Document/Exhibit Description Pages Size
1: S-1 Registration Statement (General Form) 150 596K
2: EX-2.1 Agreement and Plan of Reorganization 78 341K
3: EX-3.1 Seventh Amendment and Restated Articles of 20 96K
Incorporation
4: EX-3.2 Certificate of Incorporation (Delaware) 20 97K
5: EX-3.3 Form of Amended and Restated Cert. of 30 128K
Incorporation
6: EX-3.4 Amended and Restated Bylaws, As Currently in 22 104K
Effect
7: EX-3.5 Bylaws of Lynuxworks (Delaware) 25 118K
8: EX-3.6 Form of Amended & Restated Bylaws, Currently in 25 115K
Effect
9: EX-4.2 Amended and Restated Investors' Rights Agmt 81 159K
10: EX-10.1 Form of Indemnification Agreement 12 61K
11: EX-10.2 1988 Stock Option Plan and Related Agreements 33 124K
12: EX-10.3 1992 Stock Plan and Related Agreements 39 129K
13: EX-10.4 1997 Stock Plan and Related Agreements 26 106K
14: EX-10.5 Isdcorp 2000 Equity Incentive Plan and Related 40 150K
Agmts
15: EX-10.6 Isdcorp 2000 Exec. Equity Incent. Plan & Related 55 187K
Agmts
16: EX-10.7 Form of 2000 Espp and Related Agreements 14 66K
17: EX-10.8 Form of 2000 Stock Option Plan & Related Agmts 20 82K
18: EX-10.9 Form of Change of Control Severance Agreement 7 40K
19: EX-10.10 Lease Agreement, Dated January 31, 1995 15 104K
20: EX-10.11 Lease, Dated October 2, 2000 33 164K
21: EX-10.12 Software Licensing Agmt, Dated June 8, 1999 17 91K
22: EX-10.13 Software Development Agreement, Dated May 25, 2000 15 64K
23: EX-10.14 License & Distribution Agmt, Dated February 2000 11 55K
24: EX-10.15 Oem Software Licensing Agmt, Dated April 30, 1999 13 64K
25: EX-10.16 Int'L Distributor Agmt, Dated November 20, 1991 28 96K
26: EX-10.17 Software License Agreement, Dated December 4, 1998 21 94K
27: EX-21.1 Subsidiaries of Lynuxworks, Incorporated 1 16K
28: EX-23.2 Consent of Pricewaterhousecoopers Llc 1 16K
29: EX-27.1 Financial Data Schedule 2 17K
As filed with the Securities and Exchange Commission on October 25, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
LYNUXWORKS, INCORPORATED
(Exact name of registrant as specified in its charter)
---------------
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California 7371 77-0181528
(pending reincorporation in
Delaware) (Primary Standard Industrial (I.R.S. Employer
(State or other jurisdiction Classification Code Number) Identification No.)
of incorporation or
organization)
2239 Samaritan Drive
San Jose, CA 95124
(408) 879-3900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Inder M. Singh
President, Chief Executive Officer and Chairman
LynuxWorks, Incorporated
2239 Samaritan Drive
San Jose, CA 95124
(408) 879-3900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
[Download Table]
Steven E. Bochner Eric S. Haueter
Steven V. Bernard Brown & Wood llp
Eveline Mutsaers 555 California Street
Wilson Sonsini Goodrich & Rosati San Francisco, CA 94104
Professional Corporation (415) 772-1200
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
Approximate date of commencement of proposed sale to public:
As soon as practicable after the effective date of this Registration
Statement.
---------------
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,
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, please 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,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
[Enlarge/Download Table]
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Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to Be Registered Offering Price(1) Registration Fee
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Common Stock, $0.001 par value.......................... $70,000,000 $18,480
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o).
---------------
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, as amended, 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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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary 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 declared effective. This +
+preliminary prospectus is not an offer to sell these securities and we are +
+not soliciting an offer to buy these securities in any state where the offer +
+or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated October 25, 2000
[LYNUXWORKS, INCORPORATED LOGO]
--------------------------------------------------------------------------------
Shares
Common Stock
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This is the initial public offering of LynuxWorks, Incorporated. We are
offering shares of our common stock. We anticipate the initial public
offering price will be between $ and $ per share. We have applied for
quotation of our common stock on the Nasdaq National Market under the symbol
"LNWX."
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
[Download Table]
Price
to Underwriting Discounts Proceeds to
Public and Commissions LynuxWorks
Per Share $ $ $
Total $ $ $
We have granted the underwriters the right to purchase up to
additional shares to cover any over-allotments.
Deutsche Banc Alex. Brown
Prudential Volpe Technology
a unit of Prudential Securities
Dain Rauscher Wessels
ABN AMRO Rothschild LLC
The date of this prospectus is , 2001
EDGAR DESCRIPTION OF INSIDE FRONT COVER ARTWORK:
The top of the page contains a heading which reads "Orchestrating
Embedded Linux Solutions". The center of the page contains the Lynuxworks logo
surrounded by an ellipse. This ellipse is in turn surrounded by eight
rectangles. Each rectangle contains a photograph, and indicates an industry
segment.
On the far top left of the ellipse is a photograph of an airplane
in flight; below this photograph are the words "Aerospace and Defense." To the
right of that photograph is a photograph of a computer screen; below this
photograph are the words "Internet Infrastructure." To the right of that
photograph is a photograph of a satellite dish; below this photograph is the
word "Communications." To the right of that photograph is a photograph of a hand
holding a credit card; below this photograph is the word "Retail." On the far
right of the bottom of the ellipse is a photograph of the front end of a car;
below this photograph are the words "Automotive Transportation." To the left of
this photograph is a photograph of a person wearing a lab coat, seated before a
computer; below this photograph are the words "Medical Devices." To the left of
this photograph is a photograph of a copier; below this photograph are the words
"Consumer and Business Electronics." To the left of this photograph is a
photograph of an industrial tool which is throwing off sparks;
below this photograph are the words "Industrial Control Systems."
At the foot of the page is the following text: "LynuxWorks is a provider
of scalable operating systems and development tools. We offer professional
services and access to a global network of value-added strategic relationships
through our Synergy Partners Program. LynuxWorks enables customers to develop
embedded systems for real-time and open-source Linux applications."
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that you
should consider before investing in our common stock. You should carefully read
the entire prospectus, including "Risk Factors" and the financial statements,
before making an investment decision.
Our Business
We provide operating systems and related products and services designed for
the embedded systems market. Our operating systems and development tools enable
our customers to develop embedded systems based on open standards that are
compatible with Linux products, which can significantly reduce total
development costs and time to market. Our embedded operating systems feature
performance and scalability and can support complex applications without
compromising reliability. We also provide software development tools and
applications that are important for developing and enhancing the performance
and functionality of our embedded operating systems, and we offer custom
engineering and consulting services to enable our customers to develop and
customize our products for their specific needs. We have a twelve year history
in the embedded operating systems market, which we believe gives us the
experience necessary to better understand our customers' needs. Our customers
are primarily embedded systems developers in the communications and Internet
infrastructure, aerospace and defense, office equipment and consumer
electronics, and industrial controls and medical devices industries. Our
customers include Boeing, Hewlett-Packard, Lucent Technologies, Marconi
Communications, Motorola, NEC, United Defense and Xerox.
Our solutions provide customers with the capabilities of both a real-time
operating system and an open source Linux operating system through our two
principal products, LynxOS and BlueCat Linux. LynxOS is an embedded real-time
operating system that is based on open standards and is Linux compatible.
BlueCat Linux is a Linux-based operating system specifically tailored for
embedded systems that do not require real-time performance. To promote adoption
of our products, we have engaged in co-marketing initiatives with industry
leaders such as Hewlett-Packard and Motorola Computer Group and joint
development efforts with Force Computers and Trillium Digital Systems. We
believe that our products, services and strategic alliances provide a
comprehensive solution to address the rapidly growing embedded systems market.
We were originally incorporated in California on March 18, 1988 as Singh Lynx
Corporation. We changed our name to Lynx Real-Time Systems, Incorporated in
March 1988 and changed our name to LynuxWorks, Incorporated in May 2000. We
intend to reincorporate in Delaware prior to the completion of this offering.
Our principal executive offices are located at 2239 Samaritan Drive, San Jose,
California 95124. Our telephone number at that location is (408) 879-3900.
LynxOS is a registered trademark of LynuxWorks, Incorporated. We have applied
for federal trademark registrations for LynuxWorks and BlueCat. All other brand
names or trademarks appearing in this prospectus are the property of their
respective holders.
Proposed Acquisition of ISDCorp
On July 21, 2000, we entered into an agreement to acquire Integrated Software
& Devices Corporation, or ISDCorp, a California corporation. ISDCorp was
incorporated in 1994 and has its principal offices located at 2160 Lundy
Avenue, Suite 100, San Jose, California 95125. Upon completion of the
acquisition, ISDCorp will become a wholly-owned subsidiary of LynuxWorks.
1
ISDCorp provides services and software for the embedded computing market,
including embedded Linux applications. ISDCorp specializes in adapting
operating systems to specific microprocessors, developing software device
drivers and providing embedded system integration. Customers of ISDCorp include
Cirrus Logic, Hewlett-Packard, IBM, Sony and Sun Microsystems.
The agreement provides that we are to effect the acquisition by issuing
shares of our common stock and by assuming ISDCorp's obligations under its
outstanding stock options. The exact number of shares and options to be issued
is dependent on the number of shares of ISDCorp's common stock and the number
of options that will be outstanding as of the completion of the acquisition.
Based on ISDCorp's capitalization as of October 19, 2000, we expect to issue a
total of 5,022,776 shares of our common stock to ISDCorp shareholders and we
expect to convert outstanding options to purchase ISDCorp's common stock into
options to purchase 981,757 shares of our common stock. We will account for the
acquisition using the purchase method of accounting.
The effectiveness of the acquisition is subject to obtaining tax clearance
from the California Franchise Tax Board with respect to the acquisition
vehicle. We expect to obtain this tax clearance and effect the acquisition
prior to completion of this offering. Unless otherwise indicated, the
information in this prospectus assumes the completion of the acquisition.
2
The Offering
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Common stock offered by LynuxWorks.................. shares
Common stock to be outstanding after this offering.. shares
Use of proceeds..................................... For general corporate
purposes, including
working capital and
capital expenditures.
Proposed Nasdaq National Market symbol.............. LNWX
The number of shares of common stock to be outstanding upon completion of
this offering is based on the number of shares outstanding as of October 19,
2000. This number assumes the conversion of all of our preferred stock
outstanding on that date into 20,176,461 shares of common stock. This number
excludes as of October 19, 2000:
. 7,150,668 shares subject to outstanding options under our prior stock
option plans with a weighted average exercise price of $1.70 per share;
. 981,757 shares of our common stock subject to outstanding options under
ISDCorp's stock option plans with a weighted average exercise price of
$2.30 per share;
. 1,130,666 shares available for future option grants under our 1997 Stock
Option Plan plus any shares that may be returned to our 1988 and 1992
stock option plans;
. 4,000,000 shares plus annual increases that will be reserved for
issuance under our 2000 Stock Option Plan upon completion of this
offering; and
. 1,500,000 shares plus annual increases that will be reserved for
issuance under our 2000 Employee Stock Purchase Plan upon completion of
this offering.
3
Summary Consolidated Financial Data
(in thousands, except per share data)
The pro forma data in the following table assumes that our acquisition of
ISDCorp was completed on the first day of the respective periods presented and
includes additional pro forma amortization of goodwill and other intangible
assets and deferred stock-based compensation resulting from the acquisition
totaling $12.5 million for fiscal 2000 and $3.1 million for the three months
ended July 31, 2000.
[Enlarge/Download Table]
Pro
Forma
Pro Forma Three
Year Three Months Months
Year Ended April 30, Ended Ended July 31, Ended
------------------------- April 30, ---------------- July 31,
1998 1999 2000 2000 1999 2000 2000
------- ------- ------- --------- ------- ------- --------
Consolidated Statement
of Operations Data:
Total revenues.......... $11,130 $14,860 $17,196 $ 20,809 $ 4,341 $ 5,108 $ 6,283
Total cost of revenues.. 2,923 4,279 4,504 7,395 936 1,827 2,895
Gross profit............ 8,207 10,581 12,692 13,414 3,405 3,281 3,388
Total
operating expenses..... 9,742 13,981 21,424 36,893 4,516 8,098 12,742
Operating loss.......... (1,535) (3,400) (8,732) (23,479) (1,111) (4,817) (9,354)
Net loss................ (1,849) (3,095) (8,604) (23,367) (1,030) (4,355) (8,939)
Net loss attributable to
common stockholders.... (1,849) (3,095) (10,598) (25,361) (1,030) (6,022) (10,606)
Pro forma net loss per share and shares used in computing pro forma net loss
per share appearing in the following table:
. assume that our acquisition of ISDCorp was completed and 5,022,776
shares of our common stock were issued to ISDCorp's shareholders on the
first day of the respective periods presented and include additional pro
forma amortization of goodwill and other intangible assets and deferred
stock-based compensation resulting from the acquisition totaling $12.5
million for fiscal 2000 and $3.1 million for the three months ended July
31, 2000;
. assume the conversion of all outstanding shares of preferred stock into
20,176,461 shares of common stock as if each share of preferred stock
converted as of its original issue date; and
. assume the exercise of warrants to purchase 373,210 shares of our common
stock at an exercise price of $0.50 per share, which took place in
August 2000 as if that exercise occurred on the date of issuance of the
warrants.
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Pro
Forma
Pro Forma Three Months Three
Year Ended Months
Year Ended April 30, Ended July 31, Ended
---------------------- April 30, -------------- July 31,
1998 1999 2000 2000 1999 2000 2000
------ ------ ------ --------- ------ ------ --------
Net loss attributable to
common stockholders per
share--basic and
diluted ............... $(0.38) $(0.54) $(1.78) $(1.06) $(0.17) $(0.97) $(0.34)
Shares used in computing
net loss attributable
to stockholders per
share--basic and
diluted................ 4,906 5,781 5,959 23,845 5,886 6,207 31,334
4
[Download Table]
As of July 31, 2000
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $ 31,411 $31,858 $
Working capital............................... 29,382 28,108
Total assets.................................. 38,319 70,460
Long term obligations, less current portion... 21 21
Mandatorily redeemable convertible preferred
stock........................................ 55,101 --
Total stockholders' equity (deficit).......... (23,962) 60,853
The pro forma balance sheet data summarized above assumes:
. the completion of our acquisition of ISDCorp as if the acquisition was
completed as of July 31, 2000;
. the conversion of all outstanding shares of our preferred stock into
20,176,461 shares of common stock as if that conversion occurred at July
31, 2000; and
. the exercise of warrants to purchase 373,210 shares of our common stock
at an exercise price of $0.50 per share which took place in August 2000
as if that exercise occurred at July 31, 2000.
The pro forma as adjusted balance sheet data summarized above reflects our
pro forma balance sheet data, computed as described above, adjusted to give
effect to our receipt of the estimated net proceeds of this offering, assuming
an initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.
The pro forma financial data appearing on this page and on the prior page is
subject to a number of estimates, assumptions and uncertainties and does not
purport to be indicative of the results of operations or financial position
that would have resulted had the acquisition been completed on the dates
referred to above, nor does it purport to be indicative of our future results
of operations or financial condition.
--------
Unless otherwise indicated, all information in this prospectus assumes:
. that the underwriters have not exercised their option to purchase
additional shares;
. conversion of all outstanding shares of preferred stock into shares of
common stock upon completion of this offering;
. our reincorporation in Delaware and the filing of our amended and
restated certificate of incorporation upon completion of this offering
to increase our authorized common stock, authorize a class of ten
million shares of undesignated preferred stock and to make further
changes in our certificate of incorporation; and
. the completion of our acquisition of ISDCorp.
5
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties and the other information in this prospectus before
deciding whether to invest in shares of our common stock. Any of the following
risks could cause the trading price of our common stock to decline.
Risks Related To Our Business
Because we recently substantially changed our business plan, our historical
operating results provide little or no basis upon which to evaluate the
prospects for our business.
Although we began operations in 1988, during the past twelve months we have
substantially revised our business plan to focus on developing embedded
operating systems based on and compatible with Linux. As a result, we believe
that our historical financial results are not indicative of our future
performance, and provide little or no basis upon which to evaluate our business
prospects.
Our two principal products are LynxOS, an embedded real-time operating system
that is Linux-compatible, and BlueCat Linux, a Linux-based operating system
specifically tailored for embedded systems.
As part of our new business plan, we have begun to market LynxOS as a "Linux-
compatible" product. The success of this part of our business plan primarily
depends on two principal assumptions. First, that existing and potential
customers will conclude that compatibility with other Linux-based products
increases the attractiveness of LynxOS. Second, that the recent introduction of
our Linux-based embedded operating system, BlueCat Linux, will result in
increased sales of LynxOS because customers that are initially targeted for
BlueCat Linux may migrate to LynxOS or choose LynxOS for products requiring a
real-time embedded operating system as a result of our cross marketing efforts
and the compatibility of our products. Because we have only recently begun to
implement this business plan, you have little or no basis upon which to
evaluate whether this part of our business plan will be successful.
The other significant aspect of our new business plan is based on our recent
development and release of our BlueCat Linux product. Because BlueCat Linux is
an open source product, we market it on a royalty-free basis and typically
receive only nominal revenues for each sale. Thus, this portion of our business
plan depends upon generating substantial revenues from the sale of software
development tools, software applications and engineering, consulting and
training services related to BlueCat Linux. We completed our first sale of
BlueCat Linux in March 2000 and we have not yet generated any meaningful
revenues from software or services related to BlueCat Linux. In addition,
although we have a number of software applications related to BlueCat Linux
under development, only a few related software applications are currently
available. As a result, you have only a limited basis, if any, upon which to
evaluate whether this part of our business plan will be successful.
We expect to focus a substantial portion of our sales, marketing, research
and development efforts on our new strategy, and we expect to continue to
substantially increase our expenses to execute this business plan. If we do not
successfully implement our new business plan, or if the new business plan does
not result in significantly increased revenue, the value of your investment
will decline significantly.
6
Because our operating results substantially depend upon sales of LynxOS and
related software tools and engineering services, our business will be
materially adversely affected if demand for these products and services does
not significantly increase.
Substantially all of our historical revenues have been generated by sales of
our real-time operating system, LynxOS, and related software tools and by
providing engineering, consulting and training services related to LynxOS. Our
new business plan depends, to a significant extent, upon our ability to
substantially increase revenues attributable to sales of LynxOS and related
tools and services. Thus, the success of our new business plan significantly
depends on the success of our new strategy of marketing LynxOS as a "Linux-
compatible" product and our ability to increase sales of LynxOS by expanding
our direct sales force and cross-marketing with our BlueCat Linux product.
These marketing efforts may not result in increased sales of LynxOS.
Additionally, our sales force, even if it is significantly expanded, and these
other marketing efforts may not succeed in increasing sales of LynxOS to the
level necessary to achieve our business plan. Any reduction in the demand for
LynxOS and related services, or the failure to significantly increase revenues
generated by this product and these services, would materially adversely affect
our operating results and cause the price of our common stock to decline
significantly.
Our new business plan presents additional challenges that we will need to
overcome to be successful.
In addition to the risks associated with evaluating our prospects with
limited historical information and the risk that we may not be able to
significantly increase sales of our LynxOS product, operating with a new and
unproven business model presents additional risks. For example, we may not be
able to:
. increase market acceptance of our BlueCat Linux product, which we first
introduced in November 1999 and which to date has been acquired by only
a limited number of customers;
. increase revenues from the sale of software development tools and
applications and engineering, consulting and training services related
to BlueCat Linux;
. achieve a higher level of compatibility between LynxOS and BlueCat Linux
within the time frame required to execute our new business model;
. broaden awareness of the LynuxWorks brand; and
. maintain our current, and develop new, strategic relationships with
technology partners, solution providers, microprocessor and original
equipment manufacturers and independent software vendors.
If we are unable to execute our strategy, we will not be successful and our
revenues may not grow and may decline, which would significantly reduce the
value of your investment.
We have a history of net losses and expect to continue to incur net losses for
the foreseeable future.
We incurred net losses attributable to common stockholders of $10.6 million
in fiscal 2000 and $6.0 million for the three months ended July 31, 2000. We
had an accumulated deficit of $22.5 million as of July 31, 2000. On a pro forma
basis, after giving effect to the acquisition of ISDCorp as if that transaction
occurred on May 1, 1999, our net losses attributable to common stockholders for
the fiscal year ended April 30, 2000 would have been $25.4 million, our net
losses attributable to common stockholders for the three months ended July 31,
2000 would
7
have been $10.6 million and our accumulated deficit as of July 31, 2000 would
have been $23.1 million. We expect to continue to incur net losses for the
foreseeable future as we incur significant expenses in connection with product
development, sales and marketing and hiring and training employees, as well as
expenses relating to our acquisition of ISDCorp. Goodwill and other intangibles
resulting from the ISDCorp acquisition are approximately $30.6 million in
total, and we expect to amortize that amount over approximately two to three
years. Deferred stock-based compensation resulting from the acquisition is
approximately $6.1 million, and we expect to amortize that amount over
approximately 3 years. Amortization of these amounts will substantially
increase our operating expenses. For example, amortization of goodwill and
other intangible assets arising as a result of the ISDCorp acquisition will
increase our expenses by approximately $5.2 million in the second half of
fiscal 2001, $10.5 million in fiscal 2002, $10.0 million in fiscal 2003 and
$4.4 million in fiscal 2004. Our net losses may also be increased by any
expenses we incur to acquire, license or integrate any other new technologies
or businesses. We know of no company that has built a profitable business based
wholly or largely on open source software. If our revenues decline or grow 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 not be able to
achieve or sustain profitability or generate positive cash flow.
We may not accurately forecast our revenues, which may result in volatility of
our stock price.
The market for Linux-based and Linux-compatible embedded operating systems in
general, and our products in particular, is new and rapidly evolving and is
difficult to forecast. Our ability to accurately forecast our quarterly
revenues is made more difficult by the fact that we have recently begun to
offer embedded operating systems and related professional services based on
Linux. Thus, we have little or no operating history with respect to BlueCat
Linux and related products and services upon which we can develop forecasts.
Also, the shift in our marketing strategy with respect to LynxOS and related
products and services significantly limits the relevance of our historical
operating results. In addition, during fiscal 2000, we greatly increased our
operating expenses. We do not know whether our business will grow rapidly
enough to absorb these increased expenses and we expect that our operating
expenses will continue to increase substantially. We also recently acquired
ISDCorp, which was a significant acquisition and which will result in
significant additional expense relating to the amortization of goodwill and
other intangibles and deferred stock-based compensation arising in connection
with the acquisition. We do not know if we will be able successfully to
integrate ISDCorp's business with our own. As a result, we expect our quarterly
operating results to fluctuate significantly and they may be below expectations
of public market analysts or investors. If this occurs, the price of our common
stock would likely drop rapidly and significantly.
As a result of the introduction of BlueCat Linux, demand for LynxOS may be
reduced, which could cause our revenues to decline.
During the fiscal year ended April 30, 2000, our LynxOS product and related
services generated substantially all of our revenue. Sales of LynxOS may
decrease as a result of the introduction of BlueCat Linux because our customers
may choose BlueCat Linux over LynxOS if they believe that their embedded
operating system requirements can be met by BlueCat Linux, particularly because
BlueCat Linux is a royalty-free product. Since we derive significant income
from run-time license fees on our LynxOS product, whereas our BlueCat Linux
product is royalty free, a decline in the demand for LynxOS may result in a
decline in our revenue, which would reduce the value of your investment.
8
If additional software applications and embedded software components compatible
with Linux are not developed, the market for our products will not grow, and
our product sales will be harmed.
For Linux, in general, and our products, in particular, to gain market
acceptance, more third-party software applications and embedded software
components designed to operate on Linux-based embedded operating systems must
be introduced and achieve market acceptance. If third parties do not introduce
software applications able to operate on Linux-based embedded operating
systems, or if those applications do not achieve mainstream business and
consumer acceptance, our products will not gain market acceptance, and we may
not be able to increase our product sales. In addition, if multiple,
incompatible versions of Linux are developed, application developers could be
less likely to develop Linux compatible applications which could reduce sales
of our LynxOS and BlueCat Linux products. We may be required to offer and
support more versions of Linux, which could increase our operating expenses.
One customer accounted for a significant portion of our combined historical
revenues, and our operations would be harmed by the loss of this customer.
We and ISDCorp have contracts with various divisions of Hewlett Packard. The
combined historical revenues of LynuxWorks and ISDCorp under these contracts
accounted for approximately 14% of the combined historical revenues of
LynuxWorks and ISDCorp for the six months ended June 30, 2000. The loss of
Hewlett-Packard as a customer could have an adverse impact on our business.
We sell a significant portion of our products to customers dependent upon
government funding and expenditures, which may not continue to be available.
We have derived a significant portion of our revenues from sales of systems
used in military, telecommunications, space and research applications. For
example, in fiscal year 2000, revenues from systems used in these applications
accounted for approximately 22% of our total revenues. Academic institutions
and defense industry participants, which are the source of most of these
revenues, are dependent on government funding and on sales of their products to
governmental entities. Any termination of government funding for these
customers or governmental purchases of their products would reduce our
revenues, perhaps substantially.
We may not be able to integrate ISDCorp successfully, which could adversely
impact our operating results.
We have recently acquired ISDCorp. We may not successfully integrate the
operations, technologies, personnel and customers of ISDCorp. Specifically, we
may have difficulty retaining ISDCorp's key technical and managerial personnel
and we may experience a loss of ISDCorp's customers. In addition, there may be
a disruption in our business because of the substantial resources necessary to
integrate ISDCorp's business and personnel and the resulting diversion of our
management's attention. Further, this acquisition will result in substantial
ongoing expenses from the amortization of goodwill and other intangibles and
deferred stock-based compensation resulting from the acquisition, and may have
a further negative impact on our business and financial condition as we are
required to assume ISDCorp's ongoing expenses and liabilities.
Members of our management team have only recently begun working together and we
are seeking key personnel in other areas.
Our business is highly dependent on our ability to recruit and retain
necessary members of our management team and on our management team's ability
to work together effectively.
9
Some members of our current management, including our Vice President,
Engineering and our Vice President, Marketing, have been employed by us for a
relatively short period of time. Our Vice President, Engineering was appointed
in February 2000 and our Vice President, Marketing was appointed in August
2000. Additionally, our former President resigned in August 2000. Our Vice
President, World Wide Sales was appointed in July 2000 after serving as our
Managing Director of Europe, Middle East and Africa. We have added additional
management personnel upon our recent acquisition of ISDCorp, including a Vice
Chairman of the Board, a Chief Operating Officer and a Vice President, Business
Development, all of whom were formerly members of ISDCorp's management. Several
members of our management team have not previously worked together, and our
management team as a whole has only limited experience managing a rapidly
growing company on either a public or private basis. The failure of our
management team to work together effectively could negatively affect our
decision-making, product development, sales and marketing efforts and the
management of our financial and other resources, which would negatively impact
our operating results.
We depend on the continued services of our Chief Executive Officer and key
personnel, whose knowledge of our business and technical expertise would be
difficult to replace.
Our products and technologies are complex, and we are dependent upon the
continued services of our existing engineering personnel and executive
management, especially Inder M. Singh, our Chief Executive Officer. These key
personnel can terminate their employment relationship with us at any time
without notice. The loss of any, or a group, of our key personnel, particularly
to a competitor, could adversely affect our business, reduce our market share,
slow our product development processes and diminish our brand identity.
Additionally, members of the open source community are not our employees and
have no obligation to perform services on our behalf. We do not have key person
life insurance on our Chief Executive Officer or any of our other personnel.
If we are unable to hire and retain additional research and development,
customer service and support, sales and marketing staff, we will not have
sufficient resources to compete and grow our revenues.
We will seek to hire a significant number of key personnel during fiscal
2001. Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain highly qualified personnel. Our future success
and ability to increase our revenues also depends upon the continued service of
our executive officers and other key engineering, sales, marketing and support
personnel. Competition for qualified personnel in our industry and in the San
Francisco Bay Area, as well as in the other geographic markets in which we
recruit, is extremely intense and characterized by rapidly increasing salaries,
which may increase our operating expenses or hinder our ability to recruit
qualified candidates.
Stock options and other stock-based compensation are significant factors in
recruiting and retaining our officers and employees. Our ability to use stock
options and stock-based incentives to recruit and retain personnel will be
adversely affected if our stock price declines.
Our reliance on independent third parties who develop certain portions of the
software included in our products could result in delays or unreliable products
and damage to our reputation.
Our products consist of many different open source and proprietary software
components and applications, certain portions of which are developed by
independent third parties over whom we have no control. In particular, the
Linux "kernel", which is the core of the Linux operating system, was originally
developed by Linus Torvalds and the ongoing development
10
of the kernel is controlled by a small group of individuals over whom we have
no control. We cannot guarantee that the software we incorporate into our
products will perform reliably or in accordance with specifications or that we
will successfully integrate third-party software components into our products.
In addition, if any of these third-party products is not reliable or available,
we may have to develop substitute applications ourselves, which would likely
significantly increase our development expenses and delay our time to market.
If these third-party products fail to work as designed, or adequate product
support is not provided, our products could malfunction, which would likely
lead to dissatisfaction among our customers and could damage our reputation and
lead to potential litigation.
A significant portion of our revenues is derived from run-time license fees and
the amounts we receive under these licenses depend upon the efforts of third
parties outside our control.
Our customers incorporate our embedded operating systems into their products
and then sell their products to their customers. Except for BlueCat Linux and
other open source products, we receive run-time license fees based upon the
number of units of those products sold by our customers. Thus, our run-time
license revenues depend upon our customers' successful commercialization of
their products. We cannot control their product development or predict their
ability to successfully market their products. If our customers are not
successful, our run-time license revenues will decline significantly.
Our business will be harmed if we are unable to protect our intellectual
property rights from misuse by third parties.
Although our BlueCat Linux product is based on open source Linux, our LynxOS
and BlueCat Linux products and many aspects of our other products include
intellectual property that is proprietary to us. Our success depends
significantly on our ability to protect our trademarks and 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 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 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 which governs the usage of the Linux
operating system in a manner that could put the protection of our intellectual
property at risk because some of our products include both our own intellectual
property and intellectual property covered by the GNU General Public License.
Legal proceedings to enforce our intellectual property rights 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 effectively protect intellectual property rights important to our
business, our business may be harmed.
We are vulnerable to claims that our products infringe third-party intellectual
property rights, especially because our products incorporate many distinct
software components developed by third parties. Any resulting claims against us
could be costly to defend or subject us to significant damages.
We may be exposed to future costly litigation based on claims that our
products infringe the intellectual property rights of others or intellectual
property rights covered by the GNU General Public License. This risk is
exacerbated by the fact that a significant portion of the code in our
11
products is developed by our engineers, who may not be aware of the legal
requirements that need to be complied with when using third party or GNU
General Public License intellectual property, and by independent parties, over
whom we exercise no supervision or control and who, themselves, might not have
the same financial resources as us to pay damages to a successful litigant. Any
litigation, with or without merit, could be time consuming to defend, result in
high litigation costs, divert our management's attention and resources, or
cause product shipment delays. We also could be required to remove or replace
infringing technology, which could be costly and delay product development and
shipment, or we could be required to publicly disclose some or all of the
proprietary source code of the relevant products.
If we do not introduce new products and services in a timely manner, demand for
our products and services will decline, and our operating results will suffer.
The market for embedded operating systems is characterized by rapidly
changing technology, evolving industry standards, frequent new service and
product introductions, and a complex development and testing environment. As a
result, we cannot accurately estimate the life cycles of our products.
Significant delays in new product releases or significant problems in
installing or implementing new products could seriously damage our business. We
have experienced delays in the scheduled introduction of new and enhanced
products and may experience similar delays in the future. For example, we
experienced a four month delay in the distribution of version 3.1 of our LynxOS
product, which was scheduled to be distributed in January 2000 but which was in
fact distributed for the first time in April 2000. Our success depends upon our
ability to enhance existing products, develop and introduce new products,
satisfy customer requirements and respond to technological advances and
emerging industry standards in a timely and cost-effective manner. This process
is made more challenging by the fact that much of the software development for
our products is done by members of the open source community who are not our
employees and over whom we have no control, and we must work with a large
number of developers who are not our employees in this process. You should be
aware that:
. our technology or systems may become obsolete upon the introduction of
alternative technologies or new industry standards;
. the technological life cycles of our products have been historically
short and are difficult to accurately estimate;
. we may not have sufficient resources to develop or acquire new
technologies or to introduce new services capable of competing with
future technologies or service offerings; and
. the price of the products and services we provide may decline as rapidly
as, or more rapidly than, the cost of any competitive alternatives.
To the extent we determine that new technologies and equipment are required
to remain competitive, the development, acquisition or licensing, and
implementation of those technologies and equipment are likely to continue to
require significant expenditures by us. We may not have sufficient funds for
this purpose, and even if funds are available, investments in new technologies
may not result in commercially viable products. If we do not develop and
introduce new products and services and achieve market acceptance in a timely
manner, demand for our products and services will drop and our business will
suffer.
We may require additional financing to sustain our operations and execute our
business strategy.
We currently believe that the net proceeds from this offering, together with
our current cash and cash equivalents, will be sufficient to fund our currently
anticipated working capital
12
and capital expenditure requirements for at least the next twelve months,
although it is possible that we may require additional financing within the
next twelve months if our capital expenditures or other cash needs exceed our
expectations. We expect that our operating expenses, particularly research and
development and sales and marketing expenses, and our capital expenditures will
increase significantly in order to execute our business strategy. We also
anticipate that our operating expenses will increase significantly as a result
of our acquisition of ISDCorp. We anticipate that these operating expenses and
capital expenditures will constitute a material use of our cash resources. In
addition, following the next twelve months, we may need to obtain substantial
additional financing in order to sustain our operations and execute our
business strategy. Moreover, we also may need to raise substantial additional
funds to support more rapid expansion, respond to competitive pressures,
acquire or invest in other businesses or technologies or respond to
unanticipated requirements. We cannot assure you that additional financing will
be available to us in amounts or on terms acceptable to us, or at all. If
sufficient financing is not available or is not available on acceptable terms,
our ability to sustain our operations, execute our business strategy, take
advantage of acquisition opportunities, develop or enhance our products or
services, or otherwise respond to competitive pressures would be significantly
impaired.
Attempts to expand by means of business combinations and strategic alliances
may not be successful and may disrupt our operations or harm our revenues.
In addition to our acquisition of ISDCorp, we may seek in the future to make
investments in or acquire other companies, products or technologies. Our
competitive position could decline if we are unable to identify and acquire
businesses or technologies that are strategic for our success in this market.
As a result of our acquisition of ISDCorp, or in the event of any future
acquisitions or investments, we will face additional financial and operational
risks, including:
. difficulty in assimilating the operations, technology and personnel of
acquired companies;
. disruption in our business because of the allocation of resources to
consummate these transactions and the diversion of management's
attention from our core business;
. difficulty in retaining key technical and managerial personnel from
acquired companies;
. assumption of net operating losses, if any, increased expenses and
liabilities of acquired businesses;
. our relationships with existing employees, customers and business
partners may be weakened or terminated as a result of these
transactions; and
. we may experience one-time in-process research and development charges
and ongoing expenses associated with amortization of goodwill and other
purchased intangible assets.
Expanding our services business will be costly and may not result in sufficient
new revenues to offset these costs.
We believe that the expansion of our business and the acceptance of Linux are
dependent upon the availability of high quality engineering and consulting
services to assist customers in designing and implementing Linux-based systems.
If we are unable to successfully provide these services, our revenues will not
grow and we may lose customers. We have recently expanded our strategic focus
to place additional emphasis on providing engineering and
13
consulting services and one of the primary purposes of our acquisition of
ISDCorp is to enhance our ability to provide these services. This expansion has
required, and will continue to require, significant additional expenses and
resources. We may not generate sufficient services revenues to offset the
expenses of providing these services. We may not attract or retain a sufficient
number of the highly qualified service personnel we need to support the
expansion of our engineering and consulting services organization. In addition,
this expansion will place further strain on our management and operational
resources.
If we are unable to implement appropriate systems, procedures and controls to
manage our growth, we may not be able to successfully offer our services and
grow our business.
Our ability to successfully offer our services and grow our business requires
an effective planning and management process. Since we began operations, we
have significantly increased the size of our operations and our recent
acquisition of ISDCorp has further significantly increased the size of our
company. This growth has placed, and we expect that any future growth we
experience will continue to place, a significant strain on our management,
systems and resources. Our key personnel have limited experience managing this
type of growth. In order to manage growth effectively, we will need to continue
to implement or update operational and financial systems, procedures and
controls.
Our service revenues are difficult to predict because they will in part be
generated on a project-by-project basis.
We have in the past and expect to continue to derive revenues from our
consulting and engineering services primarily from fees generated on a project-
by-project basis. These projects will likely vary in size and scope. Therefore,
a customer that accounts for a significant portion of our service revenues in a
given period may not generate a similar amount of revenues, if any, in
subsequent periods. In addition, after we complete a project, we have no
assurance that a customer will retain our services in the future. Furthermore,
our existing clients can generally reduce the scope of our engagement or cancel
their use of our services without penalty and with little or no notice. If
clients terminate existing engagements or if we are unable to enter into new
engagements, our revenues could be substantially lower than amounts anticipated
by us, financial analysts and investors, which could cause the price of our
stock to drop rapidly and significantly.
If we do not achieve a sufficient number of design wins for our products, or if
we fail to generate revenues from design wins, our business will be seriously
harmed.
We rely on design wins with manufacturers to predict and generate revenues
for our products. However, the development of our LynxOS and BlueCat Linux
products and related products and product enhancements is a complex and
uncertain process. Achieving a design win with a customer does not mean that
the customer will order large volumes of our products. A design win is not a
binding commitment by a customer to purchase our products. Rather, it is a
decision by a customer to use our products in the design process of that
customer's products. In addition, our customers can choose at any time to
discontinue using our products in their designs or product development efforts.
If customers choose to incorporate our products, we may still not realize
significant revenues from that customer if that customer's products are not
commercially successful. Any failures on our part to obtain additional design
wins, or any failure by our customers to either incorporate our products or to
successfully market their own products, could harm our business, financial
condition and results of operations.
14
We will face additional operational and financial risks related to our
international operations, any one of which could harm our international market
share and revenues.
In the fiscal year ended April 30, 2000 approximately 32% of our revenues
were generated from customers located outside North America, principally in
Europe. We face a number of challenges associated with maintaining and
expanding our business overseas. For example:
. we may have difficulty managing and administering a globally-dispersed
business;
. fluctuations in exchange rates may negatively affect our operating
results;
. we may encounter greater difficulty in collecting accounts receivable
resulting in longer collection periods;
. we may not be able to repatriate the earnings of our foreign operations;
. changes in import/export duties and quotas could affect the competitive
pricing of our products and services and reduce our market share in some
countries; and
. economic or political instability in some international markets could
result in the forfeiture of some foreign assets and the loss of sums
spent developing and marketing those assets.
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.
Portions of the software code in our products are developed by independent
parties over whom we exercise no supervision or control. Because our operating
systems are incorporated into microprocessors which are in turn incorporated
into other products, it is difficult to correct defects and to provide software
upgrades for our embedded operating systems. If errors are discovered, we may
have to make significant expenditures to eliminate them and 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 and our ability to convince commercial users of the
benefits of our products.
Failures in our products could also cause failures in our customers' systems,
including in critical business systems. If such failures occur, our customers
may assert warranty and other claims for substantial damages against us.
Although our warranties typically contain provisions designed to limit our
exposure to potential product liability claims, it is possible that these
provisions may not be effective or enforceable. Our insurance policies may not
provide coverage sufficient to materially limit our exposure to this type of
claim. These claims, even if unsuccessful, could be costly and time consuming
to defend.
15
Risks Related To Our Industry
The Linux-based and the real-time embedded operating systems industries are
intensely competitive and we may be unable to compete effectively with other
providers of Linux-based or real-time embedded operating systems.
The market for embedded operating systems and related products and services
is becoming increasingly competitive. We face competition from:
. the internal research and development departments of our current and
potential customers who develop their own embedded operating systems;
. companies that have developed proprietary embedded real-time operating
systems, such as Wind River Systems, QNX Software Systems and Microsoft;
. companies that have developed Linux-based embedded operating systems,
such as Lineo and MontaVista;
. companies that have developed proprietary general purpose desktop
operating systems that can be used in some embedded systems, such as
Microsoft and Sun Microsystems; and
. companies that have developed Linux-based general purpose desktop
operating systems that can be used in some embedded systems, such as Red
Hat, Caldera, SuSE and Turbolinux.
Failure to compete successfully in any of these areas against current or
potential competitors could harm our business.
The commercial companies with whom we compete 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. In addition, most
of these companies have greater resources, stronger brand awareness and larger
customer bases than we do and have already achieved or could quickly achieve
significant market share. This may result in price fluctuations and lower
product prices. Furthermore, because Linux-based operating systems can be
downloaded from the Internet for free or purchased at a nominal cost and
modified and re-sold with few restrictions, traditional barriers to entry are
minimal. Accordingly, new competitors or alliances among existing competitors
may emerge and rapidly acquire significant market share. There is also the
possibility that traditional embedded real-time operating systems competitors
will introduce Linux-based embedded products. In addition, to the extent that
competing companies which have developed proprietary operating systems 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, which could greatly increase the competitive
threat posed by these proprietary operating systems.
If the Linux embedded operating system does not continue to gain market
acceptance or if Linux developers do not continue to enhance the source code of
the Linux operating system, we will not be able to grow and our business could
fail.
Our strategy is to focus our sales, marketing, research and development
efforts on Linux-based and Linux-compatible embedded operating systems and the
provision of services and support for these systems. The use of Linux as a
general operating system has only recently gained market acceptance. The use of
Linux in embedded systems is even more recent. Our success depends on the
continued and increased rate of adoption of Linux in the embedded operating
systems market. If this does not occur, our business will suffer.
16
Our ability to introduce new products or product enhancements would be
impaired if Linus Torvalds, the original developer of Linux, and other third-
party developers fail to further develop the Linux kernel, which is the core of
the Linux operating system, or if the development community does not continue
to improve the functionality of the Linux operating system or introduce new
open source software or software enhancements. Mr. Torvalds and other members
of the open source community are not our employees and we have no ability to
control or direct their development activities.
Negative reaction within the open source community to our business strategy
could harm our reputation and business.
By developing products based on proprietary technology that is not freely
available we may run counter to the perception of Linux as an open source model
and alienate the Linux community. Because we rely on our relationships with the
open source community, this type of negative reaction, particularly if widely
shared by our customers, developers or the rest of the open source community,
could harm our reputation, impair our ability to capitalize on the development
efforts of the open source community, diminish the LynuxWorks brand and harm
our business.
If we are prohibited from using the Linux trademark, our business could be
adversely affected.
Like many other companies, we market Linux-based products, systems and
services. We use the term "Linux" in our advertising and marketing materials,
in our product documentation and for other commercial uses. We do not own the
trademark to "Linux." We believe that the continued use of the "Linux"
trademark is important to our business. If the "Linux" trademark is invalidated
through a legal action, or if we are no longer permitted to use it, our
business will likely suffer. In addition, we cannot control the use of this
trademark, and use by others may lead to confusion about the source, quality,
reputation and dependability of Linux, which may harm our business.
We could be prevented from selling or developing our products if the GNU
General Public License and similar licenses are not enforceable, or are not
effectively enforced, or if we are deemed to be in violation of these licenses.
The Linux kernel and the Linux operating system incorporated into our
products have been developed and licensed under the GNU General Public License
and similar open source licenses. These licenses require that any software
program licensed under them may be 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, all compliance with these licenses
has been voluntary. It is possible that a court would hold one or more of these
licenses to be unenforceable in the event that someone were to file a claim
asserting proprietary rights in a program developed and distributed under them.
Any ruling by a court that these licenses are not enforceable, or that Linux-
based operating systems, or significant portions of them, may not be copied,
modified or distributed freely, would have the effect of preventing us from
selling or developing our Linux products and services, unless we are able to
negotiate a license for the use of the software or replace the affected
portions. 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
17
and licensing of products, such as LynxOS and BlueCat Linux, that incorporate
both Linux-based and proprietary elements. Because some of our products include
proprietary technologies in addition to open source technology, we charge our
customers a fee to license these products from us. These fees could be deemed
to be a violation of the GNU General Public License, which could result in the
termination of our right to use Linux software. 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 and impact our ability to market our existing and future Linux-
based products.
Risks Related To This Offering
Our stock price may be extremely volatile.
Our common stock has never been sold in a public market and an active trading
market for our common stock may not develop or be sustained upon the completion
of this offering. We are negotiating the initial public offering price of the
common stock with the underwriters. However, you should not consider the
initial public offering as being indicative of the prices that will prevail in
the public market after the offering, and the market price of the common stock
could fall below the initial public offering price. You should read the
"Underwriting" section for a discussion of the factors to be considered in
determining the initial public offering price.
In addition, the market price of our common stock could fluctuate widely in
response to the following factors:
. variations in operating results or failure to meet stock market
analysts' projections;
. announcements of technological innovations, new products or new services
by us or by our competitors or customers;
. changes in financial estimates or recommendations by stock market
analysts regarding us or our competitors;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel;
. future equity or debt offerings by us or our announcements of these
offerings; and
. general market and economic conditions.
In addition, in recent years, the stock market in general, and the Nasdaq
National Market and the securities of technology companies in particular, have
experienced extreme price and volume fluctuations. These fluctuations have
often been unrelated or disproportionate to the operating performance of
individual companies. These broad market fluctuations may materially adversely
affect our stock price, regardless of our operating results.
We may invest or spend the proceeds of this offering in ways with which you may
not agree and in ways that may not yield a return.
We will retain broad discretion over the use of proceeds from this offering.
Stockholders may not deem the actual uses desirable, and our use of the
proceeds may not yield a significant return or any return at all. We intend to
use the net proceeds from this offering for general corporate purposes,
including working capital and capital expenditures. A portion of the proceeds
may also be used to acquire or invest in businesses or products or to obtain
the right to use technologies, although we have no current commitments or
agreements for any of these transactions, other than licensing arrangements we
expect to enter into in the ordinary
18
course of business. Because of the number and variability of factors that will
determine our use of the net proceeds from this offering, we cannot assure you
that these uses will not vary substantially from our currently planned uses.
Some of our existing stockholders can exert control over us, and they may not
make decisions that reflect the interests of all stockholders.
After this offering, our officers, directors and our current 5% or greater
stockholders will together control approximately % of our outstanding
common stock. This includes Motorola, who will control % of our outstanding
common stock, Inder M. Singh, who will control % of our outstanding common
stock, and Reza Soliman-Noori, who will control % of our outstanding common
stock. As a result, these stockholders, if they act together, will be able to
exert a significant degree of influence over our management and affairs and
will control matters requiring stockholder approval, including the election of
all of our directors and approval of significant corporate transactions. This
concentration of ownership may also delay or prevent a change in control of
LynuxWorks and might affect the market price of our common stock, even when a
change may be in the best interests of all stockholders. In addition, the
interests of these stockholders may not always coincide with our interests or
the interests of other stockholders. In addition, we have entered into voting
and other agreements with Motorola, increasing Motorola's influence with
respect to the election of directors and limiting our ability to enter into
certain exclusive licensing and strategic transactions with third parties. See
"Certain Transactions--Agreements with Motorola."
Our charter and bylaws and Delaware law contain provisions that may delay or
prevent a change of control.
Provisions of our charter and bylaws may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of us. These provisions could limit the price
that investors might be willing to pay for shares of our common stock. These
provisions include:
. division of the board of directors into three separate classes serving
staggered three-year terms;
. elimination of cumulative voting in the election of directors;
. prohibitions on our stockholders from acting by written consent and
calling special meetings;
. procedures for advance notification of stockholder nominations and
proposals; and
. the ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, upon completion of this offering, our board of directors will
have the authority to issue up to ten million shares of preferred stock and to
determine the rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The issuance of preferred stock, while providing flexibility in
connection with possible financings or acquisitions or other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of our outstanding voting stock or otherwise take control
of our company.
We are subject to Section 203 of the Delaware General Corporation Law that,
subject to exceptions, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three
years following the date that this stockholder became an interested
stockholder. The preceding provisions of our charter and bylaws, as well
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