARY TECHNOLOGIES, IS UNPROVEN, AND WE ARE UNABLE TO ACCURATELY PREDICT
WHETHER WE CAN GENERATE A PROFIT OR MAINTAIN A SUCCESSFUL BUSINESS BASED ON THIS
STRATEGY.
Our business model relies on a combination of open source software,
proprietary technologies and commercial products. We know of no company that has
built a profitable business based on open source software. In addition, because
Linux is open source software and is freely accessible by the public and can be
copied, modified and distributed with few restrictions, customers may be
unwilling to pay royalties to license our Linux-based products. By incorporating
open source software in our offerings, we cannot provide our customers with the
same warranties on products and services that customers of proprietary systems
may typically receive. In addition, by developing products based on proprietary
technology that is not freely available, we may alienate the open source
community. Because we rely on our relationships within the open source
community, negative reaction to our use of the Linux operating system could harm
our reputation, impair our ability to capitalize on the development efforts of
the open source community, diminish our brand and harm our business.
OUR ABILITY TO INTRODUCE NEW PRODUCTS OR PRODUCT ENHANCEMENTS WOULD BE IMPAIRED
IF LINUX DEVELOPERS DO NOT CONTINUE TO ENHANCE THE SOURCE CODE OF LINUX AND
DEVELOP LINUX-BASED UTILITIES AND APPLICATIONS.
As open source software, the Linux source code is open to the public and can
be copied, modified and distributed without an associated fee. Our success
depends in part on the continued efforts of the open source development
community to enhance the source code of Linux and Linux-based utilities and
applications to make Linux compatible for use across multiple software and
hardware platforms. If
10
Linus Torvalds, the initial developer of Linux, and other third-party developers
fail to further develop or improve the functionality of Linux or to introduce
new open source software or software enhancements, our ability to market our
existing and future Linux products and services would suffer. In this event, we
may be forced to rely to a greater extent on our own development efforts or the
development efforts of third-party consultants, which would significantly
increase our costs.
WE ARE VULNERABLE TO CLAIMS THAT OUR PRODUCTS INFRINGE THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS, PARTICULARLY BECAUSE OUR PRODUCTS ARE COMPRISED OF MANY
DISTINCT SOFTWARE COMPONENTS DEVELOPED BY A BROAD COMMUNITY OF INDEPENDENT
PARTIES, AND THESE CLAIMS COULD BE COSTLY TO DEFEND AND COULD HARM OUR
REPUTATION.
We may be exposed to future litigation based on claims that our products
infringe the intellectual property rights of others. This risk is magnified by
the fact that a significant portion of the software code in our products is
developed by a community of independent parties over whom we exercise no
supervision or control and who might not have the same financial resources as us
to pay damages to a successful litigant. Claims of infringement could require us
to re-engineer our products or seek to obtain licenses from third parties in
order to continue offering our products. Moreover, we have agreed in many cases
to provide our customers with protection from third-party infringement claims.
An adverse legal decision affecting our intellectual property, or the use of
significant resources to defend against this type of claim, could place a
significant strain on our financial resources and harm our reputation.
FAILURE TO ADEQUATELY PROTECT INTELLECTUAL PROPERTY RIGHTS THAT ARE KEY TO OUR
BUSINESS COULD RESULT IN SIGNIFICANT HARM TO OUR OPERATING RESULTS.
Although our Embedix platform is based on open source Linux, many aspects of
our products include intellectual property that is proprietary to us. Our
success depends significantly on our ability to protect our trademarks, trade
secrets and the internally developed proprietary technologies contained in our
products. We rely on a combination of patent, copyright, trademark and trade
secret laws and on confidentiality and other contractual provisions to protect
our proprietary rights. These measures afford only limited protection. Effective
intellectual property protection may not be available in every country in which
we intend to offer our products and services. Our means of protecting our
proprietary rights and technologies in the United States or abroad may not be
adequate, and competitors may independently develop similar technologies or
unauthorized parties may copy aspects of our products or obtain and use trade
secrets or other information that we regard as proprietary. In addition, a third
party could attempt to interpret the GNU General Public License in a manner that
could put the protection of our intellectual property at risk because of the
interaction between our intellectual property and the intellectual property
covered by the GNU General Public License. Moreover, because we rely in part on
open source intellectual property, we may find it necessary to defend the open
source community from attempts by others to misappropriate, whether by patent,
copyright or otherwise, technology which belongs to the open source community.
Legal proceedings to enforce our intellectual property rights or the rights of
the open source community could be burdensome and expensive and involve a high
degree of uncertainty. These legal proceedings may also divert management's
attention from our core business. If we do not enforce and protect intellectual
property rights important to our business, our business may be harmed.
BECAUSE WE DO NOT OWN THE LINUX TRADEMARK, WE MAY BE PROHIBITED FROM USING IT IN
CONNECTION WITH OUR PRODUCTS, WHICH COULD DAMAGE OUR BRAND AWARENESS AND MAKE IT
MORE DIFFICULT TO MARKET OUR PRODUCTS AND SERVICES.
We use the term "Linux" in our advertising and marketing materials, in our
product documentation and for other commercial uses. Linus Torvalds owns the
Linux trademark, however, and
11
we do not have any ownership of, or contractual right to use, this trademark. If
the Linux trademark is invalidated through legal action, or if we are otherwise
prohibited from using it, our reputation and brand awareness could suffer. Also,
the use by others of the Linux trademark could lead to confusion about the
source, quality, reputation and dependability of Linux in general, which could
negatively affect the market for Linux products.
RISKS RELATED TO COMPETITION WITHIN OUR INDUSTRY
WE FACE INTENSE COMPETITION IN THE EMBEDDED OPERATING SYSTEMS MARKET, WHICH MAY
RESULT IN PRICE REDUCTIONS, REDUCED REVENUE AND LOWER PROFIT MARGINS.
The market for embedded operating systems products and services is becoming
increasingly competitive. Failure to compete successfully with current or
potential competitors would harm our business. We face competition from:
- the internal research and development departments of our current and
potential customers, which may seek to develop their own proprietary
embedded operating systems;
- companies that have developed proprietary embedded operating systems, such
as Mentor Graphics Corporation, Microsoft Corporation, Microware Systems
Corporation, Palm Computing, Inc., QNX Software Systems Ltd., Sun
Microsystems, Inc., Symbian, PLC and Wind River Systems, Inc.;
- companies that have developed, or may in the future develop, Linux
embedded operating systems, such as Caldera Systems, Inc.,
Coollogic, Inc., Information Storage Devices, Inc., LynuxWorks, Inc.,
MontaVista Software, Inc., Red Hat Software, Inc., SuSE Inc. and
TurboLinux Inc.; and
- companies that have developed Web browsers, such as Microsoft, Netscape
Communications Corporation and Spyglass, Inc. (which recently announced
its merger with OpenTV, Inc.).
Many of these companies have greater financial resources, more established
direct and indirect sales channels and greater name recognition than we do.
These companies also have larger and more established service organizations to
support their products and operating systems. These companies may be able to
leverage their existing organizations and provide a wider offering of products
and higher levels of support on a more cost-effective basis than we can. In
addition, these companies may be able to undertake more extensive promotional
activities, adopt more aggressive pricing policies and offer more attractive
terms to their customers than we can. Any pricing pressures or loss of potential
customers resulting from our failure to compete effectively would reduce our
revenue.
Furthermore, because Linux distributions can be downloaded from the Internet
for free or purchased at a nominal cost, modified and resold with few
restrictions, some traditional barriers to market entry are minimized.
Accordingly, new competitors or alliances among existing competitors may emerge
and acquire significant market share. In addition, to the extent that our
competitors make their source code available to the public, software developers
will be able to customize these systems and solutions more quickly and easily
than if these technologies remain proprietary. This could harm our ability to
compete by making our product and service offerings less attractive to
prospective customers.
IF WE DO NOT INTRODUCE NEW OR UPDATED PRODUCTS AND SERVICES IN A TIMELY MANNER,
OUR OFFERINGS MAY BECOME OBSOLETE, AND OUR OPERATING RESULTS WILL SUFFER.
The embedded operating systems market is characterized by rapid
technological change, frequent new product enhancements, uncertain product life
cycles, changes in original equipment manufacturer and end-user demands and
evolving industry standards, including developments in the open source
community. Our products could be rendered obsolete if products based on new
technologies, such as
12
operating systems other than Linux, are introduced or new industry standards
emerge. Due to the labor-intensive nature of our software development business
model, new products and product enhancements can require long development and
testing periods, which requires us to hire and retain increasingly scarce,
technically competent personnel. Significant delays in new product releases or
significant problems in installing or implementing new products could seriously
damage our business.
In addition, our future success depends upon our ability to enhance existing
products, develop and introduce new products, satisfy customer requirements and
achieve market acceptance. This process is made more challenging by the fact
that much of the software development for our products is done by the open
source community, and we must work with a large number of developers who are not
our employees in this process. We may not be able to successfully identify new
product opportunities and develop and bring new products to market in a timely
and cost-effective manner. Moreover, we may be required to license technologies
from third parties to remain competitive, which could increase our expenses and
harm our operating results.
OTHER RISKS RELATED TO OUR BUSINESS
WE FACE OPERATIONAL AND FINANCIAL RISKS AS WE MAINTAIN AND EXPAND OUR
INTERNATIONAL OPERATIONS, ANY OF WHICH COULD HARM OUR RESULTS OF OPERATIONS.
In the nine months ended July 31, 2000, approximately 70% of our revenue was
generated from customers located outside the United States, principally in
Japan, South Korea and Taiwan. As we maintain and expand our international
operations, we face a number of challenges, including:
- difficulties in managing and administering a globally-dispersed business;
- fluctuations in exchange rates that may negatively affect our operating
results;
- difficulties in collecting accounts receivable resulting in longer
collection periods;
- compliance with a wide variety of foreign laws and regulatory environments
with which we have limited familiarity;
- protecting our trademarks and other intellectual property due to the
uncertainty of laws and enforcement in certain countries relating to the
protection of intellectual property rights;
- seasonality in business activity in certain parts of the world, which
could negatively impact the operating results of our foreign operations;
- multiple and possibly overlapping tax structures, which could reduce the
financial performance of our foreign operations;
- changes in import and export duties and quotas, which could affect the
competitive pricing of our products and services and reduce our market
share in some countries; and
- economic or political instability in some international markets, including
political instability in South Korea and Taiwan, the threat of hostilities
in Taiwan and economic fluctuations in other Asian markets, which could
negatively affect our operating results, especially given the
concentration of our customers in this region.
THE LOSS OF KEY EMPLOYEES OR OUR INABILITY TO ATTRACT, TRAIN AND RETAIN OTHER
QUALIFIED PERSONNEL COULD HARM OUR BUSINESS.
Our products and technologies are complex, and we depend upon the continued
services of our existing software engineering personnel and executive
management, especially Bryan W. Sparks, our president, chief executive officer
and chairman of the board. Although we have employment agreements with
Mr. Sparks, Robert B. Waldie, our chief operating officer, and a limited number
of
13
our key software engineering personnel, their employment may nonetheless be
terminated by them or us at any time. The loss of Mr. Sparks or any of our key
software engineering personnel, especially to a competitor, could adversely
affect our business, slow our product development and diminish our brand
identity. We depend on our ability to attract, train and retain qualified
personnel, specifically those with management, Linux and embedded systems
development skills. Competition for such personnel is intense, particularly for
qualified developers of Linux and embedded systems. We may not be able to
attract, train or retain additional qualified personnel in the future, which
could require us to use outside contractors, a more costly alternative. In
addition, we may be required to grant substantial numbers of stock options in
order to attract and retain such qualified personnel, which would result in
additional dilution of our existing stockholders.
OUR PRODUCTS MAY CONTAIN DEFECTS THAT COULD BE COSTLY TO CORRECT, DELAY MARKET
ACCEPTANCE OF OUR PRODUCTS AND EXPOSE US TO LITIGATION.
Despite testing by us and our customers, errors may be found in our
products. The risk of errors in our products is increased as a result of our use
of open source software because a portion of the software code in our products
is developed by independent parties over whom we exercise no supervision or
control. If errors are discovered, we may have to make significant capital
expenditures to eliminate them and yet may not be able to correct them in a
timely manner, if at all. Errors and failures in our products could result in a
loss of, or delay in, market acceptance of our products and could damage our
reputation. Because our offerings are embedded into the products and systems of
our customers, failures in our products could also cause system failures,
including failures in critical business systems, and our customers may assert
common law warranty or other claims for substantial damages against us. Our
insurance policies may not provide sufficient coverage to adequately limit our
exposure to these types of claims. These claims, even if unsuccessful, could be
costly and time consuming to defend.
WE MAY NOT BE ABLE TO RAISE SUFFICIENT FUNDS TO EXECUTE OUR BUSINESS STRATEGY.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, will be sufficient to fund our current
working capital and capital expenditure requirements for at least the next
18 months. Given our growth strategy and our need to continuously respond to the
changing demands in the embedded operating system and Linux markets, however, we
may need to raise additional funds to support more rapid expansion, respond to
competitive pressures, acquire complementary businesses or technologies or
respond to unanticipated developments. Additional funding may not be available
to us in amounts, or on terms, acceptable to us. If sufficient funds are not
available or are not available on acceptable terms, our ability to fund our
expansion, execute our strategy, take advantage of acquisition opportunities,
develop or enhance our services or products, or otherwise respond to competitive
pressures would be significantly limited.
14
RISKS RELATED TO THIS OFFERING
A SMALL NUMBER OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US AND THEIR
INTERESTS MAY CONFLICT WITH THOSE OF OUR OTHER STOCKHOLDERS.
Our executive officers, directors and principal stockholders holding more
than 5% of our common stock together beneficially hold approximately 71.8% of
our outstanding common stock before this offering and will together hold %
of our outstanding common stock after completion of this offering. As a result,
these stockholders, if they act together, will be able to control our management
and affairs and all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions.
Moreover, of these stockholders, Ralph J. Yarro, one of the members of our board
of directors, beneficially holds 38.9% of our outstanding common stock, or %
after this offering, and Raymond J. Noorda, another member of our board of
directors, beneficially holds 36.6% of our outstanding common stock, or %
after this offering. The concentration of ownership among our existing
stockholders may have the effect of delaying or preventing a change in our
control and might reduce the market price of our common stock.
WE HAVE SIGNIFICANT TIES WITH ONE OF OUR COMPETITORS, INCLUDING COMMON DIRECTORS
AND EQUITY INTERESTS IN ONE ANOTHER, WHICH MAY RESULT IN CONFLICTS OF INTERESTS
BETWEEN OUR COMPANIES THAT MAY NOT BE RESOLVED IN OUR FAVOR.
Three of our directors and significant stockholders, Mr. Noorda, Mr. Yarro
and John R. Egan, serve on the board of directors and beneficially own
significant amounts of common stock of Caldera Systems, one of our potential
competitors. As board members and significant stockholders, these individuals
may influence the management and affairs of the two companies and may have
interests that conflict with those of our other stockholders. We cannot be
certain that any conflicts that arise between the interests of our company and
those of Caldera Systems will always be resolved in our favor. In addition,
Caldera Systems holds approximately 7.8% of our outstanding common stock prior
to completion of this offering, and we hold approximately 3.2% of the
outstanding common stock of Caldera Systems as of October 10, 2000. These
stockholdings and overlapping directors could enable each company to exert
influence over the other with respect to matters requiring stockholder approval,
which could create conflicts of interest.
IT MIGHT BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.
Certain provisions of our certificate of incorporation, Delaware law and our
stockholders' agreement with Metrowerks Holdings, a subsidiary of Motorola, may
discourage, delay or prevent a change in our control or a change in our
management even if doing so would be beneficial to our stockholders. Our board
of directors has the authority under our certificate of incorporation to issue
preferred stock without stockholder approval with rights superior to the rights
of the holders of common stock. As a result, preferred stock could be issued
quickly and easily with terms calculated to delay or prevent a change in control
of our company or make removal of our management more difficult. In addition, as
of the first annual meeting of stockholders following the closing of this
offering, our board of directors will be divided into three classes. The
directors in each class will serve for three-year terms, one class being elected
each year by our stockholders. This system of electing and removing directors
may tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of our company because it generally makes it more
difficult for stockholders to replace a majority of our directors. Moreover, in
the event that we decide to enter into negotiations with a third party regarding
a potential acquisition of us, the provisions of our agreement with Metrowerks
Holdings require us to give Metrowerks Holdings the right to participate in
these negotiations and to acquire us on terms comparable to those offered by any
such third party. In addition, Metrowerks Holdings has rights of first refusal
to purchase shares of our common stock
15
offered by Mr. Sparks, Dry Canyon Holdings, LLC, Caldera Systems and The Canopy
Group, Inc. These provisions may discourage or deter third parties from making
or considering offers to acquire us, even if such offers would be beneficial to
our stockholders.
THE MARKET FOR OUR SHARES OF COMMON STOCK MAY EXPERIENCE EXTREME PRICE AND
VOLUME FLUCTUATIONS, WHICH COULD RESULT IN LEGAL CLAIMS AGAINST US.
Recently, the market prices of the common stock of other companies in the
industries in which we compete, including the embedded operating system and
Linux markets, have experienced extreme volatility. We anticipate that the
market price of our common stock may similarly fluctuate significantly in
response to a number of factors, some of which are beyond our control,
including:
- changes in market valuations of technology companies, especially companies
focusing on embedded systems and open source technologies;
- variations in our quarterly operating results;
- our or our competitors' announcements of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- additions or departures of key personnel;
- high volumes of short-term trading in our stock;
- future issuances of our capital stock or the effect of the substantial
number of shares that will be eligible for sale in the public market in
the future; and
- changes in financial estimates by public market analysts.
In the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of their common
stock. In the future, we may be the target of similar litigation. Such claims,
even if unsuccessful, could result in substantial costs and divert management's
attention and resources.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN THE USE OF THE PROCEEDS OF THIS
OFFERING, AND OUR FAILURE TO APPLY SUCH FUNDS EFFECTIVELY COULD HARM OUR
BUSINESS.
We have not designated any specific use for the net proceeds from this
offering other than for general corporate purposes. We may also use a portion of
the net proceeds to acquire additional business, products and technologies that
we believe will complement our business. Management will have significant
flexibility in applying the net proceeds of the offering. Our failure to apply
such funds effectively could harm our business.
THE NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE FUTURE MAY ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price of the
common stock. As additional shares of our common stock become available for
resale in the public market, the supply of our common stock will increase, which
could decrease the price of our common stock. The number of shares of common
stock available for sale in the public market is limited by restrictions under
the federal securities laws and under agreements that some of our stockholders,
directors and employees have entered into with the
16
underwriters. The following table shows the timing of when shares outstanding on
October 10, 2000 first become eligible for resale in the public market:
[Enlarge/Download Table]
NUMBER OF SHARES COMMENT
------------------------ -------------------------------------
- 181 days after the date of this - 35,297,328 - Tradable upon expiration of lock-up
prospectus......................... agreements, subject to the
provisions of Rule 144
- October 2, 2001.................... - 3,000,000 - Tradable, subject to the provisions
of Rule 144
17
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "expects,"
"plans," "intends," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. These statements involve known and unknown risks, uncertainties and
factors, including those listed under "Risk Factors," that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot and do not guarantee future results, levels of activity,
performance or achievements.
This prospectus also contains citations to industry sources on which our
market projections are based. These projections are based in part on assumptions
about technological developments and preferences of microprocessor companies and
original equipment manufacturers, among other things, and are subject to change
due to a number of factors, including economic and market conditions,
technological advancements and changes in customer preferences. As a result, we
cannot assure you that these market projections will actually be realized.
USE OF PROCEEDS
We expect to receive approximately $ million in net proceeds from the
sale of shares of common stock in this offering, or $ if the
underwriters exercise their over-allotment option in full, based upon an assumed
initial public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses.
The principal purposes of this offering are to create a public market for
our stock and to raise working capital. We have not designated any specific use
for the net proceeds from this offering other than for general corporate
purposes. We may also use a portion of the net proceeds to acquire additional
businesses, products and technologies that we believe will complement our
business. We have no specific agreements or commitments to do so, however, and
are not currently engaged in any negotiations with respect to any acquisition.
Pending such uses, we intend to invest the net proceeds of this offering in
investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not anticipate paying any cash dividends in the
foreseeable future.
18
CAPITALIZATION
The following table sets forth our capitalization as of July 31, 2000:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares
of our convertible preferred stock into 16,763,813 shares of our common
stock upon completion of this offering; and
- on a pro forma as adjusted basis to reflect the sale of shares
of common stock in this offering at an assumed initial public offering
price of $ per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses.
The capitalization information set forth in the table below is qualified by
and should be read in conjunction with our Consolidated Financial Statements and
related Notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus.
[Enlarge/Download Table]
JULY 31, 2000
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
Long-term debt, net of current maturities................... $ 556 $ 556 $ 556
-------- ------- -------
Stockholders' equity:
Preferred stock, $0.001 par value: 30,000,000 shares
authorized (actual, pro forma and pro forma as
adjusted); 16,763,813 shares outstanding (actual); no
shares outstanding (pro forma and pro forma as
adjusted)............................................... 17 -- --
Common stock, $0.001 par value: 100,000,000 shares
authorized (actual, pro forma and pro forma as
adjusted); 21,487,307 shares outstanding (actual);
38,251,120 shares outstanding (pro forma); shares
outstanding (pro forma as adjusted)..................... 21 38
Additional paid-in capital................................ 74,902 74,902
Deferred compensation..................................... (4,390) (4,390)
Accumulated deficit....................................... (20,178) (20,178)
Accumulated other comprehensive income.................... 96 96
-------- ------- -------
Total stockholders' equity.............................. 50,468 50,468
-------- ------- -------
Total capitalization.................................. $ 51,024 $51,024 $
======== ======= =======
The share information in this table does not include the following:
- 3,705,034 shares of our common stock issuable upon exercise of stock
options outstanding as of July 31, 2000, at a weighted average exercise
price of $2.88 per share;
- 1,266,110 shares of our common stock issuable upon exercise of stock
options granted subsequent to July 31, 2000 through October 10, 2000, net
of forfeitures, at a weighted average exercise price of $5.60 per share;
- 2,000,000 shares of our common stock reserved for issuance upon exercise
of a stock warrant issued on October 2, 2000, at an exercise price of
$6.00 per share;
- 1,358,545 shares of our common stock reserved for future issuance under
our stock option plan as of October 10, 2000; and
- 2,000,000 shares of our common stock reserved for issuance under our
employee stock purchase plan.
19
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the pro forma as adjusted net tangible book value per share
of our common stock after this offering. At July 31, 2000, our pro forma net
tangible book value was $27.1 million, or $0.71 per share of common stock. We
calculate pro forma net tangible book value per share by dividing the pro forma
net tangible book value, which equals total assets less intangible assets and
total liabilities, by the number of pro forma outstanding shares of common
stock.
After giving effect to the sale of the shares of common stock in this
offering at an assumed initial public offering price of $ per share, less
estimated underwriting discounts and commissions and estimated offering
expenses, our pro forma as adjusted net tangible book value at July 31, 2000
would have been $ million, or $ per share. This represents an
immediate increase in the pro forma as adjusted net tangible book value of
$ per share to existing stockholders and an immediate dilution of $
per share to new investors, or approximately % of the assumed offering price
of $ per share.
The following table illustrates this dilution on a per share basis:
[Download Table]
Assumed initial public offering price per share......... $
Pro forma net tangible book value per share at July 31,
2000.................................................. $ 0.71
Increase per share attributable to new investors........
--------
Pro forma as adjusted net tangible book value per share
after this offering...................................
--------
Dilution per share to new investors..................... $
The following table shows on a pro forma as adjusted basis at July 31, 2000,
after giving effect to the conversion of all outstanding preferred stock as of
July 31, 2000 into 16,763,813 shares of common stock upon completion of this
offering, the number of shares of common stock purchased from us, the aggregate
effective cash consideration paid to us and the average price paid per share by
existing stockholders and by new investors purchasing common stock in this
offering, before deducting estimated underwriting discounts and commissions and
estimated offering expenses:
[Enlarge/Download Table]
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
Existing stockholders.................... 38,251,120 % $40,160,939 % $1.05
New investors............................ $
---------- ---- ----------- ----
Total.................................. 100% 100%
========== ==== =========== ====
The above computations assume no exercise of options after July 31, 2000.
The number of shares outstanding at July 31, 2000 excludes:
- 3,705,034 shares of our common stock issuable upon exercise of options
outstanding as of July 31, 2000, at a weighted average exercise price of
$2.88 per share;
- 1,266,110 shares of our common stock issuable upon exercise of stock
options granted subsequent to July 31, 2000 through October 10, 2000, net
of forfeitures, at a weighted average exercise price of $5.60 per share;
and
- 2,000,000 shares of our common stock issuable upon exercise of a stock
warrant issued on October 2, 2000, at an exercise price of $6.00 per
share.
20
Assuming the exercise of all 3,705,034 outstanding options for shares of
common stock and the exercise in full of the underwriters' over-allotment
option, our pro forma as adjusted net tangible book value at July 31, 2000 would
have been approximately per share, representing an immediate increase in
pro forma net tangible book value of per share to our existing
stockholders and an immediate dilution in net tangible book value of per
share to new investors. For a more detailed discussion of our stock option plan
and outstanding options to purchase common stock, see Note 6 of Notes to our
Consolidated Financial Statements.
21
SELECTED ACTUAL AND PRO FORMA FINANCIAL DATA
You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Unaudited Pro Forma Condensed Consolidated Financial Statements
and related Notes and our Consolidated Financial Statements and related Notes
included elsewhere in this prospectus. The statements of operations data for the
fiscal years ended October 31, 1997, 1998 and 1999 and the balance sheet data as
of October 31, 1998 and 1999 are derived from, and are qualified by reference
to, the audited Consolidated Financial Statements and related Notes included in
this prospectus. The statement of operations data for the period from July 23,
1996 (inception) to October 31, 1996 and the balance sheet data as of
October 31, 1996 and 1997 are derived from unaudited financial statements not
included in this prospectus. The statements of operations data for the nine
months ended July 31, 1999 and 2000 and the balance sheet data as of July 31,
2000 are derived from unaudited financial statements included in this
prospectus.
Our actual operating results for the nine months ended July 31, 2000
include, for the period from their respective acquisition dates through
July 31, 2000, the operating results of Zentropic, which we acquired on
April 3, 2000; United System, Fireplug, Inup, Moreton Bay, each of which we
acquired effective May 1, 2000; and the acquisition of RT-Control, which we
acquired on May 12, 2000. The unaudited pro forma statement of operations data
for the fiscal year ended October 31, 1999 and the nine months ended July 31,
2000:
- give effect to our acquisitions of Zentropic, United System, Fireplug,
Inup, Moreton Bay and RT-Control as if they had occurred on November 1,
1998; and
- reflect the amortization of goodwill and other intangibles related to the
acquisitions, as well as adjustments for acquired in-process research and
development in connection with the acquisitions and the elimination of
intercompany transactions.
The pro forma financial data are presented for illustrative purposes only
and are not necessarily indicative of the operating results or financial
position that would have resulted if these acquisitions had been in effect
during the periods presented or of future operating results.
22
[Enlarge/Download Table]
YEAR ENDED OCTOBER 31,
PERIOD FROM --------------------------------------------
JULY 23, 1996 1999
(INCEPTION) TO ----------------------
OCTOBER 31, 1996 1997 1998 ACTUAL PRO FORMA
----------------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue......................... $ 62 $ 945 $ 1,376 $ 2,801 $ 4,640
Cost of revenue................. 67 247 361 185 1,380
------- ------- ------- ------- --------
Gross margin (deficit).......... (5) 698 1,015 2,616 3,260
------- ------- ------- ------- --------
Operating expenses:
Research and development...... -- 660 1,382 1,594 2,131
Sales and marketing........... 16 669 1,055 936 1,243
General and administrative.... 28 196 583 727 2,110
Non-cash stock-related
compensation*............... -- -- -- 250 382
Amortization of goodwill and
other intangibles........... -- -- -- -- 7,243
Acquired in-process research
and development............. -- -- -- -- --
------- ------- ------- ------- --------
Total operating expenses.... 44 1,525 3,020 3,507 13,109
------- ------- ------- ------- --------
Loss from operations............ (49) (827) (2,005) (891) (9,849)
Other income (expense), net..... (12) (50) (181) (163) (235)
------- ------- ------- ------- --------
Loss before income taxes........ (61) (877) (2,186) (1,054) (10,084)
Benefit for income taxes........ -- -- -- -- 17
------- ------- ------- ------- --------
Net loss........................ $ (61) $ (877) $(2,186) (1,054) $(10,067)
======= ======= ======= ======= ========
Basic and diluted net loss per
common share.................. $ (0.00) $ (0.05) $ (0.12) $ (0.06) $ (0.48)
======= ======= ======= ======= ========
Basic and diluted weighted
average common shares
outstanding................... 18,000 18,000 18,000 18,000 21,079
======= ======= ======= ======= ========
Basic and diluted supplemental
pro forma net loss per common
share (unaudited)............. $ (0.45)
========
Basic and diluted supplemental
pro forma weighted average
common shares outstanding
(unaudited)................... 22,592
========
NINE MONTHS ENDED JULY 31,
---------------------------------------
2000
-------------------------
1999 ACTUAL PRO FORMA
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue......................... $ 1,373 $ 3,878 $ 4,941
Cost of revenue................. 143 844 1,597
------- ----------- --------
Gross margin (deficit).......... 1,230 3,034 3,344
------- ----------- --------
Operating expenses:
Research and development...... 1,233 5,080 5,412
Sales and marketing........... 639 3,414 3,736
General and administrative.... 640 2,364 3,444
Non-cash stock-related
compensation*............... -- 1,791 2,208
Amortization of goodwill and
other intangibles........... -- 1,992 5,450
Acquired in-process research
and development............. -- 2,900 --
------- ----------- --------
Total operating expenses.... 2,512 17,541 20,250
------- ----------- --------
Loss from operations............ (1,282) (14,507) (16,906)
Other income (expense), net..... (83) 399 373
------- ----------- --------
Loss before income taxes........ (1,365) (14,108) (16,533)
Benefit for income taxes........ -- 53 104
------- ----------- --------
Net loss........................ $(1,365) $ (14,055) $(16,429)
======= =========== ========
Basic and diluted net loss per
common share.................. $ (0.08) $ (0.69) $ (0.74)
======= =========== ========
Basic and diluted weighted
average common shares
outstanding................... 18,000 20,268 22,146
======= =========== ========
Basic and diluted supplemental
pro forma net loss per common
share (unaudited)............. $ (0.52)
========
Basic and diluted supplemental
pro forma weighted average
common shares outstanding
(unaudited)................... 31,667
========
[Enlarge/Download Table]
OCTOBER 31,
----------------------------------------------- JULY 31,
1996 1997 1998 1999 2000
----------- ----------- -------- -------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5 $ 44 $ 117 $ 68 $ 25,121
Working capital (deficit)................................... 31 (380) (1,354) (2,157) 23,875
Total assets................................................ 521 363 465 1,134 54,815
Long-term liabilities....................................... -- -- -- -- 556
Total stockholders' equity (deficit)........................ 364 (129) (1,184) (1,983) 50,468
[Enlarge/Download Table]
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, 1999 JULY 31, 2000
------------------------------- -------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
-------------- -------------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
(*) NON-CASH STOCK-RELATED COMPENSATION HAS BEEN EXCLUDED
FROM THE FOLLOWING OPERATING EXPENSES:
Research and development.............................. $ 16 $ 60 $ 437 $ 526
Sales and marketing................................... 26 85 102 197
General and administrative............................ 208 237 1,252 1,485
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES AND THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES, INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. SEE "SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS" FOR
MORE INFORMATION ABOUT THESE STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS."
OVERVIEW
We began operations as part of Caldera, Inc. in July 1996 when Caldera
purchased assets relating to a disk operating system, known as DR DOS. Caldera
marketed DR DOS technology primarily as an embedded operating system for
microprocessors to be used in products and systems other than desktop personal
computers. In August 1998, we were incorporated as a separate entity, and in
September 1998, Caldera transferred to us licensing rights and assets relating
to the DR DOS and embedded system businesses. At the same time, Caldera
transferred assets not related to those businesses to a separate entity, Caldera
Systems, Inc. See "Related-Party Transactions" on page 55 for a more complete
description of the transactions between us and Caldera Systems.
Starting in January 1999, we began focusing our strategy on developing
embedded operating systems based on Linux. We commercially released the first
version of our embedded Linux operating system, Embedix Linux, in January 2000.
Since March 2000, we have acquired six businesses with technologies that are
complementary to our own, including Zentropic, United System, Fireplug, Inup,
Moreton Bay and RT-Control. In connection with these acquisitions, we issued an
aggregate of 3,078,559 shares of our common stock, 1,513,816 shares of our
convertible preferred stock and paid an aggregate of $1.7 million, including
direct expenses of approximately $792,000. We also granted to employees of the
acquired companies options to purchase an aggregate of 673,596 shares of common
stock at a weighted average exercise price of $2.82 per share. We currently have
established development groups in the United States, Australia, Canada, France,
Japan, Taiwan and the United Kingdom.
SOURCES OF REVENUE
Historically, we have generated revenue primarily from licenses of DR
DOS-based embedded operating systems. With the commercial release of the first
version of Embedix Linux in January 2000, we began generating revenue from
licenses of Linux-based products. Sales of our Linux-based products accounted
for 60% of total revenue in the nine months ended July 31, 2000. We expect that
the majority of our future revenue will be derived from the licensing of our
embedded Linux operating system and related software products, including Embedix
Linux, Embedix Real Time, Embedix Software Development Kit, Embedix UI, Embedix
mClinux, Lineo High Availability Clustering and NETtel. A relatively small
number of customers account for a significant portion of our total revenue. In
the fiscal year ended October 31, 1999, our three largest customers accounted
for 48% of our total revenue, with Sun Microsystems, Inc. accounting for 23%,
Brooktrout Inc. accounting for 13% and Symbol Technologies, Inc. accounting for
12%. Sales to our ten largest customers accounted for 59% of total revenue in
the nine months ended July 31, 2000, with DaiShin accounting for 18% of total
revenue. During that same period, no other customer accounted for more than 10%
of total revenue. Through fiscal 2001, we expect that revenue from our ten
largest customers will continue to account for a majority of our revenue.
We market and sell our operating system and related software products and
services both domestically and internationally. Revenue from sales to customers
outside the United States
24
represented 25% and 71% of our total revenue in fiscal 1999 and in the nine
months ended July 31, 2000, respectively. To date, the majority of our revenue
transactions have been denominated in U.S. dollars, including sales to customers
outside the United States. We expect revenue from sales to customers outside the
United States to remain as a significant percentage of our total revenue in the
future and to continue to be denominated in U.S. dollars. However, we expect
that a majority of the revenue generated by our operations in Japan will be
derived from customers outside the United States and will be denominated in
Japanese Yen.
We generate a majority of our revenue from licenses of our operating system
and related software products to original equipment manufacturers. We recognize
this revenue when an agreement has been executed, the product has been
delivered, no significant implementation obligations remain, the fee is fixed
and determinable and collection is probable. Through July 31, 2000, some of our
license agreements were bundled with maintenance and support services. Because
we had not established the necessary vendor specific objective evidence until
the second quarter of fiscal 2000, we could not recognize separately the service
revenue. Accordingly, revenue for these licenses was deferred and recognized
over the term of the support and maintenance services. As we have now
established this evidence, we unbundle the service revenue components on our new
contracts and report separately service revenue. Service revenue for the nine
months ended July 31, 2000 was approximately $535,000, primarily from
engineering contracts.
We have recently begun to give our customers the option of entering into
separate service contracts for maintenance and support. We recognize revenue
from maintenance and support services over the term of the agreement. If
maintenance and support services offered in connection with a software license
agreement are provided for a period of one year or less, the estimated cost of
the services is insignificant and there is no commitment to provide upgrades or
enhancements, we recognize this service revenue upon our delivery of the
software and accrue the estimated costs of providing these services. If the
service period is greater than one year, or if upgrades or enhancements are
included, we defer the revenue and recognize it either over the period that the
services are to be provided or when no significant performance obligations
remain.
With the acquisitions of Moreton Bay and RT-Control, we began selling our
NETtel and mClinux products. Revenue from these hardware sales is recognized
upon delivery to the customer. Hardware revenue for the nine months ended
July 31, 2000 was approximately $340,000, of which 74% was from the sale of
NETtel products.
In addition, we have recently begun to enter into engineering and training
contracts with our customers. Under our engineering contracts, we offer custom
engineering services to customers purchasing our embedded operating system, or
we may develop and license a complete custom embedded software solution at a
customer's request. Under our training contracts, we offer instructor-led
training to provide developers access to information and resources to assist
with design and implementation. We recognize revenue from engineering and
training services as the services are performed.
STRATEGIC ALLIANCE AND JOINT VENTURE
In August 2000, we entered into a strategic alliance agreement with
Metrowerks Corp., a subsidiary of Motorola, to integrate our Embedix SDK with
Motorola's products and bundle the resulting products with select Motorola
development boards. In connection with this agreement, Metrowerks Holdings,
Inc., also a subsidiary of Motorola, purchased from us for total consideration
of $1.5 million a warrant to purchase up to 2,000,000 shares of our common stock
at an exercise price of $6.00 per share. Motorola beneficially holds 13.2% of
our common stock prior to this offering.
25
In September 2000, with Samsung Electro-Mechanics Co., Ltd and Samsung
Venture Investment Corporation (a Samsung Electronics affiliate), we executed an
agreement to form Listech Limited, a South Korean corporation, as a joint
venture to develop and sell embedded and real time application products. We will
invest approximately $1.1 million in cash for an initial 57% equity interest in
Listech.
RECENT ACQUISITIONS AND PRO FORMA RESULTS OF OPERATIONS
From April 3, 2000 to May 12, 2000, we acquired six businesses with
technologies that are complementary to our own. Each acquisition was accounted
for using purchase accounting.
On April 3, 2000, we acquired Zentropic for total consideration of
$6.7 million, consisting of 1,745,226 shares of our common stock with an
estimated fair market value of $3.80 per share and approximately $112,000 in
costs directly associated with the acquisition. Zentropic provides Linux
software for industrial and other time-sensitive applications, that it refers to
as real-time technology. Zentropic is headquartered in Herndon, Virginia and
also has an engineering office located in the United Kingdom. For the fiscal
year ended October 31, 1999, Zentropic had revenue of approximately $85,000 and
an operating loss of approximately $752,000. For the period from November 1,
1999 to April 2, 2000, Zentropic had revenue of approximately $256,000 and an
operating loss of approximately $390,000. As of April 3, 2000, Zentropic had
assets of approximately $276,000 and liabilities of approximately $160,000.
On May 1, 2000, we acquired all of the outstanding capital stock of United
System, in connection with which we paid approximately $542,000 in cash,
including approximately $219,000 in estimated costs directly associated with the
acquisition. We also issued options to purchase 507,335 shares of common stock
at an exercise price of $3.00 per share to the United System stockholders. The
estimated fair market value of the options was $4.35 per share, or $2.2 million
in aggregate. United System is a custom systems engineering company and is based
in Shiojiri, Nagano, Japan. For the year ended December 31, 1999, United System
had revenue of $1.5 million and an operating loss of approximately $509,000. For
the six months ended March 31, 2000, United System had revenue of approximately
$764,000 and an operating loss of approximately $557,000. As of May 1, 2000,
United System had assets of $1.6 million and liabilities of $2.4 million.
On May 1, 2000, we acquired all of the outstanding capital stock of
Fireplug, in connection with which we issued 69,998 shares of our Series D
convertible preferred stock with an estimated fair market value of $6.00 per
share and paid approximately $612,000 in cash, including approximately $112,000
in estimated costs directly associated with the acquisition. We also granted to
the stockholders of Fireplug options to purchase 62,220 shares of our common
stock at an exercise price of $1.50 per share with an estimated fair market
value of $5.03 per share, or $312,905 in aggregate. Fireplug provides contract
engineering development of embedded Linux network systems and tools that allow
Linux and specialized Linux applications to run on a variety of hardware
configurations and is based in Vancouver, Canada. For the year ended
December 31, 1999, Fireplug had revenue of approximately $145,000 and an
operating loss of approximately $33,000. For the six months ended March 31,
2000, Fireplug had revenue of approximately $128,000 and an operating loss of
approximately $110,000. As of May 1, 2000, Fireplug had assets of approximately
$68,000 and liabilities of approximately $79,000.
On May 1, 2000, we acquired all of the outstanding capital stock of Inup, in
connection with which we issued 1,333,333 shares of our common stock with an
estimated fair market value of $6.00 per share and 83,334 shares of our
Series C convertible preferred stock with an estimated fair market value of
$6.00 per share and paid approximately $189,000 in cash, including $179,000 in
estimated costs directly associated with the acquisition. Inup develops
Linux-based software that compensates for hardware failures and is based in
Saint-Ouen, France. For the year ended December 31, 1999, Inup had revenue of
approximately $8,000 and an operating loss of approximately $125,000. For the
six months ended March 31, 2000, Inup had revenue of approximately $8,000 and an
operating loss of approximately
26
$306,000. As of May 1, 2000, Inup had assets of approximately $648,000 and
liabilities of approximately $146,000.
Effective May 1, 2000, we acquired all of the outstanding capital stock of
Moreton Bay in connection with which we issued 956,315 shares of our Series D
convertible preferred stock with an estimated fair market value of $6.00 per
share, and paid approximately $122,000 in cash, including $112,000 in estimated
costs directly associated with the acquisition. We also issued options to
purchase 87,374 shares of common stock at an exercise price of $3.00 per share
to the Moreton Bay stockholders with an estimated fair market value of $4.35 per
share, or $379,741 in aggregate. Moreton Bay develops embedded virtual private
network solutions for Internet appliances that provide communications solutions
to securely connect computer networks and devices to the Internet and provides
engineering development services for the Motorola ColdFire microprocessor
platform. Moreton Bay is based in Brisbane, Australia and has a sales and
service office in San Jose, California. Prior to the acquisition, Moreton Bay
transferred the assets, liabilities and operations of one of its unrelated
product lines to a separate legal entity. For the year ended October 31, 1999,
the acquired operations of Moreton Bay had no revenue and an operating loss of
approximately $200,000. For the six months ended April 30, 2000, the acquired
operations of Moreton Bay had revenue of approximately $27,000 and an operating
loss of approximately $230,000. As of May 1, 2000, Moreton Bay had assets of
approximately $550,000 and liabilities of approximately $136,000.
On May 12, 2000, we acquired all of the outstanding capital stock of
RT-Control, in connection with which we issued 404,169 shares of our Series D
convertible preferred stock with an estimated fair market value of $6.00 per
share and paid approximately $149,000 in cash, including $134,000 in estimated
costs directly associated with the acquisition. We also granted to the
stockholders of RT-Control options to purchase 16,667 shares of our common stock
at an exercise price of $1.50 per share with an estimated fair market value of
$5.03 per share, or $83,818 in aggregate. RT-Control was the principal developer
of the mClinux version of Linux for microcontrollers and is based in Toronto,
Canada. For the period from its inception (June 30, 1999) to December 31, 1999,
RT-Control had revenue of approximately $67,000 and an operating loss of
approximately $96,000. For the six months ended March 31, 2000, RT-Control had
revenue of approximately $79,000 and an operating loss of approximately
$246,000. As of May 12, 2000, RT-Control had assets of approximately $240,000
and liabilities of approximately $307,000.
The shares of our Series C and Series D convertible preferred stock issued
in the acquisitions will automatically convert into common stock upon completion
of this offering.
The unaudited pro forma condensed consolidated statements of operations for
the fiscal year ended October 31, 1999 and for the nine months ended July 31,
2000 are included elsewhere in this prospectus and reflect our acquisitions of
Zentropic, United System, Fireplug, Inup, Moreton Bay, and RT-Control as if
these transactions had occurred as of November 1, 1998. Pro forma revenues were
$4.6 million in the fiscal year ended October 31, 1999 and $4.9 million in the
nine months ended July 31, 2000. Pro forma losses from operations were
$9.8 million in the fiscal year ended October 31, 1999 and $16.9 million in the
nine months ended July 31, 2000. The unaudited pro forma condensed consolidated
statements of operations reflect the amortization of goodwill and other
intangibles related to the acquisitions and adjustments for acquired in-process
research and development and the elimination of intercompany transactions. Pro
forma amortization of goodwill and other intangibles was $7.2 million in the
fiscal year ended October 31, 1999 and $5.5 million in the nine months ended
July 31, 2000. Acquired in-process research and development expense in
connection with the acquisitions was $2.9 million in the nine months ended
July 31, 2000, and is not included in the pro forma results of operations for
that period. Intercompany revenue, net of the cost of that revenue, between
Zentropic and us prior to the acquisition was approximately $118,000 in the nine
months ended July 31, 2000, and is not included in the pro forma results of
operations for that period.
27
IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisitions of Zentropic, Inup, Moreton Bay and
RT-Control, we recorded total write-offs of $2.9 million for in-process research
and development, of which $800,000 was recorded in the second quarter of fiscal
2000 and $2.1 million in the third quarter of fiscal 2000. The value assigned to
the in-process research and development was determined based on an analysis of
the estimated costs to develop the acquired in-process research and development
into commercially viable products, the market for the developed products and
technologies, and discounting the resulting net cash flows related to these
projects and technologies. At the date of the acquisition, the acquired in-
process research and development had not yet reached technological feasibility
and had no alternative future uses.
In-process technology acquired from Zentropic included development ports of
our real time abstract interface extensions, or RTAI. to Power PC, Arm and MIPS
platforms and software that facilitates communication and content update between
multiple computers. Total fair value assigned to these in-process projects was
$800,000. At the date of the acquisition, we estimated that the acquired
in-process research and development projects were approximately 60% complete and
that an additional $150,000 would be required to develop these projects and
technologies to commercial viability. We anticipate completing each of the
projects during the second quarter of fiscal 2001, with total expected costs to
complete these projects approximating our original estimate. We believe that our
projected revenue and net cash flows from these projects will approximate those
used to calculate the in-process research and development. To date, no revenue
has been recognized on these projects.
In-process technology acquired from Inup included high availability
clustering software to bring Linux to environments where failure rates and
associated downtime must be very low. Total fair value assigned to the
in-process project was $800,000. At the date of the acquisition, we estimated
that the acquired in-process research and development project was approximately
25% complete and that an additional $135,000 would be required to develop the
project and technologies to commercial viability. In September 2000, we
completed the high availability clustering project and anticipate sales in the
first quarter of fiscal 2001. Total costs to complete the project approximated
our original estimate. We believe that our projected revenue and net cash flows
from these projects will approximate those used to calculate the in-process
research and development. To date, no revenue has been recognized on these
projects.
In-process technology acquired from Moreton Bay included eLIA, a hardware
platform that runs on Linux and IP6, and connectivity technology for virtual
private network and multi-site locations. Total fair value assigned to these
in-process projects was $900,000. At the date of the acquisition, we estimated
that the acquired in-process research and development projects were
approximately 53% complete and that an additional $87,000 would be required to
develop these projects and technologies to commercial viability. We anticipate
completing each of the projects during the second quarter of fiscal 2001, with
total expected costs to complete these projects approximating our original
estimate. We believe that our projected revenue and net cash flows from these
projects will approximate those used to calculate the in-process research and
development. To date, no revenue has been recognized on these projects.
In-process technology acquired from RT-Control included a customized version
of Linux for microcontrollers and a hardware/software solution incorporating
that technology. Total fair value assigned to these in-process projects was
$400,000. At the date of the acquisition, we estimated that the acquired
in-process research and development projects were approximately 35% complete and
that an additional $321,000 would be required to develop these projects and
technologies to commercial viability. We anticipate completing each of the
projects during the third quarter of fiscal 2001, with total expected costs to
complete these projects approximating our original estimate. We believe that our
projected revenue and net cash flows from these projects will approximate those
used to calculate the in-process research and development. To date, no revenue
has been recognized on these projects.
28
HISTORICAL RESULTS OF OPERATIONS
We have included a discussion of our results of operations for the fiscal
years ended October 31, 1997, 1998 and 1999 and the nine months ended July 31,
1999 and 2000. As a result of focusing our strategy on Linux-based embedded
systems starting in January 1999, commercially releasing the first version of
Embedix Linux in January 2000 and our six acquisitions, we believe that
period-to-period comparisons of our historical results are not indicative of our
future performance.
COMPARISON OF THE NINE MONTHS ENDED JULY 31, 1999 AND 2000
REVENUE
SOFTWARE REVENUE. Software revenue increased 119% from $1.4 million in the
nine months ended July 31, 1999 to $3.0 million in the nine months ended
July 31, 2000. This increase was due to additional licensing revenue from the
sale of our Linux-based operating system and related software products,
including Embedix SDK, as well as the acquisitions completed during 2000. We
began selling Linux-based products in the nine-months ended July 31, 2000, and
those sales accounted for 60% of total revenue in that period. We believe that
sales of our Linux-based operating system and related software products and
services will represent an increasing portion of our total revenue.
SERVICES REVENUE. Services revenue consists primarily of engineering
contracts and maintenance and support services. Services revenue was
approximately $535,000 in the nine months ended July 31, 2000 as compared to no
services revenue in the nine months ended July 31, 1999. The increase was
primarily attributable to our acquisition of United System and our
implementation of additional engineering contracts, which we believe will become
an increasing portion of our revenue. We did not separately classify any
services revenue in the July 31, 1999 period because we had not established the
necessary vendor specific objective evidence until the second quarter of fiscal
2000 in order to recognize separately the service component of our contracts
with both software and service elements.
HARDWARE REVENUE. Hardware revenue consists of our NETtel and mClinux
products. These products were acquired with our acquisitions of Moreton Bay and
RT-Control. Hardware revenue during the nine months ended July 31, 2000 was
approximately $340,000 as compared to no hardware revenue in the nine months
ended July 31, 1999.
COST OF REVENUE
COST OF SOFTWARE REVENUE. Cost of software revenue consists of production,
fulfillment and shipment of our operating system software products. Also
included in cost of software revenue are any royalties paid to third parties for
inclusion of their software products in our product offerings. Cost of software
revenue increased 145% from approximately $143,000 in the nine months ended
July 31, 1999 to approximately $350,000 in the nine months ended July 31, 2000.
This increase was primarily due to the increase in our revenue during that
period.
COST OF SERVICES REVENUE. Cost of services revenue consists of salaries,
benefits and related expenses of systems engineers. Cost of services revenue was
approximately $338,000 in the nine months ended July 31, 2000 as compared to
none for the nine months ended July 31, 1999. Because we had not established the
necessary vendor specific objective evidence until the second quarter of fiscal
2000, we did not recognize separately any services revenue for the nine months
ended July 31, 1999 and, accordingly, had no cost of services revenue during
that period.
COST OF HARDWARE REVENUE. Cost of hardware revenue consists of hardware
components purchased and assembled by third parties and fulfillment and shipping
charges associated with the sale of our integrated hardware products. Cost of
hardware revenue was approximately $155,000 in the nine months ended July 31,
2000 as compared to no cost of hardware revenue in the nine months ended
29
July 31, 1999. The increase was the result of the increase in related revenue
during that period as a result of our acquisitions of Moreton Bay and
RT-Control.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses consist of
payroll and related expenses for software engineers, technical writers and
quality assurance and management personnel and the costs of materials used by
these employees in the development of new or enhanced product offerings. We
expense all of our research and development costs as they are incurred. Research
and development expenses were $1.2 million in the nine months ended July 31,
1999 and $5.1 million in the nine months ended July 31, 2000. This increase was
due to our hiring of additional research and development personnel in connection
with the development of our Linux-based products and services and also due to
our acquisitions through which we acquired research and development personnel.
We believe that a significant level of investment in Linux-based product
development and other research and development initiatives will be required as
we integrate and complete the development of the technologies we acquired.
Accordingly, we expect research and development expenses to continue to increase
in absolute dollars.
SALES AND MARKETING. Sales and marketing expenses consist of salaries,
commissions and related expenses for personnel engaged in marketing, sales and
sales support functions, as well as costs associated with trade shows,
advertising and promotional activities. Sales and marketing expenses were
approximately $638,000 in the nine months ended July 31, 1999 and $3.4 million
in the nine months ended July 31, 2000. This increase was due to our hiring of
additional sales and marketing personnel and increased expenses incurred in
connection with our branding efforts following the commercial release of our
Embedix Linux product in January 2000. The increase also was due to our
acquisitions. We intend to continue to expand our sales and marketing
activities, both domestically and internationally, to increase market awareness
and sales of our products and services. Accordingly, we expect our sales and
marketing expenses to continue to increase in absolute dollars.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
professional fees, salaries and related costs for accounting, administrative,
finance, human resources, information systems and legal personnel, as well as
expenses associated with implementing and expanding our internal information and
management reporting systems. General and administrative expenses were
approximately $641,000 in the nine months ended July 31, 1999 and $2.4 million
in the nine months ended July 31, 2000. This increase was due to our hiring of
additional finance, legal, human resources and administrative personnel, as well
as increased rent and related facilities expenses. The increase also was due to
our acquisitions. We expect general and administrative expenses to continue to
increase in absolute dollars as we add administrative personnel to support our
business expansion.
NON-CASH STOCK-RELATED COMPENSATION. Non-cash stock-related compensation
reflects the amortized portion of the difference between the deemed fair market
value of the common stock for accounting purposes and the sales price or
exercise price of the stock or stock options as of the date of sale or grant.
Deferred compensation is presented as a reduction of stockholders' equity and is
amortized over the vesting period of the applicable options. In connection with
stock option grants, we recorded deferred compensation of $5.2 million in the
nine months ended July 31, 2000. We amortized approximately $904,000 of deferred
compensation in the nine months ended July 31, 2000 and recorded $825,000 of
compensation expense related to the sale of 1,500,000 shares of our common stock
to our officers. There were no non-cash stock-related compensation amounts in
the nine months ended July 31, 1999. Based on option grant activity through
October 10, 2000, we expect to expense an additional $1.1 million of deferred
compensation in the remainder of fiscal 2000, $3.1 million in fiscal 2001,
$1.5 million in fiscal 2002, approximately $743,000 in fiscal 2003 and
approximately $237,000 in fiscal 2004.
30
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Goodwill represents the
excess of purchase price over the fair value of net assets acquired. Intangible
assets other than goodwill include assembled workforce, core technology and
non-competition agreements identified at the time of acquisition. Our
acquisitions resulted in $25.4 million of goodwill and other intangibles, which
is being amortized over the expected lives of the assets, ranging from two to
five years. We recorded amortization expense of $2.0 million for the nine months
ended July 31, 2000.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research
and development expense relates to the portion of the purchase price of an
acquired company that is attributable to in-process technology that has not
reached the requirements of technological feasibility at the closing date. In
connection with our acquisitions we expensed $2.9 million of acquired in-process
research and development in the nine months ended July 31, 2000.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income from our
cash investments offset by interest expense on borrowings. Other expense, net
was approximately $83,000 in the nine months ended July 31, 1999, and other
income, net was approximately $399,000 in the nine months ended July 31, 2000.
The net increase was due to an increase in interest income of approximately
$466,000 as a result of increased cash balances, offset by an increase in
interest expense of approximately $19,000. On April 30, 2000, we repaid all
outstanding principal and interest due under a borrowing arrangement with one of
our principal stockholders, The Canopy Group. This repayment resulted in a
decreased borrowing level in the nine months ended July 31, 2000 compared to the
same period in 1999.
INCOME TAX BENEFIT
Prior to January 6, 2000, we were not directly subject to income taxes since
our operations were consolidated with those of Caldera for income tax purposes.
On January 6, 2000, our operations were deconsolidated from Caldera for income
tax purposes and as a result we recorded deferred tax assets of approximately
$159,000. From January 6, 2000 through April 3, 2000, the date of the Zentropic
acquisition, we incurred a net operating loss for income tax purposes that
resulted in a deferred income tax asset of approximately $499,000. The
realization of the deferred income tax assets was dependent upon future earnings
or other future events, the effect of which could not then be determined;
accordingly, we recorded a valuation allowance against the deferred income tax
assets. In connection with the acquisition of Zentropic, we recorded a deferred
income tax liability of approximately $717,000 related to acquired intangible
assets that are not deductible for income tax purposes. As a result of recording
the deferred income tax liability, the previously recorded valuation allowance
was reduced because the realization of the related deferred income tax asset was
then probable. Due to the remaining deferred income tax liability of
approximately $59,000, we recorded a deferred income tax benefit of
approximately $59,000 during the nine months ended July 31, 2000 principally as
a result of the net operating loss generated from the date of the Zentropic
acquisition through July 31, 2000. See Note 7 of Notes to our Consolidated
Financial Statements for a more complete discussion of our income taxes.
COMPARISON OF THE FISCAL YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
REVENUE AND COST OF REVENUE
REVENUE. Revenue increased from approximately $945,000 in fiscal 1997, to
$1.4 million in fiscal 1998, to $2.8 million in fiscal 1999. Historically, we
generated revenue primarily from licenses of DR DOS-based embedded operating
systems. The increase in revenue in each year was due to increased market
acceptance of these products.
31
COST OF REVENUE. Cost of revenue was approximately $248,000 in fiscal 1997,
approximately $361,000 in fiscal 1998 and approximately $185,000 in fiscal 1999.
As a percentage of total revenue, these costs were 26% in each of fiscal 1997
and fiscal 1998 and 7% in fiscal 1999. The increase in absolute dollars from
fiscal 1997 to fiscal 1998 was due to additional costs incurred as a result of
additional license sales. During each of fiscal 1997 and fiscal 1998, cost of
revenue included the amortization expense associated with the acquisition of the
DR DOS assets. The decrease in research and development expense from fiscal 1998
to fiscal 1999 was due to these amounts being fully amortized at the end of
fiscal 1998.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses were
approximately $660,000 in fiscal 1997, $1.4 million in fiscal 1998 and
$1.6 million in fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was
due to our hiring of software developers and quality assurance personnel to
expand our DR DOS offerings and to support development and testing activities.
This increase was also the result of the separation of our business from
Caldera. Prior to the separation from Caldera, a majority of Caldera's research
and development efforts were focused on developing Linux for desktop computers
and servers and to a lesser extent on our DR DOS-based products. The Linux-based
products for desktop computers and servers and related development were not
transferred to us in the separation. Upon separation, we began to increase the
amount of research and development specific to developing Linux-based products
for embedded devices. The decrease from fiscal 1998 to fiscal 1999 was due to
our decreased spending on DR DOS-based development offsetting any increases in
research and development costs associated with Linux-based products.
SALES AND MARKETING. Sales and marketing expenses were approximately
$669,000 in fiscal 1997, $1.1 million in fiscal 1998 and approximately $937,000
in fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was due to
additional expenditures related to selling and marketing DR DOS-based products
and the separation of our business from Caldera. Upon separation from Caldera,
our only focus was on selling DR DOS-based products, and as a result we
increased the amount of sales and marketing expenditures. The decrease from
fiscal 1998 to fiscal 1999 was due to our decreased spending on selling and
marketing DR DOS-based products offsetting any increases in costs associated
with selling and marketing Linux-based products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
approximately $196,000 in fiscal 1997, approximately $584,000 in fiscal 1998 and
approximately $726,000 in fiscal 1999. The increase from fiscal 1997 to fiscal
1998 was due to legal and other costs incurred in connection with our separation
from Caldera as well as the hiring of additional administrative personnal to
support our growing operations. The increase from fiscal 1998 to fiscal 1999 was
due to the hiring of additional administrative, executive and finance personnel.
NON-CASH STOCK-RELATED COMPENSATION. In connection with grants of stock
options to employees and directors, we recorded approximately $311,000 of
deferred compensation in the last six months of fiscal 1999, of which
approximately $250,000 was expensed. We did not grant any options, and had no
deferred stock compensation, in fiscal 1997 or 1998.
OTHER INCOME (EXPENSE), NET
Other expense, net, which consists principally of interest expense, was
approximately $50,000 in fiscal 1997, approximately $181,000 in fiscal 1998 and
approximately $163,000 in fiscal 1999. The increase from fiscal 1997 to fiscal
1998 was the result of increased borrowings to fund the carved-out operations of
Caldera. Subsequent to our incorporation in August 1998, we funded our
operations through borrowings from Canopy. The decrease from fiscal 1998 to
fiscal 1999 was due to an overall reduction in borrowings resulting from the
separation of our business from Caldera.
32
LIQUIDITY AND CAPITAL RESOURCES
Since our establishment as a separate entity in August 1998, we have funded
our operations primarily through loans from Canopy and through sales of our
common and convertible preferred stock. As of July 31, 2000, we had
$24.9 million of cash. This represents an increase of $24.8 million over
October 31, 1999. Our working capital at July 31, 2000 was $23.9 million
compared to a working capital deficit of $2.2 million at October 31, 1999.
The increase in cash and working capital from October 31, 1999 was primarily
a result of the sale of our common and convertible preferred stock and the
exercise of stock options. During the nine months ended July 31, 2000, we
received proceeds of:
- $1.2 million from the sale of 1,500,000 shares of our common stock at a
purchase price of $0.80 per share, which resulted in the recording of
$825,000 of compensation expense, representing the difference between the
estimated fair value of the shares of common stock of $1.35 per share on
the purchase date and the purchase price;
- approximately $536,000 from the exercise of outstanding stock options;
- $3.7 million from the sale of 2,500,000 shares of Series A Class 2
convertible preferred stock at a purchase price of $1.50 per share;
- $14.5 million from the sale of 4,833,331 shares of Series B convertible
preferred stock at a purchase price of $3.00 per share; and
- $17.5 million from the sale of 2,916,666 shares of Series C convertible
preferred stock at a purchase price of $6.00 per share.
During fiscal 1998 and 1999, we borrowed $400,000 and $1.9 million,
respectively, from Canopy under a convertible promissory note arrangement
bearing interest at 7.25% per annum. We accrued approximately $4,000, $139,000
and $58,000 of interest on the borrowings during fiscal 1998, fiscal 1999 and
the nine months ended July 31, 2000, respectively. During the nine months ended
July 31, 2000, we used approximately $2.5 million of the proceeds from the stock
sales described above to repay in full the borrowings and accrued interest under
the Canopy agreement.
On February 17, 2000, we entered into a recapitalization agreement with
Canopy whereby 5,000,000 shares of common stock owned by Canopy were exchanged
for 5,000,000 shares of our Series A Class 1 convertible preferred stock. In
connection with the exchange, we recorded a deemed distribution to Canopy of
$750,000, representing the difference between the estimated fair value of the
shares of Series A Class 1 convertible preferred stock of $1.50 per share, based
on the offering price of shares of Series A Class 2 convertible preferred stock,
and the estimated fair value of common stock of $1.35 per share on February 17,
2000.
Additionally, as of July 31, 2000 we had 3,705,034 outstanding options to
purchase shares of our common stock at a weighted average exercise price of
$2.88 per share. Subsequent to July 31, 2000 through October 10, 2000 we have
granted an additional 1,266,110 options, net of forfeitures, to purchase common
stock at a weighted average exercise price of $5.60 per share.
In August 2000, we entered into a strategic alliance agreement with a
Metrowerks Corp., a subsidiary of Motorola, to integrate our Embedix SDK with
Motorola's products and then bundle the resulting products with select Motorola
development boards. As part of the agreement, Metrowerks made an initial
purchase commitment of approximately $500,000 for our Embedix SDK. In connection
with this agreement, Metrowerks Holdings, also a subsidiary of Motorola,
purchased from us for total consideration of $1.5 million a warrant to purchase
up to 2,000,000 shares of our common stock at an exercise price of $6.00 per
share. The warrant may be exercised any time before October 2, 2002 and includes
a cashless exercise provision which may result in the warrant being exercised
with no cash paid
33
to us. The difference between the fair value of the warrant and the
consideration received will be expensed over the expected periods to be
benefited from this agreement.
In October 2000, Caldera Systems sold 2,000,000 shares of our common stock
to Metrowerks Holdings for aggregate consideration of $15.0 million. In
addition, Canopy sold 1,000,000 shares of our common stock to Metrowerks
Holdings for aggregate consideration of $7.5 million. We did not receive any
proceeds from these sales. As a result of these stock and warrant purchases,
Motorola beneficially owns approximately 13.2% of our outstanding common stock
prior to this offering.
In connection with our joint venture agreement with Samsung
Electro-Mechanics Co., Ltd. and Samsung Venture Investment Corporation, a
Samsung Electronics affiliate, we will invest approximately $1.1 million in the
joint venture, Listech Limited, in October 2000, for an initial 57% equity
interest in Listech. It is expected that the joint venture will develop and sell
embedded and real time application products. In addition, we entered into a
license agreement with the joint venture that provides for an initial sale of
$1.1 million of our software products to Listech.
Net cash used in operating activities during the nine months ended July 31,
2000 was $7.7 million. Cash used in operating activities was primarily
attributed to the net loss of $14.1 million during that period, offset by
non-cash expenses associated with acquired in-process research and development
of $2.9 million, depreciation and amortization of approximately $2.2 million and
amortization of deferred compensation of $1.8 million. Net cash used in
operating activities was approximately $185,000 in fiscal 1997, $1.2 million in
fiscal 1998 and $1.8 million in fiscal 1999. Cash used in operating activities
was primarily attributed to the net loss of approximately $877,000 in fiscal
1997, $2.2 million in fiscal 1998 and $1.1 million in fiscal 1999, each offset
by non-cash expenses and changes in working capital.
Our investing activities have historically consisted of purchases of
equipment. Purchases of equipment totaled approximately $108,000 in fiscal 1997,
approximately $72,000 in fiscal 1998, approximately $190,000 in fiscal 1999 and
approximately $918,000 in the nine months ended July 31, 2000. During the nine
months ended July 31, 2000, we sold office equipment for approximately $75,000
and advanced approximately $578,000 to the companies that we subsequently
acquired.
During the nine months ended July 31, 2000, we acquired net tangible assets
of approximately $194,000, including cash of $1.3 million, from Zentropic,
United System, Fireplug, Inup, Moreton Bay and RT-Control. In connection with
the acquisition of United System we assumed aggregate loans payable of
$1.9 million, of which $1.2 million is a current liability. The loans bear
interest that is payable monthly, at rates ranging from 2.3% to 3.2%. The
aggregate purchase price for these acquisitions consisted of 3,078,559 shares of
our common stock, 83,334 shares of our Series C convertible preferred stock,
1,430,482 shares of our Series D convertible preferred stock, options to
purchase 673,596 shares of our common stock and cash of $1.4 million, including
approximately $568,000 in estimated costs directly associated with the
acquisitions.
We currently anticipate that we will continue to experience significant
increases in our operating expenses for the foreseeable future as we enter new
markets for our products and services, increase research and development
activities and sales and marketing activities, develop new distribution channels
and broaden our professional service capabilities. We anticipate that our
operating expenses will consume a material amount of our capital resources,
including a portion of the net proceeds of this offering. We believe that the
net proceeds of this offering, together with our existing cash, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 18 months. Although we believe that we will
be able to meet our anticipated cash needs after that time from cash generated
from operations and do not currently anticipate the need to raise additional
capital, if we do seek to raise additional capital, additional financing may not
be available on acceptable terms, if at all.
As of October 31, 1999 and July 31, 2000, we did not have any material
commitments for capital expenditures.
34
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as a part
of a hedge transaction and, if it is, the type of hedge transaction. This
statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. We do not use derivative instruments, therefore the
adoption of this statement will not have any effect on our results of operations
or financial position.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of Accounting Principles Board Opinion No. 25,"
or APB No. 25. This interpretation clarifies the definition of employee for
purposes of applying APB No. 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. This interpretation is effective July 1, 2000, but some conclusions
in this interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. To the extent that this interpretation
covers events occurring during the period after December 15, 1998 or
January 12, 2000, but before the effective date of July 1, 2000, the effects of
applying this interpretation are recognized on a prospective basis from July 1,
2000. This interpretation did not have a material impact on our results of
operations, financial position or liquidity.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
As we maintain and expand our international operations, our financial
results will be affected by factors such as changes in foreign currency rates or
weak economic conditions in foreign markets. Because all of our revenue is
currently denominated in U.S. dollars, a strengthening of the dollar could make
our products and services less competitive in international markets.
We currently have operations in the United States, Australia, Canada,
France, Japan, Taiwan and the United Kingdom. To date, foreign currency
fluctuations have had little effect on our business. In the future, more of our
sales transactions may be denominated in local currencies. We will continue to
evaluate our foreign currency exposures and risks and develop appropriate
hedging or other strategies to manage those risks. We have not revised our
current business practices or modified any of our products to conform to
Europe's conversion to the euro.
35
BUSINESS
OVERVIEW
We provide a broad range of operating system products and services for use
in devices and systems containing embedded microprocessors. We do so through a
combination of our experience with embedded operating systems, expertise in
Linux operating systems and involvement in the open source community. We offer
embedded Linux operating system products, generally under the product family
name Embedix, including an operating system, a software development kit and a
compact Web browser that allows users to navigate and view the World Wide Web.
We also offer several other complementary products, including software that
provides Embedix Linux with predetermined response time, or real time,
capabilities and continuous operation, or high availability, capabilities. Our
products are based on the Linux open source software and also contain our own
proprietary software features that are added on to Linux. In addition, we offer
comprehensive professional services, or Embedix Services, including customized
engineering, training and technical support services.
Our offerings enable microprocessor companies and original equipment
manufacturers to design and develop their own customized embedded Linux
solutions and integrate those technologies into their products and systems. We
also develop and license complete embedded systems solutions for our customers
according to their specifications. Our products and services are designed to
reduce the time and expense associated with the development of embedded systems
and to assist our customers in creating systems with high functionality,
performance, reliability and ease of use.
Customers of our Linux products and services consist of original equipment
manufacturers such as Analog Devices, Bast, CIS Technology, DaiShin, MiTAC,
Samsung Electronics and Samsung Electro-Mechanics. We have also entered into
strategic relationships with microprocessor companies such as Hitachi and
Metrowerks, a subsidiary of Motorola, to modify and adapt our products for use
with their specific microprocessors and to further promote our offerings with
their customers.
INDUSTRY BACKGROUND
Rapid technological advancements have dramatically increased the type and
capabilities of products and systems that enable organizations and individuals
to collaborate, access information and conduct business more effectively. This
proliferation is largely fueled by innovations in microprocessors, which are
hidden, or embedded, in a variety of products and systems. Complex tasks, such
as Internet access, computer network traffic routing and graphics display,
require a high level of computing power, which is currently delivered by 16-,
32- and 64-bit embedded microprocessors. Based on information provided by an
industry research firm, worldwide unit shipments of 16-, 32- and 64-bit embedded
microprocessors will grow from approximately 390 million in 1998 to
approximately 1.2 billion in 2003. Products and systems containing embedded
microprocessors play a role in virtually every aspect of modern life and
include:
- Internet and communications infrastructure equipment such as computer
routers that determine the path for sending data across networks, modems
that connect computers through telephone lines, and switches used to
transfer data over computer networks;
- consumer-oriented devices such as personal digital assistants, smart
cellular phones, entertainment systems, Internet-enabled television
set-top boxes, home automation systems, automated teller machines and
Internet kiosks;
- retail business products such as handheld point-of-sale terminals, bar
code scanners, smart cash registers, credit card readers and other systems
that provide inventory tracking and automate procurement processes;
36
- transportation-related systems such as automobile and aviation navigation
and safety systems; and
- industrial control and automation systems such as manufacturing equipment
and components as well as maintenance and repair machinery.
Microprocessors require an operating system to manage the interaction
between various hardware and software components. The growth in products and
systems with embedded microprocessors has created demand for more robust,
reliable and customizable embedded operating systems that are adaptable to
product memory and storage limitations. In addition, as the development of
embedded operating systems has significantly increased in complexity, software
developers often require specialized software tools to customize and integrate
these embedded operating systems.
Many original equipment manufacturers use internal resources to develop
their own operating systems for their embedded microprocessor projects. We
believe that these internal development efforts have generally not proven to be
cost-effective, in part because the programmers of these systems may not possess
the requisite operating system expertise. Alternatively, manufacturers seeking
more sophisticated operating systems for their embedded microprocessors have
purchased proprietary operating systems from third parties. However, because of
the proprietary nature of these operating systems, they typically cannot be
easily and cost-effectively customized to meet the requirements of specific
embedded systems. In addition, both internally developed and third-party
proprietary operating systems are frequently designed for use with a limited set
of applications and devices, and, as a result, we believe the companies that
create these proprietary systems have largely been unable to achieve cost-saving
economies of scale in production. Because many of these operating systems were
originally created several years ago, and are therefore based on earlier
microprocessor technology, the ability of companies using these operating
systems to take full advantage of increasing microprocessor functionality may be
limited. Further, because the companies that create these proprietary operating
systems may be limited by the cost, expertise and availability of the developers
that they employ, it is difficult for them to keep pace with innovations in
microprocessor technology.
Open source operating systems have emerged as an alternative to internally
developed or third-party proprietary operating systems. The term open source
applies to software that can be copied, modified and distributed with few
restrictions. As such, the software programming code for these operating systems
is open to the public and can be customized for a specific application or use.
The growth of the Internet has greatly increased the scope and efficiency of
open source software development through the availability of collaborative
technologies such as e-mail lists, news groups and Web sites. Popular open
source software is continuously maintained and improved by worldwide communities
of developers who share information, code and suggestions, primarily over the
Internet, increasing the frequency of software releases and the speed of feature
development and error correction.
Linux has emerged as a leading open source operating system, enjoying
acceptance by both commercial and academic communities due to its high
performance and stability, low cost and broad developer support. Until recently,
the growth in the use of the Linux operating system has primarily been in the
server and desktop computer markets. Microprocessor companies are now promoting,
and original equipment manufacturers are now adopting, Linux in the embedded
systems market. Many of these manufacturers have only limited experience working
with Linux, however, and may lack developers with the specialized skills and
relationships in the open source community necessary to identify and take
advantage of the many enhancements to Linux that are continuously under
development.
In addressing the increased complexity and functionality of products and
systems with embedded microprocessors, microprocessor and original equipment
manufacturers are faced with a number of
37
challenges. As a result, we believe that there is a significant market
opportunity for an embedded operating system that:
- is powerful, reliable and full-featured, yet minimizes product memory and
storage requirements;
- can easily be customized across a variety of platforms to support a broad
range of hardware devices;
- allows for rapid development and deployment of the original equipment
manufacturer's products, reducing time-to-market;
- provides increased functionality, connectivity and performance, including
real time capabilities, consistent with ongoing technological innovation;
- is supported by a broad developer base; and
- is complemented by a sophisticated set of development tools to enable
integration, support services and value-added applications.
THE LINEO SOLUTION
We provide a broad range of embedded operating system software products and
services through a combination of our experience with embedded operating
systems, expertise in Linux operating systems and involvement in the open source
community. The key benefits of our solution include:
FULL-FEATURED EMBEDDED OPERATING SYSTEM. Embedix Linux, our embedded Linux
operating system, not only provides the capabilities currently offered by
existing embedded operating systems but also leverages the numerous advantages
of Linux. We have a proprietary method of identifying and segmenting specific
portions of Linux to meet the performance criteria specified by the developer,
enabling the development of reliable, full-featured embedded Linux variations
with reduced memory and storage requirements and attributes appropriate for each
customer's needs. We also offer additional software features that provide
Embedix Linux with real time and high availability capabilities for mission
critical applications and have developed a full-featured version of Linux for
extremely small processors known as microcontrollers. In addition, our
experience and long-standing relationships with the open source community allow
us to combine its broad development and support resources with our internal
expertise to fix errors and develop enhancements to our Linux-based products for
a wide range of products and systems in a quick and cost-effective manner.
BROAD PLATFORM COMPATIBILITY. We work closely with microprocessor companies
and original equipment manufacturers in developing our embedded Linux operating
system solutions. As a result, these solutions are designed to operate on a
broad range of embedded systems and meet diverse functionality requirements.
Each embedded system has its own spectrum of performance, size and memory
requirements. We offer solutions appropriate for products and systems ranging
from small industrial components to handheld consumer devices to large
networking infrastructure equipment, and currently support more than 10
different microprocessor platforms.
VALUE-ADDED DEVELOPMENT TOOLS AND APPLICATIONS. Our Embedix Software
Development Kit, or SDK, is a package of proprietary software development tools
designed to facilitate the design, development, error detection and correction,
and maintenance of embedded systems. We began commercial shipments of Embedix
SDK in June 2000. We also offer our Embedix Linux customers our proprietary
Embedix UI, a compact, Linux-based Web browser for embedded products and systems
that interact with the Internet. In addition, by incorporating third-party
software applications from independent software vendors into our products, we
can expand the functionality and features of products and systems that include
our operating system.
38
PROFESSIONAL ENGINEERING AND SUPPORT SERVICES. We offer our original
equipment manufacturer customers and microprocessor companies a broad range of
engineering, implementation, deployment and support services. Our engineers have
significant experience with embedded systems, participate actively in the Linux
community and contribute enhancements and additions to the Linux open source
technology. In addition, we offer professional engineering, training and
education services and technical support. Because we leverage the expertise of
the extensive open source community, we believe that our services enable our
customers to reduce their cost to implement, maintain and support embedded
systems.
STRONG INTERNATIONAL PRESENCE. Through development of international offices
and acquisitions, we have built a worldwide presence. This presence allows us to
address the needs of our international customers more quickly and effectively.
We currently have international offices and operations in Australia, Japan,
Taiwan, Canada, the United Kingdom and France. We also have a significant
interest in a joint venture with Samsung, which is located in South Korea.
THE LINEO STRATEGY
Our objective is to become the leading provider of embedded operating system
software products and services. To achieve this objective, we are implementing
the following strategies:
ENHANCE OUR TECHNOLOGY LEADERSHIP AND MARKET AWARENESS. We intend to
continue to introduce technology that is compatible with existing embedded
operating system software and to develop solutions specific to selected markets
and industries. To support this effort, we plan both to develop technologies
internally and to acquire proprietary technologies or other companies. We also
intend to enhance our brand awareness and increase the demand for our products
through targeted advertising and will continue our active involvement in, and
support of, the open source community to further enhance our reputation as one
of the leading providers of embedded Linux solutions.
CONTINUE TO DEVELOP STRATEGIC RELATIONSHIPS WITH MICROPROCESSOR
COMPANIES. We intend to expand our strategic relationships with microprocessor
companies to establish our brand of Linux-based software and services with the
customers of these companies. We plan to continue to develop close relationships
with microprocessor companies through our research and development efforts and
by educating the employees of these companies about our products so that they
may promote our products and be able to provide more comprehensive solutions to
their customers. For example, we have entered into a strategic relationship with
Metrowerks, a subsidiary of Motorola, to integrate Embedix SDK with Motorola
products and then bundle the resulting products with select Motorola development
boards. Through strategic relationships such as this, we intend to further
enhance our understanding of microprocessor technology and embedded systems and
to continue to understand future technology developments. We currently support
more than 10 different microprocessor platforms and we intend to continue to
expand the breadth of that support.
EXPAND STRATEGIC RELATIONSHIPS WITH ORIGINAL EQUIPMENT MANUFACTURERS. We
intend to continue to develop, strengthen and expand our relationships with
original equipment manufacturers of products and systems that require embedded
operating systems. By establishing close relationships with these manufacturers,
we are better able to understand their future product development plans. Through
these collaborative efforts, original equipment manufacturers can help ensure
that their future products will have embedded Linux operating system support and
we are able to integrate their requirements into our future product plans. For
example, we have entered into an agreement with an affiliate of Samsung
Electronics and Samsung Electro-Mechanics to create a joint venture in South
Korea to develop and sell embedded and real time application products and
solidify our relationship with these original equipment manufacturers in South
Korea.
39
EXPAND SALES EFFORTS INTERNATIONALLY. We intend to continue to expand our
sales efforts internationally by growing our internal sales force and through
additional strategic acquisitions. We believe that as the proliferation of
digital consumer devices and other electronic products and systems continues,
significant international demand for our embedded operating system solutions
will develop. We also believe that many of the large manufacturers of these
devices will be located in Asia and Europe.
CONTINUE TO EXPAND OUR OFFERINGS BY INCORPORATING PRODUCTS FROM INDEPENDENT
SOFTWARE VENDORS AND DEVELOPING A LIBRARY OF EMBEDDED OPERATING SYSTEM
SOLUTIONS. We will continue to enhance the value of our operating system
solutions by incorporating additional software products of independent software
vendors. As part of our independent software vendor program, software vendors
may include their products within our embedded software development kit,
allowing us to introduce our customers to the benefits of these products when
they are used in the embedded environment with our operating system. Original
equipment manufacturers may incorporate these third-party technologies into
their products under licenses obtained through us, for which we receive
royalties, or under licenses obtained directly from the software vendors. In
addition, our experience in providing professional support services to our
customers enables us to maintain a library of common problems and their
resolutions. We intend to continue to develop this library to be used in
conjunction with our development tools and integrated in future products.
PRODUCTS AND SERVICES
We offer a wide range of embedded Linux software products and services to
enable our customers to develop, optimize and implement embedded products and
systems.
SOFTWARE PRODUCTS
Our embedded Linux products, which we generally market under our Embedix
brand, include Embedix Linux, Embedix SDK and Embedix Browser.
Embedix Linux Logo
Embedix Linux is a powerful and reliable Linux-based operating system that
is designed specifically for embedded products and systems and is able to handle
complex functions. Embedix Linux is a combination of open source Linux and
internally developed technologies. We have enhanced and extended open source
Linux, traditionally designed for desktop/server implementation, with new
technologies and advancements to enable developers and original equipment
manufacturers to utilize Linux within highly customized embedded products and
systems. We have developed a proprietary process for identifying and modifying
various portions of the Linux operating system, which allows us to assemble and
integrate a full-feature set of components. By separating Linux into components,
our customers can use the specific components that their embedded system
products and systems require. We believe this decreases costs for our customers
by allowing them to build a wide range of embedded products and systems that use
less memory and less storage.
Embedix Linux not only provides the features currently offered by existing
proprietary embedded operating systems, but it also leverages the numerous
advantages of open source software development. We are able to combine the broad
development and support resources of the Linux open source community with our
own engineering expertise to develop enhancements across various platforms
quickly and cost-effectively. Further, we test the components that we provide
both individually and as an integrated whole to maintain the quality of our
products.
40
Embedix_RealTime Logo
Embedix RealTime is a customized version of Embedix Linux, designed
specifically for applications that require rapid, predetermined response times
from the operating system. Embedix RealTime provides guaranteed response times,
regardless of other ongoing processes on a device. This performance is important
in applications such as avionics, medical devices and industrial controls.
Embedix RealTime includes a set of tools designed specifically for real time
applications.
Embedix_mClinux Logo
Embedix mClinux is a customized version of Embedix Linux, designed
specifically to operate on very small devices. These devices typically use small
microprocessors known as microcontrollers. These microcontrollers are often used
in deeply embedded applications, including, for example, our secure Internet
routing product and in handheld devices.
Embedix Browser Logo
Embedix UI is a compact, Linux-based Web browser designed for embedded
products and systems that interact with the Internet, allowing users to navigate
and view the World Wide Web. Embedix UI can be easily customized and has low
memory and storage requirements. Because it has low system resource requirements
and is easily adapted to meet diverse customer needs, it is well suited for a
number of products and systems, including handheld devices; computer devices
used to connect televisions to the Internet, called set-top boxes; computers in
public locations used to display information, or kiosks; and point-of-sale
terminals, which are computers serving as sophisticated cash registers.
Embedix SDK Logo
Embedix SDK is a package of proprietary software and open source development
tools and is designed to help microprocessor companies and original equipment
manufacturers accelerate the design, development, error detection and
correction, and maintenance of embedded Linux operating systems in their
products and systems. We began the commercial shipment of Embedix SDK in
June 2000.
Embedix SDK provides developers with an assortment of tools designed to
manage the complex tasks of building and arranging an embedded Linux operating
system. It will allow system developers to construct customized versions of
Embedix Linux for a range of microprocessors and add specialized functions and
services. Further, Embedix SDK allows the customization process to be automated
to reduce the possibility of defects and to enhance duplication efforts by
maintaining a record of past enhancements and the interdependencies between
various operating system components.
41
One of the key features of Embedix SDK is the "Target Wizard," a tool that
provides information about available system options and the effect that each
component and arrangement will have on the resulting product or system. It also
identifies and shows interdependencies among different components, enabling our
customers to select the computer software components necessary to achieve the
functions and capabilities of their embedded systems and products, decreasing
memory and storage requirements and reducing time to market.
Through our independent software vendor program, we include in Embedix SDK a
variety of third-party Linux-based software applications and components. These
third-party technologies enable our original equipment manufacturer customers to
enhance their embedded systems with features such as voice command-and-control
and embedded databases. Original equipment manufacturers can incorporate these
third-party technologies into their products under licenses obtained through us,
for which we receive royalties, or under licenses obtained directly from the
software vendors. We test and certify the independent software vendors'
technologies to ensure that these technologies can operate with Embedix,
providing our customers with a single source of compatible embedded system
operating systems, components and third-party software technologies.
Embedix_high_avail_Logo
High Availability Clustering is a combination of hardware and software
specifically designed for bringing Linux into environments requiring high
performance with little or no downtime. The benefits of High Availability
Clustering include the ability to spread computing tasks over multiple
processors and to handle hardware failures or substitute new hardware without
associated downtime. This technology is important for Internet service providers
and other applications requiring high availability, including high speed
telephone switches.
INTEGRATED PRODUCTS
Embedix_NETTEL Logo
NETtel provides secure Internet communications for small businesses and
homes. We license our hardware design and software to original equipment
manufacturers and, when requested, provide our customers with integrated
hardware and software products.
Embedix_mCsimm Logo
mCsimm is a comprehensive set of development tools for our mClinux product.
It includes a programmable microcontroller, in which mClinux is embedded, and
may be used as a development platform and for applications such as programmable
video controllers and factory automation controllers.
OTHER TECHNOLOGIES
In addition to our embedded Linux technologies and products, we continue to
sell our embedded disk operating system, called DR DOS. Although we no longer
actively develop DR DOS, this technology is sufficient for some embedded system
requirements, and we continue to sell this technology to original equipment
manufacturers that request it or who extend existing DR DOS
42
contracts with us. We also support a variety of open source products, including
BusyBox, a collection of freely available open source embedded Linux utilities
and tools.
SERVICES
We provide comprehensive professional services, or Embedix Services, to our
embedded systems customers, including customized engineering, training and
technical support services. Our professional services personnel have significant
experience with embedded systems, participate actively in the open source
community and contribute enhancements and additions to the Linux open source
technology. We believe that our services enable our customers to reduce their
cost to implement, maintain and support their embedded systems.
ENGINEERING. We offer custom engineering services to those embedded systems
customers that require assistance. Alternatively, we may develop and license a
complete custom embedded system solution at a customer's request. We typically
offer these services on a per-project basis, although we also may offer these
services on a time-and-expense basis. Each project is reviewed by our research
and development, product marketing and sales groups to determine whether we
should include the resulting custom technology development in our future product
line. Our contracts for custom work generally provide that all intellectual
property resulting from the work is either owned by us or is contributed to the
open source community.
EDUCATION. We offer instructor-led training on our products to assist with
design and implementation of embedded products and systems. We intend to also
offer Web-based and computer-based training programs in the future.
TECHNICAL SUPPORT. We provide technical support by e-mail, over the
telephone and onsite at our customer locations worldwide. We are also
implementing a database to capture our experience from prior projects. Our
customers will have access to the database through our Web site. In addition,
our products include comprehensive online documentation and support materials. A
basic level of technical support is provided complimentary to our customers via
the Web and e-mail, and fee-based support options are available.
TECHNOLOGY
Our software products are based on a combination of open source software
code and internally developed and third-party proprietary technology. Embedix
Linux is designed to operate with various microprocessors and is currently
available for the following microprocessors: Intel and Intel-compatible x86 and
Pentium microprocessors; Motorola PowerPC, 68000, Coldfire and Dragonball
microprocessors; ARM7 microprocessors; Hitachi SH3 and SH4 microprocessors;
StrongARM microprocessors; and select MIPS microprocessors. We are developing
customized versions of Embedded Linux for additional microprocessors including:
- Transmeta's Crusoe microprocessor;
- other MIPS microprocessors; and
- Motorola's MCORE microprocessor.
Key features of Embedix Linux include industry-standard communication components
for accessing the Internet, organizing and directing network traffic and other
multi-tasking capabilities. Another key feature of Embedix Linux is that it can
be run from read-only memory, a type of data storage with contents that are
fixed and unalterable, thus conserving memory resources and lowering the cost of
an embedded product or system.
43
Embedix SDK consists of a combination of proprietary and open source
software tools and utilities that allows an engineer to custom configure Embedix
Linux to the specific requirements of an embedded product or system. It also
allows developers to create and modify applications in a wide variety of
computer languages, including C, C++ and Java, and to incorporate third-party
applications. Our second version of Embedix SDK, which has been released for
testing by select customers, includes broad compilation capabilities.
STRATEGIC RELATIONSHIPS
INDEPENDENT SOFTWARE VENDOR PROGRAM
As part of our independent software vendor program, which we call Lineo
Partner Connect, software vendors may include their products within our embedded
software development kit, allowing us to introduce our customers to the benefits
of these products when they are used in the embedded environment with our
operating systems. Our team members recruit new vendors, who, in order to
participate, are required to complete various certification and training
requirements to ensure that their products operate with Embedix and that their
employees are familiar with our products. Vendors who have products with a very
high degree of integration with our products are included in the Certified
Embedix Partner Program. Vendors who have products with base Embedix Linux
functionality are included in the Embedix Partner program. Current participants
in these programs include Insignia Solutions, plc, Jabber, Inc., Metro Link,
Inc., NewMonics Inc., PointBase, Inc., Solid Information Technology and
Transvirtual Technologies, Inc. Original equipment manufacturers may incorporate
these third-party technologies into their products under licenses obtained
through us, for which we receive royalties, or under licenses obtained directly
from the software vendors. Through this program, we believe that we are able to
increase the appeal of our products and services by acting as a single source of
Linux-based applications and components. As a result, our customers may
streamline the complexity of their licensing requirements and reduce the
time-to-market for any specific solution. At the same time, under this program,
the independent software vendors benefit by expanding their marketing channels
to a range of original equipment manufacturers.
MICROPROCESSOR COMPANIES
We have entered into a variety of non-exclusive, short-term strategic
relationships with microprocessor companies. Through these relationships, we
have agreed to modify and adapt our products for use with the manufacturer's
specific microprocessor. In return, we are able to establish our brand of Linux
products and services to the customers of these companies, thus generating
potential sales. Moreover, we have entered into a strategic relationship with
Metrowerks, a subsidiary of Motorola, to integrate and bundle Embedix SDK with
Motorola products. We believe these relationships will enable us to further
enhance our understanding of microprocessor technology and embedded systems and
to continue to understand future technology developments. Currently, we also
have relationships with Hitachi, MIPS Technologies, Inc. and Samsung. We intend
to develop strategic relationships with additional microprocessor companies.
CUSTOMERS
Our primary customers for our Linux products and services are original
equipment manufacturers. Our license arrangements with these original equipment
manufacturers are generally subject to short-term, non-exclusive contracts, and
our sales cycle is typically two to six months. As of July 31, 2000, we had
generated revenue from licenses of our Linux products and services to several
original equipment manufacturers, such as Bast, CIS Technology, DaiShin and
MiTAC International.
In the fiscal year ended October 31, 1999, our three largest customers
accounted for 48% of our total revenue, with Sun Microsystems accounting for
23%, Brooktrout accounting for 13% and Symbol
44
Technologies accounting for 12%. In the nine months ended July 31, 2000, our ten
largest customers accounted for 59% of our total revenue, with DaiShin
accounting for 18%.
SALES AND MARKETING
We market our Linux products and services to original equipment
manufacturers through our direct sales force. We have a sales or marketing
presence both domestically and in Australia, Canada, France, Japan, Taiwan and
the United Kingdom. Key elements of our sales and marketing strategy include
direct advertising, event marketing, active public relations, customer and
strategic alliance partner programs, co-marketing programs and a comprehensive
Web site.
We are also currently developing indirect sales channels, including
third-party distributors and systems integrators. We believe that these
additional channels will further increase our brand awareness and promote the
development of Linux-based software applications and solutions for embedded
systems. We intend to use these channels to educate engineers on the benefits of
our products.
RESEARCH AND DEVELOPMENT
We have invested and will continue to invest in the development of
innovative new product features and technologies in response to the evolving
market for embedded Linux operating systems and input from original equipment
manufacturer customers and microprocessor companies. Our engineers have
significant experience with embedded systems, participate actively in the Linux
community and contribute enhancements and additions to the Linux open source
technology. We believe our contributions to the Linux community will facilitate
the development of industry standards and encourage industry cooperation. We
also analyze and incorporate the development and support efforts of the Linux
open source community into our products on a continual basis.
COMPETITION
The market for embedded operating systems products and services is becoming
increasingly competitive. We compete principally on the basis of the following:
- product performance and functionality;
- price;
- quality of support and customer services;
- breadth of embedded platform support;
- availability of third-party software applications;
- time-to-market;
- relationships with original equipment manufacturers and microprocessor
companies;
- distribution penetration; and
- technical and financial resources.
Although we believe we compete favorably in each of these areas, failure to
compete successfully in any of these areas against current or potential
competitors could harm our business. We face competition from:
- our current and potential customers' internal research and development
departments that may seek to develop their own proprietary embedded
operating systems;
45
- established companies that have developed proprietary embedded operating
systems, such as Mentor Graphics, Microsoft, Microware Systems, Palm
Computing, QNX Software Systems, Sun Microsystems, Symbian and Wind River
Systems;
- companies that have developed, or may in the future develop, embedded
Linux operating systems, such as Caldera Systems, Coollogic, Information
Storage Devices, LynuxWorks, MontaVista Software, Red Hat, SuSE and
TurboLinux; and
- companies that have developed Web browsers, such as Microsoft, Netscape
and Spyglass.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Intellectual property is critical to our success. Although our Embedix
platform is based on open source Linux, many aspects of our products are based
on intellectual property that is proprietary to us. This proprietary technology
includes software development tools and other development resources to configure
and implement Embedix Linux. We have also developed a graphical development
environment that facilitates the creation and customization of embedded Linux
solutions, and we have a proprietary Linux-based browser specifically for
embedded systems. We take steps to protect our intellectual property rights
through copyright, trademark and trade secret laws and contractual
confidentiality arrangements. At the same time, because we rely in part on open
source intellectual property, we may find it necessary to defend the open source
community from attempts by others to misappropriate, whether by copyright or
otherwise, technology which belongs to the open source community.
We generally enter into confidentiality or noncompete agreements with our
employees, consultants and corporate partners and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our processes or technologies. The steps we have taken may not prevent
misappropriation of our processes or technologies, particularly in foreign
countries where the laws or law enforcement may not protect our proprietary
rights as fully as in the United States. We have licensed, and may license in
the future, elements of our trademarks, trade dress and similar proprietary
right to third parties. While we attempt to ensure that the quality of our brand
is maintained by these third parties, they may take actions that could harm the
value of our proprietary rights or reputation.
EMPLOYEES
As of October 10, 2000, we had 265 employees, excluding independent
contractors and other temporary employees, including 131 employees in
engineering, 72 employees in sales and marketing and 62 employees in general and
administrative services. Of these employees, 167 were in the United States, 13
were in Australia, 26 were in Canada, nine were in France, one was in Germany,
31 were in Japan, 10 were in Taiwan and eight were in the United Kingdom. In
addition, from time to time, we employ temporary employees and consultants. None
of our employees is represented by a labor union, and we consider our relations
with our employees to be good.
FACILITIES
Our principal executive office is located in Lindon, Utah, where we sublease
a total of 20,000 square feet under two separate leases, with one lease expiring
in February 2002 and the other expiring in March 2001. We also lease office
space in Brighton, United Kingdom; Brisbane, Australia; Herndon, Virginia;
Nagano, Japan; Saint-Ouen, France; San Jose, California; Seattle, Washington;
Taipei, Taiwan; Tokyo, Japan; Toronto, Ontario, Canada and Vancouver, British
Columbia, Canada. We believe that our existing facilities are adequate for our
current requirements and that additional space can be obtained on commercially
reasonable terms to meet our future requirements.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information regarding our executive
officers, directors and key employees as of October 10, 2000:
[Enlarge/Download Table]
NAME OF EXECUTIVE OFFICER OR DIRECTOR AGE POSITION
------------------------------------- --------------------- ------------------------------------------
Bryan W. Sparks........................... 38 Chairman of the Board, President and Chief
Executive Officer
Robert B. Waldie.......................... 46 Chief Operating Officer
Gregory C. Hill........................... 51 Senior Vice President, Chief Financial
Officer and Treasurer
Timothy R. Bird........................... 37 Senior Vice President, Chief Technology
Officer
Matthew R. Harris......................... 40 Senior Vice President, Corporate
Development, Secretary and General Counsel
Richard H. Larsen......................... 44 Senior Vice President, Worldwide Sales
Raymond J. Noorda......................... 76 Director
Ralph J. Yarro III........................ 36 Director
John R. Egan.............................. 43 Director
William P. Barnett........................ 42 Director
Steven G. Rothmeier....................... 54 Director
Alex Serge Vieux.......................... 43 Director
NAME OF KEY EMPLOYEE
------------------------------------------
Kim D. Clark.............................. 41 General Manager, Embedix Business Unit
Lyle S. Ball.............................. 31 Vice President, Marketing Communications
Nathan S. Hatch........................... 38 Vice President, Professional Services
Christy A. Omohundro...................... 41 Vice President, Human Resources and
Integration
BRYAN W. SPARKS, has been our chairman of the board, president and chief
executive officer since our incorporation in August 1998. Prior to that,
Mr. Sparks was president and chief executive officer of Caldera, Inc., an
operating systems company and predecessor of us and Caldera Systems, Inc., which
he founded in January 1995. From 1986 to 1994, Mr. Sparks was employed at
Novell, Inc., a network solutions company, holding a variety of engineering and
management positions during his tenure there. Mr. Sparks received a bachelor's
degree in computer science from Brigham Young University. He is also a member of
the board of directors of Edgemail Technologies, Inc., a provider of high
performance Web-based server technology.
ROBERT B. WALDIE has been our chief operating officer since August 2000.
Prior to joining us, Mr. Waldie was employed as managing director at Moreton
Bay, a technology enterprise he founded in November 1996, and which we acquired
in May 2000. Prior to his responsibilities at Moreton Bay, Mr. Waldie founded
Stallion Technologies Pty Ltd, a company that specializes in the design,
manufacturing and sales of network hardware for personal computers, where he
served as the managing director since June 1985. Mr. Waldie received a
bachelor's degree in electronic engineering from the University of Queensland
and a graduate diploma in management from the University of Central Queensland.
He is also a member of the board of directors of Netcomm Ltd, a data
communications company.
GREGORY C. HILL has been our senior vice president, chief financial officer
and treasurer since January 2000. Prior to joining us, Mr. Hill was an
independent financial consultant and, before that, the chief financial officer
of Sensorium Software, Incorporated, a business intelligence software company,
47
from December 1997 to June 1998. From May 1997 to December 1997, Mr. Hill was an
independent financial consultant, and from July 1995 to May 1997, Mr. Hill
served as the corporate treasurer of Quark, Inc., a developer of professional
desktop publishing applications. From July 1993 to July 1995, Mr. Hill was vice
president and treasurer of Tyco Toys, Inc., a publicly held toy and
entertainment company. Mr. Hill received a bachelor's degree in humanities and
science from the Massachusetts Institute of Technology and a masters of business
administration from Harvard Business School.
TIMOTHY R. BIRD has been our senior vice president, chief technology officer
since July 1999, and was a senior software engineer with us from September 1998
to July 1999. Prior to joining us, from July 1995 to September 1998, Mr. Bird
was a senior developer at Caldera, Inc., where he worked on numerous open source
Linux projects. From January 1988 to July 1995, Mr. Bird was a software engineer
at Novell. Mr. Bird became a lead engineer at Novell in November 1991. Mr. Bird
is the co-author of "Special Edition: Using OpenLinux" by MacMillan Publishing.
Mr. Bird received both his bachelor's and master's degrees in computer science
from Brigham Young University.
MATTHEW R. HARRIS has been our senior vice president, corporate development,
secretary and general counsel since January 2000. Prior to joining us, from
March 1997 to January 2000, Mr. Harris was a founding partner at Summit Law
Group, PLLC, a Seattle-based law firm. From October 1992 to March 1997,
Mr. Harris was an attorney at Heller Ehrman White and McAuliffe, a San
Francisco-based law firm. Prior to that time, Mr. Harris was a law clerk to the
Honorable Eugene Wright, United States Court of Appeals for the Ninth Circuit.
From 1983 to 1988, Mr. Harris worked as a software development engineer.
Mr. Harris received a bachelor's degree in business administration from the
University of Washington and a juris doctorate from the University of Michigan
Law School.
RICHARD H. LARSEN has been our senior vice president, worldwide sales since
October 2000. Prior to joining us, from August 1993 to October 2000, Mr. Larsen
served in a variety of sales management positions in the software and technology
sales group at Sun Microsystems, Inc., a network computing company, including
director of strategic partnering and business development and director of North
American sales. Mr. Larsen received his bachelor's degree in marketing from
Arizona State University and a masters of business administration from
Pepperdine University.
RAYMOND J. NOORDA has served as a member of our board of directors since our
incorporation in August 1998. Mr. Noorda currently serves as chairman of the
board of directors of MTI Technology Corporation, a data storage and management
company, a position he has held since 1987, and of The Canopy Group, Inc., a
holding company that beneficially owns 36.6% of our outstanding common stock
prior to this offering. Mr. Noorda is also a member of the board of directors of
Caldera Systems, a position he has held since August 1998. From 1983 to 1994,
Mr. Noorda served as president, chief executive officer and chairman of the
board of Novell and has served as a trustee of the Noorda Family Trust since
1994. He received a bachelor's degree in electrical engineering from the
University of Utah.
RALPH J. YARRO III has served as a member of our board of directors since
our incorporation in August 1998. Mr. Yarro has served as the president and
chief executive officer of The Canopy Group since April 1995 and currently
serves as chairman of the board of directors of Caldera Systems, a position he
has held since August 1998. Mr. Yarro also is a member of the board of directors
of MTI Technology Corporation. Mr. Yarro received a bachelor's degree in
political science from Brigham Young University.
JOHN R. EGAN has served as a member of our board of directors since
January 2000. He currently serves as a managing partner of Egan-Managed Capital,
a venture capital firm that owns 6.3% of our outstanding common stock prior to
this offering, a position he has held since February 1997. Mr. Egan is also a
member of the board of directors of Caldera Systems, EMC Corporation, a provider
of storage-related hardware, software and service products, and several private
technology companies. From April 1983 to September 1998, Mr. Egan has served in
various capacities at EMC Corporation, including positions with responsibility
for developing and managing EMC's sales force and most
48
recently as an executive vice president. He received a bachelor's degree in
computer science from Boston College.
WILLIAM P. BARNETT has served as a member of our board of directors since
March 2000. Mr. Barnett is currently an associate professor at the Stanford
Graduate School of Business, a position he has held since July 1991. Prior to
joining Stanford, from 1988 to 1991, Mr. Barnett was an assistant professor of
management at the University of Wisconsin at Madison. He received his bachelor's
degrees in economics and political science and his Ph.D. in business
administration from the University of California, Berkeley.
STEVEN G. ROTHMEIER has served as a member of our board of directors since
July 2000. He currently serves as chairman and chief executive officer of Great
Northern Capital, a private investment management, consulting and merchant
banking firm he founded in March 1993. Prior to that, through 1990,
Mr. Rothmeier held various positions with Northwest Airlines, including chief
financial officer, chief operating officer, president and, as of 1985, chairman
and chief executive officer. Mr. Rothmeier joined Northwest Airlines in 1973. He
is also a member of the board of directors of GenCorp Inc., a technology-based
manufacturing company, Department 56 Inc., a manufacturer of giftware and
collectibles, Precision Castparts Corporation, a manufacturer of metal
components and products, Waste Management, Inc., a solid waste collection,
recycling and disposal company, and E.W. Blanch Holdings, Inc., a provider of
integrated risk management services. Mr. Rothmeier holds a bachelor's degree
from the University of Notre Dame in business administration and a masters of
business administration from the University of Chicago.
ALEX SERGE VIEUX has served as a member of our board of directors since July
2000. Mr. Vieux has worked in the information technology and media industries
for two decades with a variety of experience with information systems management
at Andersen Consulting and as business correspondent for the French daily LE
MONDE. He co-founded several software companies, including CATS software and
Renaissance Software, firms focusing on the banking industry. He has also worked
as special advisor to the Minister of Industry of France, covering all issues
relating to the high-tech industry and was named President of the Infotech
Commission for France in 1997. Mr. Vieux holds a law degree from the Universite
de Paris and a masters of business administration from Stanford University,
where he was a Fulbright Scholar.
KIM D. CLARK has been our general manager, Embedix business unit since
August 2000. Prior to that, from March 2000 to August 2000, he served as our
vice president, engineering. Prior to joining us, Mr. Clark worked at Novell,
from September 1988 to March 2000, in a variety of positions, most recently as
the director of engineering. While at Novell, Mr. Clark was also responsible for
the engineering team developing the NetWare operating system. Mr. Clark received
a bachelor's degree in electrical engineering from Utah State University.
LYLE S. BALL has been our vice president, marketing communications since our
incorporation in August 1998. Prior to joining us, from November 1995 to
April 1998, Mr. Ball was the director of communications at Caldera, Inc. From
June 1993 to October 1995, Mr. Ball worked at Novell as a corporate
communications manager. Mr. Ball received a bachelor's degree in business
communications from Brigham Young University.
NATHAN S. HATCH has been our vice president, professional services since
August 2000. Prior to that, he served as our vice president, marketing. Prior to
joining us, from June 1998 to February 2000 Mr. Hatch served as enterprise
accounts marketing manager at Novell, Inc. From June 1996 to April 1998,
Mr. Hatch served as director and then vice president of marketing at Caldera,
Inc. From January 1996 to May 1996, Mr. Hatch was the director of marketing at
Allen Communications, a multimedia software company, and from March 1988 to
November 1995, Mr. Hatch was the marketing manager for UNIX products at
WordPerfect, which was acquired by Novell. Mr. Hatch received a bachelor's
degree in business management from the University of Phoenix.
49
CHRISTY A. OMOHUNDRO has been our vice president, human resources and
integration since April 2000. Prior to joining us, from April 1998 to April
2000, Ms. Omohundro was the director of regulatory policy at Puget Sound Energy,
an electric and gas utility corporation. From April 1997 to April 1998, Ms.
Omohundro was the vice president, client services at Bright Horizons, formerly
known as CorporateFamily Solutions, a work/life consulting firm. Prior to that,
Ms. Omohundro was employed by Puget Sound Energy as director of strategic
planning from February 1997 to April 1997 and as director of rates from February
1995 to February 1997. Ms. Omohundro received her bachelor's degree in
accounting and liberal arts from Spring Hill College and her masters of business
administration from Vanderbilt University.
BOARD OF DIRECTORS
We currently have authorized seven directors. Currently all directors hold
office until the next annual meeting of stockholders or until their successors
are duly elected, and will continue to do so following the completion of this
offering. However, our certificate of incorporation will provide that as of the
first annual meeting of stockholders after the completion of this offering, our
board of directors will be divided into three classes, each with staggered
three-year terms. As a result, only one class of directors will be elected at
each annual meeting of our stockholders, with the other classes continuing for
the remainder of their respective three-year terms.
COMMITTEES
Our board of directors currently has an audit committee, a compensation
committee, a finance committee and a nominating committee. The audit committee
consists of Messrs. Barnett, Rothmeier and Vieux, and Mr. Rothmeier currently
serves as its chairman. The audit committee makes recommendations to our board
of directors regarding the selection of independent auditors, reviews the scope
of audit and other services by our independent auditors, reviews the accounting
principles and auditing practices and procedures to be used for our financial
statements and reviews the results of our audits. The compensation committee
consists of Messrs. Barnett and Egan. The compensation committee reviews and
approves the compensation and benefits for our executive officers, grants stock
options under our stock option plan and makes recommendations to our board of
directors on compensation matters. The finance committee consists of
Messrs. Egan, Rothmeier, Sparks and Yarro, and Mr. Rothmeier currently serves as
its chairman. The finance committee makes recommendations to our board of
directors regarding working capital matters, our capital structure and other
financial matters. The nominating committee consists of Messrs Barnett, Egan,
Vieux and Yarro, and Mr. Barnett currently serves as its chairman. The
nominating committee makes recommendations to our board of directors regarding
board membership.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between any member of our board of
directors or compensation committee and any member of the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
In January 2000, we entered into a stock purchase and sale agreement with
Caldera Systems, Inc. to purchase 1,250,000 shares of Caldera Systems' common
stock in exchange for 3,238,437 shares of our common stock. One of the members
of our compensation committee, Mr. Egan, is a member of the board of directors
of Caldera Systems.
In February 2000, we sold 2,000,000 shares, out of a total of 2,500,000
shares, of Series A Class 2 convertible preferred stock at a per share price of
$1.50 to Egan-Managed Capital, L.P. for aggregate consideration of
$3.0 million, and in March 2000, we sold 326,667 shares, out of a total of
4,833,331 shares, of Series B convertible preferred stock at a per share price
of $3.00 to Egan-Managed Capital
50
for aggregate consideration of $980,000. Mr. Egan is a managing partner of
Egan-Managed Capital, which holds 6.3% of our outstanding common stock prior to
this offering.
In connection with the sale of the convertible preferred stock, Egan-Managed
Capital, along with other investors, were granted registration rights, and we
may therefore become obligated to effect a registration under the Securities Act
of 1933 of shares of common stock held by these investors upon the conversion of
the convertible preferred stock. See "Description of Capital Stock" on page 61
for a more complete explanation of these registration rights.
We have also granted to Mr. Barnett, one of the members of our compensation
committee, options to purchase up to 120,000 shares of common stock at exercise
prices of $0.80 and $6.00 per share under our stock option plan.
We have granted Egan-Managed Capital, on behalf of Mr. Egan, options to
purchase up to 80,000 shares of common stock at an exercise price of $1.50 per
share under our stock option plan. Egan-Managed Capital was also granted the
right, on behalf of Mr. Egan, to purchase up to 40,000 shares of restricted
common stock at a price of $6.00 per share, all of which were purchased in
August 2000.
COMPENSATION
Our directors are reimbursed for expenses incurred in connection with
attending board and committee meetings but are not otherwise compensated for
their services as board members.
EXECUTIVE OFFICERS
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
officers.
COMPENSATION
The following table sets forth information concerning compensation for
services rendered to us in all capacities during the fiscal year ended
October 31, 1999 by our chief executive officer and all of our other executive
officers who earned or received salary and bonus in fiscal 1999 in excess of
$100,000.
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ANNUAL LONG TERM ALL OTHER
COMPENSATION COMPENSATION COMPENSATION
------------------- ------------ ----------------------
SECURITIES HEALTH LIFE AND
UNDERLYING INSURANCE DISABILITY
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#S) PREMIUMS PREMIUMS
--------------------------- -------- -------- ------------ --------- ----------
Bryan W. Sparks .......................... $121,218 $4,800 600,000 $6,674 $360
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Timothy R. Bird .......................... 101,863 4,000 55,000 6,322 308
SENIOR VICE PRESIDENT, CHIEF TECHNOLOGY
OFFICER
Bradley J. Walters ....................... 103,675 2,343 70,000 6,176 203
SENIOR VICE PRESIDENT, SALES
OPTION GRANTS IN FISCAL YEAR 1999
The following table sets forth information with respect to stock options
granted to each of our named executive officers during the fiscal year ended
October 31, 1999. All options granted to these executive officers in the last
fiscal year were granted under our stock option plan. In connection with the
rules of the Securities and Exchange Commission, also shown below is the
potential realizable value over the term of the option, the period from the
grant date to the expiration date, using a fair market
51
value of $1.35 per share at the time of grant and based on assumed rates of
stock appreciation of 5% and 10%, compounded annually. These amounts are
mandated by the Securities and Exchange Commission and do not represent our
estimate of future stock price. Actual gains, if any, on stock option exercises
will depend on the future performance of our common stock. In fiscal year 1999,
we granted options to acquire up to an aggregate of 955,700 shares of our common
stock to employees and directors.
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POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF
PERCENT OF TOTAL STOCK PRICE APPRECIATION
NUMBER OF OPTIONS GRANTED EXERCISE FOR OPTION TERM
SECURITIES UNDERLYING TO EMPLOYEES PRICE EXPIRATION -------------------------
NAME OPTIONS GRANTED # IN FISCAL 1999 PER SHARE DATE 5% ($) 10% ($)
---- --------------------- ---------------- --------- ---------- ---------- ------------
Bryan W. Sparks...... 600,000 62.8% $0.80 9/23/09 $839,405 $1,620,931
Timothy R. Bird...... 55,000 5.8 0.80 9/23/09 76,945 148,585
Bradley J. Walters... 70,000 7.3 0.80 9/23/09 97,931 189,109
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES
None of our named executive officers exercised any options in fiscal 1999.
With respect to our named executive officers, the following table sets forth
information concerning exercisable and unexercisable options held as of
October 31, 1999. The "Value of Unexercised In-the-Money Options at October 31,
1999" is based upon an assumed initial public offering price of $ per share
minus the per share exercise price multiplied by the number of shares underlying
the options.
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NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT OCTOBER 31, 1999 OCTOBER 31, 1999 ($)
----------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- -------------
Bryan W. Sparks................................ 600,000 -- --
Timothy R. Bird................................ 14,895 40,105
Bradley J. Walters............................. 18,958 51,042
EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
Our board of directors adopted and our stockholders approved our stock
option plan in June 1999. As of October 10, 2000, we had reserved a total of
7,000,000 shares of common stock for issuance under the stock option plan. In
addition, the board of directors has approved an additional annual increase of
up to 3% of the total number of shares then reserved under the plan, each such
annual increase to be approved by the board. The stock option plan provides for
the granting to our employees, including officers and directors, of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986 and for the granting to employees, consultants and non-employee directors
of nonstatutory stock options. If an optionee would have the right in any
calendar year to exercise for the first time incentive stock options for shares
having an aggregate fair market value, determined for each share as of the date
the option to purchase the shares was granted, in excess of $100,000, any such
excess options shall be treated as nonstatutory stock options. Unless terminated
earlier by our board of directors, the plan will terminate in June 2009. As of
October 10, 2000, options to purchase 4,964,936 shares of common stock were
outstanding under this plan and 716,519 shares had been issued upon exercise of
options.
The stock option plan may be administered by our board of directors or by a
committee appointed by our board and is currently administered by our
compensation committee. The plan administrator
52
determines the terms of each option granted under the stock option plan,
including the number of shares subject to an option, exercise price, vesting
schedule and duration. The exercise price of all incentive stock options granted
under the stock option plan cannot be less than the fair market value of the
common stock on the date of grant and, in the case of incentive stock options
granted to holders of more than 10% of our voting power, not less than 110% of
the fair market value. Generally, options granted under the stock option plan
have a term of ten years, vest over a four-year period and are nontransferable.
Payment of the exercise price of options may be made in cash or other
consideration as determined by the plan administrator.
Our board of directors has the authority to amend or terminate the stock
option plan as long as such action does not adversely affect any outstanding
options and provided that stockholder approval for any amendments to the stock
option plan be obtained to the extent required by applicable law.
EMPLOYEE STOCK PURCHASE PLAN
Our employee stock purchase plan was adopted by our board of directors on
August 29, 2000 and will become effective on the completion of this offering.
The plan is designed to allow our eligible employees and eligible employees of
our subsidiaries to purchase shares of our common stock through periodic payroll
deductions. A total of 2,000,000 shares of our common stock will initially be
reserved for issuance under the plan. The maximum value of common stock that may
be purchased by a participant during any calendar year is $25,000, and no
participant is permitted to purchase any shares under the plan if such
participant, immediately after such purchase, owns 5% or more of our outstanding
capital stock. The plan will have a series of successive offering periods, each
with a maximum duration of 12 months. However, the initial offering period will
begin on the effective date of this offering and will end on December 31, 2002.
Shares may be purchased semi-annually on June 30 and December 31 of each year
during each offering period. Individuals who have been employed by us or one of
our subsidiaries for 30 days as of the start date of any offering period may
enter the plan on that start date. A participant may contribute up to 20% of his
or her cash earnings through payroll deductions, and the accumulated payroll
deductions will be applied to the purchase of shares on the participant's behalf
on each semi-annual purchase date. The purchase price per share will be 85% of
the lower of the fair market value of our common stock on the start date of the
relevant offering period or the fair market value on the semi-annual purchase
date. Our board may at any time amend or modify the plan, provided that
stockholder approval for any amendments to the plan be obtained to the extent
required by applicable law.
401(k) PLAN
In May 2000 our board of directors ratified the adoption of a tax-qualified
employee savings and retirement plan for eligible U.S. employees. Eligible
employees may elect to defer a percentage of their eligible compensation in the
401(k) plan, subject to the statutorily prescribed annual limit. We make
matching contributions on behalf of all participants in the 401(k) plan in the
amount equal to one-half of the first 6% of an employee's contributions.
Matching contributions are subject to a vesting schedule; all other
contributions are at all times fully vested. We intend the 401(k) plan to
qualify under Sections 401(k) and 501 of the Internal Revenue Code so that
contributions by employees or us to the 401(k) plan, and income earned, if any,
on plan contributions, are not taxable to employees until withdrawn from the
401(k) plan, and so that we will be able to deduct our contributions when made.
The trustee of the 401(k) plan, at the direction of each participant, invests
the assets of the 401(k) plan in any of a number of investment options.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
In May 2000, we entered into an employment agreement with Bryan W. Sparks,
our president and chief executive officer, for a term of 24 months, subject to
renewal thereafter. Under his employment
53
agreement, Mr. Sparks is entitled to receive an annual salary of at least
$150,000, as adjusted from time to time, and is eligible to receive bonuses as
determined by us. If Mr. Sparks is terminated without cause, as defined in his
employment agreement, he is entitled to receive his salary for a period of 12
months. Mr. Sparks has agreed not to compete, directly or indirectly, with us
during his employment and for a period of 12 months thereafter.
In addition, in May 2000 we also entered into an employment agreement with
Mr. Robert B. Waldie, our chief operating officer, for a terms of 24 months.
Under his employment agreement, Mr. Waldie is entitled to receive an annual
salary of at least $120,000, as adjusted from time to time, and is eligible to
receive bonuses as determined by us. Mr. Waldie has agreed not to compete,
directly or indirectly, with us during his employment and until the later of six
months from the date of termination of his employment or two years from the
effective date of his employment agreement.
We currently do not have any employment agreements with any of our other
executive officers. Our stock option plan provides that in the event a third
party acquires us through the purchase of all or substantially all of our
assets, a merger or other business combination, unless otherwise provided in
applicable stock option agreements, the unexercised portion of outstanding
options will vest and become immediately exercisable unless the options are
assumed by the third party or are replaced with comparable options.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
Our certificate of incorporation limits the liability of directors and
officers to the fullest extent currently permitted by Delaware law or as it may
be amended in the future. Consequently, subject to Delaware law, no director
will be personally liable to us or our stockholders for monetary damages
resulting from his conduct as our director, except liability for:
- acts or omissions involving intentional misconduct or knowing violations
of law;
- unlawful distributions; or
- transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally entitled.
Our certificate of incorporation also provides that we shall indemnify any
individual made a party to a proceeding because that individual is or was one of
our directors or officers and shall advance or reimburse reasonable expenses
incurred by such individual in advance of the final disposition of the
proceeding to the fullest extent permitted by applicable law. Any repeal of or
modification to our certificate of incorporation may not adversely affect any
right of any of our directors who is or was a director at the time of such
repeal or modification.
We intend to enter into indemnification agreements with each of our officers
and directors. In addition, our bylaws provide that we shall indemnify our
directors and officers and may indemnify our employees and agents to the fullest
extent permitted by law. Finally, we intend to purchase and maintain a liability
insurance policy, pursuant to which our directors and officers will be
indemnified against liability they may incur for serving in their capacities as
our directors and officers. We believe that the indemnification and limitation
of liability provisions in our certificate of incorporation, bylaws,
indemnification agreements and the liability insurance policy will facilitate
our ability to continue to attract and retain qualified individuals to serve as
our directors and officers.
To the extent the provisions of our certificate of incorporation, bylaws or
indemnification agreements provide for indemnification of directors for
liabilities arising under the Securities Act, those provisions are, in the
opinion of the Securities and Exchange Commission, against public policy as
expressed in the Securities Act and are therefore unenforceable.
54
RELATED-PARTY TRANSACTIONS
TECHNOLOGY
In September 1998, we entered into a DR DOS License Agreement with Caldera,
Inc., a company founded by Mr. Sparks, our president, chief executive officer
and chairman of the board. The agreement granted to us a perpetual,
non-exclusive, royalty-free worldwide license to make, use, sell, reproduce and
distribute DR DOS. It also allowed us to create new products based on DR DOS. As
consideration, we granted Caldera the right to receive shares of our common
stock.
In December 1999, we entered into a Technology Assignment Agreement with The
Canopy Group with respect to software technology. In return for a payment of
$10.00, Canopy transferred to us all of its interest in a technology known as
Willows. Willows allows a number of the functions of Microsoft's Windows
operating system to be compatible with Linux.
SALES OF COMMON STOCK
In fiscal 1998 and 1999, we borrowed an aggregate of $2,290,000 from Canopy,
of which approximately $337,000 was repaid in January 2000 and the balance of
approximately $1,953,000 was repaid in March 2000. Two of our directors,
Messrs. Noorda and Yarro, are members of Canopy. In October 2000, Canopy sold
1,000,000 shares of our common stock to Metrowerks Holdings, Inc., a subsidiary
of Motorola, for aggregate consideration of $7.5 million. Canopy currently holds
approximately 36.6% of our outstanding common stock prior to completion of this
offering.
In December 1999, we sold 750,000 shares of our common stock at a per share
price of $0.80 to each of MRH Investments, LLC and Dry Canyon Holdings, LLC. One
of our executive officers, Mr. Harris, is a member of MRH Investments, and
Mr. Sparks is a member of Dry Canyon Holdings.
In January 2000, we entered into a stock purchase and sale agreement with
Caldera Systems to purchase 1,250,000 shares of Caldera Systems' common stock in
exchange for 3,238,437 shares of our common stock. The fair value of the shares
of our common stock exchanged with Caldera Systems was approximately
$4.4 million at the time of the transaction. Three of our directors,
Messrs. Egan, Noorda and Yarro, are also members of the board of directors of
Caldera Systems. In October 2000, Caldera Systems sold 2,000,000 shares of our
common stock to Metrowerks Holdings for aggregate consideration of
$15.0 million, and Caldera Systems currently holds approximately 7.8% of our
outstanding common stock prior to completion of this offering. We hold
approximately 3.2% of the outstanding common stock of Caldera Systems as of
October 10, 2000.
SALES OF CONVERTIBLE PREFERRED STOCK
In February 2000, we sold an aggregate of 7,500,000 shares of Series A
convertible preferred stock at a per share price of $1.50 to four investors. The
purchasers of Series A convertible preferred stock included:
- The Canopy Group, which exchanged 5,000,000 shares of our common stock for
5,000,000 shares of Series A Class 1 convertible preferred stock pursuant
to a recapitalization agreement between us and Canopy. This exchange was
undertaken to confer rights previously bargained for by Canopy and to
facilitate our efforts to secure additional investments in our company.
- Dry Canyon Holdings, which purchased 166,667 shares of Series A Class 2
convertible preferred stock for total consideration of $250,000.
- Egan-Managed Capital, which purchased 2,000,000 shares of Series A
Class 2 convertible preferred stock for total consideration of
$3.0 million. One of our directors, Mr. Egan, is a managing partner of
Egan-Managed Capital, which holds 6.3% of our outstanding common stock
prior to completion of this offering.
55
In March 2000, we sold 326,667 shares, out of a total of 4,833,331 shares,
of Series B convertible preferred stock at a per share price of $3.00 to
Egan-Managed Capital.
In April 2000, we sold 83,333 shares, out of a total of 3,000,000 shares, of
Series C convertible preferred stock at a per share price of $6.00 to Angel
Partners. One of our directors, Mr. Yarro, is president, chairman and a trustee
of Angel Partners.
In connection with the sale of our convertible preferred stock, the
investors, other than Dry Canyon Holdings, were granted registration rights, and
we may therefore become obligated to effect a registration under the Securities
Act of 1933 of shares of common stock held by these investors upon the
conversion of the preferred stock. See "Description of Capital Stock" on page 61
for a more complete description of these registration rights.
MOTOROLA
In August 2000, we entered into a strategic alliance agreement with
Metrowerks Corp., a subsidiary of Motorola, to integrate Embedix SDK with
Motorola products and then bundle the resulting products with select Motorola
development boards. Motorola beneficially holds approximately 13.2% of our
outstanding common stock prior to this offering. In connection with this
agreement, Metrowerks Holdings, also a subsidiary of Motorola, purchased from us
for total consideration of $1.5 million a warrant to purchase up to 2,000,000
shares of our common stock at an exercise price of $6.00 per share. The warrant
may be exercised at any time for cash or no cash under the cashless exercise
provisions of the warrant. In addition, we entered into a stockholders'
agreement with Metrowerks Holdings and four of our stockholders which, among
other things, gives Metrowerks Holdings participation rights in the event of a
potential change in our control. Metrowerks Holdings also became a party to our
investor rights agreement and, as a result, was granted registration rights with
respect to shares of our common stock issuable upon exercise of the Metrowerks
Holdings warrant and any other shares of our common stock owned by Metrowerks.
We may therefore be obligated to effect a registration under the Securities Act
of 1933 of shares of common stock held by Metrowerks. See "Description of
Capital Stock" for a more detailed description of the rights of Metrowerks
Holdings.
56
STOCK OPTIONS
We granted options to purchase shares of common stock to the following
executive officers and directors on the date, for the number of shares and with
an exercise price indicated opposite each person's name:
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NUMBER OF SHARES
NAME GRANT DATE UNDERLYING OPTION EXERCISE PRICE
---- ---------- ----------------- --------------
Bryan W. Sparks...................................... 09/24/99 600,000 $0.80
04/25/00 160,000 $3.00
Robert B. Waldie..................................... 05/15/00 25,000 $3.00
08/18/00 100,000 $6.00
Gregory C. Hill...................................... 12/30/99 200,000 $0.80
10/03/00 100,000 $6.00
Timothy R. Bird...................................... 09/24/99 55,000 $0.80
07/05/00 1,500 $6.00
Matthew R. Harris.................................... 12/30/99 150,000 $0.80
08/18/00 100,000 $6.00
Richard H. Larsen.................................... 10/03/00 200,000 $3.00
10/03/00 200,000 $6.00
Ralph J. Yarro III................................... 09/24/99 60,000 $0.80
02/29/00 20,000 $1.50
07/01/00 40,000 $6.00
Egan-Managed Capital, L.P.*.......................... 02/29/00 80,000 $1.50
07/01/00 40,000 $6.00
William P. Barnett................................... 02/14/00 80,000 $0.80
07/01/00 40,000 $6.00
Steven G. Rothmeier.................................. 07/15/00 120,000 $6.00
Alex Serge Vieux..................................... 07/15/00 120,000 $6.00
------------------------
* On behalf of one of our directors, Mr. Egan.
OTHER MATTERS
The Canopy Group is a venture capital company that invests primarily in
start-up technology companies that encourage the adoption, deployment and
promotion of Linux. Canopy currently holds equity interests in companies in
fields including data storage and protection, Linux operating systems, data
satellites, universal voice messaging and electronic commerce. We have entered
into transactions with a number of these companies and Canopy including with
respect to product sales and purchases, joint insurance coverage and rent. None
of these transactions were material, other than our sale of used office
furniture having a net book value of approximately $68,000 to KeyLabs, Inc. for
aggregate consideration of $75,000. See Note 9 of Notes to our Consolidated
Financial Statements for a more complete description of our relationship with
Canopy.
All transactions between us and our officers, directors and principal
stockholders and their affiliates were approved by a majority of our
disinterested directors at the time and we believe were on terms no less
favorable to us than we could obtain from unaffiliated third parties.
57
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of October 10, 2000, and as adjusted to reflect
the sale of the common stock in this offering, by:
- each stockholder known by us to own beneficially more than 5% of our
outstanding common stock;
- each of our directors;
- each of our named executive officers; and
- all current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. For purposes of calculating the number of
shares beneficially owned by a stockholder and the percentage ownership of that
stockholder, shares of common stock subject to options or warrants that are
currently exercisable or exercisable within 60 days of October 10, 2000 by that
stockholder are deemed outstanding. These options and warrants are listed below
under the heading "Number of Shares Underlying Options and Warrants" and are not
treated as outstanding for the purpose of computing the percentage ownership of
any other stockholder. Percentage ownership is based on 38,297,328 shares of
common stock outstanding on October 10, 2000 and shares outstanding upon
completion of this offering.
Unless otherwise noted below, the address for each stockholder below is: c/o
Lineo, Inc., 390 South 400 West Lindon, Utah 84042. Unless otherwise noted, we
believe that each of the stockholders has sole investment and voting power with
respect to the common stock indicated, except to the extent shared by spouses
under applicable law.
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NUMBER OF
SHARES PERCENTAGE OF
UNDERLYING SHARES OUTSTANDING
OPTIONS -------------------
NUMBER OF AND BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES WARRANTS OFFERING OFFERING
------------------------------------ ---------- ---------- -------- --------
Ralph J. Yarro III(1)................................ 14,843,886 75,000 38.9% %
Raymond J. Noorda(2)................................. 14,010,585 -- 36.6
The Canopy Group, Inc.(3) ........................... 14,010,585 -- 36.6
240 West Center Street
Orem, UT 84057
Motorola, Inc.(4) ................................... 3,333,333 2,000,000 13.2
c/o Metrowerks Corp.
9801 Metric Boulevard
Austin, TX 78758
Bryan W. Sparks(5)................................... 3,147,441 -- 8.2
Caldera Systems, Inc.(6) ............................ 3,000,000 -- 7.8
240 West Center Street
Orem, UT 84057
Dry Canyon Holdings, LLC............................. 2,439,296 -- 6.4
Egan-Managed Capital, L.P. .......................... 2,366,667 60,000 6.3
c/o Michael H. Shanahan
30 Federal Street
Boston, MA 02110
John R. Egan(7)...................................... 2,366,667 60,000 6.3
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[Enlarge/Download Table]
NUMBER OF
SHARES PERCENTAGE OF
UNDERLYING SHARES OUTSTANDING
OPTIONS -------------------
NUMBER OF AND BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES WARRANTS OFFERING OFFERING
------------------------------------ ---------- ---------- -------- --------
Entities affiliated with J. and W. Seligman and 2,000,001 -- 5.2
Co.(8) ............................................
c/o J. and W. Seligman and Co.
100 Park Avenue, 8th Floor
New York, NY 10017
Timothy R. Bird(9)................................... 137,376 11,458 *
Bradley J. Walters................................... 23,532 16,042 *
William P. Barnett................................... -- 60,000 *
Steven G. Rothmeier.................................. -- -- --
Alex Serge Vieux..................................... -- -- --
All executive officers and directors as a group
(12 persons)(10)................................... 21,538,190 206,458 56.5
------------------------
* Less than 1%
(1) Includes 11,010,585 shares of common stock held by The Canopy Group, of
which Mr. Yarro is the president and chief executive officer, 3,000,000
shares of common stock held by Caldera Systems, of which Mr. Yarro is
chairman of the board of directors, and 83,333 shares of common stock held
by Angel Partners, of which Mr. Yarro is president, chairman and a trustee.
Mr. Yarro disclaims beneficial ownership of the shares owned by The Canopy
Group, Caldera Systems and Angel Partners, except to the extent of his
pecuniary interest.
(2) Includes 11,010,585 shares of common stock held by The Canopy Group, of
which Mr. Noorda is chairman and a member of the board of directors, and
3,000,000 shares of common stock held by Caldera Systems, of which
Mr. Noorda is a member of the board of directors. Mr. Noorda disclaims
beneficial ownership of the shares owned by The Canopy Group and Caldera
Systems, except to the extent of his pecuniary interest.
(3) Includes 3,000,000 shares of common stock held by Caldera Systems, of which
The Canopy Group is a majority stockholder.
(4) Includes 3,000,000 shares of common stock and a warrant to purchase up to
2,000,000 shares of common stock held by Metrowerks Holdings, Inc., a
subsidiary of Motorola, Inc.
(5) Includes 2,439,296 shares of common stock held by Dry Canyon Holdings, LLC,
of which Mr. Sparks is a member, and 708,145 shares of common stock held by
Dry Canyon Family, LLC, of which Mr. Sparks is a member.
(6) Includes 1,761,563 shares of common stock acquired from The Canopy Group in
May 2000.
(7) Includes 2,366,667 shares of common stock held by Egan-Managed Capital, of
which Mr. Egan is a managing partner. Mr. Egan disclaims beneficial
ownership of the shares owned by Egan-Managed Capital, except to the extent
of his pecuniary interest.
(8) Includes 600,000 shares of common stock held by Seligman New Technologies
Fund, Inc., 1,233,334 shares of common stock held by Seligman Investment
Opportunities (Master) Fund-NTV Portfolio, and 166,667 shares of common
stock held by Seligman Communications and Information Fund, Inc., all of
which are affiliated with J. and W. Seligman and Co.
(9) Includes 117,897 shares of common stock held by the Bird Family Trust, of
which Mr. Bird is a co-trustee.
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(10) Includes 750,000 shares of common stock held by MRH Investments, LLC, of
which Matthew R. Harris is a member, 146,410 shares of common stock held by
Robert B. Waldie, and 146,410 shares of common stock held by Mary E. Waldie,
Mr. Waldie's wife. See also footnotes 1, 2, 5, 7 and 9 above.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, we will be authorized to issue up to
100,000,000 shares of common stock, $0.001 par value, and 30,000,000 shares of
preferred stock, $0.001 par value. This description is subject to and qualified
in its entirety by provisions of our certificate of incorporation and bylaws,
which are included as exhibits to the registration statement of which this
prospectus is a part, and by provisions of applicable Delaware law.
COMMON STOCK
As of October 10, 2000, assuming conversion of all outstanding shares of
preferred stock, there were 38,297,328 shares of common stock outstanding that
were held of record by 186 stockholders. After giving effect to the sale of
common stock offered in this offering, there will be shares of common
stock outstanding, assuming no exercise of outstanding stock options. As of
October 10, 2000, there were outstanding options to purchase a total of
4,964,936 shares of common stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
granted to any outstanding shares of convertible preferred stock, the holders of
common stock are entitled to receive ratably only those dividends our board of
directors declares out of funds legally available for the payment of dividends
as well as any other distributions to the stockholders.
If we are liquidated, dissolved or wound-up, the holders of common stock are
entitled to share pro rata all of our assets remaining after payment of our
liabilities and liquidation preferences of any then-outstanding shares of
convertible preferred stock. Holders of common stock have no preemptive rights
or rights to convert their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and non-assessable, and the
shares of common stock to be issued in this offering will be fully paid and
non-assessable.
CONVERTIBLE PREFERRED STOCK
Upon completion of this offering, all outstanding shares of convertible
preferred stock will be converted into 16,763,813 shares of common stock.
Pursuant to our certificate of incorporation, our board of directors will then
have the authority, without further action by the stockholders, to issue up to
30,000,000 shares of preferred stock in one or more series and to fix the
relative designations, powers, preferences and privileges of the preferred
stock, any or all of which may be greater than the rights of the common stock.
Our board of directors, without stockholder approval, can issue preferred stock
with voting, conversion or other rights that could adversely affect the voting
power and other rights of the holders of common stock. Preferred stock could
thus be issued quickly with terms that could delay or prevent a change in
control of us or make removal of our management more difficult. Additionally,
the issuance of preferred stock may decrease the market price of the common
stock and may adversely affect the voting and other rights of the holders of
common stock. We have no present plans to issue any preferred stock.
WARRANTS
As of October 10, 2000, we had one outstanding warrant to purchase up to
2,000,000 shares of our common stock at an exercise price of $6.00 per share.
The warrant may be exercised at any time prior to October 2, 2002. This warrant
contains a cashless exercise provision which would allow the holder to pay the
exercise price of the warrant by having shares of common stock otherwise
issuable under the warrant withheld by us.
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REGISTRATION RIGHTS
After this offering, the holders of 20,166,664 shares of common stock,
including shares issuable upon the exercise of the warrant held by Metrowerks
Holdings, will be entitled to rights with respect to the registration of those
shares under the Securities Act under an investor rights agreement among those
holders and us dated February 17, 2000, as amended. Under the terms of this
agreement, if we propose to register any of our securities under the Securities
Act, either for our own account or for the account of other security holders
exercising registration rights, the holders of these shares are entitled to
notice of the registration and to include their shares of common stock in the
registration at our expense. Additionally, the holders of these shares are
entitled to demand registration rights pursuant to which they may require us to
file a registration statement under the Securities Act at our expense with
respect to their shares of common stock. Further, the holders of these shares
may require us to file additional registration statements on Form S-3 at our
expense. All of these registration rights are subject to the right of the
underwriters of an offering to limit the number of shares included in such
registration. These registration rights terminate when the holder can transfer
his or her registrable shares pursuant to Rule 144. Holders of these
registration rights have entered into lock-up agreements and waived their
registration rights until 180 days following the closing of this offering.
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION,
BYLAWS, DELAWARE LAW AND OUR AGREEMENT WITH METROWERKS HOLDINGS
Our board of directors, without stockholder approval, has the authority
under our certificate of incorporation to issue preferred stock with rights
superior to the rights of the holders of common stock. As a result, preferred
stock could be issued quickly and easily, could adversely affect the rights of
holders of common stock and could be issued with terms calculated to delay or
prevent a change in control of us or make removal of our management more
difficult. In addition, as of the first annual meeting of stockholders following
the closing of this offering, our board of directors will be divided into three
classes. The directors in each class will serve for three-year terms, one class
being elected each year by our stockholders, and directors can only be removed
for cause. This system of electing and removing directors may tend to discourage
a third party from making a tender offer or otherwise attempting to obtain
control of our company because it generally makes it more difficult for
stockholders to replace a majority of the directors.
Upon completion of this offering, our certificate of incorporation will also
permit the stockholders to adopt, amend or repeal our bylaws only upon the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of voting stock entitled to vote at an election of directors. In addition,
directors will be removable for cause only by stockholders holding a majority of
the then outstanding shares of stock entitled to vote. Vacancies on the board of
directors resulting from death, resignation, removal or other reason shall be
filled by a majority of the directors then in office, even if less than a
quorum.
Upon completion of this offering, our bylaws will require that all
stockholder actions must be effected at a duly called annual or special meeting
and not by a consent in writing. Our bylaws will not permit stockholders to call
a special meeting. In addition, our bylaws will establish an advance notice
procedure for matters to be brought before an annual or special meeting of our
stockholders, including the election of directors. Business permitted to be
conducted at any annual meeting or special meeting of stockholders will be
limited to business properly brought before the meeting. Our bylaws will also
provide that we will indemnify officers and directors against losses that they
may incur in investigations and legal proceedings resulting from their services
to us, which may include services in connection with takeover defense measures.
These provisions may have the effect of preventing changes in our management.
In addition, section 203 of the Delaware General Corporation Law prohibits
certain "business combination" transactions between a Delaware corporation and
any "interested stockholder" owning
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15% or more of the corporation's outstanding voting stock for a period of three
years after the date on which such stockholder became an interested stockholder,
unless:
- the board of directors approves, prior to such date, either the proposed
business combination or the proposed acquisition of stock which resulted
in the stockholder becoming an interested stockholder;
- upon consummation of the transaction in which the stockholder becomes an
interested stockholder, the interested stockholder owned at least 85% of
those shares of the voting stock of the corporation which are not held by
the directors, officers or certain employee stock plans; or
- on or subsequent to the date on which such stockholder became an
interested stockholder, the business combination with the interested
stockholder is approved by the board of directors and also approved at a
stockholders' meeting by the affirmative vote of the holders of at least
two-thirds of the outstanding shares of the corporation's voting stock
other than shares held by the interested stockholder.
Under Delaware law, a "business combination" includes a merger, asset sale
or other transaction resulting in a financial benefit to the interested
stockholder. Section 203 does not apply, however, to those stockholders who own
15% or more of our voting stock prior to this offering.
Moreover, in the event that we decide to enter into negotiations with a
third party regarding a potential acquisition of us, the provisions of our
agreement with Metrowerks Holdings, a subsidiary of Motorola, require us to give
Metrowerks Holdings the right to participate in these negotiations and to
acquire us on terms comparable to those offered by any such third party. In
addition, Metrowerks Holdings has rights of first refusal with respect to shares
of common stock offered for sale by Mr. Sparks, Dry Canyon Holdings, Caldera
Systems and The Canopy Group. These provisions may discourage or deter third
parties from making or considering offers to acquire us, even if such offers
would be beneficial to our stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C. The transfer agent's address is 520 Pike Street,
Suite 1220, Seattle, Washington 98101, and its telephone number is
(206) 292-3795.
NATIONAL MARKET LISTING
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "LNEO."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of common
stock outstanding, assuming no exercise of options after October 10, 2000. Of
these shares, the shares sold in this offering will be freely tradable in
the public market without restriction under the Securities Act, unless such
shares are held by our "affiliates," as that term is defined in Rule 144 under
the Securities Act.
The remaining 38,297,328 shares of common stock that will be outstanding
after this offering will be restricted shares because they were sold in private
transactions in reliance on exemptions from registration under the Securities
Act. The following table shows the timing of when shares outstanding on
October 10, 2000 first become eligible for resale in the public market:
[Enlarge/Download Table]
NUMBER OF SHARES COMMENT
---------------- -------------------------------------
- 181 days after the date of this
prospectus......................... - 35,297,328 - Tradable upon expiration of lock-up
agreements, subject to the
provisions of Rule 144
- October 2, 2001.................... - 3,000,000 - Tradable, subject to the provisions
of Rule 144
S-8 REGISTRATION STATEMENTS
As of October 10, 2000, there were a total of 4,964,936 shares of common
stock subject to outstanding options under our stock option plan. Following
effectiveness of this offering, we intend to file registration statements on
Form S-8 under the Securities Act to register shares of common stock issued or
reserved for future issuance under our stock option plan and employee stock
purchase plan. After the effective date of the registration statements on
Form S-8, shares purchased upon exercise of options granted pursuant to our
stock option plan or pursuant to our employee stock purchase plan generally
would be available for resale in the public market without restriction.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year would be entitled to sell in any three-month period
up to the greater of:
- 1% of the then-outstanding shares of common stock, or approximately
shares immediately after this offering; and
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about us.
RULE 701
Any of our employees, directors, officers, consultants or advisors who
purchased shares from us in connection with a written stock or option plan
before the effective date of this offering is entitled to rely on the resale
provisions of Rule 701, subject to the lock-up agreements described above. In
general, Rule 701 permits non-affiliates to sell their Rule 701 shares 90 days
after the effectiveness of a registration statement relating to a company's
initial public offering without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the
holding period of Rule 144.
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RULE 144(k)
Under Rule 144(k), a person who has not been one of our affiliates during
the preceding 90 days and who has beneficially owned the restricted shares for
at least two years is entitled to sell them without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
LOCK-UP AGREEMENTS
Pursuant to "lock-up" agreements, our executive officers, directors and
certain of our other stockholders have agreed not to offer, sell, contract to
sell, announce an intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the SEC a registration statement under the Securities
Act relating to, any shares of common stock or securities convertible into or
exchangeable or exercisable for any common stock without the prior written
consent of Credit Suisse First Boston Corporation for a period of 180 days after
the date of this prospectus.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Lehman
Brothers Inc., Dain Rauscher Incorporated and Wit SoundView Corporation are
acting as representatives, the following respective numbers of shares of common
stock:
[Download Table]
NUMBER
UNDERWRITER OF SHARES
----------- ---------
Credit Suisse First Boston Corporation......................
Lehman Brothers Inc.........................................
Dain Rauscher Incorporated..................................
Wit SoundView Corporation...................................
---------
Total...................................................
=========
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares from us at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
[Enlarge/Download Table]
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
Underwriting discounts and
commissions paid by us.................. $ $ $ $
Expenses payable by us.................. $ $ $ $
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the SEC a registration
statement under the Securities Act relating to, any shares of our common stock
or securities convertible into or exchangeable or exercisable for any shares of
common stock, or publicly disclose the intention to make any such offer, sale,
pledge, disposition or filing, without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus.
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Our officers, directors and certain of our other stockholders have agreed
that they will not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
swap, hedge or other arrangement that transfers, in whole or part, any of the
economic consequences of ownership of our common stock, whether any such
transaction is to be settled by delivery of our common stock or such other
securities, in cash or otherwise, or publicly disclose the intention to make any
such offer, sale, pledge or disposition, or to enter into any such transaction,
swap, hedge or other arrangement, without, in each case, the prior written
consent of Credit Suisse First Boston Corporation for a period of 180 days after
the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to five percent of the shares to be sold in this offering for
employees, directors and certain other persons associated with us, who have
expressed an interest in purchasing common stock in the offering. The number of
shares available for sale to the general public in this offering will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
purchased will not be subject to the lock-up agreements described above. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "LNEO."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters and will not necessarily reflect the market
price of the common stock following the offering. The principal factors that
will be considered in determining the public offering price will include:
- the information in this prospectus and otherwise available to the
underwriters;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies; and
- the general condition of the securities markets at the time of this
offering.
We can offer no assurances that the initial public offering price will
correspond to the price at which the common stock will trade in the public
market subsequent to the offering or that an active trading market for the
common stock will develop and continue after the offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with
Regulation M under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. The short position may be either
a covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is
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not greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more than could be covered
by the over-allotment option--a naked short position--that position can
only be closed out by buying shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the shares in the open
market after pricing that could adversely affect investors who purchase in
the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of our common
stock or preventing or retarding a decline in the market price of the common
stock. As a result the price of our common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format will be made available on the Web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to the underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make Internet distributions on the
same basis as other allocations. Wit SoundView Corporation has allocated shares
of common stock for Internet distributions through its affiliate, Wit Capital
Corporation, an online broker/dealer.
In April 2000, DRW Venture Partners L.P., an affiliate of Dain Rauscher
Wessels, one of the representatives, purchased 125,000 shares of our Series C
preferred stock at a purchase price of $6.00 per share for a total purchase
price of $750,000.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
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REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that:
- such purchaser is entitled under applicable provincial securities laws to
purchase such common stock without the benefit of a prospectus qualified
under such securities laws;
- where required by law, that such purchaser is purchasing as principal and
not as agent; and
- such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named may
be located outside of Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon the issuer
or such persons. All or a substantial portion of the assets of the issuer and
such persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against the issuer or such persons in Canada or
to enforce a judgment obtained in Canadian courts against such issuer or persons
outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR # 95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the common stock in this offering will be passed upon for
the company by Summit Law Group, PLLC, Seattle, Washington. Certain legal
matters will be passed upon for the underwriters by Stoel Rives LLP, Seattle,
Washington.
As of the date of this prospectus, Summit Law Group beneficially owns 80,000
shares of our common stock, and certain members of Summit Law Group are
affiliated with both Rainier Investors, LLC, which beneficially holds 86,666
shares of our common stock, and MRH Investments, LLC, which beneficially holds
750,000 shares of our common stock.
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EXPERTS
The financial statements and schedules included in this prospectus and
elsewhere in the registration statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen and
BEFEC - Price Waterhouse, independent public accountants, and are included
herein in reliance upon the authority of said firms as experts in giving said
reports.
WHERE TO FIND ADDITIONAL DOCUMENTS
We have filed with the SEC a registration statement on Form S-1. This
prospectus, which forms a part of the registration statement, does not contain
all the information included in the registration statement. Certain information
is omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this prospectus to any of our contracts or
other documents you should refer to the exhibits attached to the registration
statement for copies of the actual contract or document. You may read and copy
the registration statement, including exhibits and schedules filed with it, at
the SEC's public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the SEC's public reference facilities by calling the SEC at
1-800-SEC-0330. The SEC maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants, such as us, that file electronically with the SEC.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements under the Exchange Act and, in accordance
with this law, will file periodic reports, proxy statements and other
information with the SEC. These periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference facilities and the Web site of the SEC referred to above.
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INDEX TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended October 31, 1999............ P-3
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended July 31, 2000........ P-4
Notes to Pro Forma Condensed Consolidated Financial
Statements................................................ P-5
P-1
LINEO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated statements of
operations are based on the historical consolidated statements of operations of
Lineo, Inc. included elsewhere in this prospectus adjusted to give effect to the
acquisition of Zentropic Computing, LLC ("Zentropic") effective April 3, 2000,
the acquisitions of United System Engineers ("United System"), Fireplug
Computers Inc. ("Fireplug"), Inup S.A. ("Inup"), Moreton Bay Ventures Pty Ltd
("Moreton Bay") effective May 1, 2000 and the acquisition of RT-Control, Inc.
("RT-Control") completed on May 12, 2000. The accompanying unaudited pro forma
condensed consolidated statements of operations should be read in conjunction
with the audited financial statements, including the notes thereto, of these
entities included elsewhere in this prospectus. The unaudited pro forma
condensed consolidated statements of operations have been prepared using the
purchase method of accounting for the acquisitions and reflect the effect of all
of the acquisitions as if they had occurred on November 1, 1998.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that management believes are reasonable. The
unaudited pro forma condensed consolidated statements of operations included in
this prospectus are for illustrative purposes only. Such information does not
purport to represent what the Company's results of operations actually would
have been had the acquisitions in fact occurred when assumed, nor is it
indicative of actual or future operating results that may occur.
P-2
LINEO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999
[Enlarge/Download Table]
HISTORICAL
-----------------------------------------------------------------------------------------------
LINEO ZENTROPIC UNITED SYSTEM FIREPLUG INUP
---------------- ---------------- ----------------- ----------------- -----------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1999 OCTOBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999
---------------- ---------------- ----------------- ----------------- -----------------
Revenue.......................... $ 2,800,584 $ 85,474 $1,534,000 $ 144,778 $ 8,355
Cost of revenue.................. 184,857 38,364 1,024,000 88,996 1,785
----------- ---------- ---------- ---------- ----------
Gross margin................. 2,615,727 47,110 510,000 55,782 6,570
----------- ---------- ---------- ---------- ----------
Operating expenses:
Research and development....... 1,593,836 320,828 48,000 -- 55,387
Sales and marketing............ 936,558 249,898 -- 32,382 --
General and administrative..... 725,597 150,132 971,000 56,787 76,169
Non-cash stock-related
compensation(*).............. 250,265 78,708 -- -- --
Amortization of goodwill and
other intangibles............ -- -- -- -- --
----------- ---------- ---------- ---------- ----------
Total operating expenses..... 3,506,256 799,566 1,019,000 89,169 131,556
----------- ---------- ---------- ---------- ----------
Loss from operations............. (890,529) (752,456) (509,000) (33,387) (124,986)
Other expense, net............... (163,146) -- (69,000) -- (50)
----------- ---------- ---------- ---------- ----------
Loss before income taxes......... (1,053,675) (752,456) (578,000) (33,387) (125,036)
Income tax (provision) benefit... -- 4,117 (2,000) -- 14,718
----------- ---------- ---------- ---------- ----------
Net loss......................... $(1,053,675) $ (748,339) $ (580,000) $ (33,387) $ (110,318)
=========== ========== ========== ========== ==========
Basic and diluted net loss per
common share................... $ (0.06)
===========
Basic and diluted weighted
average common shares
outstanding.................... 18,000,000 1,745,226 (b) 1,333,333 (b)
=========== ========== ==========
Basic and diluted supplemental
net loss per common share...... $ (0.06)
===========
Basic and diluted supplemental
weighted average common shares
outstanding.................... 18,000,000 1,745,226 (c) 69,998 (c) 1,416,667 (c)
=========== ========== ========== ==========
------------------------------
* Non-cash stock-related compensation
has been excluded from the following
expenses:
Research and development..... $ 15,935 $ 850
Sales and marketing.......... 26,376 58,393
General and administrative... 207,954 19,465
HISTORICAL
--------------------------------------
MORETON BAY RT-CONTROL
---------------- -------------------
INCEPTION (JUNE 30,
YEAR ENDED 1999) TO PRO FORMA
OCTOBER 31, 1999 DECEMBER 31, 1999 ADJUSTMENTS PRO FORMA
---------------- ------------------- ----------- ------------
Revenue.......................... $ -- $ 66,951 $ -- $ 4,640,142
Cost of revenue.................. -- 42,392 -- 1,380,394
--------- -------- ----------- ------------
Gross margin................. -- 24,559 -- 3,259,748
--------- -------- ----------- ------------
Operating expenses:
Research and development....... 37,839 74,468 -- 2,130,358
Sales and marketing............ 17,114 7,324 -- 1,243,276
General and administrative..... 92,038 38,446 -- 2,110,169
Non-cash stock-related
compensation(*).............. 53,201 -- -- 382,174
Amortization of goodwill and
other intangibles............ -- -- 7,243,205 (a) 7,243,205
--------- -------- ----------- ------------
Total operating expenses..... 200,192 120,238 7,243,205 13,109,182
--------- -------- ----------- ------------
Loss from operations............. (200,192) (95,679) (7,243,205) (9,849,434)
Other expense, net............... -- (2,764) -- (234,960)
--------- -------- ----------- ------------
Loss before income taxes......... (200,192) (98,443) (7,243,205) (10,084,394)
Income tax (provision) benefit... -- -- -- 16,835
--------- -------- ----------- ------------
Net loss......................... $(200,192) $(98,443) $(7,243,205) $(10,067,559)
========= ======== =========== ============
Basic and diluted net loss per
common share................... $ (0.48)
============
Basic and diluted weighted
average common shares
outstanding.................... 21,078,559
============
Basic and diluted supplemental
net loss per common share...... $ (0.45)
============
Basic and diluted supplemental
weighted average common shares
outstanding.................... 956,315 (c) 404,169 (c) 22,592,375
========= ======== ============
------------------------------
* Non-cash stock-related compensa
has been excluded from the foll
expenses:
Research and development..... $ 43,097 $ 59,882
Sales and marketing.......... -- 84,769
General and administrative... 10,104 237,523
P-3
LINEO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 2000
[Enlarge/Download Table]
HISTORICAL
------------------------------------------------------------------------------------
LINEO ZENTROPIC UNITED SYSTEM FIREPLUG INUP
------------- ----------------- -------------- -------------- --------------
NINE MONTHS PERIOD FROM SIX MONTHS SIX MONTHS SIX MONTHS
ENDED NOVEMBER 1, 1999 ENDED ENDED ENDED
JULY 31, 2000 TO APRIL 2, 2000 MARCH 31, 2000 MARCH 31, 2000 MARCH 31, 2000
------------- ----------------- -------------- -------------- --------------
Revenue........................ $ 3,877,907 $ 256,491 $ 764,000 $ 128,238 $ 8,355
Cost of revenue................ 843,729 102,035 650,000 35,455 1,785
------------ ---------- --------- --------- ----------
Gross margin............... 3,034,178 154,456 114,000 92,783 6,570
------------ ---------- --------- --------- ----------
Operating expenses:
Research and development..... 5,079,754 81,406 48,000 -- 100,273
Sales and marketing.......... 3,414,386 223,870 -- 72,087 --
General and administrative... 2,363,849 72,108 623,000 16,652 212,752
Non-cash stock-related
compensation(*)............ 1,791,920 167,354 -- 114,500 --
Amortization of goodwill and
other intangibles.......... 1,992,053 -- -- -- --
Acquired in-process research
and development............ 2,900,000 -- -- -- --
------------ ---------- --------- --------- ----------
Total operating expenses... 17,541,962 544,738 671,000 203,239 313,025
------------ ---------- --------- --------- ----------
Loss from operations........... (14,507,784) (390,282) (557,000) (110,456) (306,455)
Other income (expense), net.... 399,497 -- (31,000) -- 443
------------ ---------- --------- --------- ----------
Loss before income taxes....... (14,108,287) (390,282) (588,000) (110,456) (306,012)
Income tax (provision)
benefit...................... 52,787 (1,942) (1,000) -- 53,888
------------ ---------- --------- --------- ----------
Net loss....................... $(14,055,500) $ (392,224) $(589,000) $(110,456) $ (252,124)
============ ========== ========= ========= ==========
Basic and diluted net loss per
common share................. $ (0.69)
============
Basic and diluted weighted
average common shares
outstanding.................. 20,268,412 987,263 (g) 890,511 (g)
============ ========== ==========
Basic and diluted supplemental
net loss per common share.... $ (0.49)
============
Basic and diluted supplemental
weighted average common
shares outstanding........... 28,674,875 (h) 987,263 (i) 46,750 (i) 946,168 (i)
============ ========== ========= ==========
------------------------------
* Non-cash stock-related
compensation has been
excluded from the following
expenses:
Research and development... $ 437,141 $ 29,454 $ --
Sales and marketing........ 102,434 94,242 --
General and
administrative........... 1,252,345 43,658 114,500
HISTORICAL
--------------------------------
MORETON BAY RT-CONTROL
--------------- --------------
SIX MONTHS SIX MONTHS
ENDED ENDED PRO FORMA
APRIL 30, 2000 MARCH 31, 2000 ADJUSTMENTS PRO FORMA
--------------- -------------- ----------- -----------
Revenue........................ $ 26,558 $ 79,083 $ (200,000)(d) $ 4,940,632
Cost of revenue................ 13,691 32,330 (81,933)(d) 1,597,092
--------- --------- ----------- -----------
Gross margin............... 12,867 46,753 (118,067) 3,343,540
--------- --------- ----------- -----------
Operating expenses:
Research and development..... 94,456 125,679 (118,067)(d) 5,411,501
Sales and marketing.......... 13,583 11,528 -- 3,735,454
General and administrative... 75,381 80,149 -- 3,443,891
Non-cash stock-related
compensation(*)............ 59,365 75,000 -- 2,208,139
Amortization of goodwill and
other intangibles.......... -- -- 3,458,073 (e) 5,450,126
Acquired in-process research
and development............ -- -- (2,900,000)(f) --
--------- --------- ----------- -----------
Total operating expenses... 242,785 292,356 440,006 20,249,111
--------- --------- ----------- -----------
Loss from operations........... (229,918) (245,603) (558,073) (16,905,571)
Other income (expense), net.... -- 4,123 -- 373,063
--------- --------- ----------- -----------
Loss before income taxes....... (229,918) (241,480) (558,073) (16,532,508)
Income tax (provision)
benefit...................... -- -- -- 103,733
--------- --------- ----------- -----------
Net loss....................... $(229,918) $(241,480) $ (558,073) $(16,428,775)
========= ========= =========== ===========
Basic and diluted net loss per
common share................. $ (0.74)
===========
Basic and diluted weighted
average common shares
outstanding.................. 22,146,186
===========
Basic and diluted supplemental
net loss per common share.... $ (0.52)
===========
Basic and diluted supplemental
weighted average common
shares outstanding........... 670,119 (i) 286,163 (i) 31,611,338
========= ========= ===========
------------------------------
* Non-cash stock-related
compensation has been
excluded from the following
expenses:
Research and development... $ 59,365 $ -- $ 525,960
Sales and marketing........ -- -- 196,676
General and
administrative........... -- 75,000 1,485,503
P-4
LINEO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The unaudited pro forma condensed consolidated statements of operations are
based on adjustments to the historical consolidated statements of operations of
Lineo, Inc. to give effect to the acquisitions described in Note 2 using the
purchase method of accounting assuming all acquisitions were consummated as of
November 1, 1998. The unaudited pro forma condensed consolidated statements of
operations are not necessarily indicative of results that would have occurred
had the acquisitions been consummated as of November 1, 1998 or that might be
attained in the future. The pro forma condensed consolidated statements of
operations should be read in conjunction with the historical consolidated
financial statements of the Company, the historical financial statements of the
acquired companies and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
(2) ACQUISITIONS
The following table sets forth the consideration paid in cash, including
estimated direct expenses to be paid in connection with each acquisition, and
through the issuance of shares of common stock, shares of Series C and Series D
convertible preferred stock and options to acquire shares of common stock. For
purposes of computing the estimated purchase price, the value of the common
stock was determined using an estimated fair value of $3.80 per share for the
Zentropic acquisition and a value of $6.00 per share for the shares of Series C
and Series D convertible preferred shares and common shares issued for the
acquisition of all other entities, which represents the estimated fair value
based upon equity transactions with independent parties at or near the dates the
acquisitions were consummated. The estimated fair values of the options to
purchase common stock issued in connection with the acquisitions were determined
using the Black-Scholes option pricing model with the following assumptions:
expected exercise lives of five years, risk free interest rate of 5.65 percent,
expected dividend yield of zero percent and volatility of 60 percent. The
estimated purchase price for the acquisitions is based on preliminary estimates
and is subject to certain purchase price adjustments following closing. However,
management does not expect the final purchase price allocation to be materially
different from the preliminary allocation nor does it expect there to be any
material post closing adjustments.
[Enlarge/Download Table]
OPTIONS TO SHARES OF SHARES OF
PURCHASE SHARES SERIES C SERIES D
SHARES OF OF COMMON STOCK CONVERTIBLE CONVERTIBLE
COMMON ------------------------- PREFERRED PREFERRED
CASH STOCK SHARES EXERCISE PRICE STOCK STOCK
---------- --------- -------- -------------- ----------- -----------
Zentropic................... $ 111,867 1,745,226 -- $ -- -- --
United System............... 542,123 -- 507,335 3.00 -- --
Fireplug.................... 611,581 -- 62,220 1.50 -- 69,998
Inup........................ 189,301 1,333,333 -- -- 83,334 --
Moreton Bay................. 121,588 -- 87,374 3.00 -- 956,315
RT-Control.................. 149,240 -- 16,667 1.50 -- 404,169
---------- --------- ------- ------ ---------
Total..................... $1,725,700 3,078,559 673,596 83,334 1,430,482
========== ========= ======= ====== =========
Zentropic was acquired effective April 3, 2000, the acquisitions of United
System, Fireplug, Inup and Moreton Bay were effective May 1, 2000 and the
acquisition of RT-Control was effective May 12, 2000.
P-5
LINEO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS (CONTINUED)
Management of the Company believes that the historical carrying value of the
acquired companies' assets and liabilities approximate fair value. The estimated
purchase prices have been allocated to each of the acquired companies as
follows:
[Enlarge/Download Table]
ZENTROPIC UNITED SYSTEM FIREPLUG INUP MORETON BAY RT-CONTROL TOTAL
---------- ------------- ---------- ---------- ----------- ---------- -----------
Net assets
(liabilities)...... $ 115,765 $ (760,322) $ (10,727) $ 502,077 $ 414,068 $ (66,449) $ 194,412
Net deferred income
tax liability...... (59,101) -- -- -- -- -- (59,101)
Acquired in-process
research and
development........ 800,000 -- -- 800,000 900,000 400,000 2,900,000
Assembled
workforce.......... 610,000 475,000 130,000 210,000 320,000 -- 1,745,000
Core technology...... 1,301,000 466,000 600,000 -- 2,600,000 280,000 5,247,000
Non-competition
agreements......... -- -- 400,000 -- -- -- 400,000
Goodwill............. 3,976,062 2,566,403 225,201 7,177,226 2,005,151 2,044,521 17,994,564
---------- ---------- ---------- ---------- ---------- ---------- -----------
$6,743,726 $2,747,081 $1,344,474 $8,689,303 $6,239,219 $2,658,072 $28,421,875
========== ========== ========== ========== ========== ========== ===========
The valuation of the in-process research and development included, but was
not limited to, an analysis of (1) the market for the acquired companies
products and technologies; (2) the completion costs for the projects; (3) the
expected cashflows attributed to the projects; and (4) the risks associated with
achieving such cash flows. The assumptions used in valuing the in-process
research and development were based upon assumptions the Company believed to be
reasonable but which are inherently uncertain and unpredictable. For these
reasons, actual results may vary from projected results.
In-process technology acquired from Zentropic included development ports of
real-time abstract interface extensions (RTAI) to Power PC, Arm and MIPS
platforms and software that facilitates communication and content update between
multiple computers. Total fair value assigned to these in-process projects was
$800,000. At the date of the acquisition, management estimated that the acquired
in-process research and development projects were approximately 60% complete and
that an additional $150,000 would be required to develop these projects and
technologies to commercial viability. Management anticipates completing each of
the projects during the second quarter of fiscal 2001, with total expected costs
to complete approximating the original estimate. Management believes that the
projected revenues and net cash flows from these projects will approximate those
used to calculate the in-process research and development.
In-process technology acquired from Inup included high availability
clustering extensions to Linux that adapt it to environments where failure rates
and associated downtime must be very low. Total fair value assigned to the
in-process project was $800,000. At the date of the acquisition, management
estimated that the acquired in-process research and development project was
approximately 25% complete and that an additional $135,000 would be required to
develop the project and technologies to
P-6
LINEO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS (CONTINUED)
commercial viability. In September 2000, the Company completed the high
availability clustering project and anticipates sales in the first quarter of
fiscal 2001. Total costs to complete the project approximated the original
estimate. Management believes that the projected revenues and net cash flows
from these projects will approximate those used to calculate the in-process
research and development.
In-process technology acquired from Moreton Bay included eLIA, a thin server
hardware platform running on Linux and IP6, connectivity technology for virtual
private network and multi-site locations. Total fair value assigned to these
in-process projects was $900,000. At the date of the acquisition, management
estimated that the acquired in-process research and development projects were
approximately 53% complete and that an additional $87,000 would be required to
develop these projects and technologies to commercial viability. Management
anticipates completing each of the projects during the second quarter of
fiscal 2001, with total expected costs to complete approximating the original
estimate. Management believes that the projected revenues and net cash flows
from these projects will approximate those used to calculate the in-process
research and development.
In-process technology acquired from RT-Control included extensions to Linux
for microcontrollers and a hardware/software solution incorporating that
technology. Total fair value assigned to these in-process projects was $400,000.
At the date of the acquisition, management estimated that the acquired
in-process research and development projects were approximately 35% complete and
that an additional $321,000 would be required to develop these projects and
technologies to commercial viability. Management anticipates completing each of
the projects during the third quarter of fiscal 2001, with total expected costs
to complete approximating the original estimate. Management believes that the
projected revenues and net cash flows from these projects will approximate those
used to calculate the in-process research and development.
(3) PRO FORMA ADJUSTMENTS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS
YEAR ENDED OCTOBER 31, 1999
(a) To reflect the amortization of goodwill and other intangibles related to the
acquisitions. The amortization periods for intangible assets are as follows:
[Download Table]
PERIOD
-----------
Goodwill.................................................... 3 - 5 years
Core technology............................................. 3 - 5 years
Assembled workforce......................................... 2 - 5 years
Non-competition agreements.................................. 2 years
(b) Reflects the shares of common stock issued in connection with acquisitions
of Zentropic and Inup assuming the acquisitions were effective as of
November 1, 1998. All other acquisitions were completed through the issuance
of options to purchase common stock and the issuance of Series C and
Series D convertible preferred stock. The options and preferred stock are
considered anti-dilutive and accordingly, have not been included in the
calculation of pro forma weighted average common shares outstanding.
P-7
LINEO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(3) PRO FORMA ADJUSTMENTS (CONTINUED)
(c) Reflects the additional shares of common stock to be issued upon conversion
of the preferred shares issued as consideration in connection with the
acquisitions, which will occur upon completion of this offering.
NINE MONTHS ENDED JULY 31, 2000
(d) To eliminate intercompany revenues and expenses between Lineo and Zentropic
earned and incurred prior to April 3, 2000 (the effective date of the
acquisition).
(e) To reflect the amortization of goodwill and other intangibles related to the
acquisitions.
(f) To eliminate the impact of the acquired in-process research and development
expensed as part of the acquisitions.
(g) Reflects the additional shares of common stock that would have been
outstanding had the acquisitions of Zentropic and Inup been effective as of
November 1, 1999. All other acquisitions were completed through the issuance
of options to purchase common stock and the issuance of Series C and
Series D convertible preferred stock. The options and preferred stock are
considered anti-dilutive and accordingly, have not been included in the
calculation of pro forma weighted average common shares outstanding.
(h) Reflects the additional shares of common stock to be issued upon conversion
of the preferred shares outstanding as of July 31, 2000 which will occur
upon completion of this offering as follows:
[Download Table]
Weighted average common shares outstanding for nine months
ended July 31, 2000....................................... 20,268,412
Weighted average common shares to be issued upon conversion
of the preferred shares outstanding as of July 31, 2000... 8,406,463
----------
Supplemental weighted average common shares outstanding..... 28,674,875
==========
(i) Reflects the additional shares of common stock to be issued upon conversion
of the preferred shares issued as consideration in connection with the
acquisitions, which will occur upon completion of this offering.
P-8
INDEX TO FINANCIAL STATEMENTS
[Download Table]
LINEO, INC.
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations and Comprehensive
Loss.................................................... F-5
Consolidated Statements of Stockholders' Equity
(Deficit)............................................... F-7
Consolidated Statements of Cash Flows..................... F-9
Notes to Consolidated Financial Statements................ F-11
ZENTROPIC COMPUTING, LLC
Report of Independent Public Accountants.................. F-36
Consolidated Balance Sheets............................... F-37
Consolidated Statements of Operations and Comprehensive
Loss.................................................... F-38
Consolidated Statements of Members' Capital............... F-39
Consolidated Statements of Cash Flows..................... F-40
Notes to Consolidated Financial Statements................ F-42
UNITED SYSTEM ENGINEERS, INC.
Report of Independent Public Accountants.................. F-51
Balance Sheets............................................ F-52
Statements of Operations and Comprehensive Income
(Loss).................................................. F-53
Statements of Stockholders' Deficit....................... F-54
Statements of Cash Flows.................................. F-55
Notes to Financial Statements............................. F-57
FIREPLUG COMPUTERS INC.
Report of Independent Public Accountants.................. F-69
Balance Sheets............................................ F-70
Statements of Operations and Comprehensive Loss........... F-71
Statements of Stockholders' Deficit....................... F-72
Statements of Cash Flows.................................. F-73
Notes to Financial Statements............................. F-74
INUP
Report of Independent Accountants......................... F-79
Balance Sheets............................................ F-80
Statements of Operations.................................. F-81
Statements of Stockholders' Equity........................ F-82
Statements of Cash Flows.................................. F-83
Notes to Financial Statements............................. F-84
MORETON BAY VENTURES PTY LTD
Report of Independent Public Accountants.................. F-89
Statements of Assets, Liabilities, and Equity (Deficit) of
the Acquired Operations................................. F-90
Statements of Revenue and Expenses and Comprehensive
Loss.................................................... F-91
Statements of Changes in Equity (Deficit) of the Acquired
Operations.............................................. F-92
Statements of Cash Flows.................................. F-93
Notes to Financial Statements............................. F-94
RT-CONTROL, INC.
Report of Independent Public Accountants.................. F-100
Balance Sheets............................................ F-101
Statements of Operations and Comprehensive Loss........... F-102
Statements of Shareholders' Equity (Deficit).............. F-103
Statements of Cash Flows.................................. F-104
Notes to Financial Statements............................. F-105
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Lineo, Inc.:
We have audited the accompanying consolidated balance sheets of Lineo, Inc.
(a Delaware corporation), the carved-out portion of Caldera, Inc. (a Utah
corporation) and their subsidiary as of October 31, 1998 and 1999, and the
related consolidated statements of operations and comprehensive loss,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended October 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Lineo, Inc., the carved-out portion of Caldera, Inc. and their subsidiary as of
October 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 1999 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
May 15, 2000
F-2
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
CONSOLIDATED BALANCE SHEETS
ASSETS
[Enlarge/Download Table]
OCTOBER 31,
--------------------- JULY 31,
1998 1999 2000
-------- ---------- -----------
(UNAUDITED)
Current assets:
Cash.................................................... $117,058 $ 67,794 $24,922,644
Restricted time deposit................................. -- -- 197,863
Marketable securities................................... -- -- 326,704
Accounts receivable, net of allowance for doubtful
accounts of approximately $13,000, $68,000 and
$114,000, respectively................................ 135,632 854,796 1,527,752
Related party receivables............................... 29,884 32,116 59,192
Inventories............................................. 5,434 3,626 406,039
Other current assets.................................... 6,507 1,997 226,543
-------- ---------- -----------
Total current assets.................................. 294,515 960,329 27,666,737
-------- ---------- -----------
Property and equipment:
Computer equipment...................................... 124,934 115,920 1,168,308
Furniture and fixtures.................................. 55,881 117,897 156,376
Buildings and leasehold improvements.................... -- 5,396 443,232
-------- ---------- -----------
180,815 239,213 1,767,916
Less accumulated depreciation and amortization.......... (95,610) (65,420) (213,332)
-------- ---------- -----------
Net property and equipment............................ 85,205 173,793 1,554,584
-------- ---------- -----------
Investment in affiliate................................... -- -- 745,279
-------- ---------- -----------
Non-marketable securities................................. -- -- 300,000
-------- ---------- -----------
Intangibles, net of accumulated amortization of
$1,992,053.............................................. -- -- 23,418,065
-------- ---------- -----------
Other assets.............................................. 85,000 -- 1,130,729
-------- ---------- -----------
$464,720 $1,134,122 $54,815,394
======== ========== ===========
See accompanying notes to consolidated financial statements.
F-3
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
[Enlarge/Download Table]
JULY 31, 2000
PRO FORMA
OCTOBER 31, STOCKHOLDERS'
------------------------- JULY 31, EQUITY
1998 1999 2000 (NOTE 2)
----------- ----------- ------------ -------------
(UNAUDITED) (UNAUDITED)
Current liabilities:
Accounts payable...................................... $ 314,444 $ 65,084 $ 1,402,038
Accrued liabilities................................... 142,780 290,579 794,979
Deferred revenue...................................... 782,075 293,155 481,671
Related party payables................................ 5,538 35,745 12,914
Current maturities of long-term debt.................. -- -- 1,099,695
Convertible promissory note payable to majority
stockholder and related accrued interest............ 403,542 2,432,387 --
----------- ----------- ------------
Total current liabilities........................... 1,648,379 3,116,950 3,791,297
----------- ----------- ------------
Long-term debt, net of current maturities............... -- -- 555,937
----------- ----------- ------------
Commitments and contingencies (Notes 1, 8 and 13)
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 30,000,000 shares
authorized:
Series A Class 1 convertible preferred stock,
5,000,000 shares designated and outstanding as of
July 31, 2000 and none pro forma, aggregate
liquidation preferences of $7,500,000............. -- -- 5,000 $ --
Series A Class 2 convertible preferred stock,
2,500,000 shares designated and outstanding as of
July 31, 2000 and none pro forma, aggregate
liquidation preferences of $3,750,000............. -- -- 2,500 --
Series B convertible preferred stock, 4,850,000
shares designated and 4,833,331 shares outstanding
as of July 31, 2000 and none pro forma, aggregate
liquidation preferences of $14,500,000............ -- -- 4,833 --
Series C convertible preferred stock, 3,000,000
shares designated and 3,000,000 shares outstanding
as of July 31, 2000 and none pro forma, aggregate
liquidation preferences of $18,000,000............ -- -- 3,000 --
Series D convertible preferred stock, 2,000,000
shares designated and 1,430,482 outstanding as of
July 31, 2000 and none pro forma, aggregate
liquidation preferences of $8,582,892............. -- -- 1,430 --
Common stock, $0.001 par value; 100,000,000 shares
authorized, 18,000,000, 18,000,000 and 21,487,307
shares outstanding, respectively and 38,251,120 pro
forma............................................... 18,000 18,000 21,487 38,251
Additional paid-in capital............................ (719,002) (408,399) 74,901,831 74,901,830
Deferred compensation................................. -- (60,338) (4,389,658) (4,389,658)
Accumulated deficit................................... (478,416) (1,532,091) (20,178,079) (20,178,079)
Accumulated other comprehensive income................ (4,241) -- 95,816 95,816
----------- ----------- ------------ ------------
Total stockholders' equity (deficit)................ (1,183,659) (1,982,828) 50,468,160 $ 50,468,160
----------- ----------- ------------ ============
$ 464,720 $ 1,134,122 $ 54,815,394
=========== =========== ============
See accompanying notes to consolidated financial statements.
F-4
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
[Enlarge/Download Table]
YEAR ENDED OCTOBER 31, NINE MONTHS ENDED JULY 31,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
Revenue:
Software................................... $ 945,414 $ 1,376,209 $ 2,800,584 $ 1,373,410 $ 3,002,771
Services................................... -- -- -- -- 534,779
Hardware................................... -- -- -- -- 340,357
----------- ----------- ----------- ----------- ------------
Total revenue............................ 945,414 1,376,209 2,800,584 1,373,410 3,877,907
----------- ----------- ----------- ----------- ------------
Cost of Revenue:.............................
Software................................... 247,694 360,727 184,857 143,053 350,166
Services................................... -- -- -- -- 338,301
Hardware................................... -- -- -- -- 155,262
----------- ----------- ----------- ----------- ------------
Total cost of revenue.................... 247,694 360,727 184,857 143,053 843,729
----------- ----------- ----------- ----------- ------------
Gross margin............................... 697,720 1,015,482 2,615,727 1,230,357 3,034,178
----------- ----------- ----------- ----------- ------------
Operating expenses:
Research and development (exclusive of non-
cash stock-related compensation of
$15,935 in fiscal year 1999 and $437,141
in the nine months ended July 31,
2000).................................... 660,221 1,382,403 1,593,836 1,232,808 5,079,754
Sales and marketing (exclusive of non-cash
stock-related compensation of $26,376 in
fiscal year 1999 and $102,434 in the nine
months ended July 31, 2000).............. 669,043 1,054,280 936,558 638,149 3,414,386
General and administrative (exclusive of
non-cash stock-related compensation of
$207,954 in fiscal year 1999 and
$1,252,345 in the nine months ended
July 31, 2000)........................... 195,753 583,933 725,597 640,997 2,363,849
Non-cash stock-related compensation........ -- 250,265 -- 1,791,920
Amortization of goodwill and other
intangibles.............................. -- -- -- -- 1,992,053
Acquired in-process research and
development.............................. -- -- -- -- 2,900,000
----------- ----------- ----------- ----------- ------------
Total operating expenses................. 1,525,017 3,020,616 3,506,256 2,511,954 17,541,962
----------- ----------- ----------- ----------- ------------
Loss from operations......................... (827,297) (2,005,134) (890,529) (1,281,597) (14,507,784)
----------- ----------- ----------- ----------- ------------
Other income (expense):
Interest expense........................... (51,048) (186,904) (138,542) (94,096) (75,350)
Interest income............................ -- 669 14,245 11,169 477,534
Other income (expense), net................ 1,439 5,098 (38,849) -- (2,687)
----------- ----------- ----------- ----------- ------------
Other income (expense), net.............. (49,609) (181,137) (163,146) (82,927) 399,497
----------- ----------- ----------- ----------- ------------
Loss before income tax benefit............... (876,906) (2,186,271) (1,053,675) (1,364,524) (14,108,287)
Income tax benefit........................... -- -- -- -- 52,787
----------- ----------- ----------- ----------- ------------
Net loss..................................... $ (876,906) $(2,186,271) $(1,053,675) $(1,364,524) $(14,055,500)
=========== =========== =========== =========== ============
Basic and diluted net loss per common
share...................................... $ (0.05) $ (0.12) $ (0.06) $ (0.08) $ (0.69)
=========== =========== =========== =========== ============
Weighted average common shares outstanding... 18,000,000 18,000,000 18,000,000 18,000,000 20,268,412
=========== =========== =========== =========== ============
F-5
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (CONTINUED)
[Enlarge/Download Table]
YEAR ENDED OCTOBER 31, NINE MONTHS ENDED JULY 31,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
Basic and diluted supplemental pro forma net
loss per common share (unaudited).......... $ (0.06) $ (0.49)
=========== ============
Basic and diluted supplemental pro forma
weighted average common shares outstanding
(unaudited)................................ 18,000,000 28,674,875
=========== ============
Comprehensive loss:
Net loss................................... $ (876,906) $(2,186,271) $(1,053,675) $(1,364,524) $(14,055,500)
Foreign currency translation adjustments... (11,463) 7,222 4,241 4,241 14,140
Unrealized gain on marketable securities... -- -- -- -- 81,676
----------- ----------- ----------- ----------- ------------
$ (888,369) $(2,179,049) $(1,049,434) $(1,360,283) $(13,959,684)
=========== =========== =========== =========== ============
See accompanying notes to consolidated financial statements.
F-6
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
[Enlarge/Download Table]
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED
--------------------- --------------------- PAID-IN DEFERRED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS)
---------- -------- ---------- -------- ----------- ------------- --------------
Balance, October 31,
1996.................... -- $ -- -- $ -- $ -- $ -- $ --
Debt funding and related
accrued interest
applicable to carved-out
operations of Caldera,
Inc..................... -- -- -- -- -- -- --
Foreign currency
translation
adjustment.............. -- -- -- -- -- -- (11,463)
Net loss applicable to
carved-out operations of
Caldera, Inc............ -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ----------- --------
Balance, October 31,
1997.................... -- -- -- -- -- -- (11,463)
Debt funding and related
accrued interest
applicable to carved-out
operations of Caldera,
Inc..................... -- -- -- -- -- -- --
Net loss applicable to
carved-out operations of
Caldera, Inc. through
August 31, 1998......... -- -- -- -- -- -- --
Incorporation of Lineo,
Inc. and issuance of
common shares to
Caldera, Inc. in
exchange for certain net
liabilities recorded at
carryover basis......... -- -- 18,000,000 18,000 (719,002) -- --
Foreign currency
translation
adjustment.............. -- -- -- -- -- -- 7,222
Net loss for the period
subsequent to
incorporation........... -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ----------- --------
Balance, October 31,
1998.................... -- -- 18,000,000 18,000 (719,002) -- (4,241)
Deferred compensation
related to stock option
grants.................. -- -- -- -- 310,603 (310,603) --
Amortization of deferred
compensation............ -- -- -- -- -- 250,265 --
Foreign currency
translation
adjustment.............. -- -- -- -- -- -- 4,241
Net loss.................. -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ----------- --------
Balance, October 31,
1999.................... -- -- 18,000,000 18,000 (408,399) (60,338) --
CALDERA, INC.'S
EQUITY
(DEFICIT) IN
ACCUMULATED CARVED-OUT
DEFICIT OPERATIONS
------------ ---------------
Balance, October 31,
1996.................... $ -- $ 364,189
Debt funding and related
accrued interest
applicable to carved-out
operations of Caldera,
Inc..................... -- 394,816
Foreign currency
translation
adjustment.............. -- --
Net loss applicable to
carved-out operations of
Caldera, Inc............ -- (876,906)
------------ -----------
Balance, October 31,
1997.................... -- (117,901)
Debt funding and related
accrued interest
applicable to carved-out
operations of Caldera,
Inc..................... -- 1,124,754
Net loss applicable to
carved-out operations of
Caldera, Inc. through
August 31, 1998......... -- (1,707,855)
Incorporation of Lineo,
Inc. and issuance of
common shares to
Caldera, Inc. in
exchange for certain net
liabilities recorded at
carryover basis......... -- 701,002
Foreign currency
translation
adjustment.............. -- --
Net loss for the period
subsequent to
incorporation........... (478,416) --
------------ -----------
Balance, October 31,
1998.................... (478,416) --
Deferred compensation
related to stock option
grants.................. -- --
Amortization of deferred
compensation............ -- --
Foreign currency
translation
adjustment.............. -- --
Net loss.................. (1,053,675) --
------------ -----------
Balance, October 31,
1999.................... (1,532,091) --
F-7
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
[Enlarge/Download Table]
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED
--------------------- --------------------- PAID-IN DEFERRED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS)
---------- -------- ---------- -------- ----------- ------------- --------------
Conversion of common
shares to Series A Class
1 convertible preferred
shares and distribution
to majority stockholder
for fair value of
preferred shares issued
in excess of common
shares converted
(unaudited)............. 5,000,000 5,000 (5,000,000) (5,000) 750,000 -- --
Issuance of convertible
preferred shares for
cash and services at
prices ranging from
$1.50 to $6.00 per
share, net of offering
costs of $95,069
(unaudited)............. 10,249,997 10,250 -- -- 35,644,677 -- --
Issuance of convertible
preferred shares, common
shares and options to
purchase common shares
in the acquisitions of
Zentropic Computing,
United System Engineers,
Fireplug Computers,
Moreton Bay Ventures and
RT-Control
(unaudited)............. 1,513,816 1,513 3,078,559 3,078 26,691,583 -- --
Issuance of common shares
in exchange for
investment in Caldera
Systems, Inc. and
distribution to majority
stockholder for fair
value of shares issued
in excess of the
carryover basis of
investment
(unaudited)............. -- -- 3,238,437 3,238 4,368,652 -- --
Issuance of common shares
for cash and services
(unaudited)............. -- -- 1,500,000 1,500 2,023,500 -- --
Issuance of common shares
upon exercise of stock
options (unaudited)..... -- -- 670,311 671 535,578 -- --
Grant of common stock
option by majority
stockholder for services
(unaudited)............. -- -- -- -- 63,374 -- --
Deferred compensation
related to stock option
grants (unaudited)...... -- -- -- -- 5,232,866 (5,232,866) --
Amortization of deferred
compensation
(unaudited)............. -- -- -- -- -- 903,546 --
Foreign currency
translation adjustments
(unaudited)............. 14,140
Unrealized gain on
marketable securities
(unaudited)............. 81,676
Net loss (unaudited)...... -- -- -- -- -- -- --
---------- ------- ---------- ------- ----------- ----------- --------
Balance, July 31, 2000
(unaudited)............. 16,763,813 $16,763 21,487,307 $21,487 $74,901,831 $(4,389,658) $ 95,816
========== ======= ========== ======= =========== =========== ========
CALDERA, INC.'S
EQUITY
(DEFICIT) IN
ACCUMULATED CARVED-OUT
DEFICIT OPERATIONS
------------ ---------------
Conversion of common
shares to Series A Class
1 convertible preferred
shares and distribution
to majority stockholder
for fair value of
preferred shares issued
in excess of common
shares converted
(unaudited)............. (750,000) --
Issuance of convertible
preferred shares for
cash and services at
prices ranging from
$1.50 to $6.00 per
share, net of offering
costs of $95,069
(unaudited)............. -- --
Issuance of convertible
preferred shares, common
shares and options to
purchase common shares
in the acquisitions of
Zentropic Computing,
United System Engineers,
Fireplug Computers,
Moreton Bay Ventures and
RT-Control
(unaudited)............. -- --
Issuance of common shares
in exchange for
investment in Caldera
Systems, Inc. and
distribution to majority
stockholder for fair
value of shares issued
in excess of the
carryover basis of
investment
(unaudited)............. (3,840,488) --
Issuance of common shares
for cash and services
(unaudited)............. -- --
Issuance of common shares
upon exercise of stock
options (unaudited)..... -- --
Grant of common stock
option by majority
stockholder for services
(unaudited)............. -- --
Deferred compensation
related to stock option
grants (unaudited)...... -- --
Amortization of deferred
compensation
(unaudited)............. -- --
Foreign currency
translation adjustments
(unaudited).............
Unrealized gain on
marketable securities
(unaudited).............
Net loss (unaudited)...... (14,055,500) --
------------ -----------
Balance, July 31, 2000
(unaudited)............. $(20,178,079) $ --
============ ===========
See accompanying notes to consolidated financial statements.
F-8
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
[Enlarge/Download Table]
YEAR ENDED NINE MONTHS ENDED
OCTOBER 31, JULY 31,
------------------------------------- --------------------------
1997 1998 1999 1999 2000
--------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss................................................. $(876,906) $(2,186,271) $(1,053,675) $(1,364,524) $(14,055,500)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 191,307 237,635 101,217 80,347 2,161,062
Acquired in-process research and development........... -- -- -- -- 2,900,000
Non-cash stock related compensation.................... -- -- 250,265 -- 1,791,920
Gain on disposition of assets.......................... -- -- -- -- (6,368)
Deferred income tax benefit............................ -- -- -- -- (59,101)
Accrued interest applicable to funding of carved-out
operations of Caldera, Inc........................... 51,048 183,362 -- -- --
Accrued interest on convertible note payable to
majority stockholder................................. -- 3,542 138,845 94,031 57,769
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable, net............................. 150,764 (103,896) (719,164) (86,064) (339,712)
Related party receivables............................ -- (29,884) (2,232) 21,796 (27,076)
Inventories.......................................... -- (5,434) 1,808 1,788 (315,256)
Other current assets................................. (36,853) 30,346 4,510 4,507 54,746
Other assets......................................... -- (85,000) 85,000 85,000 (856,561)
Accounts payable..................................... 113,515 200,929 (249,360) (265,279) 1,036,085
Accrued liabilities.................................. 25,652 117,128 147,799 103,779 178,325
Deferred revenue..................................... 196,817 428,615 (488,920) (136,932) (137,066)
Related party payables............................... -- 5,538 30,207 21,729 (125,094)
--------- ----------- ----------- ----------- ------------
Net cash used in operating activities.............. (184,656) (1,203,390) (1,753,700) (1,439,822) (7,741,827)
--------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Purchase of property and equipment....................... (108,473) (72,342) (189,805) (175,958) (917,581)
Proceeds from sale of property and equipment............. -- -- -- -- 75,000
Advances to companies subsequently acquired.............. -- -- -- -- (578,607)
Net cash paid in acquisitions............................ -- -- -- -- (155,954)
--------- ----------- ----------- ----------- ------------
Net cash used in investing activities.............. (108,473) (72,342) (189,805) (175,958) (1,577,142)
--------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Borrowings from majority stockholder prior to
reorganization......................................... 343,768 941,392 -- -- --
Borrowings from majority stockholder under convertible
promissory note........................................ -- 400,000 1,890,000 1,890,000 --
Repayment of borrowings from majority stockholder........ -- -- -- -- (2,490,135)
Repayment of long term debt.............................. -- -- -- -- (201,362)
Net proceeds from issuance of preferred stock............ -- -- -- -- 35,114,927
Proceeds from the sale of common stock................... -- -- -- -- 1,200,000
Proceeds from the exercise of common stock options....... -- -- -- -- 536,249
--------- ----------- ----------- ----------- ------------
Net cash provided by financing activities.......... 343,768 1,341,392 1,890,000 1,890,000 34,159,679
--------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash............................ 50,639 65,660 (53,505) 274,220 24,840,710
Foreign currency translation adjustments................... (11,463) 7,222 4,241 4,241 14,140
Cash, beginning of the period.............................. 5,000 44,176 117,058 117,058 67,794
--------- ----------- ----------- ----------- ------------
Cash, end of the period.................................... $ 44,176 $ 117,058 $ 67,794 $ 395,519 $ 24,922,644
========= =========== =========== =========== ============
See accompanying notes to consolidated financial statements.
F-9
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH
[Enlarge/Download Table]
YEAR ENDED NINE MONTHS ENDED
OCTOBER 31, JULY 31,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
--------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Supplemental disclosure of cash flow information:
Cash paid for interest................................... $ -- $ -- $ -- $ -- $ 200,156
Supplemental schedule of noncash investing and financing
activities:
Issuance of convertible preferred stock, common stock and
common stock options in connection with acquisitions:
Assets acquired........................................ $ -- $ -- $ -- $ -- $31,951,987
Liabilities assumed.................................... $ -- $ -- $ -- $ -- $ 3,332,350
Common stock issued.................................... $ -- $ -- $ -- $ -- $14,631,857
Convertible preferred stock issued..................... $ -- $ -- $ -- $ -- $ 9,082,895
Fair value of common stock options issued.............. $ -- $ -- $ -- $ -- $ 2,981,422
Issuance of common stock in connection with the
acquisition of certain net assets from Caldera, Inc.
recorded at carryover basis............................ $ -- $ 701,002 $ -- $ -- $ --
Issuance of common stock in exchange for investment in
Caldera Systems, Inc. recorded at carryover basis...... $ -- $ -- $ -- $ -- $ 531,402
Distribution to majority stockholder for fair value of
shares issued in excess of the carryover basis of the
investment in Caldera Systems, Inc..................... $ -- $ -- $ -- $ -- $ 3,840,488
Conversion of 5,000,000 shares of common stock to
5,000,000 shares of Series A Class 1 convertible
preferred stock........................................ $ -- $ -- $ -- $ -- $ 5,000
Distribution to majority stockholder for fair value of
preferred shares issued in excess of common shares
converted.............................................. $ -- $ -- $ -- $ -- $ 750,000
Issuance of convertible preferred stock for services..... $ -- $ -- $ -- $ -- $ 540,000
Receipt of non-marketable securities as payment for
services............................................... $ -- $ -- $ -- $ -- $ 300,000
Unrealized gain on marketable securities................. $ -- $ -- $ -- $ -- $ 81,676
See accompanying notes to consolidated financial statements.
F-10
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Lineo, Inc. ("Lineo") was originally incorporated as a Utah corporation on
August 26, 1998 as Caldera Thin Clients, Inc. and was reincorporated as a
Delaware corporation on January 21, 2000. Lineo began operations in July 1996 as
part of Caldera, Inc. ("Caldera").
Prior to July 1996, Caldera was developing and marketing Linux operating
system software and related products for desktop personal computers and servers.
On July 23, 1996, through an asset purchase, Caldera acquired certain rights
related to a DOS-based operating system, which was marketed primarily as an
embedded operating system in non-desktop microprocessors. Caldera continued the
development of the DOS-based operating system for embedded applications. Caldera
subsequently made the strategic determination to separate its two business lines
into separate entities and, effective September 1, 1998, transferred certain of
the assets relating to the DOS-based operating system to Lineo in exchange for
18,000,000 shares of common stock. Also effective September 1, 1998, Caldera
sold certain assets not related to the DOS-based operating system to Caldera
Systems, Inc. ("Caldera Systems"). Prior to the reorganization of Caldera, The
Canopy Group ("Canopy") was the majority shareholder of Caldera and continued to
be the majority shareholder of Lineo and was the sole shareholder of Caldera
Systems.
Since Caldera was the sole shareholder of Lineo, the transfer of the
DOS-based operations from Caldera to Lineo has been treated as a reorganization
of entities under common control with the assets and liabilities reflected at
carry-over basis in a manner similar to a pooling of interests. The accompanying
consolidated financial statements include the carved-out operations of Caldera
related to the DOS-based operations through September 1, 1998.
The revenue of the carved-out operations of Caldera reflect actual revenue
derived from sales of DOS-based operating system products and the expenses of
the carved-out operations reflect actual expenses associated with the DOS-based
business and an allocated portion of common expenses. The allocated common
expenses consist primarily of rent, depreciation, interest and personnel
benefits. Rent, depreciation and personnel benefits were allocated based upon
actual personnel expense. Interest was allocated based upon borrowings related
to the carved-out operations of Caldera. Management believes that the allocation
methods used are reasonable and reflect its best estimate of the expenses that
would have been incurred by the Company as a stand-alone entity.
Prior to the reorganization, the net losses of Caldera were funded through
loans and equity contributions from Canopy. The funding applicable to the
carved-out operations has been reflected as a component of Caldera Inc.'s Equity
(Deficit) in Carved-out Operations included in the accompanying consolidated
statements of stockholders' equity (deficit). This funding has been offset by
the accumulated losses applicable to the carved-out operations. The resulting
deficit balance as of the date of reorganization, September 1, 1998, of $701,002
has been reflected as a deemed distribution to Caldera and charged to equity.
In connection with the reorganization, the assets transferred to Lineo
included the stock of a wholly owned subsidiary of Caldera, located in England,
Caldera (UK) Limited ("Caldera Ltd"), which performed research and development
activities. The operations of Caldera Ltd were terminated in February 1999.
Effective April 3, 2000, Lineo acquired Zentropic Computing, LLC ("Zentropic"),
a
F-11
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)
Virginia limited liability company. Zentropic provides Linux solutions for
time-sensitive processing functions, referred to as real-time technology.
Effective May 1, 2000, the Company acquired the following entities: United
System Engineers, Inc. ("United System"), a Japanese corporation that is a
custom systems engineering company with experience in embedded operating
systems; Fireplug Computers Inc. ("Fireplug"), a Canadian corporation that
provides contract engineering development of embedded Linux network application
software solutions and embedded Linux tools; Inup S.A. ("Inup"), a French
corporation that develops Linux-based solutions for embedded devices that
provide software backup in the event of hardware failures; and Moreton Bay
Ventures Pty Ltd. ("Moreton Bay"), an Australian corporation that develops
embedded virtual private network solutions for Internet appliances and provides
engineering development for the Motorola ColdFire microprocessor platform. On
May 12, 2000, the Company acquired RT-Control, Inc. ("RT-Control"), a Canadian
corporation that was the principal developer of the mClinux version of Linux for
micro controllers. The operations of Zentropic, United System, Fireplug, Inup,
Moreton Bay and RT-Control are included in the accompanying financial statements
from the date of their respective acquisitions. Lineo, its subsidiaries and the
carved-out operations of Caldera are collectively referred to as the "Company."
Historically, the Company developed, marketed and supported DOS-based
operating system products for the embedded systems market. Starting in
January 1999, the Company focused its strategy on developing embedded operating
systems based on Linux. In January 2000, the Company commercially released the
first version of its embedded Linux operating system. The Company sells and
distributes its software products through license agreements principally with
original equipment manufacturers ("OEMs"). These sales occur throughout the
United States and in certain international locations.
The Company is subject to certain risks including the uncertainty of market
acceptance and demand for Linux-based products and services, competition from
larger, more established companies, short product life cycles, the Company's
ability to develop and bring to market new products on a timely basis,
dependence on key employees, the ability to attract and retain additional
qualified personnel and the ability to obtain adequate financing to support
growth.
(2) SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of July 31, 2000 and for the
nine months ended July 31, 1999 and 2000 have been prepared on the same basis as
the audited financial statements and, in the opinion of management, reflect all
normal recurring adjustments necessary to present fairly the financial
information set forth therein, in accordance with accounting principles
generally accepted in the United States. The results of operations for the nine
months ended July 31, 2000 are not necessarily indicative of the results to be
expected for the entire fiscal year ending October 31, 2000.
F-12
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
The Company's Board of Directors has authorized the filing of a registration
statement with the Securities and Exchange Commission to register shares of its
common stock in connection with a proposed initial public offering (the "IPO").
If the IPO is consummated under the terms presently anticipated, the outstanding
shares of convertible preferred stock as of July 31, 2000 will be converted into
16,763,813 shares of common stock upon the closing of the IPO (see Note 4.) The
effect of the conversion of the preferred stock outstanding at July 31, 2000 has
been reflected as unaudited pro forma stockholders' equity in the accompanying
consolidated balance sheet.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying consolidated financial
statements for cash, accounts receivable and accounts payable approximate fair
values because of the immediate or short-term maturities of these financial
instruments. The carrying amounts of the Company's debt obligations approximate
fair value based on current interest rates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Lineo, its subsidiaries and the carved-out operations of Caldera prior to
Lineo's incorporation after elimination of intercompany accounts and
transactions.
FOREIGN CURRENCY TRANSLATION
For purposes of consolidation, the Company has determined the functional
currency for each subsidiary to be the respective subsidiary's local currency.
Accordingly, translation gains and losses are included as a component of
comprehensive loss.
CASH AND CASH EQUIVALENTS
For purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with maturities of three or fewer
months to be cash equivalents. Cash equivalents primarily consist of investments
in money market mutual funds.
F-13
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
In connection with the acquisition of Moreton Bay, the Company received
2,000,000 shares of common stock of Netcomm Ltd ("Netcomm"). The Company
recorded the shares of Netcomm's common stock based upon the quoted market price
on the date of the acquisition. The Company's investment in Netcomm has been
categorized as available for sale, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Unrealized holding gains and losses are reflected
as a component of stockholders' equity until realized. The cost, gross
unrealized gain and fair value of the marketable securities as of July 31, 2000
are as follows:
[Download Table]
Cost........................................................ $245,028
Gross unrealized gain....................................... 81,676
--------
Fair value.................................................. $326,704
========
INVENTORIES
Inventories consist primarily of completed products and raw materials.
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market value. As of October 31, 1998 and 1999 and July 31, 2000
inventories consisted of raw materials of $0, $0 and $204,488, respectively, and
finished goods of $5,434, $3,626 and $201,551, respectively.
Provisions, when required, are made to reduce excess and obsolete
inventories to their estimated net realizable values. Due to competitive
pressures and technological innovation, it is possible that estimates of the net
realizable value could change in the near term.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Computer equipment and furniture and fixtures are depreciated
using the straight-line method over the estimated useful life of the asset,
typically three to five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful life of the
improvement or the remaining term of the lease agreement.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation and amortization are removed from the accounts and any resulting
gain or loss is recognized in the statement of operations.
CAPITALIZED SOFTWARE COSTS
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," development costs
F-14
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
incurred in the research and development of new software products to be sold,
leased or otherwise marketed are expensed as incurred until technological
feasibility in the form of a working model has been established. Internally
generated capitalizable software development costs have not been material for
the years ended October 31, 1997, 1998 and 1999 and the nine months ended
July 31, 2000. The Company has charged its software development costs to
research and development expense in the accompanying consolidated statements of
operations.
OTHER ASSETS
As of October 31, 1998, other assets consisted of prepaid software license
fees of $85,000. During the year ended October 31, 1999, as a result of the
Company focusing its strategy on Linux-based products for the embedded market,
the determination was made that the remaining balance of prepaid software
license fees was impaired and was therefore expensed as part of cost of revenue.
As of July 31, 2000, other assets consisted primarily of legal and accounting
fees capitalized in connection with the Company's anticipated initial public
offering. Capitalized offering costs will be netted against the actual offering
proceeds.
INTANGIBLE ASSETS
Intangible assets include work force, core technology, noncompetition
agreements and goodwill associated with the acquisitions (see Note 13).
Intangible assets are amortized using the straight-line method over the
following periods:
[Download Table]
PERIOD
------
Goodwill.................................................... 3-5 years
Core Technology............................................. 3-5 years
Assembled workforce......................................... 2-5 years
Noncompetition agreements................................... 2 years
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including intangibles, for
impairment when events or changes in circumstances indicate that the book value
of an asset may not be recoverable. The Company evaluates, at each balance sheet
date, whether events and circumstances have occurred which indicate possible
impairment. The Company uses an estimate of future undiscounted net cash flows
of the related asset or group of assets over the remaining life in measuring
whether the assets are recoverable. As of October 31, 1999 and July 31, 2000,
the Company does not consider any of its long-lived assets to be impaired.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position No. 97-2
("SOP 97-2"), "Software Revenue
F-15
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recognition." Revenue from the sale of software is recognized upon delivery of
the product when persuasive evidence of an arrangement exists, the price is
fixed or determinable, collection is probable and no significant post-delivery
obligations exist. Certain of the Company's software sales agreements include
post-contract maintenance and support ("PCS") services. If these PCS services
are to be provided for a period of one year or less, the estimated cost of
providing the PCS is insignificant and there is no commitment to provide
upgrades or enhancements, revenue is recognized upon delivery and the estimated
costs of providing the PCS are accrued. If the PCS services are to be provided
for a period greater than one year, or if the PCS includes upgrades or
enhancements, software revenue is deferred and recognized over the PCS period or
deferred until no significant obligations exist. As of October 31, 1998 and 1999
and July 31, 2000, the Company had deferred revenue of $782,075, $293,155 and
$481,671, respectively. Additionally, the Company has not recognized revenue on
any contracts that may include customer cancellation or termination clauses that
indicate a demonstration period or otherwise incomplete transaction.
The Company has historically generated a majority of its revenue from
software products sold directly to OEMs. Through April 30, 2000, some of the
Company's license agreements have included bundled maintenance and support
services. Because the Company had not established the necessary vendor specific
objective evidence until the second quarter of fiscal year 2000, the Company
could not recognize separately the service revenue. Accordingly, revenue for
these licenses was deferred and recognized over the term of the maintenance and
support services.
During the nine months ended July 31, 2000, the Company has begun to enter
into multiple-element arrangements including software products, maintenance and
support, engineering and training services. Generally the Company's products do
not require significant customization or modification before the products can be
used by the customer as intended. In these multiple-element arrangements,
revenue is allocated to each element based on vendor-specific objective evidence
("VSOE") of fair value for each element. The value of the VSOE is determined
based on pricing for the individual element as if sold separately or prices
established by management for elements not yet sold separately. If a discount is
offered on these multiple-element arrangements, a proportionate amount of the
discount is allocated to each element based on VSOE of fair value except for
elements containing upgrade rights for which no portion of the discount is
allocated. Software license revenue under a multiple-element arrangement is
recognized as described above if the service elements are not essential to the
functionality of the software. If any services to be provided are essential to
the functionality of the software product, contract accounting is applied to
both the software and service elements. To date, the Company has not entered
into any agreements requiring contract accounting.
In December 1998, the AICPA issued Statement of Position No. 98-9
"Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to
Certain Transactions" ("SOP 98-9"). SOP 98-9 amended SOP 97-2 to require
recognition of revenue using a "residual method" in certain circumstances. The
Company adopted SOP 98-9 effective for transactions entered into by the Company
beginning in its fiscal year 2000. The adoption of this statement did not have a
material effect on the Company's revenue recognition policies.
F-16
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Service revenue includes fees from consulting, training, support and other
services. The services are not considered essential to the functionality of the
software and are available from other vendors. Service revenue is generally
recognized as the work is performed using the percentage of completion method
based on costs incurred to date compared to the estimated costs at completion.
Amounts received in advance of the performance of the services are recorded as
deferred revenue and are recognized as the services are performed.
Hardware revenue is recognized upon delivery to the customer.
ROYALTIES
Royalties paid by the Company on products licensed from third parties that
are incorporated into software products sold by the Company are expensed as cost
of revenue on a per unit basis as software products are sold. Royalties paid in
advance of the sale of the Company's software products are recorded as prepaid
expenses and included in other current assets. Prepaid royalties amounted to $0
and $25,000 as of October 31, 1999 and July 31, 2000, respectively.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist of salaries, commissions and related
expenses for personnel engaged in marketing, sales and sales support functions
as well as costs associated with trade shows, advertising and promotional
activities. The Company expenses the cost of advertising the first time the
advertising takes place. Advertising expenses totaled $0, $2,400, and $2,240 for
the years ended October 31, 1997, 1998 and 1999, respectively and $2,240 and
$118,666 for the nine months ended July 31, 1999 and 2000, respectively.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation issued to directors,
officers and employees under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations
("APB 25"). Under APB 25, compensation related to stock options, if any, is
recorded if an option's exercise price on the measurement date is below the fair
value of the Company's common stock and amortized to expense over the vesting
period. Compensation expense for stock awards or purchases, if any, is
recognized if the award or purchase price on the measurement date is below the
fair value of the Company's common stock and is recognized on the date of award
or purchase.
The Company accounts for its stock-based compensation issued to other than
employees in accordance with SFAS No. 123 "Accounting for Stock-Based
Compensation" and related interpretations ("SFAS 123"). Under SFAS 123,
stock-based compensation is determined as either the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. The measurement date for these issuances
is the earlier of either the date at which a commitment for performance by the
recipient to earn the equity instruments is reached or the date at which the
recipient's performance is complete.
F-17
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Prior to January 6, 2000, the Company was not directly subject to income
taxes as the Company's operations were consolidated with those of Caldera for
income tax reporting purposes. The Company was not an income tax reporting
entity nor did it have a tax-sharing agreement with Caldera. As a result,
Caldera allocated no income tax expense or related current or deferred income
tax assets or liabilities to the Company and the liabilities or benefits
attributable to the Company's operations were recorded by Caldera. Had Caldera
allocated income taxes to the Company as if it were a separate taxable entity,
no income tax expense or benefit would have been recorded due to the Company's
net operating loss position and the uncertainty of future realization of any
deferred income tax assets. A full valuation allowance would have been recorded
against the Company's net deferred income tax assets.
On January 6, 2000, as a result of the issuance of common stock by the
Company to Caldera Systems (see Note 5), the Company could no longer be
consolidated with Caldera for income tax reporting purposes and it became a
separate taxable entity. Accordingly, the Company began to account for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, the Company recognizes a liability or asset for the deferred income tax
consequences of all temporary differences between the income tax bases of assets
and liabilities and their reported amounts in the consolidated financial
statements that will result in taxable or deductible amounts in future years
when the reported amounts of the assets and liabilities are recovered or
settled. These deferred income tax assets or liabilities are measured using the
enacted income tax rates that will be in effect when the differences are
expected to reverse. Deferred income tax assets are reviewed periodically for
recoverability and valuation allowances are provided, as necessary.
CONCENTRATION OF CREDIT RISK
The Company offers credit terms on the sale of its software products to
OEMs and other customers. The Company performs ongoing credit evaluations of its
customers' financial condition and requires no collateral from its customers.
The Company maintains an allowance for uncollectable accounts receivable based
upon the expected collectibility of all accounts receivable. As of October 31,
1998 and 1999 and July 31, 2000, the allowance for bad debts was $13,000,
$68,000 and $114,000, respectively. As of October 31, 1999, two customers
accounted for approximately 73 percent of the gross accounts receivable balance.
As of July 31, 2000, three customers accounted for approximately 52 percent of
the gross accounts receivable balance.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior periods' consolidated
financial statements to conform with the current period presentation.
F-18
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 establishes new accounting and
reporting standards for companies to report information about derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to have a material impact on the Company's results of
operations, financial position or liquidity.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of Accounting Principles Board Opinion No. 25
("APB No. 25")." This interpretation clarifies the definition of employee for
purposes of applying APB No. 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. This interpretation was effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occurred after
either December 15, 1998, or January 12, 2000. To the extent that this
interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this interpretation are recognized on a prospective basis
from July 1, 2000. The Company has adopted the provisions of this
interpretation, which adoption did not have a material impact on the Company's
results of operations, financial position or liquidity.
NET LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings Per Share", and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net loss per common share
("Basic EPS") is computed by dividing net loss available to common stockholders
by the weighted average number of common shares outstanding. Diluted net loss
per common share ("Diluted EPS") is computed by dividing net loss by the sum of
the weighted average number of common shares outstanding and the weighted
average dilutive common share equivalents then outstanding.
Common share equivalents consist of shares issuable upon the exercise of
stock options, shares issuable upon the conversion of the convertible note
payable to majority stockholder and related accrued interest, and shares
issuable upon conversion of convertible preferred stock. As of October 31, 1998
and 1999 and July 31, 1999 and 2000, there were 403,542, 3,388,087, 2,342,679
and 20,463,411 outstanding common share equivalents, respectively, that were not
included in the computation of diluted net loss per common share as their effect
would have been anti-dilutive, thereby decreasing the net loss per common share.
There were no common share equivalents outstanding as of October 31, 1997. For
the years ended October 31, 1997 and 1998, the 18,000,000 shares of common stock
issued in the initial capitalization of the Company were treated as outstanding
for the entire period.
F-19
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Supplemental pro forma net loss per share has been presented in the
accompanying consolidated statement of operations for the fiscal year ended
October 31, 1999 and the nine months ended July 31, 2000 to give effect to the
conversion of all shares of convertible preferred stock outstanding which will
occur upon consummation of the Company's initial public offering. The pro forma
net loss per common share has been calculated using the if-converted method as
if the shares had been converted on the dates of issuance.
(3) NOTES PAYABLE
CONVERTIBLE PROMISSORY NOTE PAYABLE TO MAJORITY STOCKHOLDER
On September 11, 1998, Lineo and Canopy entered into a Secured Convertible
Promissory Note Agreement (the "Note Agreement") pursuant to which the Company
could borrow up to $2,290,000 to fund ongoing operations. Borrowings under the
Note Agreement accrued interest at a rate of 7.25 percent per year, were due
30 days after demand and were secured by essentially all assets of the Company.
At Canopy's option, borrowings under the Note Agreement, together with accrued
interest thereon, were convertible into shares of the Company's common stock at
$1.00 per share, which was deemed to be equal to or greater than the estimated
fair market value of the Company's common stock on September 11, 1998. Under the
Note Agreement, the Company borrowed $400,000 and $1,890,000 during the years
ended October 31, 1998 and 1999, respectively. Additionally, the Company accrued
interest on borrowings under the Note Agreement of $3,542, $138,845 and $57,769
during the years ended October 31, 1998 and 1999 and the nine months ended
July 31, 2000, respectively.
On January 12, 2000, the Company repaid $500,000 of principal and interest
under the Note Agreement. Concurrently, the Note Agreement was amended to delete
the conversion provision. No principal or interest was converted to common stock
prior to the deletion of the conversion provision. The Company repaid all
outstanding principal and interest due under the Note Agreement on March 22,
2000 and the Note Agreement was cancelled.
LONG-TERM DEBT
Through its acquisition of United System, the Company assumed long-term debt
totaling $1,856,994 on the date of acquisition. At July 31, 2000, $1,655,632
remains outstanding. The debt consists of three separate loans with banks in
Japan with interest rates ranging from 2.3 percent to 3.2 percent per annum.
Principal and interest payments are due monthly through 2003 with current
maturities of $1,099,695 as of July 31, 2000. The loans are secured by a
restricted time deposit of $197,863 and certain property. The lending banks have
the right to offset cash deposited with them against any debt or obligations
that become due and, in the case of default and certain other specified events,
against all other debt payable to the banks.
(4) PREFERRED STOCK
The Company's articles of incorporation provide for the issuance of up to
30,000,000 shares of $0.001 par value preferred stock in one or more series. The
Company's Board of Directors is
F-20
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(4) PREFERRED STOCK (CONTINUED)
authorized, without shareholder approval, to designate and determine the
preferences, limitations and relative rights granted to or imposed upon any
series of preferred stock or increase or decrease the number of shares
constituting any series of preferred stock.
The Company's Board of Directors designated 7,500,000 shares as Series A
Convertible Preferred Stock ("Series A"), 5,000,000 of which were designated as
Series A Class 1 Convertible Preferred Stock ("Series A Class 1") and 2,500,000
of which were designated as Series A Class 2 Convertible Preferred Stock
("Series A Class 2), 4,850,000 shares as Series B Convertible Preferred Stock
("Series B"), 3,000,000 shares as Series C Convertible Preferred Stock ("Series
C") and 2,000,000 shares as Series D Convertible Preferred Stock ("Series D").
RIGHTS AND PREFERENCES
The Series A, B and C shares have priority over any other class or series of
outstanding capital stock of the Company with respect to dividend rights and
liquidation, winding up or dissolution rights. The Series D shares rank junior
to the Series A, B and C shares in all respects but have priority over the
common stock of the Company with respect to liquidation, winding up or
dissolution rights. The Series A, B, C and D shares are entitled to receive,
when, as and if declared by the Board of Directors, dividends at the same rate
as dividends are paid with respect to the Company's common stock. In the event
of any voluntary or involuntary liquidation, dissolution or winding up of the
Company, each holder of Series A, B and C shares then outstanding shall be
entitled to receive, on a PARI PASSU basis, out of the assets available for
distribution to stockholders an amount equal to the greater of (i) the sum of
(1) the respective stated value per share plus (2) an amount equal to all unpaid
accruing dividends (whether or not declared) plus (3) any other dividends
declared but unpaid, and (ii) the amount that such holder of Series A, B or C
shares would hold had all Series A, B and C shares been converted to common
immediately prior to the liquidation, dissolution, or winding up after giving
consideration to the amounts to be received by the holders of Series D shares.
In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Company, each holder of Series D shares then outstanding shall be
entitled to receive out of the assets available for distribution to stockholders
an amount equal to the sum of (1) the respective stated value per share plus
(2) any dividends declared but unpaid. After payment of the full liquidation
preference to the Series A, B, C and D shares and any other preferences payable
to preferred stockholders, any remaining assets of the Company then available
are to be distributed ratably among the holders of Series A, B, C and common
shares.
A share exchange, merger or sale of substantially all of the assets of the
Company, as defined, is to be regarded as a liquidation, dissolution or winding
up of the affairs of the Company and the Series A, B, C and D shares would be
entitled to the preference payment described above.
Each share of Series A, B, C and D is entitled to one vote for each share of
common stock that would be issuable upon conversion of such share.
All but one holder of Series A, B and C shares has certain rights with
respect to registration of the common shares issued or issuable upon conversion
of their shares. Additionally, the holders of
F-21
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(4) PREFERRED STOCK (CONTINUED)
Series A, B or C shares have demand rights that require the Company to use its
best efforts to register the requested shares in accordance with the Securities
Exchange Act of 1933. The Company has agreed to bear all expenses in connection
with any registration.
CONVERTIBILITY
Any holder of Series A, B, C or D shares may convert all or any shares of
Series A, B, C or D shares into common stock at any time. Each share of
Series A, B and C automatically converts into common stock (i) immediately prior
to the closing of a firm commitment underwritten public offering of common stock
of the Company at a minimum price of $10 per share and gross proceeds of at
least $15,000,000 (a "Qualified Offering"), (ii) upon approval of at least
two-thirds of the then outstanding shares of the respective series or
(iii) upon the cumulative conversion of at least two-thirds of the then
outstanding shares of the respective series. Each share of Series D
automatically converts into common stock (i) immediately prior to the closing of
a firm commitment underwritten public offering of common stock of the Company at
a minimum price of $7.50 per share and gross proceeds of at least $7,500,000 (a
"Qualified Offering"), (ii) upon a share exchange or merger of the Company into
or with another entity resulting in a change in control or (iii) upon the
approval of at least two-thirds of the then outstanding shares of preferred
stock. Each Series A, B, C and D share initially converts into one share of
common stock. The conversion ratio is adjusted upon the happening of certain
events, including the issuance of additional shares of common stock as a
dividend or other distribution or changes resulting from a stock split.
CONVERSION OF COMMON STOCK INTO SERIES A CLASS 1
On February 17, 2000, the Company entered into a recapitalization agreement
with Canopy whereby 5,000,000 shares of common stock owned by Canopy were
exchanged for 5,000,000 shares of Series A Class 1. In connection with the
exchange, the Company recorded a deemed distribution to Canopy of $750,000
representing the difference between the estimated fair value of the shares of
Series A Class 1 of $1.50 per share based on the offering price of Series A
Class 2 shares and the estimated fair value of the shares of common stock of
$1.35 per share on February 17, 2000.
ISSUANCE OF SERIES A CLASS 2
On February 17, 2000, the Company sold 2,500,000 shares of Series A Class 2
at $1.50 per share for cash proceeds of $3,750,000. The Company incurred $47,322
of direct offering expenses in connection with the sale of the Series A Class 2
shares which have been netted against the total proceeds.
ISSUANCE OF SERIES B
On March 15, 2000, the Company issued 4,833,331 shares of Series B at $3.00
per share for cash proceeds of $14,260,000 and services of $240,000. The Company
incurred $37,751 of direct offering expenses in connection with the sale of the
Series B shares which have been netted against the proceeds.
F-22
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(4) PREFERRED STOCK (CONTINUED)
ISSUANCE OF SERIES C
On April 28, 2000, the Company issued 2,916,666 shares of Series C at $6.00
per share for cash proceeds of $17,199,996 and services of $300,000. On May 1,
2000, the Company issued 83,334 shares of Series C in conjunction with the
acquisition of Inup (see Note 13). The Company incurred $9,996 of direct
offering expenses in connection with the sale of the Series C shares which have
been netted against the total proceeds.
ISSUANCE OF SERIES D
From May 1, 2000 through May 12, 2000, the Company issued 1,430,482 shares
of Series D in connection with the acquisitions of Fireplug, Moreton Bay and R-T
Control (see Note 13).
(5) COMMON STOCK
STOCK SPLIT
On September 24, 1999, the Company's Board of Directors approved a
two-for-one stock split for holders of common stock. This stock split has been
retroactively reflected in the accompanying consolidated financial statements
for all periods presented.
REINCORPORATION AS A DELAWARE CORPORATION
On January 21, 2000, Lineo was reincorporated in Delaware. The
reincorporation was effected by way of a merger with a newly-formed Delaware
subsidiary, and the associated issuance of one share of common stock of the
subsidiary for each share of common stock of the Company held by the
stockholders of record. All share and per share amounts in the accompanying
consolidated financial statements have been adjusted to retroactively reflect
the reincorporation.
COMMON STOCK TRANSACTIONS
As discussed in Note 1, on September 1, 1998, in connection with the initial
capitalization of Lineo, the Predecessor was issued 18,000,000 shares of common
stock in exchange for certain net assets associated with the DOS-based
operations of the Predecessor. The net assets acquired from the Predecessor were
recorded at the Predecessor's carryover basis, which was a deficit of $701,002.
On December 29, 1999, the Company's Board of Directors authorized the
issuance of 1,500,000 shares of common stock to two officers of the Company at
$0.80 per share. The estimated fair value of the common shares on December 29,
1999 for financial statement purposes was deemed to be $1.35 per share. The
difference between the estimated fair value and the purchase price of $0.55 per
share, or $825,000 in aggregate, has been recorded as non-cash stock-related
compensation expense by the Company.
F-23
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(5) COMMON STOCK (CONTINUED)
STOCK EXCHANGE AGREEMENT WITH CALDERA SYSTEMS
On January 6, 2000, the Company and Caldera Systems entered into a stock
purchase and sale agreement. Pursuant to the stock purchase agreement, the
Company agreed to purchase 1,250,000 shares of common stock of Caldera Systems
(approximately 3.5 percent of Caldera Systems' then outstanding common stock) in
exchange for 3,238,437 shares of the Company's common stock.
Because Caldera Systems is also majority owned by Canopy, the investment in
Caldera Systems has been accounted for as a transaction between entities under
common control with the transfer being reflected in the accompanying financial
statements at Caldera Systems' carry over basis. At the date of the agreement,
Caldera Systems had stockholders' equity of approximately $15,113,000, of which
approximately $530,000 relates to the 3.5 percent interest acquired by Lineo.
Accordingly, the investment in Caldera Systems common stock was recorded at
$531,402. Additionally, the Company recorded the estimated fair value of the
shares of its common stock issued to Caldera Systems of $1.35 per share, or
$4,371,890 in aggregate, with the difference between the $4,371,890 and the
$531,402 investment recorded as a deemed distribution to Canopy.
In connection with the acquisition of United System, the Company received
16,833 shares of common stock of Caldera Systems having a fair value of $213,877
(see Note 9). The Company currently intends to hold all shares of Caldera
Systems indefinitely.
On May 11, 2000, Canopy transferred 1,761,563 shares of the Company's common
stock which were held by Canopy to Caldera Systems. As a result of this
transaction, Caldera Systems held a total of 5,000,000 shares of the Company's
common stock (see Note 14). In management's opinion, the transfer between Canopy
and Caldera Systems was a transaction between stockholders from which the
Company received no benefit.
(6) STOCK OPTION PLAN
THE 1999 STOCK OPTION PLAN
During fiscal year 1999, the Company adopted the 1999 Stock Option Plan (the
"1999 Plan") that provides for the granting of incentive or nonqualified stock
options to purchase shares of common stock. The 1999 Plan is administered by the
compensation committee (the "Committee") of Company's Board of Directors (the
"Board"). Under the 1999 Plan, the Board can grant up to 7,000,000 options to
employees, directors and to such other persons as the Board selects. Options
granted under the 1999 Plan are subject to expiration and vesting terms as
determined by the Board. No options can expire more than ten years from the date
of grant. The exercise price for the options may be paid in cash or, as approved
by the Board, in shares of the Company's common stock valued at fair market
value on the exercise date. As of July 31, 2000, the Board had not authorized
the exercise price of any of the options to be paid in shares of the Company's
common stock.
F-24
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(6) STOCK OPTION PLAN (CONTINUED)
A summary of stock option activity under the 1999 Plan for the year ended
October 31, 1999 and the nine months ended July 31, 2000 is as follows:
[Download Table]
WEIGHTED AVERAGE
OPTIONS PRICE RANGE EXERCISE PRICE
--------- ------------ ----------------
Balance, October 31, 1998............. -- $ -- $ --
Granted............................... 955,700 0.80 0.80
---------
Balance, October 31, 1999............. 955,700 0.80 0.80
Granted (unaudited)................... 3,424,145 0.80-6.00 3.05
Exercised (unaudited)................. (670,311) 0.80 0.80
Forfeited (unaudited)................. (4,500) 1.50-3.00 2.83
---------
Balance, July 31, 2000 (unaudited).... 3,705,034 $ 0.80-3.00 $2.88
=========
As of October 31, 1999, the 955,700 outstanding options had a remaining
contractual life of ten years and 677,469 of the options were exercisable. As of
July 31, 2000, the 3,705,034 outstanding options had a remaining contractual
life of 9.7 years and 98,097 of the options were exercisable.
As discussed in Note 13, in connection with the acquisitions, the Company
has granted options to purchase an additional 673,596 shares of common stock at
a weighted average exercise price of $2.82 per share. Additionally, the Company
has subsequently granted 1,300,805 additional options to employees as discussed
below.
STOCK-BASED COMPENSATION
During the year ended October 31, 1999 and the nine months ended July 31,
2000, the Company granted 955,700 and 3,424,145 options, respectively, with
exercises prices below the estimated fair market value on the measurement date
as determined for financial reporting purposes resulting in $310,603 and
$5,232,866, respectively, in deferred compensation. This deferred compensation
has been recorded as a component of stockholders' equity and will be amortized
as non-cash stock-related compensation over the vesting period of the underlying
stock options. Amortization of deferred compensation amounted to $250,265 for
the year ended October 31, 1999 and $903,546 for the nine months ended July 31,
2000.
Between August 1, 2000 and October 10, 2000, the Company has granted options
to purchase an additional 1,300,805 shares of common stock to employees,
officers and directors at a weighted average exercise price per share of $5.54,
resulting in approximately $2,212,279 of additional deferred compensation.
SFAS No. 123 requires pro forma information regarding net loss as if the
Company had accounted for its stock options granted under the fair value method.
The fair market value of the stock options is estimated on the date of grant
using the Black-Scholes pricing model with the following weighted-average
assumptions for grants during the year ended October 31, 1999: risk-free
interest rate of 5.65 percent; expected dividend yield of 0 percent; volatility
of 0 percent and an expected exercise life
F-25
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(6) STOCK OPTION PLAN (CONTINUED)
of five years. For purposes of the pro forma disclosures, the estimated fair
market value of the stock options is amortized over the vesting periods of the
respective stock options. The following is the pro forma disclosure and the
related impact on net loss for the year ended October 31, 1999:
[Download Table]
Net loss as reported........................................ $(1,053,675)
Pro forma net loss.......................................... (1,205,304)
(7) INCOME TAXES
As described in Note 2, prior to January 6, 2000, the Company was not
directly subject to income taxes as the Company's operations were consolidated
with those of Caldera for income tax reporting purposes. On January 6, 2000, as
a result of sales of common stock by the Company, the Company could no longer be
consolidated with Caldera for income tax reporting purposes and became a
separate taxable entity.
The loss before income tax benefit consisted of the following components for
the period from January 6, 2000 through July 31, 2000:
[Download Table]
Domestic U.S. operations.................................... $ (8,958,640)
Foreign operations.......................................... (3,384,660)
------------
$(12,343,300)
============
The components of the provision (benefit) for income taxes for the period
from January 6, 2000 through July 31, 2000 are as follows:
[Download Table]
Current:
U.S. Federal.............................................. $ --
U.S. State................................................ --
Non-U.S................................................... 6,314
-----------
6,314
===========
Deferred:
U.S. Federal.............................................. (2,388,238)
U.S. State................................................ (393,094)
Non-U.S................................................... (778,793)
Increase in valuation allowance........................... 3,501,024
-----------
(59,101)
-----------
Total income tax benefit.................................... $ (52,787)
===========
In connection with the acquisition of Zentropic (see Note 13), the Company
recorded a deferred income tax liability of $716,625 related to the acquired
intangible assets other than goodwill that are
F-26
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(7) INCOME TAXES (CONTINUED)
not deductible for income tax purposes. As a result of the deferred income tax
liability, the Company reduced the valuation allowance against its deferred
income tax assets by $657,523 on the date of the acquisition. This reduction was
included as a component of the purchase accounting in accordance with SFAS
No. 109. The significant components of the Company's deferred income tax assets
and liabilities as of July 31, 2000 are as follows:
[Download Table]
Deferred income tax assets:
Net operating loss carryforward........................... $ 4,000,107
Reserves and accrued expenses............................. 190,657
Deferred revenue.......................................... 75,248
-----------
Total deferred income tax assets.......................... 4,266,012
Valuation allowance....................................... (3,628,580)
-----------
Net deferred income tax assets............................ 637,432
-----------
Deferred income tax liabilities:
Non-deductible intangibles................................ (637,000)
Tax depreciation in excess of book........................ (432)
-----------
Total deferred income tax liabilities..................... (637,432)
-----------
Net deferred income taxes............................... $ --
===========
As of July 31, 2000, the Company had net operating loss carryforwards for
U.S. income tax reporting purposes totaling approximately $6,615,000, which
expire in 2020 and net operating loss carryforwards for foreign income tax
reporting purposes totaling approximately $2,495,000 which begin to expire in
2000.
The Internal Revenue Code and certain foreign income tax regulations contain
provisions that likely could reduce or limit the availability and utilization of
net operating loss carryforwards if certain changes in ownership have taken
place or will take place. The Company has not performed an analysis to determine
whether any such limitations have occurred.
F-27
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(8) COMMITMENTS AND CONTINGENCIES
OPERATING AGREEMENTS
The Company leases certain foreign and domestic facilities used in its
operations under operating lease agreements. The aggregate commitments under
non-cancelable operating leases in effect at October 31, 1999 were as follows:
[Download Table]
YEAR ENDING OCTOBER 31,
-----------------------
2000........................................................ $78,926
2001........................................................ 2,202
-------
$81,128
=======
The Company incurred expenses of approximately $12,796, $36,466 and $137,536
in connection with operating leases during the years ended October 31, 1997,
1998 and 1999, respectively.
During the nine months ended July 31, 2000, the Company has entered into
additional operating lease arrangements for additional facilities. The future
minimum rental payments on these premises are as follows:
[Download Table]
YEAR ENDING OCTOBER 31,
-----------------------
2000........................................................ $ 349,633
2001........................................................ 707,271
2002........................................................ 444,203
2003........................................................ 38,000
2004........................................................ 20,000
Thereafter.................................................. 120,000
----------
$1,679,107
==========
LEGAL
The Company may become party to certain legal proceedings arising in the
ordinary course of business. Management believes, after consultation with legal
counsel, that as of October 1, 1999 and July 31, 2000, no pending or threatened
legal proceedings exist which would have a material adverse effect on the
Company's financial position, liquidity or results of operations.
(9) RELATED PARTY TRANSACTIONS
CANOPY AND AFFILIATED COMPANIES
A member of the Company's Board of Directors is the president and chief
executive officer and a director of Canopy. Additionally, another director of
the Company is the chairman of Canopy's Board of Directors. As discussed in
Note 1, Canopy was the majority stockholder of Caldera. Canopy advanced $400,000
and $1,890,000 under a secured convertible promissory note agreement during the
F-28
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(9) RELATED PARTY TRANSACTIONS (CONTINUED)
years ended October 31, 1998 and 1999, respectively (see Note 3). As discussed
in Note 10, through June 30, 2000 the Company participated in a 401(k) plan
sponsored by Canopy.
The Company has entered into certain transactions with Canopy and other
entities that are majority-owned by Canopy. These transactions consist mainly of
participating in rent, joint insurance coverage and product sales and purchases.
The Company believes that the terms of these related party transactions are no
less favorable than the terms that could have been obtained from an unaffiliated
third party in similar transactions. During the years ended October 31, 1997,
1998 and 1999 and the nine months ended July 31, 2000, transactions with these
related parties were as follows:
[Enlarge/Download Table]
YEAR ENDED OCTOBER 31, NINE MONTHS
-------------------------------- ENDED JULY 31,
1997 1998 1999 2000
-------- -------- ---------- ---------------
Transactions:
Revenue....................................... $14,717 $ 42,302 $ 106,637 $ --
Purchases..................................... -- -- 1,700 26,246
Rent.......................................... 12,796 12,296 82,174 56,995
Insurance..................................... 2,076 2,321 14,955 5,796
Interest expense.............................. 51,048 186,904 138,542 57,769
Gain on disposition of assets................. -- -- -- 6,368
Balances:
Convertible note payable together with accrued
interest.................................... -- 403,542 2,432,387 --
Accounts payable.............................. -- 5,538 35,745 12,914
Accounts receivable........................... -- 29,884 32,116 59,192
The Company's related-party receivables and payables are non-interest
bearing and provide for settlement through cash payments in the normal course of
business.
As a result of an option agreement between Canopy and its chief executive
officer, who is also a director of the Company, the Company has recorded a
one-time compensation charge of $63,374 during the nine months ended July 31,
2000. The option agreement, which granted options to purchase Lineo common
shares directly from Canopy was subsequently rescinded. No shares were purchased
under the agreement.
CALDERA SYSTEMS
As discussed in Note 5, in January 2000, the Company acquired an ownership
interest in Caldera Systems. Three members of the Company's Board of Directors
are also directors of Caldera Systems, one of which is also the chairman of the
Board of Directors of Caldera Systems.
Additionally, prior to its acquisition by the Company, United System entered
into an agreement with Caldera Systems to localize certain of Caldera Systems'
software products for the Japanese market. As consideration, Caldera Systems
agreed to issue 33,667 shares of common stock to United
F-29
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(9) RELATED PARTY TRANSACTIONS (CONTINUED)
System for the services, of which 16,833 were issued immediately for services
previously rendered and the remaining 16,834 are to be issued upon completion of
the localization services.
In the event that the localized software is not accepted by Caldera Systems
under the agreement prior to December 31, 2001, then United System agreed to pay
$100,000 to Caldera Systems. However, United System will have no obligation to
pay such amount if the localized software is not accepted by Caldera Systems
prior to December 31, 2001 because Caldera Systems unreasonably withheld or
delayed such acceptance.
On the date of acquisition of United System, the 16,833 shares of common
stock of Caldera had a fair market value of $213,877. The Company has recorded
this investment as an additional investment in affiliate in the accompanying
financial statements (see Note 5).
ADVANCED SIMULATION TECHNOLOGY, INC.
On April 3, 2000, the Company acquired Zentropic (see Note 13). The former
principal members of Zentropic, who became stockholders of the Company as a
result of the acquisition, are also majority stockholders of Advanced Simulation
Technology, inc. ("ASTi"). Prior to the acquisition, Zentropic and ASTi entered
into an informal agreement whereby ASTi paid substantially all operating
expenses of Zentropic. As of April 3, 2000, Zentropic had a payable of $102,263
to ASTi. During the period from the acquisition (April 3, 2000) to July 31,
2000, the Company incurred $9,287 in expenses that were paid by ASTi on behalf
of the Company. As of July 31, 2000, the Company had no related party payable to
ASTi.
(10) EMPLOYEE BENEFIT PLANS
401(K) PLANS
Through June 30, 2000 the Company participated in a 401(k) plan sponsored by
Canopy in which all eligible employees are entitled to make pre-tax
contributions. All full-time employees became eligible for participation in the
plan once they have reached the age of 21. Eligible participants were able to
contribute up to 15 percent of annual compensation to the plan, subject to
certain IRS limitations. As of October 31, 1999, the Company had not made any
contributions to the plan, however, the Board of Directors of Canopy had
approved a discretionary matching program allowing the Company to annually match
up to 50 percent of each dollar contributed by employees up to six percent of
the employee's salary. This matching program went in effect beginning
January 1, 2000.
On July 1, 2000, the Company established the Lineo, Inc. 401(k) Plan,
discontinued its participation in the 401(k) plan sponsored by Canopy and
transferred all of the participants' assets to the new 401(k) plan. The
provisions of the Lineo, Inc. 401(k) Plan are similar to the provisions of the
401(k) plan sponsored by Canopy. During the nine months ended July 31, 2000, the
Company contributed $56,228 to the 401(k) plans.
F-30
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(10) EMPLOYEE BENEFIT PLANS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "ESPP") was adopted by the
Board of Directors on August 29, 2000. The ESPP will become effective
immediately upon the closing of the IPO. The ESPP is designed to allow eligible
employees of the Company to purchase shares of common stock, at semi-annual
intervals, through periodic payroll deductions. A total of 2,000,000 shares of
the Company's common stock will initially be reserved for issuance under the
ESPP. The share reserve may increase only upon approval by both the Board of
Directors and the shareholders.
Individuals who have been employed by the Company for 30 days as of the
start date of any offering period may begin participation in the ESPP on that
start date or any subsequent semi-annual entry date (generally July 1 and
January 1). Individuals who become eligible employees after the start date of
the offering period may begin participation in the ESPP on any subsequent
semi-annual date. Individuals may also, subject to limitations, withdraw or
discontinue participation in the ESPP at any time.
A participant may contribute up to 20 percent of their cash earnings through
payroll deductions. The accumulated payroll deductions will be applied to the
purchase of shares on the participant's behalf on each semi-annual purchase date
(the last business day of June and December). The purchase price per share will
be 85 percent of the lower of the fair market value of the Company's common
stock on the start date of the relevant offering period or the fair market value
on the semi-annual purchase date. The maximum value of common stock that may be
purchased by a participant during any calendar year is $25,000, and no
participant is permitted to purchase any shares under the ESPP if the
participant, immediately after such purchase, owns five percent or more of the
Company's outstanding capital stock.
The ESPP will have a series of successive offering periods, each with a
maximum duration of 12 months. However, the initial offering period will begin
on the effective date of the IPO and will end on the earlier of December 31,
2002 or 27 months from the effective date of the ESPP.
The Board of Directors may at any time amend or modify the ESPP, provided
that stockholder approval is obtained for any amendments to the ESPP to the
extent required by applicable law.
(11) SIGNIFICANT CUSTOMERS
During the years ended October 31, 1997, 1998 and 1999, the Company had
sales to one, one and three customer(s), respectively, that accounted for
74 percent, 22 percent and 48 percent of revenue, respectively. During the nine
months ended July 31, 1999 and 2000, the Company has sales to two and one
customer(s), respectively, that accounted for 28 percent and 18 percent of
revenue, respectively. No other customers accounted for more than ten percent of
revenue during the years ended October 31, 1997, 1998 and 1999 and the nine
months ended July 31, 1999 and 2000.
F-31
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(12) SEGMENT INFORMATION
In June 1998, SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information" was issued. SFAS No. 131 establishes disclosures related to
components of a company for which separate financial information is available
and evaluated regularly by the company's chief operating decision makers in
deciding how to allocate resources and in assessing performance. It also
requires segment disclosures about products and services as well as geographic
areas. The Company has determined that it did not have any separately reportable
operating segments as of October 31, 1997, 1998 and 1999 and July 31, 2000.
Revenue attributable to DOS and Linux-based products and services for the years
ended October 31, 1997, 1998 and 1999 and for the nine months ended July 31,
2000 was as follows:
[Enlarge/Download Table]
YEAR ENDED OCTOBER 31, NINE MONTHS
---------------------------------- ENDED JULY 31,
1997 1998 1999 2000
-------- ---------- ---------- ---------------
DOS........................................... $945,414 $1,376,209 $2,800,584 $ 684,893
Linux......................................... -- -- -- 2,317,878
-------- ---------- ---------- ----------
$945,414 $1,376,209 $2,800,584 $3,002,771
======== ========== ========== ==========
Revenue attributable to individual countries based on the location of sales
to unaffiliated customers for the years ended October 31, 1997, 1998 and 1999
and the nine months ended July 31, 2000 is as follows:
[Enlarge/Download Table]
YEAR ENDED OCTOBER 31, NINE MONTHS
---------------------------------- ENDED JULY 31,
1997 1998 1999 2000
-------- ---------- ---------- ---------------
United States................................. $895,341 $ 904,722 $2,100,599 $1,124,257
-------- ---------- ---------- ----------
Foreign:
China....................................... 25,000 302,273 272,727 3,500
South Korea................................. -- -- -- 682,125
Taiwan...................................... -- 19,250 64,350 476,033
Japan....................................... -- 19,490 101,769 1,073,772
Other....................................... 25,073 130,474 261,139 518,220
-------- ---------- ---------- ----------
Total foreign............................. 50,073 471,487 699,985 2,753,650
-------- ---------- ---------- ----------
$945,414 $1,376,209 $2,800,584 $3,877,907
======== ========== ========== ==========
No other individual countries accounted for more than ten percent of revenue
during the years ended October 31, 1997, 1998 and 1999 and the nine months ended
July 31, 2000.
(13) ACQUISITIONS
From the period from April 3, 2000 through May 12, 2000, the Company
acquired, Zentropic, United System, Fireplug, Inup, Moreton Bay and RT-Control.
In each of the acquisitions, the Company purchased 100 percent of the
outstanding equity of each entity. With respect to Moreton Bay, certain
F-32
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(13) ACQUISITIONS (CONTINUED)
net assets and operations not acquired were split out to a separate entity by
Moreton Bay prior to the acquisition. The following table sets forth the
consideration paid including direct expenses of $867,871.
[Enlarge/Download Table]
OPTIONS TO SHARES OF SHARES OF
PURCHASE SHARES SERIES C SERIES D
SHARES OF OF COMMON STOCK CONVERTIBLE CONVERTIBLE
COMMON ------------------------- PREFERRED PREFERRED
CASH STOCK SHARES EXERCISE PRICE STOCK STOCK
---------- --------- -------- -------------- ----------- -----------
Zentropic................... $ 111,867 1,745,226 -- $ -- -- --
United System............... 542,123 -- 507,335 3.00 -- --
Fireplug.................... 611,581 -- 62,220 1.50 -- 69,998
Inup........................ 189,301 1,333,333 -- -- 83,334 --
Moreton Bay................. 121,588 -- 87,374 3.00 -- 956,315
RT-Control.................. 149,240 -- 16,667 1.50 -- 404,169
---------- --------- ------- ------ ---------
Total..................... $1,725,700 3,078,559 673,596 83,334 1,430,482
========== ========= ======= ====== =========
The value of the common stock was determined using an estimated fair value
of $3.80 per share for the Zentropic acquisition and a value of $6.00 per share
for the shares of Series C and Series D and common shares issued for the
acquisitions of all other entities, which represents the estimated fair value
based upon equity transactions with independent parties at or near the dates the
acquisitions were consummated. The estimated fair values of the options to
purchase common stock issued in connection with the acquisitions were determined
using the Black-Scholes option pricing model with the following assumptions:
expected exercise lives of five years, risk free interest rate of 5.65 percent,
expected dividend yield of zero percent and volatility of 60 percent.
Each acquisition was accounted for as a purchase. The following table sets
the allocation of the purchase consideration, including direct expenses.
[Enlarge/Download Table]
UNITED MORETON RT-
ZENTROPIC SYSTEM FIREPLUG INUP BAY CONTROL
---------- ----------- ---------- ---------- ---------- ----------
Current assets................ $ 233,367 $ 925,509 $ 40,120 $ 504,674 $ 298,540 $ 175,945
Property and equipment........ 38,630 443,001 28,075 143,223 6,474 62,015
Other assets.................. 3,815 233,783 -- -- 245,370 2,244
Assembled workforce........... 610,000 475,000 130,000 210,000 320,000 --
Core technology............... 1,301,000 466,000 600,000 -- 2,600,000 280,000
Acquired in-process research
and development............. 800,000 -- -- 800,000 900,000 400,000
Non-competition agreements.... -- -- 400,000 -- -- --
Goodwill...................... 3,976,062 2,566,403 225,201 7,177,226 2,005,151 2,044,521
Current liabilities........... (160,047) (1,737,056) (78,922) (145,820) (136,316) (306,653)
Long term debt, net of current
portion..................... -- (625,559) -- -- -- --
Net deferred income tax
liability................... (59,101) -- -- -- -- --
---------- ----------- ---------- ---------- ---------- ----------
Purchase consideration........ $6,743,726 $ 2,747,081 $1,344,474 $8,689,303 $6,239,219 $2,658,072
========== =========== ========== ========== ========== ==========
F-33
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(13) ACQUISITIONS (CONTINUED)
The results of operations of Zentropic, United System, Fireplug, Inup,
Moreton Bay and RT-Control are included in the accompanying financial statements
from the date of their respective acquisitions.
The following unaudited pro forma information for the nine months ended
July 31, 1999 and 2000 presents the results of operations of the Company as if
the acquisitions had taken place at the beginning of the period presented. The
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of future results or what would have occurred had the
acquisition been made at the beginning of the applicable period. Acquired
in-process research and development totaling $2,900,000 related to the
acquisitions was expensed at the date of the respective acquisitions and is not
presented in the following unaudited pro forma financial statement data since
the expense is non-recurring and directly attributable to the acquisitions.
[Download Table]
NINE MONTHS ENDED JULY 31,
---------------------------
1999 2000
------------ ------------
(UNAUDITED) (UNAUDITED)
Revenue.......................................... $ 2,509,681 $ 4,940,632
Net loss......................................... (9,493,010) (16,428,775)
Basic and diluted net loss per common share...... (0.45) (0.74)
In connection with the acquisitions of Zentropic, Inup, Moreton Bay and
RT-Control, the Company expensed a total of $2,900,000 of acquired in-process
research and development which had not yet reached technological feasibility and
had no alternative future uses. The value assigned to the acquired in-process
research and development was determined based on an analysis of the estimated
costs to develop the acquired in-process research and development into
commercially viable products, the market for the developed products and
technologies and discounting the resulting cash flows related to these projects
and technologies. The valuations were based upon assumptions management believed
to be reasonable at the time of the valuations but which are inherently
uncertain and unpredictable. For these reasons, actual results may vary from
projected results. The in-process research and development projects acquired
from Zentropic were estimated to be 60 percent complete at the date of
acquisition, that an additional $150,000 would be required to develop these
projects and technologies to commercial viability and that these projects should
be completed by April 30, 2001. The in-process research and development projects
acquired from Inup were estimated to be 25 percent complete at the date of
acquisition, that an additional $135,000 would be required to develop these
projects and technologies to commercial viability and that these projects should
be completed by September 30, 2000. The in-process research and development
projects acquired from Moreton Bay were estimated to be 53 percent complete at
the date of acquisition, that an additional $87,000 would be required to develop
these projects and technologies to commercial viability and that these projects
should be completed by April 30, 2001. The in-process research and development
projects acquired from RT-Control were estimated to be 35 percent complete at
the date of acquisition, that an additional $321,000 would be required to
develop these projects and technologies to commercial viability and that these
projects should be completed by July 31, 2001. As of July 31, 2000, management
F-34
LINEO, INC. AND SUBSIDIARIES
(INCLUDING THE CARVED-OUT PORTION OF CALDERA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 2000 AND FOR THE NINE MONTHS ENDED
JULY 31, 1999 AND 2000 IS UNAUDITED)
(13) ACQUISITIONS (CONTINUED)
estimates that the expected completion costs should approximate the original
estimate and that the projects should be completed in the time period originally
estimated.
(14) STRATEGIC ALLIANCES
MOTOROLA
In August 2000, the Company entered into a strategic alliance agreement with
Metrowerks Corp. ("Metrowerks"), a subsidiary of Motorola, Inc., to integrate
Embedix SDK with Motorola products and then bundle the resulting products with
select Motorola development boards.
In connection with this agreement, Metrowerks made an initial purchase
commitment of approximately $500,000. In addition, Metrowerks Holdings, Inc.
also purchased from the Company, for total consideration of $1,500,000, a
two-year warrant to purchase up to 2,000,000 shares of our common stock at an
exercise price of $6.00 per share. The warrant may be exercised at any time for
cash or no cash under certain cashless exercise provisions of the warrant. The
difference between the fair value of the warrant and the consideration received
will be expensed over the expected periods to be benefited from this agreement.
In October 2000, in connection with the warrant and the strategic alliance
agreement noted above, Metrowerks Holdings, Inc. purchased 2,000,000 and
1,000,000 shares of the Company's common stock from Caldera Systems and Canopy,
respectively, for $7.50 per share. As a result of these agreements, Motorola
beneficially owns 13.2 percent of the Company's common stock. In management's
opinion, the transfer between Metrowerks Holdings, Inc., Caldera Systems and
Canopy was a transaction between shareholders from which the Company received no
benefit.
Metrowerks Holdings, Inc. also became a party to the investor rights
agreement and, as a result, was granted registration rights with respect to
shares of the Company's common stock issuable upon exercise of the warrant and
any other shares of the Company's stock owned by Metrowerks Holdings, Inc.
SAMSUNG
In September 2000, the Company executed an agreement with Samsung
Electro-Mechanics Co., Ltd. and Samsung Venture Investment Corporation to form a
joint venture, Listech Limited ("Listech"), a Korean corporation, for the
purposes of developing and selling embedded and realtime application products.
In accordance with the agreement, the Company will invest 1,200,000,000 South
Korean Won (approximately $1,100,000) for an initial equity interest of 57
percent. Three of the five directors are to be nominated by the Company and two
directors are to be nominated by the other investors. Certain significant
transactions of Listech require the approval of at least four directors.
F-35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Zentropic Computing, LLC:
We have audited the accompanying consolidated balance sheets of Zentropic
Computing, LLC (a Virginia limited liability company), the carved-out portion of
Advanced Simulation Technology, inc. (a Virginia corporation) and their
subsidiary as of October 31, 1998 and 1999, and the related consolidated
statements of operations and comprehensive loss, members' capital and cash flows
for each of the two years in the period ended October 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zentropic
Computing, LLC, the carved-out portion of Advanced Simulation Technology, inc.
and their subsidiary as of October 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the two years in the period ended
October 31, 1999 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
April 3, 2000
F-36
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
OCTOBER 31,
--------------------- JANUARY 31,
1998 1999 2000
--------- --------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash...................................................... $ 63,678 $ 120,037 $ 170,864
Accounts receivable, net of allowance for doubtful
accounts of $0.......................................... -- 25,667 22,500
Value added tax and income tax receivables................ 7,053 4,280 4,945
Prepaid expenses.......................................... 2,426 11,534 16,141
--------- --------- ---------
Total current assets.................................... 73,157 161,518 214,450
--------- --------- ---------
Property and equipment:
Computer equipment........................................ 3,385 10,764 12,752
Furniture and fixtures.................................... 3,059 9,368 9,352
--------- --------- ---------
6,444 20,132 22,104
Less accumulated depreciation............................. (1,084) (6,106) (6,779)
--------- --------- ---------
Net property and equipment.............................. 5,360 14,026 15,325
--------- --------- ---------
Other assets, net........................................... 461 4,345 4,027
--------- --------- ---------
$ 78,978 $ 179,889 $ 233,802
========= ========= =========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable.......................................... $ 36,252 $ 6,810 $ 32,938
Accrued warranty.......................................... -- 5,000 5,000
Deferred revenue.......................................... -- 30,667 10,417
Related party payable..................................... -- 40,580 76,861
--------- --------- ---------
Total current liabilities............................... 36,252 83,057 125,216
--------- --------- ---------
Commitments and contingencies (Notes 1 and 4)
Members' capital:
Contributed capital....................................... 275,669 787,852 955,206
Member capital contributions receivable................... -- (137,900) --
Accumulated comprehensive income (loss)................... 446 96 (39)
Accumulated deficit....................................... (23,910) (271,702) (566,071)
Net deficit of carved-out operations...................... (209,479) (281,514) (280,510)
--------- --------- ---------
Total members' capital.................................. 42,726 96,832 108,586
--------- --------- ---------
$ 78,978 $ 179,889 $ 233,802
========= ========= =========
See accompanying notes to consolidated financial statements.
F-37
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
[Enlarge/Download Table]
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
----------------------- -------------------------
1998 1999 1999 2000
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenue:
Software....................................... $ -- $ 26,141 $ -- $ 7,461
Services....................................... -- 59,333 -- 35,250
--------- --------- --------- ---------
Total revenue................................ -- 85,474 -- 42,711
--------- --------- --------- ---------
Cost of revenue:
Software....................................... -- 20,725 -- 2,687
Services....................................... -- 17,639 -- 10,886
--------- --------- --------- ---------
Total cost of revenue........................ -- 38,364 -- 13,573
--------- --------- --------- ---------
Gross margin................................. -- 47,110 -- 29,138
--------- --------- --------- ---------
Operating expenses:
Research and development (exclusive of non-cash
compensation of $0, $850, $0 and $29,454,
respectively)................................ 208,539 320,828 70,300 76,826
Sales and marketing (exclusive of non-cash
compensation of $0, $58,393, $0 and $94,242,
respectively)................................ 130,314 249,898 57,849 79,700
General and administrative (exclusive of
non-cash compensation of $0, $19,465, $0 and
$43,658, respectively)....................... 90,674 150,132 36,123 71,733
Non-cash compensation.......................... -- 78,708 -- 167,354
--------- --------- --------- ---------
Total operating expenses..................... 429,527 799,566 164,272 395,613
--------- --------- --------- ---------
Loss before income taxes......................... (429,527) (752,456) (164,272) (366,475)
Provision (benefit) for income taxes............. 2,482 (4,117) 4,907 3,479
--------- --------- --------- ---------
Net loss......................................... $(432,009) $(748,339) $(169,179) $(369,954)
========= ========= ========= =========
Comprehensive loss:
Net loss....................................... $(432,009) $(748,339) $(169,179) $(369,954)
Foreign currency translation adjustments....... 446 (350) (454) (135)
--------- --------- --------- ---------
$(431,563) $(748,689) $(169,633) $(370,089)
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-38
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
[Enlarge/Download Table]
MEMBER CAPITAL ACCUMULATED NET DEFICIT OF
CONTRIBUTED CONTRIBUTIONS COMPREHENSIVE ACCUMULATED CARVED-OUT
CAPITAL RECEIVABLE INCOME (LOSS) DEFICIT OPERATIONS
----------- -------------- ------------- ----------- --------------
Balance, October 31, 1997...... $ -- $ -- $ -- $ -- $ --
Member capital contributions... 58,295 -- -- -- --
ASTi funding of carved-out
operations and contribution
to members' capital.......... 217,374 -- -- -- 198,620
Net loss applicable to
carved-out operations........ -- -- -- -- (408,099)
Cumulative translation
adjustment................... -- -- 446 -- --
Net loss....................... -- -- -- (23,910) --
-------- --------- ----- --------- ---------
Balance, October 31, 1998...... 275,669 -- 446 (23,910) (209,479)
Member capital contributions... 361,440 (137,900) -- -- --
ASTi funding of carved-out
operations and contribution
to members' capital.......... 72,035 -- -- -- 428,512
Net loss applicable to
carved-out operations........ -- -- -- -- (500,547)
Issuance of member interests
for services................. 78,708 -- -- -- --
Cumulative translation
adjustment................... -- -- (350) -- --
Net loss....................... -- -- -- (247,792) --
-------- --------- ----- --------- ---------
Balance, October 31, 1999...... 787,852 (137,900) 96 (271,702) (281,514)
ASTi funding of carved-out
operations (unaudited)....... -- -- -- -- 76,589
Net loss applicable to
carved-out operations
(unaudited).................. -- -- -- -- (75,585)
Cash received related to member
capital contributions
receivable (unaudited)....... -- 137,900 -- -- --
Issuance of member interests
for services (unaudited)..... 167,354 -- -- -- --
Cumulative translation
adjustment (unaudited)....... -- -- (135) -- --
Net loss (unaudited)........... -- -- -- (294,369) --
-------- --------- ----- --------- ---------
Balance, January 31, 2000
(unaudited).................. $955,206 $ -- $ (39) $(566,071) $(280,510)
======== ========= ===== ========= =========
See accompanying notes to consolidated financial statements.
F-39
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
[Enlarge/Download Table]
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
----------------------- -------------------------
1998 1999 1999 2000
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss....................................... $(432,009) $(748,339) $(169,179) $(369,954)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 7,272 7,007 362 991
Non-cash compensation expense................ -- 78,708 -- 167,354
Changes in operating assets and liabilities,
excluding effects of acquisition:
Accounts receivable........................ 11,527 (25,667) -- 3,167
VAT and income tax receivables............. (6,021) 2,773 (3,932) (665)
Prepaid expenses........................... (2,426) (9,108) (3,794) (4,607)
Accounts payable........................... 24,465 (29,442) (20,512) 26,128
Deferred revenue........................... -- 30,667 -- (20,250)
Accrued warranty........................... -- 5,000 -- --
Related party payable...................... -- 40,580 -- 36,281
--------- --------- --------- ---------
Net cash used in operating activities.... (397,192) (647,821) (197,055) (161,555)
--------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment............. (3,683) (13,688) -- (1,972)
Acquisition of Autospan Limited, net of cash
acquired..................................... (9,692) -- -- --
Purchase of other long-term assets............. (490) (5,869) -- --
--------- --------- --------- ---------
Net cash used in operating activities.... (13,865) (19,557) -- (1,972)
--------- --------- --------- ---------
Cash flows from financing activities:
Members' capital contributions................. 275,669 295,575 72,025 137,900
ASTi funding of carved-out operations not
contributed to members' capital.............. 198,620 428,512 127,288 76,589
--------- --------- --------- ---------
Net cash provided by financing
activities............................. 474,289 724,087 199,313 214,489
--------- --------- --------- ---------
Net increase in cash............................. 63,232 56,709 2,258 50,962
Cumulative translation adjustment................ 446 (350) (454) (135)
Cash, beginning of period........................ -- 63,678 63,678 120,037
--------- --------- --------- ---------
Cash, end of period.............................. $ 63,678 $ 120,037 $ 65,482 $ 170,864
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-40
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
[Enlarge/Download Table]
THREE MONTHS
YEAR ENDED ENDED
OCTOBER 31, JANUARY 31,
-------------------- --------------------
1998 1999 1998 1999
--------- -------- --------- --------
Cash paid for income taxes....................... $ -- $2,482 $ -- $9,441
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
During fiscal 1998, in connection with the acquisition of Autospan Limited,
Advanced Simulation Technology, inc. received $15,308 of cash, $12,559 of
receivables, $8,920 of equipment and other assets and assumed $11,787 of
accounts payable and accrued liabilities in exchange for $25,000 in cash.
See accompanying notes to consolidated financial statements.
F-41
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Zentropic Computing, LLC's subsidiary, Zentropic Computing Ltd ("Ltd"),
began operations in the United Kingdom during November 1994 as Autospan Limited
("Autospan"). Autospan developed and marketed tools, related products and
utilities for real time ("RT") Linux operating system software. Advanced
Simulation Technology, inc. ("ASTi") acquired Autospan on February 1, 1998 for
$25,000 in cash.
Three individuals, together with ASTi, created a separate entity to market
and sell Ltd's tools and products in the United States and certain other
locations. These individuals, together with ASTi, organized Zentropic Computing,
LLC, a Virginia limited liability company doing business as Zentropix
("Zentropix"), and became its founding members on January 5, 1998.
Effective May 12, 1999, ASTi transferred its wholly owned subsidiary, Ltd,
to Zentropix. As a result of the transfer, Ltd became a wholly owned subsidiary
of Zentropix (collectively referred to as the "Company"). Certain controlling
shareholders of ASTi also owned a controlling interest in Zentropix (both
directly and through ASTi's ownership interest in Zentropix). In connection with
this transaction, the relative ownership of Zentropix and ASTi did not change
and no minority interests were acquired. Accordingly, this transaction has been
accounted for at historical cost in a matter similar to a pooling of interests.
Subsequent to the acquisition of Ltd and the reorganization of Zentropix, ASTi
has paid substantially all operating expenses on behalf of the Company (see
Note 5). These expenses were not recorded by the Company. Accordingly, the
accompanying consolidated financial statements include the expenses paid by ASTi
on behalf of the Company during the years ended October 31, 1998 and 1999 and
the three months ended January 31, 2000 (referred to as the carved-out
operations of ASTi).
The expenses of the carved-out portion of ASTi reflect actual direct
expenses associated with the Company's business and an allocated portion of
common expenses. The allocated common expenses consist primarily of facilities
rent and legal and accounting expenses and were allocated based on the
percentage of ASTi payroll expense allocated to the Company. Management believes
that the allocation methods used are reasonable and reflect their best estimate
of the expenses that would have been incurred by the Company as a standalone
entity.
ASTi has funded the net losses of the Company by paying substantially all
operating expenses of the Company. The funding applicable to the carved-out
operations has been reflected as a component of equity entitled "Net Deficit of
Carved-out Operations" in the accompanying consolidated balance sheets. This
funding has been offset by the accumulated losses applicable to the carved-out
operations of ASTi and the contributions to members' capital made by ASTi.
The Company continues to develop, market and support operating system
products primarily for the RT Linux and embedded Linux markets. The Company
sells and distributes its software and related products through license
agreements directly to end-users. These sales occur throughout the United States
and in certain international locations.
The Company is subject to certain risks including the uncertainty of market
acceptance and demand for Linux-related products and services, competition from
larger, more established companies,
F-42
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)
short product life cycles, the Company's ability to develop and bring to market
new products on a timely basis, dependence on key employees, the ability to
attract and retain additional qualified personnel and the ability to obtain
adequate financing to support growth.
During the years ended October 31, 1998 and 1999 and the three months ended
March 31, 2000, the Company has suffered net losses of $432,009, $748,339 and
$369,954, respectively. As discussed in Note 8, subsequent to March 31, 2000 the
Company has been acquired by Lineo, Inc. ("Lineo") and Lineo has committed to
provide funding to the Company as required.
(2) SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of January 31, 2000 and for
the three months ended January 31, 1999 and 2000 have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
reflect all normal recurring adjustments necessary to present fairly the
financial information set forth therein in accordance with accounting principles
generally accepted in the United States. The results of operations for the three
months ended January 31, 2000 are not necessarily indicative of the results to
be expected for the entire fiscal year ending October 31, 2000.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying consolidated financial
statements for cash, accounts receivable, value added tax and income tax
receivables and accounts payable approximate fair values because of the
immediate or short-term maturities of these financial instruments.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Zentropix, the
carved-out operations of ASTi and their wholly owned subsidiary, Ltd, after
elimination of intercompany accounts and transactions.
F-43
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
For purposes of consolidating the operations of Ltd, the Company has
determined the functional currency for Ltd's operations to be the British Pound.
Accordingly, translation gains and losses are included as a component of
comprehensive loss.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Computer equipment and furniture and fixtures are depreciated using the
straight-line method over the estimated useful life of the asset, typically
three years.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of operations.
CAPITALIZED SOFTWARE COSTS
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," development costs
incurred in the research and development of new software products to be sold,
leased or otherwise marketed are expensed as incurred until technological
feasibility in the form of a working model has been established. Internally
generated capitalizable software development costs have not been material for
the years ended October 31, 1998 and 1999 and the three months ended
January 31, 2000. The Company has charged its software development costs to
research and development expense in the accompanying consolidated statements of
operations.
OTHER ASSETS
Other assets consist of legal and other direct costs incurred to obtain the
Company's trademarks. The trademarks are being amortized using the straight-line
method over a period of five years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including intangibles, for
impairment when events or changes in circumstances indicate that the book value
of an asset may not be recoverable. The Company evaluates, at each balance sheet
date, whether events and circumstances have occurred which indicate possible
impairment. The Company uses an estimate of future undiscounted net cash flows
of the related asset or group of assets over the remaining life in measuring
whether the assets are recoverable. As of October 31, 1999 and January 31, 2000,
the Company does not consider any of its long-lived assets to be impaired.
F-44
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company generates revenue from software sold directly to end-users. The
Company also generates service revenue from training fees, consulting fees, and
customer support fees.
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position No. 97-2 ("SOP
97-2"), "Software Revenue Recognition." Revenue from the sale of software
products is recognized upon delivery when persuasive evidence of an arrangement
exists, the price is fixed or determinable and collection is probable. Direct
sales to end-users are evidenced by a binding purchase order for the product and
are governed by a license agreement. Generally, the only multiple element
arrangement of the Company's initial software sales are training and technical
support services the Company provides at additional charge to the end-user. None
of the post contract maintenance and support services extend for more than a
year following the date of the sale. These services do not include product
update or upgrade rights. After the initial support period, customers can elect
to enter into separate support agreements. Revenue from the extended support
agreements are deferred and recognized over the period of the contract or as the
services are provided.
If other significant post-delivery vendor obligations exist or if a product
is subject to customer acceptance, revenues are deferred until no significant
obligations remain or acceptance has occurred. To date, the Company has not
shipped any software subject to acceptance terms or subject to other
post-delivery vendor obligations. Additionally, the Company has not recognized
revenue on any contract with customers that may include customer cancellation or
termination clauses that indicate a demonstration period or otherwise incomplete
transaction.
The Company also offers it customers consulting, training and other services
separate from the software sale. This service revenue is recognized as the
services are performed.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist of the following: advertising,
promotional activities, public relations, trade shows and the salaries,
commissions and related expenses of all personnel in the sales process. The
Company expenses the cost of advertising the first time the advertising takes
place. Advertising expenses totaled $0 and $7,990 for the years ended
October 31, 1998 and 1999, respectively, and $0 and $2,921 for the three-month
periods ended January 31, 1999 and 2000, respectively.
EQUITY-BASED COMPENSATION
The Company accounts for its equity-based compensation issued to directors,
officers and employees under Accounting Principles Board Opinion No. 25 ("APB
No. 25") "Accounting for Stock Issues to Employees" and related interpretations.
Compensation expense for member-interest awards or purchases, if any, is
recognized if the award or purchase price on the measurement date is below its
intrinsic fair value and is recognized on the date of award or purchase.
F-45
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company accounts for its equity-based compensation issued to other than
employees in accordance with SFAS No. 123 "Accounting for Stock-Based
Compensation" and related interpretations. Under SFAS No. 123, equity-based
compensation is determined as either the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measureable. The measurement date for these issuances is the earlier of
either the date at which a commitment for performance by the recipient to earn
the equity instruments is reached or the date at which the recipient's
performance is complete.
INCOME TAXES
Historically, the Company has not recorded any income tax assets or
liabilities related to its United States operations due to its treatment as a
partnership for Federal income tax purposes. However, effective January 15,
2000, the Company elected to be taxed as a corporation rather than a partnership
for Federal income tax purposes. The Company's subsidiary, Ltd, does recognize
income tax assets and liabilities due to its classification as a Private Company
Limited by Shares in the United Kingdom. The Company's policy was to make
distributions to its members in amounts at least equal to the member's income
taxes that were attributable to the net earnings of the Company. Due to its
history of losses in the United States, the Company has not made any
distributions to members for the payment of income taxes.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company offers credit terms on the sale of its software products to its
customers. The Company performs ongoing credit evaluations of its customers'
financial condition and requires no collateral from its customers. The Company
continually evaluates the need for an allowance for uncollectable accounts
receivable based upon the expected collectibility of all accounts receivable. As
of October 31, 1999, two customers accounted for 100 percent of the gross
accounts receivable balance which the Company deemed to be entirely collectible.
During the year ended October 31, 1999, the Company's sales to three
customers accounted for 45, 23 and 19 percent of revenue. No other customer
accounted for more than ten percent of net revenue during the year ended
October 31, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new accounting and
reporting standards for companies to report information about derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to have a material impact on the Company's results of
operations, financial position or liquidity.
F-46
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition
in Financial Statements." This pronouncement summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to selected
revenue recognition issues. The Company is required to adopt SAB No. 101 during
the first quarter of fiscal year 2001. Although management is currently
evaluating the impact, if any, of SAB No. 101, management does not presently
believe it will have a material impact on the Company's results of operations,
financial position or liquidity.
(3) MEMBERS' CAPITAL
CONTRIBUTED CAPITAL
On January 5, 1998, Zentropix was organized with capital of $25,100
contributed by ASTi and three other founding members. During the period from
January 5, 1998 through October 31, 1998, these members contributed an
additional $33,195. On May 12, 1999, additional members were admitted to
Zentropix. Together with the founding members, these members agreed to
contribute additional capital of $336,440. As of October 31, 1999, the Company
had member capital contributions receivable of $137,900. As of January 31, 2000,
all amounts receivable from members had been collected.
As discussed in Note 1, ASTi has funded the net losses of the Company by
paying substantially all operating expenses of the Company. During fiscal 1999,
ASTi and the other members agreed that a portion of ASTi's funding would be
deemed as contributed capital. During the years ended October 31, 1998 and 1999,
the funding which was deemed to be contributed capital by the members totaled
$217,374 and $72,035, respectively.
TRANSFER OF MEMBER INTERESTS
On May 12, 1999, the Company granted three founding members an additional
5.6 percent interest in the Company for services rendered. The Company valued
this interest at $78,708 based upon the sale of member interests to third
parties for cash at that same date.
On December 7, 1999, three principal members of Zentropix transferred a
portion of their membership interests in Zentropix to four key employees as
compensation for services rendered by the employees. These three principal
members transferred 7.1 percent of the total outstanding membership interest in
the Company to these four employees. In accordance with Interpretation No. 1 to
Accountings Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," the Company recorded the $167,354 estimated fair value related to
the member interests transferred as non-cash compensation expense in the
accompanying statement of operations for the quarter ended January 31, 2000. The
fair value of the member interests transferred was based upon other equity
transactions in fiscal 1999 and fiscal 2000 and in the opinion of management, is
a reasonable estimate of fair value.
F-47
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(4) COMMITMENTS AND CONTINGENCIES
OPERATING AGREEMENTS
The Company shares its corporate office facilities with ASTi, which pays for
all rent expense associated with corporate facilities. Historically no formal
agreement between ASTi and the Company governed this arrangement. However, after
the merger with Lineo (see Note 8), the Company expects to move its corporate
offices and assume direct responsibility for its rent obligations. A portion of
the rent expense paid by ASTi has been included in the carved-out operations of
ASTi.
The Company leases office space in Brighton, U.K. The current lease expires
in March 2002. The Company is obligated to pay rent of approximately $5,100 per
year plus annual VAT. Rent expense was approximately $800 for the year ended
October 31, 1998 under a prior lease arrangement. Rent expense was approximately
$5,000 (including VAT) for the year ended October 31, 1999 under the current and
prior lease arrangements. Future minimum lease obligations related to this lease
are $5,100 in fiscal 2000, $5,100 in fiscal 2001 and $1,200 in fiscal 2002.
LIMITATION OF MEMBERS' LIABILITY
None of the members are obligated to contribute capital to restore any
negative capital account, nor is any member liable for any of the debts, losses,
liabilities or obligations of the Company beyond such member's capital
contributions as governed by the provisions of the Virginia Limited Liability
Company Act and other applicable laws of the Commonwealth of Virginia.
(5) RELATED PARTY TRANSACTIONS
The Company had an informal agreement whereby ASTi paid substantially all
operating expenses of the Company. The expenses paid on behalf of the Company by
ASTi consisted of the following:
[Download Table]
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
----------------------- -------------------
1998 1999 1999 2000
---------- ---------- -------- --------
Payroll.............................. $332,551 $446,862 $106,886 $66,766
Contract research and development.... 37,500 -- -- --
Facilities rent...................... 17,795 33,693 8,423 7,500
Legal and accounting fees and other
general operating expenses......... 8,083 17,971 4,493 2,323
Marketing expenses................... 20,065 2,021 505 --
-------- -------- -------- -------
Total expenses..................... $415,994 $500,547 $120,307 $76,589
======== ======== ======== =======
The Company had a related party payable to ASTi of $40,580 as of
October 31, 1999 and $76,861 at January 31, 2000 related to expenses paid by
ASTi on behalf of the Company. The agreement between ASTi and the Company
relating to these expenses is informal. Consequently, the Company has classified
the related party payable as a current liability.
F-48
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(6) INCOME TAXES
As described in Note 2, Zentropix was treated as a partnership for Federal
income tax purposes prior to January 15, 2000 at which time it elected to be
treated as a taxable entity. Ltd has been treated as a taxable entity under the
laws of the United Kingdom since it's inception. The carved-out portion of ASTi
was included in the U.S. tax return of ASTi for all periods presented. Had these
carved-out expenses been paid by Zentropix, the tax benefit would have flowed
through to the members and would not have been reflected in the accompanying
financial statements for all periods prior to January 15, 2000.
The net loss before income taxes consisted of the following components:
[Enlarge/Download Table]
YEAR ENDED OCTOBER 31 THREE MONTHS
--------------------- ENDED JANUARY 31,
1998 1999 2000
--------- --------- ------------------
Domestic U.S. operations............................... $(428,380) $(742,434) $(383,804)
Operations of foreign subsidiary, Zentropic Computing
Ltd.................................................. (1,147) (10,022) 17,329
--------- --------- ---------
Net loss before income taxes......................... $(429,527) $(752,456) $(366,475)
========= ========= =========
The provision (benefit) for income taxes for the years ended October 31,
1998 and 1999 consisted entirely of taxes related to Ltd.
The Company determines its deferred tax assets and liabilities based on the
differences between the financial reporting and tax bases of assets and
liabilities. They are measured by applying the enacted tax rates and laws in
effect for the years in which such differences are expected to reverse. As of
January 15, 2000 (the date Zentropix became a taxable entity in the U.S.) the
Company had approximately $6,000 of deferred income tax assets related to
deferred revenue and accruals. As of January 31, 2000, the Company had
approximately $29,000 of deferred income tax assets related to net operating
losses, deferred revenue and accruals. The amount of and ultimate realization of
the deferred income tax assets is dependent, in part, upon the tax laws in
effect, the Company's future earnings, and other future events, the effects of
which cannot be determined. The Company has established a valuation allowance
against its deferred income tax assets because the available objective evidence
creates sufficient uncertainty regarding their realizability.
(7) SEGMENT INFORMATION
In June 1998, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 establishes disclosures related
to components of a company for which separate financial information is available
and evaluated regularly by a company's chief operating decision makers in
deciding how to allocate resources and in assessing performance. It also
requires segment disclosures about products and services as well as geographic
areas. The Company has determined that it did not have any separately reportable
operating segments as of October 31, 1998 and 1999 and January 31, 2000.
However, the Company does sell software and related services in
F-49
ZENTROPIC COMPUTING, LLC, THE CARVED-OUT PORTION OF
ADVANCED SIMULATION TECHNOLOGY, INC.
AND THEIR SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JANUARY 31, 2000 AND FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
(7) SEGMENT INFORMATION (CONTINUED)
geographic locations outside the United States. Revenues attributed to
individual countries based on the location of sales to unaffiliated customers
were as follows:
[Enlarge/Download Table]
YEAR ENDED
OCTOBER 31, THREE MONTHS
-------------------- ENDED JANUARY 31,
1998 1999 2000
--------- -------- ------------------
Revenue:
United States............................... $ -- $47,141 $36,461
France...................................... -- 38,333 6,250
--------- ------- -------
Total revenue................................. $ -- $85,474 $42,711
========= ======= =======
The Company's long-lived assets, consisting of property and equipment, by
geographic location were as follows as of October 31, 1998 and 1999 and
January 31, 2000:
[Download Table]
OCTOBER 31,
------------------- JANUARY 31,
1998 1999 2000
-------- -------- -----------
United States................................... $ -- $ -- $ 2,002
United Kingdom.................................. 5,360 14,026 13,323
------ ------- -------
$5,360 $14,026 $15,325
====== ======= =======
(8) SUBSEQUENT EVENT
On January 21, 2000, the Company signed a letter of intent to merge with
Lineo. The Company agreed to exchange 100 percent of its members' capital for
1,745,226 shares of Lineo's common stock. On March 28, 2000, the Company and
Lineo signed a definitive Agreement and Plan of Merger and on April 3, 2000, the
Company finalized its merger with Lineo in accordance with the terms specified
above.
F-50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United System Engineers, Inc.:
We have audited the accompanying balance sheets of United System
Engineers, Inc. (a Japanese corporation) as of December 31, 1998 and 1999, and
the related statements of operations and comprehensive income (loss),
stockholders' deficit and cash flows for the years then ended, expressed in
Japanese yen. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United System
Engineers, Inc. as of December 31, 1998 and 1999, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles in the United States of America (see
Note 1).
Also, in our opinion, the amounts translated into U.S. dollars in the
accompanying financial statements have been computed on the basis set forth in
Note 1.
ARTHUR ANDERSEN
Tokyo, Japan
April 14, 2000
F-51
UNITED SYSTEM ENGINEERS, INC.
BALANCE SHEETS
[Enlarge/Download Table]
THOUSANDS OF YEN
------------------------------------------------------ THOUSANDS OF U.S. DOLLARS
DECEMBER 31, --------------------------
----------------------------------- MARCH 31, DECEMBER 31, MARCH 31,
1998 1999 2000 1999 2000
---------------- ---------------- ---------------- ------------ -----------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................. Y 35,398 Y 20,067 Y 11,406 $ 196 $ 112
Time deposits............................. 9,104 9,124 9,130 89 89
Time deposit-restricted................... 20,024 20,024 20,024 195 195
Accounts receivable....................... 14,127 10,979 11,541 107 113
Unbilled revenue.......................... 5,979 13,790 -- 135 --
Prepaid expenses.......................... 12,732 13,857 1,357 135 13
Investment in marketable security......... -- -- 41,990 -- 410
Other current assets...................... 1,160 1,212 2,259 12 22
---------------- ---------------- ---------------- ------- -------
Total current assets.................... 98,524 89,053 97,707 869 954
---------------- ---------------- ---------------- ------- -------
Property and equipment, at cost:
Buildings and improvements................ 99,039 99,039 99,039 967 967
Equipment................................. 17,294 17,793 17,945 174 175
Less accumulated depreciation............. (61,345) (67,275) (68,541) (657) (669)
---------------- ---------------- ---------------- ------- -------
54,988 49,557 48,443 484 473
---------------- ---------------- ---------------- ------- -------
Other assets................................ 2,375 1,994 1,942 20 19
---------------- ---------------- ---------------- ------- -------
Y 155,887 Y 140,604 Y 148,092 $ 1,373 $ 1,446
================ ================ ================ ======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................... Y -- Y 8,500 Y -- $ 83 $ --
Customer advances and deferred revenue.... 193 182 1,839 1 18
Short-term debt........................... 69,735 78,284 81,846 764 799
Current maturities of long-term debt...... 19,920 31,094 31,484 304 308
Accrued vacation payable.................. 5,528 6,191 6,191 60 60
Other accrued liabilities................. 3,780 4,304 1,958 42 19
Income taxes payable...................... 206 206 51 2 --
Other current liabilities................. 2,044 7,903 4,153 78 41
---------------- ---------------- ---------------- ------- -------
Total current liabilities............... 101,406 136,664 127,522 1,334 1,245
---------------- ---------------- ---------------- ------- -------
Long-term debt, net of current maturities... 107,970 76,876 83,440 751 814
---------------- ---------------- ---------------- ------- -------
Commitments and contingencies (Notes 1 and
5)
Stockholders' deficit:
Common stock, Y500 par value per share;
Authorized--160,000 shares;
Outstanding--80,000 shares as of
December 31, 1998, 160,000 shares as of
December 31, 1999 and March 31, 2000.... 40,000 80,000 80,000 781 781
Accumulated deficit......................... (93,489) (152,936) (171,185) (1,493) (1,671)
Accumulated other comprehensive income...... -- -- 28,315 -- 277
---------------- ---------------- ---------------- ------- -------
Total stockholders' deficit............. (53,489) (72,936) (62,870) (712) (613)
---------------- ---------------- ---------------- ------- -------
Y155,887 Y140,604 Y148,092 $ 1,373 $ 1,446
================ ================ ================ ======= =======
See accompanying notes to financial statements.
F-52
UNITED SYSTEM ENGINEERS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
[Enlarge/Download Table]
THOUSANDS OF U.S. DOLLARS
THOUSANDS OF YEN --------------------------
--------------------------------------------------------------------- THREE
YEAR ENDED THREE MONTHS ENDED MONTHS
DECEMBER 31, MARCH 31, YEAR ENDED ENDED
--------------------------------- --------------------------------- DECEMBER 31, MARCH 31,
1998 1999 1999 2000 1999 2000
--------------- --------------- --------------- --------------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues:
Services................... Y 202,408 Y 146,117 Y 34,050 Y 23,101 $1,427 $ 225
Software................... -- 10,990 -- 8,628 107 85
--------------- --------------- --------------- --------------- ------ -----
Total revenue............ Y202,408 Y157,107 Y 34,050 Y 31,729 $1,534 $ 310
Cost of revenue.............. 91,778 104,879 27,716 34,432 1,024 336
--------------- --------------- --------------- --------------- ------ -----
Gross profit (loss)...... 110,630 52,228 6,334 (2,703) 510 (26)
--------------- --------------- --------------- --------------- ------ -----
Operating expenses:
Research and development... 25,560 4,934 4,934 -- 48 --
General and
administrative........... 82,495 99,506 14,296 13,890 971 136
--------------- --------------- --------------- --------------- ------ -----
Total operating
expenses............... 108,055 104,440 19,230 13,890 1,019 136
--------------- --------------- --------------- --------------- ------ -----
Income (loss) from
operations................. 2,575 (52,212) (12,896) (16,593) (509) (162)
--------------- --------------- --------------- --------------- ------ -----
Other income (expense):
Interest expense, net...... (6,134) (7,119) (1,639) (1,515) (69) (15)
Other income (expense),
net...................... 81 90 55 (90) -- (1)
--------------- --------------- --------------- --------------- ------ -----
Other expense, net....... (6,053) (7,029) (1,584) (1,605) (69) (16)
--------------- --------------- --------------- --------------- ------ -----
Loss before income taxes..... (3,478) (59,241) (14,480) (18,198) (578) (178)
Provision for income taxes... 206 206 51 51 2 --
--------------- --------------- --------------- --------------- ------ -----
Net loss..................... Y (3,684) Y (59,447) Y (14,531) Y (18,249) $ (580) $(178)
=============== =============== =============== =============== ====== =====
Comprehensive income (loss):
Net loss................... Y (3,684) Y (59,447) Y (14,531) Y (18,249) $ (580) $(178)
Unrealized gain on
marketable security...... -- -- -- 28,315 -- 277
--------------- --------------- --------------- --------------- ------ -----
Y (3,684) Y (59,447) Y (14,531) Y 10,066 $ (580) $ 99
=============== =============== =============== =============== ====== =====
See accompanying notes to financial statements.
F-53
UNITED SYSTEM ENGINEERS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
[Enlarge/Download Table]
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
----------------------------------------------------- --------------------------
DECEMBER 31,
---------------------------------- MARCH 31, DECEMBER 31, MARCH 31,
1998 1999 2000 1999 2000
--------------- ---------------- ---------------- ------------ -----------
(UNAUDITED) (UNAUDITED)
Common stock:
Beginning balance.................... Y 30,000 Y 40,000 Y 80,000 $ 391 $ 781
Shares issued:
20,000 shares in December 1998..... 10,000 -- -- -- --
80,000 shares in December 1999..... -- 40,000 -- 390 --
--------------- ---------------- ---------------- ------- -------
Ending balance....................... Y 40,000 Y 80,000 Y 80,000 $ 781 $ 781
=============== ================ ================ ======= =======
Accumulated deficit:
Beginning balance.................... Y(89,805) Y (93,489) Y(152,936) $ (913) $(1,493)
Net loss............................. (3,684) (59,447) (18,249) (580) (178)
--------------- ---------------- ---------------- ------- -------
Ending balance....................... Y(93,489) Y(152,936) Y(171,185) $(1,493) $(1,671)
=============== ================ ================ ======= =======
Accumulated other comprehensive income:
Beginning balance.................... Y -- Y -- Y -- $ -- $ --
Unrealized gain on investment in
marketable security................ -- -- 28,315 -- 277
--------------- ---------------- ---------------- ------- -------
Ending balance....................... Y -- Y -- Y 28,315 $ -- $ 277
=============== ================ ================ ======= =======
See accompanying notes to financial statements.
F-54
UNITED SYSTEM ENGINEERS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
[Enlarge/Download Table]
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
--------------------------------------------------------------------- ----------------------------
YEAR ENDED THREE MONTHS ENDED THREE MONTHS
DECEMBER 31, MARCH 31, YEAR ENDED ENDED
--------------------------------- --------------------------------- DECEMBER 31, MARCH 31,
1998 1999 1999 2000 1999 2000
--------------- --------------- --------------- --------------- ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Cash flows from operating
activities:
Net loss................. Y (3,684) Y(59,447) Y(14,531) Y(18,249) $(580) $(178)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities--
Depreciation and
amortization......... 6,144 6,180 1,454 1,266 60 12
Changes in assets and
liabilities--
Accounts
receivable......... 11,420 3,148 (5,025) (562) 31 (6)
Unbilled revenue..... (5,103) (7,811) 5,979 115 (76) 2
Prepaid expenses..... (11,192) (1,125) 11,498 12,500 (11) 122
Other current
assets............. (799) (52) 1,058 (1,047) (1) (10)
Other assets......... (1,319) 131 52 52 1 1
Accounts payable..... (5,882) 8,500 -- (8,500) 83 (83)
Customer advances and
deferred revenue... 54 (11) 14 1,657 -- 17
Accrued vacation
payable............ 908 663 (1) -- 6 --
Other accrued
liabilities........ (2,970) 524 (1,999) (2,346) 5 (23)
Income tax payable... -- -- (155) (155) -- (2)
Other current
liabilities........ (2,813) 5,859 2,950 (3,750) 57 (37)
--------------- --------------- --------------- --------------- ----- -----
Net cash provided by
(used in) operating
activities......... (15,236) (43,441) 1,294 (19,019) (425) (185)
=============== =============== =============== =============== ===== =====
Cash flows from investing
activities:
Purchases of buildings
and improvements, and
equipment.............. (1,529) (499) -- (152) (4) (1)
Increase in time
deposits............... (23,659) (20) (11) (6) -- --
--------------- --------------- --------------- --------------- ----- -----
Net cash used in
investing
activities........... (25,188) (519) (11) (158) (4) (1)
--------------- --------------- --------------- --------------- ----- -----
Cash flows from financing
activities:
Proceeds from long term
debt................... 85,200 -- -- 15,000 -- 146
Repayments of long term
debt................... (22,780) (19,920) (4,800) (8,046) (194) (79)
Increase (decrease) in
short term debt, net... (21,186) 8,549 (600) 3,562 83 35
Sale of common shares.... 10,000 40,000 -- -- 390 --
--------------- --------------- --------------- --------------- ----- -----
Net cash provided by
(used in) financing
activities........... 51,234 28,629 (5,400) 10,516 279 102
=============== =============== =============== =============== ===== =====
Net increase (decrease) in
cash and cash
equivalents.............. 10,810 (15,331) (4,117) (8,661) (150) (84)
Cash and cash equivalents:
Beginning of period...... 24,588 35,398 35,398 20,067 346 196
--------------- --------------- --------------- --------------- ----- -----
End of period............ Y 35,398 Y 20,067 Y 31,281 Y 11,406 $ 196 $ 112
=============== =============== =============== =============== ===== =====
See accompanying notes to financial statements.
F-55
UNITED SYSTEM ENGINEERS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
[Enlarge/Download Table]
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
--------------------------------------------------------------------- ----------------------------
YEAR ENDED THREE MONTHS ENDED THREE MONTHS
DECEMBER 31, MARCH 31, YEAR ENDED ENDED
--------------------------------- --------------------------------- DECEMBER 31, MARCH 31,
1998 1999 1999 2000 1999 2000
--------------- --------------- --------------- --------------- ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Supplemental disclosure of
cash flow information:
Cash paid for interest... Y 7,219 Y 6,959 Y 1,658 Y 1,640 $ 67 $ 16
Cash paid for income
taxes.................. Y 206 Y 206 Y 206 Y 206 $ 2 $ 2
Supplemental schedule of
noncash investing and
financing activities:
Receipt of investment in
marketable security as
payment for services... Y -- Y -- Y -- Y 13,675 $ -- $ 134
See accompanying notes to financial statements.
F-56
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
United System Engineers, Inc. (the "Company") was founded on October 24,
1984. Since its founding, the Company has specialized in providing engineering
and software development services. A majority of the Company's services have
been provided to computer system vendors and integrators in Japan. The Company's
experience has been concentrated in embedded systems development.
In November 1997, the Company began to develop its proprietary Linux-based
server application software product named WebMart. In March 1999, the Company
began to generate revenues from the sale of WebMart directly through the
Company's Internet homepage and is negotiating with other vendors and system
integrators for indirect sales.
The Company's revenues are generated from two sources: contract engineering
services and sales of WebMart, including technical support of WebMart. The
commercial success of WebMart is subject to certain risks including the
uncertainty of market acceptance and life cycles. The Company is yet to recover
the research and development costs of WebMart, which was financed primarily by
bank borrowings.
During the years ended December 31, 1998 and 1999 and the three months ended
March 31, 2000, the Company suffered net losses and as March 31, 2000, the
Company had a working capital deficit of Y71,805,000 ($701,000) and a
stockholders' deficit of Y62,870,000 ($613,000). As discussed in Note 11,
subsequent to March 31, 2000 the Company's shares of common stock have been
acquired by Lineo, Inc. and Lineo, Inc. has committed to provide funding to the
Company as required.
BASIS OF PRESENTING FINANCIAL STATEMENTS
The Company maintains its accounts and prepares its financial statements in
conformity with Japanese income tax laws and accounting practices. However, the
accompanying financial statements differ from those issued for domestic purposes
in Japan. They reflect certain adjustments necessary to present the financial
statements in conformity with accounting principles generally accepted in the
United States of America ("U.S. GAAP"). The principal adjustments necessary to
conform to U.S. GAAP relate to accounting for costs of computer software to be
sold, leased or otherwise marketed, certain accrued liabilities, comprehensive
income and differences related to accounting for income taxes.
The Company's functional currency is the Japanese yen and the accompanying
financial statements are presented in yen. Additionally, as a convenience, the
balance sheets as of December 31, 1999 and March 31, 2000 and the related
statements of operations and comprehensive income (loss), stockholders' deficit
and cash flows for the year and three months then ended are also presented in
U.S. dollars by arithmetically translating all Japanese yen amounts at Y102.40
to US$1, which was the exchange rate at December 31, 1999.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of March 31, 2000 and for the
three months ended March 31, 1999 and 2000 have been prepared on the same basis
as the audited financial statements
F-57
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and, in the opinion of management, reflect all normal recurring adjustments
necessary to present fairly the financial information set forth therein in
accordance with U.S. GAAP. All financial statement disclosures related to the
interim financial statements are unaudited.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
TRANSLATION OF FOREIGN CURRENCIES
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translation", certain transactions
entered into by the Company which are denominated in foreign currencies are
translated into Japanese yen using the prevailing exchange rates as of the
transaction dates. Assets and liabilities denominated in the foreign currencies
are translated using exchange rates in effect at the balance sheet date.
Exchange gains and losses relating to these assets and liabilities are included
in the determination of net income (loss).
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents. Cash equivalents consist principally of amounts in time
deposits.
MARKETABLE SECURITY
The Company's investment in a marketable security has been categorized as
available for sale, as defined by SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Unrealized holding gains and losses
are reflected as a component of stockholders' deficit until realized.
CONCENTRATION OF CREDIT RISK
The Company offers credit terms on the sale of its software products to
certain customers. The Company performs ongoing credit evaluations of its
customers' financial condition and requires no collateral from its customers.
The Company continually evaluates the need for an allowance for uncollectible
accounts receivable based upon the expected collectibility of all accounts
receivable. As of December 31, 1998 and 1999 and March 31, 2000, no allowance
was recognized as the Company deemed its accounts receivable to be entirely
collectible.
DEPRECIATION
Depreciation of buildings and equipment is computed by using the
declining-balance method at rates based on the estimated useful lives of the
assets, which range from 20 to 26 years for buildings (including improvements)
and from two to ten years for equipment. Depreciation expense was
F-58
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Y5,668,000 ($55,000) and Y5,930,000 ($58,000) for the years ended December 31,
1998 and 1999, respectively.
Amortization of intangible assets is computed by using the straight-line
method based on a useful life of five years. Amortization expense was Y459,000
($4,000) and Y250,000 ($2,000) for the years ended December 31,1998 and 1999,
respectively.
REVENUE
Deferred revenue primarily relates to support agreements, which have been
paid for by customers prior to the performance of the related services.
REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2, "Software Revenue Recognition"
("SOP 97-2"). Additionally, in December 1998, the AICPA issued Statement of
Position No. 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition,
With Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 97-2 to
require recognition of revenue using a "residual method" in certain
circumstances. The Company has adopted SOP 97-2 and SOP 98-9 for all
transactions entered into during the periods included in the accompanying
financial statements.
The Company generates revenue from software products sold directly to
computer device manufacturers and end-users. The Company also generates services
revenue from engineering, training and customer support fees. Revenue from
contracted engineering services is recognized based upon the percentage
completion method. The Company also provides training services to its customers
and the related revenue is recognized as the services are performed.
Revenue from the sale of software products is recognized upon delivery of
the product when persuasive evidence of an arrangement exists, the price is
fixed or determinable and collection is probable. All sales into the
distribution channel require a binding purchase order. Direct sales to end-users
are evidenced by concurrent payment for the product by transfer of funds and are
governed by a license agreement. The sale of software products does not include
product update or upgrade rights.
If other significant post-delivery vendor obligations exist or if a product
is subject to customer acceptance, revenue is deferred until no significant
obligations remain or acceptance has occurred. To date, the Company has not
shipped any software products subject to acceptance terms or subject to other
post-delivery vendor obligations. Additionally, the Company has not recognized
revenue on any contracts with customers that may include customer cancellation
or termination clauses that indicate a demonstration period or otherwise
incomplete transaction.
The Company also offers its customers training and other services separate
from the software sale. The services are not integral to the functionality of
the software and are available from other vendors. This service revenue is
generally recognized over the period during which the applicable service is to
be performed or on a services-performed basis.
F-59
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE COSTS
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," development costs incurred
in the research and development of new software products to be sold, leased or
otherwise marketed are expensed as incurred until technological feasibility in
the form of a working model has been established. Internally generated
capitalizable software development costs have not been material for the years
ended December 31, 1998 and 1999 and the three months ended January 31, 2000.
The Company has charged its software development costs to research and
development expense in the accompanying statements of operations.
INCOME TAXES
The Company recognizes a liability or asset for the deferred tax
consequences of all temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years when the reported
amounts of the assets and liabilities are recovered or settled. These deferred
tax assets or liabilities are measured using the enacted tax rates that will be
in effect when the differences are expected to reverse. Deferred tax assets are
reviewed periodically for recoverability and valuation allowances are provided,
as necessary.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes new accounting and
reporting standards for companies to report information regarding derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
This statement is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (or June 1, 2001 for the Company). The Company
does not expect that SFAS No. 133 will have a material impact on the financial
condition or results of the operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB No. 1"), "Revenue Recognition in
Financial Statements." This pronouncement summarizes certain of the SEC staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. The Company is required to adopt SAB No. 101 during the
second quarter of 2000. Although management is currently evaluating the impact,
if any, of SAB No. 101, management does not presently believe it will have a
material impact on the Company's results of operations, financial position or
liquidity.
(2) MARKETABLE SECURITY
As discussed in Note 5, the Company received 16,833 shares of Caldera
Systems, Inc.'s common stock in exchange for services. This investment has been
classified as an available-for-sale security in
F-60
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(2) MARKETABLE SECURITY (CONTINUED)
the accompanying financial statements. The cost, gross unrealized holding gain,
and estimated fair value of the marketable security as of March 31, 2000 is as
follows:
[Download Table]
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
---------------- ------------
Cost............................................. Y13,675 $134
Gross unrealized holding gain.................... 28,315 276
-------------- ----
Estimated fair value............................. Y41,990 $410
============== ====
(3) SHORT-TERM AND LONG-TERM DEBT
Short-term debt consisted primarily of short-term bank loans due to banks,
shareholders and directors. The weighted-average annual interest rates
applicable to short-term debt outstanding at December 31, 1998 and 1999, were
2.9 percent and 2.3 percent, respectively. The weighted-average borrowings
during the years ended December 31, 1998 and 1999 were Y82,952,000 ($810,000)
and Y69,055,000 ($674,000), respectively.
F-61
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(3) SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
Long-term debt at December 31, 1998 and 1999, consisted of the following:
[Enlarge/Download Table]
THOUSANDS OF YEN
--------------------------------------------------- THOUSANDS OF U.S. DOLLARS
DECEMBER 31, -------------------------
--------------------------------- MARCH 31, DECEMBER 31, MARCH 31,
1998 1999 2000 1999 2000
--------------- --------------- --------------- ------------ ----------
Long-term loan from 82 Bank: interest at
2.8 percent per annum payable monthly,
principal due in monthly installments
through 2003; secured by building;
guaranteed by directors and
stockholder........................... Y 47,216 Y 34,520 Y 31,346 $ 338 $ 306
--------------- --------------- --------------- ----- -----
Long-term loan from Ina Shinkin Bank:
interest at 3.2 percent per annum
payable monthly, principal due in
monthly installments through 2003;
secured by building and time deposit;
guaranteed by directors and
stockholder........................... 68,674 63,370 73,978 619 722
--------------- --------------- --------------- ----- -----
Long-term loan from People's Finance
Corporation: interest at 2.3 percent
per annum payable monthly, principal
due in monthly installments through
2003; secured by building; guaranteed
by directors and stockholder.......... 12,000 10,080 9,600 98 94
--------------- --------------- --------------- ----- -----
Less current maturities................. (19,920) (31,094) (31,484) (304) (308)
--------------- --------------- --------------- ----- -----
Long-term debt.......................... Y107,970 Y 76,876 Y 83,440 $ 751 $ 814
=============== =============== =============== ===== =====
As is customary in Japan, substantially all bank loans are made under
agreements which provide that the banks may require, under certain conditions,
the borrower to provide collateral or guarantors for its loans.
Lending banks have a right to offset cash deposited with them against any
debt or obligation that becomes due and, in the case of default and certain
other specified events, against all other debt payable to the banks.
The Company paid guarantee fees and pledged a building with a book value of
Y1,896,000 ($18,000) as of December 31, 1999 as security to the credit guarantee
company. Additionally, another building with a book value of Y43,494,000
($424,000) as of December 31, 1999 and a time deposit of Y20,024,000 ($195,000)
are pledged as security to the banks. The time deposit is recorded as a
restricted time deposit in the accompanying balance sheets. Furthermore all
loans are guaranteed by the Company's directors and stockholders.
F-62
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(3) SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
Annual maturities of long-term debt as of December 31, 1999 are as follows:
[Download Table]
THOUSANDS OF
YEAR ENDING DECEMBER 31 THOUSANDS OF YEN U.S. DOLLARS
----------------------- ---------------- ------------
2000......................................... Y 31,094 $ 304
2001......................................... 27,744 271
2002......................................... 27,744 271
2003......................................... 21,388 209
--------------- ------
Total........................................ Y107,970 $1,055
=============== ======
(4) RETIREMENT BENEFIT PLANS
The Company has defined contribution benefit plans, which provide retirement
benefits to qualified employees. The Company makes discretionary contributions
principally based on individual technical skills and experience. The Company's
contributions are expensed as incurred and totaled Y2,472,000 ($24,000) and
Y2,252,000 ($22,000) for the years ended December 31, 1998 and 1999,
respectively.
(5) COMMITMENTS AND CONTINGENCIES
SOFTWARE LOCALIZATION AGREEMENT
On October 1, 1999, the Company entered into an agreement with Caldera
Systems, Inc. ("Caldera") to localize certain of Caldera's software products for
the Japanese market. As consideration, Caldera agreed to pay $250,000 in cash or
issue to the Company shares of Caldera's common stock with a market value of
$202,000, based on Caldera's initial public offering price per share. On
January 4, 2000, the Company and Caldera amended the agreement pursuant to which
Caldera agreed to issue 33,667 shares of common stock to the Company for the
services, of which 16,833 were to be issued immediately for services previously
rendered and the remaining 16,834 are to be issued upon completion of the
localization services.
In the event that the localized software is not accepted by Caldera under
the agreement prior to December 31, 2001, then the Company shall pay $100,000 to
Caldera. However, the Company shall have no obligation to pay such amount if the
localized software is not accepted by Caldera prior to December 31, 2001 because
Caldera unreasonably withheld or delayed such acceptance. Based on the
performance commitment, the date of the amended contract has been determined to
be the measurement date and the estimated fair value of Caldera's common stock
on that date was $269,336, or $8 per share. As of December 31,1999, the Company
recognized Y13,790,000 ($135,000) of revenue based upon the percentage
completion method (see Note 1).
OPERATING LEASE AGREEMENTS
The Company leases land for operating facilities and equipment under
cancelable and non-cancelable operating lease agreements. Rent expense under
these lease agreements amounted to
F-63
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(5) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Y2,432,000 ($23,000) and Y2,084,000 ($20,000) for the years ended December 31,
1998 and 1999, respectively.
As of December 31, 1999, the future minimum lease payments under these
operating leases were as follows:
[Download Table]
YEAR ENDING DECEMBER 31, THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
------------------------ ---------------- -------------------------
2000................................ Y 2,052 $ 20
2001................................ 2,052 20
2002................................ 2,052 20
2003................................ 2,052 20
2004................................ 2,052 20
Thereafter.......................... 12,312 120
-------------- ----
Total............................... Y22,572 $220
============== ====
(6) STOCKHOLDERS' DEFICIT
The Japanese Commercial Code (the "Code") provides that at least one-half of
the issue price of new shares, with a minimum of the par value thereof, be
included in common stock. The issue price is the price determined by the Board
of Directors of a company.
In December 1998 and 1999, the Company issued 20,000 and 40,000 shares of
Common Stock at par value, Y 500 ($4.88) per share. As of December 31, 1999, the
Company had received Y20,000,000 ($195,312) in exchange for 40,000 shares of
common stock to be issued. The shares were not actually issued until
February 2000; however, they have been reflected as issued and outstanding in
the accompanying balance sheet as of December 31, 1999.
At December 31, 1998 and 1999, the Company had an accumulated deficit and
had no amounts legally available for distribution to stockholders.
F-64
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(7) INCOME TAXES
The significant components of the Company's net deferred income tax assets
at December 31, 1998 and 1999 are as follows:
[Enlarge/Download Table]
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
--------------------------------- ------------
DECEMBER 31,
--------------------------------- DECEMBER 31,
1998 1999 1999
--------------- --------------- ------------
Deferred income tax assets:
Net operating loss carryforwards.......... Y 36,686 Y 62,882 $ 614
Research and development expenses......... 11,860 -- --
Deferred expenses......................... -- 8,982 87
Accrued vacation pay...................... 2,564 2,569 25
Other..................................... 980 977 9
Deferred revenue.......................... (2,775) (6,245) (60)
Prepaid bonus............................. (5,096) (5,025) (49)
--------------- --------------- -----
Net deferred income tax assets.......... 44,219 64,140 626
Valuation allowance......................... (44,219) (64,140) (626)
--------------- --------------- -----
Net deferred income tax assets.......... Y -- Y -- $ --
=============== =============== =====
The amount of and ultimate realization of the net deferred income tax assets
is dependent, in part, upon the tax laws in effect, the Company's future
earnings, and other future events, the effects of which cannot be determined.
The Company has established a valuation allowance against its deferred income
tax assets because the available objective evidence creates sufficient
uncertainty regarding their realizability.
Under Japanese tax regulation, the Company can carry forward net operating
losses for five years. The net operating loss carryforwards as of December 31,
1999 will expire as follows:
[Download Table]
THOUSANDS OF
YEAR OF EXPIRATION THOUSANDS OF YEN U.S. DOLLARS
------------------ ---------------- ------------
2000......................................... Y 21,455 $ 209
2001......................................... 57,610 563
2004......................................... 72,457 707
--------------- ------
Total........................................ Y151,522 $1,479
=============== ======
F-65
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(7) INCOME TAXES (CONTINUED)
The differences between the statutory tax rates and the effective tax rates
for the years ended December 31, 1998 and 1999 are summarized as follows:
[Download Table]
DECEMBER 31,
-------------------
1998 1999
-------- --------
Statutory tax rate.......................................... (49.7)% (46.4)%
Effect of tax rate change................................... 90.7 12.8
Change in valuation allowance............................... (40.8) 33.6
Minimum inhabitant tax...................................... (5.9) (0.3)
Other....................................................... (0.2) --
----- -----
Effective tax rate.......................................... (5.9)% (0.3)%
===== =====
Effective April 1, 1999, the statutory tax rate was reduced to approximately
41.5 percent and such rate has been used in calculating the future expected tax
effects of temporary differences as of December 31, 1999.
The provision for income taxes in the statements of operations reflects only
the minimum inhabitant tax due to the Company's loss from operations.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying financial statements for
cash and cash equivalents, time deposits, accounts receivables, short-term debt,
and accounts payable approximate fair values because of the immediate or
short-term maturity of these financial instruments. The carrying amount of the
Company's marketable security also approximates fair value because the
investment has been classified as available for sale and recorded at the quoted
market price.
The estimated fair values of the Company's long-term debt obligations have
been determined based on the present value of future cash flows associated with
each instrument discounted using the current borrowing rate for similar debt of
comparable maturity. As of December 31, 1999, the Company's long-term debt,
which had a carrying amount of Y107,970,000 ($1,055,000), had an estimated fair
value of Y110,525,000 ($1,079,000).
(9) SEGMENT INFORMATION
In June 1998, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. SFAS 131 establishes disclosures related to
components of a company for which separate financial information is available
and evaluated regularly by a company's chief operating decision makers in
deciding how to allocate resources and in assessing performance. It also
requires segment disclosures about products and services as well as geographic
areas. The Company has determined that it did not have any separately reportable
operating segments as of December 31, 1998 and 1999.
F-66
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(9) SEGMENT INFORMATION (CONTINUED)
However, the Company generates revenue in geographic locations outside of
Japan. Revenue attributable to individual countries based on the location of
sales is as follows:
[Enlarge/Download Table]
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
------------------------------------------------------------------- ---------------------------
YEAR ENDED THREE MONTHS ENDED THREE MONTHS
DECEMBER 31, MARCH 31, YEAR ENDED ENDED
--------------------------------- ------------------------------- DECEMBER 31, MARCH 31,
1998 1999 1999 2000 1999 2000
--------------- --------------- -------------- -------------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Japan....................... Y202,408 Y143,317 Y34,050 Y31,729 $1,399 $ 310
Other countries............. -- 13,790 -- -- 135 --
--------------- --------------- -------------- -------------- ------ -----
Total revenue............. Y202,408 Y157,107 Y34,050 Y31,729 $1,534 $ 310
=============== =============== ============== ============== ====== =====
Sales to significant customers as a percentage of total revenue are as
follows:
[Download Table]
YEAR ENDED
DECEMBER 31,
-----------------------
CUSTOMER 1998 1999
-------- -------- --------
Seiko Epson................................................. 40.0% 44.6%
Mikuni Industry............................................. 9.0 20.3
(10) RELATED PARTY TRANSACTIONS
The Company's stockholders and directors have made short-term loans to the
Company from time to time. Certain of the loans are non-interest bearing. The
Company has imputed interest on the loans, which has been reflected as
additional capital contributions.
The Company has also agreed to pay consulting fees to certain stockholders
in connection with the Caldera transaction discussed in Note 5.
The following table summarizes the amounts due from (due to) stockholders
and the related interest expense and other transactions as of and for the years
ended December 31, 1998 and 1999, and as of and for the three months ended
March 31, 2000.
[Enlarge/Download Table]
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
-------------------------------------------------- --------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
1998 1999 2000 1999 2000
-------------- --------------- --------------- ------------ -----------
(UNAUDITED) (UNAUDITED)
Interest bearing short-term debt..... Y(8,600) Y(15,550) Y(15,550) $(151) $(151)
Non-interest bearing short-term
debt............................... (3,135) (734) (334) (7) (3)
Consulting fees...................... -- 8,500 -- 83 --
Consulting fees payable.............. -- (8,500) -- (83) --
F-67
UNITED SYSTEM ENGINEERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
(10) RELATED PARTY TRANSACTIONS (CONTINUED)
The weighted average amount of non-interest short-term loans from
stockholders and directors for the years ended December 31, 1998 and 1999 and
for the three months ended March 31, 2000 were as follows:
[Enlarge/Download Table]
THOUSANDS OF YEN THOUSANDS OF U.S. DOLLARS
----------------------------------------------------------- ------------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
1998 1999 2000 1999 2000
--------------- --------------- --------------- ------------ -----------
(UNAUDITED) (UNAUDITED)
Y(18,031) Y(14,392) Y(16,083) $(140) $(157)
(11) SUBSEQUENT STOCK PURCHASE AGREEMENT
On April 13, 2000, the Company's stockholders and Lineo, Inc. ("Lineo")
entered into a stock purchase agreement pursuant to which Lineo agreed to
purchase all of the issued and outstanding capital stock of the Company for
$322,829 of cash and 507,333 options to purchase shares of Lineo common stock at
$3.00 per share. The stock purchase agreement is effective May 1, 2000. In
addition, Lineo agreed to grant 175,000 additional options to purchase shares of
Lineo's common stock to the employees of the Company who will become employees
of Lineo for future services.
F-68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fireplug Computers Inc:
We have audited the accompanying balance sheets of Fireplug Computers Inc.
(a British Columbia, Canada company) as of December 31, 1998 and 1999, and the
related statements of operations and comprehensive loss, stockholders' deficit
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fireplug Computers Inc. as
of December 31, 1998 and 1999, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN
Vancouver, British Columbia
May 15, 2000
F-69
FIREPLUG COMPUTERS INC.
BALANCE SHEETS
(U.S. DOLLARS)
[Enlarge/Download Table]
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash...................................................... $ 2,462 $ 9,334 $ 537
Accounts receivable, net of allowance for doubtful
accounts of $0, $0, and $9,803, respectively............ 304 1,008 25,189
-------- -------- ---------
Total current assets.................................... 2,766 10,342 25,726
-------- -------- ---------
Property and equipment:
Computer equipment........................................ 43,485 50,406 61,924
Furniture and fixtures.................................... 5,394 5,394 8,063
-------- -------- ---------
48,879 55,800 69,987
Less accumulated depreciation............................. (19,944) (40,777) (44,351)
-------- -------- ---------
Net property and equipment.............................. 28,935 15,023 25,636
-------- -------- ---------
$ 31,701 $ 25,365 $ 51,362
======== ======== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 6,714 $ 19,113 $ 27,051
Accrued liabilities....................................... -- 6,103 32,157
Deferred revenue.......................................... -- 3,465 --
Advances from stockholders................................ 72,951 82,015 62,476
-------- -------- ---------
Total current liabilities............................... 79,665 110,696 121,684
-------- -------- ---------
Commitments and contingencies (Note 6)
Stockholders' deficit:
Class C redeemable preferred stock, CDN$1.00 par value;
2,000,000 shares designated, none outstanding........... -- -- --
Class A voting shares, no par value; 2,000,000 shares
designated, 412, 412 and 463 shares outstanding,
respectively............................................ 288 288 134,074
Class B non-voting shares, no par value; 2,000,000 shares
designated, none outstanding............................ -- -- --
Accumulated deficit....................................... (49,930) (83,317) (199,394)
Cumulative translation adjustments........................ 1,678 (2,302) (5,002)
-------- -------- ---------
Total stockholders' deficit............................. (47,964) (85,331) (70,322)
-------- -------- ---------
$ 31,701 $ 25,365 $ 51,362
======== ======== =========
See accompanying notes to financial statements.
F-70
FIREPLUG COMPUTERS INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(U.S. DOLLARS)
[Enlarge/Download Table]
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------- -------------------------
1998 1999 1999 2000
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenue............................................ $ 33,025 $144,778 $16,618 $ 69,186
Cost of revenue.................................... 34,128 88,996 10,008 24,733
-------- -------- ------- ---------
Gross margin................................... (1,103) 55,782 6,610 44,453
-------- -------- ------- ---------
Operating expenses:
Sales and marketing.............................. 15,052 32,382 6,280 27,794
General and administrative (exclusive of non-cash
stock-related compensation of $114,500 in the
three months ended March 31, 2000)............. 32,003 56,787 5,184 18,236
Non-cash stock related compensation.............. -- -- -- 114,500
-------- -------- ------- ---------
Total operating expenses....................... 47,055 89,169 11,464 160,530
-------- -------- ------- ---------
Net loss........................................... $(48,158) $(33,387) $(4,854) $(116,077)
======== ======== ======= =========
Comprehensive loss:
Net loss......................................... $(48,158) $(33,387) $(4,854) $(116,077)
Foreign currency translation adjustments......... 1,629 (3,980) (788) (2,700)
-------- -------- ------- ---------
$(46,529) $(37,367) $(5,642) $(118,777)
======== ======== ======= =========
See accompanying notes to financial statements.
F-71
FIREPLUG COMPUTERS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(U.S. DOLLARS)
[Enlarge/Download Table]
CLASS A VOTING CUMULATIVE TOTAL
------------------- ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT DEFICIT ADJUSTMENTS DEFICIT
-------- -------- ----------- ----------- -------------
Balance, December 31, 1997.............. 412 $ 288 $ (1,772) $ 49 $ (1,435)
Foreign currency translation
adjustments........................... -- -- -- 1,629 1,629
Net loss................................ -- -- (48,158) -- (48,158)
--- -------- --------- ------- ---------
Balance, December 31, 1998.............. 412 288 (49,930) 1,678 (47,964)
Foreign currency translation
adjustments........................... -- -- -- (3,980) (3,980)
Net loss................................ -- -- (33,387) -- (33,387)
--- -------- --------- ------- ---------
Balance, December 31, 1999.............. 412 288 (83,317) (2,302) (85,331)
Issuance of Class A voting shares for
services (unaudited).................. 43 114,500 -- -- 114,500
Issuance of Class A voting shares upon
conversion of advance from stockholder
(unaudited)........................... 8 19,286 -- -- 19,286
Foreign currency translation adjustments
(unaudited)........................... -- -- -- (2,700) (2,700)
Net loss (unaudited).................... -- -- (116,077) -- (116,077)
--- -------- --------- ------- ---------
Balance, March 31, 2000 (unaudited)..... 463 $134,074 $(199,394) $(5,002) $ (70,322)
=== ======== ========= ======= =========
See accompanying notes to financial statements.
F-72
FIREPLUG COMPUTERS INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------ -----------------------------
1998 1999 1999 2000
---------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss................................ $(48,158) $(33,387) $(4,854) $(116,077)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation.......................... 19,944 20,833 4,893 3,574
Non-cash stock related compensation... -- -- -- 114,500
Changes in operating assets and
liabilities:
Accounts receivable................. (304) (704) 260 (24,181)
Accounts payable.................... 6,883 12,399 (5,393) 7,938
Accrued liabilities................. -- 6,103 6,737 26,054
Deferred revenue.................... -- 3,465 -- (3,465)
-------- -------- ------- ---------
Net cash provided by (used in)
operating activities............ (21,635) 8,709 1,643 8,343
-------- -------- ------- ---------
Cash flows from investing activities:
Purchase of property and equipment...... -- (6,921) (462) (14,187)
-------- -------- ------- ---------
Cash flows from financing activities:
Advances from stockholders.............. 22,468 9,064 1,558 (253)
-------- -------- ------- ---------
Net increase (decrease) in cash........... 833 10,852 2,739 (6,097)
Foreign currency translation
adjustments............................. 1,629 (3,980) (788) (2,700)
Cash, beginning of period................. -- 2,462 2,462 9,334
-------- -------- ------- ---------
Cash, end of period....................... $ 2,462 $ 9,334 $ 4,413 $ 537
======== ======== ======= =========
Supplemental disclosure of non-cash
investing and financing activities:
Conversion of advance from stockholder
to Class A voting shares.............. $ -- $ -- $ -- $ 19,286
See accompanying notes to financial statements.
F-73
FIREPLUG COMPUTERS INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Fireplug Computers Inc. (the "Company") was incorporated under the laws of
British Columbia on April 11, 1997. The Company provides contract engineering
development of embedded Linux network application software solutions and
embedded Linux tools.
On May 1, 2000, the Company's stockholders entered into an agreement with
Lineo, Inc. ("Lineo"), a United States corporation. Pursuant to the agreement,
Lineo acquired all of the outstanding stock of the Company in exchange for
$500,000 in cash, 69,998 shares of Lineo's series D convertible preferred stock
and options to purchase 62,220 shares of Lineo's common stock. The options have
a vesting period of one year, an exercise price of $1.50 per share and expire
ten years from the date of grant. Lineo has committed to provide funding to the
Company as required.
(2) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of March 31, 2000 and for the
three months ended March 31, 1999 and 2000 have been prepared on the same basis
as the audited financial statements and, in the opinion of management, reflect
all normal recurring adjustments necessary to present fairly the financial
information set forth therein in accordance with accounting principles generally
accepted in the United States. The results of operations for the three months
ended March 31, 2000 are not necessarily indicative of the results to be
expected for the entire year ending December 31, 2000.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying financial statements for
cash, accounts receivable and accounts payable approximate fair values because
of the immediate or short-term maturities of these financial instruments.
FOREIGN CURRENCY TRANSLATION
The Company prepares its statements in Canadian dollars since its functional
currency is the Canadian dollar. As a result of the acquisition discussed in
Note 1, the accompanying financial statements are denominated in U.S. dollars.
The Company has translated its Canadian dollar financial
F-74
FIREPLUG COMPUTERS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
statements into U.S. dollars using the current method. Under this method,
monetary and non-monetary items are translated at the rate of exchange in effect
at the balance sheet date and revenue and expenses are translated at the average
exchange rate for the periods.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Computer equipment and furniture and fixtures are depreciated
using the straight-line method over the estimated useful life of the asset,
typically three years.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the useful
lives of existing equipment are capitalized and depreciated. On retirement or
disposition of property and equipment, the cost and related accumulated
depreciation and amortization are removed from the accounts and any resulting
gain or loss is recognized in the statement of operations.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are comprised principally of equipment and fixtures. The
Company reviews its long-lived assets for impairment when events or changes in
circumstances indicate that the book value of an asset may not be recoverable.
The Company evaluates, at each balance sheet date, whether events and
circumstances have occurred which indicate possible impairment. The Company uses
an estimate of future undiscounted net cash flows of the related asset or group
of assets over the remaining life in measuring whether the assets are
recoverable. As of December 31, 1999 and March 31, 2000, the Company does not
consider any of its long-lived assets to be impaired.
REVENUE RECOGNITION
The Company generates revenue from engineering services. Services are billed
on a time and materials basis and revenue is recognized as the services are
performed. Amounts received in advance of the services being performed are
recorded as deferred revenue and recognized as earned.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation issued to directors,
officers and employees under Accounting Principles Board Opinion No. 25 ("APB
No. 25") "Accounting for Stock Issued to Employees" and related interpretations.
Under APB No. 25, compensation expense for stock options, if any, is recognized
if an option's exercise price on the measurement date is below the intrinsic
fair value of the Company's common stock and amortized to expense over the
vesting period. Through March 31, 2000, the Company has not issued any stock
options. Compensation expense for stock awards or purchases, if any, is
recognized if the award or purchase price on the measurement date is below the
intrinsic fair value of the Company's common stock and is recognized on the date
of award or purchase.
F-75
FIREPLUG COMPUTERS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company accounts for its stock-based compensation issued to other than
employees in accordance with Statement of Financial Accounting Standards
("SFAS") No. 123 "Accounting for Stock-Based Compensation" and related
interpretations. Under SFAS No. 123, stock-based compensation is determined as
either the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measureable. The
measurement date for these issuances is the earlier of either the date at which
a commitment for performance by the recipient to earn the equity instruments is
reached or the date at which the recipient's performance is complete.
INCOME TAXES
The Company recognizes a current tax liability or asset for current taxes
payable or refundable and a deferred income tax liability or asset for the
estimated future tax effects of temporary differences between the carrying value
of assets and liabilities for financial reporting and their tax basis and loss
carry forwards to the extent they are realizable. A deferred income tax
valuation allowance is required if it is "more likely than not" that all or a
portion of recorded future tax assets will not be realized.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company offers credit terms on the sale of its consulting services to
its customers. The Company performs ongoing credit evaluations of its customers'
financial condition and requires no collateral from its customers. The Company
continually evaluates the need for an allowance for uncollectable accounts
receivable based upon the expected collectability of all accounts receivable. As
of March 31, 2000, one customer accounted for 97 percent of gross accounts
receivable.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new accounting and
reporting standards for companies to report information about derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to have a material impact on the Company's results of
operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition
in Financial Statements." This pronouncement summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to selected
revenue recognition issues. The Company is required to adopt SAB No. 101 during
the second quarter of 2000. Although management is currently evaluating the
impact, if any, of SAB No. 101, management does not presently believe it will
have a material impact on the Company's results of operations, financial
position or liquidity.
F-76
FIREPLUG COMPUTERS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
(3) STOCKHOLDERS' DEFICIT
AUTHORIZED SHARES
The Company's articles of incorporation provide for the issuance of
Class A, B and C shares and sets forth the preferences, limitations and relative
rights granted or imposed upon each class of preferred stock.
Dividends may be declared on the Class A, B and C shares at the discretion
of the Board of Directors.
The Class C shares are redeemable and have priority over Class A and B
shares with respect to liquidation, winding up or dissolution. The Class B
shares have no voting rights.
CLASS A ISSUANCES
During the three months ended March 31, 2000, the Company issued 43 shares
of Class A stock to employees and consultants for services rendered. The
estimated fair value of the Class A shares on the date of issuance was deemed to
be $114,500, based on the consideration paid by Lineo to acquire the Company on
May 1, 2000. The $114,500 has been reflected as non-cash stock-related
compensation in the accompanying statement of operations for the three months
ended March 31, 2000.
During the three months ending March 31, 2000, the Company issued 8 shares
of Class A stock in connection with a conversion of $19,826 of advances from
stockholders (See Note 4).
(4) RELATED PARTY TRANSACTIONS
During the year ended December 31, 1998, certain stockholders of the Company
sold property and equipment having an estimated fair value of $48,879 to the
Company. The Company recorded the estimated fair value of these assets as
advances from stockholders.
Advances from stockholders represent amounts owed to stockholders for
property and equipment transferred to the Company and for expenses incurred on
behalf of the Company. The advances are non-interest bearing and have no fixed
repayment terms.
During the three months ended March 31, 2000, advances from stockholders of
$19,826 were converted into 8 shares of Class A stock (see Note 3).
(5) INCOME TAXES
The components of the Company's income tax provision computed at the
combined statutory Canadian federal and provincial income tax rate for the years
ended December 31, 1998 and 1999 are as follows:
[Download Table]
1998 1999
-------- --------
Income tax benefit at statutory rates...................... $9,632 $ 6,677
Change in valuation allowance.............................. (9,632) (6,677)
------ -------
$ -- $ --
====== =======
F-77
FIREPLUG COMPUTERS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
(5) INCOME TAXES (CONTINUED)
The deferred income tax assets resulting from differences in the timing of
the recognition of certain income and expense items for income tax and financial
accounting purposes at December 31, 1998 and 1999 are as follows:
[Download Table]
1998 1999
-------- --------
Net operating loss carryforwards......................... $ 8,575 $ 12,741
Depreciation............................................. 1,105 3,616
------- --------
9,680 16,357
Less: valuation allowance................................ (9,680) (16,357)
------- --------
Net deferred income taxes................................ $ -- $ --
======= ========
The ultimate realization of the deferred income tax assets is dependent, in
part, upon the tax laws in effect, the Company's future earnings, and other
future events, the effects of which cannot be determined. The Company has
established a valuation allowance against its deferred income tax assets because
the available objective evidence creates sufficient uncertainty regarding their
realizability.
At December 31, 1999, the Company's net operating loss carryforwards totaled
$64,000 and expire as follows: $43,000 in 2004 and $21,000 in 2005.
(6) COMMITMENTS AND CONTINGENCIES
The Company may become party to certain legal proceedings arising in the
ordinary course of business. Management believes, after consultation with legal
counsel, that as of December 31, 1999 and March 31, 2000, no pending or
threatened legal proceedings exist which would have a material adverse effect on
the Company's financial position, liquidity or results of operations.
F-78
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of INUP S.A.
In our opinion, the accompanying balance sheet and the related statement of
operations, stockholders' equity, and cash flows present fairly, in all material
respects, the financial position of INUP S.A. (a development stage company) (the
"Company") at December 31, 1999, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
THE STATUTORY AUDITOR
Befec -- Price Waterhouse
Member of PricewaterhouseCoopers
Paris, France
April 28, 2000, except as to Notes 3 and 8
which are as of May 1, 2000
F-79
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(U.S. DOLLARS)
[Enlarge/Download Table]
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 757,603 $ 519,815
Accounts receivable....................................... 62,992 95,259
Prepaid expenses.......................................... 9,666 3,146
Other current assets...................................... 1,623 2,030
--------- ---------
Total current assets.................................... 831,884 620,250
--------- ---------
Property and equipment, net................................. 148,243 155,877
--------- ---------
Total assets............................................ $ 980,127 $ 776,127
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 152,487 $ 103,681
Accrued liabilities....................................... 10,021 35,342
--------- ---------
Total liabilities....................................... 162,508 139,023
--------- ---------
Commitments and contingencies (Note 6)
Stockholders' Equity:
Common stock, $0.25 par value, 750,000 shares authorized,
issued and outstanding.................................. 188,363 188,363
Additional paid-in capital................................ 738,577 738,577
Accumulated other comprehensive (loss) income............. 997 (37,712)
Deficit accumulated during the development stage.......... (110,318) (252,124)
--------- ---------
Total stockholders' equity.............................. 817,619 637,104
--------- ---------
Total liabilities and stockholders' equity.............. $ 980,127 $ 776,127
========= =========
The accompanying notes are an integral part of these financial statements.
F-80
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(U.S. DOLLARS)
[Enlarge/Download Table]
PERIOD FROM
INCEPTION
YEAR ENDED THREE MONTHS (JANUARY 1, 1999)
DECEMBER 31, ENDED MARCH 31, THROUGH
1999 2000 MARCH 31, 2000
------------ --------------- -----------------
(UNAUDITED) (UNAUDITED)
Revenue.......................................... $ 8,355 $ -- $ 8,355
Cost of revenue.................................. 1,785 -- 1,785
--------- --------- ---------
Gross profit................................... 6,570 6,570
Research and development......................... 55,387 44,886 100,273
General and administrative expenses.............. 76,169 136,583 212,752
--------- --------- ---------
Loss from operations............................. (124,986) (181,469) (306,455)
--------- --------- ---------
Other income (expense)...........................
Interest income (expense)...................... (60) 494 434
Other non-operating income (expense)........... 10 (1) 9
--------- --------- ---------
Other income (expense), net.................. (50) 493 443
--------- --------- ---------
Loss before income taxes......................... (125,036) (180,976) (306,012)
Income tax credit................................ 14,718 39,170 53,888
--------- --------- ---------
Net loss......................................... $(110,318) $(141,806) $(252,124)
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-81
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
(U.S. DOLLARS)
[Enlarge/Download Table]
DEFICIT
ACCUMULATED ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE OTHER STOCKHOLDERS'
------------------- PAID-IN DEVELOPMENT COMPREHENSIVE EQUITY COMPREHENSIVE
SHARES AMOUNT CAPITAL STAGE INCOME (LOSS) TOTAL LOSS
-------- -------- ---------- ------------ -------------- ------------- --------------
Common stock issued for cash
on January 1, 1999 at $0.25
per share................... 32,000 $ 8,037 $ -- -- $ -- $ 8,037 --
Common stock issued for cash
on November 3, 1999 at $1.28
per share................... 718,000 180,326 738,577 -- -- 918,903 --
Comprehensive loss:
Net loss.................... -- -- -- $(110,318) -- (110,318) $(110,318)
Other comprehensive income:
Foreign currency
translation
adjustment.............. -- -- -- -- 997 997 997
Comprehensive loss........ -- -- -- -- -- -- $(109,321)
------- -------- -------- --------- -------- --------- =========
Balances, December 31, 1999... 750,000 188,363 738,577 (110,318) 997 817,619
Comprehensive loss:
Net loss (unaudited)........ -- -- -- (141,806) -- (141,806) $(141,806)
Other comprehensive loss:
Foreign currency
translation adjustment
(unaudited)............. -- -- -- -- (38,709) (38,709) (38,709)
---------
Comprehensive loss
(unaudited)........... -- -- -- -- -- -- $(180,515)
------- -------- -------- --------- -------- --------- ---------
Balances, March 31, 2000
(unaudited)................. 750,000 $188,363 $738,577 $(252,124) $(37,712) $ 637,104
======= ======== ======== ========= ======== =========
The accompanying notes are an integral part of these financial statements.
F-82
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(U.S. DOLLARS)
[Enlarge/Download Table]
THREE PERIOD FROM
MONTHS INCEPTION
YEAR ENDED ENDED (JANUARY 1, 1999)
DECEMBER 31, MARCH 31, THROUGH
1999 2000 MARCH 31, 2000
------------- ----------- ------------------
(UNAUDITED) (UNAUDITED)
Cash flows from operations:
Net loss............................................ $(110,318) $(141,806) $(252,124)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation...................................... 11,280 29,680 40,960
Changes in operating assets and liabilities:
Accounts receivable............................. (62,992) (32,267) (95,259)
Prepaid expenses................................ (9,666) 6,520 (3,146)
Other current assets............................ (1,623) (407) (2,030)
Accounts payable................................ 152,487 (48,806) 103,681
Accrued liabilities............................. 10,021 25,321 35,342
--------- --------- ---------
Net cash used in operating activities............. (10,811) (161,765) (172,576)
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment................ (159,523) (37,314) (196,837)
--------- --------- ---------
Net cash used in investing activities............. (159,523) (37,314) (196,837)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock............ 926,940 -- 926,940
--------- --------- ---------
Net cash provided by financing activities......... 926,940 -- 926,940
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents....................................... 997 (38,709) (37,712)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents....................................... 757,603 (237,788) 519,815
Cash and cash equivalents beginning of period....... -- 757,603 --
--------- --------- ---------
Cash and cash equivalents end of period............. $ 757,603 $ 519,815 $ 519,815
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-83
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(U.S. DOLLARS)
1. ORGANIZATION OF THE COMPANY AND NATURE OF OPERATIONS
INUP S.A. ("the Company") was formed on January 1, 1999 pursuant to French
articles of incorporations as SOCIETE A RESPONSABILITE LIMITE (Limited Liability
Company). The Company subsequently changed its corporate structure to that of a
SOCIETE ANONYME (Corporation) on November 30, 1999. The Company seeks to produce
and sell services and products associated with computer systems, electronics and
telecommunications. Specifically, the Company currently aims to produce and sell
suites for embedded and scalable Linux-based computer systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING AND PRESENTATION
The Company maintains its accounting records and prepares its statutory
financial statements in conformity with generally accepted accounting principles
in France. The financial statements and notes are representations of the
Company's management, who is responsible for their integrity and objectivity.
These financial statements have been translated into US Dollars according to
the guidance of Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation" ("SFAS 52") and include certain adjustments, not recorded
in the Company's accounting records, to present these financial statements in
conformity with accounting principles generally accepted in the United States of
America ("U.S. GAAP") and conform to the standards applicable to development
stage companies.
The Company's functional currency is the European Currency Unit ("Euro").
FOREIGN CURRENCY TRANSLATION
Under the provisions of SFAS 52, the accompanying financial statements have
been translated from Euros to US Dollars as follows:
- All assets and liabilities have been translated into US Dollars using the
current exchange rate at the balance sheet date. Equity accounts have been
translated using historical exchange rates.
- Income statement accounts have been translated into US Dollars using the
average exchange rate over the period presented.
- The adjustment from translation of the Company's financial statements into
US Dollars is reported as a separate component of other comprehensive
income.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of March 31, 2000 and for the
three months then ended have been prepared on the same basis as the audited
financial statements and, in the opinion of management, reflect all normal
recurring adjustments necessary to present fairly the financial information set
forth therein in accordance with U.S. GAAP. All financial statement disclosures
related to the interim financial statements are unaudited.
F-84
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Although the Company was formed on January 1, 1999, the Company's operations
did not begin until the fourth quarter of 1999. Accordingly, there is no
comparative financial information for the three months ended March 31, 1999 to
be included in the accompanying financial statements.
DEVELOPMENT STAGE ENTERPRISE
From the date of inception (January 1, 1999) through March 31, 2000, the
Company was a development stage company, as planned principal operations had not
yet begun to generate significant revenue.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers investments purchased with a maturity period of three
months or less at the date of purchase to be cash equivalents.
REVENUE RECOGNITION
The accompanying statements of operations reflect revenue in accordance with
the American Institute of Certified Public Accountants ("AICPA") Statement of
Position No. 97-2, "Software Revenue Recognition". Revenues in 1999 resulted
from a one-time resale of acquired software and consulting services provided by
the Company. Revenue has been recognized upon delivery of the product when
persuasive evidence of an arrangement exists, the price is fixed or
determinable, collection is probable and no significant post-delivery
obligations exist and as services have been provided. Through December 31, 1999,
and March 31, 2000 (unaudited), the Company has not recognized revenue from
other product sales.
CONCENTRATION OF CREDIT RISK
The Company primarily places its temporary cash investments with high-credit
quality financial institutions which invest primarily in French Government
securities and commercial paper of prime quality. Cash deposits are held in
financial institutions in France.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable and accounts payable approximate
fair value due to their short maturities.
F-85
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over the estimated useful lives of the related assets, generally two to
ten years. Leased assets are amortized on a straight-line basis over the lesser
of the estimated useful life of the asset or the lease term. Expenditures for
maintenance and repairs are charged to operations as incurred; major
expenditures for renewals and betterments are capitalized and depreciated. When
an asset is sold or otherwise disposed of, the cost of the asset and the related
accumulated depreciation are removed from the accounts and the related gain or
loss is recognized in the statement of operations.
Depreciation periods used for property and equipment are as follows:
[Download Table]
Computer equipment.......................................... 2 years
Furniture and fixtures...................................... 10 years
Leasehold improvements...................................... 10 years
LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets to be Disposed of," ("SFAS 121").
SFAS 121 requires recognition of impairment of long-lived assets in the event
the net book value of such assets exceeds the future undiscounted cash flows
attributed to such assets.
INCOME TAXES
The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for the temporary
differences between the financial reporting and tax bases of the Company's
assets and liabilities and for tax carryforwards at enacted statutory tax rates
in effect for the years in which the differences are expected to reverse. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. In addition, a valuation allowance is
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
ADVERTISING
The Company expenses advertising costs as incurred. For the three-month
period ended March 31, 2000 (unaudited) and for the year ended December 31,
1999, the Company incurred $6,582 and $7,341 of advertising costs, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB No. 101), which provides
F-86
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
guidance on the recognition, presentation and disclosure of revenues in
financial statements. The Company does not expect this guidance to materially
impact the financial statements.
3. LIQUIDITY
The Company incurred a net loss of $110,318 for the year ended December 31,
1999. The Company anticipates revenues generated from its continuing operations
will not be sufficient to fund ongoing operations during the year ending
December 31, 2000. As discussed in Note 8, the Company was acquired by Lineo,
Inc. ("Lineo"). Lineo has represented its intent to fund the on-going operations
of the Company.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
[Enlarge/Download Table]
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
Purchased computer software and equipment................... $138,871 $171,236
Furniture and fixtures...................................... 9,833 11,350
Leasehold improvements...................................... 10,819 14,251
-------- --------
159,523 196,837
Less accumulated depreciation............................... (11,280) (40,960)
-------- --------
$148,243 $155,877
======== ========
5. INCOME TAXES
The Company is subject to income taxes levied by the governments of France.
As of December 31, 1999, no income taxes have been generated or paid by the
Company. Income tax credits of $14,718 and $39,170 have been earned by the
Company for the year ended December 31, 1999 and for the three months ended
March 31, 2000 (unaudited), respectively, and will be received by the Company in
a future period.
6. COMMITMENTS AND CONTINGENCIES
During the year ended December 31, 1999, the Company entered into a contract
to purchase certain software. Included in the contract are terms that require
the Company to pay royalties of 2% of gross income earned on the sale of
licenses of this software. Furthermore, the Company must pay royalties of 30%
upon the sale of licenses of this software which include the right to modify the
source code. This royalty agreement will terminate on October 19, 2006.
Royalties that the Company is required to pay per the above contract will be
expensed as cost of sales.
F-87
INUP S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Also, as of December 31, 1999, the Company leased office space under a
cancelable operating lease. The contractual term of the lease is nine years,
with a right to cancel at the third and sixth anniversary dates. The portion of
future minimum lease payments required under this lease that are not cancelable
at December 31, 1999, are as follows:
[Download Table]
2000........................................................ $11,822
2001........................................................ 11,822
2002........................................................ 4,147
-------
Total minimum lease payments................................ $27,791
=======
7. STOCKHOLDERS' EQUITY
Effective November 30, 1999, the par value of the common stock of the
Company was changed from $25 per share to $0.25 per share. All references to
number of shares and per share amounts have been restated to reflect the effect
of this change.
8. SUBSEQUENT EVENTS
On May 1, 2000, the Company's stockholders and Lineo entered into a stock
purchase agreement pursuant to which Lineo agreed to purchase all of the issued
and outstanding capital stock of the Company for 83,334 shares of the
unregistered Series C convertible preferred stock and 1,333,333 shares of the
unregistered common stock of Lineo and $10,000 of cash.
F-88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Moreton Bay Ventures Pty Ltd:
We have audited the accompanying statements of assets, liabilities, and
equity (deficit) of the acquired operations of Moreton Bay Ventures Pty Ltd as
of October 31, 1998 and 1999 and the related statements of revenue and expenses
and comprehensive loss, changes in equity (deficit) of the acquired operations
and cash flows for each of the two years in the period ended October 31, 1999.
These statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the United States Securities and
Exchange Commission and, as described in Note 1, are not intended to be a
complete presentation of Moreton Bay Ventures Pty Ltd's assets, liabilities,
revenues, expenses and cash flows.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the acquired operations of
Moreton Bay Ventures Pty Ltd as of October 31, 1998 and 1999, and the results of
its operations and its cash flows for each of the two years in the period ended
October 31, 1999 in conformity with accounting principles generally accepted in
the United States of America.
Also, in our opinion, the amounts translated into U.S. dollars in the
accompanying financial statements have been computed on the basis set forth in
Note 2.
ARTHUR ANDERSEN
Brisbane, Australia
May 12, 2000
F-89
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
STATEMENTS OF ASSETS, LIABILITIES AND EQUITY (DEFICIT)
OF THE ACQUIRED OPERATIONS
[Enlarge/Download Table]
AUSTRALIAN DOLLARS U.S. DOLLARS
--------------------------------- -------------------------
OCTOBER 31,
------------------- APRIL 30, OCTOBER 31, APRIL 30,
1998 1999 2000 1999 2000
-------- -------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash................................... $ -- $ -- $332,427 $ -- $214,848
Accounts receivable.................... -- -- 13,311 -- 8,603
Inventory.............................. -- -- 90,690 -- 58,613
Research grant receivable.............. 17,368 46,378 74,584 29,974 48,204
Marketable security, at fair value..... -- -- 420,000 -- 271,446
-------- -------- -------- -------- --------
Total current assets................. 17,368 46,378 931,012 29,974 601,714
======== ======== ======== ======== ========
Property and equipment:
Computer equipment..................... 17,684 34,930 38,437 22,575 24,842
Furniture and fixtures................. 2,178 6,291 6,291 4,066 4,066
-------- -------- -------- -------- --------
19,862 41,221 44,728 26,641 28,908
Less accumulated depreciation.......... (12,520) (27,418) (33,647) (17,721) (21,746)
-------- -------- -------- -------- --------
Net property and equipment........... 7,342 13,803 11,081 8,920 7,162
-------- -------- -------- -------- --------
$ 24,710 $ 60,181 $942,093 $ 38,894 $608,876
======== ======== ======== ======== ========
LIABILITIES AND EQUITY (DEFICIT) OF THE ACQUIRED OPERATIONS
Current liabilities:
Accounts payable....................... $ -- $ 29,014 $124,999 $ 18,751 $ 80,787
Accrued liabilities.................... 7,078 36,947 76,333 23,879 49,334
Deferred revenue....................... -- -- 32,000 -- 20,682
-------- -------- -------- -------- --------
Total current liabilities............ 7,078 65,961 233,332 42,630 150,803
======== ======== ======== ======== ========
Commitments and contingencies (Notes 1
and 6)
Equity (deficit) of the acquired
operations............................. 17,632 (5,780) 708,761 (3,736) 458,073
-------- -------- -------- -------- --------
$ 24,710 $ 60,181 $942,093 $ 38,894 $608,876
======== ======== ======== ======== ========
See accompanying notes to financial statements.
F-90
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
STATEMENTS OF REVENUE AND EXPENSES AND COMPREHENSIVE LOSS
[Enlarge/Download Table]
AUSTRALIAN DOLLARS U.S. DOLLARS
------------------------------------------------- ------------------------------
YEAR ENDED SIX MONTHS ENDED
OCTOBER 31, APRIL 30, YEAR ENDED SIX MONTHS ENDED
--------------------- ------------------------- OCTOBER 31, APRIL 30,
1998 1999 1999 2000 1999 2000
--------- --------- ----------- ----------- ----------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenue....................... $ -- $ -- $ -- $ 41,093 $ -- $ 26,558
Cost of revenue............... -- -- -- 21,184 -- 13,691
--------- --------- -------- --------- --------- ---------
Gross margin.............. -- -- -- 19,909 -- 12,867
--------- --------- -------- --------- --------- ---------
Operating expenses:
General and administrative
(exclusive of non-cash
compensation expense of
AUS$0, AUS$15,633, AUS$0,
AUS$0, US$10,104 and US$0,
respectively)............. 81,964 142,408 76,794 116,634 92,038 75,381
Research and development
(exclusive of non-cash
compensation expense of
AUS$0, AUS$66,683, AUS$0,
AUS$91,854, US$43,097 and
US$59,365,
respectively)............. 81,595 58,547 8,554 146,148 37,839 94,456
Sales and marketing......... -- 26,481 6,972 21,017 17,114 13,583
Non-cash compensation
expense................... -- 82,316 -- 91,854 53,201 59,365
--------- --------- -------- --------- --------- ---------
Total operating expenses.... 163,559 309,752 92,320 375,653 200,192 242,785
--------- --------- -------- --------- --------- ---------
Expenses in excess of
revenue................... $(163,559) $(309,752) $(92,320) $(355,744) $(200,192) $(229,918)
========= ========= ======== ========= ========= =========
Comprehensive loss:
Expenses in excess of
revenue................... $(163,559) $(309,752) $(92,320) $(355,744) $(200,192) $(229,918)
Unrealized loss on
marketable security....... -- -- -- (380,000) -- (245,594)
--------- --------- -------- --------- --------- ---------
$(163,559) $(309,752) $(92,320) $(735,744) $(200,192) $(475,512)
========= ========= ======== ========= ========= =========
See accompanying notes to financial statements.
F-91
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
CHANGES IN EQUITY (DEFICIT) OF THE ACQUIRED OPERATIONS
[Enlarge/Download Table]
AUSTRALIAN DOLLARS U.S. DOLLARS
----------------------------------------- -----------------------------
YEAR ENDED OCTOBER 31, SIX MONTHS YEAR ENDED SIX MONTHS
----------------------- ENDED APRIL 30, OCTOBER 31, ENDED APRIL 30,
1998 1999 2000 1999 2000
---------- ---------- --------------- ----------- ---------------
(UNAUDITED) (UNAUDITED)
Balance, beginning of period..... $ -- $ 17,632 $ (5,780) $ 11,396 $ (3,736)
Expenses in excess of revenue.... (163,559) (309,752) (355,744) (200,192) (229,918)
Unrealized loss on marketable
security....................... -- -- (380,000) -- (245,594)
Issuance of stock options by
Moreton Bay Venture Pty Ltd.... -- 82,316 91,854 53,201 59,365
Funding provided by Moreton Bay
Ventures Pty Ltd............... 181,191 204,024 1,358,431 131,859 877,956
--------- --------- ---------- --------- ---------
Balance, end of period........... $ 17,632 $ (5,780) $ 708,761 $ (3,736) $ 458,073
========= ========= ========== ========= =========
See accompanying notes to financial statements.
F-92
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
[Enlarge/Download Table]
AUSTRALIAN DOLLARS U.S. DOLLARS
------------------------------------------------- -----------------------------
YEAR ENDED SIX MONTHS ENDED
OCTOBER 31, APRIL 30, YEAR ENDED SIX MONTHS
--------------------- ------------------------- OCTOBER 31, ENDED APRIL 30,
1998 1999 1999 2000 1999 2000
--------- --------- ----------- ----------- ----------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Expenses in excess of revenue............. $(163,559) $(309,752) $(92,320) $(355,744) $(200,192) $(229,918)
Adjustments to reconcile expenses in
excess of revenue to net cash used in
operating activities:
Depreciation............................ 8,000 14,898 5,085 6,229 9,629 4,025
Non-cash compensation................... -- 82,316 -- 91,854 53,201 59,365
Changes in operating assets and
liabilities:
Accounts receivable................... -- -- -- (13,311) -- (8,603)
Inventory............................. -- -- -- (90,690) -- (58,613)
Research grant receivable............. (17,368) (29,010) 17,368 (28,206) (18,749) (18,230)
Accounts payable...................... -- 29,014 4,670 95,985 18,751 62,036
Accrued liabilities................... 7,078 29,869 16,906 39,386 19,305 25,455
Deferred revenue...................... -- -- -- 32,000 -- 20,682
--------- --------- -------- --------- --------- ---------
Net cash used in operating
activities........................ (165,849) (182,665) (48,291) (222,497) (118,055) (143,801)
--------- --------- -------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment........ (7,979) (21,359) (15,190) (3,507) (13,804) (2,267)
--------- --------- -------- --------- --------- ---------
Cash flows from financing activities:
Funding provided by Moreton Bay Pty Ltd... 173,828 204,024 63,481 558,431 131,859 360,916
--------- --------- -------- --------- --------- ---------
Net increase in cash........................ -- -- -- 332,427 -- 214,848
Cash, beginning of period................... -- -- -- -- -- --
--------- --------- -------- --------- --------- ---------
Cash, end of period......................... $ -- $ -- $ -- $ 332,427 $ -- $ 214,848
========= ========= ======== ========= ========= =========
Supplemental disclosure of non-cash
investing and financing activities:
Allocation of property and equipment by
Moreton Bay Ventures Pty Ltd.......... $ 7,363 $ -- $ -- $ -- $ -- $ --
Issuance of common stock for marketable
security.............................. $ -- $ -- $ -- $ 800,000 $ -- $ 517,040
See accompanying notes to financial statements.
F-93
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Moreton Bay Pty Ltd ("Moreton Bay"), incorporated as an Australia
corporation on April 24, 1995, develops embedded virtual private network
solutions for Internet appliances and provides engineering development for the
Motorola ColdFire microprocessor platform. Moreton Bay's historical operations
include two product lines, RAStel multimodem cards ("RAStel") and NETtel
Internet routers ("NETtel"). Moreton Bay LLC, a United States limited liability
corporation, is a wholly owned subsidiary of Moreton Bay.
On May 12, 2000, the Moreton Bay's stockholders entered into an agreement
with Lineo, Inc. ("Lineo"), a United States corporation. Pursuant to the
agreement, Lineo acquired all of the outstanding stock of Moreton Bay in
exchange for US$10,000 in cash, 956,315 shares of series D convertible preferred
stock and options to purchase 87,374 shares of Lineo's common stock. The options
have a vesting period of one year, an exercise price of US$3.00 per share and
expire ten years from the date of grant. Prior to the acquisition, Moreton Bay
transferred the RAStel assets, liabilities and operations, which Lineo did not
acquire, to a separate legal entity.
The accompanying financial statements have been prepared for the purpose of
complying with the rules and regulations of the United States Securities and
Exchange Commission. The accompanying financial statements include Moreton Bay's
NETtel operations (the "Company") acquired by Lineo. The statements of revenue
and expenses reflect the revenue and direct expenses of the NETtel operations
and allocations of common expenses. The common expenses consist primarily of the
cost of shared facilities, employees and certain other costs. Such common
expenses have been allocated to the acquired operations based upon actual usage
or other methods that approximate actual usage. Management believes that the
allocation methods used are reasonable and reflect their best estimate of the
expenses that would have been incurred by the Company as a stand-alone entity.
During the years ended October 31, 1998 and 1999 and the six months ended
April 30, 2000, the expenses of the acquired operations exceeded revenue by
AUS$163,559 (US$105,708), AUS$309,752 (US$200,192) and AUS$355,744 (US$229,918),
respectively, requiring funding from the non-acquired operations of Moreton Bay
amounting to AUS$181,191 (US$117,104), AUS$204,024 (US$131,857) and
AUS$1,358,431 (US$877,956), respectively. No interest expense has been recorded
related to the funding received from Moreton Bay. As of April 30, 2000, the
acquired operations had equity of AUS$708,761 (US$458,073). As discussed above,
subsequent to April 30, 2000, Lineo acquired certain operations of Moreton Bay
and Lineo has committed to provide funding to the Company as required.
(2) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Moreton Bay maintains its accounting records and prepares its financial
statements in accordance with accounting principles generally accepted in
Australia. However, the accompanying financial statements reflect all material
adjustments necessary to present the financial statements in conformity with
accounting principles generally accepted in the United States of America ("U.S.
GAAP").
The Company's functional currency is the Australian dollar and the
accompanying financial statements are presented in Australian dollars.
Additionally, as a convenience, the balance sheets as of
F-94
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
October 31, 1999 and April 30, 2000 and the related statements of revenue and
expenses, changes in equity (deficit) of the acquired operations and cash flows
for the respective year and six months then ended are also presented in U.S.
dollars by arithmetically translating all Australian dollar amounts at AUS$1 to
US$0.6463, which was the exchange rate at October 31, 1999.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of April 30, 2000 and for the
six months ended April 30, 1999 and 2000 have been prepared on the same basis as
the audited financial statements, and, in the opinion of management, reflect all
normal recurring adjustments necessary to present fairly the financial
information set forth therein in accordance with U.S. GAAP. All financial
statement disclosures related to the interim financial statements are unaudited.
The results of the interim periods are not necessarily indicative of the results
to be expected for the year ending October 31, 2000.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying financial statements for
accounts receivable, research grant receivable and accounts payable approximate
fair values because of the immediate or short-term maturities of these financial
instruments.
RESEARCH AND DEVELOPMENT GRANT
The Company has a research and development grant related to the development
of the NETtel products from AusIndustry, a division of the Australian
government. The grant reimburses the Company for incurred costs. Grant
reimbursements are not recognized until the costs have been incurred and there
is reasonable assurance that the Company will comply with the grant's conditions
and that the reimbursements will be received (see Note 6). The Company has
elected to include reimbursements as a reduction of the related expenses. The
Company recorded grant reimbursements of AUS$17,368 (US$11,225) and AUS$220,049
(US$142,218) during the years ended October 31, 1998 and 1999, respectively, and
AUS$102,848 (US$66,471) and AUS$132,584 (US$85,689) during the six months ended
April 30, 1999 and 2000, respectively.
INVENTORY
Inventories consist primarily of completed products. Inventories are stated
at the lower of cost (using the first-in, first-out method) or market value.
Provisions, when required, are made to reduce excess and obsolete inventories to
their estimated net realizable values. Due to competitive pressures
F-95
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and technological innovation, it is possible that estimates of net realizable
value could change in the near term.
MARKETABLE SECURITY
The Company's investment in a marketable security has been categorized as
available for sale, as defined by Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Unrealized holding gains and losses are reflected as a component of
equity (deficit) of the acquired operations until realized.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Computer equipment and furniture and fixtures are depreciated using the
straight-line method over the estimated useful life of the asset, typically
three to five years. Expenditures for repairs and maintenance are charged to
expense when incurred. Expenditures for major renewals and betterments that
extend the useful lives of existing equipment are capitalized and depreciated.
On retirement or disposition of property and equipment, the cost and related
accumulated depreciation is removed from the accounts and any resulting gain or
loss is recognized.
CAPITALIZED SOFTWARE COSTS
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," development costs incurred
in the research and development of new software products to be sold, leased or
otherwise marketed are expensed as incurred until technological feasibility in
the form of a working model has been established. Internally generated
capitalizable software development costs have not been material for the years
ended October 31, 1998 and 1999 and the six months ended April 30, 2000. The
Company has charged its software development costs to research and development
expense in the accompanying statements of revenues and expenses.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the book value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred which indicate possible impairment. The Company
uses an estimate of future undiscounted net cash flows of the related asset or
group of assets over the remaining life in measuring whether the assets are
recoverable. As of October 31, 1999 and April 30, 2000, the Company does not
consider any of its long-lived assets to be impaired.
REVENUE RECOGNITION
The accompanying statements of revenue and expenses reflect revenue in
accordance with the American Institute of Certified Public Accountants ("AICPA")
Statement of Position No. 97-2
F-96
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
("SOP 97-2"), "Software Revenue Recognition." Revenue from the sale of software
has been recognized upon delivery of the product when persuasive evidence of an
arrangement exists, the price is fixed or determinable, collection is probable
and no significant post-delivery obligations exist.
In December 1998, the AICPA issued Statement of Position No. 98-9
"Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to
Certain Transactions" ("SOP 98-9"). SOP 98-9 amended SOP 97-2 to require
recognition of revenue using a "residual method" in certain circumstances. The
adoption of this statement did not have a material effect on the Company's
revenue recognition policies.
INCOME TAXES
For all periods presented, the Company was not directly subject to income
taxes as the acquired operations were included with those of Moreton Bay for
income tax reporting purposes. The Company was not an income tax reporting
entity nor did it have a tax-sharing agreement with Moreton Bay. As a result, no
income tax expense or related current or deferred income tax assets or
liabilities have been allocated to the acquired operations and the liabilities
or benefits attributable to the acquired operations were recorded by Moreton
Bay. Had Moreton Bay allocated income taxes to the acquired operations as if it
were a separate taxable entity, no income tax expense or benefit would have been
recorded due to the net operating loss position of the acquired operations and
the uncertainty of future realization of any deferred tax assets. The Company
has recorded a valuation allowance against the net deferred tax assets of the
acquired operations.
EQUITY (DEFICIT) OF ACQUIRED OPERATIONS
Cash remitted to or transferred from Moreton Bay has been reflected as a
decrease or increase in the equity (deficit) of acquired operations.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The acquired operations consist of one segment, NETtel operations.
Substantially all of the acquired assets, liabilities and operations have been
derived from and are located in Australia.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 establishes new accounting and
reporting standards for companies to report information about derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to have a material impact on the Company's results of
operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition
in Financial Statements." This
F-97
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
pronouncement summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company is required to adopt SAB No. 101 during the first quarter of fiscal year
2001. Although management is currently evaluating the impact, if any, of SAB
No. 101, management does not presently believe it will have a material impact on
the Company's results of operations, financial position or liquidity.
(3) MARKETABLE SECURITY
On November 12, 1999, Moreton Bay entered into a stock exchange agreement
with Netcomm Ltd ("Netcomm") whereby 206,868 shares of Moreton Bay's common
stock were exchanged for 2,000,000 shares of common stock of Netcomm. The
Company recorded the shares of Netcomm's common stock based upon the quoted
market price on the date of exchange. The cost, gross unrealized loss and fair
value of the marketable security as of April 30, 2000 is as follows:
[Download Table]
AUSTRALIAN
DOLLARS U.S. DOLLARS
---------- ------------
Cost.................................................. $ 800,000 $ 517,040
Gross unrealized loss................................. (380,000) (245,594)
--------- ---------
Fair value............................................ $ 420,000 $ 271,446
========= =========
(4) STOCK OPTIONS
During the year ended October 31, 1999 and the six months ended April 30,
2000, Moreton Bay agreed to grant options to purchase 26,250 and 20,000 shares
of common stock, respectively, to consultants and an employee of the Company for
services rendered. The committed exercise price is less than the estimated fair
value of Moreton Bay's common stock on the commitment date. Accordingly, the
Company recorded its allocated portion of the estimated expense related to these
option commitments of AUS$82,316 (US$53,201) and AUS$91,854 (US$59,365) during
the year ended October 31, 1999 and the six months ended April 30, 2000,
respectively. As of April 30, 2000, the options had not yet been formally
granted.
(5) RELATED PARTY TRANSACTIONS
As discussed in Note 3, Moreton Bay entered into a share exchange agreement
with Netcomm. Pursuant to the share exchange, Netcomm acquired approximately
20 percent of Moreton Bay's then outstanding common stock and Moreton Bay
acquired approximately 4 percent of Netcomm's then outstanding common stock. The
managing director of Moreton Bay was appointed to Netcomm's Board of Directors
on March 9, 2000.
On November 12, 1999, Moreton Bay entered into a Technology Manufacturing
and Marketing Agreement with Netcomm. This agreement granted Netcomm a
non-exclusive license to use Moreton Bay's licensed intellectual property and
the non-exclusive right to all general development products and software
products developed by or available to Moreton Bay. In consideration for the
rights granted,
F-98
THE ACQUIRED OPERATIONS OF
MORETON BAY VENTURES PTY LTD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF APRIL 30, 2000 AND FOR THE SIX MONTHS ENDED
APRIL 30, 1999 AND 2000 IS UNAUDITED)
(5) RELATED PARTY TRANSACTIONS (CONTINUED)
Netcomm agreed to pay a royalty on Netcomm product sales outside Australia and
New Zealand which incorporate Moreton Bay's intellectual property or products.
To date, no royalties have been received or are due.
On November 12, 1999, Moreton Bay entered into a Contract Manufacturing
agreement with Netcomm. The agreement specified that Netcomm would be the
preferred supplier for Moreton Bay. Transactions under this agreement are
conducted under terms that would be reasonable for entity's dealing at arm's
length in similar circumstances. During the six months ended April 30, 2000,
Moreton Bay purchased no products from Netcomm. As of April 30, 2000, the
Company had no amounts due to Netcomm.
(6) COMMITMENTS AND CONTINGENCIES
OPERATING AGREEMENTS
Rent expense included in the accompanying statements of revenues and
expenses was AUS$8,610 (US$5,565) and AUS$14,225 (US$9,194) for the years ended
October 31, 1998 and 1999, respectively, and AUS$5,675 (US$3,668) and AUS$8,550
(US$5,526) for the six months ended April 30, 1999 and 2000, respectively.
Moreton Bay has entered into non-cancelable operating lease agreements for
premises in the United States with terms of 6 months to 12 months. The future
minimum rental payments under these leases for the years ending October 31, 2000
and 2001 total AUS$31,180 (US$20,152) and AUS$905 (US$585), respectively.
Moreton Bay currently leases its Australian premises on a month-to-month
basis. Current monthly rent is AUS$700 (US$452).
RESEARCH AND DEVELOPMENT GRANT
In October 1998, Moreton Bay was awarded a research and development grant
related to the NETtel products from AusIndustry, a division of the Australian
government. The grant criteria include certain restrictions, including ownership
changes, as defined. If an ownership change is deemed to have occurred, the
grant may be cancelled and proceeds previously received by Moreton Bay may be
required to be repaid. The Company has not determined whether the acquisition by
Lineo will constitute an ownership change. Through April 30, 2000, the Company
has recorded approximately AUS$390,000 (US$239,132) in reimbursements from this
grant. Total funding available under the grant is approximately AUS$614,000
(US$397,000).
LITIGATION
The Company is a party to certain legal proceedings from time to time
arising in the ordinary course of business. Management believes, after
consultation with legal counsel, that as of October 31, 1999 and April 30, 2000,
no pending or threatened legal proceedings exist which would have a material
adverse effect on the Company's financial position, liquidity or results of
operations.
F-99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RT-Control Inc.:
We have audited the accompanying balance sheet of RT-Control Inc., a Canada
Corporation, as of December 31, 1999 and the related statements of operations
and comprehensive loss, shareholders' equity and cash flows for the period from
inception (June 30, 1999) to December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RT-Control Inc. as of
December 31, 1999 and the results of its operations and its cash flows for the
period from inception to December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN
Toronto, Canada
May 15, 2000
F-100
RT-CONTROL INC.
BALANCE SHEETS
(U.S. DOLLARS)
[Enlarge/Download Table]
DECEMBER 31, 1999 MARCH 31, 2000
----------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 37,860 $ 12,229
Accounts receivable....................................... -- 331
Prepaid expenses.......................................... -- 5,769
Inventory................................................. 21,307 48,840
Goods and services tax recoverable........................ 7,037 12,905
--------- ---------
Total current assets.................................... 66,204 80,074
--------- ---------
Computer and office equipment, net of accumulated
depreciation of $461.................................... -- 49,639
--------- ---------
$ 66,204 $ 129,713
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 36,451 $ 21,237
Accrued liabilities....................................... -- 53,506
Deferred revenue.......................................... -- 605
Advances from shareholders................................ 10,434 21,942
Notes payable to shareholders............................. 11,120 --
Note payable to Lineo, Inc................................ -- 100,000
Current portion of capital lease obligation............... -- 1,821
--------- ---------
Total current liabilities............................... 58,005 199,111
--------- ---------
Capital lease obligation, net of current portion............ -- 7,286
--------- ---------
Shareholders' equity (deficit):
Common shares, no par value, unlimited shares authorized,
291 and 300 shares outstanding, respectively............ 106,439 181,439
Accumulated deficit....................................... (98,443) (258,045)
Cumulative translation adjustment......................... 203 (78)
--------- ---------
Total shareholders equity (deficit)..................... 8,199 (76,684)
--------- ---------
$ 66,204 $ 129,713
========= =========
See accompanying notes to financial statements.
F-101
RT-CONTROL INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(U.S. DOLLARS)
[Enlarge/Download Table]
PERIOD FROM
INCEPTION THREE MONTHS
(JUNE 30, 1999) TO ENDED
DECEMBER 31, 1999 MARCH 31, 2000
------------------ --------------
(UNAUDITED)
Revenue..................................................... $ 66,951 $ 10,224
Cost of revenue............................................. 42,392 6,455
-------- ---------
Gross margin.............................................. 24,559 3,769
-------- ---------
Operating expenses:
Research and development.................................. 74,468 52,870
General and administrative (exclusive of non-cash
share-related compensation of $0 and $75,000,
respectively)........................................... 38,446 27,690
Sales and marketing....................................... 7,324 6,475
Non-cash share-related compensation....................... -- 75,000
-------- ---------
120,238 162,035
-------- ---------
Loss from operations........................................ (95,679) (158,266)
Interest expense, net..................................... (2,764) (1,336)
-------- ---------
Net loss.................................................... $(98,443) $(159,602)
======== =========
Comprehensive loss:
Net loss.................................................. $(98,443) $(159,602)
Foreign currency translation adjustments.................. 203 (281)
-------- ---------
$(98,240) $(159,883)
======== =========
See accompanying notes to financial statements.
F-102
RT-CONTROL INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(U.S. DOLLARS)
[Enlarge/Download Table]
COMMON SHARES CUMULATIVE TOTAL
------------------- ACCUMULATED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT DEFICIT ADJUSTMENT EQUITY (DEFICIT)
-------- -------- ----------- ----------- ----------------
Issuance of common shares for cash at
inception............................. 291 $ 20 $ -- $ -- $ 20
Contribution of services................ -- 106,419 -- -- 106,419
Foreign currency translation
adjustments........................... -- -- -- 203 203
Net loss................................ -- -- (98,443) -- (98,443)
--- -------- --------- ----- ---------
Balance, December 31, 1999.............. 291 106,439 (98,443) 203 8,199
Issuance of common shares for services
(unaudited)........................... 9 75,000 -- -- 75,000
Foreign currency translation adjustments
(unaudited)........................... -- -- -- (281) (281)
Net loss (unaudited).................... -- -- (159,602) -- (159,602)
--- -------- --------- ----- ---------
Balance, March 31, 2000 (unaudited)..... 300 $181,439 $(258,045) $ (78) $ (76,684)
=== ======== ========= ===== =========
See accompanying notes to financial statements.
F-103
RT-CONTROL INC.
STATEMENTS OF CASH FLOWS
(U.S. DOLLARS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
[Enlarge/Download Table]
PERIOD FROM
INCORPORATION THREE
(JUNE 30, 1999) TO MONTHS ENDED
DECEMBER 31, 1999 MARCH 31, 2000
------------------------- -------------------------
(UNAUDITED)
Cash flows from operating activities:
Net loss.................................................. $ (98,443) $ (159,602)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation.......................................... -- 461
Contribution of services.............................. 106,419 --
Non-cash share-related compensation................... -- 75,000
Changes in operating assets and liabilities:
Accounts receivable................................. -- (331)
Prepaid expenses.................................... -- (5,769)
Inventory........................................... (21,307) (27,533)
Goods and services tax recoverable.................. (7,037) (5,868)
Accounts payable.................................... 36,451 (15,214)
Accrued liabilities................................. -- 53,506
Deferred revenue.................................... -- 605
------------------------- -------------------------
Net cash provided by (used in) operating
activities........................................ 16,083 (84,745)
------------------------- -------------------------
Cash flows from investing activities:
Purchase of property and equipment........................ -- (40,993)
------------------------- -------------------------
Cash flows from financing activities:
Advances from shareholders................................ 10,434 11,508
Proceeds from (repayments of) notes payable to
shareholders............................................ 11,120 (11,120)
Proceeds from the sale of common shares upon
incorporation........................................... 20 --
Proceeds from note payable to Lineo, Inc.................. -- 100,000
------------------------- -------------------------
Net cash provided by financing activities........... 21,574 100,388
------------------------- -------------------------
Net increase (decrease) in cash and cash equivalents........ 37,657 (25,350)
Foreign currency translation adjustments.................... 203 (281)
Cash and cash equivalents, beginning of period.............. -- 37,860
------------------------- -------------------------
Cash and cash equivalents, end of period.................... $ 37,860 $ 12,229
========================= =========================
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 1,048 $ 907
Supplemental disclosure of noncash investing and financing
activities:
Acquisition of assets under capital lease arrangement..... $ -- $ 9,107
See accompanying notes to financial statements.
F-104
RT-CONTROL INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
1. ORGANIZATION AND NATURE OF OPERATIONS
RT-Control Inc. (the "Company") was incorporated under the Canada Business
Corporations Act on June 30, 1999. The Company develops and markets the mClinux
version of Linux for microcontrollers.
On May 12, 2000, the Company's shareholders entered into an agreement with
Lineo, Inc. ("Lineo"), a United States corporation. Pursuant to the agreement,
Lineo acquired all of the outstanding common shares of RT-Control in exchange
for $15,000 in cash, 404,169 shares of Lineo's series D convertible preferred
stock and options to purchase 16,667 shares of Lineo's common stock. The options
have a vesting period of one year, an exercise price of $1.50 per share and
expire ten years from the date of grant.
During the three months ended March 31, 2000, the Company received $100,000
from Lineo through the issue of a promissory note. The Company received an
additional $100,000 on April 3, 2000 from Lineo under similar terms (see
Note 6). Lineo has committed to provide funding to the Company as required.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of March 31, 2000 and for the
three months then ended have been prepared on the same basis as the audited
financial statements and, in the opinion of management, reflect all normal
recurring adjustments necessary to present fairly the financial information set
forth therein in accordance with accounting principles generally accepted in the
United States. The results of operations for the three months ended March 31,
2000 are not necessarily indicative of the results to be expected for the entire
year ending December 31, 2000.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingencies at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying financial statements for
cash and cash equivalents, accounts receivable, goods and services tax
recoverable, and accounts payable approximate fair values because of the
immediate or short-term maturities of these financial instruments. The
F-105
RT-CONTROL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
carrying amounts of the Company's debt obligations approximate fair value based
on current interest rates.
FOREIGN CURRENCY TRANSLATION
The Company prepares its statements in Canadian dollars since its functional
currency is the Canadian dollar. As a result of the acquisition discussed in
Note 1, the accompanying financial statements are denominated in U.S. dollars.
As a result, the Company has translated its Canadian dollar financial statements
into U.S. dollars using the current method. Under this method, monetary and
non-monetary items are translated at the rate of exchange in effect at the
balance sheet date and revenue and expenses are translated at the average
exchange rate for the periods.
CASH AND CASH EQUIVALENTS
For purposes of the balance sheet and statement of cash flows, the Company
considers all short-term deposits with original maturities of 90 days or less to
be cash equivalents. Cash equivalents consist of short-term low risk commercial
paper and guaranteed investment certificates.
INVENTORY
Inventory consists primarily of raw materials. Inventory is stated at the
lower of cost (using the first-in, first-out method) or market value.
Provisions, when required, are made to reduce excess and obsolete inventory to
its estimated net realizable value. Due to competitive pressures and
technological innovation, it is possible that estimates of net realizable value
could change in the near term.
RESEARCH AND DEVELOPMENT EXPENSES
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", development costs incurred in the research and development
of new software products to be sold, leased or otherwise marketed are expensed
as incurred until technological feasibility in the form of a working model has
been established.
Due to continuing technological changes and changing customer needs, the
Company has concluded that it cannot determine technological feasibility of its
various products until the development phase of the project is nearly complete.
The time period during which costs could be capitalized from the point of
reaching technological feasibility until the time of general product release is
very short and, consequently, the amounts that could be capitalized are not
material to the Company's financial position or results of operations.
Therefore, the Company charges all research and development expenses to
operations in the period incurred.
F-106
RT-CONTROL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company generates revenue from the sale of its products, which primarily
takes place through the Company's internet site.
The Company has recognized software revenue in accordance with the
provisions of Statement of Position No. 97-2, "Software Revenue Recognition"
("SOP 97-2"). Under SOP 97-2, software revenue is recognized upon execution of a
contract and delivery of software, provided that the license fee is fixed and
determinable, no significant production, modification or customization of the
software is required and collection is considered probable by management.
Hardware sales are recognized when title passes, which coincides with
shipment and customer acceptance.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation issued to directors,
officers and employees under Accounting Principles Board Opinion No. 25 ("APB
No. 25") "Accounting for Stock Issued to Employees" and related interpretations.
Under APB No. 25, compensation expense for stock options, if any, is recognized
if an option's exercise price on the measurement date is below the intrinsic
fair value of the Company's common stock and amortized to expense over the
vesting period. Through March 31, 2000, the Company has not issued any stock
options. Compensation expense for stock awards or purchases, if any, is
recognized if the award or purchase price on the measurement date is below the
intrinsic fair value of the Company's common stock and is recognized on the date
of award or purchase.
The Company accounts for its stock-based compensation issued to other than
employees in accordance with SFAS No. 123 "Accounting for Stock-Based
Compensation" and related interpretations. Under SFAS No. 123, stock-based
compensation is determined as either the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measureable. The measurement date for these issuances is the earlier of
either the date at which a commitment for performance by the recipient to earn
the equity instruments is reached or the date at which the recipient's
performance is complete.
INCOME TAXES
The Company recognizes a current tax liability or asset for current taxes
payable or refundable and a deferred tax liability or asset for the estimated
future tax effects of temporary differences between the carrying value of assets
and liabilities for financial reporting and their tax basis and loss carry
forwards to the extent they are realizable. A deferred tax valuation allowance
is required if it is "more likely than not" that all or a portion of recorded
future tax assets will not be realized.
F-107
RT-CONTROL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODS AND SERVICES TAX RECOVERABLE
Goods and services tax ("GST") is a Canadian value added tax. GST
recoverable represents input tax credits received by the Company on GST paid or
payable for certain goods and services purchased during the period.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 establishes new accounting and
reporting standards for companies to report information about derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to have a material impact on the Company's results of
operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition
in Financial Statements." This pronouncement summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to selected
revenue recognition issues. The Company is required to adopt SAB No. 101 during
the second quarter of 2000. Although management is currently evaluating the
impact, if any, of SAB No. 101, management does not presently believe it will
have a material impact on the Company's results of operations, financial
position or liquidity.
3. EQUITY AND RELATED PARTY TRANSACTIONS
During the period ended December 31 1999, certain shareholders and employees
of the Company rendered services without receiving any consideration amounting
to approximately $90,400 and $16,000, respectively. The Company recorded the
fair value of these services as a capital contribution. The fair value of these
services was based on management's estimates.
At December 31, 1999 and March 31, 2000, the Company had advances from
shareholders of $10,434 and $21,942, respectively, representing amounts owed to
shareholders for expenses incurred on behalf of the Company. The advances do not
have any fixed repayment terms and bear interest charges only to the extent the
shareholders incur interest charges.
At December 31, 1999, the Company had $11,120 in notes due to shareholders
representing cash advances made by the shareholders to the Company. The notes
did not carry any fixed repayment terms and bore interest at prime (6.5 percent
at December 31, 1999) plus 3.7 percent. Subsequent to December 31, 1999, the
Company repaid these notes together with the related interest.
On January 27, 2000, the Company issued 261 common shares to its existing
shareholders on a pro-rata basis. This issuance has been accounted for as a
stock split and retroactively reflected in the accompanying financial statements
for all periods presented.
F-108
RT-CONTROL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
3. EQUITY AND RELATED PARTY TRANSACTIONS (CONTINUED)
During January 2000, the Company issued 9 common shares to an employee and a
consultant for services rendered. The estimated fair value of the common shares
on the date of issuance was deemed to be $75,000, based on the consideration
paid by Lineo to acquire the Company on May 9, 2000. The $75,000 has been
reflected as non-cash share-related compensation in the accompanying statement
of operations for the three months ended March 31, 2000.
4. INCOME TAXES
The components of the Company's income tax provision computed at the
combined statutory Canadian federal and provincial income tax rate for the
period from inception (June 30, 1999) to December 31, 1999 is as follows:
[Download Table]
Income tax benefit at statutory
rates.............................. $22,267
Change in valuation allowance........ (22,267)
-------
$ --
=======
The deferred income tax assets resulting from differences in the timing of
the recognition of certain income and expense items for income tax and financial
accounting purposes at December 31, 1999 are as follows:
[Download Table]
Net operating loss carryforward...... $ 22,267
Less: valuation allowance............ (22,267)
--------
Net deferred income taxes.......... $ --
========
The ultimate realization of the net operating loss carryforward is
dependent, in part, upon the tax laws in effect, the Company's future earnings,
and other future events, the effects of which cannot be determined. The Company
has established a valuation allowance against its net operating loss
carryforward because the available objective evidence creates sufficient
uncertainty regarding its realizability.
At December 31, 1999, the Company's net operating loss carryforward totaled
$98,443 and expires in 2006.
5. COMMITMENTS AND CONTINGENCIES
LEGAL
The Company may become party to certain legal proceedings arising in the
ordinary course of business. Management believes, after consultation with legal
counsel, that as of December 31, 1999 and March 31, 2000, no pending or
threatened legal proceedings exist which would have a material adverse effect on
the Company's financial position, liquidity or results of operations.
F-109
RT-CONTROL INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 2000 IS UNAUDITED)
(U.S. DOLLARS)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES
The Company leases its operating facilities under an operating lease
arrangement. The lease term is 29 months commencing on March 1, 2000. The future
minimum rental payments under the arrangement are as follows:
[Download Table]
YEAR ENDING DECEMBER 31,
------------------------
2000................................. $17,914
2001................................. 23,885
2002................................. 9,952
-------
$51,751
=======
The Company has acquired certain office equipment under a capital lease
agreement. The lease term is for 60 months commencing on April 1, 2000. The
future minimum lease payments on this lease are as follows:
[Download Table]
YEAR ENDING DECEMBER 31,
------------------------
2000................................. $1,739
2001................................. 2,318
2002................................. 2,318
2003................................. 2,318
2004................................. 2,318
Thereafter........................... 580
------
11,591
Less: amounts representing
interest........................... (2,484)
------
Capital lease obligation............. 9,107
Less: current portion................ (1,821)
------
$7,286
======
6. NOTE PAYABLE TO LINEO
On February 25, 2000, the Company received proceeds of $100,000 from Lineo
in consideration for issuing an unsecured promissory note. On April 3, 2000, the
Company received an additional $100,000 from Lineo in consideration for issuing
an unsecured promissory note. The notes bear interest at a rate of 7.25 percent
per annum and are due 30 days after demand.
F-110
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
TO LINEO, INC.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Lineo, Inc., the carved-out portion of
Caldera, Inc. and their subsidiary included in this registration statement and
have issued our report thereon dated May 15, 2000. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. Schedule II--Valuation and Qualifying Accounts is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
May 15, 2000
LINEO, INC., THE CARVED-OUT
PORTION OF CALDERA, INC. AND THEIR SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
[Enlarge/Download Table]
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(A) PERIOD
-------------------------------------------------- ---------- ---------- ------------- ----------
Allowance of doubtful accounts:
Year ended October 31, 1997..................... $ -- $ -- $ -- $ --
Year ended October 31, 1998..................... -- 13,500 -- 13,500
Year ended October 31, 1999..................... 13,500 163,500 (95,168) 68,332
------------------------
(a) Represents write-offs of uncollectable accounts receivable
INSIDE BACK COVER
Text (across top) "Embed Linux Software Anywhere-TM-"
"Lineo-TM"
"The Embedded Linux Solutions Company-TM-"
(middle, left) "Small to Large and Everything in Between"
(top to bottom, right) "Digital cameras, Cellular phones, Computer network
storage and servers, Handhelds, Home appliances,
Network traffic routers, Set-top boxes, Telephone
switches, Virtual private networks"
Pictures: (left upper corner) Computer chip on tip of index finger
(left bottom corner) Person inserting computer board into file
server
[LOGO]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the securities being registered. All amounts are estimates
except the Securities and Exchange Commission registration fee, the NASD filing
fee and The Nasdaq National Market listing fee.
[Download Table]
Securities and Exchange Commission Registration Fee......... $ 15,840
NASD Filing Fee............................................. 6,500
Nasdaq National Market Filing Fee........................... 90,000
Printing Costs.............................................. 200,000
Legal Fees and Expenses..................................... 400,000
Accounting Fees and Expenses................................ 950,000
Directors' and Officers' Insurance Policy Premium........... 525,000
Blue Sky Fees and Expenses.................................. 5,000
Transfer Agent and Registrar Fees........................... 5,000
Miscellaneous............................................... 52,660
----------
Total................................................... $2,250,000
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant is a Delaware corporation. In its restated certificate of
incorporation, the registrant has adopted the provisions of Section 102(b)(7) of
the Delaware General Corporation Law (the "Delaware Law"), which enables a
corporation in its original certificate of incorporation or an amendment thereto
to eliminate or limit the personal liability of a director for monetary damages
for breach of the director's fiduciary duty, except (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware Law (providing
for liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions) or (iv) for any transaction from which a director will
personally receive a benefit in money, property or services to which the
director is not legally entitled. The registrant has also adopted
indemnification provisions in its restated certificate of incorporation and
bylaws pursuant to Section 145 of the Delaware Law, which provides that a
corporation may indemnify any persons, including officers and directors, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation), by reason of the fact that such person was an officer, director,
employee or agent of the corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such officer, director, employee or agent acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to criminal proceedings, had no
reasonable cause to believe that his conduct was unlawful. A Delaware
corporation may indemnify officers or directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the
II-1
defense of any action referred to above, the corporation must indemnify him
against expenses (including attorneys' fees) that such officer or director
actually and reasonably incurred.
The registrant intends to enter into indemnification agreements with each of
the registrant's officers and directors. The Underwriting Agreement
(Exhibit 1.1 hereto) provides for indemnification between the underwriters and
the registrant from and against certain liabilities arising in connection with
the offering which is the subject of this registration statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a description of all securities that the registrant has
sold within the past three years without registering the securities under the
Securities Act:
On September 1, 1998, the registrant issued 18,000,000 shares of its common
stock to Caldera, Inc. in exchange for a contribution of computer and office
equipment with an aggregate value of $52,787.48. This issuance was exempt from
registration pursuant to 4(2) of the Securities Act.
On December 29, 1999, the registrant sold 1,500,000 shares of its common
stock at a price of $.80 per share to two accredited investors affiliated with
the registrant for an aggregate offering price of $1,200,000. This issuance was
exempt from registration pursuant to 4(2) of the Securities Act.
On February 17, 2000, the registrant sold 2,500,000 shares of its Series A
Class 2 convertible preferred stock at a price of $1.50 per share to two
affiliated accredited investors and one accredited investor which was not then
affiliated with the registrant for an aggregate offering price of $3,750,000.
This issuance was exempt from registration pursuant to Rule 506 of Regulation D
under Section 4(2) of the Securities Act.
On February 17, 2000, the registrant exchanged 5,000,000 shares of its
Series A Class 1 convertible preferred stock to The Canopy Group, Inc. in
exchange for 5,000,000 shares of its common stock. This exchange was exempt from
registration pursuant to Rule 506 of Regulation D under Section 4(2) of the
Securities Act.
On March 15, 2000, the registrant sold 4,833,331 shares of its Series B
convertible preferred stock at a price of $3.00 per share to 15 accredited
investors, one of which is affiliated with the registrant, for an aggregate
offering price of $14,499,973. This issuance was exempt from registration
pursuant to Rule 506 of Regulation D under Section 4(2) of the Securities Act.
On April 3, 2000, the registrant issued 1,745,226 shares of its common stock
to 23 individuals pursuant to a merger agreement between the registrant and
Zentropic Computing, LLC, a Virginia limited liability company, in exchange for
all issued and outstanding shares of capital stock of Zentropic. This exchange
was exempt from registration pursuant to Rule 506 of Regulation D under
Section 4(2) of the Securities Act.
On April 28, 2000, the registrant sold 3,000,000 shares of its Series C
convertible preferred stock at a price of $6.00 per share to 21 accredited
investors, one of which is affiliated with the registrant, for an aggregate
offering price of $18,000,000. This issuance was exempt from registration
pursuant to Rule 506 of Regulation D under Section 4(2) of the Securities Act.
On May 1, 2000, the registrant issued 69,998 shares of its Series D
convertible preferred stock to five individuals pursuant to a share purchase
agreement between the registrant and certain stockholders of Fireplug
Computers Inc., a British Columbia, Canada company, in exchange for all issued
and outstanding shares of capital stock of Fireplug. This transaction was exempt
from registration pursuant to Regulation S and/or Rule 506 of Regulation D under
Section 4(2) of the Securities Act.
On May 1, 2000, the registrant issued 1,333,333 shares of its common stock
to 21 individuals and 83,334 shares of its Series C convertible preferred stock
to one corporate entity pursuant to a stock
II-2
purchase agreement between the registrant and certain stockholders of Inup S.A.,
a French corporation, in exchange for all issued and outstanding shares of
capital stock of Inup. This transaction was exempt from registration pursuant to
Regulation S and/or Rule 506 of Regulation D under Section 4(2) of the
Securities Act.
On May 10, 2000, the registrant issued 956,315 shares of its Series D
convertible preferred stock to 14 individuals pursuant to a stock purchase
agreement between the registrant and certain stockholders of Moreton Bay
Ventures Pty Ltd, an Australian corporation, in exchange for all issued and
outstanding shares of capital stock of Moreton Bay. This transaction was exempt
from registration pursuant to Regulation S and/or Rule 506 of Regulation D under
Section 4(2) of the Securities Act.
On May 12, 2000, the registrant issued 404,169 shares of its Series D
convertible preferred stock to three individuals pursuant to a stock purchase
agreement between the registrant and certain stockholders of RT-Control, Inc., a
Canadian corporation, in exchange for all issued and outstanding shares of
capital stock of RT-Control. This transaction was exempt from registration
pursuant to Regulation S and/or Rule 506 of Regulation D under Section 4(2) of
the Securities Act.
From June 1999 to October 10, 2000, options to purchase 5,680,650 shares of
the registrant's common stock were granted to 253 individuals at a weighted
average exercise price of $3.24 per share. These grants were exempt from
registration pursuant to Rule 701 under the Securities Act.
From June 1999 to October 10, 2000, 716,519 shares of the registrant's
common stock were issued to nine individuals upon the exercise of stock options
granted pursuant to the registrant's stock option plan at a weighted average
exercise price of $0.80 per share. These issuances were exempt from registration
pursuant to Rule 701 under the Securities Act.
On October 2, 2000, the registrant sold a warrant to purchase up to
2,000,000 shares of its common stock at an exercise price of $6.00 per share to
an accredited investor which was not then affiliated with the registrant for an
aggregate offering price of $1.5 million. This transaction was exempt from
registration pursuant to Rule 506 of Regulation D under Section 4(2) of the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
[Download Table]
NUMBER DESCRIPTION
--------------------- -----------
1.1* Form of Underwriting Agreement
3.1# Certificate of Incorporation and all amendments thereto
3.1(a)# Form of Restated Certificate of Incorporation
3.2# Bylaws and all amendments thereto
4.1 See Exhibits 3.1 and 3.2 for provisions defining the rights
of the holders of common stock
5.1* Form of Opinion of Summit Law Group, PLLC regarding legality
of shares
10.1# 1999 Stock Option Plan
10.2# GNU General Public License
10.3#+ OEM License Agreement No. LNO201 (Amended and Restated
3/20/2000) by and between Lineo, Inc. and DaiShin
Information and Communications Company dated February 17,
2000
10.3(a)*+ Addendum to Schedule D to OEM License Agreement No. LNO201
by and between Lineo, Inc. and DaiShin Information and
Communications Company dated July 31, 2000
II-3
[Download Table]
NUMBER DESCRIPTION
--------------------- -----------
10.4# Stock Purchase and Sale Agreement dated as of January 6,
2000, by and between Lineo, Inc. and Caldera
Systems, Inc.
10.5# DR DOS License Agreement dated as of September 1, 1998, by
and between Caldera, Inc. and Caldera Thin Clients, Inc.
10.6# Technology Assignment Agreement dated as of December 29,
1999, by and between The Canopy Group and Lineo, Inc.
10.7# Recapitalization Agreement dated February 17, 2000, by and
between Lineo, Inc. and The Canopy Group, Inc.
10.8# Form of Lineo, Inc. Series A Stock Purchase Agreement
10.9# Form of Lineo, Inc. Series B Stock Purchase Agreement
10.10# Form of Lineo, Inc. Series C Stock Purchase Agreement
10.11# Stock Purchase Agreement dated as of April 13, 2000, by and
among Lineo, Inc., United System Engineers, Inc., and the
shareholders named therein
10.12# Share Purchase Agreement dated as of May 1, 2000, by and
among Lineo, Inc., Fireplug Computers Inc. and the
shareholders named therein
10.13# Stock Purchase Agreement dated as of May 10, 2000, by and
among Moreton Bay Ventures Pty Ltd, Lineo, Inc. and the
Sellers named therein
10.14# Stock Purchase Agreement dated as of May 1, 2000, by and
among Lineo, Inc., Inup S.A. and the Sellers named therein
10.15# Share Purchase Agreement dated as of May 10, 2000, by and
among Lineo, Inc., RT-Control, Inc. and the Shareholders
named therein
10.16# Form of Lineo, Inc. Investor Rights Agreement
10.17# Form of Lineo, Inc. Amendment No. 1 to Investor Rights
Agreement
10.18# Form of Lineo, Inc. Amendment No. 2 to Investor Rights
Agreement
10.19# Form of Indemnification Agreement
10.20# Sublease dated January 31, 2000 by and between SwitchSoft
Systems, Inc. and Lineo, Inc.
10.21# Sublease 380 South 400 West, Suite C dated February 29, 2000
by and between VPNX.com and Lineo, Inc.
10.22# Employment Agreement dated May 16, 2000 by and between Bryan
W. Sparks and Lineo, Inc.
10.23*+ Strategic Alliance Agreement dated August 31, 2000 by and
between Metrowerks Corp. and Lineo, Inc.
10.24* Stockholder Agreement dated as of August 31, 2000 by and
between Lineo, Inc., Caldera Systems, Inc., The Canopy
Group, Bryan Sparks, Dry Canyon Holding Company LLC and
Metrowerks Holdings, Inc.
10.25* Warrant Purchase Agreement dated as of August 31, 2000 by
and between Lineo, Inc. and Metrowerks Holdings, Inc.
10.26* Form of Warrant dated October 2, 2000 granted to Metrowerks
Holdings, Inc.
10.27* Form of Lineo, Inc. Amendment No. 3 to Investor Rights
Agreement
II-4
[Download Table]
NUMBER DESCRIPTION
--------------------- -----------
10.28*+ Shareholders Agreement dated as of September 22, 2000 among
Lineo, Inc., Samsung Electro-Mechanics Co., Ltd. and
Samsung Venture Investment Corporation
10.29* Lineo, Inc. Employee Stock Purchase Plan
10.30* Employment Agreement dated May 10, 2000 by and between
Robert B. Waldie and Lineo, Inc.
21.1* Subsidiaries of the registrant
23.1 Consent of Summit Law Group, PLLC (contained in the opinion
filed as Exhibit 5.1 hereto)
23.2* Consent of Arthur Andersen LLP, Independent Public
Accountants
23.3* Consent of Arthur Andersen, Independent Public Accountants
23.4* Consent of Arthur Andersen, Independent Public Accountants
23.5* Consent of Befec -- Price Waterhouse, Independent
Accountants
23.6* Consent of Arthur Andersen, Independent Public Accountants
23.7* Consent of Arthur Andersen, Independent Public Accountants
24.1 Power of Attorney (See Page II-8)
27.1* Financial Data Schedule
------------------------
* Filed herewith
+ Confidential treatment requested
# Previously filed
II-5
(B) FINANCIAL STATEMENT SCHEDULES.
Schedule II -- Valuation and Qualifying Accounts for the Years Ended October
31, 1997, 1998 and 1999
Schedules not listed above have been omitted because they are inapplicable
or the requested information is shown in the consolidated financial statements
of the registrant or related notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding), is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be a part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Lindon,
State of Utah, on the 13th day of October, 2000.
[Download Table]
LINEO, INC.
By: /s/ BRYAN W. SPARKS
-----------------------------------------
Bryan W. Sparks
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to registration statement has been signed by the following persons in the
capacities indicated below on the 13th day of October, 2000.
[Enlarge/Download Table]
SIGNATURE TITLE
--------- -----
/s/ BRYAN W. SPARKS President, Chief Executive Officer and
------------------------------------------- Chairman of the Board (Principal Executive
Bryan W. Sparks Officer)
* Senior Vice President, Chief Financial Officer
------------------------------------------- and Treasurer (Principal Financial and
Gregory C. Hill Accounting Officer)
*
------------------------------------------- Director
Raymond J. Noorda
*
------------------------------------------- Director
Ralph J. Yarro
*
------------------------------------------- Director
John R. Egan
*
------------------------------------------- Director
William P. Barnett
[Download Table]
By: /s/ BRYAN W. SPARKS
--------------------------------------
Bryan W. Sparks
AS ATTORNEY-IN-FACT
II-7
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Bryan W. Sparks and Matthew R. Harris, and each of them, with full
power of substitution and resubstitution and full power to act without the
other, as his true and lawful attorney-in-fact and agent to act in his name,
place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file, any and all
amendments to this registration statement, including any and all post-effective
amendments thereto and any registration statement relating to the same offering
as this registration statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing, ratifying and confirming all that said attorneys-in-fact
and agents or any of them or their or his substitute or substitutes may lawfully
do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to registration statement has been signed by the following persons in the
capacities indicated below on the 13th day of October, 2000.
[Download Table]
/s/ STEVEN G. ROTHMEIER
------------------------------------------- Director
Steven G. Rothmeier
------------------------------------------- Director
Alex Serge Vieux
II-8
EXHIBIT INDEX
[Download Table]
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
1.1* Form of Underwriting Agreement
3.1# Certificate of Incorporation and all amendments thereto
3.1(a)# Form of Restated Certificate of Incorporation
3.2# Bylaws and all amendments thereto
4.1 See Exhibits 3.1 and 3.2 for provisions defining the rights
of the holders of common stock
5.1* Form of Opinion of Summit Law Group, PLLC regarding legality
of shares
10.1# 1999 Stock Option Plan
10.2# GNU General Public License
10.3#+ OEM License Agreement No. LNO201 (Amended and Restated
3/2/00) by and between Lineo, Inc. and DaiShin Information
and Communications Company dated February 17, 2000
10.3(a)*+ Addendum to Schedule D to OEM License Agreement No. LNO201
by and between Lineo, Inc. and DaiShin Information and
Communications Company dated July 31, 2000
10.4# Stock Purchase and Sale Agreement dated as of January 6,
2000, by and between Lineo, Inc. and Caldera
Systems, Inc.
10.5# DR DOS License Agreement dated as of September 1, 1998, by
and between Caldera, Inc. and Caldera Thin Clients, Inc.
10.6# Technology Assignment Agreement dated as of December 29,
1999, by and between The Canopy Group and Lineo, Inc.
10.7# Recapitalization Agreement dated February 17, 2000, by and
between Lineo, Inc. and The Canopy Group, Inc.
10.8# Form of Lineo, Inc. Series A Stock Purchase Agreement
10.9# Form of Lineo, Inc. Series B Stock Purchase Agreement
10.10# Form of Lineo, Inc. Series C Stock Purchase Agreement
10.11# Stock Purchase Agreement dated as of April 13, 2000, by and
among Lineo, Inc., United System Engineers, Inc., and the
shareholders named therein
10.12# Share Purchase Agreement dated as of May 1, 2000, by and
among Lineo, Inc., Fireplug Computers Inc. and the
shareholders named therein
10.13# Stock Purchase Agreement dated as of May 10, 2000, by and
among Moreton Bay Ventures Pty Ltd, Lineo, Inc. and the
Sellers named therein
10.14# Stock Purchase Agreement dated as of May 1, 2000, by and
among Lineo, Inc., Inup S.A. and the Sellers named therein
10.15# Share Purchase Agreement dated as of May 10, 2000, by and
among Lineo, Inc., RT-Control, Inc. and the Shareholders
named therein
10.16# Form of Lineo, Inc. Investor Rights Agreement
10.17# Form of Lineo, Inc. Amendment No. 1 to Investor Rights
Agreement
10.18# Form of Lineo, Inc. Amendment No. 2 to Investor Rights
Agreement
II-9
[Download Table]
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
10.19# Form of Indemnification Agreement
10.20# Sublease dated January 31, 2000 by and between SwitchSoft
Systems, Inc. and Lineo, Inc.
10.21# Sublease 380 South 400 West, Suite C dated February 29, 2000
by and between VPNX.com and Lineo, Inc.
10.22# Employment Agreement dated May 16, 2000 by and between Bryan
W. Sparks and Lineo, Inc.
10.23*+ Strategic Alliance Agreement dated August 31, 2000 by and
between Metrowerks Corp. and Lineo, Inc.
10.24* Stockholder Agreement dated as of August 31, 2000 by and
between Lineo, Inc., Caldera Systems, Inc., The Canopy
Group, Bryan Sparks, Dry Canyon Holding Company LLC and
Metrowerks Holdings, Inc.
10.25* Warrant Purchase Agreement dated as of August 31, 2000 by
and between Lineo, Inc. and Metrowerks Holdings, Inc.
10.26* Form of Warrant dated October 2, 2000 granted to Metrowerks
Holdings, Inc.
10.27* Form of Lineo, Inc. Amendment No. 3 to Investor Rights
Agreement
10.28*+ Shareholders Agreement dated as of September 22, 2000 among
Lineo, Inc., Samsung Electro-Mechanics Co., Ltd. and
Samsung Venture Investment Corporation
10.29* Lineo, Inc. Employee Stock Purchase Plan
10.30* Employment Agreement dated May 10, 2000 by and between
Robert B. Waldie and Lineo, Inc.
21.1* Subsidiaries of the registrant
23.1 Consent of Summit Law Group, PLLC (contained in the opinion
filed as Exhibit 5.1 hereto)
23.2* Consent of Arthur Andersen LLP, Independent Public
Accountants
23.3* Consent of Arthur Andersen, Independent Public Accountants
23.4* Consent of Arthur Andersen, Independent Public Accountants
23.5* Consent of Befec -- Price Waterhouse, Independent
Accountants
23.6* Consent of Arthur Andersen, Independent Public Accountants
23.7* Consent of Arthur Andersen, Independent Public Accountants
24.1 Power of Attorney (See Page II-8)
27.1* Financial Data Schedule
------------------------
* Filed herewith
+ Confidential treatment requested
# Previously filed
II-10
Dates Referenced Herein and Documents Incorporated by Reference
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