<PAGE>
As filed with the Securities And Exchange Commission on February 28, 2000
Registration No. 333-94985
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
LINUXCARE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7379 94-3315402
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
</TABLE>
Linuxcare, Inc.
650 Townsend Street
San Francisco, California 94103
(415) 354-4878
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Fernand B. Sarrat
President and Chief Executive Officer
Linuxcare, Inc.
650 Townsend Street
San Francisco, California 94103
(415) 354-4878
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
John V. Roos, Esq. William J. Whelan, III, Esq.
Page Mailliard, Esq. Cravath, Swaine & Moore
Jonathan D. Levy, Esq. Worldwide Plaza
James P.A. Shulman, Esq. 825 Eighth Avenue
Deanna M. Butler, Esq. New York, NY 10019
Wilson Sonsini Goodrich & Rosati (212) 474-1000
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
(650) 493-9300
</TABLE>
---------------
Approximate date of commencement of proposed sale to the 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 of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]__________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]__________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]__________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================
Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered Offering Price(1) Registration Fee
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value......... $77,625,000 $20,493
==============================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(o) of the Securities Act of 1933 solely for
the purpose of computing the amount of the registration fee. A
registration fee of $24,288 has previously been paid.
---------------
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 Commission, acting pursuant to said
Section 8(a), may determine.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 28, 2000
4,500,000 Shares
[LOGO OF LINUXCARE]
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
$13.00 and $15.00 per share. We have applied to list our common stock on The
Nasdaq Stock Market's National Market under the symbol "LXCR".
The underwriters have an option to purchase a maximum of 675,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 5.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Linuxcare
------------ ------------- ------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
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
Chase H&Q
Robertson Stephens
The date of this prospectus is , 2000.
<PAGE>
Inside front cover: A depiction of an advertisement used by the Company
with copy that reads as set forth below.
Headline: IF YOU THINK AN OPERATION SYSTEM SHOULD ADAPT TO YOUR BUSINESS
AND NOT VICE VERSA, YOU HAVE OUR SUPPORT.
Text: For flexibility, Linux is unrivalled. And with Linuxcare, you now
have the comprehensive enterprise-class support and services you need to take
full advantage of Linux technology. We offer everything from professional
services, to 24X7 support, to training--all in one place. The Linux revolution
has begun. And now it means business. To learn more, call 888.LIN.GURU
(546.4878) or visit www.linuxcare.com.
Bottom tagline: SUPPORT FOR THE REVOLUTION. LINUXCARE.
Gatefold two-page spread at front of prospectus: A depiction of an
advertisement used by the Company with a table of six columns and five rows
and bars going across the rows of the table.
The headings of the columns of the table read: EVALUATE, BUY, SET UP, USE,
MAINTAIN, FIX.
The headings of the rows of the table read: PROFESSIONAL SERVICES strategy,
development, migration and integration, TECHNICAL SUPPORT 24X7 telephone and
Web-based support, LINUXCARE UNIVERSITY classroom and online training and
courseware, LINUXCARE LABS vendor-neutral hardware and software certification,
WWW.LINUXCARE.COM up-to-date technology, information and guidance.
The bars extend across the columns as follows: In the PROFESSIONAL SERVICES
row, from EVALUATE through USE. In the TECHNICAL SUPPORT row, from SET UP
through FIX. In the LINUXCARE UNIVERSITY row, from EVALUATE through MAINTAIN.
In the LINUXCARE LABS row, from EVALUATE through SET UP. In the
WWW.LINUXCARE.COM row, from EVALUATE through FIX.
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 5
Special Note Regarding Forward-
Looking Statements................. 15
Use of Proceeds..................... 16
Dividend Policy..................... 16
Capitalization...................... 17
Dilution............................ 18
Unaudited Pro Forma Combined
Financial Statements............... 19
Selected Financial Data............. 21
Management's Discussion and
Analysis of Financial Condition and
Results of Operations.............. 23
Business............................ 29
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management......................... 41
Certain Relationships and
Related Transactions.............. 53
Principal Stockholders............. 55
Description of Capital Stock....... 57
Shares Eligible for Future Sale.... 60
United States Tax Consequences to
Non-United States Holders......... 62
Underwriting....................... 65
Notice to Canadian Residents....... 68
Legal Matters...................... 69
Experts............................ 69
Additional Information............. 69
Index to Financial Statements...... F-1
</TABLE>
------------
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 only be accurate
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.
<PAGE>
PROSPECTUS SUMMARY
This section sets forth a summary of information described in more detail
throughout this prospectus. This summary is not complete and may not contain
all the information you should consider before investing in our common stock.
You should read the entire prospectus, including the financial statements and
their related notes, before making an investment decision. Except as otherwise
indicated, all information in this prospectus reflects the conversion of all
shares of our preferred stock into shares of common stock automatically upon
completion of this offering, and assumes that the underwriters' over-allotment
option will not be exercised.
[LOGO OF LINUXCARE]
We are a recognized leader in providing services for Linux. We offer a
comprehensive range of services spanning the entire software and hardware life
cycle for Linux, open-source software packages and related technologies. We
offer services for 21 distributions of Linux. We help our customers choose the
best Linux solution, integrate it with their existing computing infrastructure
and provide them with ongoing support. We have assembled a worldwide team of
Linux experts who actively participate in the Linux and open-source communities
and are significant contributors to open-source projects. We are implementing
an advanced Internet-based infrastructure to communicate with and to deliver
services to our customers. This infrastructure is designed to deliver our
services remotely, thereby reducing the need for on-site professionals. As part
of this infrastructure, we have built a knowledge sharing and management
database consisting of information gained from all of our business units.
Since our inception, we have targeted our services toward large business
customers. We focus our sales and marketing efforts on original equipment
manufacturers, software vendors, Global 1000 companies and Internet
infrastructure providers. During 1999, we derived 55% of our revenues from
three customers, Motorola, Silicon Graphics, Inc. and Sun Microsystems. Our
next five largest customers were Dell Computer, Densa Techno Tokyo, Hewlett-
Packard, KPMG Peat Marwick and Macmillan USA .
Linux is emerging as the leading operating system for the Internet.
According to an April 1999 survey conducted by the Internet Operating System
Counter, Linux ran on approximately 31% of the Web servers polled, more than
any other operating system. Linux offers multiple benefits to businesses,
including reliability, reduced total cost of ownership, greater flexibility and
improved compatibility with existing computing infrastructures.
To enable customers to benefit fully from their Linux investments, we offer
a broad range of services, including:
. professional services--consulting services to help customers
successfully implement Linux solutions;
. technical support--customer support services 24 hours a day, seven days
a week on complex issues ranging from operating system installation to
application usage;
. education--courseware for Linux and other open-source technologies
through Linuxcare University, our group that provides education for
Linux; and
. product certification--vendor-neutral certification of hardware for use
with Linux by Linuxcare Labs, our group devoted to assuring
compatibility with the Linux operating system.
Our objective is to become the leading provider of Linux-related services
by:
. establishing relationships with other companies that are direct
consumers of our services and provide us with an opportunity to reach a
broad customer base;
. expanding our sales and marketing efforts and strengthening our brand;
1
<PAGE>
. extending our technical knowledge to increase the effectiveness of our
services and attract and retain Linux experts;
. using our advanced Internet-based infrastructure to deliver quality
services; and
. continuing to promote the adoption and development of Linux.
We believe it is imperative for us to maintain a close relationship with the
open-source community. Therefore, we actively support open-source initiatives,
dedicating time and resources to projects that improve the Linux operating
system and related applications. We also sponsor and participate in
organizations that foster the development and adoption of Linux. We have
established goodwill in the Linux and open-source communities through our
active involvement, making us an attractive company for Linux experts to join.
Upon completion of this offering, our executive officers and directors will
own 18,061,129 shares or approximately 59.8% of our outstanding common shares
assuming the exercise of all warrants and options held by them. Acting
together, these shareholders would be able to control all matters requiring
approval by shareholders.
We were incorporated in Delaware in December 1998. For the year ended
December 31, 1999, we incurred losses of $21.2 million. We operate in a
competitive market and, in an effort to establish our business, we anticipate
recording substantial net losses in the foreseeable future.
Our principal executive offices are located at 650 Townsend Street, San
Francisco, California 94103 and our telephone number is (415) 354-4878. Our
corporate website is located at www.linuxcare.com. Information contained on
this website or on any other website referenced elsewhere in this prospectus
does not constitute a part of this prospectus.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered................ 4,500,000 shares
Common stock to be outstanding after
this offering...................... 30,188,221 shares
Use of proceeds..................... For general corporate purposes, expansion
of our information technology
infrastructure, working capital and
potential acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol............................. LXCR
</TABLE>
The total number of outstanding shares of our common stock above is based
on:
. the assumed conversion of all shares of Series A preferred stock
outstanding as of January 31, 2000 into 7,917,536 shares of common stock
upon completion of this offering.
. the assumed conversion of all shares of Series B preferred stock as of
January 31, 2000 into 7,297,900 shares of common stock upon completion
of this offering;
. 10,472,785 shares of our common stock outstanding as of January 31,
2000;
This number excludes the following:
. 391,743 shares represented by warrants for Series A redeemable
convertible preferred stock;
. 3,136,560 shares of common stock available for grant under our 1999
Stock Plan as of January 31, 2000;
. 1,000,000 shares of common stock available for issuance under our 2000
Employee Stock Purchase Plan immediately following the offering;
. 300,000 shares of common stock available for issuance under our 2000
Director Option Plan immediately following the offering; and
. 2,876,001 shares of common stock issuable upon exercise of options
outstanding as of January 31, 2000 with a weighted average exercise
price of $0.31 per share.
3
<PAGE>
Summary Consolidated Financial Information
The following summary financial data has been derived from our unaudited pro
forma combined statement of operations and audited consolidated balance sheet
for 1999. You should read the information set forth below in conjunction with
our "Unaudited Pro Forma Combined Financial Statements," Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Pro forma
combined
year ended
December 31,
1999
------------
<S> <C>
Statement of Operations Data:
Revenues......................................................... $ 1,531,471
Cost of revenues................................................. 2,987,049
Gross margin..................................................... (1,455,578)
Loss from operations ............................................ (20,563,229)
Net loss applicable to common stockholders....................... (21,259,755)
Basic and diluted net loss per share............................. $(7.31)
Weighted average shares used in computing pro forma combined
basic and diluted net loss
per share ...................................................... 2,908,824
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
------------------------
Pro Forma
Actual As adjusted
----------- -----------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................ $29,994,575 $86,584,595
Working capital ..................................... 25,029,759 81,619,759
Total assets......................................... 36,366,003 92,956,003
Note payable and equipment financing, less current
portion............................................. 1,926,018 1,926,018
Redeemable convertible preferred stock............... 40,374,016 --
Total stockholders' (deficit) equity................. (12,628,592) 84,335,424
</TABLE>
See note 1 of notes to financial statements included elsewhere in this
prospectus for an explanation of the determination of the number of shares used
in computing per share data and the complete discussion on unaudited pro forma
earnings per share.
The as adjusted pro forma amounts above give effect to the sale of the
4,500,000 shares of common stock offered hereby at an assumed public offering
price of $14.00 per share (less underwriting discounts and commissions and
estimated offering expenses) and the conversion at the closing of this offering
of 14,999,803 shares of preferred stock into 15,215,436 shares of common stock
as of January 31, 2000. See "Use of Proceeds" and "Capitalization."
4
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and all of the information
contained in this prospectus before deciding whether to purchase our common
stock.
Risks Related to Our Business
We have a limited operating history and operate in a new industry which makes
evaluating our business prospects and results of operations difficult.
We were incorporated in December 1998. We have a limited operating history
upon which an investor may evaluate our business and prospects. Our potential
for future profitability must be considered in light of the risks,
uncertainties, expenses and difficulties frequently encountered by recently
established companies, particularly companies in new and rapidly evolving
markets such as the Linux services market. To date, few Linux-based products
have gained widespread acceptance. Our success depends on the growth, usage and
acceptance of the Linux operating system and related open-source software.
If the market for the Linux operating system fails to grow or if we fail to
successfully address the risks associated with new companies, our business may
not grow.
We have incurred substantial losses and anticipate future losses.
We incurred losses of $21.2 million during the year ended December 31, 1999
as we expanded our operations and had an accumulated stockholders' deficit of
approximately $12.6 million as of December 31, 1999. For the foreseeable
future, we expect to incur significant expenditures for marketing, recruiting
and hiring additional personnel, upgrading our information technology
infrastructure and expanding into new markets. As a result, upon completion of
the offering, we expect that our operating expenses, excluding amortization of
deferred stock compensation, will total approximately $65 million during the
year ending December 31, 2000 and, consequently, we expect to incur losses in
2000 and 2001. In addition, we may not be able to maintain our current rate of
revenue growth. Increased competition or slower than anticipated growth in our
market could also affect our revenue growth. We cannot be certain that we will
achieve profitability or that, if we do achieve profitability, we will be able
to sustain it.
We may be unable to attract and retain Linux experts and other personnel to
grow our business.
Our future success depends, in part, on our ability to identify, attract,
retain and motivate highly skilled personnel. We intend to hire approximately
250 new employees during 2000, including additional technical professionals,
Linux experts, sales and marketing and other personnel. Competition for these
individuals is intense, and we may not be able to attract, assimilate or retain
sufficient highly qualified personnel. Our ability to achieve revenue growth
also depends upon the continued service of our executive officers and other key
marketing and support personnel. Competition for qualified personnel in our
industry and in the San Francisco Bay Area, as well as 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.
We have historically generated 55% of our revenues from three customers.
To date, we have derived a significant portion of our revenues from a
limited number of customers. Our three largest customers, Sun Microsystems
Inc., Motorola, Inc. and Silicon Graphics, Inc., accounted for 26%, 18% and
11%, respectively, of our revenues during the year ended December 31, 1999. We
performed primarily technical support, professional services, and training for
Sun Microsystems, Motorola and Silicon
5
<PAGE>
Graphics, Inc., respectively. The volume of work performed for these customers
may not be sustained from year to year, and there is a risk that these
principal customers may not retain us in the future. Any cancellation, deferral
or significant reduction in the amount of work performed for these customers
could have a material adverse effect on our business, financial condition and
results of operations.
We may not be able to achieve high gross margins if we are unable to utilize
our technical staff effectively, if there are fluctuations in work flow or if
our implementation of a new information technology infrastructure does not
result in the efficiencies that we expect from it.
Our success as a service business is highly dependent on our ability to
improve our gross margins. For the year ended December 31, 1999, we had
negative gross margin of $1.6 million. Our gross margins are affected by
fluctuations in the work flow from our customers as well as the efficient use
of the time of our professional staff. Some of our highly skilled personnel may
have to spend extensive amounts of time marketing our services and performing
administrative tasks instead of solving customer problems. In particular, our
skilled Linux professionals may be required to cultivate their relationships
with the open-source community to help establish our brand. In addition, we are
implementing an advanced information technology infrastructure to help handle
the expected growth of our business. If we are unable to carry out such
implementation or if our new infrastructure does not result in the efficiencies
that we expect from it, we may not achieve high gross margins. Our failure to
achieve high gross margins may adversely affect the market price of our common
stock and our ability to achieve profitability.
Our revenues are difficult to predict because they will in part be generated on
a project-by-project basis.
We expect to derive revenues for our professional services offerings
primarily from fees for services 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 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 an 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 in
the relevant period could substantially decline and we may underutilize
existing resources that cannot be quickly redeployed to other client
engagements.
Our ability to accurately forecast our quarterly revenues is made difficult
by our limited operating history and the new and rapidly evolving market for
Linux. In addition, we have hired a significant number of employees and entered
into contracts requiring future minimum operating lease payments of $6.0
million over five years based on our revenue expectations. Therefore, if we
have a shortfall in revenues, we may be unable to reduce our expenses quickly
enough to avoid lower quarterly operating results. We do not know whether our
business will grow rapidly enough to absorb these costs. As a result, our
quarterly operating results could fluctuate, and such fluctuation could
adversely affect the market price of our common stock.
If we are unable to implement appropriate systems, procedures and controls to
manage our expected growth, we may not be able to successfully offer our
services and grow our business.
Since we began operations in December 1998, we have significantly increased
the size of our operations. During 1999, we increased our number of employees
by 127 people and greatly increased our operating expenses. 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
management team has not previously worked together. The quality of the services
we render may be adversely affected if we do not create a highly cooperative
environment within the management team and with employees. To manage growth
effectively, we will need to continue to implement or update our operational
and financial systems, procedures and controls. If we fail to implement
appropriate internal systems, and necessary modifications and improvements to
these systems, our business will suffer.
6
<PAGE>
A failure of our information technology infrastructure to handle the demands of
our current or future business would adversely affect our business.
Our service offerings and business strategy are highly dependent on the
efficient performance of our Internet-based information technology. Although we
divide our information technology infrastructure among four locations in
anticipation of possible system outages or failures, we cannot be certain that
the systems operated by us or by outside service providers will be adequate to
handle the demands of our business or will be maintained without any material
interruption. A significant growth of our business could result in an
unexpected increase in the demand for our Internet-based services. We are
implementing an advanced information technology infrastructure that is designed
to handle increased demand, but we cannot be certain that our infrastructure
will be in place when we experience such increased demand, or if we do, such
infrastructure will be able to handle the increased demand. Any system failure,
including network, software or hardware failure, that causes an interruption in
our service or a decrease in our responsiveness to our customers could harm our
reputation and adversely affect our business.
Our customers and competitors may offer their own technical support and
services which could result in a loss of market share.
Currently, we provide services and technical support for large businesses
and major hardware and software vendors. To the extent the Linux operating
system gains broader market acceptance, these companies may develop their own
technical support and services for Linux-based operations. These companies,
which have large customer bases, greater financial resources and better name
recognition than we do, 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. These companies also may be able to
leverage their existing service organizations and provide a more comprehensive
offering of services and higher levels of support on a more cost-effective
basis than we can. Furthermore, other suppliers of Linux operating systems are
focusing on technical support and services. We believe that VA Linux, Red Hat,
Caldera and S.u.S.E. currently offer technical support and services. It is
possible that these businesses will form alliances to enable them to provide
more effective services. Increased competition and the emergence of other
Linux-related services companies may result in price reductions, lower-than-
expected gross margins or our inability to establish a meaningful market share,
any of which may cause our business to fail.
Our management team is new and, if they are unable to work together
effectively, our business could be seriously harmed.
Our business is highly dependent on the ability of our management team to
work together effectively to meet demands of our growth. We grew from three
employees at December 31, 1998 to 130 employees at December 31, 1999, including
adding seven members to our management team. These individuals have not
previously worked together as a management team and have only had limited
experience managing a rapidly growing company.
We face risks related to expanding into new services and business areas.
To increase our revenues, we could expand our operations by promoting new or
complementary services and by expanding into new business areas. These services
could require both modification of existing systems and the creation or
acquisition of new software, systems and other technologies. We may lack the
managerial and technical resources necessary to expand our service offerings.
These initiatives may not generate sufficient revenues to offset their cost. If
we are unable for any reason to expand our services in line with our customer
demands, our reputation and business could suffer.
7
<PAGE>
We intend to expand by means of business combinations and strategic alliances,
which may harm our operational efficiency, financial performance and
relationships with employees and third parties.
We currently intend to expand our operations and market presence by making
investments in or entering into business combinations, joint ventures or other
strategic alliances with other businesses in the United States, Europe and
Asia-Pacific. Our ability to expand in this way may be limited due to the many
financial and operational risks accompanying such transactions. For example:
. these transactions may be time consuming, place strains on our resources
and divert management's attention away from our core, day-to-day
business;
. efficient integration of the acquired businesses or technologies may not
be successful, thereby reducing any anticipated revenues and cost
benefits;
. our stockholders will incur dilution if we issue equity in connection
with these transactions; and
. our relationships with existing employees, customers and business
partners may be weakened or terminated as a result of these
transactions.
If we fail to adequately promote and maintain our brand name or are unable to
continue using "Linux" as part of our brand name, our business may be adversely
affected.
We believe that increasing the recognition of the Linuxcare brand is
critical to our success. To promote our brand identity and to attract
customers, we plan to spend approximately $14 million during the year ending
December 31, 2000 on advertising, promotions and marketing campaigns. We cannot
be certain that these strategies will be successful. If we are unable to design
and implement effective marketing campaigns or otherwise fail to promote our
brand, our revenues will not grow sufficiently. Our business will suffer if we
incur excessive expenses in an attempt to promote our brand without a
corresponding increase in revenues. Mr. Linus Torvalds owns the trademark to
"Linux" and has approved our use of the word Linux in our company name as well
as in the title of our websites. This approval may be revoked for any reason,
however, and we may no longer be able to use this trademark in our brand or in
the title of our website. Trademark owners must enforce their trademarks
effectively in order for their trademarks to remain valid. Should the "Linux"
trademark not be enforced adequately, because of lack of resources or
otherwise, or be invalidated through legal action, our business could suffer.
We have no right to police the use of the term "Linux." Lack of policing could
cause the loss of the trademark as well as confusion about the source, quality,
reputation and dependability of Linux, which would harm our company's
reputation. In addition, the trademark "Linux" may become widely used and
diluted. This may, in turn, dilute our brand and decrease the efficacy of our
branding strategy.
We may be unable to execute our business model in international markets.
A key component to our growth strategy is to expand our presence in Asia-
Pacific and Europe and become recognized as an international leader in the
provision of Linux-related services. We believe the market for Linux-related
services is worldwide. To date, we have only limited experience marketing,
selling and supporting our services on an international basis. We have recently
expanded our operations internationally and we have offices in Australia,
Canada, Germany, Italy, Japan, The Netherlands and the United Kingdom. We are
considering further international expansion, which may include opening new
offices, acquiring established businesses or working with other companies to
market and deliver our services. It will be costly to establish international
operations, promote our brand internationally and develop localized websites
and network support. Revenues from international activities may not offset the
expense of establishing and maintaining these foreign operations. Furthermore,
expanding our international operations subjects us to additional risks,
including the following:
. increased competition from local service providers, including S.u.S.E.
in Europe and TurboLinux in Japan;
. delivering our services in multiple languages;
8
<PAGE>
. fluctuations in currency exchange rates or recessionary environments in
overseas economies;
. tariffs, duties, price controls or other trade barriers, and compliance
with export and import laws; and
. longer payment cycles and increased difficulties developing and
maintaining credit procedures.
Our failure to address these risks could inhibit or preclude our efforts to
expand our business in international markets.
If we are unable to introduce new services in a timely manner, our business
will be harmed.
The computer systems market is characterized by rapid technological change,
changes in customer demands and evolving industry standards. Our services could
be rendered obsolete if new technologies are introduced or new industry
standards emerge and we are not able to keep up with such innovation.
Computing environments are inherently complex. As a result, we cannot
accurately estimate the long-term need for our services. New environments and
new techniques may require us to hire and retain increasingly scarce,
technically competent personnel. Significant delays or problems in installing
or implementing new services could seriously damage our business.
Our future success depends upon our ability to enhance existing services,
develop new services and grow our business to satisfy customer demands. We may
not be able to successfully identify new service opportunities to grow our
business.
We may not be able to use intellectual property to protect ourselves from
competition.
Most of our activities and knowledge may not be protectable as proprietary
intellectual property. Some of the computer code resulting from the
professional services and technical support that we provide will be published
and freely-available to all Linux licensees with no payment to us. To date, we
have taken only limited steps to protect our intellectual property.
Accordingly, we may be unable to use our intellectual property to prevent other
companies from competing with us. In addition, we are unable to prevent third
parties from developing techniques that are similar or superior to our
technology, or from designing around our intellectual property.
We may be sued as a result of information published on, posted on or accessible
from our websites.
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement (including contributory infringement), or other claims
relating to the information contained on our website, whether written by us or
third parties. These types of claims have been brought against online services
in the past, and can be costly to defend, regardless of the merit of the
lawsuit. Although recent federal legislation protects online services from some
claims when the material is written by third parties, this protection is
limited. Furthermore, the law in this area remains in flux, and varies from
state to state. While no claims have been made against us to date, our business
could be seriously harmed if one were asserted.
The operating performance of our systems is dependent on outside providers.
We rely on outside service providers to help maintain our networks and
systems. For example, we outsource our Web server hosting to Digital Island, an
outside co-location service provider. This provider's failure to maintain its
systems and operations could adversely affect our business. In addition, our
technical support services are highly dependent on Internet-based technology.
Any system failure, including network, software or hardware failure, that
causes an interruption in our service or a decrease in our responsiveness could
harm our reputation.
9
<PAGE>
Increased sales of Linuxcare's services depends upon the expansion of the
Internet as a platform for commerce and communication.
Our success depends on the continued use and expansion of the Internet. If
the Internet does not continue to become a widespread communications medium and
commercial marketplace, the demand for Linuxcare's services could be
significantly reduced. The Internet infrastructure may not be able to support
the demands placed on it by continued growth. The Internet could lose its
viability due to delays in the development or adoption of new equipment,
standards and protocols to handle increased levels of Internet activity,
security, reliability, cost, ease of use, accessibility and quality of service.
Other factors that could inhibit the growth of the Internet and its use by
business as a medium for communication and commerce include:
. concerns about security of transactions conducted over the Internet;
. concerns about privacy and the use of data collected and stored
recording interactions over the Internet; and
. the possibility that federal, state, local or foreign governments will
adopt laws or regulations limiting the use of the Internet or the use of
information collected from communications or transactions over the
Internet.
We granted 6,235,189 options during the year ended December 31, 1999 at
exercise prices substantially below the per share price of this offering. The
exercise of these options will result in dilution of the book value of the
shares being offered.
During the year ended December 31, 1999, we granted 6,235,189 options to
purchase common stock at a weighted average exercise price of $0.26. Through
December 31, 1999, 2,526,312 of these options to purchase shares of common
stock have been exercised and 550,667 of these options were cancelled. To the
extent the remaining options are exercised, the investors in this offering will
experience dilution.
We are recording a significant amount of deferred stock compensation relating
to recent stock option grants. The amortization of this compensation expense
will result in a charge to our earnings over the next four years.
Amortization of deferred stock compensation represents an expense associated
with the amortization of the difference between the deemed fair market value of
the common stock at the time of the option grant and the option exercise price
over the vesting period. In the year ended December 31, 1999, we recorded
deferred stock compensation of approximately $20.0 million. In addition, we
expect to record an additional deferred compensation charge relating to option
grants made after December 31, 1999 but prior to the completion of the
offering. We estimate the charge relating to these additional grants will be
approximately $17.1 million, based upon an assumed offering price of $13.00 per
share, for the year ending December 31, 2000. We amortize deferred stock
compensation on an accelerated basis. The amortization of deferred stock
compensation will result in a charge to our earnings over the next four years.
10
<PAGE>
Risks Related to Linux
If widespread adoption of the Linux operating system does not occur, our
business will be harmed.
Our business depends on the willingness of customers to purchase Linux
systems. For the foreseeable future, we expect to derive most of our revenues
from the provision of Linux-related services and support. The Linux operating
system is still in the early stages of gaining broad market acceptance. To
date, this acceptance has been mostly limited to Internet infrastructure
applications and academic research environments. Our success is dependent upon
the continued and increased rate of adoption of Linux in these and other
markets. If this does not occur, our business will materially suffer.
The Linux operating system is an open-source software product, which users
are licensed to freely copy, use, modify and distribute. Accordingly, anyone
can download or otherwise copy the Linux operating system and numerous related
software applications from the Internet, without cost. Few open-source software
products have gained widespread commercial acceptance partly due to the lack of
viable open source industry participants to offer adequate service and support.
Moreover, open-source vendors are not able to provide standard warranties and
indemnities for their products, because these products have been developed by
independent parties over whom open source vendors exercise no control or
supervision. If open-source software should fail to gain widespread commercial
acceptance, our business could be adversely affected.
If Linux developers fail to enhance the core source code of the Linux operating
system and develop Linux-based applications, our business will suffer.
The core of the Linux operating system, the Linux kernel, is maintained by
third parties. Mr. Linus Torvalds, the original developer of the Linux kernel,
and a group of independent engineers, are primarily responsible for the
development and evolution of the Linux kernel. Any failure on the part of the
kernel developers to further develop and enhance the kernel could stifle the
development of additional Linux-based applications, which will affect our
ability to expand our business.
Software applications for Linux-based operating systems must proliferate for
our business to succeed.
The growth in our business depends, in part, on the development of
additional third-party software applications. Currently, many widely used
applications have not been made compatible with Linux. Moreover, many standard
applications, such as word processors, databases, accounting packages,
spreadsheets, e-mail programs, graphics software and personal productivity
applications that have been made compatible with Linux, have not achieved
market acceptance. These applications must gain mainstream acceptance in
business and consumer markets for our business to grow. We intend to encourage
the development of additional applications that operate on Linux-based
operating systems by providing services that assist developers in porting
applications to the Linux platform. If we are not successful in achieving these
goals, however, our services and products will not gain mainstream business and
consumer acceptance and we may not be able to grow our business.
If multiple and incompatible versions of Linux achieve sufficient market
acceptance, demand for our services could decline.
Currently, most Linux distributions are compatible and Linux applications
can operate across these distributions. If incompatible versions of Linux
should develop, however, customers may become less likely to purchase Linux
products and our business would suffer. In addition, should multiple and
incompatible versions of Linux achieve sufficient market acceptance, we may be
required to support more distributions, which could result in increased
operating expenses.
11
<PAGE>
We may not succeed if the Linux developer community fails to support us or
reacts negatively to our business strategy.
The Linux developer community may not continue to support us. Some members
of the open-source software community have criticized companies that profit
from open-source software. This type of negative reaction, from either
customers or open source developers, could harm our reputation, diminish the
Linuxcare brand and damage our business. If the Linux community fails to
support us, we may be unable to stay aware of technological developments, which
may harm our revenues.
We could be prevented from selling or developing our services and products if
the GNU General Public License (GPL) and similar licenses under which the
Linux-based systems operate are unenforceable.
The Linux kernel and the Linux operating system have been developed and
licensed under the GPL and similar open source licenses. These licenses require
that any software program licensed under them may be copied, 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.
It is possible that parties may refuse to comply with the restrictions of
these licenses. It is also possible that a court would hold one or more of the
restrictions in 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 the restrictions in these
licenses are not enforceable, or that Linux-based operating systems, or
modifications to them, may not be copied, modified, or distributed freely,
would have the effect of preventing us from developing our services, unless we
are able to negotiate a license for the use of the software or replace the
affected portions. In the event that we obtain such a license, we would likely
be required to make royalty payments with respect to sales covered by the
license. Any royalty payments would harm our operating results. There can be no
assurance that we can obtain such a license.
Failure of computer systems and software to be year 2000 compliant could
increase our costs, disrupt our services and reduce demand from our customers.
We confront the year 2000 problem in two contexts.
Our customers. The failure of our customers to ensure that their operations
are year 2000 compliant could have an adverse effect on them, which in turn
could limit their ability to retain us as a third-party service provider or
process our invoices in a timely manner. In addition, customers or potential
customers may delay purchasing our services to the extent such customers or
potential customers are required to devote resources to resolving the year 2000
problem. To date, we have not encountered any year 2000 difficulties from our
customers.
Our services. The solutions that we provide our customers integrate software
and other technology from different providers. If there is a year 2000 problem
with respect to a solution provided by us, it may be difficult to determine
whether the problem relates to services that we have performed or is due to the
software, technology or services of other providers. To date, our customers
have not reported any year 2000-related problems arising from our services. We
may, however, be subjected to year 2000-related lawsuits whether or not the
services we have performed are year 2000 compliant. We cannot be certain what
the outcomes of these types of lawsuits may be.
12
<PAGE>
Risks Related to this Offering
Our stock price may be volatile and you may not be able to resell your shares
at or above the initial public offering price.
There has been no public market for our common stock prior to this offering.
The initial public offering price for our common stock will be determined
through negotiations between the underwriters and us. This initial public
offering price may vary from the market price of our common stock after the
offering. If you purchase shares of common stock, you may not be able to resell
those shares at or above the initial public offering price. The market price of
our common stock may fluctuate significantly in response to factors, some of
which are beyond our control, include the following:
. actual or anticipated fluctuations in our annual and quarterly operating
results;
. the growth and acceptance of the Linux operating system and related
open-source software;
. changes in financial estimates by securities analysts;
. increased competition in the Linux industry, including announcements by
us or our competitors of significant technical innovations, contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. additions or departures of key personnel;
. future sale of equity or debt securities; and
. general economic, industry and market conditions.
In addition, the stock prices of Linux-based companies have been extremely
volatile. Our stock price may reflect the Linux industry's performance and fall
regardless of our performance. Moreover, companies that have experienced
volatility in the market price of their stock have been the object of
securities class action litigation. If we were the object of securities class
action litigation, we could suffer substantial costs and a diversion of
management's attention and resources regardless of the lawsuit's merits.
We may be unable to meet our future capital requirements and, if we seek
additional funding, stockholders will experience additional dilution.
We may be required, or could elect to seek additional funding during the
next 12 months or thereafter, particularly if we elect to acquire complementary
businesses, products or technologies or if our losses during and after the year
ending December 31, 2000 are greater than we expect. However, we currently do
not have any plans to issue any debt or additional equity. In the event we are
required to raise additional funds, we may not be able to do so on favorable
terms, if at all. Further, if we issue new equity securities, stockholders will
experience dilution and the holders of new equity securities may have rights,
preferences or privileges senior to those of existing holders of common stock.
Substantial future sales of our common stock in the public market may depress
our stock price.
After this offering, our current stockholders will hold 85.1% of the
outstanding shares of our common stock. These stockholders will be able to sell
in the public market in the near future. Most of our stockholders have entered
into lock-up agreements that provide for restrictions on the sale of their
shares for 180 days after the effectiveness of this offering. Sales of a
substantial number of shares of our common stock after this 180-day period
could cause our stock price to fall. In addition, the sale of these shares
could impair our ability to raise capital through the sale of additional stock.
You will experience immediate and substantial dilution in the book value of
your shares.
The initial public offering price is substantially higher than the book
value per share of our outstanding common stock immediately after the offering.
Accordingly, if you purchase common stock in the offering, you will incur
immediate dilution of approximately $11.16 in the book value per share of our
common stock from
13
<PAGE>
the price you pay for our common stock. To the extent that existing options and
warrants owned by our existing stockholders are exercised, new investors will
experience further dilution. For additional information on this calculation,
see "Dilution."
Because our directors and officers own 70.3% of our stock prior to the offering
and will own 59.8% after the offering, the voting power of other stockholders,
including purchasers in this offering, may be limited.
After this offering, it is anticipated that our officers, directors, and
five percent or greater stockholders will beneficially own or control, directly
or indirectly, 59.8% of our shares of common stock. Our directors and officers
alone will control 59.8% of our shares of common stock. As a result, if our
directors and officers choose to act together, they will have the ability to
control all matters submitted to our stockholders for approval, including the
election and removal of directors and the approval of any business
combinations. This concentration of ownership may delay or prevent an
acquisition, which could prevent our stockholders from realizing a premium over
the market price for their common shares, or cause the market price of our
stock to decline. Our directors and officers may have interests different from
yours. For example, they may be less interested than other investors in selling
our company or pursuing different business strategies.
The provisions of our charter documents may inhibit potential acquisition bids
that a stockholder may believe are desirable, and the market price of our
common stock may be lower as a result.
Upon completion of this offering, our board of directors will have the
authority to issue up to five million shares of preferred stock. Our board of
directors can fix the price, rights, preferences, privileges and restrictions
of the preferred stock without any further vote or action by our stockholders.
The issuance of shares of preferred stock may delay or prevent a change in
control transaction. As a result, the market price of our common stock and the
voting and other rights of our stockholders may be adversely affected. The
issuance of preferred stock may result in the loss of voting control to other
stockholders. We have no current plans to issue any shares of preferred stock.
Our by-laws also contain other provisions which may discourage, delay or
prevent a merger or acquisition, including:
. only one of the three classes of directors is elected each year, thereby
delaying potential acquirors from gaining control of the board;
. our stockholders have limited rights to remove directors without cause,
thereby hindering the ability of potential acquirors to replace the
members of our board; and
. our stockholders have no right to act by written consent, thereby
potentially delaying the approval of an acquisition.
These provisions could also have the effect of discouraging others from
making tender offers for our common stock. As a result, these provisions may
prevent the market price of our common stock from increasing substantially in
response to actual or rumored takeover attempts. These provisions may also
prevent changes in our management.
We have broad discretion in how we use the proceeds of this offering, and we
may not use these proceeds effectively.
Our management has broad discretion in the use of the net proceeds of this
offering and could spend the net proceeds in ways that do not yield a favorable
return or to which stockholders object. We may also use the proceeds to acquire
complementary businesses or technologies, although no such acquisitions are
currently planned. Until we need to use the proceeds of this offering, we plan
to invest the net proceeds in investment grade, interest-bearing securities.
14
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance and include statements about our plans, objectives and services as
well as our expectations and intentions. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms or other comparable
terminology. These statements are only predictions and involve known and
unknown risks, uncertainties and other factors, including the risks outlined
under "Risk Factors," that may cause our or our industry's actual results,
levels of activity, performance or achievements expressed or implied by any
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as otherwise provided under the
securities laws, we are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results.
15
<PAGE>
USE OF PROCEEDS
We expect to receive net proceeds from the sale of the 4,500,000 shares of
common stock of approximately $56.6 million (approximately $65.3 million if the
underwriters' over-allotment option is exercised in full), at an assumed
initial public offering price of $14.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses.
We intend to use the net proceeds from this offering primarily for general
corporate purposes, including working capital, funding our operating losses,
expansion of our information technology infrastructure and capital
expenditures. In addition, we may use a portion of the net proceeds to acquire
complementary products, technologies or businesses; however, we currently have
no commitments or agreements and are not involved in any negotiations with
respect to any such transactions. We have not specifically allocated the
proceeds of this offering to any of these purposes. However, we currently plan
to spend approximately $32 million on sales and marketing and approximately $19
million on information technology during the year ending December 31, 2000.
Nevertheless, our business plan, including the amount of these expenditures,
may change materially. We anticipate that these expenditures will be funded in
part by our revenue. Pending use of the net proceeds of this offering, we
intend to invest the net proceeds in interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999 on
the following two bases:
. on an actual basis; and
. on a pro forma as adjusted basis to give effect to the conversion of all
shares of preferred stock into 15,215,436 shares of common stock and the
sale of 4,500,000 shares of common stock at an assumed initial offering
price of $14.00 per share (less underwriting discounts and commissions
and estimated offering expenses).
You should read this table in conjunction with our financial statements and
the accompanying notes included elsewhere in this prospectus, "Selected
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
December 31, 1999
--------------------------
Pro Forma
Actual As Adjusted
------------ ------------
<S> <C> <C>
Note payable and equipment financing, less current
portion........................................... $ 1,926,018 $ 1,926,018
Redeemable convertible preferred stock............. --
Preferred stock, $0.0001 par value: 18,566,075
shares authorized (actual), 14,999,803 issued
and outstanding (actual); none (pro forma as
adjusted)....................................... 40,374,016 --
Stockholders' equity:
Common stock, $0.0001 par value: 32,000,000
authorized (actual); 9,685,136 issued and
outstanding (actual); 29,400,572 issued and
outstanding (pro forma as adjusted)............. 969 2,940
Additional paid-in capital....................... 24,677,072 121,639,117
Deferred compensation............................ (15,860,562) (15,860,562)
Stockholder note receivable...................... (482,014) (482,014)
Accumulated deficit.............................. (20,964,057) (20,964,057)
------------ ------------
Total stockholders' equity (deficit)........... (12,628,592) 84,335,424
------------ ------------
Total capitalization........................... $ 29,671,442 $ 86,261,442
============ ============
</TABLE>
The data in the table above excludes:
. 3,158,210 shares issuable upon exercise of outstanding stock options
outstanding as of December 31, 1999;
. 618,216 shares of common stock available for issuance at December 31,
1999 under our 1999 Stock Plan; and
. 391,743 shares represented by warrants for Series A redeemable
convertible preferred stock.
For additional information regarding these shares, see "Management--Stock
Plan," "Certain Relationships and Related Transactions," "Description of
Capital Stock" and note 8 of the notes to financial statements included
elsewhere in this prospectus.
17
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of common
stock after this offering. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the pro forma number of shares of common stock outstanding. The pro
forma net tangible book value assumes the conversion of preferred stock into
common stock. Our pro forma net tangible book value as of December 31, 1999 was
$27,000,973 or $1.08 per share of common stock. Dilution in pro forma net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of common stock in this offering and the pro
forma net tangible book value per share of common stock immediately after the
completion of this offering. After giving effect to the sale of the 4,500,000
shares of common stock offered hereby at an assumed public offering price of
$14.00 per share (less underwriting discounts and commissions and estimated
offering expenses), our pro forma net tangible book value as of December 31,
1999 would have been $83,590,973 or approximately $2.84 per share. This
represents an immediate increase in pro forma net tangible book value of $1.76
per share to existing stockholders and an immediate dilution in pro forma net
tangible book value of $11.16 per share to new investors, or approximately
79.7% of the assumed initial public offering price of $14.00 per share. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $14.00
Pro forma net tangible book value per share at December 31,
1999.......................................................... $1.08
Increase per share attributable to this offering............... 1.76
-----
Pro forma as adjusted net tangible book value per share after
this offering................................................... 2.84
------
Dilution per share to new investors.............................. $11.16
======
</TABLE>
The following table shows on a pro forma basis after giving effect to this
offering, based on an assumed initial public offering price of $14.00 per
share, as of December 31, 1999, the differences between the existing holders of
common stock and the new investors with respect to the number of shares of
common stock purchased from us, the total consideration paid to us, and the
average price per share paid, before deducting the underwriting discounts and
commissions and estimated offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 24,900,572 84.7% $ 45,154,000 41.7% $ 1.81
New investors............. 4,500,000 15.3 63,000,000 58.3 14.00
---------- ----- ------------ -----
Total................... 29,400,572 100.0% $108,154,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion and table are based on actual shares outstanding on
December 31, 1999 and assume no exercise of any stock options outstanding as of
December 31, 1999. As of December 31, 1999, there were options outstanding to
purchase 3,158,210 shares of common stock at a weighted average exercise price
of $0.31 per share. To the extent any of these options are exercised, there
will be further dilution to investors. See "Capitalization," "Management--Stock
Plans," "Description of Capital Stock" and note 8 of notes to consolidated
financial statements include elsewhere in this prospectus.
18
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements for the year
ended December 31, 1999 have been prepared from the historical financial
statements of Linuxcare, Inc., The Puffin Group, Inc. ("Puffin") and Prosa
Progettazione Sviluppo Aperto s.r.l. ("Prosa"). The unaudited pro forma
combined statement of operations gives effect to the acquisitions of Puffin and
Prosa as if such transactions had occurred on January 1, 1999. The consolidated
balance sheet is presented in the audited financial statements.
On October 1, 1999, we purchased the outstanding common stock of Puffin, a
Canadian company, for 100,000 shares of our common stock and options to
purchase approximately 25,000 shares of our common stock with an exercise price
of $0.13. The option to purchase additional shares vested immediately. The
Puffin transaction was accounted for as a purchase in accordance with the
provisions of APB 16. Under the purchase method of accounting, the purchase
price is allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. Accordingly, the shares
and options were valued at their deemed fair value on the date of the
transaction, amounting to approximately $527,000. Goodwill of $513,690 was
recorded at the date of purchase, reflecting the difference between the net
fair value of the underlying assets and liabilities and the deemed fair value
of the shares and options paid as consideration. The goodwill is being
amortized over the employment term of the employees acquired, which was
estimated as 3 years. The adjustments to the pro forma statement of operations
reflect one year of amortization of goodwill. Additionally, 300,000 options to
purchase our common stock, with vesting terms of three years and an exercise
price of $.13 per share, were granted to Puffin's key employees. There is no
effect of the issuance of these options on the pro forma statement of
operations as the deemed fair value as of January 1, 1999 was substantially
similar to the exercise price. Accordingly, the pro forma adjustment of
$163,928 to the amortization of deferred compensation reflects the elimination
of the deferred stock amortization recorded in the Linuxcare financial
statments related to the 300,000 options.
On December 30, 1999, we purchased the outstanding shares of the common
stock of Prosa, an Italian company, for cash and the assumption of liabilities
totaling $290,000. The Prosa transaction was accounted for as a purchase in
accordance with APB 16. Under the purchase method of accounting, the purchase
price is allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. Goodwill of $273,569
was recorded at the date of the purchase, reflecting the difference between the
net fair value of the underlying assets and the total consideration paid. The
goodwill is being amortized over the employment term of the employees acquired,
which was estimated as 3 years. The adjustments to the pro forma statement of
operations reflect one year of amortization of goodwill.
The purchase price for the Puffin and Prosa transactions was allocated to
the assets acquired and liabilities assumed based on their estimated fair
values as determined by us as follows as of the date of the respective
acquisitions:
<TABLE>
<CAPTION>
Puffin Prosa
September 30, December 31,
1999 1999
------------- ------------
<S> <C> <C>
Current assets.................................... $ 59,207 $ 123,880
Goodwill.......................................... 513,690 273,569
Long term assets.................................. 8,461 12,845
Current liabilities............................... (54,038) (120,709)
-------- ---------
Purchase Price.................................... $527,320 $ 289,585
======== =========
</TABLE>
19
<PAGE>
LINUXCARE, INC.
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 1999
Unaudited
<TABLE>
<CAPTION>
Puffin
Linuxcare, Inc. Prosa Nine Months
Year Ended Year Ended Ended Unaudited Unaudited
December 31, December 31, September 30, Combined Pro Forma Pro Forma
1999 1999 1999 Total Adjustments Combined
--------------- ------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 1,210,806 $222,930 $ 97,735 $ 1,531,471 $ -- $ 1,531,471
Cost of sales........... 2,814,546 120,335 52,168 2,987,049 -- 2,987,049
------------ -------- -------- ------------ --------- ------------
Gross margin............ (1,603,740) 102,595 45,567 (1,455,578) -- (1,455,578)
Operating expenses:
Selling, general and
administrative........ 14,755,289 87,250 45,264 14,887,803 -- 14,887,803
Amortization of
deferred stock
compensation.......... 4,121,356 -- -- 4,121,356 (163,928)(a) 3,957,428
Amortization of
goodwill.............. 42,808 -- -- 42,808 219,612 (b) 262,420
------------ -------- -------- ------------ --------- ------------
Total operating
expenses............... 18,919,453 87,250 45,264 19,051,967 55,684 19,107,651
------------ -------- -------- ------------ --------- ------------
Income (loss) from
operations............. (20,523,193) 15,345 303 (20,507,545) (55,684) (20,563,229)
Interest income......... 45,061 -- -- 45,061 -- 45,061
Interest expense........ (468,267) (1,048) -- (469,315) -- (469,315)
Other................... -- (1,399) -- (1,399) -- (1,399)
------------ -------- -------- ------------ --------- ------------
Net income (loss) before
income taxes........... (20,946,399) 12,898 303 (20,933,198) (55,684) (20,988,882)
Income tax expense...... 4,200 6,293 -- 10,493 -- 10,493
------------ -------- -------- ------------ --------- ------------
Net income (loss)....... (20,950,599) 6,605 303 (20,943,691) (55,684) (20,999,375)
Preferred stock
accretion.............. (260,380) -- -- (260,380) -- (260,380)
------------ -------- -------- ------------ --------- ------------
Net income (loss)
applicable to common
stockholders........... $(21,210,979) $ 6,605 $ 303 $(21,204,071) $ (55,684) $(21,259,755)
============ ======== ======== ============ ========= ============
Basic and diluted net
loss per share......... $ (7.49) $ (7.31)
============ ============
Weighted avg shares
outstanding............ 2,833,756 2,908,824
============ ============
Pro forma basic and
diluted net loss per
share.................. $ (2.26) $ (2.25)
============ ============
Pro forma weighted-
average shares
outstanding............ 9,252,635 9,327,500
============ ============
</TABLE>
- --------
(a) Reflects the elimination of deferred stock compensation expense recorded in
the Linuxcare financial statements that would not have been recorded had
the Puffin acquisition occurred on January 1, 1999.
(b) Reflects the amortization of goodwill related to the purchase of Puffin and
Prosa over three years.
20
<PAGE>
SELECTED FINANCIAL DATA
In the table below, we provide summary historical financial data of
Linuxcare. We have prepared this information using the financial statements of
Linuxcare as of December 31, 1998 and December 31, 1999 and for the period from
December 9, 1998 (inception) to December 31, 1998 and for the year ended
December 31, 1999.
When you read this summary historical financial data it is important that
you read along with it the historical financial statements and related notes
included elsewhere in this prospectus, as well as the section titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Period from
December 9, 1998
(inception) to Year ended
December 31, December 31,
1998 1999
---------------- ------------
<S> <C> <C>
Statement of Operations Data:
Revenues........................................ $ -- $ 1,210,806
Cost of revenues(1)............................. -- 2,814,546
-------- ------------
Gross margin.................................... -- (1,603,740)
Operating expenses:
Sales and marketing(2)........................ -- 4,518,801
General and administrative(3)................. 13,458 10,236,488
Amortization of deferred stock compensation... -- 4,121,356
Amortization of goodwill...................... -- 42,808
-------- ------------
Total operating expenses.................... 13,458 18,919,453
-------- ------------
Loss from operations............................ (13,458) (20,523,193)
Interest income................................. -- 45,061
Interest expense................................ -- (468,267)
-------- ------------
Loss before income taxes........................ (13,458) (20,946,399)
Income tax expense.............................. -- 4,200
-------- ------------
Net loss........................................ (13,458) (20,950,599)
Preferred stock accretion....................... -- (260,380)
-------- ------------
Net loss applicable to common stockholders...... $(13,458) $(21,210,979)
======== ============
Basic and diluted net loss per share............ $ -- $ (7.49)
======== ============
Weighted average shares used in computing basic
and diluted net loss per share................. -- 2,833,756
======== ============
Pro forma basic and diluted net loss per share
(unaudited).................................... $ (2.26)
============
Weighted average shares used in computing pro
forma basic and diluted net loss per share
(unaudited).................................... 9,252,635
============
</TABLE>
- --------
(1) Excludes $1,511,855 of deferred stock compensation in 1999.
(2) Excludes $63,654 of deferred stock compensation in 1999.
(3) Excludes $2,545,847 of deferred stock compensation in 1999.
21
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
-------- ------------
<S> <C> <C>
Balance Sheet Data (end of period):
Cash and cash equivalents............................. $138,920 $ 29,994,575
Working capital....................................... 186,842 25,029,759
Total assets.......................................... 200,300 36,366,003
Notes payable and equipment financing, less current
portion.............................................. 200,000 1,926,018
Redeemable convertible preferred stock................ -- 40,374,016
Total stockholders' deficit........................... (13,158) (12,628,592)
</TABLE>
See note 1 of notes to financial statements for an explanation of the
determination of the average number of shares of common stock used to compute
net loss per share.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and the related notes
included elsewhere in this prospectus. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of certain factors including the risks discussed in "Risk Factors" and
elsewhere in this prospectus.
Overview
We are a recognized leader in providing services for Linux. We commenced
operations in December 1998 and offer a comprehensive range of services to
support business customers. We offer our customers professional services,
technical support, education and product certification across 21 Linux
distributions and eight hardware platforms, including DEC Alpha, Intel, MIPS,
Power PC and SPARC. We are implementing an Internet-based infrastructure to
enable us to provide solutions to our customers in a timely and cost-effective
manner.
We offer a range of services, including professional services, technical
support, education and product certification. We often combine these service
offerings to provide our customers with comprehensive solutions. We currently
provide professional services on a time-and-materials basis and recognize these
revenues as and when the services are provided. We have begun to provide a
portion of our professional services on a fixed fee basis and expect this trend
to increase as our business expands. Fees for technical support are generated
on an hourly basis, a per incident basis or pursuant to long-term service
agreements. We recognize such revenues as services are performed or pro-rata
over the term of the service agreement, as applicable. Our educational
materials are licensed to customers in return for a training fee and a per
student royalty. The former is recognized upon completion of the training while
the latter is recognized as generated. We expect to provide our product
certification services either on a per usage basis or pursuant to long-term,
fixed-fee contracts. We recognize these revenues when the service is completed
or pro rata over the term of the contract. For the year ended December 31,
1999, substantially all of our revenues were derived from professional services
and technical support. As our business matures, we expect professional services
and technical support to represent a majority of our revenues.
As of December 31, 1999, we had international operations with sales
personnel located in Canada, the United Kingdom, Germany, The Netherlands,
Sweden and Australia. We also had direct sales coverage in Japan and France.
Through December 31, 1999, 9% of our revenues related to companies in Japan.
All of our international revenues during the year related to sales made to
companies in Japan. In 1999, we completed acquisitions of two small Linux
consulting companies, one in Canada and one in Italy and we intend to continue
to increase our international operations through new hires and selective
acquisitions.
Cost of revenues consists primarily of direct labor costs, including
salaries, employee benefits and incentive compensation, of employees directly
associated with the delivery of our services in client engagements, non-
reimbursed out-of-pocket expenses incurred by such employees and a
proportionate share of certain operating expenses.
We define gross margin as our revenues less our cost of revenues. We expect
that our ability to achieve favorable gross margins will depend on our ability
to improve our efficiencies in the delivery of our services, as measured by
utilization rates and effective billing rates. We define effective billing rate
as our total revenues over total billable employee hours.
Sales and marketing expenses consist primarily of the salaries, commissions
and related expenses for employees dedicated to our sales and marketing
efforts. Additionally, we include in sales and marketing expenses costs
associated with public relations, the expenses associated with the maintenance
of our website, marketing events and promotions. We expect sales and marketing
expenses to substantially increase in the future, primarily as a result of a
significant expansion in our direct sales force and increase in expenses
associated with marketing programs and events.
23
<PAGE>
General and administrative expenses consist of the salaries, employee
benefits and incentive compensation of employees performing managerial, finance
and administrative functions, depreciation and amortization expenses largely
related to our information technology infrastructure and costs associated with
recruiting and training activities. We expect our general and administrative
expenses to substantially increase in the future as we invest in our support
infrastructure and technology.
Amortization of deferred stock compensation represents the non-cash expense
associated with the amortization of the difference between the deemed fair
value of the common stock for accounting purposes and the option exercise price
over the vesting period or the service period, as applicable. In connection
with the grant of certain stock options to employees for the year ended
December 31, 1999, we recorded deferred stock compensation within stockholders'
deficit of approximately $20.0 million, representing the difference between the
deemed fair value of the common stock at the date of the option grant for
accounting purposes and the option exercise price of these options at the date
of grant. We recorded amortization of deferred compensation of approximately
$4.1 million for the year ended December 31, 1999. The deferred stock
compensation expense is being amortized on an accelerated basis over the
vesting period of the individual award, generally four years. This method is in
accordance with Financial Accounting Standards Board Interpretation No. 28.
Accordingly, at December 31, 1999, the remaining deferred compensation of
approximately $15.9 million will be amortized as follows: $9.7 million during
fiscal 2000, $4.0 million during fiscal 2001, $1.8 million during fiscal 2002
and $0.4 million in fiscal 2003. The amortization expense relates to options
awarded to employees in all operating expense categories. In addition we expect
to record an additional deferred compensation charge relating to option grants
made after December 31, 1999 but prior to the completion of the offering. We
estimate the charge relating to these additional grants will be approximately
$17.1 million, based upon an assumed offering price of $13.00 per share, for
the year ending December 31, 2000. The amount of deferred compensation expense
to be recorded in future periods could decrease if options for which accrued
but unvested compensation has been recorded are forfeited.
We have completed two acquisitions to date. In October 1999, we acquired
Puffin, a Canadian company, and in December 1999, we acquired Prosa, an Italian
company. The acquisition of Puffin adds to Linuxcare's worldwide professional
services capabilities, serving to further accelerate the rapid growth of Linux
and open-source solutions in enterprise environments. The acquisition of Prosa
adds to Linuxcare's embedded systems expertise. While we continue to consider
new acquisitions in the United States and internationally as opportunities
arise, we are not currently party to any acquisition-related agreements. The
outstanding common stock of Puffin was purchased by us for 100,000 shares of
our common stock and options to purchase an additional 325,000 shares with an
exercise price of $0.13. The options to purchase 325,000 shares were allocated
between purchase price consideration (approximately 25,000 shares) and
consideration given to certain key employees contingent upon employment
(approximately 300,000 shares). The total value of the purchase price
consideration was deemed to be $527,000. We also purchased the outstanding
common stock of Prosa for cash of $225,000 and the assumption of liabilities of
$65,000, both aggregating to $290,000, and options to employees to purchase
25,000 shares of our common stock with an exercise price of $1.00. The cash
payment was considered purchase consideration, and the options to purchase
25,000 shares were considered employment consideration. The amount of deferred
stock compensation recognized in the acquisition of Puffin and Prosa employees
and included in the total described in the preceding paragraphs was $1.3
million. We recognized goodwill of $514,000 and $274,000 in the acquisitions of
Puffin and Prosa, respectively, representing the difference between the net
fair value of the assets acquired and the total consideration paid. The
goodwill is being amortized over the employment term of the employees acquired,
which was estimated as three years. Other than accounts receivable denominated
in Italian Lire totaling approximately $115,000, no other significant assets or
liabilities were acquired. Both subsidiaries continue to operate as separate
businesses and the nature of their operations has not significantly changed
from that at the date of the respective acquisitions. We expect the
significance of the operations of these entities will increase as our
international client base grows.
We incurred significant start-up expenses during 1999 in salaries,
infrastructure development, marketing and general administration. We reported
an operating loss in 1999 and anticipate incurring operational losses in 2000
and 2001. In particular, we expect that our plans for increases in expenses and
capital expenditures over the next two years to support our expected growth
will adversely affect our operating results. As we grow our
24
<PAGE>
business, we expect to incur significant expenditures for marketing, recruiting
and hiring additional personnel, upgrading our technology infrastructure and
expanding into new markets.
Predicting our future operating performance based on only one year is
difficult given the uncertainty of our industry and the market as a whole.
Since past results are not necessarily indicative of future outcome, our
revenues and net income (loss) will likely fluctuate significantly from period
to period. The primary factors that may cause our quarterly operating results
to fluctuate include:
. the uncertain rate of growth in the usage and acceptance of the Linux
operating system and related open source software;
. our ability to continue to hire and retain leading Linux experts;
. the uncertain short-term and long-term demand for our services;
. increased competition in the Linux industry as well as the competition
we face from offerings based on proprietary operating systems;
. reductions in the cost of services offered by our competitors;
. our ability to expand our professional services, sales and customer
support organizations and develop new service offerings; and
. general economic conditions and conditions in the particular industries
in which we and our competitors operate.
Results of Operations
Quarterly Results of Operations
The following table presents our unaudited quarterly data for the periods
indicated. We derived these data from our unaudited consolidated interim
financial statements, and, in our opinion, these data include all necessary
adjustments, which consist only of normal recurring adjustments necessary to
present fairly the financial results for the period.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------
Year
Ended
March 31, June 30, Sept. 30, Dec. 31, Dec. 31,
1999 1999 1999 1999 1999
--------- -------- --------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues...................... $ 10 $ 139 $ 156 $ 906 $ 1,211
Cost of revenues.............. 173 465 692 1,485 2,815
------- ------- ------- -------- --------
Gross margin.................. (163) (326) (536) (579) (1,604)
Operating expenses:
Sales and marketing......... 675 654 908 2,282 4,519
General and administrative.. 666 1,867 2,476 5,227 10,236
Amortization of deferred
stock compensation......... -- 554 1,001 2,566 4,121
Amortization of goodwill.... -- -- -- 43 43
------- ------- ------- -------- --------
Total operating expenses.. 1,341 3,075 4,385 10,118 18,919
------- ------- ------- -------- --------
Loss from operations.......... (1,504) (3,401) (4,921) (10,697) (20,523)
Interest expense, net......... -- -- 199 224 423
------- ------- ------- -------- --------
Loss before income taxes...... (1,504) (3,401) (5,120) (10,921) (20,946)
Income tax expense............ -- -- -- 5 5
------- ------- ------- -------- --------
Net loss.................... $(1,504) $(3,401) $(5,120) $(10,926) $(20,951)
======= ======= ======= ======== ========
</TABLE>
25
<PAGE>
Year ended December 31, 1999
Revenues
Revenues of $1.2 million were generated from the provision of technical
support services for Linux and other open source technologies. Approximately
75% of our revenues were earned in the fourth quarter.
Cost of Revenues
Costs of revenues were $2.8 million. During the period, we increased
headcount significantly to support anticipated revenue growth.
Sales and Marketing Expenses
Sales and marketing expenses were $4.5 million, primarily attributable to
costs of sales and marketing personnel of $1.4 million, public relations
activities of $1.0 million and advertising and other promotions of $1.0
million.
General and Administrative Expenses
General and administrative expenses were $10.2 million, primarily
attributable to personnel costs of $2.3 million, consulting services of $5.7
million and recruiting expense of $1.0 million.
Amortization of Goodwill
The goodwill amortized in the fourth quarter relates to the purchase of
Puffin and Prosa.
Amortization of Deferred Stock Compensation
In connection with the grant of restricted stock and stock options to
employees and consultants, we recorded deferred stock compensation of $20.0
million and amortized $4.1 million during the period.
Net Loss
We recorded a net loss of $21.0 million during the period, primarily
attributable to increasing general and administrative expenses, sales and
marketing expenses and amortization of deferred stock compensation as described
above.
Period from December 9, 1998 (inception) to December 31, 1998
During the period from inception to December 31, 1998, we incurred general
and administrative expenses of $13,458.
Liquidity and Capital Resources
Since inception, our operations have been financed primarily through the
issuance of Series A and Series B redeemable convertible preferred stock. On
February 1, 1999 and April 16, 1999, we issued a total of 7.9 million shares of
Series A Preferred Stock, for approximately $4.8 million. On December 17, 1999
we raised approximately $33.5 million from the sale of 7.1 million shares of
Series B preferred stock. The proceeds from the sale of Series B preferred
stock include the conversion of $1.0 million of notes payable and receipt of a
subscription receivable of $1.0 million. Upon completion of this offering, each
Series A and B preferred share will convert into common stock at a ratio of 1:1
and 1:1.030447, respectively. As of December 31, 1999, we had cash of
$29,994,575 and positive working capital of approximately $25.0 million.
Cash used in operating activities during the year ended December 31, 1999
was $9.0 million. This was the result of a net loss of $21.0 million before
preferred stock accretion for the year ended December 31, 1999, partially
offset by non-cash expenses including $4.1 million of amortization of deferred
stock compensation,
26
<PAGE>
$2.9 million of equity compensation to consultants, $1.0 million of
compensation for stock options to consultants, $0.2 million of depreciation,
$0.3 million of amortization of debt issuance costs, and $3.5 million of other
net changes in working capital.
Cash used in investing activities during the year ended December 31, 1999
was $2.3 million, consisting of purchases of property and equipment, and the
purchase of Prosa. We anticipate substantial capital expenditures in 2000
consistent with our anticipated growth in operations, investments,
infrastructure and personnel.
Cash provided by financing activities during the year ending December 31,
1999 was $41.2 million 1999. We raised $36.0 million through the sale of
redeemable convertible preferred stock, $5.0 million through notes payable, and
$0.1 million through the exercise of stock options.
On July 27, 1999, we entered into a subordinated loan and security agreement
with a financial institution for maximum borrowings of $2.0 million. At
December 31, 1999, we had outstanding $2.0 million in notes payable. This note
payable bears an annual interest rate of 10% and is due in 36 months. We will
be obligated to make interest and principal payments beginning six months after
the issuance date. Until that time, interest accrues but is not payable. If we
default, the note payable will bear an annual interest rate of 15%. This note
payable is secured by certain of our tangible and intangible assets and is
subject to several non-financial covenants.
We also have a line of credit for equipment financing for up to $1.0
million. The annual interest rate on amounts borrowed under the line of credit
is 7.5%. The credit facility contains customary covenants and expires in
December 2002. As of December 31, 1999, we had drawn down $510,662 under the
line of credit. This loan is secured by the equipment purchased, and is subject
to several non-financial covenants.
We are obligated under various non-cancelable operating leases for our
office space. Future annual minimum rental commitments under the leases range
in the aggregate from $1.17 million to $1.23 million over the next five years.
Total future minimum rental commitments are approximately $6.0 million.
Our future liquidity and capital requirements will depend upon numerous
factors, including the costs associated with the expansion of our information
technology infrastructure and service offerings, the increases in our
requirements for professionals, our sales and marketing activities and the
amount of working capital and fixed asset investment required in our business.
We do not believe we will generate positive cash flow from operations until
2002. At our current rate of expenditures, we believe that our current cash and
investment balances and available lines of credit facilities will be sufficient
to meet our operating and capital requirements for at least the next 12 months.
Our current capital resources together with the proceeds of this offering
should be sufficient to fund our anticipated expenditures through the end of
2001. However, we may be required, or could elect to seek additional funding
during the next 12 months or thereafter, particularly if we acquire
complementary businesses, products or technologies or if our losses during the
year ending December 31, 2000 are greater than we expect. As a result, we may
be required to raise additional funds through public or private financing,
strategic relationships or other arrangements. We cannot assure you that
additional funding, if needed, will be available on reasonable terms, or at
all. Furthermore, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants. Our inability to raise capital when needed could seriously harm our
business.
Recent Accounting Pronouncements
In March 1998, the AICPA issued Statement of Position (SOP) No. 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP No. 98-1 requires entities to capitalize certain costs
related to internal-use software once certain criteria have been met. SOP No.
98-1 was adopted by the Company in fiscal 1999. The adoption of SOP No. 98-1
did not have a material effect on the Company's financial position or results
of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring
27
<PAGE>
that every derivative instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133, as recently
amended, is effective for fiscal years beginning after June 15, 2000. We
believe that the adoption of SFAS No. 133 will not have a material effect on
the Company's financial position or results of operations.
Year 2000 Impact
The Year 2000 Issue
The year 2000 issue refers to the potential for disruption to business
activities caused by system failures or miscalculations which are triggered by
advancement of data records past the year 1999. Our business has not been
affected by year 2000 issues. However, we cannot assure you that we will not
experience any disruption related to year 2000 issues in the future. We are not
currently aware of any unresolved year 2000 problems relating to any of our
internal systems, nor do we believe that we have any significant systems that
are not year 2000 compliant. Based on our assessment to date, we do not expect
the total cost of year 2000 remediation to be material to our business. To
date, our preparation and remediation costs have not been material.
We confront the year 2000 risk in two contexts.
Our customers. The failure of our customers to ensure that their operations
are year 2000 compliant could have an adverse effect on them, which in turn
could limit their ability to retain us as a third-party service provider or
process our invoices in a timely manner. In addition, customers or potential
customers may delay purchasing our services to the extent such customers or
potential customers are required to devote resources to resolving the year 2000
problem.
Our services. The solutions that we provide our customers integrate software
and other technology from different providers. If there is a year 2000 problem
with respect to a solution provided by us, it may be difficult to determine
whether the problem relates to services that we have performed or is due to the
software, technology or services of the other providers. As a result, we may be
subjected to year 2000-related lawsuits whether or not the services we have
performed are year 2000 compliant. We cannot be certain what the outcomes of
these types of lawsuits may be.
Quantitative and Qualitative Disclosures
We manage our investment activities with the primary objective of preserving
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we may invest in may be subject to market risk. A change in prevailing interest
rates may cause the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate subsequently rises,
the principal amount of our investment will likely decline. To minimize this
risk in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds and government and non-government debt securities. In
general, money market funds are not subject to market risk because the interest
paid on such funds fluctuates with the prevailing interest rate. As of December
31, 1999, all of our cash and cash equivalents were in money market and
checking funds.
Impact of Foreign Currencies
While international operations have been limited to date, we are exposed to
the effects of exchange rate fluctuations, particularly related to the Italian
Lire. At December 31, 1999, we had approximately $115,000 in receivables
denominated in Italian Lire. We expect that our exposure to exchange rate
fluctuations will increase as the significance of our international operations
grows. Our financial results could be affected by changes in foreign currency
exchange rates or weak economic conditions in foreign markets.
28
<PAGE>
BUSINESS
Overview
We are a recognized leader in providing services for Linux. We offer
professional services, technical support, education and product certification
for Linux, leading open-source software packages and other related
technologies. We deliver rapid, cost-effective, customized and expert solutions
to our customers' Linux-related service needs. We are implementing an advanced
Internet-based infrastructure that enhances our knowledge management and
customer service delivery. We currently support 21 distributions of Linux.
We focus on customer services for large businesses, with our sales and
marketing efforts targeted toward original equipment manufacturers, or OEMs,
software vendors, Global 1000 companies and Internet infrastructure providers.
During 1999, our eight largest customers were Dell Computer, Densa Techno
Tokyo, Hewlett-Packard, KPMG Peat Marwick, MacMillan USA, Motorola, Silicon
Graphics and Sun Microsystems. We have also forged alliances with Creative
Computing, Informix and Viviance.
Industry Background
The Growth of the Internet
Companies are increasingly using the Internet to build cost-effective,
reliable, efficient channels of communication and commerce with their global
base of customers, suppliers and distribution partners. In addition, companies
are adopting Internet-based business models to address the rapidly growing,
global base of online consumers. According to International Data Corporation,
or IDC, the number of worldwide Internet users is expected to grow from 142
million in 1998 to 502 million in 2003 and worldwide e-commerce revenues are
projected to increase from approximately $50 billion to more than $1.3 trillion
during the same period.
To remain competitive, companies must implement more sophisticated, reliable
and flexible Internet solutions. As a result, companies are rapidly deploying
and integrating new technologies as their Internet information technology
infrastructure needs grow. According to IDC, spending on Internet information
technology infrastructure will grow from approximately $110 billion in 1998 to
approximately $592 billion in 2003. With Linux emerging as the leading
operating system for the Internet, we believe Linux will benefit directly from
this growth.
The Emergence of Open-source Software
Open source refers to software distributed under a legal license that
permits free distribution and requires open availability of the source code,
the instructions contained within a software program. The best known open-
source software is the Linux operating system, or Linux. Linux can be
downloaded from the Internet free of charge and used with few restrictions.
Open-source licenses such as those governing the use of Linux and related
applications permit the public the right to read, modify, redistribute and use
the software freely. Furthermore, because developers have access to the
underlying source code, they are able to customize it for their specific needs.
Developers can then submit their changes and enhancements for inclusion in
future Linux releases. As a result, Linux is continuously improved by a
worldwide community of software developers. The Internet's growth has enhanced
the development of Linux, enabling large communities of independent developers
to collaborate more effectively. This growth has accelerated development cycles
and increased product quality. Businesses are increasingly adopting Linux and
other open-source technologies for their Internet infrastructures. For example,
according to the Netcraft Web Server Survey (netcraft.com/survey) during
February 2000, Apache, an open-source Web server, commanded a 58% market share,
as compared to 23% for Microsoft's Internet Information Server.
29
<PAGE>
Linux is Becoming the Leading Operating System for the Internet
Companies are increasingly adopting Linux as a platform for applications and
for file, print, Web and e-mail servers. According to IDC, shipments of Linux
server operating environments grew 93% from 1998 to 1999. In addition, several
technology industry leaders, including Hewlett-Packard, IBM and Motorola, have
recently announced that they will provide hardware or software compatible with
Linux operating systems. Linux offers multiple benefits to businesses,
including:
. reduced total cost of ownership;
. improved compatibility with other operating systems, applications and
networks; and
. ease of customization due to the open availability of the source code.
Linux is particularly well suited for the Internet where highly reliable,
secure, low-cost and customizable solutions are essential. As a result, Linux
is emerging as the leading operating system for the Internet. According to an
April 1999 survey conducted by the Internet Operating System Counter
(leb.net/hzo/ioscount), Linux ran on approximately 31% of the Web servers
polled, more than any other single system.
Market Opportunity
Despite the various benefits and initial market acceptance of Linux, a
number of challenges exist to the widespread adoption of Linux. We believe that
the greatest obstacle impeding this adoption is the lack of professional
services, technical support, education and product certification comparable to
those available for traditional, proprietary operating systems such as
Microsoft's Windows NT. According to a June 1999 Miller-Freeman survey, which
we co-sponsored, 33% of the respondents cited the lack of commercial support
and services as the largest obstacle to buying open-source products. This study
revealed that 79% of the respondents considered service and support to be an
important factor in their buying decision.
The open-source nature of Linux enables companies to market variations, or
distributions, of Linux. Other Linux vendors have begun to bundle Linux
distributions with hardware systems. However, these Linux software and hardware
vendors generally provide services limited to their distributions and systems.
In addition, other technology vendors and information technology services
providers have focused neither on building the depth of expertise nor on
providing the full range of services necessary to support Linux for business
customers.
We believe an opportunity exists for a vendor-neutral Linux services
provider to emerge with the reputation and skills necessary to provide Linux-
based solutions for enterprises. This provider must have:
. the ability to provide a full service offering, including professional
services, technical support, education and product certification;
. knowledge of Linux distributions and compatible hardware platforms, and
the ability to integrate Linux with existing computing environments;
. technical expertise;
. a technology infrastructure to efficiently serve an expanding customer
base; and
. the active support of and involvement in the Linux and open-source
communities.
Solution
To address the need for comprehensive services for Linux, we offer the
following solutions:
Complete Software and Hardware Life Cycle Support
We offer a comprehensive range of services spanning the entire software and
hardware life cycle. We help customers evaluate Linux, select Linux hardware
and software solutions, implement and maintain Linux
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<PAGE>
solutions and receive ongoing education. Our service offerings consist of
business analysis, systems implementation, application porting, device driver
development, security audits, performance analysis, technical support,
education and product certification. Our engineers' knowledge of major
operating systems, applications and networks enables us to effectively
integrate Linux and other open-source solutions with existing computing
infrastructures. As an example of our broad-based services, Linuxcare provides
Motorola with technical support for its engineering group, courseware for
Motorola University and engineering support for Motorola's embedded systems
group. We believe that our comprehensive range of services will help us develop
long-term customer relationships.
In-depth Linux and Open-source Expertise
We have assembled a worldwide team of Linux experts who actively participate
in the open-source community. As of December 31, 1999, we employed 65 Linux and
open-source hardware and software technologists on a full-time basis. As part
of their employment, many of these professionals continue to contribute to
open-source projects, such as:
. the Linux kernel, the core of the operating system that directs the most
fundamental operations of the computer;
. SAMBA, a file and print server;
. Apache, a Web server;
. Professional Home Page, or PHP, a solution that allows Internet servers
to connect with back-end resources such as databases and scripting
engines;
. EMACS, a text editing tool;
. ET-Linux, a leading Linux distribution for embedded systems;
. Majordomo, a mailing list management program; and
. the development of Linux for computer chips from Hewlett-Packard, Intel
and Motorola.
We believe that the involvement of our professionals in these projects and
our investment in Linux expertise make us an integral member of the Linux and
open-source development communities. Our involvement in these communities
enables us to maintain our technical expertise and react quickly to new
developments.
Internet-based Delivery Model
We are implementing an Internet-based infrastructure to help us more
efficiently and effectively serve our expanding customer base. We are able to
deliver services such as installation, diagnostics and maintenance remotely
over the Internet, reducing the need for on-site personnel. As part of our
infrastructure, we have implemented a knowledge sharing and management database
consisting of information gained from all of our business units. We use our
knowledge database to efficiently provide solutions to our customers. We also
provide our customers Internet-based access to our knowledge database, which
delivers automated responses to their questions. Our advanced infrastructure
and knowledge database enable us to provide high-quality solutions to our
customers in a timely and cost-effective manner.
Vendor-neutral Services Offerings
Our service offerings are designed to support many different Linux
distributions across a number of hardware platforms. We currently support 21
different Linux distributions on eight hardware platforms. Our vendor
neutrality has helped us develop a comprehensive knowledge database that
enables our experts to respond to our customers' diverse needs. We can help our
customers choose the best Linux distribution and hardware platform for their
needs and integrate these technologies with their existing computing
infrastructures. Furthermore, some customers with global operations, such as
Dell Computer, use multiple distributions of Linux. We can provide worldwide
support to these customers under a single contract.
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<PAGE>
Support of the Open-source Community
Linuxcare actively supports open-source initiatives, dedicating time and
resources to projects that improve the Linux operating system and related
applications. Our staff of experts continues to contribute to the development
of Linux. We also participate in organizations such as Linux International, a
Linux advocacy organization, the Linux Professional Institute, which
establishes Linux skills certification standards, and the Linux Standards Base,
which establishes design standards for Linux. Additionally, our website,
linuxcare.com, provides a repository of technical information and resources
about Linux and open-source solutions for developers and information technology
professionals. We believe our expertise gained through our strong relationships
with the Linux community allows us to serve our customers more effectively. We
believe that our active involvement in the Linux community, combined with the
fact that we do not package and resell a Linux distribution, make us a well-
respected member of the community and an attractive company for Linux experts
to join.
Strategy
Our objective is to become the leading provider of services for Linux. The
key elements of our strategy are:
Focus on the Enterprise
We intend to focus additional sales and marketing efforts toward Global 1000
companies and Internet infrastructure providers. We believe these companies
require stable and cost-effective platforms such as Linux to run their
increasingly complex software applications and take full advantage of the
Internet. These companies require in-depth expertise in the integration of
Linux and open-source solutions with existing computing environments. We have
started working with Global 1000 companies and Internet infrastructure
providers and we intend to leverage our experience with these customers to
market and sell our services to new customers.
Extend Technical Leadership
To maintain the quality of our services, increase the effectiveness of our
solutions and attract and retain Linux experts, we believe it is imperative for
us to remain an active member of the Linux community and stay involved with the
latest Linux developments. We continually research, test and evaluate new
Linux-related technologies, which we incorporate into our solutions to better
serve our existing and future customers. These efforts allow us to address the
growing demand for Linux services.
Use Scalable Internet-based Infrastructure
We are implementing an Internet-based infrastructure, rather than the more
labor-intensive model of traditional service providers, to deliver responsive
services to our customers. We are replacing the traditional geographically-
oriented service model with virtual work groups, which we refer to as Global
Centers of Expertise. These Global Centers of Expertise are designed to allow
technical experts of similar disciplines to work together regardless of their
geographical locations. In addition, our knowledge database is a key component
of our service model, providing our business units with ready access to
valuable technical information. We believe that our technology infrastructure
will allow us to grow our business in a cost-effective manner.
Capitalize on Alliances
We have selectively established alliances with other companies, including
Creative Computing, Informix and Viviance. These relationships provide us with
a range of benefits, including sales leads, co-marketing initiatives and the
opportunity to provide services to their customers. In addition to representing
an opportunity to reach a broad customer base, many of these companies are also
direct consumers of our services. We intend
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<PAGE>
to further expand our existing alliances and establish new alliances with
leading technology vendors. For example, we are establishing relationships with
software and hardware vendors to make their products compatible with Linux.
Strengthen Our Brand
Continuing to build our brand is essential to attracting new customers,
strengthening our relationships with OEMs and software vendors, and enhancing
our presence in the Linux and open-source communities. We intend to build our
brand through a variety of strategies, including the promotion of
linuxcare.com, public relations activities, co-marketing initiatives, direct
marketing and focused advertising campaigns. Through our Linuxcare Labs
business unit, we have developed a branding program that encourages vendors of
products that have been awarded certification status to display the "Certified
by Linuxcare Labs" logo on their products and websites. This program is
designed to give end-users the assurance that certified products have been
fully tested by Linuxcare for compliance with the Linux kernel and major
distributions of Linux. To maintain the goodwill of the Linux community, a
foundation of our brand, we will continue to contribute resources to open-
source development projects.
Promote the Adoption and Development of Linux
We have forged relationships with a variety of technology vendors to
encourage the development of commercial applications for Linux. We have a team
of Linux experts who work on open-source projects and continue to support the
development of Linux. We also actively support and sponsor the Linux
Professional Institute, Linux International and the Linux Standards Base. We
have developed a half-day training session, "Linux for the Executive," which is
currently available in a tutorial and will be made available via the Internet.
We believe that our efforts to improve Linux and educate customers on its
benefits encourage the adoption of Linux.
Linuxcare Services
We offer a broad range of services for Linux, including professional
services, technical support, education and product certification. We support a
variety of Linux distributions and hardware platforms, giving customers options
to meet their needs.
Professional Services
Linuxcare Professional Services offers customers consulting services to help
them fully benefit from their Linux investments. Linuxcare Professional
Services uses Global Centers of Expertise to effectively deliver services on a
worldwide basis. Each Global Center of Expertise is a team of experts with
extensive skills in a technology area who work together independent of
geographical location. These collaborative methods promote rapid solution
development, allowing us to execute large, complex projects and enabling us to
handle increased business volume. We have established Global Centers of
Expertise in the following areas:
. Application Porting, which enables an application written for a
different operating system to run on Linux.
. Parallel Computing and Clustering, which permits complex computing tasks
to be subdivided and handled by several processors.
. Device Driver Development, which makes Linux compatible with different
devices including printers and other peripherals.
. Network Management, which enables file and printer sharing and other
network installation and administration tasks.
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. Security Audits, which help identify and correct security weaknesses.
. Performance Optimization, which improves the speed and capacity of
existing Linux distributions.
. Web and e-mail Servers, which provide on-site and remote services for
planning, deployment and fine tuning of Internet and e-mail servers.
. Open-source Strategy Consulting, which provides consulting services for
Linux and other open-source software.
To ensure successful project management and delivery of our professional
services, we have established consistent, company-wide procedures for client
engagements. These procedures consist of project analysis and proposal,
engagement and contracting, development, testing and delivery. This project
life cycle is also used to manage changes in project scope. Knowledge gained
throughout a project is captured in the knowledge database for use in future
client engagements.
Customized Linux Solutions. As a service to our customers, we can customize
Linux and Linux-based solutions to offer full compliance and optimized
performance with their hardware or software products. A standard Linux
distribution, typically sold through the retail channels, is designed to run on
as many hardware configurations as possible, and must be suitable for a wide
range of computing solutions. We customize Linux-based solutions from Linuxcare
to streamline them for optimal performance, reliability, ease of use and
security with a specific hardware or software configuration. As part of our
customization service, we use the most current Linux kernel and driver versions
available, perform a full security audit and certify the solution through
Linuxcare Labs.
Embedded Systems. We have recently established a group to focus on providing
engineering support for our customers' embedded systems efforts. Embedded
systems are operating systems that are built into equipment such as mobile
phones, medical devices and industrial control systems. We believe that the
cost-effective, portable, compact and robust characteristics of Linux are well
suited to the rapidly expanding market for embedded systems. We employ Linux
experts who are largely responsible for the development of one of the leading
embedded Linux distributions, ET-Linux.
Technical Support
We offer customer support services 24 hours a day, seven days a week through
our global network of customer service centers. Our technical support
professionals provide customers with ongoing support on complex issues ranging
from operating system installation to application usage. We support the
installation and maintenance of 21 Linux distributions as well as database
products from IBM, Informix, Oracle and Sybase that run on Linux. In addition,
we support numerous software applications, including StarOffice, Sendmail,
Apache and SAMBA. Customer questions are typically received via e-mail, Web
submission, telephone or fax and are routed to the appropriate technical
resource. When appropriate, complex questions are referred to our Linux
experts. We typically respond to customer questions by e-mail to provide
efficient, accurate instructions.
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<PAGE>
We currently support the following distributions of Linux:
<TABLE>
<S> <C>
.Caldera .Red Hat
.Corel .RT-Linux
.Debian GNU/Linux .Slackware Linux
.ET-Linux .Stampede
.EZ Linux .S.u.S.E.
.Laser5 .Storm
.Linux-Mandrake .TurboLinux
.LinuxPPC .UltraLinux
.Macmillian Linux .Vine Linux
.MkLinux .YellowDog Linux
.Red Flag
</TABLE>
Our technical support services business unit has grown rapidly since its
inception. We handled 140 incidents in the second quarter of 1999, increasing
to approximately 15,000 incidents in the fourth quarter of 1999. We capture the
knowledge gained in resolving these incidents in the knowledge database,
increasing our level of automation and improving our service quality.
Linuxcare University
We offer educational materials for Linux and other open source technologies
through our Linuxcare University business unit. Our courseware is designed by
expert Linux developers and open source engineers in conjunction with
professional courseware developers. We license our courseware to professional
training centers in return for training fees and a per-student royalty. In
addition, we have formed a revenue and expense sharing relationship with
Viviance to deliver our courseware via the Internet.
Our current courseware covers all major Linux distributions and includes:
. Linux Fundamentals . Network Protocols
. Linux for Managers . Network Operating Systems
. Extreme SAMBA . Network Design, Implementation
and Maintenance
. Linux Programming
. Networking Essentials
. Linux System Administration
. Local Area Network Implementation
. Linux System Administration for and Maintenance
NT Professionals
. LANs, WANs and the Internet
. Internetworking with Linux and
TCP/IP
. Internet Fundamentals
. Apache Web Server . Internet and Internet Security
. Architecture and Design of . Intranet Design and Migration
Enterprise Systems
. Using the TCP/IP Protocol
. IT Infrastructure Implementation
and Management
. Enterprise-wide Communications
and Networking
Linuxcare Labs
Linuxcare Labs is our vendor-neutral testing facility that certifies
hardware for use with the Linux operating system to customers who pay a
certification fee. Certification by Linuxcare Labs gives Linux users
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<PAGE>
the assurance that all components of the tested product operate at full
functionality with the Linux kernel and successfully run all major Linux
distributions. Once certified, products earn the Linuxcare Labs certification
mark, signifying that the product is "Linux-ready."
Linuxcare Labs reviews written material for Macmillan USA, a book publishing
subsidiary of Macmillan Publishing, Ltd. for technical accuracy and
completeness on a time and materials basis.
Information Technology
We are implementing an Internet-based infrastructure to communicate with and
to deliver applications and services to our global base of employees, customers
and partners. Through the use of technology, we provide our customers with
services that would traditionally require on-site professional staffing. We can
perform remote Linux system installation, software updates, software
distribution, diagnostics, maintenance, monitoring and automated recovery
services by connecting to our customers' computers securely over the Internet.
Distributed Infrastructure
Our distributed infrastructure facilitates low-cost, rapid growth while
protecting us from system failures or network outages. Through an outside
service provider, Digital Island, we are hosting our Web servers in California,
Hong Kong, London and New York to provide redundancy, enhanced disaster
recovery protection and the ability to deliver electronic services to customers
globally with fast response times. We believe that our four locations are
capable of handling approximately five million concurrent user sessions for a
total concurrent user session capacity of 20 million. We currently use 25% or
less of our aggregate capacity during peak periods of usage.
Our information technology infrastructure is designed to enable us to form
virtual work groups, or Global Centers of Expertise, regardless of the
geographical location of individual team members. We believe these tightly
integrated teams will provide significant economies of scale as we expand our
operations and customer base. These teams can evaluate and respond to customer
requests remotely, without inefficient on-site customer service. Furthermore,
our experts can draw on our expanding knowledge database to address questions
quickly and efficiently.
We expect the distributed nature of this infrastructure will facilitate our
expansion. Through our Internet infrastructure, we will be able to support
offices in remote locations with the following capabilities: sales and
marketing automation, customer relationship management, human resources,
financial management, project accounting, order entry, video conferencing,
Internet and e-mail.
Knowledge Accumulation and Management
We have built a central knowledge database that serves as a repository for
open-source software information. The knowledge database stores corrective
instructions for our customers' service requests derived from multiple sources
and is continuously improved as we respond to questions from our customers. We
use a natural language search engine to analyze e-mail requests and rapidly
find responses in our knowledge database. Our knowledge database is available
to our staff and customers. Customers continually help us to refine the
accuracy of the knowledge database by providing feedback on the relative
usefulness of responses received. We believe that our knowledge database is a
cost-effective method for providing responses to our customers' questions.
Our knowledge database is also used internally by all of our business units
to deliver services. For example, a professional services consultant can
capitalize on solutions previously developed by Linuxcare Labs to help a new
customer.
Engineering Talent
To offer the most comprehensive Linux services, we recruit and employ
accomplished engineering talent, including developers experienced in Linux and
open-source communities. By encouraging participation in
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<PAGE>
open-source projects, we strive to foster a corporate culture that attracts and
nurtures technical talent. As we successfully attract and retain Linux and
open-source experts, we extend our internal base of engineering talent and
create momentum to attract other Linux engineers.
Our employees have contributed and continue to contribute to a variety of
significant ongoing Linux projects. The following highlights some of our
employees and their participation in core Linux and open-source projects:
<TABLE>
<CAPTION>
Project Description Employees
- ------- ----------- ---------
<S> <C> <C>
Linux kernel The fundamental part of the operating Christopher Beard
system
Alex deVries
David Kennedy
Paul Mackerras
Paul Russell
Jes Sorensen
Andrew Tridgell
Joshua Uziel
David Welton
Matthew Wilcox
SAMBA A file and print server Andrew Tridgell
Apache A Web server Rasmus Lerdorf
David Welton
Secure Networking Virtual private networking tools Paul Russell
David Sifry
Advanced Power Powersaving features for laptop computers Stephen Rothwell
Management
InterMezzo A highly available, distributed file system Phil Schwan
IPChains/Netfilters Tools for security and firewalling Jim Dennis
Paul Russell
David Sifry
</TABLE>
Customers
The following is a representative list of our customers during 1999:
<TABLE>
<S> <C>
Ameriteach Maxspeed Corporation
Browning-Ferris
Industries Motorola, Inc.
Cybernet Systems NEC Software
Cisco Systems, Inc. OK International
Dell Computer Corp. Panasonic-Fujitsu-Uchida Limited
Densa Techno Tokyo
Co., LTD Silicon Graphics, Inc.
Gannett Telematch Sun Microsystems, Inc.
Hewlett Packard
Company VA Linux Systems
Interspace Planning Wells Fargo Bank
KPMG Peat Marwick
LLP Xenote, Inc.
Macmillan USA
</TABLE>
We negotiate the business terms of each contract with each of our customers
to deliver services that fit that customer's particular needs. The contract
fees vary, and may be billed on an hourly, daily, monthly or annual basis,
depending upon the scope and nature of the services delivered. Most of our
contracts have terms of one year or less.
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<PAGE>
For the period ended December 31, 1999, three customers, Sun Microsystems,
Motorola and Silicon Graphics, Inc. represented 26%, 18% and 11%, respectively,
of our revenues. The following customer case studies illustrate the range of
services we provide for our customers:
Dell Computer. Dell is a direct seller of desktop computer systems and a
leading supplier of enterprise servers. Dell has outsourced its warranty
support under a one-year contract with Linuxcare for installation and ongoing
support of Linux and related software. Linuxcare Labs provides certification of
Dell hardware, which consists of installing specified Linux distributions on
Dell hardware and verifying that these distributions function correctly.
Densa Techno Tokyo's (DTT). DTT, a wholly owned subsidiary of Hitachi,
provides support for Hitachi's mainframes. DTT has recently started to provide
service and support for Linux and has established a call center in Tokyo for
basic support. DTT has contracted with Linuxcare for a one-year term to provide
in-depth technical support to enhance its basic support services.
Hewlett-Packard. Hewlett-Packard is a global provider of computing and
imaging solutions and services. Hewlett-Packard's Business Desktop division,
based in France, has contracted with Linuxcare for a one-year term to provide
Linux distribution certification for their Kayak, Vectra and Brio models. We
ensure that these model configurations work optimally with specific Linux
distributions.
Macmillan USA. Macmillan USA is the computer book and trade reference
publishing division of Viacom. Macmillan USA distributes Mandrake Linux and
other Linux utilities, and publishes popular Linux books. Our engineers review
Macmillan USA's books for technical accuracy and completeness prior to
publication. Under a one-year contract with Macmillan USA, we also provide
technical support to customers of Macmillan's Linux distribution and utilities
and have handled over 4,000 customer incidents since October 1999.
Motorola. Motorola provides integrated communications and embedded
electronic solutions. Motorola has contracted with Linuxcare to provide
engineering support to Motorola Computer Group's support and development
organizations. Linuxcare will work with the Motorola Computer Group's product
engineering and customer support services on product customization and
application development. Linuxcare University will provide worldwide courseware
licensing and instructor technical support for Motorola Computer Group's
training programs.
Sun Microsystems. Sun Microsystems provides computer hardware, software and
services. Sun has contracted us to provide technical support services for its
StarOffice product suite. We are also in discussions to provide professional
services to Sun Microsystems regarding device driver development and other
open-source projects.
Alliances
We have selectively established alliances with companies to benefit both
parties through co-development of products, co-marketing, and revenue sharing.
We have also formed alliances to improve delivery of services to our customers.
Examples of our alliances include:
Product Creation
We have an alliance with Creative Computing to combine a portion of our
knowledge database with their e-commerce Web site to provide support to their
customers.
Revenue Sharing
Our alliance with Viviance combines our courseware with their delivery
infrastructure to provide Web-based education.
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Co-marketing
Our alliance with Informix includes co-marketing and joint public relations
initiatives to promote our customized Linux solutions.
Sales and Marketing
We sell our services primarily through our direct sales organization. We
also employ indirect sales professionals to capitalize on our relationships
with our OEM and software vendor customers. As of December 31, 1999, we
employed 36 sales and marketing professionals located in the United States,
Canada, the United Kingdom, Germany, The Netherlands, Sweden and Australia. We
also have direct sales coverage in Japan and France. We employ resellers in
certain geographic locations where a direct sales organization has not yet been
established. In addition, our senior executives and key technology personnel,
many of whom are experienced in the Linux community, frequently participate in
building relationships with potential customers and business partners as well
as in securing engagements. We also generate sales leads through our
involvement in the open-source community.
To date, we have focused our sales and marketing efforts on OEMs and
software vendors. Some of our OEM customers provide our services in conjunction
with their products and services. We are also expanding our worldwide sales and
marketing efforts that focus on Global 1000 companies and Internet
infrastructure providers.
Our marketing strategy is to build the Linuxcare brand to enhance our
position as a leading provider of Linux-related services. We build our brand,
market our services and generate sales leads through our linuxcare.com website,
public relations activities, co-marketing initiatives, direct marketing and
targeted advertising. We have retained outside public relations and advertising
firms to assist us with our marketing efforts.
Competition
We compete in the emerging market for Linux-based professional services and
support. This market is highly competitive. Many of our competitors have longer
operating histories, better name recognition, larger client bases and greater
financial, technical, marketing and public relations resources than we. Because
the Linux-based solutions market has relatively low barriers to entry, we
believe competition will intensify as the market evolves.
Our current and potential competitors include:
. Linux distribution and services firms such as Caldera Systems, Red Hat
and VA Linux Systems;
. Hardware systems vendors such as Dell, Hewlett-Packard and Sun
Microsystems;
. Systems integrators and professional services providers such as Andersen
Consulting, IBM Global Services and the big five accounting firms; and
. Internal information technology departments of our prospective clients.
We believe that the key competitive factors relevant to our business are an
ability to provide integrated solutions that span the entire hardware and
software life cycle, reputation for in-depth Linux expertise across all major
distributions and hardware platforms and high quality of professional services
and customer support. We believe that we compete successfully with respect to
each of these factors.
Employees
As of December 31, 1999, we had a total of 130 employees, of which 112 were
located in the United States, seven in Europe, five in Canada and six in
Australia.
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None of our employees is subject to a collective bargaining agreement, and
we believe that our relationship with our employees is satisfactory.
Facilities
Our headquarters is located in a leased facility in San Francisco,
California consisting of 10,500 square feet of office space. The lease for this
office expires December 31, 2003. Additionally, we plan to occupy 30,000 square
feet of office space currently under construction in the second quarter of
2000. The lease for this office space expires on October 31, 2004. We also
lease office space in Canberra, Australia, Ottawa, Canada, Berkshire, England,
and Amsterdam, The Netherlands.
We do not own any real estate. We do not consider any specific leased
location to be material to our operations, and we believe that equally suitable
alternative locations are available in all areas where we currently operate.
Legal Proceedings
We are not currently a party to any material legal proceedings. We may in
the future be party to litigation arising in the course of our business.
Intellectual Property
While we have developed some proprietary techniques and know-how, including
software tools and utilities, optimization techniques and solutions to
recurring Linux questions, most of our knowledge is not protectable as
proprietary intellectual property. To protect our intellectual property, we
generally enter into confidentiality or license agreements with our employees,
consultants and corporate partners. Our three founders, David LaDuke, David
Sifry and Arthur Tyde III, have signed non-competition agreements with us. In
addition, we have an agreement with Linus Torvalds, owner of the "Linux"
trademark registration, allowing us to use Linux as part of our company name.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to our
officers and directors.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Fernand B. Sarrat(1)....... 49 President, Chief Executive Officer and Director
Arthur F. Tyde III......... 35 Executive Vice President and Director
David LaDuke............... 39 Vice President, Marketing
Patricia Lambs............. 51 Vice President, Service Solutions
Thomas W. Phillips......... 48 Vice President, Worldwide Sales
Robert V. Walters.......... 42 Vice President, Business Development
Christian A. Paul.......... 39 Chief Financial Officer
David L. Sifry............. 31 Chief Technology Officer
Douglas C. Nassaur......... 33 Chief Information Officer
Ted E. Schlein(1)(2)(3).... 35 Chairman of the Board of Directors and Director
Regis McKenna.............. 60 Director
John Drew(1)(2)............ 43 Director
Paul Vais(2)(3)............ 40 Director
Ernest von Simson(3)....... 61 Director
</TABLE>
- --------
(1) Member of the executive committee.
(2) Member of the audit committee.
(3) Member of the compensation committee.
Fernand B. Sarrat has served as President and Chief Executive Officer of
Linuxcare since May 1999. Prior to joining the company, Mr. Sarrat held the
positions of President and Chief Executive Officer of Cylink Corporation, a
California-based security and cryptography firm from November 1996 to November
1998. Before leading Cylink, Mr. Sarrat spent 23 years as an executive at IBM.
His career at IBM culminated as General Manager of Network-Centric Computing
Marketing and Services. Mr. Sarrat received an M.B.A. from the Wharton School
of Business and dual B.A. degrees in economics and psychology from Stanford
University.
Arthur F. Tyde III, one of our founders, has served as Executive Vice
President since May 1999, and prior to that was acting Chief Executive Officer
from the inception of the company. Before co-founding Linuxcare, Mr. Tyde held
senior consulting and management positions at Gap, Inc. from December 1996, in
addition to his post as president and founder of the Bay Area Linux User Group.
Prior to working at Gap, Inc., Mr. Tyde held senior consulting and management
positions at Fireman's Fund Insurance Company from November 1995 until December
1996, and at California State Automobile Association from June 1993 to November
1995. Mr. Tyde earned his B.A. from Michigan State University.
David LaDuke, one of our founders, has served as Vice President of Marketing
since December 1998. Prior to Linuxcare, Mr. LaDuke was an independent
marketing consultant, working with a number of high-technology companies from
March 1993 to December 1998. From 1989 to 1993, Mr. LaDuke was a marketing
manager at NeXT Computer. Before this, from 1986 to 1989, he worked in
marketing at Apple Computer where he participated in the launch of desktop
publishing. Mr. LaDuke received an M.B.A. from the Tuck Graduate School of
Business at Dartmouth College with a concentration in marketing, and a B.A. and
M.F.A. from Columbia University.
Patricia Lambs has served as our Vice President of Service Solutions since
August 1999. For five years prior to joining Linuxcare, Mrs. Lambs served as
Executive Vice President and Chief Operating Officer at Ascent Logic
Corporation, where she led a world wide sales and service delivery organization
and managed the Central Engineering Group. In this role, Mrs. Lambs served as
Chairman of the Board for Ascent Logic
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<PAGE>
Norway and Ascent Logic Ltd. in the United Kingdom. Prior to joining Ascent
Logic, Mrs. Lambs spent 18 years in management positions of Integration Service
for Digital Equipment. Mrs. Lambs attended Temple University.
Thomas W. Phillips has served as our Vice President of Worldwide Sales since
September 1999. Prior to Linuxcare, Mr. Phillips served as Vice President,
North American Sales for Baystone Software/Remedy Corporation from October 1998
to September 1999. He also served as Vice President of North American Sales for
Wayfarer Communications/Vantive Corporation, from October 1997 to September
1998. Previously, Phillips spent several years at Sterling Software, from June
1987 to September 1997, attaining the position of Vice President, North
American Sales. Mr. Phillips earned a B.A. in Sales and Marketing from
California State University.
Robert V. Walters has served as our Vice President of Business Development
since December 1999. Before joining Linuxcare, Mr. Walters was Vice President
of Corporate Strategy for Informix Software where he worked from March 1998 to
November 1999. Previously, Mr. Walters worked at Red Brick Systems, Inc, a data
warehouse software vendor, from April 1996 to February 1998, where he served as
Director of Strategic Marketing. Prior to that, Mr. Walters was a principal
technical consultant at Dynasty Technologies, Inc., an object-oriented software
development start-up, from January 1995 to March 1996. Mr. Walters holds a B.S.
in Systems Engineering from the U.S. Naval Academy.
Christian A. Paul has served as our Chief Financial Officer since December
1999. Prior to joining Linuxcare, Mr. Paul was Vice President and Chief
Financial Officer of Cloudscape, Inc., a provider of Java-based data management
systems, from October 1998 to December 1999. Before that, Mr. Paul was Vice
President and Chief Financial Officer of ICVERIFY, an e-commerce company from
July 1996 to August 1998, where he directed the finance and administration
functions and also served as Vice President and Chief Financial Officer of
Integral Systems Inc. from January 1994 to June 1996. Mr. Paul holds an M.A. in
Accounting and Taxation from the University of Cape Town, and is also a
Chartered Accountant.
David L. Sifry, one of our founders, has served as Chief Technical Officer
since December 1998 and is a recognized expert in open source development and
the Linux operating system. Prior to co-founding Linuxcare, he ran an Internet
technology consulting business, Sifry Consulting, from January 1995 to December
1998. Mr. Sifry holds a B.S. in Computer Science from Johns Hopkins University.
Douglas C. Nassaur has served as our Chief Information Officer since
November 1999. Previously, Mr. Nassaur was Vice President, Technical
Operations, for E*TRADE Technologies from September 1998 to October 1999. Prior
to E*TRADE, Mr. Nassaur directed the daily engineering, operation, and support
of distributed systems for Holiday Inn Worldwide/BASS PLC from August 1997 to
September 1998. Previously, at BellSouth.net, Mr. Nassaur led the management of
the company's Internet/intranet services, help-desk operations, corporate
service delivery, and billing systems from July 1996 to August 1997. Before
working for Bellsouth.net, Mr. Nassaur held a senior-level technology
management position at GTE Mobilnet from May 1994 to July 1996. Mr. Nassaur
earned a B.S. in Computer Science from the University of Kentucky.
Ted E. Schlein has served as Chairman of our Board of Directors since May
1999. Mr. Schlein is a partner in the venture capital firm Kleiner Perkins
Caufield & Byers which he joined in November 1996. From June 1986 to November
1996, Mr. Schlein worked at Symantec. Mr. Schlein also serves on the board of
directors for Corio, Inc., Extensity, Inc., NONSTOP Solutions, Inc., Portera
Systems and WineShopper. Prior to Kleiner Perkins Caufield & Byers, Mr. Schlein
worked at Symantec Corporation, most recently as Vice President of Networking
and Client Server Technology. Mr. Schlein holds a B.S. in Economics from the
University of Pennsylvania.
Regis McKenna has served on our Board of Directors since September 1999. He
is also Chairman of The McKenna Group, an international consulting firm
specializing in the application of information and telecommunications
technologies to business strategies, which he founded in 1970. In his capacity
as Chairman
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<PAGE>
of The McKenna Group, Mr. McKenna advised many high-tech start-up companies.
Mr. McKenna also serves as director on the following companies' boards: Caliper
"Lab on A chip," bio-information systems; Cybergold Incentive, management
software for Internet transactions systems; Cylink Encryption and security
systems software; Diabeteswell.com, E-medicine diabetes portal and management
systems; Graham Technologies Live video and audio servers for distance
monitoring, surveillance and broadcast via the Internet. Mr. McKenna attended
Saint Vincent College and Duquesne University.
John Drew has served on our Board of Directors since November 1999. Mr. Drew
also serves as executive vice president and CEO of Lucent Technologies' NetCare
Professional Services group, a portfolio of network professional services and
software solutions. Mr. Drew was president and chief executive officer of
International Network Services prior to its acquisition by Lucent in October
1999. Mr. Drew joined International Network Services in 1994 as vice president
of operations and became president in 1996. Mr. Drew holds a B.S. degree in
Engineering from West Point and an M.S. in Business Policy from Columbia
University.
Paul Vais has served on our Board of Directors since November 1999. Mr. Vais
is also managing director with Patricof & Co. Ventures, Inc., an international
private equity investment firm, which he joined in early 1997. Previously, from
March 1995 to December 1996, Mr. Vais was a vice president with Enterprise
Partners Venture Capital. Mr. Vais also serves on the Boards of Directors of
Icarian, Oblix, Ravisent Technologies, Infolibria, Peregrine Semicondutcor and
iVendor. Mr. Vais holds a B.S. in Computer Science from the University of
California.
Ernest von Simson has served on our Board of Directors since October 1999.
Mr. von Simson is a senior partner at Ostriker von Simson, Inc., which assists
Fortune 200 enterprises in developing partnerships with Web solution providers.
From October 1969 to September 1999, Mr. von Simson was the co-founder,
chairman and research director of the Research Board, a private sector think
tank that serves the chief information officers of Fortune 200 enterprises in
Europe and North America. Mr. von Simson holds a B.A. from Brown University,
and an M.B.A. from New York University.
Board of Directors
Our Board of Directors currently consists of seven members. Each director
holds office until his term expires or until his successor is duly elected and
qualified. Upon completion of this offering, our amended and restated
certificate of incorporation and bylaws will provide for a classified Board of
Directors. Our Board of Directors will be divided into three classes whose
terms will expire at different times. The three classes will be comprised of
the following directors:
. Class I consists of Messrs. Tyde and von Simson, who will serve until
the annual meeting of stockholders to be held in 2001;
. Class II consists of Messrs. Vais, Schlein and Drew, who will serve
until the annual meeting of stockholders to be held in 2002; and
. Class III consists of Messrs. Sarrat and McKenna, who will serve until
the annual meeting of stockholders to be held in 2003.
At each annual meeting of stockholders beginning with the 2001 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified. Any additional directorships resulting from an increase
in the number of directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of an equal number of directors.
43
<PAGE>
Committees
Our Board of Directors has an executive committee, an audit committee and a
compensation committee. The executive committee consists of Messrs. Sarrat,
Schlein and Drew. The executive committee approves acquisitions of businesses
in amounts up to $5 million and takes such other actions as may be delegated by
the Board from time to time. The audit committee consists of Messrs. Vais,
Schlein and von Simson. The audit committee reviews our internal accounting
procedures, consults with and reviews the services provided by our independent
accountants and makes recommendations to the Board of Directors regarding the
selection of independent accountants. The compensation committee consists of
Messrs. Vais, Schlein and Drew. The compensation committee reviews and
recommends to the Board of Directors the salaries, incentive compensation and
benefits of our officers and employees and administers our stock plans and
employee benefit plans.
Compensation Committee Interlocks and Insider Participation
Our Board of Directors established the compensation committee in January
2000. No member of our compensation committee has served as a member of the
Board of Directors or compensation committee of any entity that has one or more
executive officers serving as a member of our Board of Directors or
compensation committee. Since the formation of the compensation committee, none
of its members has been our officer or employee.
Compensation
Our non-employee directors have been granted options to purchase an
aggregate 240,000 shares of our common stock at an exercise price of $0.13 per
share for 100,000 shares; $1.00 per share for 100,000 shares; $3.25 per share
for 40,000 shares. The aggregate value of these options based on these exercise
prices is $243,000. The aggregate value of these options based on the midpoint
of the range is $3,360,000.
In January 2000, our Board of Directors approved compensation guidelines for
directors who are not our officers or employees. The compensation guidelines
provide that these directors will be reimbursed for expenses incurred in
attending any Board of Directors or committee meeting. Directors who are also
our officers or employees will not receive reimbursement for expenses incurred
in attending Board of Directors or committee meetings.
Effective upon the closing of this offering, our non-employee directors also
will be eligible to participate in our 2000 Director Option Plan. Each non-
employee director who joins our Board of Directors after this offering will
automatically receive a grant of an option to purchase 20,000 shares of our
common stock on the date on which such person becomes a director. The shares
subject to each of these options will vest and become fully exercisable over
four years as follows: 25% of the shares on each anniversary of the date of
grant. Additionally, beginning at our annual meeting of stockholders to be held
in 2001 and at each successive annual stockholder meeting, each non-employee
director who has previously served at least six consecutive months prior
thereto will receive an option to purchase 5,000 shares of our common stock.
The shares subject to each of these options will fully vest and become fully
exercisable as to 100% of the shares on the first anniversary date of the date
of grant. The exercise price per share for all options automatically granted to
directors under our 2000 Director Option Plan will be equal to the market price
of our common stock on the date of grant and will have a ten year term, but
will generally terminate within a specified time, as defined in the 2000
Director Option Plan, following the date the option holder ceases to be a
director or consultant. Employee directors are eligible to participate in our
2000 Employee Stock Purchase Plan and to receive discretionary grants under our
Restated and Amended 1999 Stock Plan.
Executive Officers
Our executive officers are appointed by and serve at the discretion of our
Board of Directors.
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<PAGE>
Compensation
The following table sets forth all compensation paid or accrued during our
fiscal 1999 to our President and Chief Executive Officer, and each of our four
other most highly compensated officers whose annual compensation exceeded
$100,000 for the period. Mr. Sarrat, Mr. Nassaur, Mr. Phillips, Mrs. Lambs and
Mr. Pollace joined us during fiscal 1999, therefore their annual compensation
does not reflect their full base salary.
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Annual Compensation Securities
------------------------- Underlying
Name and Principal Positions Salary Bonus Other(3) Options
- ---------------------------- -------- ------- -------- ------------
<S> <C> <C> <C> <C>
Fernand B. Sarrat........ $200,000 $41,667 -- 1,865,112
President and Chief
Executive Officer
Arthur F. Tyde III (1)... 150,000 -- -- --
Executive Vice President
Douglas C. Nassaur....... 41,667 70,000 -- 415,049
Chief Information
Officer
Thomas W. Phillips....... 63,697 42,000 15,098 290,533
Vice President,
Worldwide Sales
Patricia Lambs........... 75,000 15,000 -- 415,049
Vice President, Service
Solutions
Anthony Pollace (2)...... 59,118 25,000 -- 450,000
Former Chief Financial
Officer
</TABLE>
- --------
(1) Mr. Tyde served as our Chief Executive Officer until May 1999.
(2) Mr. Pollace resigned his position as our Chief Financial Officer in
December 1999.
(3) Pursuant to the terms of his employment agreement, Mr. Phillips received
$12,500 as a non-recoverable draw. Mr. Phillips also received $3,098 as a
recoverable draw which may be recoverable from his annual bonus should he
fail to meet certain specified criteria.
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<PAGE>
Option Grants in Fiscal Year 1999
The following table sets forth information concerning grants of stock
options to each of the executive officers named in the table above during
fiscal year 1999. All options granted to these executive officers in the last
fiscal year were granted under the 1999 Stock Plan. One-quarter of the shares
subject to each option vests and becomes exercisable on the first anniversary
of the date of grant, and an additional one-forty-eighth of the shares subject
to each option vests each month thereafter. In addition, options granted to
each of the individuals set forth below may be early exercised, provided that
such individual enters into a restricted stock purchase agreement. The shares
thus acquired remain subject to a right of repurchase by the Company. The
percentage of the total options set forth below is based on an aggregate of
6,235,189 options granted during 1999. All options were granted at a fair
market value as determined by our Board of Directors on the date of grant.
The 5% and 10% assumed annual rates of stock price appreciation are required
by the rules of the Securities and Exchange Commission and do not represent our
estimate or projection of future common stock prices. The potential realizable
values at 0%, 5% and 10% appreciation are calculated by assuming that the value
of the shares appreciates at the indicated rate for the entire term of the
options and that the option is exercised at the exercise price and sold on the
last day of its term at the appreciated price. For options granted in February
2000, we assumed that the fair market value on the date of grant was $14.00 per
share, the assumed initial public offering price.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------- Potential Realizable
Number of % of Total Value at Assumed
Securities Options Annual Rates of Stock Price
Underlying Granted to Appreciation for Option Term
Options Employees in Exercise Expiration --------------------------------
Name Granted Fiscal Year Price Date 0% 5% 10%
---- ---------- ------------ -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fernand B. Sarrat....... 1,660,194(1) 26.6% 0.07 05/02/09 23,126,502 37,670,636 59,984,191
Fernand B. Sarrat....... 204,918(1) 3.3% 0.13 10/21/09 2,842,213 4,629,665 7,371,968
Arthur F. Tyde III...... -- 0.0% 0.00 01/00/00 -- -- --
Douglas C. Nassaur...... 415,049 6.7% 0.13 11/01/09 5,756,730 9,377,106 14,931,474
Thomas W. Phillips...... 290,533 4.7% 0.13 10/21/09 4,029,693 6,563,945 10,451,985
Patricia Lambs.......... 415,049 6.7% 0.13 10/21/09 5,756,730 9,377,106 14,931,474
Anthony Pollace......... 450,000(2) 7.2% 0.13 10/21/09 1,543,038 2,513,445 4,002,242
</TABLE>
- --------
(1) Such options are subject to a change in control provision. Fifty percent
(50%) of the unvested shares subject to the option shall vest and become
immediately exercisable upon the occurrence of a change in control (as that
term is explained in the section "Employment Agreements and Change in
Control Arrangements" below) and twenty-five percent (25%) of the total
option shares shall vest upon the constructive termination of service with
us or the termination of service with us without cause (as that term is
explained in the section "Employment Agreements and Change in Control
Arrangements" below).
(2) Mr. Pollace was granted options to purchase 450,000 shares of common stock,
however options to purchase 338,750 shares were forfeited and returned to
the plan when Mr. Pollace resigned. The "Potential Realizable Value"
amounts are calculated based on the remaining options to purchase 111,250
shares.
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<PAGE>
Aggregate Option Exercises in Fiscal Year 1999 and Values at December 31,
1999
The following table sets forth information concerning exercisable and
unexercisable stock options held by the executive officers named in the
summary compensation table at December 31, 1999. The value of unexercised in-
the-money options is based on a value of $2.00 per share, the fair market
value of our common stock as of December 31, 1999 as determined by our Board
of Directors, minus the actual per share exercise prices, multiplied by the
number of shares underlying the option. All options were granted under our
1999 Stock Plan.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
Shares December 31, 1999 at December 31, 1999
Acquired Value ------------------------- -------------------------
On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fernand B. Sarrat....... 1,865,112 $ -- -- -- $ -- $ --
Arthur F. Tyde III...... -- -- -- -- -- --
Douglas C. Nassaur...... -- -- 415,049 -- 776,142 --
Thomas W. Phillips...... -- -- 290,533 -- 543,297 --
Patricia Lambs.......... -- -- 415,049 -- 776,142 --
Anthony Pollace......... -- -- 111,250 -- 208,038 --
</TABLE>
Employment Agreements and Change in Control Arrangements
We have entered into the following employment agreements with our current
officers:
Employment Agreements with Messrs. Tyde, Sifry and LaDuke. In April 1999,
we entered into letter agreements with each of Messrs. Tyde, Sifry and LaDuke
regarding their employment. These agreements, as amended, provide that Messrs.
Tyde, Sifry and LaDuke will each be employed "at will" and paid an annual base
salary of $150,000. The agreements provide that if the respective officer's
employment is terminated without cause (as defined below), such officer will
become vested in a number of shares of our common stock as if such officer
provided services to us for an additional twelve months. In addition, the
stock purchase agreements, as amended, pursuant to which each of Messrs. Tyde,
Sifry and LaDuke purchased 1,000,000 shares of our common stock, give us a
right to repurchase those shares, which right shall lapse with respect to 25%
of such shares if a change in control (as defined in the stock purchase
agreements) occurs.
Under the employment agreements of Messrs. Tyde, Sifry and LaDuke, cause
means the commission of:
. any act of fraud, embezzlement or dishonesty,
. any unauthorized use or disclosure of our confidential information or
trade secrets (or any parent or subsidiary), or
. any other intentional misconduct adversely affecting our business or
affairs (or any parent or subsidiary) in a material manner.
Provided, however, that no cause shall exist unless our Board of Directors
has delivered to the respective officer a written demand for the performance
of specific, measureable tasks and the performance of such tasks has not been
improved within 30 days; and provided, further that no termination for cause
may occur until the respective officer has been afforded an opportunity to
appear in person before our Board of Directors and present evidence on his
behalf regarding the existence of cause.
Employment Agreement of Fernand Sarrat. In April 1999, we entered into an
employment agreement with Mr. Sarrat. This agreement provides that Mr. Sarrat
will be paid an annual base salary of $300,000 and a bonus payment of $100,000
in the first year of his employment. After the first year of his employment,
the amount of his salary and bonus will be determined by our Board of
Directors; however, he will be guaranteed a bonus of at least $50,000 a year.
Under his employment agreement, Mr. Sarrat was granted options to purchase
shares of our common stock at an exercise price of $0.07 per share and $0.13
per share, which will vest over a four-year period beginning on May 3, 2000.
If Mr. Sarrat's employment is terminated before all of his options vest, we
will have the right to repurchase any unvested shares at cost. If Mr. Sarrat's
employment is
47
<PAGE>
involuntarily terminated, other than for cause, or is constructively terminated
(as such terms are defined below) within the first year of his employment, he
is entitled to receive, as severance, nine months of continuation of his
salary, employee benefits and a pro-rated target bonus for such year. He will
also be entitled to 1/48 vesting of stock option shares each month through the
termination date. If such termination occurs within the second year of Mr.
Sarrat's employment, he is entitled to receive, as severance, 12 months of
continuation of his salary, employee benefits and a pro-rated target bonus. He
will also be entitled to 1/48 vesting of his stock options shares for an
additional 12 months after his termination date. If such termination occurs
after the second year of Mr. Sarrat's employment, he is entitled to receive as
severance, six months of continuation of his salary, employee benefits, a pro-
rated target bonus and the continuation of the vesting of his stock option
shares for an additional 12 months after his termination date.
Upon a change in control (as this term is defined below), 50% of Mr.
Sarrat's option shares that remain unvested will vest on the closing date of
such change in control. Following such acceleration, the remaining unvested
options shall continue to vest at the same monthly rate that applied prior to
the acceleration. Also, following a change in control, if Mr. Sarrat does not
execute a new employment agreement with the successor corporation and if the
successor corporation terminates his employment (other than for cause), or if
his employment is constructively terminated, then Mr. Sarrat will be entitled
to receive the severance benefits described above (excluding any additional
acceleration of vesting).
Pursuant to the terms of Mr. Sarrat's employment agreement and stock option
agreements, a change in control is defined as:
. The consummation of a merger or consolidation with or into another
entity or any other corporate reorganization if persons who are not our
stockholders immediately prior to such merger, consolidation or other
reorganization own immediately after such merger, consolidation or other
reorganization 50% or more of the voting power of the outstanding
securities of each of (A) the continuing or surviving entity and (B) any
direct or indirect parent corporation of such continuing or surviving
entity; or
. The sale, transfer or other disposition of all or substantially all of
our assets.
Involuntary termination is defined as:
. Termination other than for cause.
Cause is defined as:
. demonstrably willful misconduct which is materially injurious to us
which is not cured within 60 days following receipt of written notice
specifying such misconduct from our Board of Directors;
. conviction of a felony (other than traffic-related offenses); or
. gross negligence in the performance of duties.
Constructive termination is defined as voluntary resignation following:
. the assignment of duties and responsibilities that are incommensurate
with the duties and responsibilities immediately before resignation, or
any material reduction of the duties, authority, or responsibilities;
. a reduction by the company in the base salary or annual target bonus as
in effect immediately before such reduction; or
. Mr. Sarrat's relocation to a facility that is more than 50 miles from
Los Altos Hills, California.
Employment Agreements of Messrs. Paul, Walters, Phillips and Mrs. Lambs.
During 1999, we entered into letter agreements with Messrs. Paul, Walters,
Phillips and Mrs. Lambs regarding their employment. According to these
agreements, Messrs. Paul, Walters, Phillips and Mrs. Lambs will be employed "at
will" and paid an annual salary of $175,000, $250,000, $150,000 and $200,000,
respectively. Each will also be entitled to an
48
<PAGE>
annual performance-based bonus targeted to be $25,000, $50,000, $125,000 and
$50,000, respectively. According to their agreements, Messrs. Paul, Walters,
Phillips and Mrs. Lambs were granted options to purchase 340,000 shares at an
exercise price per share of $1.00, 300,000 shares at an exercise price per
share of $1.00, 290,533 shares at an exercise price per share of $0.13 and
415,049 shares at an exercise price per share of $0.13 of our common stock,
respectively. The options that are granted to each are also subject to the
provisions of their stock option agreements with us and our 1999 Stock Plan
that was in effect on the date of the grant of the options. These options will
vest proportionally over a four-year period beginning on the first anniversary
of their employment. If the employment of any officer is terminated before all
of such officer's options vest, we will have the right to repurchase any
unvested shares at the exercise price.
Limitations on Directors' and Officers' Liability and Indemnification
Our amended and restated certificate of incorporation limits the liability
of our directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability associated with any of the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemption; or
. any transaction from which the director derived an improper personal
benefit.
The limitation of our director's liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
misconduct of a culpable nature), to reimburse their expenses as incurred as a
result of any proceeding against them as to which they could be indemnified,
and to cover our directors and officers under any of our liability insurance
policies applicable to our directors and officers. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.
Our amended and restated certificate of incorporation and bylaws also
provide that we shall indemnify our directors and executive officers and may
indemnify our other officers and employees and other agents to the fullest
extent permitted by law. We believe that indemnification under our bylaws
covers at least negligence on the part of indemnified parties. Our bylaws also
permit us to secure insurance on behalf of any officer, director, employee or
other agent for any liability arising out of his or her actions in such
capacity, regardless of whether our bylaws would permit indemnification.
We have entered into indemnification agreements with each of our officers
and directors containing provisions that require us to, among other things,
indemnify such officers and directors against liabilities that may arise by
reason of their status or service as directors or officers (other than
liabilities arising from willful will generally remain exercisable for three
months. However, an option may never be exercised later than the expiration of
its term.
Stock Plans
Amended and Restated 1999 Stock Plan
Our 1999 Stock Plan was amended and restated by our Board of Directors on
January 18, 2000 and our stockholders approved the plan in February 2000. This
stock plan provides for the grant of incentive stock options to our employees
and nonstatutory stock options and stock purchase rights to our employees,
directors and consultants. As of December 31, 1999, we have issued 2,526,312
shares of our common stock pursuant to the exercise of options granted under
our stock plan and we have outstanding options to purchase 3,158,210 shares of
common stock at a weighted average exercise price of $0.31 per share.
49
<PAGE>
Number of Shares of Common Stock Available under our 1999 Stock Plan. As of
December 31, 1999, a total of 618,216 shares of our common stock have been
reserved for issuance pursuant to our stock plan plus an annual increase
beginning in 2001 equal to the lesser of 5% of the outstanding shares of our
common stock on the first day of our fiscal year, 4,000,000 shares or such
lesser amount as our board of directors may determine.
Administration of the 1999 Stock Plan. Our Board of Directors or a committee
of our Board of Directors administers the stock plan. The committee may consist
of two or more "outside directors" to satisfy certain tax and securities
requirements. The administrator has the power to determine the terms of the
options or stock purchase rights granted, including the exercise price, the
number of shares subject to each option or stock purchase right, the
exercisability of the options and the form of consideration payable upon
exercise.
Options. The administrator determines the exercise price and term of options
granted under our stock plan. With respect to incentive stock options, however,
the exercise price must at least be equal to the fair market value of our
common stock on the date of grant and its term may not exceed ten years.
No optionee may be granted an option to purchase more than 3,000,000 shares
in any fiscal year. In connection with his or her initial service, an optionee
may be granted an option to purchase up to an additional 3,000,000 shares of
our common stock.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. If termination is due to death, the option will generally remain
exercisable for 12 months following such termination. If termination is due to
disability, the option will generally remain exercisable for 6 months following
such termination. In all other cases, the option will generally remain
exercisable for three months. However, an option may never be exercised later
than the expiration of its term.
Stock Purchase Rights. The administrator determines the exercise price of
stock purchase rights granted under our stock plan. Unless the administrator
determines otherwise, the restricted stock purchase agreement that an optionee
will enter into upon the exercise of options will grant us a repurchase option
that we may exercise upon the voluntary or involuntary termination of the
purchaser's service with us for any reason (including death or disability). The
purchase price for shares we repurchase will generally be the original price
paid by the purchaser. The administrator determines the rate at which our
repurchase option will lapse.
Transferability of Options and Stock Purchase Rights. Our stock plan
generally does not allow for the transfer of options or stock purchase rights
and only the optionee may exercise an option and stock purchase right during
his or her lifetime.
Adjustments upon Merger or Asset Sale. Our stock plan provides that in the
event of our merger with or into another corporation or a sale of substantially
all of our assets, the successor corporation will assume or substitute an
equivalent option or right for each outstanding option or stock purchase right.
If the outstanding options or stock purchase rights are not assumed or
substituted for, all outstanding options and stock purchase rights will vest
and become exercisable and terminate as of the closing of such merger or sale
of assets.
Amendment and Termination of our stock plan. Our stock plan will
automatically terminate in 2009, unless we terminate it sooner. In addition,
our Board of Directors has the authority to amend, suspend or terminate the
stock plan provided that it does not adversely affect any option previously
granted under our stock plan.
2000 Employee Stock Purchase Plan
Our Board of Directors adopted the 2000 Employee Stock Purchase Plan on
January 18, 2000 and our stockholders approved the plan in February 2000.
Number of Shares of Common Stock Available under the Employee Stock Purchase
Plan. A total of 1,000,000 shares of our common stock will be made available
for sale. In addition, the plan provides for annual
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<PAGE>
increases in the number of shares available for issuance under the purchase
plan beginning in 2001, equal to the lesser of 2% of the outstanding shares of
our common stock on the first day of our fiscal year, 1,000,000 shares, or such
other lesser amount as may be determined by our Board of Directors.
Administration of the Employee Stock Purchase Plan. Our Board of Directors
or a committee of our board administers the plan. Such administrator has full
and exclusive authority to interpret the terms of the plan and determine
eligibility.
Eligibility to Participate. All of our employees are eligible to participate
if they are customarily employed by us or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar year.
However, an employee may not be permitted to purchase stock under the plan if
such employee:
. immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
. whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
Offering Periods and Contributions. Our plan is intended to qualify for
special tax treatment and contains consecutive, overlapping 24-month offering
periods. Each offering period includes four 6-month purchase periods. The
offering periods generally start on the first trading day on or after November
1 and May 1 of each year, except for the first such offering period which will
commence on the first trading day on or after the effective date of this
offering and will end on the last trading day on or before April 30, 2002.
The plan permits participants to purchase common stock through payroll
deductions of up to 10% of their eligible compensation which includes a
participant's base straight time gross earnings and commissions but excluding
all other compensation paid to our employees. A participant may purchase no
more than 5,000 shares during any 6-month purchase period.
Purchase of Shares. Amounts deducted and accumulated by the participant are
used to purchase shares of our common stock at the end of each 6-month purchase
period. The price is 85% of the lower of the fair market value of our common
stock at the beginning of an offering period or the last day of a purchase
period ends. If the fair market value at the end of a purchase period is less
than the fair market value at the beginning of the offering period,
participants will be withdrawn from the current offering period following their
purchase of shares on the purchase date and will be automatically re-enrolled
in a new offering period. Participants may end their participation at any time
during an offering period, and will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with us.
Transferability of Rights. A participant may not transfer rights granted
under the plan other than by will, the laws of descent and distribution or as
otherwise provided under the plan.
Adjustments upon Merger or Asset Sale. In the event of our merger with or
into another corporation or a sale of all or substantially all of our assets, a
successor corporation may assume or substitute each outstanding option. If the
successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set.
Amendment and Termination of the Employee Stock Purchase Plan. The plan will
terminate by its terms in 2010. Our Board of Directors has the authority to
amend or terminate our plan, except that, subject to certain exceptions
described in the plan, no such action may adversely affect any outstanding
rights to purchase stock under our plan.
2000 Director Option Plan
Our Board of Directors adopted the 2000 Director Option Plan on January 18,
2000 and our stockholders approved it in February 2000. The director plan
provides for the periodic grant of nonstatutory stock options to our non-
employee directors.
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<PAGE>
Number of Shares Available under the Director Plan. As of February 2000, a
total of 300,000 shares of our common stock were reserved for issuance under
our director option plan, none of which were issued and outstanding as of this
date.
Options. Each non-employee director who joins our Board of Directors after
the effective date of this offering will automatically receive an option to
purchase 20,000 shares on the date on which such person becomes a director. All
non-employee directors who have been directors for at least the preceding 6
months receive an option to purchase 5,000 shares each year on the date of our
annual stockholders meeting.
All options granted under our director option plan have a term of ten years
and an exercise price equal to the fair market value per share of common stock
determined on the date of grant. The option granted initially to non-employee
directors becomes exercisable over four years as follows: 25% on each
anniversary of the date of grant, provided that the non-employee director
remains a director on such dates. The option granted to non-employee directors
on the date of our annual stockholders meeting becomes exercisable as to 100%
of the shares subject to the option on the first anniversary of the date of
grant.
After termination as a non-employee director with us, an optionee must
exercise an option at the time set forth in his or her option agreement. If
termination is due to death, the option will remain exercisable for 12 months
following the date of death. If termination is due to disability, the option
will remain exercisable for 6 months following the date of termination. In all
other cases, the option will remain exercisable for a period of 3 months.
However, an option may never be exercised later than the expiration of its
term.
Transferability of Options. A non-employee director may not transfer options
granted under our director option plan other than by will or the laws of
descent and distribution. Only the non-employee director may exercise the
option during his or her lifetime.
Adjustments upon Merger or an Asset Sale. In the event of our merger with or
into another corporation or a sale of substantially all of our assets, the
successor corporation may assume or substitute an equivalent option for each
outstanding option. If such assumption or substitution occurs, the options will
continue to be exercisable according to the same terms as before the merger or
sale of assets. Following such assumption or substitution, if a non-employee
director is terminated other than by voluntary resignation, the option will
become fully exercisable and generally will remain exercisable for a period of
3 months. If the outstanding options are not assumed or substituted for, our
Board of Directors will notify each non-employee director that he or she has
the right to exercise the option as to all shares subject to the option for a
period of 30 days following the date of the notice. The option will terminate
upon the expiration of the 30-day period.
Amendment and Termination of the Director Option Plan. Unless terminated
sooner, our director plan will automatically terminate in 2010. Our Board of
Directors has the authority to amend, alter, suspend, or discontinue the
director option plan, but no such action may adversely affect any grant made
under the director option plan.
401(k) Plan
We adopted a 401(k) Plan effective January 1999 covering our employees who
are 21 years old as of the effective date of the 401(k) Plan. Employees become
eligible to participate in the 401(k) Plan on the first day of the month
following their date of hire. The 401(k) Plan excludes nonresident alien
employees. The 401(k) Plan is intended to qualify under Section 401(k) of the
United States Internal Revenue Code, so that contributions to the 401(k) Plan
by employees or by us and the investment earnings thereon are not taxable to
the employees until withdrawn. If our 401(k) Plan qualifies under Section
401(k) of the United States Internal Revenue Code,
our contributions will be deductible by us when made. Our employees may elect
to reduce their current compensation by up to the statutorily prescribed annual
limit of $10,500 in 2000 and to have those funds contributed to the 401(k)
Plan. The 401(k) Plan permits us, but does not require us, to make additional
matching contributions on behalf of all participants. To date, we have not made
any contributions to the 401(k) Plan.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Preferred Stock
On February 1, 1999, and April 16, 1999 we sold an aggregate of 2,636,916
shares and 5,246,008 shares, respectively, of our Series A Preferred Stock at a
purchase price of $0.61625 per share (as adjusted for a two-for-one stock split
which occurred in April 1999). On December 17, 1999, we sold an aggregate of
7,082,267 shares of our Series B Preferred Stock at a purchase price of $4.728
per share. The following officers, directors and 5% stockholders purchased
shares in these financings:
<TABLE>
<CAPTION>
Series A Stock Series B Stock
-------------------- --------------------
Shares Aggregate Shares Aggregate
Purchaser Purchased Price Paid Purchased Price Paid
- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Patricof & Co. Entities (1):
APA Excelsior V, L.P................ -- -- 1,671,742 $7,903,996
Patricof Private Investment Club II,
L.P................................ -- -- 20,305 $ 96,002
Apax Europe IV--A, L.P. ............ -- -- 423,012 $2,000,000
KPCB Holdings, Inc. (2).............. 4,381,340 $2,700,000 1,057,529 $4,999,997
McKenna Ventures L.P. (3)............ -- -- 52,876 $ 249,998
John Drew............................ -- -- 423,011 $1,999,996
Ernest von Simson.................... -- -- 52,876 $ 249,998
</TABLE>
- --------
(1) APA Excelsior V, L.P., Patricof Private Investment Club II, L.P. and Apax
Europe IV-A, L.P. are affiliated entities and together are considered a 5%
stockholder. Mr. Vais, one of our directors, is a general partner of
Patricof & Co., an entity affiliated with APA Excelsior V, L.P., Patricof
Private Investment Club II, L.P. and Apax Europe IV-A, L.P. Mr. Vais
disclaims beneficial ownership of the securities held by such entities,
except for his proportional interest in the entities.
(2) KPCB Holdings, Inc. is considered a 5% stockholder and Mr. Schlein, one of
our directors, is a general partner of Kleiner Perkins Caufield & Byers, an
entity affiliated with KPCB Holdings, Inc. Mr. Schlein disclaims beneficial
ownership of the securities held by KPCB Holdings, Inc., except for his
proportional interest in the entity.
(3) Regis McKenna, one of our directors, is a general partner of The McKenna
Group, an entity affiliated with McKenna Ventures L.P. Mr. McKenna shares
voting control of the securities held by such entity.
Other Material Transactions
Investor Rights Agreement
We have entered into an agreement with the preferred stockholders described
above pursuant to which these and other preferred stockholders will have
registration rights with respect to their shares of common stock following this
offering. For a description of these registration rights, see "Description of
Capital Stock." Upon the completion of this offering, all shares of our
outstanding preferred stock will be automatically converted into an equal
number of shares of common stock.
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<PAGE>
Stock Option Grants to Certain Officers and Directors
During 1999, we granted the following options to purchase our common stock
to our officers, directors and stockholders who beneficially own 5% or more of
our common stock.
<TABLE>
<CAPTION>
Exercise Price
Name Date of Grant Options Per Share
- ---- ------------- --------- --------------
<S> <C> <C> <C>
Fernand B. Sarrat........................ 5/3/99 1,660,194 $0.07
Fernand B. Sarrat........................ 10/21/99 204,918 $0.13
Patricia Lambs........................... 10/21/99 415,049 $0.13
Thomas W. Phillips....................... 10/21/99 290,533 $0.13
Robert V. Walters........................ 12/9/99 300,000 $1.00
Christian A. Paul........................ 12/9/99 340,000 $1.00
Douglas C. Nassaur....................... 11/16/99 415,049 $0.13
Regis McKenna............................ 10/21/99 50,000 $0.13
Ernest von Simson........................ 10/21/99 50,000 $0.13
John Drew................................ 11/24/99 100,000 $1.00
</TABLE>
Indemnification and Employment Agreements
We have entered into indemnification agreements with each of our directors
and officers. Such indemnification agreements require us to indemnify our
directors and officers to the fullest extent permitted by Delaware law. For a
description of the limitation of our directors' liability and our
indemnification of such officers, see "Management--Limitation on Directors' and
Officers' Liability and Indemnification."
For a description of employment agreements we entered into with our
officers, see "Management--Employment Agreements and Change in Control
Arrangements."
Agreements with Directors or Executive Officers
In May 1999, Mr. Sarrat was granted options to purchase 1,660,194 shares of
common stock at an exercise price of $.07 per share. Mr. Sarrat exercised the
options by paying cash for the par value of the shares and executed a full-
recourse promissory note for $116,048, the balance of the purchase price. The
note is secured by a stock pledge agreement which pledges the underlying shares
of common stock as collateral. The note bears interest at a rate of 5.22%.
In December 1999, Mr. Paul was granted options to purchase 340,000 shares of
common stock at an exercise price of $1.00 per share. Mr. Paul exercised the
options by paying cash for the par value of the shares and executed a full-
recourse promissory note for $339,966, the balance of the purchase price. The
note is secured by a stock pledge agreement which pledges the underlying shares
of common stock as collateral. The note bears interest at a rate of 6.2%.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of January 31, 2000, and as
adjusted to reflect the sale of common stock offered hereby by the following:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. each of our executive officers named in the compensation table above;
. each of our directors; and
. all directors and executive officers as a group.
As of January 31, 2000, there were 25,688,221 shares of our common stock
outstanding, assuming that all outstanding preferred stock has been converted
into common stock. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, on the information
furnished by such owners, have sole voting power and investment power with
respect to such shares. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percent ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after
January 31, 2000 are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percent ownership of any other person.
The address for those individuals for which an address is not otherwise
indicated in the table below is Linuxcare, Inc., 650 Townsend Street, San
Francisco, California 94103.
<TABLE>
<CAPTION>
Percentage of
Shares Shares Outstanding
Beneficially -----------------------
Owned Prior to Prior To
Name or group of beneficial owners Offering Offering After Offering
---------------------------------- -------------- -------- --------------
<S> <C> <C> <C>
Directors And Executive Officers
Ted E. Schlein(1)....................... 5,491,068 21.3% 18.2%
Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Paul Vais(2)............................ 2,199,456 8.6 7.3
Patricof & Co.
2100 Geng Road
Palo Alto, CA 94303
John Drew(3)............................ 535,890 2.1 1.8
Regis McKenna(4)........................ 104,486 * *
The McKenna Group
1409 Galloway Court
Sunnyvale, CA 94087
Ernest von Simson(5).................... 104,486 * *
Arthur Tyde III(6)...................... 2,000,000 7.8 6.6
Fernand Sarrat(7)....................... 1,865,112 7.3 6.2
Christian Paul(8)....................... 340,000 1.3 1.1
David LaDuke(6)......................... 2,000,000 7.8 6.6
David L. Sifry(6)....................... 2,000,000 7.8 6.6
Robert V. Walters(9).................... 300,000 1.2 *
Thomas W. Phillips(9)................... 290,533 1.1 *
Douglas C. Nassaur(9)................... 415,049 1.6 1.4
Patricia Lambs(9)....................... 415,049 1.6 1.4
All Officers and Directors (14
persons)(10)........................... 18,061,129 70.3 59.8
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares Shares Outstanding
Beneficially -----------------------
Owned Prior to Prior To
Name or group of beneficial owners Offering Offering After Offering
---------------------------------- -------------- -------- --------------
<S> <C> <C> <C>
5% Stockholders
KPCB Holdings, Inc.(1).................. 5,491,068 21.3% 18.2%
Patricof & Company(2)................... 2,199,456 8.6 7.3
David LaDuke(6)......................... 2,000,000 7.8 6.6
David Sifry(6).......................... 2,000,000 7.8 6.6
Arthur F. Tyde III(6)................... 2,000,000 7.8 6.6
Fernand Sarrat(7)....................... 1,865,112 7.3 6.2
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 5,471,068 shares held by KPCB Holdings, Inc. Mr. Schlein is a
general partner of Kleiner Perkins Caufield & Byers and has signature
authority for KPCB Holdings, Inc. Mr. Schlein disclaims beneficial
ownership of shares held by KPCB Holdings, Inc. except to the extent of
his pecuniary interest in it. Includes an option exercisable for 20,000
shares, of which all 20,000 shares may be exercised by Mr. Schlein and
upon exercise will become subject to our right of repurchase, which lapses
over time.
(2) Includes 1,722,642 shares held by APA Excelsior V, L.P., 435,891 shares
held by Apax Europe IV-A, L.P. and 20,923 Patricof Private Investment Club
II, L.P. Mr. Vais is the managing director of Patricof & Company, and has
signature authority for APA Excelsior V, L.P., Apax Europe IV-A, L.P., and
Patricof Private Investment Club II, L.P. Mr. Vais disclaims beneficial
ownership of shares held by these entities except to the extent of his
pecuniary interest in it. Includes an option exercisable for 20,000 shares
of which all 20,000 shares may be exercised by Mr. Vais and upon exercise
will become subject to our right of repurchase, which lapses over time.
(3) Includes 100,000 shares subject to our right of repurchase, which lapses
over time.
(4) Includes 54,486 shares held by McKenna Ventures, L.P. Mr. McKenna is the
chairman of The McKenna Group and has signature authority for McKenna
Ventures. Mr. McKenna disclaims beneficial ownership of shares held by
this entity except to the extent of his pecuniary interest in this entity.
Mr. McKenna also holds an option exercisable for 50,000 shares, of which
all 50,000 shares may be exercised by Mr. McKenna and upon exercise will
become subject to our right of repurchase, which lapses over time.
(5) Includes an option exercisable for 50,000 shares, of which all 50,000
shares may be exercised by Mr. von Simson and upon exercise will become
subject to our right of repurchase, which lapses over time.
(6) Includes 1,500,000 shares subject to our right of repurchase, which lapses
over time.
(7) Includes 1,398,834 shares subject to our right of repurchase, which lapses
overtime.
(8) Includes 255,000 shares subject to our right of repurchase, which lapses
overtime.
(9) The number of shares shown represents shares subject to options that are
currently exerciseable and upon exercise will become subject to our right
of repurchase, which lapses over time.
(10) Includes the shares beneficially owned by the persons and entities
described in footnotes (1) through (9).
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
205,000,000 shares, $0.0001 par value per share, to be divided into two classes
to be designated common stock and preferred stock. Of the shares authorized,
200,000,000 shares shall be designated as common stock and 5,000,000 shares
shall be designated as preferred stock. The following description of our
capital stock is only a summary. You should refer to our certificate of
incorporation and bylaws as in effect upon the closing of this offering, which
are included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.
Common Stock
As of January 31, 2000, and assuming the conversion of all outstanding
shares of preferred stock into common stock, there were 25,688,221 shares of
common stock outstanding which were held of record by approximately 60
stockholders. There will be 30,188,221 shares of common stock outstanding
(assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding options) after giving effect to the sale of our common
stock in this offering. In addition to 2,876,001 shares issuable upon exercise
of outstanding options under our 1999 Stock Plan, there are an aggregate of
1,300,000 shares reserved for issuance under our 2000 Employee Stock Purchase
Plan and 2000 Director Option Plan. See "Management--Stock Plans" for a
description of our stock plans.
The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our amended and
restated certificate of incorporation to be filed concurrently with completion
of this offering, does not provide for cumulative voting in the election of
directors. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by our Board of
Directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock, if any, then
outstanding. Holders of our common stock have no preemptive or other
subscription or conversion rights. There are no redemption or sinking fund
provisions applicable to our common stock. All outstanding shares of common
stock are fully paid and non-assessable, and the shares of common stock to be
issued upon the completion of this offering will be fully paid and non-
assessable.
Preferred Stock
Upon the completion of this offering and filing of our amended and restated
certificate of incorporation, our Board of Directors will be authorized,
without action by the stockholders, to issue 5,000,000 shares of preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof. These rights, preferences and privileges may include
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of any series, all or any of which
may be greater than the rights of the common stock.
The issuance of preferred stock could adversely affect the voting power of
holders of common stock and the likelihood that the holders of common stock
will receive dividend payments and payments upon liquidation. In addition, the
issuance of preferred stock could have the effect of delaying or preventing a
change in our control without further action by the stockholders. We have no
present plans to issue any shares of preferred stock.
Registration Rights
Pursuant to a registration rights agreement we entered into with holders of
15,269,436 shares of our common stock (assuming conversion of all outstanding
shares of preferred stock), the holders of these shares are entitled to
57
<PAGE>
certain registration rights regarding these shares. The registration rights
provide that if we propose to register any securities under the Securities Act,
either for our own account or for the account of other security holders
exercising registration rights, they are entitled to notice of the registration
and are entitled to include shares of their common stock in the registration.
This right is subject to conditions and limitations, including the right of the
underwriters in an offering to limit the number of shares included in the
registration. The holders of these shares may also require us to file up to two
registration statements under the Securities Act at our expense with respect to
their shares of common stock. We are required to us our best efforts to effect
this registration, subject to conditions and limitations. Furthermore, the
holders of these shares may require us to file additional registration
statements on Form S-3, subject to conditions and limitations. These rights
terminate on the earlier of five years after the effective date of this
offering or the date on which a holder is able to sell all its shares pursuant
to Rule 144 under the Securities Act in any 90-day period.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make our acquisition more difficult by means of a tender offer, a
proxy contest or otherwise and could also make the removal of incumbent
officers and directors more difficult. These provisions, summarized below, are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
us to first negotiate with us. We believe that the benefits of increased
protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweighs the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
The amendment of any of the following provisions would require approval by
holders of at least 66 2/3% of our outstanding common stock.
Board of Directors
Effective with the first annual meeting of stockholders following completion
of this offering, our amended and restated bylaws provide for the division of
our Board of Directors into three classes, as nearly equal in number as
possible, with the directors in each class serving for a three-term, and 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 us and may maintain the
incumbency of the Board of Directors, as it generally makes it more difficult
for stockholders to replace a majority of the directors. Further, our amended
and restated certificate of incorporation and restated bylaws do not provide
for cumulative voting in the election of directors.
Stockholder Meetings
Under our amended and restated certificate of incorporation and amended and
restated bylaws, only our Board of Directors, Chairman of the Board, Chief
Executive Officer or the holders of a majority of the outstanding stock may
call special meetings of stockholders. Our restated bylaws establish advance
notice procedures with respect to stockholder proposals and the nomination of
candidates for election as directors, other than nominations made by or at the
direction of the Board of Directors or a committee thereof. In addition, our
amended and restated certificate of incorporation eliminates the right of
stockholders to act by written consent without a meeting and eliminates
cumulative voting.
Undesignated Preferred Stock
The authorization of undesignated preferred stock makes it possible for the
Board of Directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
us. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management.
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<PAGE>
Section 203
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three
years following the date that the stockholder became an interested stockholder
unless:
. prior to the date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to the date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by
the interested stockholder.
Section 203 defines "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
. subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Norwest Bank
Minnesota, N.A.
Nasdaq Stock Market National Market Listing
We will apply to list our common stock on The Nasdaq Stock Market's National
Market under the symbol "LXCR."
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock.
Future sales of substantial amounts of our common stock in the public market
following this offering or the possibility of such sales occurring could
adversely affect market prices for our common stock or could impair our ability
to raise capital through an offering of equity securities. Furthermore, since
no shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale as described below, sales of
substantial amounts of our common stock in the public after these restrictions
lapse could adversely affect the prevailing market price and our ability to
raise equity capital in the future.
Upon completion of this offering, we will have 30,188,221 shares of common
stock outstanding (assuming conversion of all of the currently outstanding
shares of preferred stock) based on shares outstanding as of January 18, 2000
and assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding options. Of these shares, all of the shares sold in
this offering will be freely transferable without restriction under the
Securities Act of 1933, unless these shares are purchased by "affiliates" as
that term is used under the Securities Act and the Regulations promulgated
thereunder.
Of these shares, the remaining 25,688,221 shares as of January 31, 2000,
which were sold by us in reliance on exemptions from the registration
requirements of the Securities Act, are restricted securities within the
meaning of Rule 144 under the Securities Act and become eligible for sale in
the public market as follows:
. no shares will be eligible for immediate sale on the date the
registration statement of which this prospectus is a part is declared
effective;
. no shares will be eligible for sale prior to 180 days from the date the
registration statement of which this prospectus is a part is declared
effective; and
. beginning 181 days after the effective date, 25,688,221 shares will
become eligible for sale, subject to the provisions of Rules 144 or 701,
upon the expiration of agreements not to sell such shares entered into
between the underwriters and such stockholders.
Beginning 180 days after the date of this prospectus, approximately
additional shares subject to vested options as of the date of completion of
this offering will be available for sale subject to compliance with Rule 701
and upon the expiration of agreements not to sell such shares entered into
between the underwriters and such stockholders. Any shares subject to lock-up
agreements may be released at any time without notice by the underwriters.
In general, under Rule 144 as currently in effect, a person (or group of
persons whose shares are aggregated), including an affiliate, who has
beneficially owned restricted shares for at least one year is entitled to sell,
within any three-month period commencing 90 days after the date of completion
of this offering, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of common stock (approximately 325,882 shares
immediately after this offering), or the average weekly trading volume in the
common stock during the four calendar weeks preceding such sale, subject to the
filing of a Form 144 with respect to such sale and certain other limitations
and restrictions. In addition, a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years, would
be entitled to sell such shares without regard to the requirements described
above.
Any of our employees, officers or directors of or consultant who purchased
his or her shares prior to the date of completion of this offering or who holds
vested options as of that date pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701, which
permits non-affiliates to sell their Rule 701 shares 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 Rule 144's holding-period restrictions, in each
case commencing 90 days after the date
60
<PAGE>
of completion of this offering. However, we and our officers, directors and
stockholders have agreed not to sell or otherwise dispose of any shares of our
common stock for the 180-day period after the date of this prospectus without
the prior written consent of the underwriters. See "Underwriting."
As soon as practicable after the effective date of the registration
statement of which this prospectus is a part, we intend to file a registration
statement on Form S-8 under the Securities Act to register shares of common
stock issuable under our 1999 Stock Plan our 2000 Director Option Plan, and our
2000 Employee Stock Purchase Plan, thus permitting the resale of such shares by
non-affiliates in the public market without restriction under the Securities
Act. Such registration statement will become effective immediately upon filing.
Prior to this offering, there has been no public market for our common
stock, and any sale of substantial amounts in the open market may adversely
affect the market price of our common stock offered hereby.
61
<PAGE>
UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the principal U.S. federal income
and estate tax consequences of the ownership and disposition of our common
stock by a Non-U.S. Holder. As used in this prospectus, the term "Non-U.S.
Holder" is a person other than:
. a citizen or individual resident of the United States,
. a corporation or other entity taxable as a corporation that is created
or organized in or under the laws of the United States or of any
political subdivision of the United States,
. an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source, or
. a trust, the administration of which is subject to the primary
supervision of a court within the United States and for which one or
more U.S. persons have the authority to control all substantial
decisions.
If a partnership holds our common stock, the tax treatment of a partner
generally will depend upon the status of the partner and upon the activities of
the partnership. Partners of partnerships holding our common stock should
consult their tax advisors.
This discussion does not consider:
. U.S. state and local or non-U.S. tax consequences,
. the tax consequences for the shareholders, partners or beneficiaries of
a Non-U.S. Holder,
. special tax rules that may apply to certain Non-U.S. Holders, including
without limitation, banks, insurance companies, dealers in securities
and traders in securities, or
. special tax rules that may apply to a Non-U.S. Holder that holds our
common stock as part of a "straddle," "hedge" or "conversion
transaction."
The following discussion is based on provisions of the U.S. Internal Revenue
Code of 1986, applicable Treasury regulations, and administrative and judicial
interpretations, all as of the date of this prospectus, and all of which may
change, retroactively or prospectively. The following summary is for general
information. Accordingly, each Non-U.S. Holder should consult a tax advisor
regarding the U.S. federal, state, local and non-U.S. income and other tax
consequences of acquiring, holding and disposing of shares of our common stock.
Dividends
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Dividend Policy." In the event, however, that
dividends are paid on shares of common stock, dividends paid to a Non-U.S.
Holder of common stock generally will be subject to withholding of U.S. federal
income tax at a 30% rate, or such lower rate as may be provided by an
applicable income tax treaty. Non-U.S. Holders should consult their tax
advisors regarding their entitlement to benefits under a relevant income tax
treaty.
Dividends that are effectively connected with a Non-U.S. Holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment, or in the case of an individual, a
"fixed base," in the United States, as provided in that treaty ("U.S. trade or
business income"), are generally subject to U.S. federal income tax on a net
income basis at regular graduated rates, but are not generally subject to the
30% withholding tax if the Non-U.S. Holder files the appropriate U.S. Internal
Revenue Service form with the payor. Any U.S. trade or business income received
by a Non-U.S. Holder that is a corporation may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or such lower rate as specified by an applicable income tax treaty.
62
<PAGE>
Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes
of determining the applicability of a tax treaty rate. For dividends paid after
2000, a Non-U.S. Holder of common stock who claims the benefit of an applicable
income tax treaty rate generally will be required to satisfy applicable
certification and other requirements.
A Non-U.S. Holder of common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund or credit
of any excess amounts withheld by filing an appropriate claim for a refund with
the IRS.
Gain on disposition of common stock
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of common stock unless:
. the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate Non-U.S.
Holder;
. the Non-U.S. Holder is an individual who holds the common stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code, is present in the United States for more than 182 days in the
taxable year of the disposition and meets certain other requirements;
. the Non-U.S. Holder is subject to tax pursuant to the provisions of the
U.S. tax law applicable to certain U.S. expatriates; or
. we are or have been a "U.S. real property holding corporation" for
federal income tax purposes at any time during the shorter of a five-
year period ending on the date of disposition or the period that the
Non-U.S. Holder held our common stock.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property
interests plus its other assets used or held for use in a trade or business. We
believe that we have not been, are not currently, and do not anticipate
becoming, a "U.S. real property holding corporation" for U.S. federal income
tax purposes. The tax relating to stock in a "U.S. real property holding
corporation" will not apply to a Non-U.S. Holder whose holdings, direct and
indirect, at all times during the applicable period, constituted 5% or less of
the common stock, provided that the common stock was regularly traded on an
established securities market.
Federal estate tax
Common stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes, unless an applicable estate tax or other
treaty provides otherwise and, therefore, may be subject to U.S. federal estate
tax.
Information reporting and backup withholding tax
We must report annually to the IRS and to each Non-U.S. Holder the amount of
dividends paid to that holder and the tax withheld with respect to those
dividends. Copies of the information returns reporting those dividends and
withholding may also be made available to the tax authorities in the country in
which the Non-U.S. Holder is a resident under the provisions of an applicable
income tax treaty or agreement.
Under certain circumstances, U.S. Treasury Regulations require information
reporting and backup withholding at a rate of 31% on certain payments on common
stock. Under currently applicable law, Non-U.S. Holders of common stock
generally will be exempt from these information reporting requirements and from
backup withholding on dividends paid prior to 2001 to an address outside the
United States. For dividends paid
63
<PAGE>
after 2000, however, a Non-U.S. Holder of common stock that fails to certify
its Non-U.S. Holder status in accordance with U.S. Treasury Regulations may be
subject to backup withholding at a rate of 31% on payments of dividends.
The payments of the proceeds of the disposition of common stock by a holder
to or through the U.S. office of a broker or through a non-U.S. broker
generally will be subject to information reporting and backup reporting at a
rate of 31% unless the holder either certifies its status as a Non-U.S. Holder
under penalties of perjury or otherwise establishes an exemption. The payment
of the proceeds of the disposition by a Non-U.S. Holder of common stock to or
through a non-U.S. office of a non-U.S. broker will not be subject to backup
withholding or information reporting unless a non-U.S. broker is a "U.S.
related person." In the case of the payment of proceeds from the disposition of
common stock by or through a non-U.S. office of a broker that is a U.S. person
or a "U.S. related person," information reporting, but currently not backup
withholding, on the payment applies unless the broker receives a statement from
the owner, signed under penalty of perjury, certifying its non-U.S. status or
the broker has documentary evidence in its files that the holder is a Non-U.S.
Holder and the broker has no actual knowledge to the contrary. For this
purpose, a "U.S. related person" is:
. a "controlled foreign corporation" for U.S. federal income tax purposes;
. a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year
preceding the payment, or for such part of the period that the broker
has been in existence, is derived from activities that are effectively
connected with the conduct of a U.S. trade or business; or
. effective after 2000, a foreign partnership if, at any time during the
taxable year, (A) at least 50% of the capital or profits interest in the
partnership is owned by U.S. persons, or (B) the partnership is engaged
in a U.S. trade or business.
Effective after 2000, backup withholding may apply to the payment of
disposition proceeds by or through a non-U.S. office of a broker that is a U.S.
person or a "U.S. related person" unless certain certification requirements are
satisfied or an exemption is otherwise established and the broker has no actual
knowledge that the holder is a U.S. person. Non-U.S. Holders should consult
their own tax advisors regarding the application of the information reporting
and backup withholding rules to them, including changes to these rules that
will become effective after 2000.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the IRS.
64
<PAGE>
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, FleetBoston Robertson
Stephens Inc. and Chase Securities Inc. are acting as representatives, the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
FleetBoston Robertson Stephens Inc. ...............................
Chase Securities Inc...............................................
---------
Total............................................................ 4,500,000
=========
</TABLE>
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 675,000 additional shares 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 compensation we will pay to the underwriters will consist solely of the
underwriting discount, which is equal to the public offering price per share of
common stock less the amount the underwriters pay to us per share of common
stock. The underwriters have not received and will not receive from us any
other item of compensation or expense in connection with this offering
considered by the National Association of Securities Dealers, Inc. to be
underwriting compensation under its rules of fair practice. The underwriting
fee will be determined based upon our negotiations with the underwriters at the
time the initial public offering price of our common stock is determined.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts
and Commissions
paid by us............. $ $ $ $
Expenses payable by us.. $0.44 $0.41 $2,000,000 $2,100,000
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
65
<PAGE>
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to, any additional shares of our common stock or securities
convertible into or exchangeable or exercisable for any of our 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.
Our officers, directors and certain other of our security holders 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 any swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our common stock,
whether any such aforementioned 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 225,000 shares of the common stock for employees, directors and
certain other individuals involved in the Linux community who are associated
with us and have expressed an interest in purchasing common stock in the
offering. The number of shares available for sale to the general public in the
offering will be reduced to the extent such persons purchase such reserved
shares. 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 of 1933, or contribute to payments which the underwriters may be
required to make in that respect.
We will apply to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "LXCR."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for our common stock will be
determined by negotiation between us and the representatives and may not
reflect the market price for the common stock following the offering. The
principal factors considered in determining the initial public offering price
will be:
. the information in this prospectus and otherwise available to the
representatives;
. the history of and the prospects for the industry in which we will
compete;
. the capability of our management;
. our past and present operations;
. our past and present earnings;
. the prospects for our future earnings;
. the present state of our development and our current financial
condition;
. the general condition of the securities markets at the time of this
offering;
. and the recent market prices of, and the demand for, publicly traded
common stock of generally comparable companies.
We can offer no assurances that the initial public offering price will
correspond to the price at which our common stock will trade in the public
market subsequent to the offering or that an active trading market for our
common stock will develop and continue after this offering.
66
<PAGE>
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.
. 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.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate member is purchased in a stabilizing transaction or a
syndicate covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
67
<PAGE>
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.
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 (i) 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, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) 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
herein 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 the
issuer or such 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 in 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 with 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.
68
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. The underwriters are being represented by
Cravath, Swaine & Moore, New York, New York. As of the date of this prospectus,
WS Investment Company 99B, an investment partnership composed of certain
current and former members of and persons associated with Wilson Sonsini
Goodrich & Rosati, Professional Corporation, beneficially owns an aggregate of
10,897 shares of Linuxcare, Inc. common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1999 and December 31, 1998, and for the
year ended December 31, 1999 and for period from December 9, 1998 (inception)
to December 31, 1999 and the financial statements of The Puffin Group Inc. at
September 30, 1999 and December 31, 1998 and for the nine months ended
September 30, 1999 and for the period from December 14, 1998 (inception) to
December 31, 1998, as set forth in their reports. We have included our
financial statements and the financial statements of The Puffin Group Inc. in
the prospectus and elsewhere in the registration statement in reliance on Ernst
& Young LLP's reports, given upon the authority of such firm as experts in
accounting and auditing.
Reconta Ernst & Young S.p.A., independent auditors, have audited the
financial statements of Prosa Progettazione Suiluppo Aperto S.r.l. at December
31, 1999 and 1998, and for the year ended December 31, 1999 and for the period
from May 4, 1998 (date of inception) to December 31, 1998, as set forth in
their report. We have included their financial statements in the prospectus and
elsewhere in the registration statement in reliance on Reconta Ernst & Young
S.p.A.'s report, given on authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
This prospectus is part of a registration statement on Form S-1 that we
filed with the SEC. This prospectus does not contain all of the information
contained in the registration statement and all of its exhibits and schedules.
For further information about us, please see the complete registration
statement. Summaries of agreements or other documents referred to in this
prospectus are not necessarily complete. Please refer to the exhibits to the
registration statement for complete copies of these documents.
You may read and copy our registration statement and all of its exhibits and
schedules at the following SEC public reference rooms:
<TABLE>
<S> <C> <C>
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Judiciary Plaza Suite 1300 500 West Madison Street
Room 1024 New York, NY 10048 Suite 1400
Washington, D.C. 20549 Chicago, IL 60661
</TABLE>
You may obtain information on the operation of the SEC public reference room
in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The registration
statement is also available from the SEC's website at http://www.sec.gov, which
contains reports, proxy and information statements and other information
regarding issuers that file electronically.
We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and make
available to our stockholders quarterly reports for the first three quarters of
each fiscal year containing interim unaudited financial information.
69
<PAGE>
Linuxcare, Inc.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Deficit........................... F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to the Consolidated Financial Statements............................. F-7
</TABLE>
The Puffin Group
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-23
Balance Sheets............................................................. F-24
Statements of Operations................................................... F-25
Statements of Stockholder's Equity......................................... F-26
Statements of Cash Flows................................................... F-27
Notes to Financial Statements.............................................. F-28
</TABLE>
Prosa Progettazione Sviluppo Aperto S.R.L.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Reconta Ernst & Young S.p.A., Independent Auditors............... F-32
Balance Sheets............................................................. F-33
Statements of Operations and Retained Earnings............................. F-34
Statements of Owners' Equity............................................... F-35
Statements of Cash Flows................................................... F-36
Notes to Financial Statements.............................................. F-37
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To The Board of Directors and Stockholders of
Linuxcare, Inc.
We have audited the accompanying consolidated balance sheets of Linuxcare,
Inc. and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the period from December 9, 1998 (inception) to December 31, 1998 and for the
year ended 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 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 consolidated financial position of Linuxcare,
Inc. and subsidiaries at December 31, 1998 and 1999, and the consolidated
results of their operations and their cash flows for the period from December
9, 1998 (inception) to December 31, 1998 and for the year ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States.
Palo Alto, California /s/ Ernst & Young LLP
February 14, 2000
F-2
<PAGE>
LINUXCARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
---------------------- December 31,
1998 1999 1999
-------- ------------ -------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............. $138,920 $ 29,994,575
Accounts receivable, net of allowances
of $0 in 1998 and $76,000 in 1999..... -- 650,904
Other receivable....................... -- 1,000,000
Prepaid expenses and other assets...... 61,380 78,841
-------- ------------
Total current assets..................... 200,300 31,724,320
Property and equipment, net.............. -- 2,375,824
Debt issuance costs, net................. -- 1,503,788
Goodwill................................. -- 744,451
Other assets............................. -- 17,620
-------- ------------
$200,300 $ 36,366,003
======== ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable....................... $ -- $ 1,138,027
Accrued liabilities.................... 13,458 2,514,982
Deferred revenue....................... -- 456,908
Note payable to stockholder............ -- 2,000,000
Current portion of note payable........ -- 487,682
Current portion of equipment
financing............................. -- 96,962
-------- ------------
Total current liabilities................ 13,458 6,694,561
Note payable, less current portion....... 200,000 1,512,318
Equipment financing, less current
portion................................. -- 413,700
Redeemable convertible preferred stock,
$.0001 par value, issuable in series:
18,566,075 authorized, none and
14,999,803 shares issued and outstanding
in 1998 and 1999, respectively, and no
shares pro forma for conversion of
redeemable convertible preferred stock
(aggregate liquidation value of
$38,364,140)............................ -- 40,374,016 $ --
Stockholders' deficit:
Common stock, $.0001 par value:
32,000,000 authorized; 7,058,824 and
9,685,136 issued and outstanding in
1998 and in 1999, respectively, and
24,900,572 shares pro forma for
conversion of redeemable convertible
preferred stock....................... 706 969 2,490
Additional paid-in capital............. 327,829 24,677,072 65,049,567
Deferred stock compensation............ (328,235) (15,860,562) (15,860,562)
Stockholder notes receivable........... -- (482,014) (482,014)
Accumulated deficit.................... (13,458) (20,964,057) (20,964,057)
-------- ------------ -----------
Total stockholders' deficit.............. (13,158) (12,628,592) $27,745,424
-------- ------------ ===========
$200,300 $ 36,366,003
======== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
LINUXCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
December 9, 1998
(inception) to Year ended
December 31, December 31,
1998 1999
---------------- ------------
<S> <C> <C>
Revenues........................................ $ -- $ 1,210,806
Cost of revenues (1)............................ -- 2,814,546
-------- ------------
Gross margin.................................... -- (1,603,740)
Operating expenses:
Sales and marketing (2)....................... -- 4,518,801
General and administrative (3)................ 13,458 10,236,488
Amortization of deferred stock compensation... -- 4,121,356
Amortization of goodwill...................... -- 42,808
-------- ------------
Total operating expenses.................... 13,458 18,919,453
-------- ------------
Loss from operations............................ (13,458) (20,523,193)
Interest income................................. -- 45,061
Interest expense................................ -- (468,267)
-------- ------------
Loss before income taxes........................ (13,458) (20,946,399)
Income tax expense.............................. -- 4,200
-------- ------------
Net loss........................................ (13,458) (20,950,599)
Preferred stock accretion....................... -- (260,380)
-------- ------------
Net loss applicable to common stockholders...... $(13,458) $(21,210,979)
======== ============
Basic and diluted net loss per share............ $ -- $(7.49)
======== ============
Weighted average shares used in computing basic
and diluted net loss per share................. -- 2,833,756
======== ============
Pro forma basic and diluted net loss per share
(unaudited).................................... $(2.26)
============
Weighted average shares used in computing pro
forma basic and diluted net loss per share
(unaudited).................................... 9,252,635
============
</TABLE>
- --------
(1) Excludes $1,511,855 of deferred stock compensation in 1999.
(2) Excludes $63,654 of deferred stock compensation in 1999.
(3) Excludes $2,545,847 of deferred stock compensation in 1999.
See accompanying notes.
F-4
<PAGE>
LINUXCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional Deferred Stockholder
---------------- Paid-in Stock Notes Accumulated
Shares Amount Capital Compensation Receivable Deficit Total
--------- ------ ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders............ 6,000,000 $300 $ -- $ -- $ -- $ -- $ 300
Issuance of common stock
for services to
consultants............ 1,058,824 406 327,829 (328,235) -- -- --
Net loss................ -- -- -- -- -- (13,458) (13,458)
--------- ---- ----------- ------------ --------- ------------ ------------
Balances at December 31,
1998................... 7,058,824 706 327,829 (328,235) -- (13,458) (13,158)
Equity compensation for
services performed by
consultants for common
shares issued in 1998.. -- -- 2,542,037 328,235 -- -- 2,870,272
Exercise of stock
options for cash....... 321,200 32 112,660 -- -- -- 112,692
Exercise of stock
options for notes
receivable............. 2,205,112 221 482,014 -- (482,014) -- 221
Issuance of stock
options to
consultants............ -- -- 963,684 -- -- -- 963,684
Issuance of common stock
and stock options for
Puffin acquisition..... 100,000 10 527,310 -- -- -- 527,320
Deferred stock
compensation........... -- -- 19,981,918 (19,981,918) -- -- --
Amortization of deferred
stock compensation..... -- -- -- 4,121,356 -- -- 4,121,356
Preferred stock
accretion.............. -- -- (260,380) -- -- -- (260,380)
Net loss................ -- -- -- -- -- (20,950,599) (20,950,599)
--------- ---- ----------- ------------ --------- ------------ ------------
Balances at December 31,
1999................... 9,685,136 $969 $24,677,072 $(15,860,562) $(482,014) $(20,964,057) $(12,628,592)
========= ==== =========== ============ ========= ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
LINUXCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
December 9, 1998
(inception) to Year ended
December 31, December 31,
1998 1999
---------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(13,458) $(20,950,599)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization................. -- 208,849
Amortization of debt issuance costs........... -- 329,569
Amortization of deferred stock compensation... -- 4,121,356
Amortization of goodwill...................... -- 42,808
Equity compensation for common stock issued to
consultants for services..................... -- 2,870,272
Issuance of stock options to consultants...... -- 963,684
Changes in assets and liabilities:
Accounts receivable......................... -- (650,904)
Prepaid expenses and other current assets... (61,380) (17,461)
Other assets................................ -- (17,620)
Accounts payable............................ -- 1,138,027
Accrued liabilities......................... 13,458 2,501,524
Deferred revenue............................ -- 456,908
-------- ------------
Net cash used in operating activities........... (61,380) (9,003,587)
Cash flows from investing activities:
Purchase of property and equipment (excluding
equipment financing)........................... -- (2,074,011)
Purchase of businesses, net of cash............. -- (259,939)
-------- ------------
Net cash use in investing activities............ -- (2,333,950)
Cash flows from financing activities:
Proceeds from borrowings on notes payable....... 200,000 3,000,000
Proceeds of borrowings on notes payable to
stockholders................................... -- 2,000,000
Proceeds from issuance of redeemable convertible
preferred stock................................ -- 36,080,279
Proceeds from issuance of common stock.......... 300 --
Exercise of stock options....................... -- 112,913
-------- ------------
Net cash provided by financing activities....... 200,300 41,193,192
-------- ------------
Net increase in cash and cash equivalents....... 138,920 29,855,655
Cash and cash equivalents, beginning of period.. -- 138,920
-------- ------------
Cash and cash equivalents, end of year.......... $138,920 $ 29,994,575
======== ============
Supplemental disclosures of cash flow
information:
Deferred stock compensation..................... $328,235 $ 19,981,918
Preferred stock accretion....................... -- 260,380
Warrants issued for financing commitments....... -- 1,833,357
Equipment purchased though equipment financing.. -- 510,662
Notes receivable issued from stockholder issued
for common stock............................... -- 482,014
Stock and options issued for purchase of
subsidiary..................................... -- 527,320
Preferred stock issued for note receivable...... -- 1,000,000
Conversion of debt to preferred stock........... -- 1,200,000
</TABLE>
See accompanying notes.
F-6
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
Linuxcare, Inc. ("the Company") was incorporated in Delaware on December 9,
1998 and is a provider of technical support services for Linux and other open
source technology. The Company offers a comprehensive range of services
including professional services, technical support, education and product
certification for Linux, leading open source software packages and other
related technologies. The Company supports all major variations, or
distributions, of Linux on a variety of hardware platforms.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Prosa Progettazione Sviluppo Aperto S.r.l
and The Puffin Group. All significant intercompany accounts and transactions
have been eliminated in consolidation. The consolidated financial statements
for fiscal 1998 include the operations of the Company from inception on
December 9, 1998.
Effective April 8, 1999, the Company completed a 2-for-1 stock split. As a
result of the stock split, outstanding and reserved common shares increased.
The rights of the holders of these securities were not otherwise modified. The
financial statements have been restated for all periods to reflect this stock
split.
Proposed Public Offering of Common Stock
In December 1999, the Board of Directors authorized the Company to proceed
with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, each share of outstanding redeemable
convertible preferred stock will automatically convert into common stock (Note
7).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues are derived primarily through the performance of services to third
parties, under a variety of contractual arrangements. Revenues are billed and
recognized as services are performed. Under contractual arrangements for
training services, revenue is recognized as the training is performed. Under
the terms of service agreements for technical support service, revenue is
recognized over the term of the agreement which ranges from 6 months to 12
months. Under the terms of agreements to perform certification services,
revenues are amortized over the term the certification must be performed or, in
the case of one-time certifications, as the certification service is completed.
Under the terms of multiple element arrangements (training, technical support
services, and certifications), where the Company does not have vendor specific
objective evidence of pricing, aggregate fees are amortized over the service
period after the initial training or initial certification services have been
performed, which is usually early in the term of the agreement.
Deferred revenue consists of prepaid services agreements. As of December 31,
1999, one customer represented 57% of the deferred revenue balance.
F-7
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents and trade
receivables. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. The Company did not write-off any
accounts receivable in 1999. For the year ended December 31, 1999, three
significant customers individually accounted for approximately 26%, 18% and 11%
of revenues. As of December 31, 1999, four significant customers individually
represent 33%, 19%, 18% and 12% of trade receivables. Of the total accounts
receivable balance, 18% related to customers in Italy.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were
$356,423 for the year ended December 31, 1999.
Cash and Cash Equivalents
Cash and cash equivalents consist principally of cash deposited in money
market and checking accounts, which amounts approximate fair value. The Company
considers all highly liquid debt instruments or money-market type funds with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives (three to five years) of
the assets. Assets acquired pursuant to the equipment financing arrangement are
amortized over the assets' estimated useful lives. Leasehold improvements are
amortized over the corresponding lease term.
Property and equipment consists of the following at December 31, 1999:
<TABLE>
<S> <C>
Computer and office equipment................................. $1,011,630
Furniture and fixtures........................................ 180,055
Leasehold improvements........................................ 84,832
Software...................................................... 1,308,156
----------
Total property and equipment.................................. 2,584,673
Less: accumulated depreciation and amortization............... 208,849
----------
Property and equipment, net................................... $2,375,824
==========
</TABLE>
Property and equipment includes $510,662 of financed equipment at December
31, 1999. Accumulated depreciation for such equipment for the year ended
December 31, 1999 was $32,244. Upon completion of certain equipment financing
terms, the Company has the option to purchase the leased equipment at 15% of
original cost.
The Company capitalizes certain internal use software costs in accordance
with Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. Capitalized internal use software
costs, including web site development costs, with an expected useful life in
excess of one year are amortized on a straight-line basis over their estimated
useful lives (three years). Internal use software costs with an expected useful
life of less than one year are expensed as incurred.
F-8
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Long-lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-lived
Assets to be Disposed Of, the Company reviews long-lived and intangible assets
for impairment whenever events or circumstances indicate the carrying value of
an asset may not be recoverable.
Debt Issuance Costs
Debt issuance costs related to stock warrants issued in connection with
certain loan arrangements are amortized over the term of the debt using the
effective interest rate method. Accumulated amortization for debt issuance
costs as of December 31, 1999 is $329,569.
Goodwill
Goodwill is stated at cost and amortized using the straight-line method over
the estimated economic useful life. The Company continually evaluates whether
subsequent events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill may warrant revision, or that the remaining
balance of goodwill may not be recoverable. The Company evaluates the
recoverability of goodwill by measuring the carrying amount of the assets
against the estimated undiscounted future cash flows associated with them. At
the time such evaluations indicate that the future undiscounted cash flows of
such assets are not sufficient to recover the carrying value of such assets,
the assets are adjusted to their fair values. Based on these evaluations, there
were no adjustments to the carrying value of goodwill in 1999.
Foreign Currency Translation
The Company's Canadian subsidiary uses the U.S. dollar as the functional
currency and, accordingly, has remeasured its financial statements into U.S.
dollars using current rates of exchange for monetary assets and liabilities and
historical rates of exchange for nonmonetary assets. Gains and losses from
remeasurement are included in general and administrative expense. Items of
revenue and expense for the Company's subsidiaries are translated using the
monthly average exchange rates in effect for the period in which the items
occur.
The Company's Italian subsidiary uses the local currency, the Italian lire,
as the functional currency and, accordingly, has measured its financial
statements into US dollars using year end rates of exchange for assets and
liabilities.
Income Taxes
The Company provides for income taxes based on the liability method, which
requires recognition of deferred tax assets and liabilities based on
differences between financial reporting and tax bases of assets and liabilities
measured using enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse.
Stock Options and Equity Instruments Exchanged for Services
The Company has elected to follow Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees and related Interpretations in
accounting for its employee stock options rather than adopting the alternative
fair value accounting provided for under SFAS No. 123, Accounting for Stock-
based Compensation. Under APB No. 25, because the exercise price of the
Company's stock options equals the deemed fair value of the underlying stock on
the date of grant, no compensation expense is recognized.
F-9
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The value of options, warrants, and restricted stock exchanged for services
rendered or assets acquired are valued using the Black-Scholes option pricing
model. To calculate the expense or asset value, the Company uses either the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
Comprehensive Income
In June 1998, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which established new standards for reporting
and displaying comprehensive income and its components in a full set of general
purpose financial statements. There is no difference in the Company's
historical net losses as reported and the comprehensive net losses under the
provisions of SFAS No. 130 for all periods presented. Accordingly, the adoption
of SFAS No. 130 had no effect on the Company's reported results of operations.
Net Loss Per Share
Basic and diluted net loss per share information for all periods is
presented in conformity with SFAS No. 128, Earnings Per Share. Basic earnings
per share has been computed using the weighted-average number of common shares
outstanding during the period, less shares subject to repurchase, and excludes
any dilutive effects of stock options, warrants, and convertible securities.
Potentially dilutive securities have been excluded from the computation of
diluted net loss per share as their inclusion would be antidilutive.
Pro forma Stockholders' Equity and Pro forma Net Loss
Pro forma stockholders' equity and net loss per share gives effect, under
Securities and Exchange Commission guidance, to the conversion of preferred
shares not included above that will automatically convert upon completion of
the Company's initial public offering, using the if-converted method. Pro forma
net loss per share begins with net loss per share, described above, and
increases the number of shares outstanding to give effect to the conversion of
preferred shares as if such conversion occurred at the original issuance date.
Pro forma net loss does not include preferred stock accretion under the
assumption that preferred shares have been converted into common stock.
F-10
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The calculation of historical and pro forma basic and diluted net loss per
share is as follows:
<TABLE>
<CAPTION>
Period from
December 9,
1998 (inception) Year ended
to December 31, December 31,
1998 1999
---------------- ------------
<S> <C> <C>
Historical:
Net loss applicable to common
stockholders............................. $ (13,458) $(21,210,979)
=========== ============
Weighted average shares of common stock
outstanding.............................. 6,529,412 8,258,434
Less: weighted average shares of common
stock that may be repurchased............ (6,529,412) (5,424,678)
----------- ------------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share............... -- 2,833,756
=========== ============
Basic and diluted net loss per share...... $ -- $ (7.49)
=========== ============
Pro forma (unaudited):
Net loss.................................. $(20,950,599)
============
Weighted average shares used in computing
basic and diluted net loss per share
(from above)............................. 2,833,756
Adjustment to reflect the effect of the
assumed conversion of preferred stock to
common stock from the date of issuance... 6,418,879
------------
Weighted average shares used in computing
pro forma basic and diluted net loss per
share.................................... 9,252,635
============
Pro forma basic and diluted net loss per
share.................................... $ (2.26)
============
</TABLE>
If the Company had reported net income, the calculation of historical and
pro forma diluted earnings per share would have included approximately an
additional 0 and 2,179,165 common equivalent shares related to the outstanding
stock options and warrants not included above (determined using the treasury
stock method) for the period from December 9, 1998 (inception) to December 31,
1998 and for the year ended December 31, 1999, respectively.
Segment Information
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 requires publicly held
companies to report financial and other information about key revenue segments
of the entity for which such information is available and is utilized by the
chief operating decision maker. The Company conducts its business within one
business segment: technical support for Linux and other open source technology.
Revenue by geographic region is presented as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1998 1999
----- ------
<S> <C> <C>
United States..................................................... $ -- $1,099
Japan............................................................. -- 112
----- ------
Total............................................................. $ -- $1,211
===== ======
</TABLE>
F-11
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impact of Recent Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee issued SOP 98-5,
Reporting on the Costs of Start-Up Activities. This SOP provides guidance on
the financial reporting of start-up activities and organization costs be
expensed as incurred. The SOP is effective for financial statements for fiscal
years beginning after December 15, 1998. The impact from adopting SOP 98-5 in
1999 was not material on the consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133, as recently amended, is effective for
fiscal years beginning after June 15, 2000. Management believes the adoption of
SFAS No. 133 will not have a material effect on the Company's financial
position or results of operations.
2. Acquisitions
On October 1, 1999, the Company purchased the outstanding common stock of
The Puffin Group, Inc. ("Puffin") a Canadian company, for 100,000 shares of the
Company's common stock and options to purchase approximately 25,000 shares of
the Company's common stock with an exercise price of $.13. The option to
purchase additional shares vested immediately. The Puffin transaction was
accounted for as a purchase in accordance with the provisions of APB16. Under
the purchase method of accounting, the purchase price is allocated to the
assets acquired and liabilities assumed based on their estimated fair values at
the date of acquisition. Accordingly, the shares and options were valued at
their deemed fair value on the date of the transaction, amounting to
approximately $527,000. Goodwill of $513,690 was recorded at the date of
purchase, reflecting the difference between the net fair value of the
underlying assets and liabilities and the deemed fair value of the shares and
options paid as consideration. The goodwill is being amortized over the
estimated employment term of the employees acquired, which was estimated as 3
years. Additionally 300,000 options to purchase the Company's common stock,
with vesting terms of three years and an exercise price of $.13 per share, were
granted to Puffin's key employees. The deemed fair value of these additional
options in the amount of $1.3 million was included in the Company's deferred
compensation calculations as these grants were considered compensation for
employment. Results of operations for Puffin have been included with those of
the Company for the period subsequent to the date of acquisition.
On December 30, 1999, the Company purchased the outstanding shares of the
common stock of Prosa Progettazione Sviluppe Aparto s.r.l. ("Prosa"), an
Italian company, for cash of $225,000 and the assumption of liabilities of
$65,000, both aggregating to $290,000, and options to purchase 25,000 shares
with an exercise price of $1.00. The cash payment was considered purchase
consideration, and the options to purchase 25,000 shares were considered
employment consideration. The Prosa transaction was accounted for as a purchase
in accordance with ABP16. Under the purchase method of accounting, the purchase
price is allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. Goodwill of $273,569
was recorded at the date of the purchase reflecting the difference between the
net fair value of the underlying assets and the total consideration paid. The
goodwill is being amortized over the estimated employment term of the employees
acquired which, was estimated as 3 years. Results of operations for Prosa have
been included with those of the Company for the period subsequent to the date
of acquisition.
F-12
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price for the Puffin and Prosa transactions was allocated to
the assets acquired and liabilities assumed based on their estimated fair
values as determined by the Company as follows:
<TABLE>
<CAPTION>
Puffin Prosa
September 30, December 31,
1999 1999
------------- ------------
<S> <C> <C>
Current assets................................. $ 59,207 $ 123,880
Goodwill....................................... 513,690 273,569
Long term assets............................... 8,461 12,845
Current liabilities............................ (54,038) (120,709)
-------- ---------
Purchase Price................................. $527,320 $ 289,585
======== =========
</TABLE>
The unaudited pro forma results of operations assuming consummation of these
acquisitions as of December 9, 1998 (inception) are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- ------------
<S> <C> <C>
Revenues......................................... $ 5,201 $ 1,531,471
Net loss applicable to common stockholders....... $(30,513) $(21,259,755)
Basic and diluted net loss per share............. $ -- $ (7.31)
======== ============
</TABLE>
3. Notes Payable and Equipment Financing
Note Payable
In December 1998, the Company issued promissory notes for total
consideration of $200,000 to common stock holders. These notes were
subsequently converted into 324,544 shares of Series A preferred stock on
February 1, 1999, the offering date, at the offering price of $.61625 per
share.
In December 1999, the Company issued a promissory note totaling $1.0
million. This note was subsequently exchanged for 211,506 shares of Series B
preferred stock on December 15, 1999, the offering date, at the offering price
of $4.73 per share.
In October 1999, the Company issued promissory notes totaling $2.0 million
to a Series A preferred stockholder. The promissory notes were originally due
after 30 days but were later extended. The promissory notes bear interest at
six percent (6%). The promissory notes were subsequently repaid in January
2000.
Note Payable, Equipment Financing and Letter of Credit with Lender
On July 27, 1999, the Company entered into a subordinated loan and security
agreement ("Note Payable") with a financial institution ("Lender") for maximum
borrowings of $2,000,000. The Note Payable bears interest at ten percent (10%)
per annum and is due in 36 months. Payments of principal and interest begin six
months after the Note Payable's issuance. For that six-month period, interest
is accrued but not paid. In the event of default by the Company, the Note
Payable shall bear interest at a rate of 15% per annum. The Note Payable is
secured by certain tangible and intangible assets of the Company and is subject
to certain non financial covenants. In connection with the Note Payable, the
Company issued to the Lender warrants to purchase 268,423 shares of Series A
preferred stock at an exercise price of $1.4902 per share. At December 31,
1999, the Company has $2,000,000 outstanding in notes payable and was in
compliance with its covenants.
On July 27, 1999, the Company entered into an equipment financing agreement
for a maximum loan amount of $1,000,000 with the above lender. As of December
31, 1999, the Company has drawn $510,662 on
F-13
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the equipment financing agreement. The loan is secured by equipment purchased,
bears interest at a stated rate of 7.5% and is due in December 2002. In
connection with the equipment financing agreement, the Company issued to the
Lender warrants to purchase 26,842 shares of Series A preferred stock at an
exercise price of $1.4902 per share.
On October 15, 1999, the Company signed a Letter of Credit agreement with
the Lender for $1,150,000 as security on the rental of additional office space.
The Letter of Credit bears interest at one and one-half percent (1.5%) and
expires on October 15, 2004. As of December 31, 1999, the Letter of Credit
remains unused. In connection with the agreement, a warrant to purchase 96,478
shares of Series A preferred stock with an exercise price of $1.4902 per share
was issued. The warrant expires 10 years from the grant date.
In connection with the Note Payable, equipment financing agreement, and
letter of credit agreement, the Company issued to the Lender warrants to
purchase 391,743 shares of preferred stock at an exercise price of $1.4902 per
share. The value attributable to these warrants was calculated using the Black-
Scholes valuation model with the following weighted-average assumptions: risk-
free interest rate of approximately 6.2%, fair value at date of grant of $4.73,
expected life of 5 years, 150% volatility, and no expected dividends. The
deemed fair value associated with these warrants was calculated at $1,833,357
and is recorded as a debt issuance cost and an increase to redeemable
convertible preferred stock. This discount is being amortized over the life of
the related debt as additional interest cost. Based on the fair value of the
warrant, the Company's effective interest rate on the note payable, equipment
financing agreement, and letter of credit agreement is 45.9%, 21.6%, and 9.4%,
respectively. These warrants expire the earlier of ten years from the date of
the above agreements or five years from the date of an initial public offering.
As of December 31, 1999, these warrants remained outstanding.
4. Commitments
The Company leases its facilities under operating leases that expire at
various dates through December 31, 2004.
Future minimum equipment financing and operating lease payments as follows
for the year ended December 31:
<TABLE>
<CAPTION>
Equipment Operating
Financing Leases
--------- ----------
<S> <C> <C>
2000................................................... $139,517 $1,226,234
2001................................................... 187,769 1,222,212
2002................................................... 185,226 1,198,848
2003................................................... 69,395 1,176,948
2004................................................... -- 1,170,264
-------- ----------
Future minimum lease payments.......................... 581,907 $5,994,506
==========
Amounts representing interest.......................... 71,245
--------
Present value of future minimum lease obligations...... 510,662
Amounts due within one year............................ 96,962
--------
Amounts due after one year............................. $413,700
========
</TABLE>
Rent expense for the year ended December 31, 1999 was approximately
$279,245.
F-14
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Retirement Savings Plan
The Company maintains an employee savings and retirement plan that is
intended to be qualified under Section 401(k) of the Internal Revenue Code and
is available to substantially all full-time employees of the Company. The plan
provides for tax deferred salary deductions and after-tax employee
contributions. Contributions include employee salary deferral contributions and
discretionary employer contributions. To date, there have been no employer
discretionary contributions.
6. Income Taxes
Significant components of the provision for income taxes attributable to
operations are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Current:
$ --
Federal......................................................... $ --
State........................................................... -- --
Foreign......................................................... -- 4,200
------ ------
Total Current..................................................... -- 4,200
Deferred:
Federal.......................................................... -- --
State............................................................ -- --
------ ------
Total deferred.................................................... -- --
------ ------
$4,200
Total............................................................. $ --
====== ======
</TABLE>
A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of operations is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1999
------------------------
<S> <C> <C>
U.S. federal taxes (benefit) at statutory rate....... $ (4,576) $ (6,895,617)
State................................................ (807) (1,216,874)
Foreign.............................................. -- --
Valuation allowance.................................. 5,383 6,262,863
Amortization of deferred compensation................ -- 1,648,542
Other................................................ -- 205,286
--------- -------------
Total................................................ $ -- $ 4,200
========= =============
</TABLE>
F-15
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ 5,383 $ 4,417,526
Stock option compensation......................... -- 1,533,582
Other............................................. -- 317,138
------- -----------
Total deferred tax assets .......................... 5,383 6,268,246
Valuation allowance................................. (5,383) (6,268,246)
------- -----------
Net deferred tax assets............................. $ -- $ --
======= ===========
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $5,383 and $6,262,863 during the years ended
December 31, 1998 and 1999.
As of December 31, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $11,044,000 which expire in
the years 2018 to 2019. The Company also had net operating loss carryforwards
for state income tax purposes of approximately $11,040,000 expiring in the year
2006. Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.
7. Redeemable Convertible Preferred Stock
On February 1, 1999 and April 16, 1999, the Company issued 2,636,916 and
5,246,008 shares, respectively, of Series A redeemable convertible preferred
stock ("Series A") in private placement offerings at a price of $0.61625 per
share. There are 10,695,314 shares authorized of Series A at a par value of
$0.0001.
On December 17, 1999 the Company issued 7,082,267 of Series B redeemable
convertible preferred stock ("Series B") in a private placement offering at a
price of $4.728 per share. There are 7,082,267 shares authorized of Series B at
a par value of $0.0001. In connection with Series B Financing, a noteholder
exchanged an extended 30 day promissory note totaling $1,000,000 to the Company
for 211,506 shares of Series B valued at $4.728 per share. The note was
exchanged for shares of Series B redeemable convertible preferred stock as a
part of the December 17, 1999 Series B offering. In addition, a major
corporation purchased 423,011 shares of Series B in the offering for cash of
$1,000,000 and a receivable of $1,000,000. The receivable is recorded as an
other receivable on the accompanying 1999 balance sheet. The other receivable
for $1,000,000 was settled on January 19, 2000, when the cash was received.
F-16
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The balance of Series A and Series B is comprised of the following at
December 31, 1999:
<TABLE>
<CAPTION>
Liquidation
Shares Amount Value
---------- ----------- -----------
<S> <C> <C> <C>
Series A:
Issuance of preferred stock for cash
and promissory notes totaling
$200,000, net of financing costs... 7,882,924 $ 4,816,836 $ 4,857,852
Exercise of warrant related to
Series A legal services............ 34,612 21,330 21,330
Warrant issued for financing
commitments........................ -- 1,833,357 --
Preferred stock accretion........... -- 189,180 --
---------- ----------- -----------
Total Series A........................ 7,917,536 6,860,703 4,879,182
Series B:
Issuance of preferred stock for cash
and a note receivable of
$1,000,000, net of financing
costs.............................. 7,082,267 33,442,113 33,484,958
Preferred stock accretion........... -- 71,200 --
---------- ----------- -----------
Total Series B........................ 7,082,267 33,513,313 33,484,958
---------- ----------- -----------
Balance in redeemable preferred stock
at December 31, 1999................. 14,999,803 $40,374,016 $38,364,140
========== =========== ===========
</TABLE>
Significant terms of the outstanding Series A and Series B preferred stock,
as amended, are as follows:
. In the event of any liquidation, dissolution or winding up of the
Company, the holders of Series A and Series B are entitled to receive
proceeds equal to $0.61625 and $4.728 per share respectively, plus all
declared but unpaid dividends, prior and in preference to any
distribution to holders of common stock. If the assets available for
distribution are insufficient to pay the preferred stockholders in full,
the assets will be distributed ratably among the preferred stockholders.
. Each share of Series A and Series B is redeemable at the option of the
holder in three annual installments from and after December 14, 2004. The
Series A and Series B are redeemable at a sum equal to $0.61625 and
$4.728 respectively, plus five percent (5%) of the original issue price
compounded annually. In connection with the redemption feature, the
Company recorded the accretion of the Series A and Series B in the amount
of $260,380 in 1999 through the reduction of additional paid-in capital.
The carrying amount of Series A and Series B approximates their
redemption values.
. Each share of Series A and B is convertible at the option of the holder
into one share and 1.030447 shares, respectively of common stock, subject
to certain adjustments. Each share of preferred stock converts
automatically into common stock at the earlier of (1) the closing of an
underwritten public offering of the Company's common stock at an
aggregate offering price of greater than $10,000,000 or (2) the date
specified by affirmative consent or agreement of a majority of the
holders of Series A outstanding.
. Each share of preferred stock has voting rights equivalent to the number
of shares of common stock into which it is convertible.
. Dividends may be declared at the discretion of the Board of Directors and
are non-cumulative. Dividends of $0.0308 and $0.2364 per share on Series
A and Series B, respectively, must be declared and paid prior and in
preference to any cash dividend declarations or distributions to holders
of common stock.
F-17
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Stockholders' Deficit
Amended and Restated Certificate of Incorporation
In December 1999, the Board of Directors approved an increase in the total
number of shares that the Company is authorized to issue to 50,556,075 shares,
of which 32,000,000 will be common stock and 18,566,075 will be preferred
stock.
Common Stock
On December 23, 1998, the Company issued a total of 1,058,824 shares of
common stock to two consultants in exchange for future business strategy
consulting services and a nominal cash amount. In accordance with EITF 96-18,
Accounting for Equity Instruments Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services, the fair value of the common
stock is being recorded to general and administrative expense in the
accompanying statement of operations as of the date the services are being
provided. Fair value of the services is the deemed fair value of the common
stock for accounting purposes. Each consultant provided approximately 32 hours
per month of services through December 15, 1999, the date the agreement was
completed. At December 31, 1998, the Company recorded deferred stock
compensation to the consultants of $328,235, the estimated fair value of future
services based on the then deemed fair value. The consultants vested in the
shares over the service period. As of December 31, 1999, all of the
consultants' shares are fully vested. Accordingly, for the year ended December
31, 1999, the Company recorded a total of $2,870,272 to general and
administrative expense.
In connection with the issuance of common stock to founders and the exercise
of options pursuant to the Company's 1999 Stock Option Plan, employees entered
into restricted stock purchase agreements with the Company. Under the terms of
these agreements, the Company has a right to repurchase any unvested shares up
to 60 days after the termination of the employee's service at the original
exercise price of the shares. With continuous employment, the repurchase rights
lapse at a rate of 25% after the first year, and at a rate of 1/48th of the
purchased shares for each continuous month of service thereafter. The right of
repurchase lapses with respect to 50% of the purchased shares upon a change in
control. All repurchase rights lapse in the event of a change in control when
the repurchase rights are not assigned to the new control entity. As of
December 31, 1999, 5,424,678 shares were subject to repurchase by the Company.
Deferred Stock Compensation
In connection with the grant of certain stock options to employees for the
year ended December 31, 1999, the Company recorded deferred stock compensation
within stockholders' deficit of approximately $20.0 million, representing the
difference between the deemed fair value of the common stock for accounting
purposes and the option exercise price of these options at the date of grant.
The Company recorded amortization of deferred compensation of approximately
$4.1 million for the year ended December 31, 1999.
The deferred stock compensation expense is being amortized on an accelerated
basis over the vesting period of the individual award, generally four years.
This method is in accordance with Financial Accounting Standards Board
Interpretation No. 28. Accordingly, at December 31, 1999, the remaining
deferred compensation of approximately $15.9 million will be amortized as
follows: $9.7 million during fiscal 2000, $4.0 million during fiscal 2001, $1.8
million during fiscal 2002 and $.4 during fiscal 2003. The amortization expense
relates to options awarded to employees in all operating expense categories.
The amount of deferred compensation expense to be recorded in future periods
could decrease if options for which accrued but unvested compensation has been
recorded are forfeited.
F-18
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stockholder Notes Receivable
In May 1999, the Board of Directors approved the issuance of options to
purchase 1,660,194 shares of common stock to a key officer at an exercise price
of $.07 per share. In exchange for a note receivable in the amount of $116,048,
the officer exercised the options subject to the terms of a stock repurchase
agreement. The note receivable has been recorded as a reduction of
stockholders' equity in the consolidated balance sheet at December 31, 1999.
The note is full recourse and bears interest at 5.22%.
In December 1999, the Company issued notes receivable for $26,000 and
$339,966 to executives of the Company to exercise 204,918 and 340,000 stock
options, respectively. The notes are secured by the underling stock. The notes
are full recourse and bear interest at 6.20%. In connection with the note
receivable for $339,966, the Company violated a non financial covenant on its
Note Payable with its Lender (see Note 3--Notes Payable and Equipment
Financing). The Company obtained a waiver from the Lender related to this
covenant.
Stock Option Plan
On April 5, 1999, the Company adopted and the Board of Directors approved
the 1999 Stock Plan (the "1999 Plan"). The number of shares reserved for
issuance under the 1999 Plan is 6,302,738. Under the 1999 Plan, the Board of
Directors may grant to employees, outside directors, and consultants options
and/or stock awards. The term and price of options is determined by the Board
of Directors. The Plan will terminate in 2009. Nonqualified options granted
under the 1999 Plan must be issued at a price equal to at least 85% of the fair
market value of the Company's common stock at the date of grant. All options
may be exercised at any time within 10 years of the date of grant or within
three months of termination of employment, or such shorter time as may be
provided in the stock option agreement, and vest over a vesting schedule
determined by the Board of Directors, which generally is four years.
Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value of these options was estimated at the date of grant using a Minimum
Value option pricing model with the following weighted average assumptions for
1999: risk-free interest rates of 6.2%; dividend yield of 0%; and a weighted-
average expected life of the options of 8 years.
A summary of stock option activity and related information follows:
<TABLE>
<CAPTION>
Outstanding Stock Options Weighted-
Shares --------------------------- Average
Available Number of Price Per Exercise
for Grant share share Price
---------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Original authorization--
April 5, 1999 3,674,766 -- -- --
Additional
authorization.......... 2,627,972 -- -- --
Options granted......... (6,235,189) 6,235,189 $ .07-1.00 $.26
Options exercised....... -- (2,526,312) $ .07-1.00 $.24
Options canceled........ 550,667 (550,667) $ .07- .13 $.11
---------- ------------- ------------ ----
Balance at December 31,
1999................... 618,216 3,158,210 $ .07-1.00 $.31
========== ============= ============ ====
</TABLE>
The weighted-average fair value of options granted to employees and
consultants for the year ended December 31, 1999 was $0.10 and $4.51,
respectively.
F-19
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Below are the segregated ranges of exercise prices as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ .07-.10 180,476 9.3 years $ .08 -- $--
$ .13 2,331,234 9.8 years $ .13 237,516 $.13
$ 1.00 646,500 9.9 years $1.00 -- $--
--------- --------- --------- ----- ------- ----
$.07-1.00 3,158,210 9.8 years $ .31 237,516 $.13
========= ========= ===== ======= ==== ===
</TABLE>
Stock Options to Consultants
During 1999, the Company granted a total of 213,732 stock options to
consultants for recruiting and accounting services. The value attributable to
these warrants was calculated using the Black-Scholes valuation model with the
following weighted-average assumptions: risk-free interest rate of
approximately 6.2%, expected life of 8 years, 150% volatility, and no expected
dividends. The weighted-average fair value of the stock options granted to
consultants was $4.51. For the year ended December 31, 1999, the Company
recorded $963,684 to general and administrative expense.
Warrants
On January 21, 1999, the Company issued a warrant to a partnership for the
purchase of 34,612 shares of Series A preferred stock at an exercise price of
$.61625 per share in connection with Series A legal services. In September
1999, this warrant was exercised. As the consulting services were directly
related to the first round of Series A financing, the fair value of the warrant
of $21,330 was considered an issuance cost. As of December 31, 1999, all shares
were exercised under this warrant (see Note 7--Redeemable Convertible Preferred
Stock).
On July 27, 1999, the Company issued warrants in connection with a Note
Payable and equipment financing agreement to purchase 295,265 shares of Series
A preferred stock at an exercise price of $1.4902 per share. As of December 31,
1999, these warrants remain outstanding (see Note 3--Notes Payable and
Equipment Financing).
On October 15, 1999, the Company issued warrants in connection with a Letter
of Credit to purchase 96,478 shares of Series A preferred stock at an exercise
price of $1.4902 per share. As of December 31, 1999, these warrants remain
outstanding (see Note 3--Notes Payable and Equipment Financing).
Shares Reserved for Future Issuance
As of December 31, 1999, the Company had reserved shares of its common stock
for future issuance as follows:
<TABLE>
<S> <C>
Conversion of Series A preferred stock......................... 7,917,536
Conversion of Series B preferred stock......................... 7,297,900
1999 Stock Plan................................................ 3,776,426
Exercise of outstanding warrants............................... 391,743
----------
19,383,605
==========
</TABLE>
F-20
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Note payable, note payable to stockholder, and equipment financing: The
fair values of the Company's short- and long-term debt are estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. Due to the
recent issuance of the note payable, note payable to stockholder and
equipment financing, the estimated fair value approximates the carrying
amount.
Redeemable convertible preferred stock: The fair values of the Company's
redeemable preferred stock is estimated using discounted cash flow analyses
from the redemption value beginning December 14, 2004, based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements. Due to the recent issuance of the redeemable
convertible preferred stock, the estimated fair value approximates the
carrying amount.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
1998 1999
----------------- -----------------------
Carrying Fair Carrying
Amount Value Amount Fair Value
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents..... $138,920 $138,920 $29,994,575 $29,994,575
Note payable.................. -- -- 2,000,000 2,000,000
Note payable to stockholder... -- -- 2,000,000 2,000,000
Equipment financing........... -- -- 510,662 510,662
Redeemable convertible
preferred stock.............. -- -- 40,374,016 40,374,016
</TABLE>
10. Subsequent Events
2000 Employee Stock Purchase Plan (unaudited)
The Company's 2000 Employee Stock Purchase Plan was approved by shareholders
in February 2000 to be effective upon the completion of the Company's initial
public offering of its common stock. The Company has reserved a total of
1,000,000 shares of common stock for issuance under this plan. The plan
contains consecutive, overlapping 24-month offering periods, each including
four 6-month purchase periods. Eligible employees may purchase common stock at
85% of the lesser of the fair market value of the Company's common stock on the
first day of the applicable 24-month offering period or the fair market value
of the Company's common stock on the last day of a purchase period. In
addition, the plan provides for automatic annual increases in the number of
shares available for issuance on the first day of each fiscal year equal to the
lowest of 1,000,000, 2% of the outstanding shares of the Company's common stock
on the first day of the fiscal year, or such other amount as determined by the
Board of Directors.
2000 Director Option Plan (unaudited)
In February 2000, the shareholders approved the 2000 Director Option Plan
for the participation of its non-employee directors. A total of 300,000 shares
were reserved for issuance none of which have been issued. Each non-employee
director who joins the Board of Directors after the completion of the offering
will
F-21
<PAGE>
LINUXCARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
automatically receive a grant of an option to purchase 20,000 shares of common
stock on the date on which such person becomes a director. The shares subject
to each of these options will vest and become fully exercisable over four years
as follows: 25% of the shares on each anniversary of the date of grant,
provided that the non-employee director remains a director on such dates.
Additionally, beginning at the annual meeting of stockholders to be held in
2001 and at each successive annual stockholder meeting, each non-employee
director who has previously served at least six consecutive months prior
thereto will receive an option to purchase 5,000 shares of our common stock.
The shares subject to each of these options will fully vest and become fully
exercisable as to 100% of the shares subject to the option on the first
anniversary date of the date of grant. The exercise price per share for all
options automatically granted to directors under our 2000 Director Option Plan
will be equal to the market price of the Company's common stock on the date of
grant and will have a ten year term, but will generally terminate within a
specified time, as defined in the 2000 Director Option Plan, following the date
the option holder ceases to be a director or consultant.
1999 Employee Stock Options Plan (unaudited)
In February 2000, the shareholders approved an increase in the number of
shares of common stock available for grant by 3,000,000 under the 1999 stock
plan.
F-22
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To The Board of Directors and Stockholders of
The Puffin Group Inc.:
We have audited the accompanying balance sheets of The Puffin Group Inc. as
at December 31, 1998 and September 30, 1999, and the related statements of
operations, stockholders' (deficit) equity and cash flows for the period from
September 14, 1998 (inception) to December 31, 1998 and the nine month period
ended September 30, 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 generally accepted auditing
standards in Canada and 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Puffin Group Inc. as at
December 31, 1998 and September 30, 1999, and the results of its operations and
its cash flows for the periods from September 14, 1998 (inception) to December
31, 1998 and the nine month period ended September 30, 1999 in accordance with
accounting principles generally accepted in Canada and in the United States of
America.
Ottawa, Canada /s/ Ernst & Young LLP
January 7, 2000
F-23
<PAGE>
THE PUFFIN GROUP INC.
BALANCE SHEET
US DOLLARS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $ 1,862 $14,335
Accounts receivable (note 1)...................... 3,955 40,000
Prepaid expenses.................................. -- 2,462
Other assets...................................... 192 2,400
------- -------
Total current assets............................ 6,009 59,197
Property and equipment, net (note 1)................ 1,887 8,461
------- -------
$ 7,896 $67,658
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................. $ 7,400 $35,864
Accrued professional fees......................... 3,252 14,077
Accrued salaries.................................. 550 4,087
------- -------
Total current liabilities....................... 11,202 54,028
Commitments and contingencies (note 2 and 5)
Stockholders'(deficit) equity (note 1):
Class A shares, voting on a two for one basis,
unlimited number authorized, 500,000 issued...... 67 67
Class C shares, voting on a one for one basis,
unlimited number authorized, 500,000 issued...... 67 67
Class D shares, non-voting, unlimited number
authorized, 25,000 issued........................ -- 16,633
Class B shares, non-voting, unlimited number
authorized, 0 shares issued -- --
First preferred shares, non-voting, unlimited
number authorized, 0 shares issued............... -- --
------- -------
134 16,767
Accumulated deficit............................... (3,440) (3,137)
------- -------
Total stockholders' (deficit) equity............ (3,306) 13,630
------- -------
$ 7,896 $67,658
======= =======
</TABLE>
See accompanying notes.
F-24
<PAGE>
THE PUFFIN GROUP INC.
STATEMENTS OF OPERATIONS
US DOLLARS
<TABLE>
<CAPTION>
Period from
September 14, Nine month
1998 to period ended
December 31, September 30,
1998 1999
------------- -------------
<S> <C> <C>
Revenues:
Software development and
support.................. $14,700 $97,735
------- -------
Total revenues.......... 14,700 97,735
Cost of revenues............ 14,277 52,168
------- -------
Gross margin................ 423 45,567
Operating expenses:
Sales and marketing....... -- 1,381
General and
administrative........... 3,863 43,883
------- -------
Total operating
expenses............... 3,863 45,264
------- -------
Net income (loss) and
comprehensive income
(loss)..................... $(3,440) $ 303
======= =======
</TABLE>
See accompanying notes.
F-25
<PAGE>
THE PUFFIN GROUP INC.
STATEMENT OF STOCKHOLDER'S (DEFICIT) EQUITY
US DOLLARS
<TABLE>
<CAPTION>
Class
Class A Class C D Accumulated
Shares Amount Shares Amount Shares Amount Deficit Total
------- ------ ------- ------ ------ ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of shares to
founders............... 500,000 $67 500,000 $67 -- $ -- $ -- $ 134
Net loss and
comprehensive loss..... -- -- -- -- -- -- (3,440) (3,440)
------- --- ------- --- ------ ------- ------- -------
December 31, 1998....... 500,000 67 500,000 67 -- -- (3,440) (3,306)
Issuance of shares for
cash................... -- -- -- -- 25,000 16,633 -- 16,633
Net income and
comprehensive income... -- -- -- -- -- -- 303 303
------- --- ------- --- ------ ------- ------- -------
September 30, 1999...... 500,000 $67 500,000 $67 25,000 $16,633 $(3,137) $13,630
======= === ======= === ====== ======= ======= =======
</TABLE>
See accompanying notes.
F-26
<PAGE>
THE PUFFIN GROUP INC.
STATEMENTS OF OPERATIONS
US DOLLARS
<TABLE>
<CAPTION>
Period from
September 14, Nine Month
1998 to Period ended
December 31, September 30,
1998 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $(3,440) $ 303
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation.................................... 377 798
Changes in assets and liabilities:
Accounts receivable........................... (3,955) (36,045)
Prepaid expenses.............................. -- (2,462)
Other assets.................................. (192) (2,208)
Accounts payable.............................. 7,400 28,464
Accrued liabilities........................... 3,802 14,362
------- --------
Net cash used in operating activities............. 3,992 3,212
Cash flows from investing activities:
Purchase of property and equipment................ (2,264) (7,372)
------- --------
Net cash use in investing activities.............. (2,264) (7,372)
Cash flows from financing activities:
Proceeds from issuance of common stock............ 134 16,633
------- --------
Net cash provided by financing activities......... 134 16,633
------- --------
Net increase in cash and cash equivalents......... 1,862 12,473
Cash and cash equivalents, beginning of period.... -- 1,862
------- --------
Cash and cash equivalents, end of period.......... $ 1,862 $ 14,335
======= ========
</TABLE>
See accompanying notes.
F-27
<PAGE>
THE PUFFIN GROUP INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
The Puffin Group Inc. ("the Company"), was incorporated under the Ontario
Corporation Act on September 14, 1998. The Company provides Linux-based
computer software development and consulting services.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates.
Foreign Currency Translation
The financial statements have been translated into US dollars in accordance
with Financial Accounting Standards Board issued SFAS No. 52, Foreign Currency
Translation. Monetary assets and liabilities are translated at the rates of
exchange in effect at the applicable year end. Non-monetary assets and
liabilities are translated at the rates of exchange in effect at the dates of
the transactions. Revenue and expenses are translated at the rates of exchange
in effect during the year except for depreciation which is translated at the
same rate as the asset to which is relates. Gains and losses from translations
are included in earnings in the year in which they occur.
Revenue Recognition
Revenue from fixed price long-term computer software development contracts
is recognized over the contract term based on the percentage of services
provided during the period compared to the total estimated services provided
over the entire contract. Revenue from consulting services is recognized as the
services are provided.
Fair Value of Financial instruments
The carrying values of the Company's financial instruments approximate their
fair value given their short-term nature.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade receivables. The Company provides
credit, in the normal course of business, to its customers and performs ongoing
credit evaluations of its customers. As of December 31, 1998 and September 30,
1999, accounts receivable and total revenue were concentrated as follows:
<TABLE>
<CAPTION>
Accounts Total
receivable revenue
---------- -------
<S> <C> <C>
December 31, 1998
Customer A.............................................. $ 3,955 $14,700
======= =======
September 30, 1999
Customer A.............................................. -- 32,100
Customer B.............................................. 40,000 65,635
------- -------
Total................................................... $40,000 $97,735
======= =======
</TABLE>
F-28
<PAGE>
THE PUFFIN GROUP INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. All cash and cash
equivalents at December 31, 1998 and September 30, 1999 were held with one
financial institution.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives (three to five years) of
the assets. Leasehold improvements are amortized over the corresponding lease
term.
Property and equipment consists of the following at December 31, 198 and
September 30, 1999:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Original cost:
Computer equipment.............................. $2,264 $ 3,216
Furniture and fixtures.......................... -- 5,651
Leasehold improvements.......................... -- 768
------ -------
Total property and equipment.................... 2,264 9,636
Less: accumulated depreciation.................. (377) (1,175)
------ -------
Property and equipment, net..................... $1,887 $ 8,461
====== =======
</TABLE>
Impairment of Long-lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-lived
Assets to be Disposed Of, the Company reviews long-lived and intangible assets
for impairment whenever events or circumstances indicate the carrying value of
an asset may not be recoverable.
Income Taxes
The Company provides for income taxes based on the liability method, which
requires recognition of deferred tax assets and liabilities based on
differences between financial reporting and tax bases of assets and liabilities
measured using enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse.
Stock Split
Effective August 31, 1999, the Company completed a 500-for-1 stock split. As
a result of the stock split, outstanding and issued shares increased with the
effect of the stock split accounted for retroactively in these financial
statements. The rights of the holders of these securities were not otherwise
modified.
Impact of Recent Accounting Pronouncements
In March 1998, the AICPA issued Statement of Position (SOP) No. 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP No. 98-1 requires entities to capitalize certain costs
related to internal-use software once certain criteria have been met. SOP No.
98-1 was adopted by
F-29
<PAGE>
THE PUFFIN GROUP INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
the Company in fiscal 1999. The adoption of SOP No. 98-1 did not have a
material impact on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133, as recently amended, is effective for
fiscal years beginning after June 15, 2000. Management has not yet determined
the effects of the adoption of SFAS No. 133 on the Company's financial position
or results of operations.
2. Commitments
The Company leases its facilities under operating leases that expire at
various dates through June 30, 2002.
Future minimum operating lease payments as of September 30, 1999 are as
follows:
<TABLE>
<S> <C>
2000 $ 35,150
2001 43,320
2002 32,500
--------
Total future minimum lease payments.............................. $110,970
========
</TABLE>
Rent expense for the period to December 31, 1998 and September 30, 1999 was
$0 and $4,652, respectively.
3. Income Taxes
As of September 30, 1999, the Company had federal and provincial net loss
carryforwards of approximately $2,000 which expire in the year ending 2006, if
not utilized.
Significant components of the Company's deferred tax assets for federal and
provincial income taxes as of December 31, 1998 and September 30, 1999 are as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.................................. $ 452
Valuation allowance............................................... (452)
-----
$ --
=====
</TABLE>
4. Segmented information
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information.
The Company operates in one business segment--Linux-based computer software
development and consulting services. This segment engages in business
activities from which it earns Linux-based computer software development and
support revenue and incurs expenses.
The Company has generated all of its revenue from the United States of
America. All of the Company's assets are located in Canada.
F-30
<PAGE>
THE PUFFIN GROUP INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Uncertainty due to the year 2000 (unaudited)
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than
a date. The effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect an entity's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
6. Subsequent event
On October 1, 1999 the Company's shareholders sold 100% of their interest in
the Company to Linuxcare Inc. in exchange for shares of Linuxcare Inc. Upon
completion of the acquisition the Company's name will be changed to Linuxcare
Canada.
F-31
<PAGE>
Report of Reconta Ernst & Young, S.p.A., Independent Auditors
To the Board of Directors and Shareholders of
Prosa Progettazione Sviluppo Aperto S.r.l.:
We have audited the accompanying balance sheets of Prosa Progettazione
Sviluppo Aperto S.r.l., hereinafter referred to as Prosa S.r.l., as of December
31, 1999 and 1998, and the related statements of operations, retained earnings
and cash flows for year ended December 31, 1999 and for the period from May 4,
1998 (date of inception) to December 31, 1998. 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 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 Prosa S.r.l. as of December
31, 1999 and 1998, and the results of its operations and its cash flows for the
year ended December 31, 1999 and for the period from May 4, 1998 (inception) to
December 31, 1998 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Reconta Ernst & Young, S.p.A.
Milan, Italy
February 7, 2000
F-32
<PAGE>
PROSA S.r.l.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
(in U.S. $) (in U.S. $)
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................. $ 489 $ 5,343
Accounts receivable................................... 115,049 6,114
Inventories........................................... 2,837 3,082
Deferred income taxes................................. 185 185
Prepaid expenses and other assets..................... 5,120 --
-------- -------
Total current assets................................ $123,680 $14,724
Fixed assets:
Property and equipment, net........................... 6,727 2,736
Deposit on lease...................................... 5,711 --
-------- -------
12,438 2,736
Deferred income taxes................................... 407 592
-------- -------
Total assets........................................ $136,525 $18,052
======== =======
Liability and Owners' Equity
Current liabilities:
Accounts payable...................................... $120,709 $ 1,258
Accrued liabilities................................... -- 300
Advances from owners.................................. -- 5,331
-------- -------
Total current liabilities........................... 120,709 6,889
Owners' equity:
Share Capital......................................... 12,703 12,703
Currency translation adjustment....................... (2,024) (72)
Retained earnings..................................... 5,137 (1,468)
-------- -------
Total owners' equity................................ 15,816 11,163
-------- -------
Total liabilities and owners' equity................ $136,525 $18,052
======== =======
</TABLE>
See accompanying notes
F-33
<PAGE>
PROSA S.r.l.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Period from
May 4, 1998
Year ended (inception) to
December 31, December 31,
1999 1998
(in U.S. $) (in U.S. $)
------------ --------------
<S> <C> <C>
Net sales.......................................... $222,930 $12,208
Cost of sales...................................... 120,335 8,534
-------- --------
Gross profit....................................... 102,595 3,674
Selling, general and administrative expenses....... 87,250 5,960
-------- --------
Income (loss) from operations...................... 15,345 (2,286)
Other income (expense):
Interest income (expense), net................... (1,048) 41
Other, net....................................... (1,399) --
-------- --------
Total other income (expense)................... (2,447) 41
-------- --------
Income (loss) before income taxes.................. 12,898 (2,245)
Income taxes (benefit)............................. 6,293 (777)
-------- --------
Net income (loss).................................. $ 6,605 $ (1,468)
======== ========
</TABLE>
See accompanying notes
F-34
<PAGE>
PROSA S.r.l.
STATEMENTS OF OWNERS' EQUITY
(In U.S. Dollars)
<TABLE>
<CAPTION>
Capital
-------------- Translation Retained
Quotas Amount adjustments earnings Total
------ ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
Issuance of quotas...... $ 5 $12,703 $ -- $ -- $12,703
Currency translation
adjustment............. -- -- (72) -- (72)
Net income (loss)....... -- -- -- (1,468) (1,468)
--- ------- ------- ------- -------
Balances at December 31,
1998................... 5 12,703 (72) (1,468) 11,163
Currency translation
adjustment............. -- -- (1,952) -- (1,952)
Net income (loss)....... -- -- -- 6,605 6,605
--- ------- ------- ------- -------
Balances at December 31,
1999................... $ 5 $12,703 $(2,024) $ 5,137 $15,816
=== ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-35
<PAGE>
PROSA S.r.l.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
May 4, 1998
Year ended (inception) to
December 31, December 31,
1999 1998
(in U.S. $) (in U.S. $)
------------ --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ 6,605 $(1,468)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation.................................... 1,060 275
Changes in operating assets and liabilities:
Accounts receivable........................... (108,935) (6,114)
Inventories................................... 245 (3,082)
Prepaid expenses and other current assets..... (5,120) --
Accounts payable.............................. 119,451 1,258
Deferred income tax provision (benefit)....... 185 (777)
Accrued liabilities........................... (300) 300
Currency translation adjustment............... (1,639) (63)
--------- -------
Net cash provided by (used in) operating
activities....................................... 11,552 (9,671)
Cash flows from investing activities:
Purchase of property and equipment................ (5,364) (3,020)
Deposit on lease.................................. (5,711) --
--------- -------
Net cash used in investing activities............. (11,075) (3,020)
Cash flows from financing activities:
Advances from owners'............................. (5,331) 5,331
Proceeds from issuance of capital................. -- 12,703
--------- -------
Net cash provided by (used in) financing
activities....................................... (5,331) 18,034
--------- -------
Net increase (decrease) in cash and cash
equivalents...................................... (4,854) 5,343
Cash and cash equivalents, beginning of year...... 5,343 --
--------- -------
Cash and cash equivalents, end of year............ $ 489 $ 5,343
========= =======
</TABLE>
See accompanying notes
F-36
<PAGE>
PROSA S.r.l.
NOTES TO FINANCIAL STATEMENTS
1. Background and Presentation
Prosa S.r.l. ("the Company") is a legal entity incorporated under the laws
of Italy. The Company was incorporated in Bergamo, Italy on May 4, 1998. The
Company provides Linux-based computer software and services, including system
architecture design, system integration and security consulting. The share
capital (quota) is divided into five quota shares of approximately $2,540 each.
On December 30, 1999, the share quota of the Company has been purchased by
Linuxcare, Inc. in exchange for $125,000 and 25,000 options to purchase shares
of Linuxcare, Inc. common stock. The financial statements do not reflect the
effects of push-down amounts to reflect the purchase of the Company by
Linuxcare, Inc.
To comply with appropriate statutory requirements, the Company maintains its
accounts to prepare financial statements presented in accordance with
accounting principles generally accepted in Italy (Italian GAAP). Adjustments
have been made to such financial statements presented on the basis of Italian
GAAP to prepare the accompanying financial statements, which are presented in
conformity with generally accepted accounting principles in the United States
of America (U.S. GAAP). The Company's year end is December 31.
2. Significant Accounting Policies
Use of Estimates
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 amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist principally of cash deposited in money
market and checking accounts, which amounts approximate fair value.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
Property and Equipment
Office equipment, computers, and furniture and fixtures are stated at cost
and are depreciated using the straight-line method based on the following
estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Computer & Office equipment......................................... 5
Furniture and fixtures.............................................. 5-8
</TABLE>
Revenue Recognition
Revenues from professional services, including planning, deployment and
installation, systems integration, performance analysis and security consulting
of Linux-based solutions, are recognized as services are performed.
Income taxes
Income taxes are calculated in accordance with applicable Italian law.
Deferred income taxes are accounted for under the liability method and reflect
the tax effects of all significant temporary differences
F-37
<PAGE>
PROSA S.r.l.
NOTES TO FINANCIAL STATEMENTS--(Continued)
between the tax basis of assets and liabilities and their reported amounts in
the financial statements. A valuation allowance is provided against deferred
tax assets when it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
Information expressed in U.S. Dollars
The financial statements are stated in Italian Lire, the currency of the
country in which the Company operates (functional currency). Asset and
liability accounts are translated using the current exchange rate (the rate of
translation in effect at the balance sheet date). Revenue and expenses are
translated into U.S. Dollars at the weighted average rate for the current year.
The translation adjustment results from the translation of foreign currency
statements and it has been reported separately as a component of owners'
equity. The exchange rate for the years ended December 31, 1999 and 1998 was
1,926.06 Lire per U.S. Dollar and 1,653.10 Lire per U.S. Dollar respectively.
The weighted average exchange rate for year ended December 31, 1999 and for
the period from May 4, 1998 (inception) to December 31, 1998 was 1,790.08 Lire
per U.S. Dollar and 1,735.05 Lire per U.S. Dollar respectively.
Impairment of Long-lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-lived
Assets to be Disposed Of, the Company reviews long-lived and intangible assets
for impairment whenever events or circumstances indicate the carrying value of
an asset may not be recoverable.
Impact of Recent Accounting Pronouncements
In March 1998, the AICPA issued Statement of Position (SOP) No. 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP No. 98-1 requires entities to capitalize certain costs
related to internal-use software once certain criteria have been met. The
adoption of SOP No. 98-1 did not have a material impact on the Company's
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133, as recently amended, is effective for
fiscal years beginning after June 15, 2000. Management believes the adoption of
SFAS No. 133 will not have a material effect on the Company's financial
position or results of operations.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade receivables. The Company provides
credit, in the normal course of business, to a number of companies and performs
ongoing credit evaluations of its customers. As of December 31, 1999,
approximately 38% of accounts receivable was concentrated with one customer.
The net sales to the same customer accounted for approximately 32% of total
revenues for the year ended December 31, 1999.
F-38
<PAGE>
PROSA S.r.l.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment consists of the following at December 31, 1999 and
1998 (in U.S. Dollars):
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
(in U.S. $) (in U.S. $)
----------- -----------
<S> <C> <C>
Computer and office equipment..................... 7,766 2,799
Furniture and fixtures............................ 190 221
------ -----
Total property and equipment...................... 7,956 3,020
Less: accumulated depreciation.................... (1,229) (284)
------ -----
Property and equipment, net....................... 6,727 2,736
====== =====
</TABLE>
4. Commitments
The Company leases its facilities under an operating lease that expires at
September 17, 2005 and it is renewable for a successive term of six years, at
the Company's option. Rent expense for the year ended December 31, 1999 was
approximately U.S. 9,160 Dollars. Future minimum lease payments as of December
31, 1999 are as follows (in U.S. Dollars):
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
2000........................... 23,364
2001........................... 23,364
2002........................... 23,364
2003........................... 23,364
2004........................... 23,364
Thereafter..................... 16,680
-------
Future minimum lease payments.. 133,500
=======
</TABLE>
5. Income Taxes
Income before income taxes and provision for income taxes are as follows for
the year ended December 31, 1999 and for the period ended December 31, 1998 (in
U.S. Dollars):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Income (loss) before income taxes.......................... 12,898 (2,245)
Provision for income taxes:
Current.................................................. 6,108 --
Deferred (benefit)....................................... 185 (777)
------ ------
Net income (loss).......................................... 6,605 (1,468)
====== ======
</TABLE>
The Italian statutory rate for 1999 is 41.25% comprised of a 37% national
tax (IRPEG) and 4.25% IRAP (Regional Tax on Productive Activities) tax. A
reconciliation between the Italian statutory tax rate and the effective tax
rate is as follows:
<TABLE>
<CAPTION>
1999 1998
----- ----
<S> <C> <C>
Income tax at Statutory rate (41.25%)........................ 5,320 (926)
Permanent differences........................................ 146 149
Non deductible costs--Intent and Labor (IRAP only)........... 1,041 --
Other........................................................ (214) --
----- ----
Income tax actual (48.80%)................................... 6,293 (777)
===== ====
</TABLE>
F-39
<PAGE>
PROSA S.r.l.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of deferred income tax assets and liabilities at December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
(in U.S. $) (in U.S. $)
----------- -----------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforward (NOL).............. -- 127
Depreciation of capitalized costs.............. 592 777
Valuation allowance............................ -- (127)
Deferred tax liabilities: -- --
--- ----
Net deferred tax asset (liability)............... 592 777
=== ====
<CAPTION>
December 31,
-----------------------
1999 1998
(in U.S. $) (in U.S. $)
----------- -----------
<S> <C> <C>
Balance sheet classification:
Tax assets current portion....................... 185 185
Tax assets non-current portion................... 407 592
--- ----
592 777
=== ====
</TABLE>
In 1998 the Company provided a 100% valuation allowance for deferred tax
assets related to operating loss carryforward because the weight of available
evidence indicated that it was more likely than not that the portion of the
deferred tax asset would not be realized.
6. Owners' Equity
Italian law requires that 5% of a company's net income be retained as a
legal reserve, until such reserve equals 20% of share capital. Included in
retained earnings are legal reserves of approximately U.S. 340 Dollars at
December 31, 1999. This reserve is not available for distribution.
7. Related Party Transactions
Significant related party transactions for year ended December 31, 1999 and
1998 were as follows (in U.S. Dollars):
<TABLE>
<CAPTION>
Year ended Period ended
Dec. 31, 1999 Dec. 31, 1998
------------- -------------
<S> <C> <C>
Compensation to the Board of Directors...... 21,780 0
Other compensations for services provided to
the Company by the owners.................. 11,865 0
Advances from owners........................ 9,481 5,331
</TABLE>
In 1999 and 1998 the Company received advances, free of interest from the
owners. These advances were fully repaid in December 1999.
The owners are actively involved in Company operations and its business
development.
F-40
<PAGE>
PROSA S.r.l.
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Termination Indemnity
In accordance with Italian severance pay laws and regulations statutes, an
employee benefit is accrued for service to date, representing the amount which
the employee would be entitled if the employee separates immediately. The
termination indemnity liability is calculated in accordance with local civil
and labor laws based on each employee's length of service, employment category
and remuneration. The termination liability is adjusted annually by a cost-of-
living index provided by the Italian Government. There is no vesting period or
funding requirement associated with the liability. No liability for termination
indemnities has been recorded since the Company has no employees.
9. Subsequent Events
On February 7, 1999, the Company was converted into an S.p.A. (Societa per
azioni), the corporate name was changed to LINUXCARE Italia S.p.A., and a new
registered office has been established in Rome (Italy). Following the
conversion, the Company's capital was increased to Italian Lire 1 billion by a
contribution from Linuxcare, Inc.
F-41
<PAGE>
Inside back cover: A depiction of an advertisement used by the Company with
copy that reads as set forth below.
Headline: IF WHERE YOU WANT TO GO TODAY IS LINUX, YOU HAVE OUR SUPPORT.
Text: Linuxcare offers a comprehensive range of enterprise-class support and
services for the Linux operating system. When you work with us, you'll gain
access to deep expertise in everything from integrating Linux with your current
systems, to 24 X 7 support, to training--all in one place. The Linux revolution
has begun. And now it means business. To learn more, call 888.LIN.GURU (546-
4878) or visit www.linuxcare.com.
Bottom tagline: SUPPORT FOR THE REVOLUTION LINUXCARE.
<PAGE>
[LINUXCARE LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expense other than underwriting
discounts and commissions, payable by Linuxcare, Inc. in connection with the
sale of Common Stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee................................................ $24,288
NASD filing fee..................................................... 9,700
Nasdaq National Market listing fee.................................. *
Printing and engraving costs........................................ *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Transfer Agent and Registrar fees................................... *
Miscellaneous expenses.............................................. *
-------
Total............................................................. $ *
=======
</TABLE>
- --------
*To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article 11 of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article 7 Section 7.6 of the Registrant's Bylaws provides for the
indemnification of officers, directors and third parties acting on behalf of
the Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the Registrant, and,
with respect to any criminal action or proceeding, the indemnified party had no
reason to believe his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for
in the Registrant's Bylaws, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
Item 15. Recent Sales of Unregistered Securities
Since May 3, 1999 we have issued and sold the securities described below:
(a) From May 3, 1999 to January 31, 2000 we issued and sold an aggregate of
3,290,177 shares of unregistered common stock to 46 directors, officers,
employees, former employees, and consultants at prices ranging from $0.07
to $2.00 per share, for aggregate cash consideration of approximately
$711,825, of which approximately $187,053 is subject to outstanding
promissory notes payable to us. These shares were sold pursuant to the
exercise of options granted by the board under our 1999 stock plan. As to
each of our directors, officers, employees, former employees and
consultants who were issued such securities, we relied upon Rule 701 of the
Securities Act of 1933. Each such person purchased our securities pursuant
to a written contract between such person and us. In addition, we met the
conditions imposed under Rule 701 (b).
II-1
<PAGE>
(b) On December 14, 1998 we issued and sold an aggregate of 6,000,000 shares of
unregistered common stock at a price per share of $0.00005 to our three
founders, David LaDuke, David Sifry, and Arthur Tyde, for an aggregate
purchase price of $300.00 and their shares of Linux Care, Inc., a Nevada
company. We relied upon Section 4(2) of the Securities Act of 1933 in
connection with the issuance of these securities.
(c) On December 23, 1998 we issued and sold an aggregate of 1,058,824 shares of
common stock at a price per share of $0.00005 to Constantin Delivanis and
Madhaven Rangaswami, each an accredited investor, for an aggregate purchase
price of $53.00. We relied upon Section 4(2) of the Securities Act of 1933
in connection with the issuance of these securities.
(d) On February 1, 1999 and April 16, 1999 we issued and sold (1) in the
aggregate 7,882,924 shares of unregistered Series A Preferred stock at a
price per share of $0.61625, and (2) an unregistered warrant to purchase
2,777,778 shares of Series A preferred stock, with an exercise price per
share of $0.61625, to certain investors for aggregate cash consideration of
approximately $4,857,852. The warrant was terminated, unexercised, in
December, 1999. On January 21, 1999 we issued an unregistered warrant to
purchase 34,612 shares of Series A Preferred stock, with an exercise price
per share of $0.61625, to G & H Partners in consideration of cancellation
of indebtedness. This warrant was exercised in full on September 9, 1999.
These shares and warrants were sold pursuant to Series A Preferred stock
and warrant purchase agreements between such investors and us. We relied
upon Section 4(2) of the Securities Act of 1933 and Regulation D, Rule 506,
in connection with the sale of these securities. The sale of Series A
preferred stock and warrants was made in compliance with all the terms of
Rules 501 and 502 of Regulation D, there were no more than 35 investors, as
calculated pursuant to Rule 501(e) of Regulation D, and each investor who
was not an accredited investor represented to us that it had such knowledge
and experience in financial and business matters that it was capable of
evaluating the merits and risks of the investment.
(e) On July 27, 1999, in connection with obtaining equipment leases and loans,
we issued unregistered warrants to purchase an aggregate of 295,266 shares
of Series A preferred stock, with an exercise price per share of $1.49, to
Comdisco, Inc. We relied upon Section 4(2) of the Securities Act of 1933
and Regulation D, Rule 506, in connection with the issuance of the
warrants. The issuance of the warrants was made in compliance with all the
terms of Rules 501 and 502 of Regulation D, there were no more than 35
investors, as calculated pursuant to Rule 501(e) of Regulation D, and each
investor who was not an accredited investor represented to us that it had
such knowledge and experience in financial and business matters that it was
capable of evaluating the merits and risks of the investment.
(f) On October 15, 1999 we entered into an L.O.C. Subordinated Loan and
Security Agreement with Comdisco, Inc. under which Comdisco may be issued
an unregistered warrant to purchase up to a maximum of 96,478 shares of
Series A preferred stock with an exercise price per share of $1.49. As of
January 31, 2000, no funds had been drawn down under the letter of credit
and therefore no warrant had been issued to Comdisco, Inc. We relied upon
Section 4(2) of the Securities Act of 1933 and Regulation D, Rule 506, in
connection with the issuance of the warrants. The issuance of the warrants
was made in compliance with all the terms of Rules 501 and 502 of
Regulation D, there were no more than 35 investors, as calculated pursuant
to Rule 501(e) of Regulation D, and each investor who was not an accredited
investor represented to us that it had such knowledge and experience in
financial and business matters that it was capable of evaluating the merits
and risks of the investment.
(g) On November 15, we issued and sold to the shareholders of Puffin Group,
Inc. (1) 100,000 shares of unregistered common stock and (2) options to
purchase an aggregate of 355,000 unregistered shares of common stock with
an exercise price per share of $0.13 in exchange for all outstanding shares
of Puffin Group, Inc., 23,784 of such option shares have been exercised.
These securities were issued pursuant to a share exchange agreement. We
relied upon Regulation S of the Securities Act of 1933 in connection with
the sale and issuance of these securities.
(h) On December 17, 1999 we issued and sold an aggregate 7,082,267 shares of
unregistered Series B Preferred stock at a price per share of $4.728 to
certain investors for an aggregate cash consideration of approximately
$33,484,958. These shares were sold pursuant to a Series B Preferred stock
purchase
II-2
<PAGE>
agreement between such investors and us. We relied upon Section 4(2) of the
Securities Act of 1933 and Regulation D, Rule 506, in connection with the
sale of these securities. The sale of Series B preferred stock was made in
compliance with all the terms of Rules 501 and 502 of Regulation D, there
were no more than 35 investors, as calculated pursuant to Rule 501(e) of
Regulation D, and each investor who was not an accredited investor
represented to us that it had knowledge and experience in financial and
business matters that it was capable of evaluating the merits and risks of
the investment.
(i) On December 30, 1999 we granted a right to purchase 25,000 shares of
common stock at a purchase price per share of $2.00 to the Prosa company.
This grant was made pursuant to a quota purchase agreement between Prosa
and us. We relied upon Regulation S of the Securities Act of 1933 in
connection with the sale and issuance of these securities.
(j) On January 18, 2000, in connection with obtaining equipment leases and
loans, we issued an unregistered warrant to purchase a maximum of 25,380
shares of Series B preferred stock, with an exercise price per share of
$4.728, to Comdisco, Inc. We relied upon Section 4(2) of the Securities
Act of 1933 and Regulation D, Rule 506, in connection with the issuance of
the warrant. The issuance of the warrant was made in compliance with all
the terms of Rules 501 and 502 of Regulation D, there were no more than 35
investors, as calculated pursuant to Rule 501(e) of Regulation D, and each
investor who was not an accredited investor represented to us that it had
such knowledge and experience in financial and business matters that it
was capable of evaluating the merits and risks of the investment.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Relationships and Related Transactions" in the form of prospectus included
herein. The sales of the above securities were deemed to be exempt from
registration in reliance on Rule 701 promulgated under Section 3(b) under the
Securities Act as transactions pursuant to a compensatory benefit plan or a
written contract relating to compensation, or in reliance on Section 4(2) of
the Securities Act or Regulation D promulgated thereunder as transactions by
an issuer not involving any public offering. The recipients of securities in
each such transaction represented their intention to acquire the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about Linuxcare or had access, through
employment or other relationships, to such information.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1.1** Share Exchange Agreement with Puffin Group, dated October 1, 1999.
2.1.2** Quota Purchase Agreement dated December 30, 1999.
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1* Form of stock certificates.
4.2** Second Amended and Restated Investors' Rights Agreement, dated
December 17, 1999.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2.1** Master Services Agreement with Amdahl Corporation, dated November 5,
1999.
10.2.2+** Support Training and Certification Agreement with Dell Products, LP
regarding support services, dated October 22, 1999.
10.2.3+** Master Services Agreement with Hewlett-Packard Company, dated
January 6, 2000.
10.2.4+** Master Services Agreement with Densa Techno Tokyo Co., Ltd., dated
June 1, 1999.
10.2.5** Statement of Work with IBM Global Services, dated October 21, 1999.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.2.6 Master Outsourcing Agreement with Motorola, dated August 6, 1999.
10.2.7+** Consulting Services Agreement with Macmillan USA, Inc., dated
August 30, 1999.
10.2.8+** Master Services Agreement with NEC Software Ltd., dated June 1,
1999.
10.2.9+** Master Services Agreement with Sun Microsystems, Inc., dated
October 20, 1999.
10.2.10+** StarOffice Support Services Agreement with Sun Microsystems, Inc.
dated September 24, 1999.
10.2.11 Consulting Services Agreement with Silicon Graphics, Inc. dated
April 30, 1999.
10.3.1** Lease Agreement with Euro Business Center, dated September 17,
1999.
10.3.2** Lease Agreement with Swallowfield Office Services Limited, dated
November 1, 1999.
10.3.3** Third amendment to lease with ZORO, LLC, dated October 7, 1999.
10.3.4 Lease Agreement for 650 Townsend Street, dated February 11, 1999.
10.4 Amended and Restated 1999 Stock Option Plan and form of agreements
thereunder.
10.5 2000 Employee Stock Purchase Plan.
10.6 2000 Director Option Plan.
11.1* Statement regarding computation of per share earnings.
12.1* Statements regarding computation of ratios.
21.1* Subsidiaries of the registrant.
23.1.1 Consent of Ernst & Young, LLP, Independent Auditors.
23.1.2 Consent of Ernst & Young, LLP, Independent Auditors.
23.1.3 Consent of Reconta Ernst & Young S.p.A., Independent Auditors.
23.2* Consent of Counsel (see Exhibit 5.1).
24.1** Power of Attorney.
27.1 Financial Data Schedules.
</TABLE>
- --------
+ Confidential treatment has been requested for certain portions of this
exhibit. The omitted portions have been separately filed with the
Commission.
* To be filed by amendment
**Previously filed
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or 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
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions referenced in Item 14 of this
registration statement 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 a
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-4
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, 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 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
of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, State of California, on the 28th day of February, 2000.
Linuxcare, Inc.
/s/ Fernand Sarrat
By: _________________________________
Fernand Sarrat
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Fernand Sarrat President and Chief February 28, 2000
_______________________________ Executive Officer and
Fernand Sarrat Director (Principal
Executive Officer)
/s/ Christian Paul- Chief Financial Officer February 28, 2000
_______________________________ (Principal Financial and
Christian Paul Accounting Officer)
/s/ Arthur Tyde III Director February 28, 2000
_______________________________
Arthur Tyde III
/s/ Ted E. Schlein Chairman of the Board of February 28, 2000
_______________________________ Directors
Ted E. Schlein
/s/ Paul Vais Director February 28, 2000
_______________________________
Paul Vais
/s/ John Drew Director February 28, 2000
_______________________________
John Drew
/s/ Regis McKenna Director February 28, 2000
_______________________________
Regis McKenna
/s/ Ernest Von Simson Director February 28, 2000
_______________________________
Ernest von Simson
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1.1** Share Exchange Agreement with Puffin Group, dated October 1, 1999.
2.1.2** Quota Purchase Agreement dated December 30, 1999.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Bylaws of the Registrant.
4.1* Form of stock certificates.
4.2** Second Amended and Restated Investors' Rights Agreement, dated
December 17, 1999.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement between the Registrant and each
of its directors and officers.
10.2.1** Master Services Agreement with Amdahl Corporation, dated November
5, 1999.
10.2.2+** Support Training and Certification Agreement with Dell Products, LP
regarding support services, dated October 22, 1999.
10.2.3+** Master Services Agreement with Hewlett-Packard Company, dated
January 6, 2000.
10.2.4+** Master Services Agreement with Densa Techno Tokyo Co., Ltd., dated
June 1, 1999.
10.2.5** Statement of Work with IBM Global Services, dated October 21, 1999.
10.2.6 Master Outsourcing Agreement with Motorola, dated August 6, 1999.
10.2.7+** Consulting Services Agreement with Macmillan USA, Inc., dated
August 30, 1999.
10.2.8+** Master Services Agreement with NEC Software Ltd., dated June 1,
1999.
10.2.9+** Master Services Agreement with Sun Microsystems, Inc., dated
October 20, 1999.
10.2.10+** StarOffice Support Services Agreement with Sun Microsystems, Inc.
dated September 24, 1999.
10.2.11 Consulting Services Agreement with Silicon Graphics, Inc. dated
April 30, 1999.
10.3.1** Lease Agreement with Euro Business Center, dated September 17,
1999.
10.3.2** Lease Agreement with Swallowfield Office Services Limited, dated
November 1, 1999.
10.3.3** Third amendment to lease with ZORO, LLC, dated October 7, 1999.
10.3.4 Lease Agreement for 650 Townsend Street, dated February 11, 1999.
10.4 Amended and Restated 1999 Stock Option Plan and form of agreements
thereunder.
10.5 2000 Employee Stock Purchase Plan.
10.6 2000 Director Option Plan.
11.1* Statement regarding computation of per share earnings.
12.1* Statements regarding computation of ratios.
21.1* Subsidiaries of the registrant.
23.1.1 Consent of Ernst & Young, LLP, Independent Auditors.
23.1.2 Consent of Ernst & Young, LLP, Independent Auditors.
23.1.3 Consent of Reconta Ernst & Young S.p.A., Independent Auditors.
23.2* Consent of Counsel (see Exhibit 5.1).
24.1** Power of Attorney.
27.1 Financial Data Schedules.
</TABLE>
- --------
+ Confidential treatment has been requested for certain portions of this
exhibit. The omitted portions have been separately filed with the Commission.
*To be filed by amendment
**Previously filed
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
LINUXCARE, INC.
(Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware)
Linuxcare, Inc., a corporation organized and existing under and by
virtue of the provisions of the General Corporation Law of the State of Delaware
(the "General Corporation Law"),
DOES HEREBY CERTIFY:
FIRST: That the name of this corporation is Linuxcare, Inc. and that
this corporation was originally incorporated pursuant to the General Corporation
Law on December 9, 1998 under the name LinuxCare, Inc.
SECOND: That the Board of Directors duly adopted resolutions
proposing to amend and restate the Certificate of Incorporation of this
corporation, declaring such amendment and restatement to be advisable and in the
best interests of this corporation and its stockholders, and authorizing the
appropriate officers of this corporation to solicit the consent of the
stockholders therefor, which resolution setting forth the proposed amendment and
restatement is as follows:
RESOLVED, that the Certificate of Incorporation of this corporation be
amended and restated in its entirety as follows:
ARTICLE I
The name of this corporation is Linuxcare, Inc.
ARTICLE II
The address of the registered office of this corporation in the State
of Delaware is 15 East North Street, City of Dover, County of Kent. The name of
its registered agent at such address is Incorporating Services, Ltd.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
<PAGE>
ARTICLE IV
A. Classes of Stock. This corporation is authorized to issue two
----------------
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares of Common Stock that this corporation is
authorized to issue is 200,000,000 shares, with a par value of $0.0001 per
share. The total number of shares of Preferred Stock that this Corporation is
authorized to issue is 23,566,075 with a par value of $0.0001 per share:
10,695,314 of which shares shall be designated Series A Preferred Stock ("Series
A Preferred Stock"), 7,870,761 of which shares shall be designated Series B
Preferred Stock ("Series B Preferred Stock") and 5,000,000 of which shall be
undesignated. From and after the effective date of a Qualified IPO, as defined
below, there shall be a total of 5,000,000 shares of authorized Preferred Stock
all of which shall be undesignated.
B. Rights, Preferences and Restrictions of Preferred Stock. The
-------------------------------------------------------
Preferred Stock authorized by this Amended and Restated Certificate of
Incorporation may be issued from time to time in one or more series. The
rights, preferences, privileges, and restrictions granted to and imposed on the
respective classes of the shares of capital stock or the holders thereof are as
follows:
1. Dividend Provisions.
-------------------
(a) The holders of shares of Series A Preferred Stock and
Series B Preferred Stock shall be entitled to receive dividends, out of any
assets legally available therefor, prior and in preference to any declaration or
payment of any dividend (payable other than in Common Stock or other securities
and rights convertible into or entitling the holder thereof to receive, directly
or indirectly, additional shares of Common Stock of this corporation) on the
Common Stock of this corporation, at the rate of $0.0308 and $0.2364 per share
per annum, respectively (as adjusted for any stock splits, stock dividends,
recapitalizations or the like ("Recapitalizations"), payable when, as, and if
declared by the Board of Directors. Dividends with respect to the Series B
Preferred Stock ("Series B Dividends"), when, as, and if declared by the Board
of Directors, shall be (i) payable quarterly, in arrears, on March 1, June 1,
September 1 and December 1 of each year or, if not a business day, on the next
business day (each such date is referred to as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date following the
date of issuance of the Series B Preferred Stock, and (ii) payable in cash with
respect to 50% of the Series B Dividends and the remaining 50% of the Series B
Dividends payable in additional shares of Series B Preferred Stock (the
"Additional Series B Preferred Stock") at the rate of $4.728 per share of Series
B Preferred Stock (as adjusted for any Recapitalizations), which shall be issued
on the applicable Quarterly Dividend Payment Date and shall be subject to the
terms, voting powers, preferences and relative, privileges and other rights
provided hereunder. No fractional shares of Additional Series B Preferred Stock
shall be issued, but in lieu thereof each holder of shares of Additional Series
B Preferred Stock who would otherwise be entitled to receive a fraction of a
share of Series B Preferred Stock shall receive such amount in cash as shall
equal the product of (x) a fraction of a share of additional Series B Preferred
Stock such holder of Series B Preferred Stock would be otherwise entitled
hereunder and (y) $4.728 (as adjusted for any Recapitalizations). Dividends
-2-
<PAGE>
on the Series A Preferred Stock and Series B Preferred Stock shall not be
cumulative. The holders of the outstanding Series A Preferred Stock can waive
any dividend preference that such holders shall be entitled to receive under
this Section 1 upon the affirmative vote or written consent of the holders of at
least a majority of the Series A Preferred Stock then outstanding.
(b) If, after dividends in the full preferential amount
specified in this Section 1 for the Preferred Stock have been paid or declared
and set apart in any calendar year of the corporation, and if the Board shall
declare additional dividends out of funds legally available therefor in that
calendar year, then such additional dividends shall be declared pro rata on the
Common Stock and the Preferred Stock on a pari passu basis according to the
number of shares of Common Stock held by such holders, where each holder of
shares of Preferred Stock is to be treated for such purpose as holding the
greatest whole number of shares of Common Stock then issuable upon conversion of
all shares of Preferred Stock held by such holder pursuant to Section 4.
2. Liquidation Preference. In the event of any liquidation,
----------------------
dissolution or winding up of this corporation, either voluntary or involuntary
(a "Liquidating Event"), distributions to the stockholders of the corporation
shall be made in the following manner:
(a) The holders of Series A Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of this corporation to the holders of Common Stock by reason of
their ownership thereof, an amount per share equal to the sum of (i) $0.61625
for each outstanding share of Series A Preferred Stock (the "Original Series A
Issue Price") and (ii) an amount equal to all declared but unpaid dividends on
such share (subject to adjustment of such fixed dollar amounts for any
Recapitalizations) (the "Series A Liquidation Preference"). The holders of
Series B Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of this corporation to the holders of
Common Stock by reason of their ownership thereof, an amount per share equal to
the sum of (i) $4.728 for each outstanding share of Series B Preferred Stock
(the "Original Series B Issue Price") and (iii) an amount equal to all declared
but unpaid dividends on such share (subject to adjustment of such fixed dollar
amounts for any Recapitalizations) (the "Series B Liquidation Preference"). The
Series A Preferred Stock and Series B Preferred Stock shall rank on parity as to
the receipt of the respective preferential amounts for each such series. If
upon the occurrence of such event, the assets and funds thus distributed among
the holders of the Series A Preferred Stock and Series B Preferred Stock shall
be insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then the entire assets and funds of this corporation
legally available for distribution shall be distributed ratably among the
holders of the Series A Preferred Stock and Series B Preferred Stock in
proportion to the aggregate Series A Liquidation Preference and Series B
Liquidation Preference in such a manner that the preferential amount to be
distributed to each such holder shall equal the amount obtained by multiplying
the entire assets and funds of the Corporation legally available for
distribution hereunder by a fraction, the numerator of which shall be the sum of
the number of shares of Series A Preferred Stock then held by such holder times
the Series A Liquidation Preference plus the number of shares of Series B
Preferred Stock then held by such holder times the Series B Liquidation
Preference, and the denominator of which shall be the sum of the total number of
-3-
<PAGE>
shares of Series A Preferred Stock then outstanding times the Series A
Liquidation Preference plus the total number of shares of Series B Preferred
Stock then outstanding times the Series B Liquidation Preference.
(b) After payment has been made to the holders of Series A and
Series B Preferred Stock of the full preferential amounts and set forth in
Section 2(a) of this Article IV, all of the remaining assets of this corporation
available for distribution to stockholders shall be distributed among the
holders of Common Stock pro rata based on the number of shares of Common Stock
held by each.
(c) (i) For purposes of Sections 2 and 6, a Liquidating Event
of this corporation shall be deemed to include (1) any reorganization, merger or
consolidation in which the holders of the corporation's outstanding voting stock
immediately prior to such transaction own, immediately after such transaction,
securities representing less than a majority of the voting power of the
surviving or acquiring corporation or other entity surviving such transaction,
or (2) a sale or lease of all or substantially all of the assets of this
corporation.
(ii) In any of such events, if the consideration received by
this corporation is other than cash, its value will be deemed its fair market
value as mutually determined in good faith by the Board of Directors of this
corporation and by the holders of at least a majority of the voting power of all
then outstanding shares of Series A Preferred Stock and Series B Preferred
Stock, voting as a class. Any securities shall be valued as follows:
(A) Securities not subject to investment letter or
other similar restrictions on free marketability covered by (B) below:
(1) If traded on a securities exchange or through
the Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange or system over the thirty (30)
day period ending three (3) days prior to the closing ;
(2) If actively traded over-the-counter (other
than the Nasdaq National Market), the value shall be deemed to be the average of
the closing bid or sale prices (whichever is applicable) over the thirty (30)
day period ending three (3) days prior to the closing; and
(3) If there is no active public market, the
value shall be the fair market value thereof, as mutually determined in good
faith by the Board of Directors of this corporation and by the holders of at
least a majority of the voting power of the then outstanding shares of Series A
Preferred Stock and Series B Preferred Stock, voting as a class.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (A) (1), (2) or (3) to reflect
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<PAGE>
the approximate fair market value thereof, as mutually determined in good faith
by the Board of Directors of this corporation and by the holders of at least a
majority of the voting power of the then outstanding shares of Series A
Preferred Stock and Series B Preferred Stock, voting as a class.
(iii) In the event the requirements of this Section 2(c) are
not complied with, this corporation shall forthwith either:
(A) cause such closing to be postponed until such
time as the requirements of this Section 2(c) have been complied with; or
(B) cancel such transaction, in which event the
rights, preferences and privileges of the holders of the Series A Preferred
Stock and Series B Preferred Stock shall revert to and be the same as such
rights, preferences and privileges existing immediately prior to the date of the
first notice referred to in Section 2(c)(iv) below.
(iv) This corporation shall give each holder of record of
Series A Preferred Stock and Series B Preferred Stock written notice of such
impending transaction not later than twenty (20) days prior to the stockholders'
meeting called to approve such transaction, or twenty (20) days prior to the
closing of such transaction, whichever is earlier, and shall also notify such
holders in writing of the final approval of such transaction. The first of such
notices shall describe the material terms and conditions of the impending
transaction and the provisions of this Section 2, and this corporation shall
thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than twenty (20) days after this
corporation has given the first notice provided for herein or sooner than ten
(10) days after this corporation has given notice of any material changes
provided for herein; provided, however, that such periods may be shortened or
-------- -------
such written notice requirement may be waived upon the written consent of the
holders of a majority of the voting power of the then outstanding shares of
Series A Preferred Stock and Series B Preferred Stock, voting as a class.
3. Redemption.
----------
(a) Unless the holders of at least 51% of the then
outstanding Series A Preferred Stock and Series B Preferred Stock otherwise
agree in writing, and subject to Section 3(f) below, the Corporation shall
redeem, from any source of funds legally available therefor, all outstanding
shares of Series A and Series B Preferred Stock in three annual installments
from and after December 14, 2004 (each, a "Redemption Date"). The Corporation
shall effect such redemption(s) on the applicable Redemption Date by paying in
cash in exchange (i) for the shares of Series A Preferred Stock to be redeemed a
sum equal to $0.61625 per share of Series A Preferred Stock (as adjusted for any
Recapitalization with respect to such shares), plus an amount equal to 5% of the
Original Series A Issue Price compounded annually (the "Series A Redemption
Price"), and (ii) for the shares of Series B Preferred Stock to be redeemed a
sum equal to $4.728 per share of Series B Preferred Stock (as adjusted for any
Recapitalizations with respect to such shares) plus an amount equal to 5% of the
Original Series B Issue Price compounded annually (the "Series B Redemption
Price").
-5-
<PAGE>
(b) Any redemption effected pursuant to this Section 3
shall be made on a pro rata basis among the holders of the Series A and Series B
Preferred Stock in proportion to the number of shares of Common Stock issued or
issuable upon conversion of the Series A or Series B Preferred Stock then held
by such holders.
(c) Subject to the rights of series of Preferred Stock
which may from time to time come into existence, at least fifteen (15) but no
more than (30) days prior to each Redemption Date, written notice shall be
mailed, first class postage prepaid, to each holder of record (at the close of
business on the business day next preceding the day on which notice is given) of
the Series A and Series B Preferred Stock to be redeemed, at the address last
shown on the records of the Corporation for such holder, notifying such holder
of the redemption to be effected, specifying the number of shares to be redeemed
from such holder, the Redemption Date, the applicable Redemption Price, the
place at which payment may be obtained and calling upon such holder to surrender
to the Corporation, in the manner and at the place designated, his, her or its
certificate or certificates representing the shares to be redeemed (the
"Redemption Notice").
(d) On or after the Redemption Date, each holder of Series
A or Series B Preferred Stock to be redeemed shall surrender to the Corporation
the certificate or certificates representing such share, in the manner and at
the place designated in the Redemption Notice, and thereupon the applicable
Redemption Price of such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner thereof and
each surrendered certificate shall be cancelled. In the event less than all the
shares represented by any such certificate are redeemed, a new certificate shall
be issued representing the unredeemed shares.
(e) From and after the Redemption Date, unless there shall
have been a default in payment of the applicable Redemption Price, all rights of
the holders of shares of Series A and Series B Preferred Stock designated for
redemption as holders of Series A and Series B Preferred Stock (except the right
to receive the applicable Redemption Price upon surrender of their certificate
or certificates) shall cease with respect to such shares, and such shares shall
not thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever. Subject to the rights of series of
Preferred Stock which may from time to time come into existence, if the funds of
the Corporation legally available for redemption of shares of Series A and
Series B Preferred Stock on the applicable Redemption Date are insufficient to
redeem the total number of shares of Series A and Series B Preferred Stock to be
redeemed on such date, those funds which are legally available will be used to
redeem the maximum possible number of such shares ratably among the holders of
Series A and Series B Preferred Stock. The shares of Series A and Series B
Preferred Stock not redeemed shall remain outstanding and entitled to all the
rights, preferences and privileges provided herein. At any time thereafter when
additional funds of the Corporation are legally available for the redemption of
shares of Series A and Series B Preferred Stock such funds will immediately be
used to redeem the balance of the shares which the Corporation has become
obliged to redeem on such applicable Redemption Date, but which has not been
redeemed.
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<PAGE>
(f) Notwithstanding any other provision to the contrary in this
Section 3, if on the applicable Redemption Date under this Section 3, the
redemption of such Series A and Series B Preferred Stock would be prohibited by
the provisions of applicable state law (a "Redemption Restriction"), then the
Corporation and the holder or holders of Series A and Series B Preferred Stock
shall have the rights described in this Section 3(f). Notwithstanding anything
to the contrary contained in the foregoing sentence, if a Redemption Restriction
exists and restricts the right of redemption of a holder of Series A or Series B
Preferred Stock, the Corporation shall:
(A) redeem for cash the maximum number of Series A and
Series B Preferred Stock which the Corporation is obligated to redeem hereunder,
ratably among the holders of Series A and Series B Preferred based upon the
number of shares of Series A and Series B Preferred Stock that the Corporation
is able to purchase, taking into account the effect of the applicable Redemption
Restrictions(s); and
(B) defer redemption of the remaining Series A and Series B
Preferred Stock which the Corporation is obligated to redeem hereunder as cannot
be purchased under subparagraph (A) above until such time as the Corporation is
able to consummate the redemption of such Series A and Series B Preferred Stock
without a Redemption Restriction.
(g) Deposit of Redemption Price. Two days prior to each Redemption
---------------------------
Date, the corporation shall deposit in cash the Redemption Price of all
outstanding shares of Preferred Stock submitted for redemption in response to
the Redemption Notice, and not yet redeemed or converted, with a bank or trust
corporation having aggregate capital and surplus in excess of $50,000,000 as a
trust fund for the benefit of the respective holders of the shares designated
for redemption and not yet redeemed. Simultaneously, the corporation shall
deposit irrevocable instructions and authority to such bank or trust corporation
to pay, on after the Redemption Date, the Redemption Price of the Preferred
Stock to the holders thereof upon surrender of their certificates. Any monies
deposited by the corporation pursuant to this Section 3(g) for the redemption of
shares that are thereafter converted into shares of Common Stock pursuant to
Section 4 below no later than the close of business on the Redemption Date shall
be returned to the Corporation forthwith upon such conversion. The balance of
any monies deposited by the corporation pursuant to this Section 3(g) remaining
unclaimed at the expiration of three (3) months following the Redemption Date
shall thereafter be returned to the corporation, provided that the shareholder
to which such monies would be payable hereunder shall be entitled, upon proof of
its ownership of the Preferred Stock and payment of any bond requested by the
corporation, to receive such monies but without interest from the Redemption
Date.
4. Conversion. The holders of Preferred Stock shall have conversion
----------
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock shall
----------------
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share, at the office of this corporation or any transfer
agent for such stock, into such number of
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<PAGE>
fully paid and nonassessable shares of Common Stock as is determined by dividing
the Original Series A Issue Price by the Series A Conversion Price applicable to
such share, determined as provided below, in effect on the date the certificate
is surrendered for conversion. Each share of Series B Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of this corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Original Series B Issue Price by
the Series B Conversion Price applicable to such share, determined as provided
below, in effect on the date the certificate is surrendered for conversion. The
initial Series A Conversion Price per share for shares of Series A Preferred
Stock shall be the Original Series A Issue Price, and the initial Series B
Conversion Price per share for shares of Series B Preferred Stock shall be
$4.5883; provided, however, that such Series A and Series B Conversion Prices
-------- -------
shall be subject to adjustment as set forth in Section 4(d).
(b) Automatic Conversion. Each share of Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock at the Conversion Price
for such series at the time in effect for such Preferred Stock immediately upon
the earlier of (i) this corporation's sale of its Common Stock in a firm
commitment underwritten public offering pursuant to a registration statement on
Form S-1 or Form SB-2 under the Securities Act of 1933, as amended, the public
offering price of which was not less than $9.456 per share (as adjusted for any
Recapitalizations) and with net proceeds to the corporation (after deducting
underwriter discounts, commissions and offering expenses) of not less than $30
million in the aggregate (a "Qualified IPO") or (ii) with respect to Series A
Preferred Stock, the date specified by written consent or agreement of the
holders of at least a majority of the then outstanding shares of Series A
Preferred Stock or (iii) with respect to Series B Preferred Stock, the date
specified by written consent or agreement of the holders of at least a majority
of the outstanding shares of Series B Preferred Stock.
(c) Mechanics of Conversion. Before any holder of Preferred Stock
-----------------------
shall be entitled to convert the same into shares of Common Stock, he or she
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of this corporation or of any transfer agent for the Preferred Stock, and
shall give written notice to this corporation at its principal corporate office,
of the election to convert the same and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. This corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Preferred Stock, or to the nominee or
nominees of such holder, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of such date. If the
conversion is in connection with an underwritten offering of securities
registered pursuant to the Securities Act of 1933, as amended, the conversion
may, at the option of any holder tendering Preferred Stock for conversion, be
conditioned upon the closing with the underwriters of the sale of securities
pursuant to such offering, in which event the persons entitled to receive
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<PAGE>
the Common Stock upon conversion of the Preferred Stock shall not be deemed to
have converted such Preferred Stock until immediately prior to the closing of
such sale of securities pursuant to such offering.
(d) Conversion Price Adjustments of Preferred Stock for Certain
-----------------------------------------------------------
Dilutive Issuances, Splits and Combinations. The Series A Conversion Price and
- -------------------------------------------
the Series B Conversion Price shall be subject to adjustment from time to time
as follows:
(i) (A) If this corporation shall issue, after the date upon
which this Amended and Restated Certificate of Incorporation becomes effective
(the "Effective Date"), any Additional Stock (as defined below) without
consideration or for a consideration per share less than the Conversion Price
for such series in effect immediately prior to the issuance of such Additional
Stock, the Conversion Price for such series in effect immediately prior to each
such issuance shall forthwith (except as otherwise provided in this clause (i))
be adjusted to a price determined by multiplying such Conversion Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
Outstanding (as defined below) immediately prior to such issuance plus the
number of shares of Common Stock that the aggregate consideration received by
this corporation for such issuance would purchase at such Conversion Price; and
the denominator of which shall be the number of shares of Common Stock
Outstanding immediately prior to such issuance plus the number of shares of such
Additional Stock. For purposes of this Section 4(d)(i)(A), "Common Stock
Outstanding" shall mean the sum of: (i) the number of outstanding shares of
Common Stock of the Company, (ii) the number of shares of Common Stock into
which outstanding shares of Preferred Stock of the Company are convertible, and
(iii) except for shares which would be deemed issued pursuant to options granted
to employees, directors and consultants of the Company, all rights to subscribe
for and options to purchase the Common Stock or any security convertible into,
or exchangeable for, Common Stock of the Company.
(B) No adjustment of the Conversion Price for the applicable
series of Preferred Stock shall be made in an amount less than one cent per
share, provided that any adjustments that are not required to be made by reason
of this sentence shall be carried forward and shall be either taken into account
in any subsequent adjustment made prior to three (3) years from the date of the
event giving rise to the adjustment being carried forward, or shall be made at
the end of three (3) years from the date of the event giving rise to the
adjustment being carried forward. Except to the limited extent provided for in
subsections (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant
to this Section 4(d)(i) shall have the effect of increasing such Conversion
Price above the Conversion Price of such series in effect immediately prior to
such adjustment.
(C) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by this corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be
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<PAGE>
deemed to be the fair value thereof as mutually determined in good faith by the
Board of Directors of this corporation and the holders of at least a majority of
the voting power of all then outstanding shares of Series A Preferred Stock and
Series B Preferred Stock, voting as a class.
(E) In the case of the issuance (whether before, on or after the
Effective Date) of options to purchase or rights to subscribe for or otherwise
acquire Common Stock, securities by their terms convertible into or exchangeable
for Common Stock or options to purchase or rights to subscribe for such
convertible or exchangeable securities, the following provisions shall apply for
all purposes of this Section 4(d)(i) and Section 4(d)(ii):
(1) The aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights to subscribe for
or otherwise acquire Common Stock (assuming the satisfaction of any conditions
to exercisability, including without limitation, the passage of time, but
without taking into account potential antidilution adjustments) shall be deemed
to have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
Sections 4(d)(i)(C) and (d)(i)(D)), if any, received by this corporation upon
the issuance of such options or rights plus the minimum exercise price provided
in such options or rights for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of, or in exchange for, any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities (assuming the
satisfaction of any conditions to convertability or exchangeability, including
without limitation the passage of time, but without taking into account
potential antidilution adjustments) and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such securities were
issued or such options or rights were issued and for a consideration equal to
the consideration, if any, received by this corporation for any such securities
and related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional consideration, if
any, to be received by this corporation upon the conversion or exchange of such
securities or the exercise of any related options or rights (the consideration
in each case to be determined in the manner provided in Sections 4(d)(i)(C) and
(d)(i)(D)).
(3) In the event of any change in the number of shares of
Common Stock deliverable or in the consideration payable to this corporation
upon exercise of such options or rights or upon conversion of or in exchange for
such convertible or exchangeable securities, including, but not limited to, a
change resulting from the antidilution provisions thereof (unless such options
or rights or convertible or exchangeable securities were merely deemed to be
included in the numerator and denominator for purposes of determining the number
of shares of Common Stock outstanding for purposes of Section 4(d)(i)(A)), the
Conversion Price of the applicable series, to the extent in any way affected by
or computed using such options, rights or securities, shall be recomputed to
reflect such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such
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<PAGE>
consideration upon the exercise of any such options or rights or the conversion
or exchange of such securities.
(4) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
Conversion Price of the applicable series, to the extent in any way affected by
or computed using such options, rights or securities or options or rights
related to such securities (unless such options or rights were merely deemed to
be included in the numerator and denominator for purposes of determining the
number of shares of Common Stock outstanding for purposes of Section
4(d)(i)(A)), shall be recomputed to reflect the issuance of only the number of
shares of Common Stock (and convertible or exchangeable securities that remain
in effect) actually issued upon the exercise of such options or rights, upon the
conversion or exchange of such securities or upon the exercise of the options or
rights related to such securities.
(5) The number of shares of Common Stock deemed issued and
the consideration deemed paid therefor pursuant to Section 4(d)(i)(E)(1) and (2)
shall be appropriately adjusted to reflect any change, termination or expiration
of the type described in either Section 4(d)(i)(E)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common Stock issued
(or deemed to have been issued pursuant to Section 4(d)(i)(E)) by this
corporation after the Effective Date other than:
(A) Common Stock issued pursuant to a transaction described in
Section 4(d)(iii) hereof; or
(B) Common Stock issuable or issued to employees, consultants,
directors or vendors (if in transactions with primarily non-financing purposes)
of this corporation directly or pursuant to a stock option plan or restricted
stock plan approved by the Board of Directors of this corporation; or
(C) Common Stock issuable or issued to persons or entities with
which the Company has business relationships, provided (i) that such issuances
are for other than primarily equity financing purposes, and (ii) that such
issuances be approved by both the full board of directors of this corporation
and a majority of the Outside Directors (as defined in Section 5, Article IV);
or
(D) Common Stock in the aggregate amount of 1,000 shares to be
issued to National Alliance Research on Schizophrenia & Depression and Aldea.
(iii) In the event this corporation should at any time or from time
to time after the Effective Date fix a record date for the effectuation of a
split, subdivision or reclassification of the outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, exchangeable for or entitling the
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<PAGE>
holder thereof to receive directly or indirectly, additional shares of Common
Stock ("Common Stock Equivalents") without payment of any consideration by such
holder for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion,
exchange or exercise thereof), then, as of such record date (or the date of such
dividend distribution, split or subdivision if no record date is fixed), the
Conversion Price of the applicable series of Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of such series of Preferred Stock shall be increased in
proportion to such increase of the aggregate of shares of Common Stock
outstanding and those issuable with respect to such Common Stock Equivalents.
(iv) If the number of shares of Common Stock outstanding at any time
after the Effective Date is decreased by a combination or reclassification of
the outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for the applicable series shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of such series shall be decreased in proportion to such
decrease in outstanding shares.
(e) Other Distributions. In the event this corporation shall declare
-------------------
a distribution payable in securities of other persons, evidences of indebtedness
issued by this corporation or other persons, assets (excluding cash dividends)
or options or rights not referred to in Section 4(d)(iii), then, in each such
case for the purpose of this Section 4(e), the holders of the applicable series
of Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of this corporation into which their shares of Preferred Stock were
convertible as of the record date fixed for the determination of the holders of
Common Stock of this corporation entitled to receive such distribution.
(f) Recapitalizations. If at any time or from time to time there shall
-----------------
be a recapitalization of the Common Stock (other than a subdivision, combination
or merger or sale of assets transaction provided for elsewhere in this Section 4
or Section 2), provision shall be made so that the holders of the applicable
series of Preferred Stock shall thereafter be entitled to receive upon
conversion of the applicable series of Preferred Stock the number of shares of
stock or other securities or property of the Corporation or otherwise, to which
a holder of the number of shares of Common Stock deliverable upon conversion of
such Preferred Stock would have been entitled on such recapitalization. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4 with respect to the rights of the holders of the
applicable series of Preferred Stock after the recapitalization to the end that
the provisions of this Section 4 (including adjustment of the Conversion Price
of such series then in effect and the number of shares purchasable upon
conversion of the applicable series of Preferred Stock) shall be applicable
after that event as nearly equivalent as may be practicable.
(g) No Impairment. This corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed
-12-
<PAGE>
hereunder by this corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of Preferred Stock against impairment.
(h) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon the conversion of
any share or shares of Preferred Stock, and the number of shares of Common Stock
to be issued shall be rounded to the nearest whole share. Whether or not
fractional shares are issuable upon such conversion shall be determined on the
basis of the total number of shares of Preferred Stock the holder is at the time
converting into Common Stock and the number of shares of Common Stock issuable
upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of the applicable series of Preferred Stock pursuant to
this Section 4, this corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of the applicable series of Preferred Stock a certificate
executed by the Corporation's President, Secretary, Chief Financial Officer or a
Vice President setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. This
corporation shall, upon the written request at any time of any holder of
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (A) such adjustment and readjustment, (B) the
Conversion Price for such series of Preferred Stock at the time in effect, and
(C) the number of shares of Common Stock and the amount, if any, of other
property that at the time would be received upon the conversion of a share of
the applicable series of Preferred Stock.
(i) Notices of Record Date. In the event of any taking by this
----------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Preferred Stock, at least twenty (20)
days prior to the date specified therein, a notice specifying the date on which
any such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right.
Notwithstanding anything to the contrary herein, any such notice requirement may
be waived by holders of a majority of the then outstanding shares of Series A
Preferred Stock and Series B Preferred Stock, voting as a class.
(j) Reservation of Stock Issuable Upon Conversion. This corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the Preferred Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
Preferred Stock; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of Preferred Stock, in addition to such other remedies as
shall be available to the holder of
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<PAGE>
such Preferred Stock, this corporation will take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes, including, without
limitation, engaging in best efforts to obtain the requisite shareholder
approval of any necessary amendments to this Amended and Restated Certificate of
Incorporation.
(k) Notices. Any notice required by the provisions of this Section 4
-------
to be given to the holders of shares of Series A Preferred Stock and Series B
Preferred Stock shall be deemed given if deposited in the United States mail,
postage prepaid, and addressed to each holder of record at his address appearing
on the books of this corporation.
(l) Issues Taxes. The corporation shall pay any and all issue and
------------
other taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of the Preferred Stock; provided, however, that the
-------- -------
corporation shall not be obligated to pay any transfer taxes resulting from any
transfer requested by any holder of Preferred Stock in connection with any such
conversion, or in respect of any transfer involved in the issuance and delivery
of any certificate in a name other than that of the holder of Preferred Stock
which is being converted.
5. Voting Rights.
-------------
(a) General Voting Rights. The holder of each share of Preferred
---------------------
Stock shall have the right to one vote for each share of Common Stock into which
such Preferred Stock could then be converted, and with respect to such vote,
such holder shall have full voting rights and powers equal to the voting rights
and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders' meeting in
accordance with the bylaws of this corporation, and shall be entitled to vote,
together with holders of Common Stock (and not as a separate class, except as
provided in Section 6(b) and (c) below, or as otherwise provided by law) with
respect to any question upon which holders of Common Stock have the right to
vote. Fractional votes shall not, however, be permitted and any fractional
voting rights available on an as-converted basis (after aggregating all shares
into which shares of Preferred Stock held by each holder could be converted)
shall be rounded to the nearest whole number (with one-half being rounded
upward).
(b) Voting for the Election of Directors. At each annual meeting for
------------------------------------
the election of directors or at any time at which stockholders of the
corporation will have the right to or will vote for or consent in writing to the
election of directors: (i) as long as at least a majority of the shares of
Series A Preferred Stock originally issued remain outstanding, the holders of
such shares of Series A Preferred Stock, voting as a separate class, shall be
entitled to elect one (1) director of this corporation, (ii) as long as at least
30% of the shares of Series B Preferred Stock originally issued remain
outstanding, the holders of such shares of Series B Preferred Stock, voting as a
separate class, shall be entitled to elect one (1) director of this Corporation,
(iii) the holders of outstanding Common Stock, voting as a separate class, shall
be entitled to elect two (2) directors of this corporation, (iv) three (3)
directors who shall not be an officer, employee or affiliate of the Corporation
("Outside Directors"), shall be elected by the holders of a majority of the
Common Stock of the corporation and Common Stock issued or
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issuable upon
conversion of the Series A Preferred Stock or Series B Preferred Stock, voting
together as a class and (v) any remaining directors shall be elected by the
holders of a majority of each of: (i) the Common Stock of the corporation
(voting as a separate class) and (ii) the Preferred Stock of the corporation
(voting as a separate class).
In the case of any vacancy (other than a vacancy caused by removal) in the
office of a director occurring among the directors elected by the holders of a
class or series of stock pursuant to this Section 5(b), the remaining directors
so elected by that class or series may by affirmative vote of a majority thereof
(or the remaining director so elected if there be but one, or if there are no
such directors remaining, by the affirmative vote of the holders of a majority
of the shares of the class or series entitled to elect such director), elect a
successor or successors to hold office for the unexpired term of the director or
directors whose place or places shall be vacant. Any director who shall have
been elected by the holders of a class or series of stock, or by any directors
so elected as provided in the immediately preceding sentence hereof, may be
removed during the aforesaid term of office, either with or without cause, by,
and only by, the affirmative vote of the holders of a majority of the shares of
the class or series of stock entitled to elect such director or directors, given
either at a special meeting of such stockholders duly called for that purpose or
pursuant to a written consent of stockholders, and any vacancy created by such
removal shall be filled by the holders of a majority of the shares of that class
or series of stock.
6. Protective Provisions.
---------------------
(a) So long as any shares of Series A Preferred Stock or Series
B Preferred Stock are outstanding, this corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of Series A
Preferred Stock and Series B Preferred Stock, voting as a class:
(i) effect a Liquidating Event;
(ii) authorize or issue, or obligate itself in any way to
issue, any other equity security, including any other security convertible into
or exchangeable or exercisable for any equity security, or reclassify any
outstanding shares of any class or series of stock having a preference over or
being on a parity with the Series A Preferred Stock or Series B Preferred Stock
(excluding Series A, Series B Preferred Stock and Additional Series B Preferred
Stock that the corporation may be obligated to issue pursuant to Section 1 of
Article IV hereof); or
(iii) increase or decrease the size of the Board of
Directors of the corporation;
(iv) amend or repeal any provision of this Amended and
Restated Certificate of Incorporation or Bylaws if such action would affect
adversely the rights, preferences or privileges of the Preferred Stock; or
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(v) declare or pay any dividend or other distribution on
any class of stock with a dividend preference junior to the Series A Preferred
Stock or the Series B Preferred Stock (except with respect to any dividend or
distribution payable solely in shares of Common Stock).
(b) So long as 25% of the shares of Series A Preferred Stock are
outstanding, the corporation shall not, without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of a majority of the
then outstanding shares of the Series A Preferred Stock:
(i) alter or change the rights, preferences or privileges
of shares of the Series A Preferred Stock so as to affect adversely such shares;
(ii) enter into an agreement providing for a Change of
Control of the corporation pursuant to which the stockholders of the corporation
will receive consideration in an amount valued at less than $9.536 per share of
Series A Preferred Stock (appropriately adjusted for any Recapitalization); or
(iii) authorize or issue (including the reclassification of
currently outstanding capital stock of the corporation), or obligate itself in
any way to issue, any other equity security, including any other security
convertible into or exercisable for any equity security, having a preference
over or being on a parity with the Series A Preferred Stock (excluding Series A
Preferred Stock, Series B Preferred Stock and Additional Series B Preferred
Stock that the corporation may be obligated to issue pursuant to Section 1 of
Article IV hereof).
(c) So long as 25% of the shares of Series B Preferred Stock are
outstanding, the Corporation shall not, without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of a majority of the
then outstanding shares of the Series B Preferred Stock:
(i) alter or change the rights, preferences or privileges
of Series B Preferred Stock so as to affect adversely such shares;
(ii) enter into an agreement providing for a Change of
Control of the Company pursuant to which the stockholders of the corporation
will receive consideration in an amount valued at less than $9.536 per share of
Series B Preferred Stock (appropriately adjusted for any Recapitalization); or
(iii) authorize or issue (including the reclassification of
currently outstanding capital stock of the corporation), or obligate itself in
any way to issue, any other equity security, including any other security
convertible into or exercisable for any equity security, having a preference
over or being on a parity with the Series B Preferred Stock (excluding Series A
Preferred Stock, Series B Preferred Stock and Additional Series B Preferred
Stock that the corporation may be obligated to issue pursuant to Section 1 of
Article IV hereof).
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7. Status of Converted or Redeemed Stock. In the event any shares
-------------------------------------
of Preferred Stock shall be converted pursuant to Section 4 or redeemed pursuant
to Section 3 hereof, the shares so converted or redeemed shall be cancelled and
shall not be issuable by this corporation. The Amended and Restated Certificate
of Incorporation of this corporation shall be appropriately amended to effect
the corresponding reduction in this corporation's authorized capital stock.
C. Common Stock. The rights, preferences, privileges and restrictions
------------
granted to and imposed on the Common Stock are as set forth below in this
Article IV(C).
1. Dividend Rights. Subject to the prior rights of holders of all
---------------
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of this corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
2. Liquidation Rights. Upon a Liquidating Event, the assets of this
------------------
corporation shall be distributed as provided in Article IV, Section 2.
3. Redemption. The Common Stock is not redeemable.
----------
4. Voting Rights. The holder of each share of Common Stock shall
-------------
have the right to one vote for each such share, shall have certain voting rights
as provided in Section 5(b) of Article IV, and shall be entitled to notice of
any stockholders' meeting in accordance with the bylaws of this corporation, and
shall be entitled to vote upon such matters and in such manner as may be
provided by law.
ARTICLE V
Except as otherwise provided in this Amended and Restated Certificate of
Incorporation, in furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of this corporation.
ARTICLE VI
Subject to Article IV, Section 6(a)(iii), the number of directors of this
corporation shall be fixed from time to time in accordance with the bylaws or
amendment thereof duly adopted by the Board of Directors or by the stockholders.
ARTICLE VII
This Article VII shall be effective only upon the closing of a Qualified
IPO and shall not be effective prior to such time. Upon the closing of a
Qualified IPO, the Board of Directors
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shall be divided into three classes designated as Class I, Class II and Class
III, respectively. Directors shall be assigned to each class in accordance with
a resolution or resolutions adopted by the Board of Directors. At the first
annual meeting of stockholders following the date hereof, the term of office of
the Class I directors shall expire and Class I directors shall be elected for a
full term of three years. At the second annual meeting of stockholders following
the date hereof, the term of office of the Class II directors shall expire and
Class II directors shall be elected for a full term of three years. At the third
annual meeting of stockholders following the date hereof, the term of office of
the Class III directors shall expire and Class III directors shall be elected
for a full term of three years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his or her successor is duly elected and qualified or until
his or her death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
Any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal, or other causes shall be filled by either (i) the
affirmative vote of the holders of a majority of the voting power of the then-
outstanding shares of voting stock of the Corporation entitled to vote generally
in the election of directors ("Voting Stock") voting together as a single class;
or (ii) by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum of the Board of Directors. Newly created
directorships resulting from any increase in the number of directors shall,
unless the Board of Directors determines by resolution that any such newly
created directorship shall be filled by the stockholders, be filled only by the
affirmative majority vote of the directors then in office, even though less than
a quorum of the Board of Directors. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
class of directors in which the new directorship was created or the vacancy
occurred and until such director's successor shall have been elected and
qualified.
The affirmative vote of sixty-six and two-thirds percent (66-2/3%) of the
voting power of the then outstanding shares of Voting Stock, voting together as
a single class, shall be required for the adoption, amendment or repeal of the
following sections of the Corporation's Bylaws by the stockholders of the
Corporation: 2.2 (Annual Meeting/Notices) and 2.5 (Special Meeting).
No action shall be taken by the stockholders of the Corporation except at
an annual or special meeting of the stockholders called in accordance with the
Bylaws.
Any director, or the entire Board of Directors, may be removed from office
at any time (i) with cause by the affirmative vote of the holders of at least a
majority of the voting power of all of the then-outstanding shares of the Voting
Stock, voting together as a single class; or (ii) without cause by the
affirmative vote of the holders of at least sixty-six and two-thirds
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percent (66-2/3%) of the voting power of all of the then-outstanding shares of
the Voting Stock.
ARTICLE VIII
Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or any provision of law which might otherwise
permit a lesser vote or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the Voting Stock required by law or
this Amended and Restated Certificate of Incorporation, the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal ARTICLE VII or
this ARTICLE VIII.
ARTICLE IX
Elections of directors need not be by written ballot unless the Bylaws of
this corporation shall so provide.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of this corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of this corporation.
ARTICLE XI
A director of this corporation shall, to the fullest extent permitted by
the General Corporation Law as it now exists or as it may hereafter be amended,
not be personally liable to this corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to this corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law, or (iv) for any transaction from which the director
derived any improper personal benefit. If the General Corporation Law is
amended, after approval by the stockholders of this Article, to authorize
corporation action further eliminating or limiting the personal liability of
directors, then the liability of a director of this corporation shall be
eliminated or limited to the fullest extent permitted by the General Corporation
Law, as so amended.
Any amendment, repeal or modification of this Article IX, or the adoption
of any provision of this Amended and Restated Certificate of Incorporation
inconsistent with this Article IX, by the stockholders of this corporation shall
not apply to or adversely affect any right
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or protection of a director of this corporation existing at the time of such
amendment, repeal, modification or adoption.
ARTICLE XII
This corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation, provided that
Article IV, Section 6(b) may not be amended without first obtaining the approval
of a majority of the outstanding shares of Series A Preferred Stock, and Article
IV, Section 6(c) may not be amended without first obtaining the approval of a
majority of the outstanding shares of Series B Preferred Stock.
ARTICLE XIII
To the fullest extent permitted by applicable law, this corporation is
authorized to provide indemnification of (and advancement of expenses to) agents
of this corporation (and any other persons to which General Corporation Law
permits this corporation to provide indemnification) through bylaw provisions,
agreements with such agents or other persons, vote of stockholders or
disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the General Corporation Law,
subject only to limits created by applicable General Corporation Law (statutory
or non-statutory), with respect to actions for breach of duty to this
corporation, its stockholders, and others.
Any amendment, repeal or modification of the foregoing provisions of this
Article XI shall not adversely affect any right or protection of a director,
officer, agent, or other person existing at the time of, or increase the
liability of any director of this corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to, such amendment,
repeal or modification.
ARTICLE XIV
Effective upon the closing of a Qualified IPO (as defined in
Article IV(A)(4)(b)), no action that is required or permitted to be taken by the
stockholders of the Corporation at any annual or special meeting of stockholders
may be effected by written consent of stockholders in lieu of a meeting of
stockholders.
ARTICLE XV
Effective upon the closing of a Qualified IPO, no stockholder will be
permitted to cumulate votes at any election of directors.
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* * *
THIRD: The foregoing amendment and restatement was approved by the
holders of the requisite number of shares of the corporation in accordance with
Section 228 of the General Corporation Law.
FOURTH: That such amendment and restatement was duly adopted in
accordance with the provisions of Section 242 and 245 of the General Corporation
Law.
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<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
has been executed by the President and Chief Executive Officer of this
corporation on this 28th day of February, 2000.
By: /s/ Fernand B. Sarrat
________________________________________________
Fernand B. Sarrat, President and Chief Executive
Officer
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS OF
LINUXCARE, INC.
(A DELAWARE CORPORATION)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I OFFICES.................................................... 1
ARTICLE II MEETINGS OF STOCKHOLDERS................................... 1
ARTICLE III DIRECTORS.................................................. 4
ARTICLE IV NOTICES.................................................... 7
ARTICLE V OFFICERS................................................... 7
ARTICLE VI CERTIFICATE OF STOCK....................................... 10
ARTICLE VII GENERAL PROVISIONS DIVIDENDS............................... 11
ARTICLE VIII AMENDMENTS................................................. 13
ARTICLE IX LOANS TO OFFICERS.......................................... 14
</TABLE>
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AMENDED AND RESTATED BYLAWS
OF
LINUXCARE, INC.
ARTICLE I
OFFICES
1.1 The registered office shall be in the City of Dover, County of Kent,
State of Delaware.
1.2 The corporation may also have offices at such other places both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 All meetings of the stockholders for the election of directors shall
be held in the City of San Francisco, State of California, at such place as may
be fixed from time to time by the Board of Directors, or at such other place
either within or without the State of Delaware as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting.
Meetings of stockholders for any other purpose may be held at such time and
place, within or without the State of Delaware, as shall be stated in the notice
of the meeting or in a duly executed waiver of notice thereof.
2.2 Annual meetings of stockholders, commencing with the year 1999, shall
be held at such date and time as shall be designated from time to time by the
Board of Directors and stated in the notice of the meeting, at which they shall
elect by a plurality vote a Board of Directors, and transact such other business
as may properly be brought before the meeting.
2.3 Written notice of the annual meeting stating the place, date and hour
of the meeting shall be given to each stockholder entitled to vote at such
meeting not fewer than ten (10) nor more than sixty (60) days before the date of
the meeting.
2.4 The officer who has charge of the stock ledger of the corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place
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within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
2.5 Special meetings of the stockholders, for any purpose or purposes,
unless otherwise prescribed by statute or by the certificate of incorporation,
may be called by the president and shall be called by the president or secretary
at the request in writing of a majority of the Board of Directors, or at the
request in writing of stockholders owning at least fifty percent (50%) in amount
of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
2.6 Written notice of a special meeting stating the place, date and hour
of the meeting and the purpose or purposes for which the meeting is called,
shall be given not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting, to each stockholder entitled to vote at such meeting.
2.7 Business transacted at any special meeting of stockholders shall be
limited to the purposes stated in the notice.
2.8 Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this Section. Such nominations, other than those made
by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the corporation not less than twenty (20) days
nor more than sixty (60) days prior to the meeting; provided, however, that in
the event less than thirty (30) days notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received not later than the close of business on the
tenth day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made. Such stockholder's notice shall set
forth (a) as to each person, if any, whom the stockholder proposes to nominate
for election or re-election as a director: (i) the name, age, business address
and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
corporation which are beneficially owned by such person, (iv) any other
information relating to such person that is required by law to be disclosed in
solicitations of proxies for election of directors, and (v) such person's
written consent to being named as a nominee and to serving as a director if
elected; and (b) as to the stockholder giving the notice: (i) the name and
address, as they appear on the corporation's books, of such stockholder, (ii)
the class and number of shares of the corporation which are beneficially owned
by such stockholder, and (iii) a description of all arrangements or
understandings between such stockholder and each nominee and any other person or
persons (naming such person or persons) relating to the nomination. At the
request of the Board of Directors any person nominated by the Board for election
as a director shall furnish to the Secretary of the
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corporation that information required to be set forth in the stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a director of the corporation unless nominated in accordance
with the procedures set forth in this Section. The chairman of the meeting
shall, if the facts warrant, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if the chairman should so determine, the chairman shall so declare
at the meeting and the defective nomination shall be disregarded.
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (a) as specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (b) otherwise properly brought before the
meeting by or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a stockholder. Business to be brought
before an annual meeting by a stockholder shall not be considered properly
brought if the stockholder has not given timely notice thereof in writing to the
Secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than twenty (20) nor more than sixty (60) days prior to the
meeting; provided, however, that in the event that less than thirty (30) days
notice or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A stockholder's notice to the Secretary shall set forth as
to each matter the stockholder proposes to bring before the annual meeting: (i)
a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and address of the stockholder proposing such business, (iii) the class
and number of shares of the corporation which are beneficially owned by the
stockholder, (iv) any material interest of the stockholder in such business, and
(v) any other information that is required by law to be provided by the
stockholder in the stockholder's capacity as a proponent of a stockholder
proposal. Notwithstanding anything in these bylaws to the contrary, no business
shall be conducted at any annual meeting except in accordance with the
procedures set forth in this Section. The chairman of the annual meeting shall,
if the facts warrant, determine and declare at the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this Section, and, if the chairman should so determine, the chairman shall so
declare at the meeting that any such business not properly brought before the
meeting shall not be transacted.
2.9 The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted that might have been transacted at the meeting as originally
notified. If the adjournment
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is for more than thirty (30) days, or if after the adjournment a new record date
is fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.10 When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which by express provision of the statutes or of the certificate of
incorporation, a different vote is required, in which case such express
provision shall govern and control the decision of such question.
2.11 Unless otherwise provided in the certificate of incorporation, each
stockholder shall at every meeting of the stockholders be entitled to one vote
in person or by proxy for each share of the capital stock having voting power
held by such stockholder, but no proxy shall be voted on after three years from
its date, unless the proxy provides for a longer period.
2.12 Unless otherwise provided in the certificate of incorporation, any
action required to be taken at any annual or special meeting of stockholders of
the corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. Notwithstanding the foregoing,
effective upon the closing of a firm commitment underwritten public offering of
Common Stock of the corporation, no action that is required or permitted to be
taken by the stockholders at any annual or special meeting of stockholders may
be effected by written consent of stockholders in lieu of a meeting of
stockholders.
ARTICLE III
DIRECTORS
3.1 The number of directors that shall constitute the whole Board of
Directors shall be determined by resolution of the Board of Directors or by the
stockholders at the annual meeting of the stockholders, except as provided in
Section 3.2 of this Article, and each director elected shall hold office until
his successor is elected and qualified. Directors need not be stockholders.
Effective upon the closing of a firm commitment underwritten public offering of
Common Stock of the corporation, the board of directors shall be divided into
three classes, the members of each class to serve for a term of three years;
provided that the directors shall be elected as follows: at the first annual
meeting of the stockholders held following the closing of a firm commitment
underwritten public offering of Common Stock of the corporation, the directors
in the first class shall be elected for a term of three years, at the second
annual meeting following such date, the directors in the second class shall be
elected for a term of three years, and at the third annual meeting following
such date, the directors in the third class shall be elected for a term of three
years. The board of directors
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by resolution shall nominate the directors to be elected for each class. At
subsequent annual meetings of stockholders, a number of directors shall be
elected equal to the number of directors with terms expiring at that annual
meeting. Directors elected at each such subsequent annual meeting shall be
elected for a term expiring with the annual meeting of shareholders three years
thereafter.
3.2 Vacancies and newly created directorships resulting from any increase
in the authorized number of directors may be filled by a majority of the
directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole Board of Directors (as
constituted immediately prior to any such increase), the Court of Chancery may,
upon application of any stockholder or stockholders holding at least ten percent
(10%) of the total number of the shares at the time outstanding having the right
to vote for such directors, summarily order an election to be held to fill any
such vacancies or newly created directorships, or to replace the directors
chosen by the directors then in office.
3.3 The business of the corporation shall be managed by or under the
direction of its Board of Directors, which may exercise all such powers of the
corporation and do all such lawful acts and things as are not by statute or by
the certificate of incorporation or by these bylaws directed or required to be
exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
----------------------------------
3.4 The Board of Directors of the corporation may hold meetings, both
regular and special, either within or without the State of Delaware.
3.5 The first meeting of each newly elected Board of Directors shall be
held at such time and place as shall be fixed by the vote of the stockholders at
the annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected Board of Directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board of Directors, or as shall be specified in a written waiver signed by all
of the directors.
3.6 Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
Board of Directors.
3.7 Special meetings of the Board of Directors may be called by the
president on two (2) days' notice to each director by mail or forty-eight (48)
hours notice to each director either personally or by telegram; special meetings
shall be called by the president or secretary in like manner and on like notice
on the written request of two (2) directors unless the Board of Directors
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consists of only one director, in which case special meetings shall be called by
the president or secretary in like manner and on like notice on the written
request of the sole director.
3.8 At all meetings of the Board of Directors a majority of the directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
3.9 Unless otherwise restricted by the certificate of incorporation or
these bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee thereof may be taken without a meeting,
if all members of the Board of Directors or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or committee.
3.10 Unless otherwise restricted by the certificate of incorporation or
these bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
COMMITTEES OF DIRECTORS
-----------------------
3.11 The Board of Directors may designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee.
In the absence or disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board
of Directors, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to the following matters: (i) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by the
General Corporation Law of Delaware to be submitted to stockholders for approval
or (ii) adopting, amending or repealing any provision of these bylaws.
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3.12 Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
-------------------------
3.13 Unless otherwise restricted by the certificate of incorporation or
these bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
--------------------
3.14 Unless otherwise restricted by the certificate of incorporation or
these bylaws, any director or the entire Board of Directors may be removed, with
or without cause, by the holders of a majority of shares entitled to vote at an
election of directors. Notwithstanding the foregoing, in the event that the
Board of Directors is classified (as provided in Section 3.1 above),
stockholders may effect such removal of a director or the entire Board of
Directors only for cause.
ARTICLE IV
NOTICES
-------
4.1 Whenever, under the provisions of the statutes or of the certificate
of incorporation or of these bylaws, notice is required to be given to any
director or stockholder, it shall not be construed to mean personal notice, but
such notice may be given in writing, by mail, addressed to such director or
stockholder, at his address as it appears on the records of the corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
directors may also be given by telegram.
4.2 Whenever any notice is required to be given under the provisions of
the statutes or of the certificate of incorporation or of these bylaws, a waiver
thereof in writing, signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto.
ARTICLE V
OFFICERS
--------
5.1 The officers of the corporation shall be chosen by the Board of
Directors and shall be a president, treasurer and a secretary. The Board of
Directors may elect from among its members a
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Chairman of the Board and a Vice Chairman of the Board. The Board of Directors
may also choose one or more vice-presidents, assistant secretaries and assistant
treasurers. Any number of offices may be held by the same person, unless the
certificate of incorporation or these bylaws otherwise provide.
5.2 The Board of Directors at its first meeting after each annual meeting
of stockholders shall choose a president, a treasurer, and a secretary and may
choose vice-presidents.
5.3 The Board of Directors may appoint such other officers and agents as
it shall deem necessary who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board of Directors.
5.4 The salaries of all officers and agents of the corporation shall be
fixed by the Board of Directors.
5.5 The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
-------------------------
5.6 The Chairman of the Board, if any, shall preside at all meetings of
the Board of Directors and of the stockholders at which he shall be present. He
shall have and may exercise such powers as are, from time to time, assigned to
him by the Board of Directors and as may be provided by law.
5.7 In the absence of the Chairman of the Board, the Vice Chairman of the
Board, if any, shall preside at all meetings of the Board of directors and of
the stockholders at which he shall be present. He shall have and may exercise
such powers as are, from time to time, assigned to him by the Board of Directors
and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
---------------------------------
5.8 The president shall be the chief executive officer of the corporation;
and in the absence of the Chairman and Vice Chairman of the Board he shall
preside at all meetings of the stockholders and the Board of Directors; he shall
have general and active management of the business of the corporation and shall
see that all orders and resolutions of the Board of Directors are carried into
effect.
5.9 He shall execute bonds, mortgages and other contracts requiring a
seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the corporation.
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5.10 In the absence of the president or in the event of his inability or
refusal to act, the vice-president, if any, (or in the event there be more than
one vice-president, the vice-presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
-------------------------------------
5.11 The secretary shall attend all meetings of the Board of Directors and
all meetings of the stockholders and record all the proceedings of the meetings
of the corporation and of the Board of Directors in a book to be kept for that
purpose and shall perform like duties for the standing committees when required.
He shall give, or cause to be given, notice of all meetings of the stockholders
and special meetings of the Board of Directors, and shall perform such other
duties as may be prescribed by the Board of Directors or president, under whose
supervision he shall be. He shall have custody of the corporate seal of the
corporation and he, or an assistant secretary, shall have authority to affix the
same to any instrument requiring it and when so affixed, it may be attested by
his signature or by the signature of such assistant secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the corporation and to attest the affixing by his signature.
5.12 The assistant secretary, or if there be more than one, the assistant
secretaries in the order determined by the Board of Directors (or if there be no
such determination, then in the order of their election) shall, in the absence
of the secretary or in the event of his inability or refusal to act, perform the
duties and exercise the powers of the secretary and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
--------------------------------------
5.13 The treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
5.14 He shall disburse the funds of the corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the president and the Board of Directors, at its regular meetings, or
when the Board of Directors so requires, an account of all his transactions as
treasurer and of the financial condition of the corporation.
5.15 If required by the Board of Directors, he shall give the corporation a
bond (which shall be renewed every six years) in such sum and with such surety
or sureties as shall be satisfactory to the Board of Directors for the faithful
performance of the duties of his office and for the restoration to the
corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
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5.16 The assistant treasurer, or if there shall be more than one, the
assistant treasurers in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the treasurer or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the treasurer and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
6.1 Every holder of stock in the corporation shall be entitled to have a
certificate, signed by, or in the name of the corporation by, the Chairman or
Vice Chairman of the Board of Directors, or the president or a vice-president
and the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of the corporation, certifying the number of shares owned by him in
the corporation.
Certificates may be issued for partly paid shares and in such case upon the
face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
6.2 Any of or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
LOST CERTIFICATES
-----------------
6.3 The Board of Directors may direct a new certificate or certificates to
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the
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Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or to give the corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
TRANSFER OF STOCK
-----------------
6.4 Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
------------------
6.5 In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholder or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
-----------------------
6.6 The corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends,
and to vote as such owner, and to hold liable for calls and assessments a person
registered on its books as the owner of shares and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
7.1 Dividends upon the capital stock of the corporation, subject to the
provisions of the certificate of incorporation, if any, may be declared by the
Board of Directors at any regular or special meeting, pursuant to law. Dividends
may be paid in cash, in property, or in shares of the capital stock, subject to
the provisions of the certificate of incorporation.
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7.2 Before payment of any dividend, there may be set aside out of any
funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
------
7.3 All checks or demands for money and notes of the corporation shall be
signed by such officer or officers or such other person or persons as the Board
of Directors may from time to time designate.
FISCAL YEAR
-----------
7.4 The fiscal year of the corporation shall be fixed by resolution of the
Board of Directors.
SEAL
----
7.5 The Board of Directors may adopt a corporate seal having inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
---------------
7.6 The corporation shall, to the fullest extent authorized under the laws
of the State of Delaware, as those laws may be amended and supplemented from
time to time, indemnify any director made, or threatened to be made, a party to
an action or proceeding, whether criminal, civil, administrative or
investigative, by reason of being a director of the corporation or a predecessor
corporation or, at the corporation's request, a director or officer of another
corporation; provided, however, that the corporation shall indemnify any such
agent in connection with a proceeding initiated by such agent only if such
proceeding was authorized by the Board of Directors of the corporation. The
indemnification provided for in this Section 7.6 shall: (i) not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any bylaw, agreement or vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacities and as to action in
another capacity while holding such office, (ii) continue as to a person who has
ceased to be a director, and (iii) inure to the benefit of the heirs, executors
and administrators of such a person. The corporation's obligation to provide
indemnification under this Section 7.6 shall be offset to the extent of any
other source of indemnification or any otherwise applicable insurance coverage
under a policy maintained by the corporation or any other person.
Expenses incurred by a director of the corporation in defending a civil or
criminal action, suit or proceeding by reason of the fact that he is or was a
director of the corporation (or was serving at the corporation's request as a
director or officer of another corporation) shall be paid by the
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corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation as authorized by relevant sections of the
General Corporation Law of Delaware. Notwithstanding the foregoing, the
corporation shall not be required to advance such expenses to an agent who is a
party to an action, suit or proceeding brought by the corporation and approved
by a majority of the Board of Directors of the corporation that alleges willful
misappropriation of corporate assets by such agent, disclosure of confidential
information in violation of such agent's fiduciary or contractual obligations to
the corporation or any other willful and deliberate breach in bad faith of such
agent's duty to the corporation or its stockholders.
The foregoing provisions of this Section 7.6 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of the
corporation to indemnify any person, other than a director, made a party to any
action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 7.6 of all directors, officers
and employees who are determined by the corporation or otherwise to be or to
have been "fiduciaries" of any employee benefit plan of the corporation that may
exist from time to time, Section 145 of the General Corporation Law of Delaware
shall, for the purposes of this Section 7.6, be interpreted as follows: an
"other enterprise" shall be deemed to include such an employee benefit plan,
including without limitation, any plan of the corporation that is governed by
the Act of Congress entitled "Employee Retirement Income Security Act of 1974,"
as amended from time to time; the corporation shall be deemed to have requested
a person to serve an employee benefit plan where the performance by such person
of his duties to the corporation also imposes duties on, or otherwise involves
services by, such person to the plan or participants or beneficiaries of the
plan; excise taxes assessed on a person with respect to an employee benefit plan
pursuant to such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
8.1 The original or other bylaws of the corporation may be adopted,
amended or repealed by the stockholders entitled to vote or by the board of
directors of the corporation (subject to any stockholder vote that may be
required by the certificate of incorporation with respect to Sections 2.2 and
2.5). The fact that such power has been so conferred upon the directors shall
not divest the stockholders of the power, nor limit their power to adopt, amend
or repeal bylaws.
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Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
ARTICLE IX
LOANS TO OFFICERS
9.1 The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiaries, including any officer or employee who is a Director of the
corporation or its subsidiaries, whenever, in the judgment of the Board of
Directors, such loan, guarantee or assistance may reasonably be expected to
benefit the corporation. The loan, guarantee or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in these bylaws shall be deemed to deny, limit
or restrict the powers of guaranty or warranty of the corporation at common law
or under any statute.
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CERTIFICATE OF SECRETARY OF
LINUXCARE, INC.
The undersigned, ___________, hereby certifies that he is the duly elected
and acting Secretary of Linuxcare, Inc., a Delaware corporation (the
"Corporation"), and that the Bylaws attached hereto constitute the Bylaws of
said Corporation as amended and restated at a duly held meeting of the Board of
Directors of the Company held on January 18, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name this
18/th/ day of January, 2000.
___________________________________________
__________________________
Secretary
<PAGE>
EXHIBIT 10.2.6
MASTER OUTSOURCING AGREEMENT
(MAINTENANCE SERVICES)
This Master Outsourcing Agreement (Maintenance Services) (the "Agreement")
is made as of the 13th day of December, 1999 by and between Motorola, Inc., a
Delaware corporation, through its Motorola Computer Group, with its principal
office located at 2900 South Diablo Way, Tempe, AZ 85282 ("MCG"), and LinuxCare,
Inc, with its principal office located at 650 Townsend St. San Francisco, CA
94103 (VENDOR).
RECITALS
A. MCG manufactures, sells, distributes and licenses certain computer hardware
and software products and other third party products in connection with such
computer products.
B. MCG provides installation, maintenance and other services for such computer
products and such third party products.
C. VENDOR is in the business of providing engineering support, training,
development, and consulting services for Linux products.
D. MCG desires to establish a contractual relationship with VENDOR whereby
VENDOR will provide a significant portion of MCG's support and other support
related services directly to MCG pursuant to the terms and conditions of this
Agreement.
AGREEMENT
NOW, THEREFORE, MCG and VENDOR agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings (such definitions to be equally applicable to both the singular and the
plural forms of the terms defined). Unless otherwise indicated, references to
Schedules and Exhibits shall mean Schedules and Exhibits to this Agreement, as
such Schedules and Exhibits may be amended, supplemented or modified from time
to time.
(a) "Base Term" shall have the meaning set forth in Section 3(a) of this
Agreement.
(b) "Customer Data" shall mean the customer contract files and other
information pertaining to the customers, as communicated and provided to
VENDOR by MCG in its sole discretion, whose service maintenance will be
provided by VENDOR on behalf of MCG hereunder.
(c) "Effective Date" shall mean December 13, 1999.
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(d) "Eligible Products" shall mean all Linux operating system software
currently or in the future supported by MCG or any of its affiliates
subject to any third party contractual terms between MCG and the third
party.
(e) "Loaned Equipment" shall mean equipment identified by MCG for the
support or servicing of Eligible Products which is to be loaned to VENDOR
as provided in Section 5 (c) herein.
(f) "Major Facilities" shall mean the Major Parts Facilities and VENDOR's
facilities in 650 Townsend St. San Francisco, CA 94103.
(g) "Service Area" shall mean the geographic location identified in
Schedule 1(h).
(h) "Services" shall mean the obligations, duties and services described
in an attached Statement of Work.
(i) "Statement of Work" shall mean all of the obligations, duties and
services of VENDOR in respect of the support and servicing of Eligible
Products including, without limitation, remote customer service, call
management, and customer tracking, as set forth in detail in the Statement
of Work attached hereto as an exhibit.
-------
(j) "Technical Documentation" shall mean diagnostic software and tools
(including without limitation, operations and maintenance manuals, training
materials, logic diagrams, service aids and know-how related to the
Eligible Products that are necessary or appropriate, as communicated and
provided to VENDOR by MCG in its sole discretion and to the extent MCG is
permitted under third party licenses to communicate and provide such items
to VENDOR, for VENDOR's engineers to support the Eligible Products
properly.
(k) "Transition Completion Date" shall mean the date when the transition
is completed in full and VENDOR is capable of performing the in accordance
with the standards and requirements specified in the Transition Plan, as
such date may be modified from time to time in connection with revisions to
such Transition Plan.
(l) "Transition Coordinator" shall mean an individual identified by VENDOR
who shall be acceptable to MCG and who shall serve as the Transition
Coordinator for purposes of Section 4(c) hereof.
(m) "Transition Plan" shall mean the plan created through joint effort of
VENDOR and MCG as set forth in Section 4(a), below.
(n) "Transition Phase" shall mean the period commencing on the Effective
Date and ending on the Transition Completion Date.
(o) "VENDOR Onsite Project Manager" shall have the meaning set forth in
Section 4(c).
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2. APPOINTMENT AS SERVICE CONTRACTOR
(a) Appointment. Upon and subject to the terms and conditions of this
-----------
Agreement, MCG hereby appoints VENDOR, as its contractor, to perform the Support
for or with respect to the Eligible Products within the Service Area. VENDOR may
subcontract its obligations under this Agreement to third parties provided that
(i) such third parties agree to the terms and provisions of this Agreement
applicable to the services provided by such third parties, which provisions
shall at minimum require full compliance with Section 9 - Confidential
Information; (ii) VENDOR provides MCG prior notice of the full identity (i.e.,
name, telephone number and address) of such third party and a description of the
services being so provided, and (iii) VENDOR obtains MCG's prior written consent
of such third party for the particular subcontract, which consent shall not be
unreasonably withheld. VENDOR shall indemnify MCG for any and all claims made
against MCG resulting out of any acts or omissions of such third parties in
accordance with the provisions of Section 10(a), below.
(b) Acceptance of Appointment. VENDOR hereby accepts such appointment and
-------------------------
agrees to perform the Services on or with respect to the Eligible Products
within the Service Area. VENDOR agrees to perform the Services promptly, in a
skillful, competent and workmanlike manner, and in accordance with the standards
of skill and care exercised by equipment maintenance and service providers with
respect to similar equipment.
(c) Non-exclusivity. MCG and VENDOR hereby acknowledge and agree that the
---------------
appointment of VENDOR hereunder is not exclusive. At any time, and at its sole
discretion, MCG, Motorola, Inc., and any of their respective divisions,
subsidiaries or affiliates may perform and/or may engage any third party to
perform any or all of the Services (or any other services) within or outside of
the Service Area. Nothing in this Agreement is intended to limit or restrict
VENDOR's right to provide maintenance services (including services comparable to
the Services) on behalf of other equipment vendors; provided, that any such
--------
services performed by VENDOR on behalf of any other vendor shall not interfere
with or limit VENDOR's ability to fully and timely perform the Services.
3. TERM OF AGREEMENT
(a) Base Term. Subject to Section 3(b) hereof, the term of this Agreement
---------
will commence on the Effective Date and will, unless sooner terminated in
accordance with the provisions hereof, and subject to the requirements of
Section 12, end on the third (3rd) anniversary thereof.
(b) Automatic Annual Extension. The term of this Agreement shall
--------------------------
automatically be extended for successive periods of one year each; provided,
--------
that the term of this Agreement shall not be extended under this Section 3(b) if
either party shall have delivered, not later than twelve (12) months prior to
the then scheduled expiration date, written notice to the other party of its
election not to have the term of Services to be provided under this Agreement
automatically extended pursuant to this Section 3(b).
-3-
<PAGE>
4. TRANSITION PHASE
(a) Transition Management. VENDOR will be responsible for all transition
---------------------
management and transition planning. To the extent MCG has any suggested
additions or modifications, the parties shall immediately confer and in good
faith attempt to resolve any disagreements that may arise. Both MCG and VENDOR
will diligently and timely perform their respective duties and tasks under a
mutually agreed-upon Transition Plan in accordance with the provisions of this
Agreement, the Statement of Work and the Transition Plan so that the Transition
Phase will be completed successfully within the schedule established in the
Transition Plan.
(b) Failure to Meet Transition Completion Date. In addition to MCG's right
------------------------------------------
to recover actual damages, in the event that VENDOR fails to perform its
obligations hereunder with respect to the Transition Phase in accordance with
the Statement of Work and the Transition Plan such that the Transition
Completion Date does not occur on or before the date set by mutual agreement of
the parties:
(i) VENDOR shall make available to MCG all personnel, equipment and
other resources in addition to such personnel, equipment and other
resources then dedicated to the MCG Transition Phase that are necessary
under the circumstances to maintain MCG's service and maintenance
operations fully operational at the same service level at which it was
operating on the Effective Date. VENDOR shall be reimbursed for use of the
technical people at the telephone only support rates. On site services
performed by VENDOR during this period will be reimbursed by the Flat Rate
Per Incident On-site Labor Rate as set forth in the Statement of Work.
(ii) If the Transition Completion Date has not occurred by the
mutually agreed date, VENDOR shall as soon as possible submit to MCG a
written plan to complete the Transition. MCG shall have a mutually agreed
to time period in which, by written notice to VENDOR, to (A) accept the
written plan, (B) terminate this Agreement as of a date specified in the
termination notice, without any further financial obligations to VENDOR or
(C) elect to stay at current implementation level of the Transition Plan.
If MCG does not provide a written response, it shall be deemed to have
elected to stay at the current implementation level. Nothing in this
Section 4 shall be intended to restrict or limit MCG's right to initiate
discussions and/or negotiations with any other maintenance service provider
during or after the Transition Phase.
5. GENERAL COVENANTS RELATING TO THE SERVICES
(a) Personnel. VENDOR agrees to maintain sufficient staffing levels to
---------
cause all Services to be performed in accordance with, and within the
time frames specified in, the Statement of Work. VENDOR shall assign to
maintenance services only trained and experienced personnel. Such personnel must
be technically qualified by MCG to the appropriate level required, and as
determined by MCG, for the Eligible Products to be maintained by VENDOR pursuant
to this Agreement.
-4-
<PAGE>
(b) Loaned Equipment. MCG shall deliver to VENDOR and VENDOR shall accept
----------------
the delivery of the Loaned Equipment set forth in Schedule 5(c),
attached hereto, as prescribed in the Transition Plan and such other
Loaned Equipment as MCG shall determine is required from time to time.
Such Loaned Equipment shall be used by VENDOR solely in the
performance of the Services. Unless otherwise agreed to by MCG in
writing, such Loaned Equipment shall remain the property of MCG. Upon
delivery to VENDOR, VENDOR assumes the cost of labor for safekeeping,
maintaining and repairing the Loaned Equipment and shall keep such
Loaned Equipment in good working order and repair, subject to
reasonable wear and tear that does not adversely affect the utility or
efficiency of such Loaned Equipment. MCG shall provide the parts to
the Loaned Equipment as requested by VENDOR in connection with the
safekeeping, maintenance and repair of the Loaned Equipment. VENDOR
shall maintain complete and accurate records of the location and
condition of the Loaned Equipment and shall execute precautionary UCC-
1 financing statements and any other documents that are reasonably
necessary to protect MCG's ownership interest in such Loaned
Equipment. VENDOR shall keep all such Loaned Equipment prominently
marked with clear and readable labels, signs, or notices indicating
"MOTOROLA, INC. PROPERTY." Upon delivery of Loaned Equipment to
VENDOR, VENDOR assumes all risk of loss, theft, damage or casualty to
such Loaned Equipment including, without limitation, any such loss,
theft, damage or casualty occurring during any subsequent transfer of
such Loaned Equipment to other VENDOR facilities or to customer
locations and shall indemnify and hold MCG harmless from and against
any such loss, theft, damage or casualty.
(c) Customer Data. MCG shall provide Customer Data to VENDOR as described
-------------
in the Statement of Work.
(e) Technical Documentation. MCG shall provide to VENDOR reasonably
-----------------------
sufficient copies of the Technical Documentation at no charge to
VENDOR. All such Technical Documentation shall, to the extent owned by
MCG, remain the property of MCG including, without limitation, all
modifications, enhancements, improvements and translations
("Improvements to Technical Documentation") made to it by any party.
However, MCG hereby grants to VENDOR a non-exclusive, royalty free,
right and license, limited as further described herein, to use the
MCG-owned Technical Documentation solely for the purpose of providing
services for customers pursuant to contracts such customers have with
MCG only. To the extent Technical Documentation is licensed to MCG
from a third party, MCG shall to the extent permitted by such third
party license provide VENDOR rights under the terms of such third
party license. VENDOR shall abide by all restrictions, limitations and
conditions imposed on or in connection with such Technical
Documentation as mutually agreed by the parties. Upon termination,
expiration or cancellation of this Agreement, VENDOR shall return all
Technical Documentation, including all copies thereof, to MCG. VENDOR
shall have no right or license to copy or modify the Technical
Documentation, unless otherwise agreed to in writing by MCG. VENDOR
agrees to preserve and not remove or obscure any proprietary
information notices or other use restrictions, including without
limitation, any copyright notices, trademarks and
-5-
<PAGE>
restricted government rights legends. The Technical Documentation are
provided hereunder "As Is" with no representation or warranty
whatsoever. Specifically, MCG does not represent or warrant that the
Technical Documentation does not infringe any third party intellectual
property rights.
(f) Reports. VENDOR shall prepare such reports, summaries, analyses and
-------
shall supply such data and other material as specified in the
Statement of Work, and as otherwise reasonably requested by MCG.
(g) Inspections. After notification by MCG, VENDOR shall attempt to
-----------
accommodate immediately but shall in no case later than 2 days allow
MCG to visit and inspect during VENDOR's normal business hours without
interference to VENDOR's business at any facility of VENDOR where
Services are performed or Loaned Equipment, Customer Data or Technical
Documents are used or stored and to inspect all records of VENDOR kept
or maintained in connection with the Services. Such representatives
from MCG may be required to be escorted by VENDOR for security
purposes. Such inspections shall include the opportunity to monitor
VENDOR's compliance with every aspect of the Statement of Work. VENDOR
will at all times requested by MCG cooperate with and assist such
persons in locating and gaining access to such facilities and records.
(h) Financial Information. VENDOR shall provide immediately notice to MCG
---------------------
of any event or condition that in VENDOR's reasonable judgment results
in or is reasonably likely to result in a material adverse change to
the solvency, financial condition or business operations of VENDOR.
(i) Quality Metric Measurements and Reporting of VENDOR's Performance. MCG
-----------------------------------------------------------------
and VENDOR will, on a regularly scheduled basis, meet to define and
mutually agree upon the Quality Metric goals for the Quality Metrics
defined in Exhibit D. VENDOR agrees to present, at MCG's monthly
quality meeting in Tempe, Arizona, the performance data for the goals
set above and provide root cause analysis and corrective action plans
for all quality metric goals missed. If the quality goals missed are
not resolved to MCG's satisfaction for a period of 3 consecutive
months, MCG shall provide written notice to VENDOR stating the
specific deficiencies and missed goals and requesting that an
appropriate member of VENDOR's senior staff at the Vice President or
Senior Vice President level attend the next MCG monthly quality
meeting and to be present at such time. Such senior staff person shall
attend the noticed MCG monthly quality meeting and shall present an
executive action plan which will define how VENDOR plans to resolve
the deficiencies and missed goals. Unless otherwise agreed to by the
parties, all such deficiencies and missed goals must be successfully
rectified within 90 days thereafter.
6. FEES
In consideration of VENDOR performing its obligations hereunder, MCG shall
pay VENDOR the fees and charges as specified in the Statement of Work. All
billable service
-6-
<PAGE>
performed in each month shall be invoiced the following month. All payments
required to be made by MCG hereunder shall be due and payable within thirty (30)
days from receipt of an accurate invoice. VENDOR will be permitted to increase
its prices for services as set forth in the Statement of Work no greater than 5%
for each year, after expiration of the Base Term. Notwithstanding anything to
the contrary, MCG shall be entitled to the most favorable prices for services
for equivalent type and volume of services. MCG shall provide VENDOR evidence of
tax exemption for each applicable state as required, otherwise, applicable tax
will be included with invoices.
7. TITLE
MCG shall retain all rights (including, without limitation, all
intellectual property rights), title, and interest in and to all Technical
Documentation, Customer Data, Loaned Equipment and Parts delivered to and/or
retrieved by VENDOR hereunder. VENDOR shall not make any contrary
representations to any third party. VENDOR shall not use, sell or encumber the
Technical Documentation, Customer Data, and Loaned Equipment for its own
account. VENDOR agrees to take all additional actions reasonably requested by
MCG to preserve MCG's rights in all Technical Documentation, Customer Data, and
Loaned Equipment, including, without limitation, keeping all Technical
Documentation, Customer Data, Loaned Equipment secure and separate from any
other inventory or materials which do not belong to MCG, placing and maintaining
signs on VENDOR's premises or tags on the property announcing MCG's ownership
and executing any documents reasonably necessary to preserve MCG's ownership
interest. VENDOR shall at all times keep all Technical Documentation, Customer
Data, and Loaned Equipment free and clear of any claims, liens, charges and
legal processes of VENDOR's creditors and shall defend, at is own cost and
expense, MCG's title to or rights in all such Technical Documentation, Customer
Data, and Loaned Equipment against all claims, liens, charges and legal
processes of creditors of VENDOR and shall indemnify, defend and hold MCG
harmless from and against any such claims, liens, charges and processes.
8. REPRESENTATIONS AND WARRANTIES
Each party ("Representing Party") represents and warrants to and for the benefit
of the other party that on the Effective Date:
(a) Representing Party is validly existing and in good standing under the
laws of the state in which its principle office is located and is duly licensed
or qualified and is in good standing wherever necessary to carry on its present
business and operations and to own or lease its properties and has the power and
authority and all necessary licenses and permits to carry on its present
business and operations (including carrying on its business as presently
conducted), to own or lease its properties and to enter into and perform its
obligations under this Agreement.
(b) This Agreement has been duly authorized, executed and delivered by
Representing Party and constitutes legal, valid and binding obligations of
Representing Party enforceable against Representing Party in accordance with its
respective terms, subject to bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium, or similar laws affecting creditors' rights generally
and subject to general principles of equity.
-7-
<PAGE>
(c) The execution and delivery of this Agreement and compliance by
Representing Party with all of the provisions hereof do not require any partner
(or any partner or shareholder of any partner) approval and do not and will not
contravene any law, rule, regulation, judgment or decree applicable to or
binding on Representing Party or require any consent of a third party or
contravene the provisions of, or constitute a default under, or result in the
creation of any lien on the property of Representing Party under, a general
partnership agreement or any indenture, mortgage, contract or other agreement or
instrument to which Representing Party is a party or by which it or any of its
property may be bound or affected.
(d) Representing Party is not in default, and no event or condition exists
which after the giving of notice or lapse of time or both would constitute an
event of default, under any mortgage, indenture, contract, agreement, judgment
or other undertaking to which Representing Party is a party or upon any of the
assets of Representing Party, except for any such default, event or condition
which, individually or in the aggregate, would not materially adversely affect
Representing Party financial condition, business or operations or adversely
affect Representing Party's ability to perform its obligations under this
Agreement.
(e) There are no proceedings pending or, to the knowledge of Representing
Party, threatened, and to the knowledge of Representing Party there is no
existing basis for any such proceedings, against or affecting Representing Party
or any subsidiary thereof by or before any court, arbitrator, administrative
agency or other governmental authority which, if adversely determined,
individually or in the aggregate might be reasonably expected to materially
adversely affect the properties, business, prospects, profits or condition of
Representing Party or adversely affect Representing Party's ability to perform
its obligations under this Agreement. Neither Representing Party nor any of its
subsidiaries is in default with respect to any order of any court, arbitrator,
administrative agency or other governmental authority, the violation of which
individually or in the aggregate might be reasonably expected to materially
adversely affect the properties, business, prospects, profits or condition of
Representing Party or adversely affect Representing Party's ability to perform
its obligations under this Agreement.
(f) Neither the execution and delivery by Representing Party of this
Agreement, nor the performance by Representing Party of its obligations
hereunder require the consent, approval or authorization of, the giving of
notice to, or the filing, registration, qualification or taking of any other
action with, any Federal, state, or foreign government authority or agency.
(h) This Agreement, Representing Party's written response to the other
party's due diligence requests, and the documents referenced or delivered to the
other party, individually or in the aggregate, in connection with this Agreement
do not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements and facts contained in such
documents or writings not false or misleading.
(g) VENDOR chief executive office (as such term is used in Article 9 of
the Uniform Commercial Code) is located at 650 Townsend St. San Francisco, CA
94103 and VENDOR hereby agrees to notify MCG in writing of any change in such
location within 30 days of such change.
-8-
<PAGE>
(i) In connection with Representing Party's business, there are no
collective bargaining agreements or other labor agreements to which Representing
Party is a party or by which it is bound. There is and has been no unfair labor
practice complaint against Representing Party in connection with its business
which materially or adversely affects the business of Representing Party. There
are and have been no labor strike or other material labor trouble affecting its
business and no pending representation question respecting the employees of
Representing Party in connection with its business.
(j) Representing Party and its affiliates have filed or caused to be filed
all Federal, state, local and foreign tax returns required to be filed and have
paid or caused to be paid all taxes shown to be due and payable on such returns
or any assessment received by Representing Party or any of its subsidiaries, to
the extent such taxes are due and payable (except to the extent (i) such taxes
are being contested in good faith, or (ii) such failure to file tax returns or
pay taxes would not have any material adverse effect on the properties,
business, prospects, profits, or condition of Representing Party).
9. CONFIDENTIAL INFORMATION
(a) Except as provided hereinafter, for a period of five (5) years after
termination or expiration of this Agreement, each party shall not disclose,
publish or disseminate information received from the other party which may be
required to carry out this Agreement and which the disclosing party deems
proprietary and confidential, and which has been reduced to a tangible medium
and marked confidential (hereinafter "Confidential Information"). In order for
oral information to be considered Confidential Information, it must be confirmed
in writing within thirty (30) days of disclosure.
(b) The receiving party agrees to employ the same care (which shall be at
least reasonable) and discretion with respect to Confidential Information of the
disclosing party that it employs with similar information of its own which it
does not desire to disclose, publish or disseminate.
(c) The receiving party shall limit use and access of such Confidential
Information to only VENDOR employees and others whose use or access is necessary
to effect the purposes of this Agreement and who have executed confidentiality
agreements substantially equivalent to the terms in this Section 9.
(d) At the termination or expiration of this Agreement, the receiving
party shall promptly return all Confidential Information which are in written
form or on other media, including copies thereof, back to the disclosing party.
(e) VENDOR agrees that the following constitutes Confidential Information
of MCG without further markings or written notice:
(i) the identity of Customers as compiled in a database;
(ii) the identity of equipment used by a Customer, and
(iii) the service history of such Customers.
-9-
<PAGE>
(f) VENDOR further agrees to take all actions necessary to prevent any
Confidential Information from being used or accessed by the product marketing or
sales departments of any other Company.
(g) The obligations specified in this Section 9 will not apply to any
information:
(i) that is already in the possession of the receiving party
without obligation of confidence;
(ii) that is independently developed at any time by the
receiving party;
(iii) that is or becomes publicly available without breach of
this Agreement;
(iv) that is rightfully received by the receiving party from a
third party without restriction on disclosure;
(v) that is disclosed in response to a valid order of a court
or other governmental body of the United States of America
or any political subdivision thereof; provided, however,
that the disclosing party shall first have made a good
faith effort to obtain a protective order requiring that
the information and/or documents so disclosed be used only
for the purpose for which the order was issued;
(vi) where its disclosure is otherwise required by law; or
(vii) where its disclosure is necessary to establish the
disclosing party's rights under this Agreement.
10. INDEMNIFICATION
(a) VENDOR assumes liability for, and shall defend, indemnify and keep
harmless from MCG, and its respective officers, directors, employees, successors
and assigns (each, an "Indemnified Party") from and against any and all
liabilities, obligations, losses, damages, penalties, claims, demands, actions,
suits, costs and expenses (including, without limitation, reasonable legal fees
and expenses), arising from claims of third parties, of whatsoever kind or
nature, imposed on, incurred by or asserted against any Indemnified Party,
resulting from, arising out of, or incurred with respect to (i) the breach of
any covenant or warranty made by VENDOR under Section 8 or a material breach of
this Agreement, or (ii) the performance of the Services by VENDOR but not to the
extent such claim arises from or relates to VENDOR acting at MCG's direction or
instruction or VENDOR's use of the Technical Documentation or other MCG-supplied
materials; provided, however, that VENDOR shall not be required under this
--------
Section 10(a) to defend, indemnify or keep harmless any Indemnified Party for
loss or liability resulting from any negligence, willful misconduct or gross
negligence of such Indemnified Party.
The foregoing states VENDOR's sole liability for its breach of warranties
in Section 8. MCG shall (i) promptly notify VENDOR of any such claim, (ii) allow
VENDOR full control over
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<PAGE>
the defense and settlement of such claim, and (iii) provide VENDOR full
cooperation in the defense and settlement of such claim.
(b) MCG assumes liability for, and shall defend, indemnify and keep
harmless VENDOR, and its respective officers, directors, employees, successors
and assigns (each, an "Indemnified Party") from and against any and all
liabilities, obligations, losses, damages, penalties, claims, demands, actions,
suits, costs and expenses (including, without limitation, reasonable legal fees
and expenses), arising from claims of third parties, of whatsoever kind or
nature, imposed on, incurred by or asserted against any Indemnified Party,
resulting from, arising out of, or incurred with respect to the breach of any
covenant or warranty made by MCG under Section 8 or a material breach of this
Agreement; provided, however, that MCG shall not be required under this Section
--------
10(b) to defend, indemnify or keep harmless any Indemnified Party for loss or
liability resulting from any negligence, willful misconduct or gross negligence
of such Indemnified Party.
The foregoing states MCG's sole liability for its breach of warranties in
Section 8. VENDOR shall (i) promptly notify MCG of any such claim, (ii) allow
MCG full control over the defense and settlement of such claim, and (iii)
provide MCG full cooperation in the defense and settlement of such claim.
11. TERMINATION
(a) Termination by Either Party. This Agreement may be terminated at any
---------------------------
time by either party (the terminating party is referred to as the "Acting
Party"), effective upon the giving of written notice of such termination to the
other party (the other party is referred to herein as the "Affected Party") with
such notice stating the basis upon which such termination was made, upon the
occurrence of any of the following events of default:
(i) the Affected Party shall fail to perform or observe any material
covenant, condition or agreement to be performed or observed on the part of
such Affected Party with respect to this Agreement and such failure shall
continue unremedied for thirty (30) days after the earlier of (A)the date
upon which a responsible officer of such Affected Party obtains knowledge
of such failure, or (B)the date on which written notice of such default and
demand that the same be remedied shall be given by the Acting Party to such
Affected Party; provided, however, that if the nature of such failure is
such that more than thirty (30) days are reasonably required for its cure,
then the Affected Party shall be entitled to an additional thirty (30) days
to cure if the Affected Party had diligently attempted to cure during the
initial thirty (30) day cure period.
(ii) any representation or warranty made by the Affected Party herein
or in any document, report, certificate or financial or other statement now
or hereafter furnished by such party to the Acting Party in connection with
this Agreement shall prove at any time to have been untrue or misleading in
any material respect as of the time when made;
(iii) the Affected Party shall (A)be generally not paying its debts
as they become due, (B)file, or consent by answer or otherwise to the
filing against it of a petition for relief or reorganization or liquidation
or to take advantage of any bankruptcy or
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<PAGE>
insolvency law of any jurisdiction, (C)make an assignment for the benefit
of its creditors, (D)consent to the appointment of a custodian, receiver,
trustee or other officer with similar powers of itself or any substantial
part of its property, or (E)take corporate action for the purpose of any of
the foregoing; or
(iv) as to the Affected Party, a court or governmental authority of
competent jurisdiction shall enter an order appointing, without the consent
of the such Affected Party, a custodian, receiver, trustee or other officer
with similar powers with respect to it or with respect to any substantial
part of its property, or constituting an order for relief or approving a
petition for relief or reorganization or any other petition in bankruptcy
or for liquidation or to take advantage of any bankruptcy or insolvency law
of any jurisdiction, or ordering the dissolution, winding-up or liquidation
of such Affected Party and any such order or petition is not dismissed or
stayed within 60days after the earlier of the entering of any such order or
the approval of any such petition.
(b) Termination by MCG. MCG with twelve months prior written notice may
------------------
terminate this Agreement in the event of the occurrence or notice of (i) the
sale, lease or conveyance of substantially all of VENDOR's property, assets or
business; or (ii) a conflict of interest in its role as a major provider of the
services under this Agreement or shall create an image problem which is
deleterious to MCG.
(c) Termination for Convenience. Either party may terminate this Agreement
---------------------------
for convenience upon providing the other party twelve months written notice
after the Base Term.
(d) Survival of Rights. Neither the expiration nor the early termination
------------------
of this Agreement shall release either party from the obligation to pay any sum
which may then be owing to the other party or from the obligation to perform any
other duty or discharge any other liability incurred prior to the effective date
of such expiration or termination.
12. TERMINATION ASSISTANCE
(a) Transfer Obligations. Immediately upon written notice of termination,
--------------------
expiration or cancellation of this Agreement for any reason, VENDOR shall use
its commercially reasonable efforts to transfer the Services and otherwise
cooperate fully with MCG to transfer such Services, from VENDOR's facilities to
MCG or to any third party maintenance or servicing provider designated by MCG in
a manner that (i) minimizes the time to complete such transfer, (ii) maintains
the highest quality of Services provided, and (iii) minimizes any disruption to
customer requirements. Such cooperation shall include, without limitation, the
following:
(i) At MCG's election, MCG may require VENDOR to continue to perform
all or any portion of the Services for a period not to exceed twelve (12)
months (the "Transfer Period") as part of the transfer of MCG's service and
maintenance operations out of VENDOR's facilities; provided, that in the
--------
event that the automatic renewal of the term of this Agreement does not
occur as provided in Section 3(b), VENDOR shall provide the termination
assistance under this Section 12 during the remaining term of this
Agreement.
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<PAGE>
(ii) VENDOR shall make available, at the request of MCG, all
appropriate employees as consultants during the Transfer Period to assist
MCG in transferring the Services from VENDOR to MCG or such third party.
VENDOR shall make available the highest skilled support personnel who have
performed the Services to train personnel of MCG or such third party.
(iii) VENDOR shall immediately make available to MCG a machine-
readable copy of all Customer Data which is in a machine-readable form and
which is then in VENDOR's possession or being stored by or on behalf of
VENDOR, together with all other copies of any Customer Data that may exist
in any form.
(iv) VENDOR shall immediately upon MCG's request begin delivering to
MCG or such third party all Technical Documentation, and Loaned Equipment
then in VENDOR's possession or being stored by or on behalf of VENDOR, such
transfer to be made at such time, and with respect to Parts at such times
and in such quantities, to permit the orderly transfer of Services to MCG
or such third party while providing VENDOR with all such items for the time
and to the extent necessary for VENDOR to continue to perform the Services
to the extent that MCG has required VENDOR to so perform as provided in
Section 12(a)(i). Preparation and movement of the above mentioned property
to VENDOR's shipping docks shall be at VENDOR's expense; however, expenses
related to picking up said property from VENDOR's shipping docks and
charges related to shipment of the property to MCG-designated destinations
outside of VENDOR's facilities shall be borne by MCG.
Upon delivery of said property to VENDOR's shipping docks or MCG-
designated destinations outside of VENDOR's facilities, MCG assumes all
risk of loss, theft, damage or casualty to said property including, without
limitation, any such loss, theft, damage or casualty occurring during any
subsequent transfer of such Loaned Equipment to other locations and shall
indemnify and hold VENDOR harmless from and against any such loss, theft,
damage or casualty.
(v) VENDOR shall exercise its commercially reasonable efforts to
cooperate and assist MCG in obtaining the use of any non-proprietary,
commercially available software that VENDOR itself used in connection with
the Technical Documentation while it was performing under this Agreement.
(b) Compensation and Reimbursement. VENDOR shall be reimbursed for its
------------------------------
Transfer Obligations under its normal schedule of fees, except that the
provision of all consultants as set forth in above Section 12(a)(ii) shall be
reimbursed at VENDOR's "direct cost" if the termination is due to the exercise
by MCG of its termination rights based upon Section 11(a), above. Such "direct
cost" shall consist of VENDOR's direct cost for each employee's salary, the
employee's standard personnel benefits program, and the employee's standard
incentive package; said incentive package, if any, not to exceed 20% of gross
salary.
(c) VENDOR and MCG agree that being able to provide and maintain the
service and support as set forth in this Agreement is critical to MCG's goodwill
with its customers. The parties acknowledge that unless VENDOR performs its
obligations under Section 12, MCG will
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<PAGE>
suffer irreparable injury and VENDOR therefore agrees that MCG should be
entitled to specific performance from VENDOR as to such obligations as defined
in a Statement of Work if so determined.
(d) The Transfer Obligations. If the termination of this Agreement is due
------------------------
to the exercise by VENDOR of its termination rights based upon (1) the
nonpayment by MCG of invoices for services when due or (2) MCG's refusal to pay
VENDOR for VENDOR's performance of its obligations as required under this
Agreement, and MCG is not in material breach of this Agreement such that the
breach would render VENDOR incapable of performing its obligations, then VENDOR
may as a precondition to performing such Transfer Obligations require MCG to pay
the amounts allegedly owed to VENDOR into an interest-bearing escrow account
pending resolution of the dispute. Upon resolution, such amounts which are
placed in escrow shall be distributed in accordance with the terms of settlement
between the parties or court decision.
13. USE OF MOTOROLA NAME AND MOTOROLA TRADEMARK
(a) VENDOR acknowledges that (1) Motorola, Inc. owns all right, title and
interest in the Motorola name and logotype, (2) that Motorola is the owner of
certain trademarks and trade names used in connection with certain product lines
and software, and (3) that VENDOR will acquire no interest in any such
trademarks or trade names by virtue of this Agreement, its activities under it
or its affiliation with Motorola. During the term of this Agreement VENDOR may
indicate to the trade and to the public that it is an authorized maintenance
provider for the Eligible Products, but it will not adopt or use such
trademarks, trade names or Motorola's company name nor (to the extent it may
have any power to prevent such use) allow such marks or names to be used by
others for any other purpose. At the expiration or termination of this
Agreement, VENDOR shall immediately discontinue any and all use of the Motorola
name and any other name (or combination of words, designs, trademarks or trade
names) that would indicate that VENDOR was or is in any way an agent or
contractor of Motorola.
(b) MCG acknowledges that (1) VENDOR owns all right, title and interest in
the VENDOR name and logotype, (2) that VENDOR is the owner of certain trademarks
and trade names used in connection with certain product lines and software, and
(3) that MCG will acquire no interest in any such trademarks or trade names by
virtue of this Agreement, its activities under it or its affiliation with
VENDOR. During the term of this Agreement MCG may indicate to the trade and to
the public that VENDOR is an authorized maintenance provider for the Eligible
Products. But it will not adopt or use such trademarks, trade names or VENDOR's
company name nor (to the extent it may have any power to prevent such use) allow
such marks or names to be used by others. At the expiration or termination of
this Agreement, MCG shall immediately discontinue any and all use of the VENDOR
name and any other name (or combination of words, designs, trademarks or trade
names) that would indicate that MCG is providing services to customers through
VENDOR.
14. COMPLIANCE WITH EXPORT CONTROLS
VENDOR agrees that it will not in any form export, reexport, resell, ship
or divert or cause to be exported, reexported, resold, shipped or diverted
directly or indirectly any product,
-14-
<PAGE>
parts, software, documentation, technical data or a direct product thereof to
any country for which the U.S. Government, any agency thereof, or any other
sovereign government, requires an export license or other governmental approval
without first obtaining such license or approval.
15. PROHIBITION AGAINST GIFTS OR PAYMENTS
No official, employee or agent of any government, governmental agency or
political party shall be given any benefit, share in this Agreement, or receive
any item of value --- directly or indirectly --- related to this Agreement. MCG
and VENDOR warrant that:
(a) they have not and will not pay, donate, give, offer or promise
anything of value to any such person or entity on behalf of VENDOR or MCG in
connection with this Agreement;
(b) they are familiar with the terms of the United States Foreign Corrupt
Practices Act (15 United States Code Section 78dd-1 and -2) and with all laws
and regulations of the United States including (without limitation) those
regarding corrupt payments; and
(c) they are familiar with the general principles and spirit of the
Motorola Code of Conduct Policy attached hereto as Exhibit B.
16. EQUAL EMPLOYMENT OPPORTUNITY AND AFFIRMATIVE ACTION
VENDOR agrees to comply with the EEO provisions set forth in Schedule 16,
attached hereto.
17. GOVERNMENT SUBCONTRACT
IF ANY CUSTOMER CONTRACT COVERED BY THIS AGREEMENT INDICATES THAT IT IS
SUBJECT TO A PRIME CONTRACT WITH FEDERAL, STATE AND LOCAL GOVERNMENT AGENCY, OR
A HIGHER TIER SUBCONTRACT WITH A U.S. GOVERNMENT PRIME CONTRACTOR OR
SUBCONTRACTOR, THEN VENDOR AGREES TO COMPLY WITH ALL TERMS AND CONDITIONS OF THE
GOVERNMENT CONTRACT WHICH APPEAR ON EXHIBIT C ATTACHED HERETO AND MADE A PART
HEREOF, AND ANY OTHER PERTINENT LAWS, DIRECTIVES AND EXECUTIVE ORDERS TO THE
EXTENT THAT THEY APPLY TO THE SUBJECT MATTER OF THE ORDER.
18. DISASTER RECOVERY
VENDOR shall provide certain backup procedures as set forth in the
Statement of Work to continued operation in the event of certain catastrophic
events. VENDOR shall use its commercially reasonable efforts at its own cost to
regenerate MCG's Customer Data and to bring back on-line in the event of such a
disaster. In the event that part of VENDOR's facilities are operable, VENDOR
should provide for MCG's service and maintenance operations in no less favorable
position than that given to VENDOR's other customers.
-15-
<PAGE>
19. INSURANCE.
VENDOR shall at its sole cost and expense maintain at all times during the
term of this Agreement policies of at least the following insurance coverage and
amounts:
(a) Worker's Compensation and Employers Liability Insurance for its
employees who perform services for MCG. Worker's Compensation shall be as
required by statute and Employer's Liability shall be no less than $1,000,000.
VENDOR agrees to waive its right of subrogation against Motorola in connection
said Worker's Compensation and Employers Liability Insurance. Motorola agrees to
waive its right of subrogation against VENDOR in connection with its own
Worker's Compensation and Employer's Liability Insurance.
(b) Comprehensive General Liability insurance, including broad form
contractual liability and products and completed operations coverage. The
limits shall be no less than $5,000,000 each for bodily injury and/or
property damage and $10,000,000 for the aggregate. Motorola shall be named
as additional insured under such coverage.
(c) Automobile Liability insurance covering bodily injury and property
damage liability arising out of the use by or on behalf of VENDOR and its
employees. The limits shall be no less than $5,000,000 and Motorola shall
be named as additional insured.
(d) Errors and Omissions insurance covering the VENDOR for loss or damage
arising out of negligent acts or errors or omissions which arise from
providing Designated Services under this Agreement with limits of no less
than $5,000,000 per occurrence.
(e) Umbrella or excess coverage, including professional liability, in the
amount of $5,000,000 with MCG named as additional insured.
(f) Fidelity insurance which covers VENDOR's employees. The limits shall
be at least $1,000,000.
(g) Fire insurance in an amount to cover the repair or replacement of
MCG's property provided to VENDOR's care. Business Interruption Insurance
sufficient to continue operations for six (6) months. Motorola shall be
named as loss payee under these policies.
(h) Special Provisions.
(i) VENDOR shall deliver to MCG a certificate(s) of insurance stating
that the foregoing insurance policies are in full force and effect and
shall name MCG, MCG, their directors and officers, representatives and
employees as additional insured and/or loss payee, with the exception of
workers compensation coverage with the foregoing insurance above, as their
interests may appear.
(ii) Policies shall be placed with a company rated not less than A/VII
in the A.M. Best Company Rating Guide. VENDOR shall require each
insurer to give MCG thirty (30) days written notice before the policy
or policies are canceled or materially altered.
-16-
<PAGE>
(iii) Insurance shall include cross liability, severability of
interests endorsement.
(iv) Insurance shall stipulate that the VENDOR's insurance is
primary insurance.
(v) In the event that MCG agrees to a "claims-made" policy pursuant
to the provision of the required insurance listed above, such claims-
made policy must be maintained by VENDOR for at least five (5) years
after completion of work unless this obligation is waived in writing
in whole or in part by MCG.
(vi) The foregoing requirements as to the types and limits of
insurance coverage to be maintained by VENDOR, and any approval or
waiver of said insurance by MCG is not intended to and shall not in
any manner limit or qualify the liabilities and obligations otherwise
assumed by VENDOR pursuant to this Agreement, including but not
limited to the provisions concerning the indemnification provision.
(vii) At MCG's sole option, some insurance requirements contained in
this Section 19 may be fulfilled by a self-insurance program of
VENDOR. In the event that VENDOR is self-insured, this shall not in
any way limit the liabilities assumed by VENDOR under this Agreement.
(viii) Should any of the work under this Agreement be subcontracted,
VENDOR shall either require each of its subcontractors to provide the
aforementioned coverage, or VENDOR may insure subcontractor(s) under
its own policy(ies). Irrespective of the option so selected by VENDOR,
VENDOR shall retain the sole obligations to comply with the insurance
policy requirements. Any subcontracting must be approved in writing by
MCG.
(ix) The procurement and maintenance of insurance specified in this
Section 19 shall not limit or affect any liability which VENDOR might
have by virtue of this Agreement or otherwise.
20. LIMITATION OF LIABILITY
(a) Each party's liability for actual damages from any cause whatsoever,
except as otherwise stated in this section, will be limited to $2,000,000 in
aggregate per year. This limitation will apply, regardless of the form of
action, whether in contract or tort, including negligence.
(b) IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY LOST PROFITS, LOST
SAVINGS, INCIDENTAL DAMAGES, OR CONSEQUENTIAL DAMAGES THAT MAY RESULT FROM THIS
AGREEMENT, EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.
(c) The foregoing limitations of Section 20(a) will not apply to claims by
either party for bodily injury or damage to real property or tangible personal
property for which the other party is legally
-17-
<PAGE>
liable. The foregoing limitations also shall not limit any of MCG's rights to
recover fully against matters for which VENDOR has insurance coverage as set
forth in Section 19.
21. GENERAL PROVISIONS
(a) Independent Contractor. At all times in its performance of the
----------------------
Services under this Agreement, VENDOR will be acting solely as an independent
contractor and MCG shall exercise no control, other than as specified herein,
over the activities or operations of VENDOR. The parties understand and agree
that MCG is in no way associated with or otherwise connected with the
performance of this Agreement by VENDOR, nor the employment by VENDOR of labor
or the incurring by VENDOR of expenses in connection herewith (except as
otherwise expressly provided for herein).
(b) Force Majeure. Neither party shall be liable for delays caused by
-------------
revolution, insurrection, riot, war, act of the public enemy, national
emergency, strike, flood, fire, act of God, or by any other cause, whether
similar or dissimilar, not within the control of the party.
(c) No Implied Licenses. Except as otherwise stated herein, no licenses
-------------------
are implied or granted by this Agreement under any patents or other industrial
property rights owned or controlled by or licensed to MCG, in particular, VENDOR
acknowledges that no rights to manufacture the Eligible Products are granted by
this Agreement.
(d) Assignment. Neither party shall, directly or indirectly, sell,
----------
transfer or assign its rights or delegate performance of any of its obligations
under this Agreement to a third party, without the prior written consent of the
other party (which consent shall not be unreasonably withheld), except that
either party may make such an assignment in connection with a merger, sale or
transfer of all or substantially all of its assets, provided that such party
shall notify the other party of such assignment as soon as permitted under
contract and law. Subject to the foregoing, this Agreement shall be binding upon
and inure to the benefit of the parties and their legal representatives,
successors and assigns.
(e) Entire Agreement; No Third Party Beneficiaries. This Agreement
----------------------------------------------
constitutes the entire understanding between the parties in respect of the
matters set forth herein. Nothing in this Agreement or in any schedule or
exhibit referenced herein is intended to confer on any person or entity, other
than the parties hereto, any rights, benefits or remedies under or by reason of
this Agreement. Notwithstanding the foregoing, this subsection 21(e) shall not
apply to subsection 12(c) above.
(f) Notice. Any notices, consents, objections, demands, requests or other
------
communications required or permitted to be given pursuant to this Agreement
shall be in writing, and shall be sent by certified mail, return receipt
requested, to the addresses of the parties set forth in the heading to this
Agreement. Either party may designate, by notice, a change of address hereunder.
Notices shall be deemed to have been given when deposited in the United States
mail.
(g) Choice of Law and Dispute Resolution. This Agreement shall be governed
------------------------------------
and interpreted by the laws of the State of Arizona (excluding its conflict of
laws principles and
-18-
<PAGE>
excluding that law known as the United Nations Convention for the International
Sale of Goods). The parties agree to attempt to settle any claim or controversy
arising out of this Agreement through consultation and negotiation in the spirit
of mutual friendship and cooperation. If such attempts fail, the dispute shall
first be submitted to a mutually-acceptable neutral advisor for non-binding
mediation, fact-finding or other form of non-binding alternative dispute
resolution (ADR) selected by the parties. Neither party may unreasonably
withhold acceptance of such an advisor, and his or her selection must be made
within 45 days after written notice by the party demanding the use of ADR. The
cost of such mediation or other ADR procedure shall be shared equally by the
parties. Any dispute which cannot be resolved between the parties within six
months of the date of the initial demand shall be finally determined by the
courts within Arizona. The use of an ADR procedure under this subsection shall
not be construed (under such doctrines as laches, waiver or estoppel) to have
affected adversely either party's ability to pursue its legal remedies. And
nothing in this subsection shall prevent either party from resorting to judicial
proceedings if (1) good faith efforts to resolve a dispute under these
procedures have been unsuccessful or (2) interim resort to a court is necessary
to prevent serious and irreparable injury to either party or to others. In such
proceedings, the prevailing party shall be entitled to reasonable attorney's
fees and costs.
(h) Headings. The headings of this Agreement are for convenience only and
--------
are in no way intended to affect the meaning or interpretation of any provision
of this Agreement.
(i) Waivers, Amendments and Modifications. No provisions of this Agreement
-------------------------------------
or any Schedule or Exhibit attached hereto shall be deemed waived, amended or
modified by either party unless such waiver, amendment or modification is in
writing and signed by both parties hereto.
(j) Hazardous Substances and Materials. MCG does not require in any way
----------------------------------
that VENDOR use any "hazardous substances" as defined in 29 CFR 1910.1200.
VENDOR shall indemnify and hold MCG harmless for any such use on its own.
(k) Counterparts. This Agreement may be executed by both MCG and VENDOR
------------
with original signatures on one or more documents. Duplicate original documents
or copies of this document shall be deemed to have the same force and effect as
a signed original document. VENDOR agrees that it will take all actions required
by law in order to ensure that all workers assigned to perform services under
this Agreement are authorized to engage in such employment in accordance with
the Immigration Reform and Control Act of 1986. VENDOR further agrees that, upon
request by MCG, it shall provide MCG with a copy of the Form I-9 completed for
any of its employees assigned to perform services.
-19-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first-above written.
MCG VENDOR
- --- ------
MOTOROLA, INC. COMPUTER GROUP LINUXCARE, INC.
By: /s/ Christine M. Aumann By: /s/ Thomas W. Phillips
Name: Christine M. Aumann Name: Thomas W. Phillips
------------------- ------------------
Title: V.P. Customer Services Title: V.P. Sales
---------------------- ----------
Date: 12/13/99 Date: 12/13/99
-------- --------
-20-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first-above written.
MCG: VENDOR:
- --- ------
MOTOROLA, INC. COMPUTER GROUP LINUXCARE, INC.
By: ________________________________ By: /s/ Thomas W. Phillips
Name: ______________________________ Name: Thomas W. Phillips
-----------------
Title: _____________________________ Title: V.P. Sales
----------
Date: ______________________________ Date: 12/13/99
--------
-20-
<PAGE>
Exhibit A
Motorola
- --------
Motorola requires in-depth technical backup for their Technical Support group.
They selected Linuxcare because they can get access to acknowledged Linux
experts through our help desk escalation process. Linuxcare will provide
backline engineering support to Motorola Computer Group's support and
development organizations. Under its Professional Services Group, Linuxcare will
work with the Motorola Computer Group's product engineering and customer support
services on product customization and application development. The Linuxcare
University SBU will provide worldwide courseware licensing and instructor
technical support for Motorola Computer Group's training programs.
<PAGE>
Exhibit B
MOTOROLA CODE OF CONDUCT
(AS AMENDED AUGUST 27, 1993)
POLICY
- ------
Since its inception, the keystone of Motorola's business success has been
integrity with respect to its dealing with customers, suppliers and governments.
The highest order of ethical conduct has and continues to be the very foundation
of our enterprise. These qualities have been instilled and transmitted
throughout the Company.
The following statement of business philosophy and objectives applies to
all components of our Company. It is intended to be read and applied as part of
and supplementary to our already widely disseminated statements on the subject
of business ethics and standards of conduct set forth in our For Which We Stand
document.
This Code of Conduct provides firm, uncompromising standards for each of us
in our dealings with agents, customers, suppliers, political entities and
others. The Code reemphasizes and provides further guidance regarding policies
which have been an integral part of Motorola's business philosophy from the
beginning.
Adherence to this Code is the responsibility of each employee of Motorola
and a condition of continued employment. It will be administered uniformly
throughout the company and independent of the practices of other companies.
Adherence to the Code will continue to be the subject of management attention,
periodic audits of our Internal Audit Department and review by the Business
Ethics Compliance Committee.
The terms "Motorola" and "Company" as used in this Code of Conduct include
Motorola, Inc. and all of its affiliated companies.
A. IMPROPER USE OF COMPANY FUNDS AND ASSETS
----------------------------------------
Section 1. The funds and assets of Motorola shall not be used, directly or
indirectly, for illegal payments of any kind.
Example: The payment of a bribe to a public official or the kickback of funds to
- -------
an employee of a customer would be in direct violation of this section of the
Code.
Exhibit B - Page 1
<PAGE>
Section 2. The funds and assets of Motorola shall not be used, directly or
indirectly, for payments, gifts or gratuities of any kind, whether legal or
illegal, which directly or indirectly inure to the personal benefit of any agent
or employee of any entity with which Motorola does business, with the following
exception:
(a) Unless prohibited by the policy of the Customer, Motorola may give as
social amenities to customer and employees of non-government customers normal
sales promotional items bearing the Company's name or items of insignificant
value such as flowers and candy.
Under no circumstances may the payment of a gratuity or fee (or gift of any
kind) be made to a government employee whether in recognition of efficient
service or otherwise.
Section 3. The funds and assets of Motorola shall not be used, directly or
indirectly, for political contributions, whether legal or illegal. The term
"political contributions" is used in its broadest sense and includes local,
state or national fund-raising dinners, banquets, raffles or any funds or gifts
(including the free or discounted use of property or services) which could be
routed, directly or indirectly, to a political candidate, party, committee or
organization.
Example: The foregoing prohibition of political contributions would be
-------
violated if a manager directed any employees to work for a political candidate
or party or used company funds to reimburse employees for political
contributions made with their private funds.
This section is not intended to limit or otherwise restrict: (1) the
personal political activities of Motorola employees, or (2) the right of
Motorola employees to make personal contributions to any Motorola political
action committee.
Section 4. Motorola shall not enter into any agreements with dealers,
distributors, agents or consultants:
(a) which are not in compliance with the applicable laws of the
United States and with the laws of any other country that may be involved; or
(b) which provide for a commission rate or fee that is not reasonable
and commensurate with the functions or services to be rendered.
Example: It would be a violation of this section of the Code to provide a
-------
sales agent with a commission on sales of Motorola products which the Motorola
employee knows is intended to be used in part as a kickback to employees of the
customer. (See the relevant Corporate Financial Practice for further guidance
regarding these matters.)
Section 5. The funds and assets of Motorola must be properly and
accurately recorded on the books and records of the Company in accordance with
generally accepted accounting principles and practices and no false or
artificial entries shall be made in the books, records or accounts of the
Company. No payment made on behalf of Motorola shall be approved or made with
the intention or understanding that any part of such payment is to be used for
any purpose other than that described by the documents supporting the payment.
Exhibit B - Page 2
<PAGE>
Example: It would be a violation of this section of the Code of Conduct to
-------
purposefully issue an invoice or other document which inaccurately reflects a
transaction.
B. CUSTOMER/SUPPLIER/GOVERNMENT RELATIONSHIPS
------------------------------------------
Section 1. Information disclosed by a customer to a Motorola employee and
clearly identified verbally or in writing as sensitive, private or confidential
shall be protected from disclosure to unauthorized persons inside and outside
the Company to the same extent as Motorola sensitive, private or confidential
information is protected, except where such information was already known to
Motorola, is available from other sources, or is generally known outside the
Motorola or customer organizations.
Example (a): A customer makes Motorola aware of a confidential project for
-----------
which he is contemplating use of Motorola products. He asks Motorola to hold the
discussion in confidence. His request will be honored. The information will not
be disclosed within the Company to persons without a reasonable need to know in
order to serve the best interests of that customer. Nor will the information be
disclosed to any persons outside the Company except where required to comply
with a law or regulation.
Example (b): Motorola's price and delivery quotation to a customer will
-----------
not be disclosed to Motorolans without a need to know and never outside the
Company unless the information has been released by the customer or supplier or
is required to be released by law or regulation.
Section 2. Employees of Motorola will respect the laws, customs and
traditions of each country in which they operate, but will, at the same time,
engage in no act or course of conduct which, even if legal, customary and
accepted in any such country, could be deemed to be in violation of the accepted
business ethics of Motorola or the laws of the United States relating to
business ethics.
Section 3. Employees of Motorola shall not accept payments or gifts (other
than advertising novelties or other items of nominal value), including any
favors which might be regarded as placing the employee under some obligation to
a third party dealing or desiring to deal with Motorola, provided, however, in
rare circumstances, where the refusal to accept a gift (other than gifts of
nominal value referred to above) may be impossible without injuring the
legitimate business interests of Motorola, such gifts may be accepted so long as
the gift inures to the benefit of Motorola and will not inure to the benefit of
the Motorola employee.
Example (a): Included within the scope of this prohibition is the
-----------
acceptance by Motorolans of presents from suppliers at Christmas as well as the
acceptance by Motorolans of money, property or services (e.g., free trips) from
business associates.
Example (b): A Motorolan traveling on Motorola business may accept the
-----------
courtesy of free lodging in a Customer facility so long as properly noted on
Motorolan's travel expense records.
Example (c): Suppliers win Motorola business on the basis of product or
-----------
service suitability, price, delivery and quality. There is no other basis.
-----------------------
Attempts to influence procurement decisions by offers of any compensation,
commission, kickback, paid vacation, special discount on
Exhibit B - Page 3
<PAGE>
a product or service, entertainment or any form of gift or gratuity must be
firmly rejected by all Motorolans.
Section 4. Motorola may, unless otherwise prohibited, pay the
transportation and lodging expenses incurred by customers, agents or suppliers,
prospective or otherwise, in connection with a visit to a Motorola facility or
product installation for any reasonable business purpose, including on-site
examination of equipment, the participation in a training session or contract
negotiations with Motorola, but (except for ground transportation provided by an
accompanying Motorolan) only in such cases where prior to any such visit:
(i) the written approval for the payment of such expenses has been
obtained from both the Office of the Division General Manager and the General
Counsel, and whenever practicable, the senior management of the traveler has
been informed of the payment of such expenses by Motorola, or
(ii) Motorola is obligated by contract to pay such expenses and the
obligation is specifically delineated.
All such expenses must be accounted for in accordance with standard travel
procedures. General accounts such as sales promotion, should not be charged for
---
travel expenses. Payment of such expenses by Motorola may only be made if they
are not otherwise prohibited. For example, payment of such expenses by Motorola
could be prohibited in a particular situation by applicable law or regulation,
by a contract, or by the policy of the customer, agent or supplier.
Section 5. Motorola will not employ any individuals known to be related,
by blood, marriage or adoption (except relations more remote than first cousin),
to any person having influence over the purchasing decisions of any private or
public entity to which Motorola sells any of its products unless such employment
is first disclosed to and approved in writing by (1) the senior management of
such private or public entity; and (2) the general manager of the Motorola
Group/Division involved.
C. CONFLICT OF INTEREST
Section 1. Secondary Employment
--------------------
(a) A Motorola employee shall not:
(i) be employed by any other firm or person, including self-
---------------
employment, if such firm or person is a competitor or supplier of Motorola, or
- ----------
(ii) be employed by any other firm or person, excluding self-
---------------
employment, if such firm or person is a customer of Motorola, or
- ----------
(iii) engage in any activity where the skill and knowledge the
employee develops or applies in the employee's Motorola position is transferred
or applied to such activity in derogation of the present or prospective business
interests of Motorola.
Exhibit B - Page 4
<PAGE>
(b) A Motorola employee shall not have any relationship with any other
business enterprise which might affect the employee's independence of judgment
in transactions between Motorola and the other business enterprise or otherwise
conflicts with the proper performance of the employee's duties at Motorola.
(c) A Motorola employee may not accept any appointment to membership of
the Board of Directors, standing committee, or similar body of any outside
company, organization, or government agency (other than charitable, educational,
fraternal, political, community or religious organizations or similar groups)
without first receiving the prior approval of Motorola's Chief Executive
Officer, whether or not a possible conflict of interest might result from the
acceptance of any such appointment.
Section 2. Personal Financial Interest
---------------------------
(a) Supplier-Customer Relationships. A Motorola employee may not have any
-------------------------------
interest in any supplier or customer of Motorola which interest could in any
respect compromise the employee's loyalty to Motorola.
(b) Competitor Relationships. A Motorola employee may not have any
------------------------
interest in another enterprise which might appear to adversely affect the
employee's judgment regarding the employee's job or loyalty to Motorola. The
proper application of criteria concerning the effect of a specific interest on
an employee's judgment and loyalty will vary somewhat with the circumstances of
each employee, but generally, the greater the job responsibility of the employee
within Motorola, the higher the employee's duties are in these regards. Careful
consideration must be given by all employees to investments in enterprises
similar to Motorola. For instance, investments in companies primarily engaged in
semiconductor manufacturing and major competitors in wireless communications
equipment manufacture should be avoided. Other limitations may arise from
investments in companies whose business is similar to the Motorola employee's
group or sector organization and even more so regarding investments which are
similar to the employee's day-to-day responsibilities.
In case of a remote or relatively minor business similarity which does not
adversely affect one's judgment or loyalty, an employee may find that there is
no conflict in owning interests:
(i) in a company, the shares of stock of which are publicly held and
traded on a national securities exchange or automated quotation system; and
(ii) where the amount of stock owned by the employee is (a) less than
one one-hundredth of one percent of the class outstanding, and (b) less than 5%
of the employee's net worth.
(c) Interest of Associates. The interest of a Motorola employee's associate
----------------------
in a supplier, customer or competitor of Motorola may create a conflict-of-
interest depending upon the facts and circumstances of the particular case.
"Associate" for purposes of this policy statement shall mean:
Exhibit B - Page 5
<PAGE>
(i) any relative of a Motorola employee, any person living in the
employee's household or to whom the employee furnishes support or any person
having a personal relationship, similar to the above, with a Motorola employee;
(ii) any business in which the employee has a financial interest, any
creditor or debtor of the Motorola employee, or any other person benefits to
whom could reasonably be expected to relieve the Motorola employee of some
obligation or obtain for the employee some personal advantage or gain; or
(iii) any trust or estate administered by such persons or in which
they may have a financial interest as a beneficiary.
(d) Business Involvement with Associates. A Motorola employee may not
-------------------------------------
cause or Motorola to do business with any business in which the employee or an
associate is interested. If an instance occurs where it is important to
Motorola's advantage to enter into such a transaction, the proposed situation
shall be submitted in writing to, and receive prior written approval of
Motorola's General Counsel before any commitment is made. Such approval will not
be granted unless it can be ascertained that the terms of the transaction are to
be determined by competitive bidding or are established by law, or are
determined under other conditions which clearly establish an arm's length
fairness of terms.
Section 3. Inside Information
------------------
(a) A Motorola employee may not buy or sell or recommend to others to buy
or sell, any security or other interest in property based on knowledge derived
from such person's employment. Employees should avoid transactions in the area
of real estate which Motorola may be considering buying or selling or has
decided to buy or sell.
(b) A Motorola employee may not disclose confidential Motorola information
to any person other than in the proper discharge of the employee's Motorola
duties.
D. OPERATING PROCEDURES
--------------------
Section 1. If at any time a Motorola employee (or a subordinate or an
associate of a Motorola employee) has engaged, or is about to engage in any
activity covered by the Code of Conduct, the employee should promptly make all
facts known to Motorola's Corporate Vice President and General Counsel who will:
* Give advice to employees concerning the Code of Conduct;
* Make factual investigations where indicated;
* Determine whether the facts give rise to a violation of the Code of
Conduct and advise the Chief Executive Office of each violation, and recommend
the remedial action to be taken; and
* Consider exceptions from the Code of Conduct on a case by case basis.
Exhibit B - Page 6
<PAGE>
Section 2. Motorola's Corporate Vice President and General Counsel will
cause the Code of Conduct to be circulated periodically to each officer,
director and certain other employees.
Section 3. In all substantive matters relating to the administration of
this Code of Conduct, the Corporate Vice President and General Counsel shall
confer with the Business Ethics Compliance Committee.
Exhibit B - Page 7
<PAGE>
Exhibit C
I. U.S. GOVERNMENT TERMS AND CONDITIONS
CLAUSES FOR A NEGOTIATED FIXED PRICE, TIME AND MATERIALS, OR LABOR HOUR
SUPPLY OR SERVICE CONTRACT.
This contract incorporates the following clauses by reference, with the
same force and effect as if they were given in full text. Upon request, a full
copy text will be made available.
<TABLE>
<CAPTION>
FAR FAR CLAUSE
CLAUSE NUMBER CLAUSE TITLE DATE
<S> <C> <C> <C>
52.202-1 252.202-0001 Definitions April 1984
52.203-1 252.203-0001 Officials Not to Benefit April 1984
52.203-3 252.203-0003 Gratuities April 1984
52.203-5 252.203-0005 Covenant Against Contingent Fees April 1984
52.203-6 252.203-0006 Restrictions on Subcontractor Sales to the July 1985
Government
52.203-7 252.203-0007 Anti-Kickback Procedures. The following October 1988
is added to paragraph (c)(2): "seller shall
notify Buyer when such action has been
taken." In the first sentence of paragraph
(c)(4) "the contracting officer may..." is
replaced by "after the contracting officer
has effected an offset at the contract level
or has directed Buyer to withhold any sum
from the Seller, Buyer shall...".
52.210-6 Listing of Used or Reconditioned Material, April 1984
Residual Inventory and Former
Government Surplus Property. Seller
discloses hereunder that spare and/or repair
parts provided under this Agreement may
include components which have been
refurbished. Such components will be
provided in "like new" condition and will
include warranty coverage equivalent to
new components.
</TABLE>
Exhibit C - Page 1
<PAGE>
<TABLE>
<CAPTION>
FAR FAR CLAUSE
CLAUSE NUMBER CLAUSE TITLE DATE
<S> <C> <C> <C>
52.212-8 Defense Priority and Allocation September
Requirements 1990
52.215-1 252.215-0001 Examination of Records by Controller April 1984
General
52.222-4 Contract Work and Safety Standards Act- March 1986
Overtime Compensation
52.222-24 Pre-award On-Site Equal Opportunity April 1984
Compliance Review
52.222-25 Affirmative Action Compliance April 1984
52.222-40 Service Contract Act of 1965, as amended April 1984
- Contracts of $2,500
52.222-41 1 Service Contract Act of 1965, As May 1989
Amended (Over $2,500)
52.222-42 1 Statement of Equivalent Rates for Hire May 1989
52.223-2 252.223-0002 Clean Air and Water (Over $100,000) April 1984
52.223-6 252.223-0006 Drug Free Workplace July 1990
52.225-13 Restrictions on Contracting With May 1989
Sanctioned Persons
52.227-2 Notice and Assistance Regarding Patent April 1984
and Copyright Infringement
52.227-14 Rights in Data - General June 1987
52.228-5 252.228-0005 Insurance - Work on Government April 1984
Installation
</TABLE>
______________________
1 Seller represents only that it shall pay its employees performing under
this Agreement not less than the minimum wage specified under 6(20(1) of the
Fair Labor Standards Act of 1938, as amended (29 U.S.C. 201-206), unless wage
determination(s) applicable to particular customer orders are provided to the
Seller for review and validation of affected employees' wages and fringe
benefits.
Exhibit C - Page 2
<PAGE>
<TABLE>
<CAPTION>
FAR FAR CLAUSE
CLAUSE NUMBER CLAUSE TITLE DATE
<S> <C> <C> <C>
52.232-23 252.232-0023 Assignment of Claims January 1986
52.232-28 Electronic Funds Transfer Payment April 1989
Method
52.243-1 252.243-0001 Changes - Fixed Price Alternate II August 1987
52.246-25 252.246-0025 Limitation of Liability - Services April 1984
52.249-1 Termination for Convenience of the
Government (Fixed-Price)(Short Forms)
</TABLE>
II. STATE & LOCAL TERMS AND CONDITIONS
Rules of the Procurement Policy Board of the City of New York dated August 1,
1990.
Exhibit C - Page 3
<PAGE>
Schedule 16
-----------
EQUAL EMPLOYMENT OPPORTUNITY
A) PROVISIONS OF FEDERAL ACQUISITION REGULATION (FAR) 52.222-26(B)(1)-
(11) PERTAINING TO EQUAL OPPORTUNITY CLAUSE;
B) ALL PROVISIONS OF 41 C.F.R. 60-250 AS IMPLEMENTED BY FAR 25.222-35 AND
- -37 PERTAINING TO EMPLOYMENT REPORTS AND AFFIRMATIVE ACTION FOR DISABLED
VETERANS AND VETERANS OF THE VIETNAM ERA; AND
C) ALL PROVISIONS OF C.F.R. 60-741 AS IMPLEMENTED BY FAR 52.222-36
PERTAINING TO AFFIRMATIVE ACTION FOR HANDICAPPED/DISABLED WORKERS.
VENDOR REPRESENTS THAT IT HAS SUBMITTED STANDARD FORM 100 (EEO-1).
COMPLIANCE REPORTS AS REQUIRED BY C.F.R. 60-1.7 AS IMPLEMENTED BY FAR 52.222-22.
VENDOR CERTIFIES THAT, IN COMPLIANCE WITH 41 C.F.R. 60-1.8 AS IMPLEMENTED BY FAR
52.222-21, IT DOES NOT AND WILL NOT MAINTAIN OR PROVIDE FOR ITS EMPLOYEES ANY
SEGREGATED FACILITIES AT ANY OF ITS ESTABLISHMENTS, AND THAT IT DOES NOT AND
WILL NOT MAINTAIN OR PROVIDE FOR ITS EMPLOYEES ANY SEGREGATED FACILITIES AT ANY
OF ITS ESTABLISHMENTS, AND THAT IT DOES NOT AND WILL NOT PERMIT ITS EMPLOYEES TO
PERFORM THEIR SERVICES AT ANY LOCATION UNDER ITS CONTROL WHERE SEGREGATED
FACILITIES ARE MAINTAINED. VENDOR AGREES THAT BREACH OF THIS CERTIFICATION IS A
VIOLATION OF THE EQUAL OPPORTUNITY CLAUSE INCORPORATED HEREIN. VENDOR FURTHER
AGREES THAT IT WILL EITHER (A) OBTAIN CERTIFICATIONS OF NONSEGREGATED FACILITIES
FROM PROPOSED SUBCONTRACTOR FOR SPECIFIC TIME PERIODS; OR (B) OBTAIN
CERTIFICATIONS OF NONSEGREGATED FACILITIES FROM PROPOSED SUBCONTRACTORS PRIOR TO
AWARD OF ANY SUBCONTRACT SUBJECT TO THE EQUAL OPPORTUNITY CLAUSE, WILL RETAIN
SUCH CERTIFICATIONS IN ITS FILES, AND FORWARD THE NOTICE SET FORTH IN FAR
52.222-21 TO PROPOSED SUBCONTRACTORS. VENDOR AGREES TO COMPLY WITH ANY AND ALL
STATE AND LOCAL GOVERNMENT EQUAL EMPLOYMENT OPPORTUNITY AND AFFIRMATIVE ACTION
LAWS, INCLUDING ANY AND ALL APPLICABLE STATUTES, RULES, REGULATIONS, ORDINANCES
AND OTHER GUIDELINES.
-1-
<PAGE>
Schedule 1(h)
-------------
SERVICE AREA
The Service Area under this Agreement shall be all major areas of the world
including, but not limited to, North America, South America, Europe, Asia
Pacific and Japan.
-1-
<PAGE>
EXHIBIT 10.2.11
SILICON GRAPHICS
CONSULTING AGREEMENT
This CONSULTING AGREEMENT is made and entered into as of April 30, 1999, by and
between LINUXCARE, a COMPANY organized under the laws of CALIFORNIA
("Consultant"), having a place of business at 650 TOWNSEND ST SAN FRANCISCO, CA
94103 and Silicon Graphics, Inc., a Delaware corporation ("SGI"), having a place
of business at 2011 N. Shoreline Blvd., Mountain View, CA 94043-1389.
WHEREAS, Consultant is in the business of providing consulting services; and
WHEREAS, SGI desires Consultant to provide its consulting services to SGI, and
Consultant desires to provide such services to SGI.
NOW, THEREFORE, the parties hereto agree as follows:
1.0. DEFINITIONS.
1.1 "Agreement" means Consulting Agreement.
1.2 "Confidential Information" means any information about SGI's customers,
employees, marketing, technology or products that should reasonably be
understood to be proprietary and/or confidential in nature.
1.3 "Consultant" means the individual or independent business entity
identified above and, individually and collectively, the agents, employees,
officers, partners and principals of such individual or business entity.
1.4 "Licensed Rights" means any preexisting intellectual property rights
owned and/or licensable by Consultant, its employees or any third party that are
required for SGI to exercise its rights in the Work Product or benefit from
Services.
1.5 "Services" means the services to be performed by Consultant hereunder,
which shall be described on Exhibit A hereto.
1.6 "Work Product" means any and all concepts, data, designs, ideas,
information, inventions, know-how, processes, techniques, and works of
authorship or the like developed or created by Consultant during the course of
performing Services, regardless of the form of embodiment. Work Product shall
(i) include all copyrights, property rights associated therewith, and (ii) in
the case of copyrights, be considered (to the extent permitted by law) works
made for hire within the meaning of the Copyright Act (17 U.S.C. (S) 101 et
seq.).
2.0 INDEPENDENT CONTRACTOR STATUS. The parties acknowledge and agree that
Consultant is an independent contractor and not an employee, agent, joint
venturer or partner of SGI. Consultant acknowledges and agrees that, as an
independent contractor, Consultant will not be entitled to (i) make claim for
unemployment, worker's compensation or disability, or (ii) receive any vacation,
health, retirement or other benefits, pursuant to this Agreement or Consultant's
relationship with SGI. SGI will not make state or federal unemployment insurance
contributions on behalf of Consultant, or withhold FICA (Social Security)
contributions or state and federal income taxes from its payments to Consultant,
and Consultant agrees that it shall make such contributions and withhold such
taxes for any of its employees performing Services. Consultant's Federal
taxpayer identification number is 94-3315402 and local business license/permit
number is __________________________.
3.0 PERFORMANCE OF SERVICES.
3.1. Services; Progress Reports. Consultant agrees to provide the Services
--------------------------
to SGI, and to promptly deliver to SGI any Work Product resulting from the
performance of Services. Consultant will report its progress on its performance
of Services to SGI at the time and in the manner reasonably requested by SGI.
3.2. Method of Performing and Scheduling of Services. Consultant will
-----------------------------------------------
determine the general method, details and means of performing the Services,
provided that Consultant shall strictly observe any SGI policies or procedures
applicable to the workplace if using the premises and/or equipment of SGI.
Consultant will use its best efforts to complete the Services in accordance with
the schedule set forth in Exhibit A.
3.3. Changes in Scope of Work. SGI shall have the right to change the scope
------------------------
of the Services, if (i) such change is reasonably acceptable to Consultant, and
(ii) the parties mutually agree on the terms applicable to any such change,
including changes to Consultant's compensation (if any), which shall be set
forth i a signed, written amendment to this Agreement.
4.0 COMPENSATION; INVOICES AND PAYMENT.
4.1. Compensation and Expenses. SGI will pay the applicable amount(s) set
-------------------------
forth on Exhibit A to Consultant following Consultant's completion and deliver,
and SGI's acceptance of, the Services and Work Product. Consultant shall be
responsible for all costs and expenses incidental to its performance of the
Services, except as otherwise expressly set forth on Exhibit A.
4.2. Invoices and Payment. Consultant shall submit invoices to SGI at least
--------------------
every thirty (30) days, but not more often than weekly (once every five (5)
working days, together with sufficiently detailed information for SGI to verify
all invoice items. SGI will pay Consultant net thirty (30) days after SGI's
receipt of Consultant's invoice or acceptance of Services and/or Work Product,
whichever is later. SGI will not be liable for and will not pay any invoice that
------------------------------------------------------------
Consultant submits to SGI more than ninety (90) days after Consultant performed
- -------------------------------------------------------------------------------
and SGI accepted the associated Services.
- ----------------------------------------
5.0 CONFIDENTIAL INFORMATION
5.1. Confidential Information. Consultant shall maintain in strict
------------------------
confidence all Confidential Information that Consultant receives in the course
of providing Services or otherwise in connection with its relationship with SGI.
5.2 Exclusions. The restrictions in Section 5.1 above shall not apply to
----------
information that Consultant can clearly show (i) was already lawfully known to
Consultant; (ii) was independently developed by Consultant; (iii) becomes
rightfully known to Consultant from another source, without restriction on
subsequent disclosure or use; or (iv) is or becomes part of the public domain
through no wrongful act of Consultant.
Page 1 of 5
<PAGE>
6.0 OWNERSHIP OF WORK PRODUCT; LICENSED AND RESIDUAL RIGHTS.
6.1. Ownership of Work Product. Consultant agrees that, in consideration
-------------------------
for SGI's payment to Consultant hereunder, all Work Product shall become the
property of SGI. To the extent that any such Work Product may not, under
applicable law, be considered works made for hire, Consultant agrees to assign
on an exclusive basis al of Consultant's right, title and interest in and to the
Work Product to SGI. Accordingly, Consultant agrees that it shall (i) not use
any Work Product for the benefit of any party other than SGI, (ii) execute an
assignment agreement in the form attached hereto as Exhibit B on completion of
Services, and (iii) perform such other acts (including, but not limited to,
cooperating with and assisting SGI in the protection and enforcement of SGI's
rights in the Work Product by adjudication or otherwise) and execute such other
documents and instruments as SGI may now or hereafter deem reasonably necessary
or desirable to evidence the transfer of sole ownership of all Work Product to
SGI. If, by operation of law, Consultant is deemed to retain any rights in and
to any intellectual property created hereunder, Consultant, to the extent that
any such rights conflict with any assignment of rights made by Consultant to SGI
hereunder, hereby waives all such rights.
6.2. Licensed Rights. To the extent Licensed Rights are required under
---------------
this Agreement, Consultant grants or will cause to be granted to SGI before the
expiration of the term hereof a fully-paid, irrevocable, worldwide, non-
exclusive license and right to make, have made, sell, possess, use, disclose,
reproduce, prepare derivative works based on, distribute, sublicense, perform
and display works, products or the like that incorporate or are based on, in
whole or in part, Licensed Rights. Consultant represents that there shall be no
Licensed Rights required hereunder unless specifically noted and described on
Exhibit A.
6.3. Residual Rights Of Consultant. Notwithstanding anything to the
-----------------------------
contrary herein, Consultant shall be free to use its general skills, know-how
and expertise in the course of providing its services to others, provide that
Consultant shall not specifically disclose any Confidential Information and/or
providing Work Product to any third party in so doing.
7.0. WARRANTIES.
7.1. Warranties. Consultant represents and warrants to SGI that:
a. General. Consultant has all requisite right and authority to enter into this
Agreement and the performance of its obligations hereunder will not conflict
with any of its agreements with or obligations to any third party.
b. Independent Contractor. Consultant will establish and maintain its status as
an independent contractor by participating in SGI's independent contractor
evaluation and scoring process from time to time as specified by SGI.
c. Performance of Services. Consultant will perform all Services in a good and
workmanlike manner, in accordance with the best practices of Consultant's
industry, and the Services and Work Product will conform to the applicable
specification and/or statement of work set forth herein.
d. Year 2000 Compliance. To the extent that Work Product Licensed Rights and any
other deliverable items hereunder are comprised of computer hardware and/or
software, such items will use a four (4) digit representation of the year and
process (including, without limitation, inputting, outputting, retrieving and
storing) without error information and/or data that includes or refers to
dates and/or time on any day in any year before, during, and after the
twenty-first century, including any leap day or year.
e. Intellectual Property Rights. The Work Product, Licensed Material and any
associated deliverables shall not violate any patent, copyright, trademark,
trade secret or other intellectual property right of any third party.
7.2. Warranty Exclusions. THE FOREGOING WARRANTIES ARE EXCLUSIVE, AND
-------------------
CONSULTANT DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING,
WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
8.0 INSURANCE. Consultant shall obtain and maintain in full force and effect
during the term of this Agreement (i) commercial general liability insurance
(including contractual liability coverage) with coverage limits of not less than
One Million Dollars ($1,000,000) per occurrence, naming SGI as an additional
insured thereunder, and (iii) worker's compensation insurance as required by
law. At the time of execution of this Agreement, Consultant shall provide SGI
with a certificate of insurance evidencing the insurance coverages required
under this Section 8. The insurance companies now or hereafter issuing the
foregoing insurance policies shall be reasonably acceptable to SGI. Any
modification, renewal, replacement or cancellation of such insurance coverages
shall require at least thirty (30) days prior written notice to SGI.
9.0 INDEMNIFICATION. Consultant shall indemnify, defend and hold SGI harmless
from and against any and all third party claims, suits, proceedings, damages,
costs, liabilities and expenses (including, without limitation, reasonable
attorneys' fees) arising from the negligence or willful misconduct of Consultant
in connection with Consultant's performance of Services or relationship with SGI
hereunder. The foregoing indemnification shall also apply to damage or loss to
the property of SGI arising from the actions or inactions of Consultant's
employees or agents, whether in the course of their employment or not, including
but not limited to acts of theft, vandalism or the like.
10.0. TERM; TERMINATION.
10.1. Term. This Agreement will become effective on the date first set
----
forth above and will continue in effect through the earlier of the completion of
the Services and delivery of the Work Product, or the completion date set forth
on Exhibit A, unless terminated earlier in accordance with this Section 10.
10.2 Termination of Services and/or Agreement for Convenience by SGI. SGI
---------------------------------------------------------------
may terminate this Agreement and/or all or any portion for the Services by
giving written notice to Consultant. On receipt of such notice, Consultant shall
cease providing Services, advise SGI of the extent to which Consultant has
completed, and collect
Page 2 of 5
<PAGE>
and deliver to SGI whatever Work Product then exists, regardless of the form of
embodiment, in the manner requested by SGI. After SGI receives and accepts
Consultant's detailed statement of any terminated-related expenses and costs
incurred by Consultant, SGI shall make a final settlement payment to Consultant
for all work performed through the date of such termination within thirty (30)
days.
10.3. Termination of Agreement for Default. If a party fails to cure any
------------------------------------
breach of its obligations hereunder within ten (10) days after its receipt of
written notice thereof from the other party, then the other party may terminate
this Agreement at any time thereafter by providing the defaulting party with
written notice of termination.
10.4. Delivery Of Materials Upon Termination. Consultant agrees, covenants
--------------------------------------
and promises that, in the event of termination or expiration of this Agreement
for any reason, Consultant will promptly and without request surrender and
deliver to SGI all materials containing, embodying or otherwise evidencing any
Confidential Information, regardless of whether any such item or the information
therein was prepared, produced or authored by Consultant, except that Consultant
may retain a copy of this Agreement for its records.
10.5. Survival. Sections 5, 6, 7, 10.5, 11.1, 11.2 and 11.8 hereof shall
--------
survive the expiration or earlier termination of this Agreement.
11.0. GENERAL.
11.1 Resolution of Disputes. The parties agree that they will make good
----------------------
faith efforts to settle any dispute, claim or controversy arising out of or
relating to this Agreement by discussion, negotiation and/or mediation.
11.2 Governing Law; Venue, Waiver of Jury Trial. This Agreement shall be
------------------------------------------
governed by and interpreted in accordance with the laws of the State of
California, excluding its choice of law rules. Any adjudicated dispute
regarding the interpretation or validity of or otherwise arising out of this
Agreement, or relating to Services provided under this Agreement, shall be
subject to the exclusive jurisdiction of the California state courts in and for
Santa Clara, County, California (or, if there is federal jurisdiction, the U.S.
District Court for the Northern District of California), and SGI and Consultant
agree to submit to the personal and exclusive jurisdiction and venue of these
courts. The parties hereto expressly waive any right they have to a jury trial
and agree that any court proceeding under this Agreement shall be tried by a
judge without a jury.
11.3 Non-exclusive Relationship. This Agreement is non-exclusive.
--------------------------
Consultant shall have the right to perform work for others during the term of
this Agreement. SGI may cause similar work to be performed by its own personnel
or other contractors or consultants during the term of this Agreement.
11.4. Record Keeping. Consultant agrees to keep records regarding its
--------------
performance of Services and invoices to SGI for a period of at least three (3)
years after the expiration or termination of this Agreement, and that it shall
produce such records for inspection and audit by SGI on SGI's written request.
11.5 Representation by Counsel. Consultant hereby certifies and represents
-------------------------
that it has been, or had the opportunity to be, represented by counsel in the
negotiation of this Agreement.
11.6 Assignment. No Portion of this Agreement or any of Consultant's rights
----------
(including, without limitation, the right to payment hereunder) duties or
obligations hereunder may be assigned and/or delegated by Consultant.
11.7 Modifications. Any modifications of this Agreement shall be in
-------------
writing and signed by both parties.
11.8 Complete Agreement. This Agreement, including all attachments hereto,
------------------
constitutes the complete and exclusive statement of the agreement between SGI
and Consultant, and it supersedes all proposals, oral or written, and all other
communications between SGI and Consultant relating to the subject matter of this
Agreement.
SILICON GRAPHICS, INC CONSULTANT
By: Bill Dusterhoff By:
---------------------------------- --------------------------------
- ------------------------------------- -----------------------------------
(NAME PRINT OR TYPE) (NAME PRINT OR TYPE)
EDUCATION MANAGER
- ------------------------------------- -----------------------------------
TITLE TITLE
4/30/99
- ------------------------------------- -----------------------------------
DATE DATE
Page 3 of 5
<PAGE>
EXHIBIT A
DESCRIPTION OF SERVICES, WORK PRODUCT, AND COMPENSATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Item Description of Services and Work Product Completion Payment on
# Date Completion
(if any)
- -----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
1 LINUX TRAINING CLASS 5/8/99
1 LINUX TRAINING CLASS 5/22/99
1 LINUX TRAINING CLASS 6/12/99
2 LINUX TRAINING CLASS TO BE
ASIA/PACIFIC DETERMINED
2 LINUX TRAINING CLASS
EUROPE 6/5/99
6/12/99
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Statement of Work or project Description/Quotation of Consultant Attached:
X
- ----- -----
Yes No
/
- ------------------------------------------------------------------
Consultant (by/date)
/s/ Bill Dusterhoff 4/30/99
- ------------------------------------------------------------------
SGI (by/date)
Page 4 of 5
<PAGE>
EXHIBIT B
ASSIGNMENT OF INTELLECTUAL PROPERTY RIGHTS
This ASSIGNMENT OF INTELLECTUAL PROPERTY RIGHTS ("Assignment") is made and
entered into this day of 4/30, 1999, by and between LINUXCARE ("Consultant") and
Silicon Graphics, Inc. ("SGI").
Consultant and SGI have entered into a Consulting Agreement (the "Agreement") of
even date herewith pur-suant to which Consultant has agreed to provide Services
and/or create certain Work Product for SGI. Unless otherwise defined herein,
the defined terms used in this Assignment shall have the same meanings as set
forth in the Agreement.
1.0. DESCRIPTION OF WORK PRODUCT. Work Product consists of and is described as:
PRODUCT is training classes in which consultant is owner of intellectual
property except for 1 module on SGI IriX/LINUX differences.
2.0. ASSIGNMENT AND TRANSFER OF INTELLECTUAL PROPERTY RIGHTS. In consideration
of SGI's obligation to pay Consultant the compensation described on Exhibit A to
the Agreement. Consultant hereby grants, assigns, conveys and transfers, and
agrees to grant, assign, convey and transfer from time to time, on an exclusive
basis, to SGI all of Consultant's right, title and interest in and to all Work
Product now or hereafter created or developed by Consultant during the course of
performing the Services, without the necessity of further consideration. This
Assignment shall be operative with respect to all intellectual property rights
in and to all Work Product, including, without limitation, (i) all copyrights
worldwide, including all rights of regis-tration and publication, rights to
create derivative works, and all other rights incident to copyright ownership,
for the residue now unexpired of the present term of any and all such copyrights
and any term thereafter during which the Work Product shall be entitled to
copyright, and (ii) all trade secrets, inventions, know-how, ideas and
confidential information embodied or reflected in Work Product, for the longest
period of protection accorded to such interests under applicable law. This
Assignment shall be binding upon and inure to the benefit of the parties hereto
and their respective successors, assigns and legal representatives.
/
- ------------------------------------------------------------------
Consultant (by/date)
/s/ Bill Dusterhoff 4/30/99
- ------------------------------------------------------------------
SGI (by/date)
Page 5 of 5
<PAGE>
EXHIBIT 10.3.4
Salient Lease Terms
<PAGE>
LEASE
650 TOWNSEND STREET
SAN FRANCISCO, CA
TABLE OF CONTENTS
1. SALIENT LEASE TERMS 1
2. DEFINITIONS 4
3. PREMISES 10
4. TERM 11
5. PRE-TERM POSSESSION 11
6. DELAY IN DELIVERY OF POSSESSION 11
7. MINIMUM RENT 12
8. ADDITIONAL RENT 12
9. ACCORD AND SATISFACTION 14
10. SECURITY DEPOSIT 15
11. USE 16
12. COMPLIANCE WITH LAWS AND REGULATIONS 17
13. SERVICE AND EQUIPMENT 25
14. WASTE 26
15. ALTERATIONS 27
16. PROPERTY INSURANCE 29
17. INDEMNIFICATION, WAIVER OF CLAIMS AND SUBROGATION 30
18. LIABILITY INSURANCE 32
19. INSURANCE POLICY REQUIREMENTS 33
20. LESSEE INSURANCE DEFAULT 33
21. FORFEITURE OF PROPERTY AND LESSOR'S LIEN 33
22. MAINTENANCE AND REPAIRS 34
23. DESTRUCTION 35
24. CONDEMNATION 36
25. ASSIGNMENT AND SUBLETTING 38
26. ABANDONMENT 42
27. ENTRY BY LESSOR 42
28. SIGNS 42
29. DEFAULT 43
30. REMEDIES UPON DEFAULT 43
31. BANKRUPTCY 46
32. SURRENDER OF LEASE 49
33. LESSOR'S EXCULPATION 49
34. ATTORNEYS' FEES 50
35. NOTICES 50
36. SUBORDINATION 51
i.
<PAGE>
37. ESTOPPEL CERTIFICATES 52
38. WAIVER 52
39. HOLDING OVER 52
40. SUCCESSORS AND ASSIGNS 53
41. TIME 53
42. EFFECT OF LESSOR'S CONVEYANCE 53
43. COMMON AREAS 53
44. TRANSFER OF SECURITY 53
45. LATE CHARGES 54
46. CORPORATE AUTHORITY 54
47. MORTGAGEE PROTECTION 54
48. MISCELLANEOUS PROVISIONS 55
49. WAIVER OF CALIFORNIA CODE SECTIONS 58
50. SHUTTLE SERVICE 58
ii.
<PAGE>
THIS LEASE is dated for reference purposes only this 11 day of February, 1999.
--
1. SALIENT LEASE TERMS
1.1 Rent Payment: ZORO, LLC
650 Townsend Street
San Francisco, CA 94103
Attn: Building Management Office
Fax No.: (415) 487-4056
1.2 Parties and Notice Lessor: ZORO, LLC
Address: 650 Townsend Street
San Francisco, CA 94103
Attn: Building Management Office
Fax No.: (415) 487-4056
Lessee:
LINUXCARE, INC., a Delaware Corporation
After commencement at
the Leased Premises
Attention: Arthur Tyde
Fax No: (to be provided after
installation of fax equipment)
(If more than one party, then the
obligations hereunder shall be joint
and several.)
(Section 35.1)
1.
<PAGE>
1.3 Premises: (A) Name and Location of Complex:
650 Townsend Street
San Francisco, CA
(B) Leased Premises, indicated on
Exhibits C-1 and C-2 and
consisting of the following:
Adjusted
Usable Rentable
Suite Area Area
----- ---- ----
320 1,145 1,489*
355 2,534 3,294*
Total 4,783*
(*based on the Usable square feet
multiplied by a load factor of 1.3)
1.4 Term: Commencing with respect to each quadrant
as follows:
Suite 355: February 1, 1999
Suite 320: May 1, 1999
and expiring with respect to the entire
Leased Premises (the "Expiration Date")
on December 31, 2003.
(Section 4.1)
1.5 Rent: Minimum Rent:
From the Commencement Date with respect
to each Premises through the Expiration
Date: $129,141 per year; $10,761.75 per
month.
(Section 7.2)
1.6 Security Deposit: Letter of Credit in an amount of Seventy
Thousand Dollars ($70,000)
(Section 10.1)
2.
<PAGE>
1.7 Use: The Leased Premises shall be used for
multimedia software research,
development, production, assembly,
testing, engineering, marketing,
distribution, wholesale and retail sales,
licensing, customer service and related
office and administrative functions.
(Section 11.1)
1.8 Pro Rata Percent: .71%
(Section 2.1)
(Section 16.3)
1.9 Base Operating Cost 1999 Base Expense Year and 1998-1999
for the Complex: Base Tax Year
(Section 8.2)
(Section 16.3)
1.10 Real Estate Cushman & Wakefield of California, Inc.
Brokers: and Polatnick Properties (Lessor's
Broker) Pacific Union (Lessee's Broker)
(Section 48.14)
1.11 Rentable Area of 670,604 square feet Building at
Commencement:
1.12 Contents: This Lease consists of:
Pages 1 through 59
Sections 1 through 50
Addenda (if any)
Exhibits:
A - Legal Description of Complex
B - Plan of the Complex
C - (C-1 and C-2) Floor Plan of the
Leased Premises
D - Work Letter Agreement
E - Acknowledgment of Commencement
F - Intentionally Omitted.
G - Rules and Regulations
H - Building Standards
I - Intentionally Omitted.
J - Janitorial Specifications
3.
<PAGE>
2. DEFINITIONS
2.1 The terms defined in this Article 2 shall, for all purposes of this
Lease and all agreements supplemental hereto, have the meanings herein specified
unless expressly stated otherwise.
"ADJUSTED RENTABLE AREA" means the Usable Area multiplied by 1.2
----------------------
except on the 2nd and 3rd floors for which the multiplicand shall be 1.3.
"ATRIUM" means the Central Atrium on floors 2 through 6 of the
------
Building so identified on Exhibits B and C.
"BASE BUILDING WORK" shall mean the exhaust line, waste line and
------------------
domestic water hook ups which Lessor shall stub to the Leased Premises.
"BASE OPERATING COST" means the sum set forth in Section 1.9 hereof.
-------------------
"BOMA" means the standards of measurement adopted by the Building
----
Owners and Managers Association, American National Standard, ANSI/BOMA 2.65.1 -
1996 ("BOMA") as modified by Lessor for uniform use in the Complex.
"BUILDING" shall mean the structure which contains the Leased
--------
Premises.
"BUILDING STANDARDS" shall mean Lessor's standard specifications for
------------------
construction in the Building as set forth in Exhibit H and as may be established
by Lessor from time to time.
"COMMENCEMENT DATE" shall mean the earlier of the following dates:
-----------------
(i) The day upon which Lessee takes possession of the
Leased Premises; or
(ii) The date upon which the Tenant Improvements, including
the Lessee's Work (as herein defined), have been substantially completed as
determined by Lessor's project architect; or
(iii) Sixty (60) days following the Delivery Date (as herein
defined).
"COMMON AREAS" shall mean all areas and facilities outside the
------------
Leased Premises within the exterior boundaries of the Complex of which the
Leased Premises form a part, that are provided and designated by Lessor from
time to time for the general use and convenience of Lessee and of other tenants
of Lessor having the common use of such areas, and their respective authorized
representatives and invitees. Common Areas include, without limitation,
corridors, stairways, elevator shafts, janitor rooms, driveways, parking areas,
and landscaped areas all as generally described on Exhibit B attached hereto.
Exhibit B is tentative and Lessor reserves the right to make alterations thereto
from time to time. Other areas may
4.
<PAGE>
be designated by Landlord from time to time as for the exclusive use of certain
lessees and shall cease being Common Areas.
"COMPLEX" is the real property of which the Leased Premises forms a
-------
part, including, but not limited to, the Building, parking facility and
landscaping, which property is described with particularity in Exhibit A
attached hereto and made a part hereof by reference.
"DELIVERY DATE" shall mean the earlier of the following dates: (i) the
-------------
date upon which Lessee takes possession of the Leased Premises (provided
possession shall not mean Lessee's possession of and entry to the Leased
Premises for the purpose set forth in Section 5.1) or (ii) the date upon which
Lessor's Work with respect to the Leased Premises has been substantially
completed in accordance with Exhibit D; provided, however, in the event
completion of Lessor's Work is delayed by Lessee's Work or other acts of Lessee
or its agents ("Lessee Delay") any such Lessee Delay shall thereupon effect a
postponement of the date at which Lessor is obliged to deliver the Leased
Premises to Lessee by the number of days of Lessee Delay. However, the Delivery
Date and the Commencement Date as would otherwise be established had Lessee
Delay not occurred shall not be postponed by the number of days of Lessee Delay.
"FORCE MAJEURE" shall mean event(s) beyond the reasonable control of
-------------
the obligated party such as, for example only, strikes, riots, governmental act
or failure to act, shortage of materials, weather and other such matters over
which the party does not have reasonable control (except matters resulting from
financial insufficiency).
"LEASE YEAR" means any calendar year, or portion thereof, following
----------
the commencement hereof, the whole or any part of which period is included
within the Term.
"LESSEE'S WORK" shall mean the work of improvement to the Leased
-------------
Premises to be performed by Lessee in accordance with the Work Letter Agreement
attached hereto as Exhibit D.
"LESSOR'S WORK" shall mean the following work to be performed by
-------------
Lessor in accordance with the Work Letter Agreement attached hereto as Exhibit
D: demolition of all walls within the Leased Premises below the ceiling line;
installation of exhaust line, waste line and domestic water hook-ups stubbed to
the Leased Premises and installation of a check meter (the cost of the check
meter and its installation costs shall be deducted from the Allowance, defined
in Exhibit D).
"LEASED PREMISES" shall mean the portion of space leased to Lessee
---------------
hereunder.
"LINES" shall mean domestic water and waste pipes and lines, exhaust
-----
pipes and vents, communications, computer, audio and video, security and
electrical (other than electrical wiring within the Leased Premises terminating
at or connected to Building check meters), cables, wires, lines, duct work,
sensors, switching equipment, control boxes, risers and related improvements at
the Complex, Building or the Leased Premises.
5.
<PAGE>
"MAJOR VERTICAL PENETRATIONS" shall mean stairs, elevator shafts, flues,
---------------------------
pipe shafts, vertical ducts, and the like, and their enclosing walls, which
serve more than one floor of the Building, but shall not include stairs,
dumbwaiters, lifts, and the like, exclusively serving a lessee occupying space
on more than one floor.
"OCCUPIED FLOOR AREA" means that portion of the Rentable Area of the
-------------------
Complex which is leased and occupied.
"OPERATING COSTS" means the total amounts paid or payable, whether by
---------------
Lessor or others on behalf of Lessor, in connection with the ownership,
maintenance, repair, replacement and operations of the Complex (including,
without limitation, all areas and facilities within the exterior boundaries of
the Complex) as determined in a manner consistent with generally accepted
accounting principles ("GAAP"). Operating Costs shall include, but not be
limited to, the aggregate of the amount paid for all electricity and fuel used
in heating and air conditioning of the Building; the amount paid or payable for
all electricity furnished by Lessor to the Complex; the cost of periodic
relamping and reballasting of Building Standard lighting fixtures; the amount
paid or payable for all hot and cold water (other than that chargeable to
lessees by reason of their extraordinary consumption of water); the amount paid
or payable for all labor and/or wages and other payments including cost to
Lessor of workers' compensation and disability insurance, payroll taxes, welfare
and fringe benefits made to janitors, caretakers, and other employees,
contractors and subcontractors of Lessor (including wages of the Building
manager) involved in the operation, maintenance and repair of the Complex;
painting for exterior walls of the buildings in the Complex; managerial and
administrative expenses; the total charges of any independent contractors
employed in the repair, care, operation, maintenance, and cleaning of the
Complex; the amount paid or payable for all supplies occasioned by everyday wear
and tear; the costs of VAC (as defined in Section 13.1) of the Complex, (except
to the extent paid by Lessee, or other lessees, for VAC provided to the Leased
Premises, or other leased premises, in respect of VAC provided outside the
Climate Control Hours defined in Section 13.1), window and exterior wall
cleaning, telephone and utility costs; the cost of accounting services necessary
to compute the rents and charges payable by Lessees and keep the books of the
Complex; fees for management, legal, accounting, inspection and consulting
services; the cost of operating, repairing and maintaining and replacing the
Building escalators and elevators and the utility systems, including Lines, of
the Complex including the cost of inspection and service contracts; the cost of
porters, guards and other protection services; the cost of establishing and
maintaining the Building's directory board; payments for general maintenance and
repairs to the plant and equipment supplying climate control; the cost of
supplying all services pursuant to Article 13 hereof to the extent such services
are not paid by individual lessees; amortization of the costs, including repair
and replacement, of all maintenance and cleaning equipment and master utility
meters and of the costs incurred for repairing or replacing all other fixtures,
equipment and facilities serving or comprising the Complex which by their nature
require periodic or substantial repair or replacement, and which are not charged
fully in the year in which they are incurred, at rates on the various items
determined from time to time by Lessor in accordance with GAAP; the cost of the
Shuttle Service described in Article 50 hereof; the cost of operating the
parking facility in the Complex and the cost of parking fees and rents paid to
6.
<PAGE>
the owner of another parcel for use of certain parking spaces therein
(collectively "Parking Costs") net of parking fees and rents collected by Lessor
in connection herewith provided, however, Lessor shall not be obligated to
credit any sums received in excess of the actual Parking Costs; the cost and
expenses for insurance for which Lessor is responsible hereunder or which Lessor
reasonably deems necessary in connection with the operation of the Complex
(including, without limitation, self-insurance and the payment of deductible
amounts under insurance policies); community association dues or assessments and
property owners' association dues and assessments which may be imposed upon
Lessor by virtue of any recorded instrument affecting title to the Complex; and
costs of complying with all governmental regulations, rules, laws, ordinances
and codes, including Environmental Laws as such term is defined in Article 12.
In addition, Operating Costs shall include any Real Estate Taxes as defined in
Paragraph 2.1 hereof. Operating Costs shall also include, without limitation,
the repair and replacement, resurfacing and repaving of any paved areas, curbs,
gutters or other surfaces or areas within the Complex, the repair and
replacement of any equipment or facilities located within or serving the
Complex, and the cost of any capital repairs, replacements or improvements made
by Lessor to the Complex ("Capital Costs"). However, certain Capital Costs (the
"RESTRICTED CAPITAL COSTS") shall be includable in Operating Costs each year
only to the extent of that fraction allocable to the year in question calculated
by amortizing such Restricted Capital Costs over the reasonably useful life of
the improvement resulting therefrom, as determined by Lessor, with interest on
the unamortized balance at the higher of (i) ten percent (10%) per annum; or
(ii) the interest rate as may have been paid by Lessor for the funds borrowed
for the purpose of performing the work for which the Restricted Capital Costs
have been expended, but in no event to exceed the highest rate permissible by
law. The Restricted Capital Costs subject to such amortization procedure are the
following: (x) those costs for capital improvements to the Complex of a type
which do not normally recur more frequently than every five (5) years in the
normal course of operation and maintenance of facilities such as the Complex
(specifically excluding painting of all or a portion of the Complex); (y) costs
incurred for the purpose of reducing other operating expenses or utility costs,
from which Lessee can expect a reduction in the amounts it would otherwise
expend, or reimburse Lessor, and (z) expenditures by Lessor that are required by
governmental law, ordinance, regulation or mandate, including, without
limitation, any Environmental Laws (as such term is defined in Article 12),
which were not applicable to the Complex at the time of the original
construction. Operating Costs shall not include legal or accounting expenses
incurred expressly for negotiating a lease with a particular lessee, or as a
result of a default of a specific lessee, which negotiation or default does not
affect the operation of the Complex.
"PROPORTIONATE SHARE" or "PRO RATA PERCENT" shall be that fraction
------------------- ----------------
(converted to a percentage) the numerator of which is the Rentable Area of the
Leased Premises and the denominator of which is the number of square feet of
Rentable Area of all floors (or leased premises if the Complex is on a single
floor) rentable to lessees in the Complex. Lessee's Proportionate Share as of
the commencement of the Term hereof is specified in Section 1.8. Said
Proportionate Share shall be recalculated as may be required effective as at the
commencement of any period to which the calculation is applicable in this Lease.
Notwithstanding the preceding provisions of this Section, Lessee's Proportionate
Share
7.
<PAGE>
as to certain expenses may be calculated differently to yield a higher
percentage share for Lessee as to certain expenses in the event Lessor permits
other lessees in the Complex to directly incur such expenses rather than have
Lessor incur the expense in common for the Complex (such as, by way of
illustration, wherein a lessee performs its own janitorial services). In such
case Lessee's Proportionate Share of the applicable expense shall be calculated
as having as its denominator the Rentable Area of all floors (or leased premises
if the Complex is on a single floor) rentable to lessees in the Complex less the
Rentable Area of lessees who have incurred such expense directly. Furthermore,
in the event Lessee consumes extraordinary amounts of any provided utility or
other service as determined in Lessor's good faith judgment, Lessee's
Proportionate Share for such utility or service may, at Lessor's election, be
based on usage as opposed to Rentable Area, that is, Lessee's Proportionate
Share of such a utility or service would be calculated as having as its
denominator the total usage of such utility or service in the Complex (or
Building as the case may be), and having as its numerator Lessee's usage of such
utility or service, as determined by Lessor in its sole good faith judgment. In
any case in which Lessee, with Lessor's consent, incurs such expenses directly,
Lessee's Proportionate Share will be calculated specially so that expenses of
the same character which are incurred by Lessor for the benefit of other lessees
in the Complex shall not be prorated to Lessee. If repairs are required for
systems exclusively serving the Leased Premises (whether within or outside of
said Leased Premises), Lessee shall pay one hundred percent (100%) of such
repair costs. Nothing herein shall imply that Lessor will permit Lessee or any
other lessee of the Complex to incur any Common Area Costs or Operating Costs.
Any such permission shall be in the sole discretion of the Lessor, which Lessor
may grant or withhold in its arbitrary judgment.
"Quadrant." Each floor of the Building is centered around the common Atrium
--------
with Rentable Area being approximately divided into four unequal parts known as
"Quadrant(s)" and commonly carrying identifying letters as follows:
Quadrant A: Southeast of Atrium
Quadrant B: Northeast of Atrium
Quadrant C: Northwest of Atrium
Quadrant D: Southwest of Atrium
"R/U RATIO" (an abbreviation for Rentable/Usable Ratio) shall mean that
---------
fraction the numerator of which is Rentable Area and the denominator of which is
Usable Area.
"REAL ESTATE TAXES" or "TAXES" shall mean and include all general and
----------------- -----
special taxes, assessments, fees of every kind and nature, duties and levies,
charged and levied upon or assessed by any governmental authority against the
Complex including the land, the Building, any other improvements situated on the
land other than the Building, the various estates in the land and the Building,
any Tenant Improvements, fixtures, installations, additions and equipment,
whether owned by Lessor or Lessee; except that it shall exclude any taxes of the
kind covered by Section 8.1 hereof to the extent Lessor is reimbursed therefor
by any lessee in the Building. Real Estate Taxes shall also include the
reasonable cost to Lessor of contesting
8.
<PAGE>
the amount, validity, or the applicability of any Taxes mentioned in this
Section. Further included in the definition of Taxes herein shall be general and
special assessments, license fees, commercial rental tax, levy, penalty or tax
(other than inheritance or estate taxes) imposed by any authority having the
direct or indirect power to tax, as against any legal or equitable interest of
Lessor in the Leased Premises or in the Complex or on the act of entering into
this Lease or, as against Lessor's right to rent or other income therefrom, or
as against Lessor's business of leasing the Leased Premises or the Complex, any
tax, fee, or charge with respect to the possession, leasing, transfer of
interest, operation, management, maintenance, alteration, repair, use, or
occupancy by Lessee, of the Leased Premises or any portion thereof or the
Complex, or any tax imposed in substitution, partially or totally, for any tax
previously included within the definition of Taxes herein, or any additional
tax, the nature of which may or may not have been previously included within the
definition of Taxes. Further, if at any time during the Term of this Lease the
method of taxation or assessment of real estate or the income therefrom
prevailing at the time of execution hereof shall be, or has been altered so as
to cause the whole or any part of the Taxes now or hereafter levied, assessed or
imposed on real estate to be levied, assessed or imposed upon Lessor, wholly or
partially, as a capital levy, business tax, fee, permit or other charge, or on
or measured by the Rents received therefrom, then such new or altered taxes,
regardless of their nature, which are attributable to the land, the Building or
to other improvements on the land shall be deemed to be included within the term
Real Estate Taxes for purposes of this Section, whether in substitution for, or
in addition to any other Real Estate Taxes, save and except that such shall not
be deemed to include any enhancement of said tax attributable to other income of
Lessor. With respect to any general or special assessments which may be levied
upon or against the Leased Premises, the Complex, or the underlying realty, or
which may be evidenced by improvement or other bonds, and may be paid in annual
or semi-annual installments, only the amount of such installment, prorated for
any partial year, and statutory interest shall be included within the
computation of Taxes for which Lessee is responsible hereunder.
"RENT," "rent" or "rental" means Minimum Rent and all other sums required
----
to be paid by Lessee pursuant to the terms of this Lease.
"RENTABLE AREA." The Rentable Area means the Rentable Area determined by
-------------
BOMA. The Rentable Area of a floor shall mean all areas available or held for
the exclusive use and occupancy of occupants or future occupants of the Complex,
calculated in accordance with BOMA. No deductions shall be made for columns and
projections necessary to the Building. The Rentable Area of that portion of a
lessee's premises located on a floor shall be computed by multiplying the Usable
Area of such premises by the R/U Ratio. The Rentable Area of the Building is the
aggregate of the Rentable Area on all floors.
"STRUCTURAL" as herein used shall mean any portion of the Leased Premises
----------
or Complex which provides bearing support to any other integral member of the
Complex such as, by limitation, the roof structure (trusses, joists, beams),
posts, load bearing walls, foundations, girders, floor joists, footings, and
other load bearing members constructed by Lessor.
9.
<PAGE>
"TENANT IMPROVEMENTS" shall mean the Lessee's Work in accordance with
-------------------
the Work Letter Agreement attached hereto as Exhibit D, if any, and all
subsequent alterations to the Leased Premises made by Lessee.
"TERM" shall mean the term of the lease as specified in Article 4
----
hereof, including any partial month at the commencement of the Term.
"USABLE AREA." The Usable Area of any individual leased premises
-----------
shall be the number of square feet calculated in accordance with BOMA; provided,
however, that the term Usable Area shall include toilet rooms in each Quadrant
if such toilet rooms are for the exclusive use of a lessee occupying such
Quadrant. The Usable Area of a floor shall be equal to the sum of all Usable
Areas on that floor.
3. PREMISES
3.1 DEMISING CLAUSE. Lessor hereby leases to Lessee, and Lessee hires
from Lessor a portion of the Complex as hereinafter defined.
3.2 DESCRIPTION. The Complex, as defined in Section 2.1, is described
generally in Section 1.3(A) hereof. The premises leased herein are described in
Section 1.3(B) and delineated on Exhibits C-1 and C-2, which are attached hereto
and made a part hereof by reference, consisting of the approximate amount of
square footage as specified in Section 1.3(C) hereof. The term "BUILDING" shall
refer to the Building in which the Leased Premises are located. The portion
leased herein to Lessee is hereinafter referred to as the "LEASED PREMISES."
Lessee acknowledges that Lessor may change the shape, size, location, number and
extent of the improvements to any portion of the Complex without consent of
Lessee and without affecting Lessee's obligations hereunder. Lessor reserves the
area beneath and above the Leased Premises as well as the exterior thereof
together with the right to install, maintain, use, repair and replace Lines,
pipes, ducts, conduits, wires, and structural elements leading through the
Leased Premises serving other parts of the Complex, including, but not limited
to, vertical risers, so long as such items are concealed by walls, flooring or
ceilings. Such reservation in no way affects the maintenance obligations imposed
herein, nor shall such reservation alter the parties' responsibilities and
obligations set forth in this Lease regarding Hazardous Materials (as defined in
Section 12.3(a) below).
3.3 SUBSTITUTED PREMISES. In the event the Leased Premises consist of
less than six thousand (6,000) square feet, Lessor shall have the right, at any
time during the Term hereof, upon not less than ninety (90) days' prior written
notice to Lessee, to substitute for the Leased Premises such other space in the
Complex as shall be substantially the same size as the Leased Premises (the
"SUBSTITUTED PREMISES"), Provided that Lessor shall pay all expenses of Lessee
incidental to Lessee's relocation to the Substituted Premises and that Lessor
shall improve the Substituted Premises for Lessee's use and occupancy at least
to the same extent as the Leased Premises occupied by Lessee prior to such
relocation.
10.
<PAGE>
3.4 COVENANTS, CONDITIONS AND RESTRICTIONS. The parties agree that this
Lease is subject to the effect of (a) any covenants, conditions, restrictions,
easements, mortgages or deeds of trust, ground leases, rights of way of record,
and any other matters or documents of record; (b) any zoning laws of the city,
county and state where the Complex is situated; and (c) general and special
taxes not delinquent. Lessee agrees that as to its leasehold estate, Lessee and
all persons in possession or holding under Lessee will conform to and will not
violate the terms of any covenants, conditions or restrictions of record which
may now or hereafter encumber the property (hereinafter the "RESTRICTIONS").
This Lease is subordinate to the restrictions and any amendments or
modifications thereto.
4. TERM
4.1 COMMENCEMENT DATE. The Term of this Lease shall commence on the
Commencement Date defined in Section 2.1 and shall be for the term specified in
Section 1.4 hereof, plus any partial month at the commencement of the Term.
4.2 ACKNOWLEDGMENT OF COMMENCEMENT. After delivery of the Leased Premises
to Lessee, Lessee shall execute a written acknowledgment of the date of
commencement in the form attached hereto as Exhibit E, and by this reference it
shall be incorporated herein.
5. PRE-TERM POSSESSION
5.1 CONDITIONS OF ENTRY. In the event the Leased Premises are to be
constructed or remodeled by Lessor, Lessor may notify Lessee when the Leased
Premises are ready for Lessee's fixturing or Lessee's Work, which may be prior
to substantial completion of the Leased Premises by Lessor. Lessee may thereupon
enter the Leased Premises for such purposes at its own risk, to make such
improvements as Lessee shall have the right to make, to install fixtures,
supplies, inventory and other property. Lessee agrees that it shall not in any
way interfere with the progress of Lessor's Work by such entry. Should such
entry prove an impediment to the progress of Lessor's Work, in Lessor's
judgment, Lessor may demand that Lessee forthwith vacate the Leased Premises
until such time as Lessor's work is complete, and Lessee shall immediately
comply with this demand.
During the course of any pre-term possession, whether such pre-term period
arises because of an obligation of construction on the part of Lessor, or
otherwise, all terms and conditions of this Lease, except for rent and
commencement, shall apply, particularly with reference to indemnity by Lessee of
Lessor under Article 17 herein for all occurrences within or about the Leased
Premises.
6. DELAY IN DELIVERY OF POSSESSION
6.1 DELAY. If Lessor, for any reason whatsoever, cannot deliver
possession of the Leased Premises to Lessee at the Estimated Delivery Date, this
Lease shall not be void or voidable, nor shall Lessor be liable for any loss or
damage resulting therefrom, but in that event, there shall be no accrual of Rent
for the period between the Estimated Delivery Date
11.
<PAGE>
and the Commencement Date. In the event Lessor cannot deliver the Leased
Premises to Lessee within six (6) months beyond the Estimated Delivery Date,
then Lessor may elect to terminate this Lease. In the event the Leased Premises
are not delivered within three (3) years from the date of execution, this Lease
shall automatically terminate.
7. MINIMUM RENT
7.1 PAYMENT. Lessee shall pay to Lessor at the address specified in
Section 1.1, or at such other place as Lessor may otherwise designate, as
"MINIMUM RENT" for the Leased Premises the amount specified in Section 1.5
hereof, payable in advance on the first day of each month during the Term. If
the Term commences on other than the first day of a calendar month, the rent for
the first partial month shall be prorated accordingly.
All payments of Minimum Rent (including sums defined as rent in Section
2.1) shall be in lawful money of the United States, and payable without
deduction, setoff, offset, counterclaim, recoupment, notice or demand.
7.2 ADVANCE RENT. The amount specified in Section 1.5(B) hereof is paid
herewith to Lessor upon execution of this Lease as advance rent, receipt of
which is hereby acknowledged, provided, however, that such amount shall be held
by Lessor as a "SECURITY DEPOSIT" pursuant to Section 10.1 hereof until it is
applied by Lessor to the first Minimum Rent due hereunder.
7.3 LATE PAYMENT. If during any twelve (12) month period Lessee fails on
more than one occasion to make any payment of Minimum Rent to Lessor on the date
when it is due, then Lessor may, by giving written notice to Lessee, require
that Lessee pay the Minimum Rent to Lessor quarterly in advance.
8. ADDITIONAL RENT
8.1 PERSONAL PROPERTY, GROSS RECEIPTS, LEASING TAXES. This Section 8.1 is
intended to deal with impositions or taxes directly attributed to Lessee or this
transaction, as distinct from taxes attributable to the Complex which are to be
allocated among various lessees and others and which are included in Operating
Costs. In addition to the Minimum Rent and additional charges to be paid by
Lessee hereunder, Lessee shall reimburse Lessor upon demand for any and all
taxes required to be paid by Lessor (excluding state, local or federal personal
and corporate income taxes measured by the income of Lessor from all sources,
and estate and inheritance taxes) whether or not now customary or within the
contemplation of the parties hereto:
(a) Upon, measured by, or reasonably attributable to the cost or
value of Lessee's equipment, furniture, fixtures and other personal property
located in the Leased Premises or by the cost or value of any Tenant
Improvements made in or to the Leased Premises by or for Lessee, regardless of
whether title to such improvements shall be in Lessee or Lessor;
12.
<PAGE>
(b) Upon or with respect to the possession, leasing, operation, management,
maintenance, alteration, repair, use or occupancy by Lessee of the Leased
Premises or any portion thereof to the extent such taxes are not included as
Real Estate Taxes as defined in Section 2.1;
(c) Upon this transaction or any document to which Lessee is a party
creating or transferring an interest or an estate in the Leased Premises; and
(d) In connection with any testing, investigation, abatement, remediation,
removal, transportation and/or disposal of any Hazardous Materials by Lessee (or
by Lessor, pursuant to any provision of this Lease granting to Lessor the right
to do any of the foregoing and to bill Lessee therefor).
For purposes of this Section 8.1, the term "taxes" shall include, but not
be limited to, any fees, charges, fines, penalties and costs (including, without
limitation, permit, approval or licensing fees, charges or costs).
In the event that it shall not be lawful for Lessee so to reimburse Lessor,
the Minimum Rent payable to Lessor under this Lease shall be increased to net
Lessor (i.e., after payment of the Taxes for which Lessor may not receive
reimbursement from Lessee) the amount of Minimum Rent plus reimbursement for
Taxes which would have been receivable by Lessor if such tax had not been
imposed. All Taxes payable by Lessee under this Section shall be deemed to be,
and shall be paid as, additional Rent.
8.2 OPERATING COSTS.
(a) During each calendar year or part thereof subsequent to the Base
Expense Year, Lessee shall pay to Lessor as additional Rent, in accordance with
Section 8.3 hereof, Lessee's Proportionate Share of the total dollar increase,
if any, in all Operating Costs for such calendar year over the Operating Costs
for the Base Expense Year. During each tax year (July 1 through June 30) or part
thereof subsequent to the Base Tax Year ending June 30, Lessee shall pay to
Lessor as additional Rent, in accordance with Section 8.3 hereof, Lessee's
Proportionate Share of the total dollar increases, if any, in all Real Estate
Taxes for such tax year over the Real Estate Taxes for the Base Tax Year.
Lessee's Proportionate Share shall be calculated on the basis of the greater of
(i) actual Operating Costs; or (ii) as if the Complex were at least ninety-five
percent (95%) occupied and operational for the whole of such Lease Year.
(b) If any Lease Year of less than twelve (12) months is included within
the Term, the amount payable by Lessee for such period shall be prorated on a
per diem basis (utilizing a three hundred sixty (360) day year).
(c) Lessor shall exercise good faith efforts to equitably allocate those
Operating Costs that are incurred for the direct benefit of specific types of
lessees or users in the Complex to and among those specific lessees and/or users
("Cost Pools"). Such Cost Pools may include, but shall not be limited to, the
office and showroom space, the second
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floor Atrium, the lower level exhibition hall, and any retail space lessees of
the Complex. Lessor's determination of such allocations shall be made in a
manner consistent with the terms and conditions of this Section 8.2(c) and shall
be subject to reconciliation per Section 8.3(c). Lessee acknowledges that the
allocation of Operating Costs among Cost Pools does not affect all Operating
Costs and is limited to specific items which Lessor determines, in good faith,
should be shared among the lessees and/or users of a certain Cost Pool.
8.3 METHOD OF PAYMENT. Any additional Rent payable by Lessee under
Sections 8.1 and 8.2 hereof shall be paid as follows, unless otherwise provided:
(a) During the Term, Lessee shall pay to Lessor monthly in advance
with its payment of Minimum Rent, one-twelfth (1/12) of the amount of such
additional Rent as estimated by Lessor in advance, in good faith, to be due from
Lessee.
(b) Annually, as soon as is reasonably possible after the expiration
of each Lease Year, Lessor shall prepare in good faith and deliver to Lessee a
comparative statement, which statement shall be conclusive between the parties
hereto, setting forth (1) the Operating Costs for such Lease Year, and (2) the
amount of additional Rent as determined in accordance with the provisions of
this Article 8.
(c) If the aggregate amount of such estimated additional Rent payments
made by Lessee in any Lease Year should be less than the additional Rent due for
such year, then Lessee shall pay to Lessor as additional Rent upon demand the
amount of such deficiency. If the aggregate amount of such additional Rent
payments made by Lessee in any Lease Year of the Term should be greater than the
additional Rent due for such year, then should Lessee not be otherwise in
default hereunder, the amount of such excess will be applied by Lessor to the
next succeeding installments of such additional Rent due hereunder; and if there
is any such excess for the last year of the Term, the amount thereof will be
refunded by Lessor to Lessee, provided Lessee is not otherwise in default under
the terms of this Lease.
9. ACCORD AND SATISFACTION
9.1 ACCEPTANCE OF PAYMENT. No payment by Lessee or receipt by Lessor of a
lesser amount of Minimum Rent or any other sum due hereunder, shall be deemed to
be other than on account of the earliest due rent or payment, nor shall any
endorsement or statement on any check or any letter accompanying any such check
or payment be deemed an accord and satisfaction, and Lessor may accept such
check or payment without prejudice to Lessor's right to recover the balance of
such rent or payment or pursue any other remedy available in this Lease, at law
or in equity. Lessor may accept any partial payment from Lessee without
invalidation of any contractual notice required to be given herein (to the
extent such contractual notice is required) and without invalidation of any
notice required to be given pursuant to California Code of Civil Procedure
Section 1161, et seq., or of any successor statute thereto.
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10. SECURITY DEPOSIT
10.1 Letter of Credit.
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(a) On or before February 1, 1999, Lessee shall obtain and deliver to
Lessor an irrevocable letter of credit in the amount shown in Section 1.6 (the
"Letter of Credit") in a form acceptable to Lessor. As a material consideration
for Lessor entering into this Lease Lessee shall provide the Letter of Credit to
secure the performance of Lessee's obligations under the terms of the Lease.
Without the Letter of Credit provided by the Lessee herein Lessor would not have
entered into this Lease.
(b) The Letter of Credit shall be issued by the California office of
either a U.S. bank or a U.S. agency of a foreign bank, authorized to conduct
banking business in the State of California, which Letter of Credit shall be
subject to reduction and cancellation on the terms and conditions contained
below. The Letter of Credit will secure all obligations under the Lease to be
performed by Lessee and its Transferee(s) for the full Term hereof. The Letter
of Credit may be for a period shorter than the entire Term (but not in any case
for a term less than one (1) year), provided: (i) it shall be required to be
renewed or replaced by delivery of a new Letter of Credit subject to the same
requirements as the original (subject to any Permitted Reductions), for a period
of not less than twelve (12) months, (ii) such renewal or replacement shall be
required to be delivered to Lessor not later than thirty (30) days prior to
expiration of the original Letter of Credit (or replacement or renewal, as the
case may be) and, (iii) if not so renewed or replaced by delivery to Lessor,
such failure shall constitute a default entitling Lessor to draw upon the
existing Letter of Credit in full forthwith without notice to Lessee.
10.2 Right to Draw. Lessor shall be entitled to draw on that portion of the
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Letter of Credit which Lessor in good faith determines to be necessary to cure
Lessee's default (or, in the event Lessor is barred by applicable law,
specifically including any laws with respect to insolvency, from issuing to
Lessee a default notice, Lessee's breach) of any Lease provision(s). Any such
draw shall be made by Lessor's written signed statement to the drawee bank of
(i) a default by Lessee or its Transferee(s) under this Lease (and the passing
of the applicable cure period provided in the Lease without a cure of the
default, subject to the provisions of Section 10.6 below) or (ii) a breach of
the Lease by Lessee with respect to which Lessor is barred by applicable law,
specifically including any laws with respect to insolvency, from issuing to
Lessee a default notice. No other act or notice whatsoever shall be required by
Lessor in order to be entitled to draw on the entire sum of the Letter of
Credit. Any sums remaining after deduction by Lessor of the amounts owed by
Lessee pursuant to the default or breach under this Lease shall be treated as a
Security Deposit as provided in Section 10.3 below.
10.3 Payment. For purposes of this Lease, the amount of any draw under the
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Letter of Credit shall be designated as a Security Deposit and the use of the
draw thereon shall be treated as a use of the Security Deposit in the manner
provided in this Article 10. The amount of the draw shall be applied to cure
Lessee's default or breach and any excess shall remain the sole and separate
property of Lessor until actually repaid to Lessee (or at Lessor's
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option the last assignee, if any, of Lessee's interest hereunder), Lessee not
being entitled to the return of said sum until all conditions precedent for its
payment to Lessee have been fulfilled. As this sum both in equity and at law is
Lessor's separate property, Lessor shall not be required to (1) keep said
deposit separate from its general accounts, or (2) pay interest, or other
increment for its use, except that if the amount of the draw exceeds one hundred
fifty percent (150%) of the costs incurred by Lessor to cure a Lessee default,
and such unused portion of the draw is not returned to the drawee bank as set
forth in section 10.5, such unused portion of the draw shall bear interest from
the date of the draw at the rate set forth in Section 50.16 hereof. If Lessee
fails to pay rent or other charges when due hereunder, or otherwise defaults
with respect to any provision of this Lease, including and not limited to
Lessee's obligation to restore or clean the Leased Premises following vacation
thereof, Lessee, at Lessor's election, shall (except as set forth in Section
10.5 below) be deemed not to have the right to receive those portions of draws
used or applied by Lessor for the payment of any rent or other charges in
default, or for the payment of any other sum to which Lessor may become
obligated by reason of Lessee's default, or to compensate Lessor for any loss or
damage which Lessor may suffer thereby. Lessor may retain the Security Deposit
and draw thereupon as it reasonably deems necessary to restore or clean the
Leased Premises following vacation by Lessee to the extent Lessee has such
obligation under this Lease. The amount of any draw is not to be characterized
as rent until and unless so applied in respect of a default by Lessee.
10.4 Restoration of Deposit. If Lessor draws upon the Letter of Credit,
----------------------
Lessee shall, within ten (10) days after written demand therefor, take such
action as is necessary to require the drawee bank to issue a new Letter of
Credit with a face amount equal to the pre-draw amount of the previous Letter of
Credit or to reinstate the previous Letter of Credit to the full pre-draw
amount, and Lessee's failure to so do shall be a material breach of this Lease.
The objective of this Section 10.4 is for Lessee to restore the face amount of
the Letter of Credit to the principal amount that would have existed, as of the
date of any draw, had there been no default which caused the Lessor to draw upon
the Letter of Credit, and Lessee's failure to do so shall be a material breach
of this Lease. The ten (10) day notice specified in the first sentence of this
Section 10.4 shall, insofar as not prohibited by law, constitute full
satisfaction of notice of default provisions required by law or ordinance.
10.5 Draws Upon Letter of Credit. The proceeds of a draw on the Letter of
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Credit shall be used by the Lessor to effect a cure of the Lessee's breach. The
unexpended proceeds of the draw shall, after deducting from the amount
originally drawn any costs incurred by the Lessor in curing or attempting to
cure the default, be returned to the drawee bank upon receipt by Lessor of a
Letter of Credit in the pre-draw amount.
11. USE
11.1 PERMITTED USE.
The Leased Premises may be used and occupied only for the purposes
specified in Section 1.7 hereof, and for no other purpose or purposes. Lessee
shall promptly comply
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with all laws, ordinances, orders and regulations affecting the Leased Premises,
their cleanliness, safety, occupation and use.
11.2 SAFES, HEAVY EQUIPMENT. Lessee shall not place a load upon any floor
of the Leased Premises which exceeds fifty (50) pounds per square foot live
load. Lessor reserves the right to prescribe the weight and position of all
safes and heavy installations which Lessee wishes to place in the Leased
Premises so as properly to distribute the weight thereof, or to require plans
prepared by a qualified structural engineer at Lessee's sole cost and expense
for such heavy objects. Notwithstanding the foregoing, Lessor shall have no
liability for any damage caused by the installation of such heavy equipment or
safes.
11.3 MACHINERY. Business machines and mechanical equipment belonging to
Lessee which cause noise and/or vibration that may be transmitted to the
structure of the Building or to any other leased space to such a degree as to be
objectionable to Lessor or to any Lessees in the Complex shall be placed and
maintained by the party possessing the machines or equipment, at such party's
expense, in settings of cork, rubber or spring type noise and/or vibration
eliminators, and Lessee shall take such other measures as needed to eliminate
vibration and/or noise. If the noise or vibrations cannot be eliminated, Lessee
must remove such equipment within ten (10) days following written notice from
Lessor.
11.4 HAZARDOUS ACTIVITIES. Lessee shall not engage in any activities or
permit to be kept, used, or sold in or about the Leased Premises, any article
which may be prohibited by the standard form of fire insurance policies. Lessee
shall, at its sole cost and expense, comply with any and all requirements,
pertaining to the Leased Premises, of any insurance organization or company,
necessary for the maintenance of reasonable fire and public liability insurance
covering the Building and appurtenances.
12. COMPLIANCE WITH LAWS AND REGULATIONS
12.1 LESSEE'S OBLIGATIONS. Lessee, shall, at its sole cost and expense,
comply with all of the requirements of all municipal, state and federal
authorities now in force, or which may hereafter be in force, pertaining to the
Leased Premises, and shall faithfully observe in the use of the Leased Premises
all municipal ordinances and state and federal statutes and regulations now in
force or which may hereafter be in force, including, without limitation,
Environmental Laws (as hereinafter defined), and the Americans with Disabilities
Act, 42 U.S.C. sections 12101-12213 (and any rules, regulations, restrictions,
guidelines, requirements or publications promulgated or published pursuant
thereto, collectively herein referred to as the "ADA"), whether or not any of
the foregoing were foreseeable or unforeseeable at the time of the execution of
this Lease. The judgment of any court of competent jurisdiction, or the
admission of Lessee in any action or proceeding against Lessee, whether Lessor
be a party thereto or not, that any such requirement, ordinance, statute or
regulation pertaining to the Leased Premises has been violated, shall be
conclusive of that fact as between Lessor and Lessee. Within five (5) days after
receipt of notice or knowledge of any violation or alleged violation of any
Environmental Law(s), and/or the ADA pertaining to the Complex, any governmental
or regulatory proceedings, investigations, sanctions and/or actions threatened
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or commenced with respect to any such violation or alleged violation, and any
claim made or commenced with respect to such violation, or alleged violation,
Lessee shall notify Lessor thereof and provide Lessor with copies of any written
notices or information in Lessee's possession. Lessee shall make, at Lessee's
sole cost and expense, any and all alterations, improvements or non-structural
changes that are required by laws, statutes, ordinances and governmental
regulations or requirements as a result of Lessee's specific use of the Premises
or any alterations, additions or improvements made by Lessee. If any
alterations, improvements or structural changes are required to be made to the
Building in general or are applicable to substantially all lessees in the
Building without regard to Lessee's specific use of the Leased Premises or any
alterations, additions or improvements made by Lessee, then Lessor shall make
such alterations, additions or improvements and the costs thereof shall be
included within Operating Costs pursuant to Section 2.1.
12.2 CONDITION OF LEASED PREMISES. Subject to Lessor's Work, if any, as
referred to in Exhibit D to this Lease, Lessee hereby accepts the Leased
Premises in the condition existing as of the date of occupancy, subject to all
applicable zoning, municipal, county and state laws, ordinances, rules,
regulations, orders, restrictions of record, and requirements in effect during
the Term or any part of the Term hereof regulating the Leased Premises, and
without representation, warranty or covenant by Lessor, express or implied, as
to the condition, habitability or safety of the Leased Premises, the suitability
or fitness thereof for their intended purposes, or any other matter. Lessor
covenants that the Lessor's Work pursuant to Exhibit D shall be in material
compliance with applicable local and state building codes and ordinances in such
manner that any violations or conditions of non-compliance will not result in
the inability of Lessee to be issued a building permit for Lessee's Work
pursuant to Exhibit D ("Code Compliance").
12.3 HAZARDOUS MATERIALS.
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(a) Hazardous Materials Defined. As used herein, the term "HAZARDOUS
MATERIALS" shall mean any wastes, materials or substances (whether in the form
of liquids, solids or gases, and whether or not air-borne), which are or are
deemed to be pollutants or contaminants, or which are or are deemed to be
hazardous, toxic, ignitable, reactive, corrosive, dangerous, harmful or
injurious, or which present a risk, to public health or to the environment, or
which are or may become regulated by or under the authority of any applicable
local, state or federal laws, judgments, ordinances, orders, rules, regulations,
codes or other governmental restrictions, guidelines or requirements, any
amendments or successor(s) thereto, replacements thereof or publications
promulgated pursuant thereto (collectively "ENVIRONMENTAL LAWS"), including,
without limitation, any waste, material or substance which is:
(i) defined as "hazardous waste," "extremely hazardous waste," or
"restricted hazardous waste" under Sections 25115, 25117 or 25122.7, or listed
pursuant to Section 25140, of the California Health and Safety Code, Division
20, Chapter 6.5 (Hazardous Waste Control Law);
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(ii) defined as a "hazardous substance" under Section 25316 of the
California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-
Tanner Hazardous Substance Account Act);
(iii) defined as a "hazardous material," "hazardous substance," or
"hazardous waste" under Section 25501 of the California Health and Safety Code,
Division 20, Chapter 6.95 (Hazardous Materials Release Response Plans and
Inventory);
(iv) defined as a "hazardous substance" under Section 25281 of the
California Health and Safety Code, Division 20, Chapter 6.7 (Underground Storage
of Hazardous Substances);
(v) defined as a "waste" or "hazardous substance" under Section 13050 of
the California Water Code, Division 7, Chapter 2 (Porter-Cologne Water Quality
Control Act);
(vi) listed as a chemical known to the State of California to cause
cancer or reproductive toxicity pursuant to Section 25249.8 of the California
Health and Safety Code, Division 20, Chapter 6.6 (Safe Drinking Water and Toxic
Enforcement Act of 1986);
(vii) defined as a "hazardous substance" or "pollutant or contaminant"
pursuant to Section 101 of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. section 9601 et
seq.;
(viii) listed as an "extremely hazardous substance," "hazardous chemical,"
or "toxic chemical" pursuant to the Emergency Planning and Community
Right-to-Know Act of 1986, 42 U.S.C. section 11001 et seq.;
(ix) listed as a "hazardous substance" in the United States Department of
Transportation Table, 49 C.F.R. 172.101 and amendments thereto, or by the
Environmental Protection Agency (or any successor agency) in 40 C.F.R. Part 302
and amendments thereto;
(x) defined, listed or designated by regulations promulgated pursuant to
any Environmental Law; or
(xi) any of the following: pesticide; flammable explosive; petroleum,
including crude oil or any fraction thereof; asbestos or asbestos-containing
material; polychlorinated biphenyl; radioactive material; or urea formaldehyde.
In addition to the foregoing, the term Environmental Laws shall be deemed
to include, without limitation, local, state and federal laws, judgments,
ordinances, orders, rules, regulations, codes and other governmental
restrictions, guidelines and requirements, any amendments and successors
thereto, replacements thereof and publications promulgated
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pursuant thereto, which deal with or otherwise in any manner relate to, air or
water quality, air emissions, soil or ground conditions or other environmental
matters of any kind.
(b) Use, etc. of Hazardous Materials. Lessee agrees that during the Term,
--------------------------------
there shall be no use, presence, disposal, storage, generation, leakage,
treatment, manufacture, import, handling, processing, release or threatened
release of Hazardous Materials on, from or under the Leased Premises except to
the extent that, and in accordance with such conditions as, Lessor may have
previously approved in writing. The use, presence, disposal, storage,
generation, leakage, treatment, manufacture, import, handling, processing,
release or threatened release of Hazardous Materials are sometimes hereinafter
individually or collectively referred to as "HAZARDOUS USE." It is further
agreed that Lessee shall be entitled to use and store only those Hazardous
Materials which are necessary for Lessee's business, provided that such usage
and storage is in full compliance with Environmental Laws, and all judicial and
administrative decisions pertaining thereto. Lessee shall not be entitled to
install any tanks under, on or about the Leased Premises for the storage of
Hazardous Materials without the express written consent of Lessor, which may be
given or withheld in Lessor's sole arbitrary judgment. For the purposes of this
Section 12.3, the term Hazardous Use shall include Hazardous Use(s) on, from or
under the Leased Premises by any and all lessees, occupants, and/or users of the
Leased Premises (except Lessor), whether known or unknown to Lessee, and whether
occurring and/or existing during or prior to the commencement of the Term.
(c) Hazardous Materials Report: When Required. Lessee shall submit to
-----------------------------------------
Lessor a written report with respect to Hazardous Materials ("REPORT") in the
form prescribed in subparagraph (d) below on the following dates:
(i) Within ten (10) days after the Commencement Date,
(ii) Within ten (10) days after each anniversary of the Commencement
Date during the Term,
(iii) At any time within ten (10) days after written request by
Lessor, and
(iv) At any time when there has been or is planned any condition which
constitutes or would constitute a change in the information submitted in the
most recent Report, including any notice of violation as referred to in
subparagraph (d)(vii) below.
(d) Hazardous Materials Report: Contents. The Report shall contain, without
------------------------------------
limitation, the following information:
(i) Whether on the date of the Report and (if applicable) during the
period since the last Report there has been any Hazardous Use on, from or under
the Leased Premises.
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(ii) If there was such Hazardous Use, the exact identity of the
Hazardous Materials, the dates upon which such materials were brought upon the
Leased Premises, the dates upon which the Hazardous Materials were removed
therefrom, and the quantity, location, use and purpose thereof.
(iii) If there was such Hazardous Use, any governmental permits
maintained by Lessee with respect to such Hazardous Materials, the issuing
agency, original date of issue, renewal dates (if any) and expiration date.
Copies of any such permits and applications therefor shall be attached.
(iv) If there was such Hazardous Use, any governmental reporting or
inspection requirements with respect to such Hazardous Materials, the
governmental agency to which reports are made and/or which conducts inspections,
and the dates of all such reports and/or inspections (if applicable) since the
last Report. Copies of any such Reports shall be attached.
(v) If there was such Hazardous Use, identification of any
operation or business plan prepared for any government agency with respect to
Hazardous Use.
(vi) Any liability insurance carried by Lessee with respect to
Hazardous Materials, the insurer, policy number, date of issue, coverage
amounts, and date of expiration. Copies of any such policies or certificates of
coverage shall be attached.
(vii) Any notices of violation of Environmental Laws, written or
oral, received by Lessee from any governmental agency since the last Report, the
date, name of agency, and description of violation. Copies of any such written
notices shall be attached.
(viii) Any knowledge, information or communication which Lessee has
acquired or received relating to (x) any enforcement, cleanup, removal or other
governmental or regulatory action threatened or commenced against Lessee or with
respect to the Leased Premises pursuant to any Environmental Laws; (y) any claim
made or threatened by any person or entity against Lessee or the Leased Premises
on account of any alleged loss or injury claimed to result from any alleged
Hazardous Use on or about the Leased Premises; or (z) any report, notice or
complaint made to or filed with any governmental agency concerning any Hazardous
Use on or about the Leased Premises. The Report shall be accompanied by copies
of any such claim, report, complaint, notice, warning or other communication
that is in the possession of or is available to Lessee.
(ix) Such other pertinent information or documents as are requested
by Lessor in writing.
(e) Release of Hazardous Materials: Notification and Cleanup. If at any
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time during the Term Lessee knows or believes that any release of any Hazardous
Materials has come or will come to be located upon, about or beneath the Leased
Premises, then Lessee shall immediately, either prior to the release or
following the discovery thereof by Lessee, give verbal and follow-up written
notice of that condition to Lessor. Lessee covenants to
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investigate, clean up and otherwise remediate any release of Hazardous Materials
at Lessee's cost and expense; such investigation, clean-up and remediation shall
be performed only after Lessee has obtained Lessor's written consent, which
shall not be unreasonably withheld; provided, however, that Lessee shall be
entitled to respond immediately to an emergency without first obtaining Lessor's
written consent. All clean-up and remediation shall be done in compliance with
Environmental Laws and to the reasonable satisfaction of Lessor. Notwithstanding
the foregoing, whether or not such work is prompted by the foregoing notice from
Lessee or is undertaken by Lessor for any other reason whatsoever, Lessor shall
have the right, but not the obligation, in Lessor's sole and absolute
discretion, exercisable by written notice to Lessee at any time, to undertake
within or outside the Leased Premises all or any portion of any investigation,
clean-up or remediation with respect to Hazardous Materials (or, once having
undertaken any of such work, to cease same, in which case Lessee shall perform
the work), all at Lessee's cost and expense, which shall be paid by Lessee as
additional rent within ten (10) days after receipt of written request therefor
by Lessor (and which Lessor may require to be paid prior to commencement of any
work by Lessor). No such work by Lessor shall create any liability on the part
of Lessor to Lessee or any other party in connection with such Hazardous
Materials or constitute an admission by Lessor of any responsibility with
respect to such Hazardous Materials. It is the express intention of the parties
hereto that Lessee shall be liable under this Section 12.3(e) for any and all
conditions covered hereby which were caused or created by any person or entity
whatsoever (except Lessor) whether such condition occurred, was created or
caused or existed prior to or after the execution of this Lease and/or prior to
or after Lessee's possession of the Leased Premises. Lessee shall not enter into
any settlement agreement, consent decree or other compromise with respect to any
claims relating to any Hazardous Materials in any way connected to the Leased
Premises without first (i) notifying Lessor of Lessee's intention to do so and
affording Lessor the opportunity to participate in any such proceedings, and
(ii) obtaining Lessor's written consent.
(f) Inspection and Testing by Lessor. Lessor shall have the right at
--------------------------------
all times during the Term to (i) inspect the Leased Premises, as well as
Lessee's books and records, and to (ii) conduct tests and investigations to
determine whether Lessee is in compliance with the provisions of this Section.
Except in case of emergency, Lessor shall give reasonable notice to Lessee
before conducting any inspections, tests, or investigations. The cost of all
such inspections, tests and investigations shall be borne by Lessee, if Lessor
reasonably believes them to be necessary. Neither any action nor inaction on the
part of Lessor pursuant to this Section 12.3(f) shall be deemed in any way to
release Lessee from, or in any way modify or alter, Lessee's responsibilities,
obligations, and/or liabilities incurred pursuant to Section 12.3 hereof.
12.4 INDEMNITY. Lessee shall indemnify, hold harmless, and, at Lessor's
option (with such attorneys as Lessor may approve in advance and in writing),
defend Lessor and Lessor's officers, directors, shareholders, trustees,
partners, employees, contractors, agents and mortgagees or other lien holders,
from and against any and all claims, demands, expenses, actions, judgments,
damages (whether consequential, direct or indirect, known or unknown, foreseen
or unforeseen), penalties, fines, liabilities, losses of every kind and nature
(including,
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without limitation, property damage, diminution in value of Lessor's interest in
the Leased Premises or the Complex, damages for the loss or restriction on use
of any space or amenity within the Leased Premises or the Complex, damages
arising from any adverse impact on marketing space in the Complex, sums paid in
settlement of claims and any costs and expenses associated with injury, illness
or death to or of any person), suits, administrative proceedings, costs and
fees, including, but not limited to, attorneys' and consultants' fees and
expenses, and the costs of cleanup, remediation, removal and restoration (all of
the foregoing being hereinafter sometimes collectively referred to as "Losses"),
arising from or related to any violation or alleged violation of any of the
requirements, ordinances, statutes, regulations or other laws referred to in
this Article, including, without limitation, Environmental Laws, any breach of
the provisions of this Article, or any Hazardous Use on, about or from the
Leased Premises caused by the acts or omissions of any persons or entities
whatsoever, whether related or unrelated to Lessee, including without limitation
any Hazardous Use or release of Hazardous Materials arising, occurring or
existing prior to the execution of this Lease and/or Lessee's possession of the
Leased Premises. Lessee warrants that it is leasing the Premises "as-is, where-
is," that it has thoroughly inspected the Leased Premises prior to execution of
this Lease, and that it intends to act as an insurer with respect to any
Hazardous Use on, under or about the Leased Premises.
12.5 RELEASE AND ASSUMPTION OF RISK.
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(a) Lessee, for itself, and its officers, directors, shareholders,
partners, agents, contractors, attorneys, brokers, servants, employees,
sublessees, lessees, invitees, concessionaires, licensees and representatives
(hereinafter referred to as "RELEASORS"), hereby waives, releases, acquits and
forever discharges Lessor and its officers, directors, trustees, shareholders,
partners, agents, contractors, attorneys, brokers, servants, employees, lessees,
invitees, licensees and representatives (hereinafter referred to as "RELEASEES")
of and from any and all Losses, which are in any way connected with, based upon,
related to or arising out of (i) any Hazardous Use or Hazardous Materials on or
about the Leased Premises or the Complex, (ii) any violation by or relating to
the Leased Premises or the Complex (or the ownership, use, condition, occupancy
or operation thereof), or by the Releasors or any other persons or entities, of
any Environmental or Wetlands Laws affecting the Leased Premises or the Complex,
or (iii) any investigation, inquiry, order, hearing, action or other proceeding
by or before any governmental agency or any court in connection with any of the
matters referred to in clauses (i) or (ii) above (collectively, the "RELEASED
MATTERS"), except to the extent caused by the gross negligence or willful
misconduct of the Releasees. Releasors hereby expressly assume any and all risk
of Losses based on or arising out of or pertaining to the Released Matters.
(b) Lessee agrees, represents and warrants that the Released Matters
are not limited to matters which are known, disclosed or foreseeable, and Lessee
waives any and all rights and benefits which are conferred upon Lessee by virtue
of the provisions of Section 1542 of the California Civil Code, which provides:
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A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
(c) Lessee agrees, represents and warrants that it is familiar with,
has read, understands, and has consulted legal counsel of its choosing with
respect to California Civil Code Section 1542 and Lessee realizes and
acknowledges that factual matters now unknown to it may have given, or may
hereinafter give, rise to Losses which are presently unknown, unanticipated and
unsuspected. Lessee further agrees, represents and warrants that the provisions
of this Section 12.5 have been negotiated and agreed upon in light of that
realization and that Lessee nevertheless hereby intends to release, discharge
and acquit the Releasees from any such unknown Losses which are in any way
related to this Lease or the Complex.
12.6 INDOOR AIR QUALITY. To prevent the generation, growth or deposit of
any mold, mildew, bacillus, virus, pollen or other microorganism (collectively,
"BIOLOGICALS") and the deposit, release or circulation of any indoor
contaminants, including, but not limited to, emissions from paint, carpet and
drapery treatments, cleaning, maintenance and construction materials and
supplies, pesticides, pressed wood products, insulation, tobacco and other
materials and products (collectively with Biologicals, "CONTAMINANTS"), that
could adversely affect the health, safety or welfare of any tenant, employee, or
other occupant of the Complex or their invitees (each, an "OCCUPANT"), Lessee
shall, at Lessee's sole cost and expense, at all times during the Term (i)
maintain, operate and repair the HVAC system servicing the Leased Premises (to
the extent that Lessee is otherwise obligated to perform such maintenance,
operation and repair pursuant to this Lease) in a manner consistent with
preventing or minimizing the generation, growth, circulation, release or deposit
of any Contaminants, (ii) maintain the humidity level and the air exchange rate
within the Leased Premises (to the extent that Lessee has control thereof) at a
level recommended to prevent or minimize the growth of any Biologicals and the
circulation of any other Contaminants, (iii) maintain, operate and repair the
Leased Premises in such a manner to prevent or minimize the accumulation of
stagnant water and moisture in planters, kitchen appliances and vessels,
carpeting, insulation, water coolers and any other locations where stagnant
water and moisture could accumulate, and (iv) otherwise maintain, operate and
repair the Leased Premises to prevent the generation, growth, deposit, release
or circulation of any Contaminants. If any governmental entity or any Occupant
alleges that health, safety or welfare has been or could be adversely affected
by any such Contaminants, Lessee shall notify Lessor in writing within twenty-
four (24) hours of the time the allegation is made. Lessor may then elect to
engage the services of an industrial hygiene testing laboratory (or
alternatively or concurrently require Lessee to do the same) to determine
whether the cause of any alleged adverse health effect is or could be
attributable to any Contaminants present within the Leased Premises. Lessee
shall be responsible for all such testing costs and for any consequential
damages and costs (including, without limitation, any third-party claims, loss
of
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rental, remediation, removal and/or abatement costs, and increases in insurance
premiums) resulting from Lessee's failure to comply in whole or in part with the
terms of this Section 12.7. The indemnity set forth in Section 12.5 above shall
apply to Lessee's failure to comply with any of the terms of this Section.
13. SERVICE AND EQUIPMENT
13.1 CLIMATE CONTROL.
(a) Lessor shall provide as part of Operating Costs ventilating and
air conditioning ("VAC") to the Leased Premises which meets the design load
standards ("Design Load Standards") on file in the Building Management Office
from 8:00 a.m. to 6:00 p.m., Monday through Friday and 8:00 a.m. to 1:00 p.m.
Saturday (the "CLIMATE CONTROL HOURS") provided that Lessor shall have no
responsibility or liability for failure to supply VAC service when making
repairs, alterations or improvements or when prevented from so doing by strikes
or any cause beyond Lessor's reasonable control. Any VAC provided to the Leased
Premises at Lessee's request after the Climate Control Hours shall be at
Lessee's sole cost and expense in accordance with rate schedules promulgated by
Lessor from time to time. Lessee acknowledges that Lessor has installed in the
Building a system for the purpose of climate control. Initially, the use of fans
to circulate outside air or in conjunction with the climate control equipment
outside of the Climate Control Hours shall be charged at $24 per each additional
fan, and the use of chillers outside of the Climate Control Hours shall be
charged at $150 per hour, each prorated among those lessees requiring such
additional hours of climate control. Any use of the Leased Premises which
exceeds the Design Load Standards may require changes or alterations in the
system or ducts through which the climate control system operates. Any changes
or alterations so occasioned, if such changes can be accommodated by Lessor's
equipment, shall be made by Lessee at its cost and expense but only with the
written consent of Lessor first had and obtained, and in accordance with
drawings and specifications and by a contractor first approved in writing by
Lessor. If Lessee's use of the Premises exceeds the Design Load Standards, such
excess use may necessitate the re-balancing of the climate control equipment in
the Leased Premises. In such event, the same will be performed by Lessor at
Lessee's expense. Any charges to be paid by Lessee hereunder shall be due within
ten (10) days of receipt of an invoice from Lessor, which invoice may precede
Lessor's expenditure for the benefit of Lessee.
13.2 ELEVATOR SERVICE. Lessor shall provide elevator service (which may be
with or without operator at Lessor's option) during normal business hours.
13.3 CLEANING PUBLIC AREAS. Lessor shall maintain and keep clean the street
level lobbies, sidewalks, truck dock, public corridors and other public portions
of the Building.
13.4 REFUSE DISPOSAL. Lessee shall pay Lessor, within ten (10) days of
being billed therefor, for the removal from the Leased Premises and the Building
of such refuse and rubbish of Lessee as shall exceed that ordinarily accumulated
daily in the routine of business office occupancy.
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13.5 Janitorial Service. Lessor shall provide cleaning and janitorial
service in and about the Complex and Leased Premises in accordance with Exhibit
J.
To the extent that Lessee shall require cleaning and/or janitorial service
in excess of that set forth in Exhibit J (hereinafter referred to as "SPECIAL
CLEANING SERVICE") Lessor may, upon reasonable advance notice from Lessee, elect
to furnish such Special Cleaning Service and Lessee agrees to pay Lessor, within
ten (10) days of being billed therefor, Lessor's reasonable charge for providing
such additional service. If Lessor does not elect to provide said Special
Cleaning Service, Lessee may perform or provide for said Special Cleaning
Service, at Lessee's sole cost and expense.
13.6 INTERRUPTIONS. Lessor does not warrant that any of the services
referred to above or any other services and/or utilities which Lessor may supply
or are supplied will be free from interruption and/or the need for maintenance
and repairs or replacement. Lessee acknowledges that any one or more such
services may be suspended or reduced by reason of repairs, alterations or
improvements necessary to be made, by strikes or accidents, by any cause beyond
the reasonable control of Lessor, or by orders or regulations of any federal,
state, county or municipal authority. In addition, Lessor shall have no
liability for damages arising from, and Lessor does not warrant that Lessee's
use of any Lines will be free from, (a) any eavesdropping or wire-tapping by
unauthorized parties, (b) any failure of any Lines to satisfy Lessee's
requirements, or (c) any shortages, failures, variations, interruptions,
disconnections, loss or damage caused by installation, maintenance, replacement,
use or removal of Lines by or for other occupants of the Complex, by any failure
of the environmental conditions or the power supply for the Building to conform
to any requirements for the Lines or any associated equipment or any other
problems associated with any Lines by any other cause.
Any such interruption or suspension of services shall not be deemed an
eviction or disturbance of Lessee's use and possession of the Leased Premises or
any part thereof, nor render Lessor liable to Lessee for damages by abatement of
Rent or otherwise, nor relieve Lessee of performance of Lessee's obligations
under this Lease.
13.7 BUILDING UPGRADE WORK. Lessor has advised Lessee that Lessor may make
certain upgrades and improvements to the Common Areas and central systems of the
Complex ("Building Upgrade Work"). Lessee acknowledges that the performance of
the Building Upgrade Work may result in noise, dust and other temporary
inconveniences or interruptions to the conduct of normal business activity in
the Building. Lessor will utilize reasonable measures to reduce noise levels
associated with the performance of the Building Upgrade Work; provided, however,
the Building Upgrade Work shall in no event constitute a constructive eviction
or serve as a basis for any abatement or reduction in rent.
14. WASTE
14.1 WASTE OR NUISANCE. Lessee shall not commit, or suffer to be committed,
any waste upon the Leased Premises, or any nuisance, or other act or thing which
may disturb the
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quiet enjoyment of any other lessee or occupant of the Complex in which the
Leased Premises are located.
15. ALTERATIONS
15.1 CONSENT OF LESSOR; OWNERSHIP. Lessee shall not make, or suffer to be
made, any alterations to the Leased Premises, the Building, or the Complex,
and/or Lines, systems and facilities therein, or any part thereof, without the
written consent of Lessor first had and obtained. Any additions to or
alterations of the Leased Premises (except trade fixtures) shall, immediately
upon being made, constitute a part of the realty and Lessor's property, and
shall, at the expiration or earlier termination of this Lease, remain upon the
Leased Premises without compensation to Lessee. Except as otherwise provided in
this Lease, Lessee shall have the right to remove its trade fixtures placed upon
the Leased Premises provided that Lessee restores the Leased Premises as
indicated below. Any and all costs incurred by Lessor, whether in complying with
laws, governmental requirements or otherwise, as a result of any "alterations"
(as hereinafter defined), or as a result of request by Lessee for increased
Lines or other utility capacity above that presently existing (or, in the event
the Building is to be constructed or substantially altered by Lessor prior to
the delivery date, above that which is planned by Lessor for the Building) shall
be paid by Lessee within ten (10) days after demand therefor by Lessor.
15.2 REQUIREMENTS. Any alterations, additions or installations performed by
Lessee (hereinafter collectively "alterations") shall be subject to strict
conformity with the following requirements:
(a) All alterations shall be at the sole cost and expense of Lessee;
(b) Prior to commencement of any work of alteration, Lessee shall
submit detailed plans and specifications, including working drawings
(hereinafter referred to as "Plans"), of the proposed alterations, which shall
be subject to the consent of Lessor in accordance with the terms of Section 15.1
above;
(c) Following approval of the Plans by Lessor, Lessee shall give
Lessor at least ten (10) days' prior written notice of commencement of work in
the Leased Premises so that Lessor may post notices of non-responsibility in or
upon the Leased Premises as provided by law;
(d) No coring or penetrations shall be made to the floor or ceiling of
the Leased Premises;
(e) No alterations shall be commenced without Lessee having previously
obtained all appropriate permits and approvals required by and of governmental
agencies;
(f) All alterations shall be performed in a skillful and workmanlike
manner, consistent with the Building Standards set forth as Exhibit H, and
pursued with diligence in accordance with the Plans previously approved by
Lessor and in full accord with all applicable
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laws and ordinances. All material, equipment, and articles incorporated in the
alterations are to be new and of recent manufacture and of the most suitable
grade for the purpose intended. Lessee's contractor shall maintain all of the
insurance reasonably required by Lessor, including, without limitation,
commercial general liability, workers' compensation, builder's risk and course
of construction insurance. The limits of such insurance shall be the same as
those specified in Article 18;
(g) Lessee must obtain the prior written approval from Lessor for
Lessee's contractor before the commencement of the work. Lessor may require that
Lessee use subcontractors designated by Lessor as to specified portions of the
work. Lessee's contractor shall maintain all of the insurance reasonably
required by Lessor, including, without limitation, commercial general liability,
workers' compensation, builder's risk and course of construction insurance. The
limits of such insurance shall be the same as those specified in Article 18;
(h) As a condition of approval of the alterations, Lessor may require
performance and labor and materialmen's payment bonds issued by a surety
approved by Lessor, in a sum equal to the cost of the alterations guarantying
the completion of the alterations free and clear of all liens and other charges
in accordance with the Plans. Such bonds shall name Lessor as beneficiary;
(i) The alterations must be performed in a manner such that they will
not interfere with the quiet enjoyment of the other lessees in the Complex;
(j) Lessor shall have the right to condition any approval of the
alterations upon (i) submission by Lessee of a Report with respect to Hazardous
Materials, and/or (ii) the performance by Lessee at Lessee's cost and expense of
such investigation, clean-up and remediation with respect to Hazardous Materials
as Lessor may request, in Lessor's sole and absolute discretion; provided,
however, that Lessor shall have the right, but not the obligation, to undertake
all or any portion of such investigation, clean-up or remediation at Lessee's
cost and expense in accordance with the provisions of Section 12.3(e) above.
Lessee acknowledges and agrees that Lessor shall have the right, in its sole and
absolute discretion, to disapprove the making of any such alterations based upon
the results of any investigation with respect to Hazardous Materials.
15.3 LIENS. Lessee shall keep the Leased Premises and the Complex in which
the Leased Premises are situated free from any liens arising out of any work
performed, materials furnished or obligations incurred by Lessee. In the event a
mechanic's or other lien is filed against the Leased Premises or the Complex of
which the Leased Premises form a part as a result of a claim arising through
Lessee, Lessor may demand that Lessee furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to at least one hundred fifty percent
(150%) of the amount of the contested lien claim or demand, indemnifying Lessor
against liability for the same and holding the Leased Premises free from the
effect of such lien or claim. Such bond must be posted within ten (10) days
following notice from Lessor. In addition, Lessor may require Lessee to pay
Lessor's attorneys' fees and costs in participating in
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any action to foreclose such lien if Lessor shall decide it is to its best
interest to do so. Lessor may pay the claim prior to the enforcement thereof, in
which event Lessee shall reimburse Lessor in full, including attorneys' fees,
for any such expense, as additional rent, with the next due rental.
15.4 RESTORATION. Lessee shall, at Lessee's sole cost and expense, return
the Leased Premises to Lessor at the expiration or earlier termination of this
Lease in good and sanitary order, condition and repair, free of rubble and
debris, broom clean, reasonable wear and tear excepted. In addition, Lessee
shall ascertain from Lessor at the time of approval of any alterations,
installations and improvements, whether Lessor considers any such alterations,
installations and improvements to be specialized and non-reusable areas, such as
class rooms, manufacturing areas and storage racks, and whether Lessor desires
such specialized and non-reusable areas of the Leased Premises, restored to its
condition prior to the making of such permitted alterations, installations and
improvements. In such event, Lessor shall, at least three (3) months prior to
Lease expiration, provide Lessee with an estimate of the costs to so restore the
Leased Premises ("Restoration Costs") and Lessee shall pay to Lessor, as
additional Rent, the entire amount of the Restoration Costs no later than ten
(10) days prior to Lease expiration. The foregoing restoration of the Leased
Premises shall be performed after the Lease expiration. All damage to the Leased
Premises caused by the removal of such trade fixtures and other personal
property that Lessee is permitted to remove under the terms of this Lease and/or
such restoration shall be repaired by Lessee at its sole cost and expense prior
to termination. Lessee's obligations under this Section 15.4 shall apply to the
parking garage, roof and other areas of the Complex impacted by Lessee's use
and/or occupancy of the Complex or any part thereof.
16. PROPERTY INSURANCE
16.1 LESSOR'S INSURANCE. Lessor shall, to the extent available, procure and
maintain at all times during the Term, an "all risk" or "special form" policy or
policies of insurance covering loss or damage to the Building and the Complex in
an amount sufficient to exceed minimum coinsurance requirements of such policy
(exclusive of Lessee's trade fixtures, inventory, personal property, Tenant
Improvements and equipment), providing protection against all perils included
within the classification of fire and extended coverage, vandalism coverage and
malicious mischief, sprinkler leakage, water damage, and special extended
coverage on Building. Additionally, Lessor may (but shall not be required to)
carry: (i) bodily injury and property damage liability insurance and/or excess
liability coverage insurance; (ii) earthquake and/or flood damage insurance; or
(iii) rental income insurance at its election or if required by its lender from
time to time during the Term; or (iv) any other insurance as Lessor or its
lender reasonably deem appropriate, in such amounts and with such limits as
Lessor or its lender may deem appropriate. The costs of all such insurance shall
be included in Operating Costs.
16.2 USE OF PREMISES. No use shall be made or permitted to be made on the
Leased Premises, nor acts done, which will increase the existing rate of
insurance upon the Building in which the Leased Premises are located or upon any
other Building in the Complex or cause
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the cancellation of any insurance policy covering the Building, or any part
thereof, nor shall Lessee sell, or permit to be kept, used or sold, in or about
the Leased Premises, any article which may be prohibited by the standard form of
"All Risk" fire insurance policies. Lessee shall, at its sole cost and expense,
comply with any and all requirements pertaining to the Leased Premises, of any
insurance organization or company, necessary for the maintenance of reasonable
property damage and commercial general liability insurance, covering the Leased
Premises, the Building, or the Complex.
16.3 INCREASE IN PREMIUMS. Lessee agrees to pay to Lessor, as additional
Rent, any increase in premiums on policies which may be carried by Lessor on the
Leased Premises, the Building or the Complex, or any blanket policies which
include the Building or Complex, covering damage thereto and loss of Rent caused
by fire and other perils above the rates for the least hazardous type of
occupancy for office use. Lessee further agrees to pay Lessor, as additional
Rent, any increases in such premiums resulting from the nature of Lessee's
occupancy or any act or omission of Lessee. All payments of additional rent by
Lessee to Lessor pursuant to this Section 16.2 shall be made within ten (10)
days after receipt by Lessee of Lessor's billing therefor.
16.4 PERSONAL PROPERTY INSURANCE. Lessee shall maintain in full force and
effect on all of its fixtures, furniture, equipment and other business personal
property in the Leased Premises a policy or policies providing protection
against any peril included within the classification "All Risk" to the extent of
at least ninety percent (90%) of their replacement cost, or that percentage of
the replacement cost required to negate the effect of a coinsurance provision,
whichever is greater. No such policy shall have a deductible in a greater amount
than ONE THOUSAND DOLLARS ($1,000.00). Lessee shall also insure in the same
manner the physical value of all its Tenant Improvements and alterations in the
Leased Premises including the Lessee's Work. During the Term, the proceeds from
any such policy or policies of insurance shall be used for the repair or
replacement of the fixtures, equipment, and Tenant Improvements so insured.
Lessor shall have no interest in said insurance, and will sign all documents
necessary or proper in connection with the settlement of any claim or loss by
Lessee. Lessee shall also maintain insurance for all plate glass upon the Leased
Premises. All insurance specified in this Section 16.4 to be maintained by
Lessee shall be maintained by Lessee at its sole cost.
17. INDEMNIFICATION, WAIVER OF CLAIMS AND SUBROGATION
17.1 WAIVER OF SUBROGATION. Lessor and Lessee release each other, and their
respective authorized representatives, from any claims for damage to the Leased
Premises and the Building and other improvements in which the Leased Premises
are located, and to the furniture, fixtures, and other business personal
property, Lessee's improvements and alterations of either Lessor or Lessee, in
or on the Leased Premises and the Building and other improvements in which the
Leased Premises are located, including loss of income, that are caused by or
result from risks insured or required under the terms of this Lease to be
insured against under any property insurance policies carried or to be carried
by either of the parties.
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17.2 FORM OF POLICY. Each party shall cause each such insurance policy
obtained by it to provide that the insurance company waives all rights of
recovery by way of subrogation against either party in connection with any
damage covered by such policy. Neither party shall be liable to the other for
any damage caused by any peril included within the classification "All Risk"
which is insured against under any property insurance policy carried under the
terms of this Lease.
17.3 INDEMNITY. Lessee, as a material part of the consideration to be
rendered to Lessor, shall indemnify, defend, protect and hold harmless Lessor
against all actions, claims, demands, damages, liabilities, losses, penalties,
or expenses of any kind which may be brought or imposed upon Lessor or which
Lessor may pay or incur by reason of injury to person or property or business,
from whatever cause, all or in any way connected with the acts and omissions of
Lessee, and the condition or use of the Leased Premises, or the improvements or
personal property therein or thereon, including without limitation any liability
or injury to the person or property or business of Lessee, its agents, officers,
employees or invitees. Lessee agrees to indemnify, defend and protect Lessor and
hold it harmless from any and all liability, loss, cost or obligation on account
of, or arising out of, any such injury or loss however occurring, including
breach of the provisions of this Lease and the negligence of the parties hereto.
Nothing contained herein shall obligate Lessee to indemnify Lessor against its
own sole or gross negligence or willful acts, for which Lessor shall indemnify
Lessee.
17.4 DEFENSE OF CLAIMS. In the event any action, suit or proceeding is
brought against Lessor by reason of any such occurrence, Lessee, upon Lessor's
request, will at Lessee's expense resist and defend such action, suit or
proceeding, or cause the same to be resisted and defended by counsel designated
either by Lessee or by the insurer whose policy covers the occurrence and in
either case approved by Lessor. The obligations of Lessee under this Section
arising by reason of any occurrence taking place during the Term shall survive
any termination of this Lease.
17.5 WAIVER OF CLAIMS. Lessee, as a material part of the consideration to
be rendered to Lessor, hereby waives all claims against Lessor for damages or
injury, as described below, from any cause arising at any time, including breach
of the provisions of this Lease and the negligence of the parties hereto:
(a) damages to goods, wares, merchandise and loss of business in,
upon or about the Leased Premises; and
(b) (notwithstanding anything to the contrary contained in this
Lease, including, without limitation, the definition of Operating Costs in
Section 2.1, which includes "policing") damages to goods, wares, merchandise and
loss of business, in, upon or about the Leased Premises or the Complex, and
injury to Lessee, its agents, employees, invitees or third persons in, upon or
about the Leased Premises or the Complex, where such damage or injury results
from Lessor's failure to police or provide security for the Complex or Lessor's
negligence in connection therewith.
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Lessee expressly acknowledges and agrees that the provisions of Section
12.5(b) above apply fully with respect to the matters waived pursuant to this
Section 17.5, and, for such purpose, the term Released Matters, as used in
Section 12.5(b), shall be deemed to include the matters waived pursuant to this
Section 17.5.
17.6 REFERENCES. Wherever in this Article the term Lessor or Lessee is
used and such party is to receive the benefit of a provision contained in this
Article, such term shall refer not only to that party but also to its officers,
directors, shareholders, employees, contractors, partners, agents and mortgagees
or other lien holders.
18. LIABILITY INSURANCE
18.1 LESSEE'S INSURANCE. Lessee shall, at Lessee's expense, obtain and
keep in force during the Term, a commercial general liability insurance policy
insuring Lessee against the risks of, bodily injury and property damage,
personal injury, contractual liability, completed operations, products
liability, host liquor liability, owned and non-owned automobile liability
arising out of the ownership, use, occupancy or maintenance of the Leased
Premises and all areas appurtenant thereto. Such insurance shall be a combined
single limit policy in an amount not less than ONE MILLION DOLLARS
($1,000,000.00) per occurrence with a TWO MILLION DOLLAR ($2,000,000.00) annual
aggregate; and an umbrella policy of THREE MILLION DOLLARS ($3,000,000.00) any
one occurrence. Lessor and any lender or other party in interest designated by
Lessor shall be named as additional insured(s). The policy shall contain cross
liability endorsements and shall insure performance by Lessee of the indemnity
provisions of this Lease; shall be primary, not contributing with, and not in
excess of coverage which Lessor may carry; shall state that Lessor is entitled
to recovery for the negligence of Lessee even though Lessor is named as an
additional insured; shall provide for severability of interest; shall provide
that an act or omission of one of the insured or additional insureds which would
void or otherwise reduce coverage shall not void or reduce coverages as to the
other insured or additional insured; and shall afford coverage after the Term
(by separate policy or extension if necessary) for all claims based on acts,
omissions, injury or damage which occurred or arose (or the onset of which
occurred or arose) in whole or in part during the Term. The limits of said
insurance shall not limit any liability of Lessee hereunder. Not more frequently
than every three (3) years, if, in the reasonable opinion of Lessor, the amount
of liability insurance required hereunder is not adequate, Lessee shall promptly
increase said insurance coverage as required by Lessor.
18.2 WORKERS' COMPENSATION INSURANCE. Lessee shall carry Workers'
Compensation insurance as required by law, including an employers' liability
endorsement.
18.3 RENT LOSS/BUSINESS INTERRUPTION INSURANCE. Lessee shall carry Rental
Loss/Business Interruption insurance covering rental loss or business
interruptions resulting from those risks referred to in Section 18.1 in an
amount equal to all Rent payable under this Lease for a period of twelve (12)
months at the then current rate of charges.
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19. INSURANCE POLICY REQUIREMENTS
19.1 GENERAL REQUIREMENTS. All insurance policies required to be carried
by Lessee (except Lessee's business personal property insurance) hereunder shall
conform to the following requirements:
(a) The insurer in each case shall carry a designation in "Best's
Insurance Reports" as issued from time to time throughout the Term as follows:
Policyholders' rating of A; financial rating of not less than VII;
(b) The insurer shall be qualified to do business in the state in
which the Leased Premises are located;
(c) The policy shall be in a form and include such endorsements as
are acceptable to Lessor;
(d) Certificates of insurance shall be delivered to Lessor at
commencement of the Term and certificates of renewal at least thirty (30) days
prior to the expiration of each policy;
(e) Each policy shall require that Lessor be notified in writing by
the insurer at least thirty (30) days prior to any cancellation or expiration of
such policy, or any reduction in the amounts of insurance carried.
20. LESSEE INSURANCE DEFAULT
20.1 RIGHTS OF LESSOR. In the event that Lessee fails to obtain any
insurance required of it under the terms of this Lease, Lessor may, at its
option, but is not obligated to, obtain such insurance on behalf of Lessee and
bill Lessee, as additional rent, for the cost thereof. Payment shall be due
within ten (10) days of receipt of the billing therefor by Lessee.
21. FORFEITURE OF PROPERTY AND LESSOR'S LIEN
21.1 REMOVAL OF PERSONAL PROPERTY. Lessee agrees that as at the date of
termination of this Lease or repossession of the Leased Premises by Lessor, by
way of default or otherwise, it shall remove all personal property to which it
has the right to ownership pursuant to the terms of this Lease. Any and all such
property of Lessee not removed by such date shall, at the option of Lessor,
irrevocably become the sole property of Lessor. Lessee waives all rights to
notice and all common law and statutory claims and causes of action which it may
have against Lessor subsequent to such date as regards the storage, destruction,
damage, loss of use and ownership of the personal property affected by the terms
of this Article. Lessee acknowledges Lessor's need to relet the Leased Premises
upon termination of this Lease or repossession of the Leased Premises and
understands that the forfeitures and waivers provided herein are necessary to
aid said reletting, and to prevent Lessor incurring a loss for inability to
deliver the Leased Premises to a prospective lessee.
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21.2 LESSOR'S LIEN. Lessee hereby grants to Lessor a lien upon and
security interest in all fixtures, chattels and personal property of every kind
now or hereafter to be placed or installed in or on the Leased Premises and
agrees that in the event of any default on the part of Lessee, Lessor shall have
all the rights and remedies afforded the secured party by the chapter on
"DEFAULT" of Division 9 of the Uniform Commercial Code of the state in which the
Leased Premises are located and may, in connection therewith, also (a) enter on
the Leased Premises to assemble and take possession of the collateral, (b)
require Lessee to assemble the collateral and make its possession available to
Lessor at the Leased Premises, and (c) enter the Leased Premises, render the
collateral, if equipment, unusable and dispose of it in a manner provided by the
Uniform Commercial Code of the state in which the Leased Premises are located.
Lessee hereby designates Lessor as his attorney-in-fact for purposes of
executing such documents as may be necessary to perfect the lien and security
interest granted hereunder.
22. MAINTENANCE AND REPAIRS
22.1 LESSOR'S OBLIGATIONS. Subject to the other provisions of this Lease
imposing obligations in this respect upon Lessee, Lessor shall repair, replace
and maintain the external and Structural parts of the Complex which do not
comprise a part of the Leased Premises and are not leased to others, janitor and
equipment closets and shafts within the Leased Premises designated by Lessor for
use by it in connection with the operation and maintenance of the Complex, and
all Common Areas. Lessee shall maintain and repair equipment, Lines, facilities
or systems of the Building or Complex which are outside of the Leased Premises
or which do not exclusively serve the Leased Premises. Lessor shall perform such
repairs, replacements and maintenance with reasonable dispatch, in a good and
workmanlike manner; but Lessor shall not be liable for any damages, direct,
indirect or consequential, or for damages for personal discomfort, illness or
inconvenience of Lessee by reason of failure of equipment, Lines, facilities or
systems or reasonable delays in the performance of such repairs, replacements
and maintenance, unless caused by the deliberate act or omission of Lessor, its
servants, agents, or employees. The cost for such repairs, maintenance and
replacement shall be included in Operating Costs in accordance with Section 2.1
hereof.
22.2 NEGLIGENCE OF LESSEE. If the Building, the elevators, escalators,
boilers, engines, pipes or apparatus used for the purpose of climate control of
the Building or operating the elevators, or escalators, or if the water pipes,
drainage pipes, electric lighting or other equipment, Lines, systems and/or
facilities of the Building or the Complex, or the roof or the outside walls of
the Building, fall into a state of disrepair or become damaged or destroyed
through the negligence, carelessness or misuse of Lessee, its agents, employees
or anyone permitted by it to be in the Complex, or through it in any way, the
cost of the necessary repairs, replacements or alterations shall be borne by
Lessee who shall pay the same to Lessor as additional charges forthwith on
demand.
22.3 LESSEE'S OBLIGATIONS. Lessee shall repair the Leased Premises,
including without limiting the generality of the foregoing, all interior
partitions and walls, fixtures, Leasehold Improvements and alterations in the
Leased Premises and all electrical and telephone outlets and conduits, fixtures
and shelving, and special mechanical and electrical
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equipment which equipment is not a normal part of the Leased Premises installed
by or for Lessee, reasonable wear and tear, damage with respect to which Lessor
has an obligation to repair as provided in Section 22.1 and Section 23.2 hereof
only excepted. Prior to commencement of any repairs, Lessee shall give Lessor at
least ten (10) days' prior written notice thereof so that Lessor may post
notices of non-responsibility in or upon the Leased Premises as provided by law.
Lessee must obtain the prior written approval from Lessor for Lessee's
contractor before the commencement of the repair. Lessor may require that Lessee
use a specific contractor for certain types of repairs. Lessor may enter and
view the state of repair and Lessee will repair in a good and workmanlike manner
according to notice in writing. Notwithstanding the foregoing, Lessee shall not
make any repairs to the equipment, Lines, facilities or systems of the Building
or Complex which are outside of the Leased Premises or which do not exclusively
serve the Leased Premises.
22.4 CLEANING. Lessee agrees at the end of each business day to leave the
Leased Premises in a reasonably clean condition for the purpose of the
performance of Lessor's cleaning services referred to herein. Lessee shall
maintain the appearance of the Leased Premises in a manner consistent with the
character, use and appearance of the Complex.
22.5 WAIVER. Lessee waives all rights it may have under law to make
repairs at Lessor's expense.
22.6 ACCEPTANCE. Except as to the construction obligations of Lessor for
the Lessor's Work, if any, stated in Exhibit D to this Lease, Lessee shall
accept the Leased Premises in "as is" condition as of the date of execution of
this Lease by Lessee, and Lessee acknowledges that the Leased Premises in such
condition are in good and sanitary order, condition and repair. Lessee
acknowledges that there shall be no floor/ceiling coring or penetrations due to
the post tension floor slab structural system of the Building.
23. DESTRUCTION
23.1 RIGHTS OF TERMINATION. In the event the Leased Premises suffers (a)
an "uninsured property loss" (as hereinafter defined) or (b) a property loss
which cannot be repaired within one hundred twenty (120) days from the date of
destruction under the laws and regulations of state, federal, county or
municipal authorities, or other authorities with jurisdiction, Lessor may
terminate this Lease as at the date of the damage upon written notice to Lessee
following the property loss. For purposes of this Lease, the term "uninsured
property loss" shall mean any loss arising from a peril not covered by the
standard form of "All Risk" property insurance policy.
23.2 REPAIRS. In the event of a property loss which may be repaired within
one hundred twenty (120) days from the date of the damage, or, in the
alternative, in the event Lessor does not elect to terminate this Lease under
the terms of Section 23.1 above, then this Lease shall continue in full force
and effect and Lessor shall forthwith undertake to make such repairs to
reconstitute the Leased Premises to as near the condition as existed prior to
the property loss as practicable but not including any construction originally
performed by Lessee
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(including Lessee's Work) or subsequently undertaken by Lessee, but shall
include solely property constructed by Lessor (including Lessor's Work) prior to
the commencement of the Term. Such partial destruction shall in no way annul or
void this Lease except that Lessee shall be entitled to a proportionate
reduction of Minimum Rent following the property loss and until the time the
Leased Premises are restored. Such reduction shall be pro rata based upon the
number of Usable square feet of the Leased Premises damaged and not occupied.
Lessor's obligations to restore shall in no way include any construction
originally performed by Lessee or subsequently undertaken by Lessee, but shall
include solely that property constructed by Lessor prior to commencement of the
Term.
23.3 REPAIR COSTS. The cost of any repairs to be made by Lessor, pursuant
to Section 23.2 of this Lease, shall be paid by Lessor utilizing available
insurance proceeds. Lessee shall reimburse Lessor upon completion of the repairs
for any deductible for which no insurance proceeds will be obtained under
Lessor's insurance policy to the extent such deductible is not reimbursed as an
Operating Cost, or if other premises are also repaired, a pro rata share based
on total costs of repair equitably apportioned to the Leased Premises. Lessee
shall, however, not be responsible to pay any deductible or its share of any
deductible to the extent that Lessee's payment would be in excess of $10,000 if
Lessee's consent has not been received by Lessor, unless such denial of consent
by Lessee is unreasonable in the reasonable judgment of Lessor's insurance
consultant.
23.4 WAIVER. Lessee hereby waives all statutory or common law rights of
termination in respect to any partial destruction or property loss which Lessor
is obligated to repair or may elect to repair under the terms of this Article.
Further, in event of a property loss occurring during the last two (2) years of
the original Term hereof or of any extension, Lessor need not undertake any
repairs and may cancel this Lease unless Lessee has the right under the terms of
this Lease to extend the Term for an additional period of at least five (5)
years and does so within thirty (30) days of the date of the property loss.
23.5 LESSOR'S ELECTION. In the event that the Complex or Building in which
the Leased Premises are situated be destroyed to the extent of not less than
thirty-three and one-third percent (33-1/3%) of the replacement cost thereof,
Lessor may elect to terminate this Lease, whether the Leased Premises be injured
or not, in the same manner as in Section 23.1 above. At all events, a total
destruction of the Complex of which the Leased Premises form a part, or the
Leased Premises itself, shall terminate this Lease.
24. CONDEMNATION
24.1 DEFINITIONS.
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(a) "CONDEMNATION" means (i) the exercise of any governmental power,
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whether by legal proceedings or otherwise, by a condemnor and/or (ii) a
voluntary sale or transfer by Lessor to any condemnor, either under threat of
condemnation or while legal proceedings for condemnation are pending.
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(b) "DATE OF TAKING" means the date the condemnor has the right to
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possession of the property being condemned.
(c) "AWARD" means all compensation, sums or anything of value
-----
awarded, paid or received on a total or partial condemnation.
(d) "CONDEMNOR" means any public or quasi-public authority, or
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private corporation or individual, having the power of condemnation.
24.2 TOTAL TAKING. If the Leased Premises are totally taken by
condemnation, this Lease shall terminate on the date of taking.
24.3 PARTIAL TAKING: COMMON AREAS.
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(a) If any portion of the Leased Premises is taken by condemnation,
this Lease shall remain in effect, except that Lessee can elect to terminate
this Lease if thirty-three and one-third percent (33-1/3%) or more of the total
number of square feet in the Leased Premises is taken.
(b) If any part of the Common Areas of the Complex is taken by
condemnation and as a consequence thereof, the Complex is not in compliance with
applicable governmental codes and requirements, then Lessor shall have the
election to terminate this Lease pursuant to this Section.
(c) If fifty percent (50%) or more of the Building in which the
Leased Premises are located is taken, Lessor shall have the election to
terminate this Lease in the manner prescribed herein.
24.4 TERMINATION OR ABATEMENT. If either party elects to terminate this
Lease under the provisions of Section 24.3 (such party is hereinafter referred
to as the "Terminating Party"), it must terminate by giving notice to the other
party (the "Nonterminating Party") within thirty (30) days after the nature and
extent of the taking have been finally determined (the "Decision Period"). The
Terminating Party shall notify the Nonterminating Party of the date of
termination, which date shall not be earlier than sixty (60) days after the
Terminating Party has notified the Nonterminating Party of its election to
terminate nor later than the date of taking. If Notice of Termination is not
given within the Decision Period, the Lease shall continue in full force and
effect except that Minimum Rent shall be reduced by subtracting therefrom an
amount calculated by multiplying the Minimum Rent in effect prior to the taking
by a fraction the numerator of which is the number of square feet taken from the
Leased Premises and the denominator of which is the number of square feet in the
Leased Premises prior to the taking.
24.5 RESTORATION. If there is a partial taking of the Leased Premises and
this Lease remains in full force and effect pursuant to this Article, Lessor, at
its cost, shall accomplish all necessary restoration so that the Leased Premises
is returned as near as practical to its condition immediately prior to the date
of the taking, but in no event shall Lessor be
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obligated to expend more for such restoration than the extent of funds actually
paid to Lessor by the condemnor.
24.6 AWARD. Any award arising from the condemnation or the settlement
thereof shall belong to and be paid to Lessor except that Lessee shall receive
from the award compensation for the following if specified in the award by the
condemning authority, so long as it does not reduce Lessor's award in respect of
the real property: Lessee's trade fixtures, tangible personal property, loss of
business and relocation expenses. At all events, Lessor shall be solely entitled
to all award in respect of the real property, including the bonus value of the
leasehold. Lessee shall not be entitled to any award until Lessor has received
the above sum in full.
25. ASSIGNMENT AND SUBLETTING
25.1 LEASE IS PERSONAL. The purpose of this Lease is to transfer
possession of the Leased Premises to Lessee for Lessee's personal use in return
for certain benefits, including rent, to be transferred to the Lessor. Lessee's
right to assign or sublet as stated in this Article is subsidiary and incidental
to the underlying purpose of this Lease. Lessee acknowledges and agrees that it
has entered into this Lease in order to acquire the Leased Premises for its own
personal use and not for the purpose of obtaining the right to convey the
leasehold to others.
25.2 "TRANSFER OF THE LEASED PREMISES" DEFINED. The terms "Transfer of
the Leased Premises" or "Transfer" as used herein shall include any assignment
of all or any part of this Lease (including assignment by operation of law),
subletting of all or any part of the Leased Premises or transfer of possession,
or granting of the right of possession or contingent right of possession of all
or any portion of the Leased Premises including, without limitation, license,
concession, mortgage, devise, hypothecation, agency, franchise or management
agreement, or suffering any other person (the agents and servants of Lessee
excepted) to occupy or use the Leased Premises or any portion thereof. If Lessee
is a corporation which is not deemed a public corporation, or is an
unincorporated association or partnership, or Lessee consists of more than one
party, the transfer, assignment or hypothecation of any stock or interest in
such corporation, association, partnership or ownership interest, in the
aggregate in excess of twenty-five percent (25%), shall be deemed a Transfer of
the Leased Premises; provided, however, that the issuance of up to fifty percent
(50%) of the stock (which percentage shall be calculated at the date of such
issuance) of Lessee to any investor in exchange for capital investment shall not
be deemed a Transfer of the Leased Premises.
25.3 NO TRANSFER WITHOUT CONSENT. Lessee shall not suffer a Transfer of
the Leased Premises or any interest therein, or any part thereof, or any right
or privilege appurtenant thereto without the prior written consent of Lessor,
and a consent to one Transfer of the Leased Premises shall not be deemed to be a
consent to any subsequent Transfer of the Leased Premises. Any Transfer of the
Leased Premises without such consent shall (i) be voidable, and (ii) terminate
this Lease, in either case, at the option of Lessor.
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25.4 WHEN CONSENT GRANTED.
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(a) The consent of Lessor to a Transfer may not be unreasonably
withheld, provided that it is agreed to be reasonable for Lessor to consider any
of the following reasons, which list is not exclusive, in electing to consent or
to deny consent:
(i) Financial strength of the proposed transferee is not at
least equal to that of Lessee at the time of execution of this Lease;
(ii) A proposed transferee whose occupation of the Leased
Premises would cause a diminution in the reputation of the Complex or the other
businesses located therein;
(iii) A proposed transferee whose impact on the common
facilities or the other occupants of the Complex would be disadvantageous to the
operation and management of the Complex including increasing the cost of
operation and management;
(iv) A proposed transferee whose use presents a risk of
violation of Article 12;
(v) A proposed transferee whose occupancy will require a
variation in the terms of this Lease (for example, a variation in the use
clause) or which otherwise adversely affects any interest of Lessor;
(vi) That there be no uncured notices of default under the
terms of this Lease; or
(vii) A proposed transferee who is or is likely to be, or
whose business is or is likely to be, subject to compliance with additional laws
or other governmental requirements beyond those to which Lessee or Lessee's
business is subject.
(b) Notwithstanding the foregoing, Lessee shall have the right,
without the consent of Lessor, but upon prior written notice to Lessor, to
assign this Lease to a company incorporated or to be incorporated by Lessee,
provided that Lessee owns or beneficially controls all the issued and
outstanding shares of capital stock of the company; further provided, however,
that in the event that at any time following such assignment, Lessee wishes to
sell, mortgage, devise, hypothecate or in any other manner whatsoever transfer
any portion of the ownership or beneficial control of the issued and outstanding
shares in the capital stock of such company, such transaction shall be deemed to
constitute a Transfer and shall be subject to all of the provisions of this
Article 25 with respect to a Transfer of the Premises including, by specific
reference, the provisions of Section 25.8.
25.5 PROCEDURE FOR OBTAINING CONSENT.
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(a) Lessor need not commence its review of any proposed Transfer,
or respond to any request by Lessee with respect to such, unless and until it
has received from
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Lessee adequate descriptive information concerning the transferee, the business
to be conducted by the transferee, the transferee's financial capacity, and such
other information as may reasonably be required in order to form a prudent
judgment as to the acceptability of the proposed Transfer, including, without
limitation, the following:
(i) Reasonable financial information concerning the proposed
transferee including the past two years' audited annual Balance Sheets and
Profit and Loss statements, certified correct by a Certified Public Accountant;
(ii) Banking references of the proposed transferee;
(iii) A resume of the business background and experience of
the proposed transferee;
(iv) At least five (5) business references for the proposed
transferee;
(v) An executed copy of the instrument by which Lessee
proposes to effectuate the Transfer;
(vi) A certified statement, including the calculation, of the
amount of unamortized cost of Lessee's Tenant Improvements to the Leased
Premises.
(b) Lessee shall reimburse Lessor as additional rent for Lessor's
reasonable costs and attorneys' fees incurred in conjunction with the processing
and documentation of any proposed Transfer of the Leased Premises, whether or
not consent is granted.
25.6 RECAPTURE.
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(a) By written notice to Lessee (the "Termination Notice") within
twenty (20) business days following submission to Lessor by Lessee of the
information specified in Section 25.5, Lessor (i) may terminate this Lease in
the event of an assignment of this Lease or sublet of the entire Leased
Premises, or (ii), if such proposed subletting will result in more than 50% of
the entire Leased Premises being sublet (in the aggregate with any previous
subleases), terminate this Lease as to all or any portion of the Leased. Any
termination pursuant to clause (ii) above shall be subject to the rights of any
sublessees under any existing subleases provided Lessor has previously consented
to the sublease in accordance with the terms of this Lease. In the event Lessor
elects to terminate this Lease as to that portion of the Leased Premises to be
sublet, an amendment to this Lease shall be executed whereby the description of
the Leased Premises is restated and Lessee's obligations for rent and other
charges are reduced in proportion to the reduction in Rentable Area of the
Leased Premises caused thereby.
(b) In the event that Lessor terminates this Lease or terminates
this Lease as to a portion thereof, Lessor may, if it elects, enter into a new
lease covering the Premises or a portion thereof with the intended assignee or
sublessee on such terms as Lessor and such person may agree or enter into a new
lease covering the Premises with any other person; in
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such event, Lessee shall not be entitled to any portion of the profit if any
which Lessor may realize on account of such termination and reletting. From and
after the date of such termination of this Lease, the parties shall have no
further obligations to each other under this Lease except for matters occurring
or obligations arising prior to the date of such termination.
25.7 REASONABLE RESTRICTION. The restrictions on Transfer described in
this Article 25 are acknowledged by Lessee to be reasonable for all purposes,
including, without limitation, the provisions of California Civil Code (the
"Code") Section 1951.4(b)(2). Lessee expressly waives any rights which it might
otherwise be deemed to possess pursuant to applicable law, including, without
limitation, Section 1997.040 of the Code, to limit any remedy of Lessor pursuant
to Section 1951.2 or 1951.4 of the Code by means of proof that enforcement of a
restriction on use of the Leased Premises would be unreasonable.
25.8 EFFECT OF TRANSFER. If Lessor consents to a Transfer, (or if a
Transfer occurs without Lessor's consent in accordance with Section 25.4(b)),
the following conditions shall apply:
(a) Each and every covenant, condition or obligation imposed upon
Lessee by this Lease and each and every right, remedy or benefit afforded Lessor
by this Lease shall not be impaired or diminished as a result of such Transfer.
(b) Lessee shall pay to Lessor on a monthly basis, one hundred
percent (100%) of the excess of any sums of money, or other economic
consideration received by Lessee from the Transferee in such month (whether or
not for a period longer than one month), including higher rent, bonuses, key
money, or the like over the aggregate, of (i) the amortized portion of the
reasonable expenses actually paid by Lessee to unrelated third parties for
brokerage commissions, tenant improvements to the Leased Premises, or design
fees incurred as a direct consequence of the Transfer, and, (ii) the total sums
which Lessee pays Lessor under this Lease in such month, or the prorated portion
thereof if the Leased Premises transferred is less than the entire Leased
Premises. The amount so derived shall be paid with Lessee's payment of Minimum
Rent. The term "amortized portion" is that portion of the applicable expenses
derived by dividing such expenses by the number of months in the original term
of the Transfer transaction.
(c) No Transfer, whether or not consent of Lessor is required
hereunder, shall relieve Lessee of its primary obligation to pay the rent and to
perform all other obligations to be performed by Lessee hereunder. The
acceptance of rent by Lessor from any person shall not be deemed to be a waiver
by Lessor of any provision of this Lease or to be a consent to any Transfer of
the Leased Premises.
(d) If Lessor consents to a sublease, such sublease shall not
extend beyond the expiration of the Term.
(e) No Transfer shall be valid and no transferee shall take
possession of the Leased Premises or any part thereof unless, within ten (10)
days after the execution of the documentary evidence thereof, Lessee shall
deliver to Lessor a duly executed duplicate original
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of the Transfer instrument in form satisfactory to Lessor which provides that
(i) the transferee assumes Lessee's obligations for the payment of rent and for
the full and faithful observance and performance of the covenants, terms and
conditions contained herein, (ii) such transferee will, at Lessor's election,
attorn directly to Lessor in the event Lessee's Lease is terminated for any
reason on the terms set forth in the instrument of transfer and (iii) such
instrument of transfer contains such other assurances as Lessor reasonably deems
necessary.
26. ABANDONMENT
26.1 LESSEE TO OCCUPY. Lessee shall not abandon the Leased Premises at any
time during the Term, and if Lessee shall abandon, vacate or surrender the
Leased Premises, or be dispossessed by process of law, or otherwise, any
personal property belonging to Lessee and remaining on the Leased Premises
thereafter shall, at the option of Lessor, be deemed abandoned.
27. ENTRY BY LESSOR
27.1 RIGHTS OF LESSOR. Lessee shall permit Lessor and Lessor's agents to
enter the Leased Premises at all reasonable times for the purpose of inspecting
the same or for the purpose of maintaining the Building and the Lines, systems
and facilities therein, or for the purpose of making repairs, replacements,
alterations or additions to any portion of the Building and the Lines, systems
and facilities therein, including the erection and maintenance of such
scaffolding, canopies, fences and props as may be required, or for the purpose
of posting notices of non-responsibility for alterations, additions or repairs,
or for the purpose of placing upon the Building any usual or ordinary "for sale"
signs, without any rebate of Rent and without any liability to Lessee for any
loss of occupation or quiet enjoyment of the Leased Premises thereby occasioned,
and shall permit Lessor, at any time within ninety (90) days prior to the
expiration of this Lease, to place upon the Leased Premises any usual or
ordinary "to let" or "to lease" signs. This Section in no way affects the
maintenance obligations of the parties hereto.
28. SIGNS
28.1 Lessee shall not place on the Leased Premises or on the Complex, any
exterior signs or advertisements nor any interior signs or advertisements that
are visible from the exterior of the Leased Premises including the Atrium,
without Lessor's prior written consent, which Lessor reserves the right to
withhold for any aesthetic reason in its sole judgment. Lessee's name shall be
included on the Building directory in the main lobby of the Building and in
applicable Common Areas, in accordance with Lessor's Sign Program, if
applicable. The cost of installation and regular maintenance of any such signs
approved by Lessor shall be at the sole expense of Lessee. At the termination of
this Lease, or any extension thereof, Lessee shall remove all its signs, and all
damage caused by such removal shall be repaired at Lessee's expense.
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29. DEFAULT
29.1 DEFINITION. The occurrence of any of the following shall constitute
a material default and breach of this Lease by Lessee:
(a) Any failure by Lessee to pay the rent or to make any other
payment required to be made by Lessee hereunder when due;
(b) The abandonment of the Leased Premises by Lessee in violation
of Section 26.1 hereof;
(c) Any failure by Lessee to provide executed documents as and when
required under the provisions of Section 36.2 and/or Article 37;
(d) A failure by Lessee to observe and perform any other provision
of this Lease to be observed or performed by Lessee, where such failure
continues for ten (10) days after written notice thereof by Lessor to Lessee;
provided, however, that if the nature of the default is such that the same
cannot reasonably be cured within the ten (10) day period allowed, Lessee shall
not be deemed to be in default if Lessee shall, within such ten (10) day period,
commence to cure and thereafter diligently prosecute the same to completion;
(e) Either (1) the appointment of a receiver (except a receiver
appointed at the instance or request of Lessor) to take possession of all or
substantially all of the assets of Lessee, or (2) a general assignment by Lessee
for the benefit of creditors, or (3) any action taken or suffered by Lessee
under any insolvency or bankruptcy act shall constitute a breach of this Lease
by Lessee. In such event, Lessor may, at its option, declare this Lease
terminated and forfeited by Lessee, and Lessor shall be entitled to immediate
possession of the Leased Premises. Upon such notice of termination, this Lease
shall terminate immediately and automatically by its own limitation;
(f) Any two (2) failures by Lessee to observe and perform any
provision of this Lease during any twelve (12) month period of the Term, as such
may be extended, shall constitute, at the option of Lessor, a separate and
noncurable default.
30. REMEDIES UPON DEFAULT
30.1 Termination and Damages. In the event of any default by Lessee, then
in addition to any other remedies available to Lessor herein or at law or in
equity, Lessor shall have the immediate option to terminate this Lease and all
rights of Lessee hereunder by giving written notice of such intention to
terminate. In the event that Lessor shall elect to so terminate this Lease, then
Lessor may recover from Lessee:
(a) The worth at the time of award of any unpaid rent which had
been earned at the time of such termination; plus
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(b) The worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss Lessee proves could have been
reasonably avoided; plus
(c) The worth at the time of award of the amount by which the
unpaid rent for the balance of the Term after the time of award exceeds the
amount of such rental loss that Lessee proves could be reasonably avoided; plus
(d) Any other amount necessary to compensate Lessor for all the
detriment proximately caused by Lessee's failure to perform its obligations
under this Lease or which in the ordinary course of events would be likely to
result therefrom; and
(e) At Lessor's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by the applicable
law in the state in which the Leased Premises are located.
30.2 Definition. As used in subsections 30.1(a) and (b) above, the "worth
at the time of award" is computed by allowing interest at the rate of ten
percent (10%) per annum. As used in subsection 30.1(c) above, the "worth at the
time of award" is computed by discounting such amount at the discount rate of
the Federal Reserve Bank for the region in which the Complex is located at the
time of award plus one percent (1%).
30.3 PERSONAL PROPERTY.
(a) In the event of any default by Lessee, Lessor shall also have
the right, with or without terminating this Lease, to reenter the Leased
Premises and remove all persons and property from the Leased Premises; such
property may be removed and stored in a public warehouse or elsewhere at the
cost of and for the account of Lessee.
(b) In the event of default, all of Lessee's fixtures, furniture,
equipment, improvements, additions, alterations and other personal property
shall remain upon the Leased Premises and in that event, and continuing during
the length of such default, Lessor shall have the sole right to take exclusive
possession of such property and to use it, rent or charge free, until all
defaults are cured or, at Lessor's option, at any time during the Term, to
require Lessee to forthwith remove such property. The rights stated herein are
in addition to Lessor's rights described in Section 21.1.
30.4 RECOVERY OF RENT; RELETTING.
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(a) In the event of the vacation or abandonment of the Leased
Premises by Lessee or in the event that Lessor shall elect to reenter as
provided in Section 30.3 above, or shall take possession of the Leased Premises
pursuant to legal proceeding or pursuant to any notice provided by law, then if
Lessor does not elect to terminate this Lease as provided in Section 30.1 above,
this Lease shall continue in effect for so long as Lessor does not terminate
Lessee's right to possession, and Lessor may enforce all its rights and remedies
under this Lease, including, without limitation, Lessor's right from, time to
time, without terminating
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this Lease, to either recover all rental as it becomes due or relet the Leased
Premises or any part thereof for such term or terms and at such rental or
rentals and upon such other terms and conditions as Lessor, in its sole
discretion, may deem advisable, with the right to make alterations and repairs
to the Leased Premises. Acts of maintenance or preservation or efforts to relet
the Leased Premises or the appointment of a receiver upon initiation of Lessor
or other legal proceeding granting Lessor or its agent possession to protect
Lessor's interest under this Lease shall not constitute a termination of
Lessee's right to possession.
(b) In the event that Lessor shall elect to so relet, then rentals
received by Lessor from such reletting shall be applied: first, to the payment
of any indebtedness other than rent due hereunder from Lessee to Lessor; second,
to the payment of any cost of such reletting; third, to the payment of the cost
of any alterations and repairs to the Leased Premises; fourth, to the payment of
rent due and unpaid hereunder; and the residue, if any, shall be held by Lessor
and applied in payment of future rent as the same may become due and payable
hereunder. Should that portion of such rentals received from such reletting
during any month, which is applied by the payment of rent hereunder, be less
than the rent payable during that month by Lessee hereunder, then Lessee shall
pay such deficiency to Lessor immediately upon demand therefor by Lessor. Such
deficiency shall be calculated and paid monthly. Lessee shall also pay to
Lessor, as soon as ascertained, any costs and expenses incurred by Lessor in
such reletting or in making such alterations and repairs not covered by the
rentals received from such reletting.
(c) No reentry or taking possession of the Leased Premises or any
other action under this Section shall be construed as an election to terminate
this Lease unless a written notice of such intention be given to Lessee or
unless the termination thereof be decreed by a court of competent jurisdiction.
Notwithstanding any reletting without termination by Lessor because of any
default by Lessee, Lessor may at any time after such reletting elect to
terminate this Lease for any such default.
(d) Lessor has the remedy described in California Civil Code
Section 1951.4 (Lessor may continue Lease in effect after Lessee's breach and
abandonment and recover rent as it becomes due, if Lessee has right to sublet or
assign, subject only to reasonable limitations).
30.5 NO WAIVER. Efforts by Lessor to mitigate the damages caused by
Lessee's default in this Lease shall not constitute a waiver of Lessor's right
to recover damages hereunder, nor shall Lessor have any obligation to mitigate
damages hereunder.
30.6 CURING DEFAULTS. Should Lessee fail to repair, maintain, keep clean,
and/or service the Leased Premises, or any part or contents thereof at any time
or times, or perform any other obligations imposed by this Lease or otherwise,
then after having given Lessee reasonable notice of the failure or failures and
a reasonable opportunity which in no case shall exceed ten (10) days, to remedy
the failure, Lessor may enter upon the Leased Premises and perform or contract
for the performance of the repair, maintenance, or other Lessee
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obligation, and Lessee shall pay Lessor for all direct and indirect costs
incurred in connection therewith within ten (10) days of receiving a bill
therefor from Lessor.
30.7 NO RIGHT TO CURE. Notwithstanding anything to the contrary set forth
in Section 33.1 above, Lessee shall be deemed to have committed a material
default and breach of this Lease, without any right on Lessee's part to cure
such default and breach, upon the failure by Lessee to observe and perform the
provisions of any one or more of the following Sections (or indicated portions
thereof) of this Lease: 3.3, 12.1, 15.1 (first sentence), 25.3, 27.1, 36.2,
37.1, and 37.2.
30.8 CUMULATIVE REMEDIES. The various rights, options, election powers,
and remedies of Lessor contained in this Article and elsewhere in this Lease
shall be construed as cumulative and no one of them exclusive of any others or
of any legal or equitable remedy which Lessor might otherwise have in the event
of breach or default, and the exercise of one right or remedy by Lessor shall
not in any way impair its right to any other right or remedy.
31. BANKRUPTCY
31.1 BANKRUPTCY EVENTS. If at any time during the Term there shall be
filed by or against Lessee in any court pursuant to any statute either of the
United States or of any state, commonwealth, district or territory thereof a
petition in bankruptcy or insolvency or for reorganization or for the
appointment of a receiver or trustee of all or a portion of Lessee's property or
estate, or if a receiver or trustee takes possession of any of the assets of
Lessee, or if the leasehold interest herein passes to a receiver, or if Lessee
makes an assignment for the benefit of creditors or petitions for or enters into
an arrangement (any of which are referred to herein as a "Bankruptcy Event"),
then the following provisions shall apply:
(a) Upon the occurrence of a Bankruptcy Event, or if Lessee takes
advantage of any insolvency laws of any state, district, commonwealth or
territory of the United States, then in any such event Lessor at its option and
sole discretion may terminate this Lease at any time by written notice to Lessee
(subject, however, to applicable provisions of the applicable bankruptcy federal
or state statutes or any insolvency laws during the pendency of any action
thereunder involving Lessee as the subject debtor). If this Lease is terminated
under this Article, (i) Lessee agrees to immediately surrender and vacate the
Premises, waives all statutory or other notice to quit, and agrees that Lessor's
obligations under this Lease shall cease from such termination date, and (ii)
Lessor may recover possession by process of law or in any other lawful manner.
Furthermore, if this Lease terminates under this Section (b), Lessor shall,
subject to the Bankruptcy Code, have all rights and remedies against Lessee as
provided in this Lease and at law for a default of Lessee in the payment of
Minimum Rent, Percentage Rent, if any, and/or additional Rent. Lessee hereby
acknowledges that it shall have abandoned all of its personal property remaining
in the Premises after Lessee surrenders possession of the Premises, and Lessee
hereby authorizes Lessor to dispose of such personal property in any manner
Lessor deems appropriate without accounting to Lessee or its legal
representative for the proceeds thereof. Notwithstanding the foregoing, Lessor
retains the right to assert an administrative claim and a general unsecured
claim that result from a breach
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of this Lease including, without limitation, the cost to remove Lessee's
personal property from the Premises and to restore the Premises after Lessee
surrenders possession thereof.
(b) In all events any receiver or trustee in bankruptcy or Lessee
as debtor in possession shall, by written notice, either expressly assume or
reject this Lease within sixty (60) days following the entry of an "Order for
Relief." Failure of the trustee to give notice of such assumption hereof within
said period shall conclusively and irrevocably constitute a rejection of this
Lease and waiver of any rights to assume or assign this Lease.
(c) Lessee or the receiver or trustee shall not have the right to
assume this Lease unless (1) Lessee or the receiver or trustee cures any default
or provides adequate assurances that defaults will be promptly cured; (2) Lessee
or the receiver or trustee compensates Lessor and any other party other then
Lessor for all monetary damages and/or any actual pecuniary loss incurred as a
result of such default or provides adequate assurances that compensation will be
made for such monetary damages and/or actual pecuniary loss; (3) the Bankruptcy
Court (or other court of competent jurisdiction) enters an order authorizing the
assumption or assignment; (4) the assumption or assignment is not prohibited
under applicable law, including, but not limited to, Section 365 of the
Bankruptcy Code; and (5) Lessee or the receiver or trustee provides to Lessor
"adequate assurance of future performance" (as defined herein below) of the
Lease. For the purposes of this Section (c), "adequate assurance of future
performance" of all obligations under this Lease shall include, but is not
limited to:
(i) providing financial records which reveal that Lessee's
gross receipts in the ordinary course of its business during the thirty (30)
days immediately preceding the initiation of the case under the Bankruptcy Code
must be at least ten (10) times greater than the next installment of Minimum
Rent and other charges due under this Lease;
(ii) providing financial records which reveal that both the
average and median of Lessee's monthly gross receipts in the ordinary course of
business during the six (6) months immediately preceding initiation of the case
under the Bankruptcy Code must be at least five (5) times greater than the next
installment of Minimum Rent and other charges due under this Lease;
(iii) covenanting in writing to Lessor (and obtaining approval
from the Bankruptcy Court therefor) that Lessee shall pay in advance to Lessor
all Minimum Rent and other sums payable by Lessee hereunder including, but not
limited to, its share (as estimated by Lessor) of the cost of all services
provided by Lessor (whether directly or through agents or contractors, and
whether or not the cost of such services is to be passed through to Lessee) in
advance of the performance or provision of such services;
(iv) covenanting in writing to Lessor (and obtaining approval
from the Bankruptcy Court therefor) that Lessee shall pay Minimum Rent and any
other consideration due under the Lease shall first be paid before any other of
Lessee's costs of operation of its business in the Premises are paid;
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(v) covenanting in writing to Lessor (and obtaining approval from the
Bankruptcy Court therefor) that Lessee's business shall be conducted in a first
class manner, and that no liquidating sales, auctions, or other non-first class
business operations shall be conducted on the Premises, and that the use of the
Premises as stated in this Lease will remain unchanged, and that the assumption
or assignment of this Lease will not violate or adversely affect the rights of
other lessees located in the Complex, and that if any of these breaches occur,
Lessee or the receiver or trustee will indemnify Lessor against such loss
(including costs of suit and attorneys' fees), occasioned by such breach; and
(vi) in the event this Lease is for space within a shopping center,
Lessee reasonably satisfying any additional requirements imposed under Section
365(b)(3) of the Bankruptcy Code.
(d) Where a default exists under the Lease, the party assuming the Lease
may not require Lessor to provide services or supplies incidental to the Lease
before its assumption, unless Lessor is compensated under the terms of the Lease
for such services and supplies before the assumption of such Lease.
(e) In the event Lessee is unable to: (i) cure its defaults, (ii) reimburse
Lessor or any other party to this Lease for its monetary damages or actual
pecuniary loss to such party resulting from the defaults, (iii) pay the rents
due under this Lease or any other payments required of Lessee under this Lease
when due, or (iv) meet the criteria and obligations imposed by (i) through (vi)
in the previous Section (d), then Lessee hereby agrees in advance that it has
not met its burden to provide adequate assurance of future performance and
therefore cannot assume this Lease, and this Lease may be immediately terminated
by Lessor in accordance with Section (b) above.
(f) Lessee or the receiver or trustee may only assign this Lease in
accordance with the terms of Article 25 and if adequate assurance of future
performance by the assignee is provided, whether or not there has been a default
under the Lease. Any consideration paid by any assignee in excess of the rental
reserved in the Lease shall be the sole property of, and paid to, Lessor. Upon
assignment by Lessee or the receiver or trustee, the obligations of Lessee under
this Lease shall be deemed to have been assumed by the assignee, and the
assignee shall execute an assumption agreement on request of Lessor.
(g) Subsequent to the commencement of a Bankruptcy Event, Lessor shall be
entitled to receive as rental for the Premises and the services provided by
Lessor no less than the rental and charges reserved in the Lease.
(h) It is further stipulated and agreed that, notwithstanding any provision
herein to the contrary, in the event of the termination of this Lease pursuant
this Article, Lessor shall forthwith, upon such termination, to the extent that
Lessor is prevented by the Bankruptcy Code from pursuing remedies under this
Lease, and/or as provided by state law, become entitled to recover as liquidated
damages for the breach of the provisions of this Lease an amount equal to the
amount by which the then cash value of the Minimum Rent reserved hereunder for
the unexpired portion of the Lease Term exceeds the then cash rental value of
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the Premises for such unexpired portion of the Lease Term, unless the statute
which governs or shall govern the proceedings in which such damages are to be
proved limits or shall limit the amount of such claim capable of so being
proved, in which case Lessor shall be entitled to prove as and for liquidated
damages an amount equal to that allowed by or under any such statute. When
calculating damages hereunder, Lessor shall be entitled to recover the amount of
any "free rent" or other concessions extended by Lessor and received by Lessee
prior to the premature expiration of this Lease, it being agreed by Lessee that
such "free rent" and concessions were contingent upon Lessee fulfilling its
obligations for the entire term of this Lease. The provisions of this paragraph
shall be without prejudice to (i) Lessor's right to prove in full damages for
Minimum Rent, Percentage Rent, if any, and additional Rent accrued prior to the
termination of this Lease, but not paid, and (ii) any rights given to Lessor by
any pertinent statute to prove any amounts allowed thereby. In making any such
computation, the then cash rental value of the Premises shall be deemed prima
facie to be the rental realized upon any reletting, if such reletting can be
accomplished by Lessor within a reasonable time after such termination of this
Lease, and the then present cash value of the future rents hereunder reserved to
Lessor for the unexpired portion of the Lease Term hereby demised shall be
deemed to be such sum, if invested at the then current passbook account rate
offered by Wells Fargo Bank, N.A. at its main office in San Francisco, as will
produce the future rent over the period of time in question. Lessor and Lessee
further agree that in making any computation of damages for Lessee holding over
after the termination of this Lease, Lessor may claim damages based on the
Minimum Rent, Percentage Rent, if any, and additional Rent provided herein for
the period of such hold over, it being agreed that the Minimum Rent, Percentage
Rent, if any, and additional Rent constitutes the fair rental value of the
Premises during the hold over period.
(i) Notwithstanding subsection (i) of this Article, Lessor specifically
reserves any and all remedies available to Lessor in Article 30 hereof or at law
or in equity in respect of a Bankruptcy Event to the extent such remedies are
permitted by law.
32. SURRENDER OF LEASE
32.1 NO MERGER. The voluntary or other surrender of this Lease by Lessee,
or a mutual cancellation thereof, shall not work as a merger, and shall, at the
option of Lessor, terminate all or any existing subleases or subtenancies, or
may, at the option of Lessor, operate as an assignment to it of any or all such
subleases or subtenancies.
33. LESSOR'S EXCULPATION
33.1 LIMITED LIABILITY. In the event of default, breach, or violation by
Lessor (which term includes Lessor's partners, co-venturers, co-tenants,
officers, directors, trustees, employees, agents, or representatives) of any of
Lessor's obligations under this Lease, Lessor's liability to Lessee shall be
limited to its ownership interest in the Leased Premises (or its interest in the
Complex, if applicable) or the proceeds of a public sale of such interest
pursuant to foreclosure of a judgment against Lessor. Lessor may, at its option,
and among its other alternatives, relieve itself of all liability under this
Lease by conveying the Leased Premises to
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Lessee. Notwithstanding any such conveyance, Lessee's leasehold and ownership
interest shall not merge.
33.2 NO RECOURSE. Lessor (as defined in Section 33.1) shall not be
personally liable for any deficiency beyond its interest in the Leased Premises.
All personal liability of all trustees, their employees, agents or
representatives, is expressly waived by Lessee.
34. ATTORNEYS' FEES
34.1 ACTIONS, PROCEEDINGS, ETC. Lessee hereby agrees to pay, as additional
rent, all attorneys' fees and disbursements, and all other court costs or
expenses of legal proceedings or other legal services which Lessor may incur or
pay out by reason of, or in connection with:
(a) Any appearance by Lessor (or any officer, partner, or employee of
Lessor) as a witness or otherwise in any action or proceeding whatsoever
involving or affecting Lessee or this Lease except as otherwise covered by
Section 34.3;
(b) Any assignment, sublease, or leasehold mortgage proposed or
granted by Lessee (whether or not permitted under this Lease), and all
negotiations with respect thereto; and
(c) Any alteration of the Leased Premises by Lessee, and all
negotiations with respect thereto.
34.2 SURVIVAL. Lessee's obligations under this Section shall survive the
expiration or any other termination of this Lease. This Section is intended to
supplement (and not to limit) other provisions of this Lease pertaining to
indemnities and/or attorneys' fees.
34.3 ATTORNEYS' FEES. If there is any legal action or proceeding (including
arbitration) between Lessor and Lessee arising out of any default by Lessee or
Lessor in the observance or performance of any obligation under this Lease or to
enforce this Lease or to protect or establish any right or remedy under this
Lease, the unsuccessful party to such action or proceeding shall pay to the
prevailing party all costs and expenses, including reasonable attorneys' fees
and disbursements, incurred by such prevailing party in such action or
proceeding and in any appeal in connection therewith. If such prevailing party
recovers a judgment in any such action or proceeding (including arbitration) or
appeal thereon, such costs, expenses and attorneys' fees and disbursements shall
be included in and as a part of such judgment.
35. NOTICES
35.1 WRITING. All notices, demands and requests required or permitted to be
given or made under any provision of this Lease shall be in writing and shall be
given or made by (i) personal service, or (ii) by telephone facsimile upon which
date and time are imprinted in the course of transmission to the number
indicated in Section 1.2, or (iii) by mailing same by
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registered or certified mail, return receipt requested, postage prepaid, or (iv)
by reputable courier which provides written evidence of delivery, addressed to
the respective party at the address set forth in Section 1.2 of this Lease or at
such other address as the party may from time to time designate, by a written
notice sent to the other in the manner aforesaid.
35.2 EFFECTIVE DATE. Any such notice, demand or request ("notice") shall be
deemed given or made on the third day after the date so mailed. Notwithstanding
the foregoing, notice given by personal delivery to the party at its address as
aforesaid shall be deemed given on the day on which delivery is made. Notice
given by a reputable courier service which provides written evidence of delivery
shall be deemed given on the business day immediately following deposit with the
courier service.
35.3 AUTHORIZATION TO RECEIVE. Each person and/or entity whose signature
is affixed to this Lease as Lessee or as guarantor of Lessee's obligations
("obligor") designates such other obligor its agent for the purpose of receiving
any notice pertaining to this Lease or service of process in the event of any
litigation or dispute arising from any obligation imposed by this Lease.
36. SUBORDINATION
36.1 PRIORITY OF ENCUMBRANCES. This Lease shall be subject and subordinate
at all times to any and all ground leases and the lien of any and all mortgages
and deeds of trust securing any amount or amounts whatsoever which may now exist
or hereafter be placed on or against or encumbering the Building or on or
against or encumbering Lessor's interest or estate therein ("Superior Leases and
Mortgages"), all without the necessity of having further instruments executed by
Tenant to effect such subordination; provided however, (i) with respect to that
certain deed of trust encumbering the Building of record as of the date of this
Lease in favor of WELLS FARGO (the "Bank"), Lessor covenants to use commercially
reasonable efforts (without any requirement to pay any fees to said lender or to
initiate litigation) to cause the Bank to execute and deliver on or before the
Delivery Date a non-disturbance agreement on the current form used by Bank in
favor of Lessee, and (ii) with respect to any Superior Leases and Mortgages
encumbering the Building after the date of this Lease, Lessee shall execute a
subordination agreement, provided that the subordination of this Lease shall be
conditioned upon such Lessor's mortgagee executing a non-disturbance agreement
in favor of Lessee on the current form used by such lender. In the event of a
foreclosure of any such mortgage or deed of trust or of any other action or
proceeding for the enforcement thereof, or of any sale thereunder or in the
event of a termination of any such ground lease, this Lease shall not be
terminated or extinguished, nor shall the rights and possession of Lessee
hereunder be disturbed, if no default then exists under this Lease, and Lessee
shall attorn to the person who acquires Lessor's interest hereunder through any
such mortgage or deed of trust.
36.2 EXECUTION OF DOCUMENTS. Lessee agrees to execute any documents
required to effectuate such subordination or to make this Lease prior to the
lien of any mortgage, deed of trust or ground lease, as the case may be, and
failing to do so within ten (10) days after written
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demand, does hereby make, constitute and irrevocably appoint Lessor-as Lessee's
attorney-in-fact and in Lessee's name, place and stead, to do so. It is
understood by all parties that Lessee's failure to execute the subordination
documents referred to above may cause Lessor serious financial damage by causing
the failure of a financing or sale transaction.
36.3 ATTORNMENT. Lessee shall attorn to any purchaser at any foreclosure
sale, or to any grantee or transferee designated in any Deed given in lieu of
foreclosure.
37. ESTOPPEL CERTIFICATES
37.1 EXECUTION BY LESSEE. Within ten (10) days of request therefor by
Lessor, Lessee shall execute a written statement acknowledging the commencement
and termination dates of this Lease, that it is in full force and effect, has
not been modified (or if it has, stating such modifications) and providing any
other pertinent information as Lessor or its agent might reasonably request.
Failure to comply with this Article shall be a material breach of this Lease by
Lessee giving Lessor all rights and remedies under Article 30 hereof, as well as
a right to damages caused by the loss of a loan or sale which may result from
such failure by Lessee.
37.2 FINANCING, SALE OR TRANSFER. If Lessor desires to finance, refinance,
sell, ground lease or otherwise transfer the Leased Premises, or any part
thereof, or the Building, Lessee hereby agrees, within ten (10) days of request
therefor by Lessor, to deliver to any lender or to any prospective buyer, ground
lessor or other transferee designated by Lessor such financial statements of
Lessee, its Guarantor and its parent company, if any, as may be reasonably
required by such party. Such statements shall include the past three (3) years'
financial statements of Lessee. All such financial statements shall be received
by Lessor in confidence and shall be used only for the purposes herein set
forth.
38. WAIVER
38.1 EFFECT OF WAIVER. The waiver by Lessor of any breach of any Lease
provision shall not be deemed to be a waiver of such Lease provision or any
subsequent breach of the same or any other term, covenant or condition therein
contained. The subsequent acceptance of rent hereunder by Lessor shall not be
deemed to be a waiver of any preceding breach by Lessee of any provision of this
Lease, other than the failure of Lessee to pay the particular rental so
accepted, regardless of Lessor's knowledge of such preceding breach at the time
of acceptance of such rent.
39. HOLDING OVER
39.1 MONTH-TO-MONTH TENANCY ON ACCEPTANCE. If Lessee should remain in
possession of the Leased Premises after the expiration of the Term and without
executing a new Lease, then, upon acceptance of rent by Lessor, such holding
over shall be construed as a tenancy from month-to-month, subject to all the
conditions, provisions and obligations of this Lease as existed during the last
month of the Term hereof, so far as applicable to a month to
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month tenancy, except that the Minimum Rent shall be equal to twice the Minimum
Rent payable immediately prior to the expiration or sooner termination of the
Lease.
40. SUCCESSORS AND ASSIGNS
40.1 BINDING EFFECT. The covenants and conditions herein contained shall,
subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of all of the parties hereto;
and all of the parties hereto shall be jointly and severally liable hereunder.
41. TIME
41.1 TIME OF THE ESSENCE. Time is of the essence of this Lease with respect
to each and every article, section and subsection hereof.
42. EFFECT OF LESSOR'S CONVEYANCE
42.1 RELEASE OF LESSOR. If, during the Term, Lessor shall sell its interest
in the Building or Complex of which the Leased Premises form a part, or the
Leased Premises, then from and after the effective date of the sale or
conveyance, Lessor shall be released and discharged from any and all obligations
and responsibilities under this Lease, except those already accrued.
43. COMMON AREAS
43.1 Lessor shall, in Lessor's sole discretion, maintain the Common Areas
(subject to reimbursement pursuant to Article 8 hereof), establish and enforce
reasonable rules and regulations concerning such areas, close any of the Common
Areas to whatever extent required in the opinion of Lessor's counsel to prevent
a dedication of any of the Common Areas or the accrual of any rights of any
person or of the public to the Common Areas, close temporarily any of the Common
Areas for maintenance purposes, and make changes to the Common Areas including,
without limitation, changes in the location of driveways, corridors, entrances,
exits, vehicular parking spaces, parking area, the designation of areas for the
exclusive use of others, the direction of the flow of traffic or construction of
additional buildings thereupon. Lessor may provide security for the Common Areas
but is not obligated to do so.
44. TRANSFER OF SECURITY
44.1 TRANSFER TO PURCHASER. If any security be given by Lessee to secure
the faithful performance of all or any of the covenants of this Lease on the
part of Lessee, Lessor may transfer and/or deliver the security, as such, to the
purchaser of the reversion, in the event that the reversion be sold, and
thereupon Lessor shall be discharged from any further liability in reference
thereto.
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45. LATE CHARGES
45.1 LATE PAYMENT BY LESSEE. Lessee acknowledges that late payment by
Lessee to Lessor of rent or any other payment due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of such costs being
extremely difficult and impractical to fix. Such costs include, without
limitation, processing and accounting charges, and late charges that may be
imposed on Lessor by the terms of any encumbrance and note secured by any
encumbrance covering the Leased Premises. Therefore, if any installment of rent,
or any other payment due hereunder from Lessee is not received by Lessor when
due, Lessee shall pay to Lessor an additional sum of ten percent (10%) of such
rent or other charge as a late charge. The parties agree that this late charge
represents a fair and reasonable estimate of the cost that Lessor will incur by
reason of late payment by Lessee. Acceptance of any late charge shall not
constitute a waiver of Lessee default with respect to the overdue amount, or
prevent Lessor from exercising any other rights or remedies available to Lessor.
46. CORPORATE AUTHORITY
46.1 AUTHORIZATION TO EXECUTE. If Lessee is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
corporation in accordance with a duly adopted resolution of the Board of
Directors of said corporation in accordance with a the Bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms. Further, Lessee shall, within thirty (30) days after execution
of this Lease, deliver to Lessor a certified copy of a resolution of the Board
of Directors of said corporation authorizing or ratifying the execution of this
Lease.
47. MORTGAGEE PROTECTION
47.1 NOTICE AND RIGHT TO CURE DEFAULT. Lessee agrees to give any
mortgage(s) and/or trust deed holders, by registered mail, a copy of any notice
of default served upon Lessor, provided that prior to such notice Lessee has
been notified, in writing (by way of Notice of Assignment of Rents and Leases,
or otherwise), of the address of such mortgagees and/or trust deed holders.
Lessee further agrees that if Lessor shall have failed to cure such default
within the time provided for in this Lease, then the mortgagees and/or trust
deed holders shall have an additional thirty (30) days within which to cure such
default or, if such default cannot be cured within that time, then such
additional time as may be necessary if, within such thirty (30) days, any
mortgagee and/or trust deed holder has commenced and is diligently pursuing the
remedies necessary to cure such default (including, but not limited to,
commencement of foreclosure proceedings, if necessary to effect such cure), in
which event this Lease shall not be terminated while such remedies are being so
diligently pursued.
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48. MISCELLANEOUS PROVISIONS
48.1 CAPTIONS. The captions of this Lease are for convenience only and are
not a part of this Lease and do not in any way limit or amplify the terms and
provisions of this Lease.
48.2 NUMBER AND GENDER. Whenever the singular number is used in this Lease
and when required by the context, the same shall include the plural, the plural
shall include the singular, and the masculine gender shall include the feminine
and neuter genders, and the word "person" shall include corporation, firm or
association. If there be more than one Lessee, the obligations imposed under
this Lease upon Lessee shall be joint and several.
48.3 MODIFICATIONS. This instrument contains all of the agreements,
conditions and representations made between the parties to this Lease and may
not be modified orally or in any other manner than by an agreement in writing
signed by all of the parties to this Lease.
48.4 PAYMENTS. Except as otherwise expressly stated, each payment required
to be made by Lessee shall be in addition to and not in substitution for other
payments to be made by Lessee.
48.5 SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
48.6 NO OFFER. The preparation and submission of a draft of this Lease by
either party to the other shall not constitute an offer, not shall either party
be bound to any terms of this Lease or the entirety of the Lease itself until
both parties have fully executed a final document and an original signature
document has been received by both parties. Until such time as described in the
previous sentence, either party is free to terminate negotiations with no
obligation to the other.
48.7 DISPUTED SUMS. Under the terms of this Lease numerous charges are and
may be due from Lessee to Lessor including, without limitation, Operating Costs,
Real Estate Taxes and other items of a similar nature including advances made by
Lessor in respect of Lessee's default at Lessor's option. In the event that at
any time during the Term there is a bona fide dispute between the parties as to
the amount due for any of such charges claimed by Lessor to be due, the amount
demanded by Lessor shall be paid by Lessee until the resolution of the dispute
between the parties or by litigation. Failure by Lessee to pay the disputed sums
until resolution shall constitute a default under the terms of the Lease.
48.8 LESSEE'S REMEDIES. Notwithstanding anything to the contrary contained
in this Lease, if any provision of this Lease expressly or impliedly obligates
Lessor not to unreasonably withhold its consent or approval, an action for
declaratory judgment or specific performance will be Lessee's sole right and
remedy in any dispute as to whether Lessor has breached such obligation.
55.
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48.9 Light, Air and View. No diminution of light, air, or view by any
structure which may hereafter be erected (whether or not by Lessor) shall
entitle Lessee to any reduction of Rent, result in any liability of Lessor to
Lessee, or in any other way affect this Lease or Lessee's obligations hereunder.
48.10 PUBLIC TRANSPORTATION INFORMATION. Lessee shall establish and
maintain during the Term hereof a program to encourage maximum use of public
transportation by personnel of Lessee employed on the Leased Premises,
including, without limitation, the distribution to such employees of written
materials explaining the convenience and availability of public transportation
facilities adjacent or proximate to the Complex, staggering working hours of
employees, and encouraging use of such facilities, all at Lessee's sole
reasonable cost and expense. Lessee shall comply with all requirements of any
local transportation management ordinance.
48.11 RULES AND REGULATIONS. Lessee agrees to comply with all reasonable
rules and regulations adopted and promulgated by Lessor and applicable to all
tenants in the Complex for the lawful, orderly, clean, safe, aesthetic, quiet,
and beneficial use, operation, maintenance, management, and enjoyment of the
Complex. Lessor shall have no liability for violation by any other lessee in the
Complex of any rules or regulations, nor shall such violation or waiver thereof
excuse Lessee from compliance. The initial rules and regulations concerning the
Complex are attached hereto as Exhibit G. Lessor reserves the right to make
additional rules affecting the Complex throughout the Term hereof. All delivery
and dispatch of supplies, fixtures, equipment and furniture shall be by means
and during hours established by Lessor. Lessee shall not at any time park its
trucks or other delivery vehicles in the Common Areas, except in such parts
thereof as from time to time designated by Lessor.
48.12 JOINT AND SEVERAL LIABILITY. Should Lessee consist of more than one
person or entity, they shall be jointly and severally liable on this Lease.
48.13 SURVIVAL OF OBLIGATIONS. All obligations of Lessee which may accrue
or arise during the Term or as a result of any act or omission of Lessee during
said Term shall, to the extent they have not been fully performed, satisfied or
discharged, survive the expiration or termination of this Lease.
48.14 REAL ESTATE BROKERS. Lessor and Lessee each represents and warrants
to the other party that it has not authorized or employed, or acted by
implication to authorize or employ, any real estate broker or salesman to act
for it in connection with this Lease other than the real estate brokers
specified in Section 1.10. Lessor shall pay the commission due Lessor's broker
and Lessee's broker pursuant to a separate agreement between Lessor and Lessor's
broker. Lessor and Lessee shall each indemnify, defend and hold the other party
harmless from and against any and all claims by any real estate broker or
salesman whom the indemnifying party authorized or employed, or acted by
implication to authorize or employ, to act for the indemnifying party in
connection with this Lease.
48.15 NONLIABILITY OF LESSOR FOR APPROVALS. Except as may otherwise be
expressly stated by a provision of this Lease, and only to the extent so stated,
the consent or approval,
56.
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whether express or implied, or the act, failure to act or failure to object, by
Lessor in connection with any plan, specification, drawing, proposal, request,
act, omission, notice or communication (collectively, "act") by or for, or
prepared by or for, Lessee, shall not create any responsibility or liability on
the part of Lessor, and shall not constitute a representation by Lessor, with
respect to the completeness, sufficiency, efficacy, propriety, quality or
legality of such act.
48.16 INTEREST ON PAST DUE AMOUNTS. If any sum due Lessor from Lessee is
not received by Lessor within five (5) calendar days after the date such sum is
due and payable, such sum shall bear interest from the due date until paid by
Lessee at the rate of two percent (2%) above the Prime Rate (as herein defined),
not to exceed the maximum rate of interest allowed by law in the state where the
Leased Premises are located, and such interest shall be deemed to be additional
rent. "Prime Rate" means the Prime Rate of interest as quoted in the Wall Street
Journal on the date such sum was due and payable.
48.17 CONVERSION TO A LIMITED LIABILITY ENTITY.
(a) No Conversion Without Consent. Anything to the contrary in this
-----------------------------
Lease notwithstanding, if Lessee is currently a partnership (either general or
limited), joint venture, cotenancy, joint tenancy or an individual, Lessee may
not convert (the "Conversion") the Lessee entity or person into any type of
entity which possesses the characteristic of limited liability such as, by way
of example only, a corporation, a limited liability company, limited liability
partnership or limited liability limited partnership (singularly and
collectively, "Limited Entity"), without the consent of Lessor, which consent,
subject to fulfillment of the conditions below, shall not be unreasonably
withheld.
(b) Conditions to Lessor's Consent. The following are conditions
------------------------------
precedent to Lessor's obligation to act reasonably with respect to a Conversion
to a Limited Entity:
(i) The Limited Entity assumes all of Lessee's business and assets
as of the effective date of the Conversion;
(ii) As of the effective date of the Conversion, the Limited Entity
shall have a net worth ("Net Worth"), which is not less than the greater of (i)
Lessee's Net Worth on the date of execution of the Lease or (ii) Lessee's Net
Worth as of the date Lessee requests Lessor's consent to the Conversion;
(iii) Lessee has not been in default under any of the terms,
covenants or conditions of this Lease during the term of the Lease;
(iv) Lessee delivers to Lessor an agreement, in form and substance
satisfactory to Lessor and executed by each partner of Lessee, wherein each
partner of Lessee agrees to remain personally liable for all of the terms,
covenants and conditions of the Lease that are to be observed and performed by
the Limited Entity; and
57.
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(v) Lessee shall reimburse Lessor within ten (10) days
following Lessor's written demand therefor for any and all reasonable costs and
expenses that may be incurred by Lessor in connection with the Conversion
including, without limitation, reasonable attorney's fees.
(c) Nothing in this Section 48.17 shall modify or reduce the
obligations of Lessee to perform under this Lease.
48.18 COUNTERPARTS. This Lease may be executed in one or more counterparts,
each of which shall be deemed an original, and all taken together shall
constitute one and the same instrument.
49. WAIVER OF CALIFORNIA CODE SECTIONS
49.1 WAIVER BY LESSEE. In this Lease, numerous provisions have been
negotiated by the parties, some of which provisions are covered by statute.
Whenever a provision of this Lease and a provision of any statute or other law
cover the same matter, the provisions of this Lease shall control. Therefore,
Lessee waives (for itself and all persons claiming under Lessee) the provisions
of Civil Code Sections 1932(2) and 1933(4) with respect to the destruction of
the Leased Premises; Civil Code Sections 1941 and 1942 with respect to Lessor's
repair duties and Lessee's right to repair; Civil Code Section 1995.310,
granting to a tenant all remedies provided by law for breach of contract
(including, without limitation, the right to contract damages and the right to
terminate the lease) in the event that the landlord unreasonably withholds
consent to a transfer in violation of the tenant's rights under the lease; Code
of Civil Procedure Section 1265.130, allowing either party to petition the
Superior Court to terminate this Lease in the event of a partial taking of the
Leased Premises by condemnation as herein defined; and any right of redemption
or reinstatement of Lessee under any present or future case law or statutory
provision (including Code of Civil Procedure Sections 473 and 1179 and Civil
Code Section 3275) in the event Lessee is dispossessed from the Leased Premises
for any reason. This waiver applies to future statutes enacted in addition to or
in substitution for the statutes specified herein.
50. SHUTTLE SERVICE
50.1 Lessor shall maintain for the benefit of employees and invitees of
the Building, a van shuttle service which shall operate Monday through Friday
from 7:00 a.m. to 7:00 p.m. with not less than one van vehicle operating
throughout the day and two vehicles operating during peak commute hours of 7:00
a.m. to 9:00 a.m. Monday through Friday and 5:00 p.m. to 7:00 p.m. Monday
through Friday. The shuttle will serve the major transportation centers of San
Francisco, i.e., the Transbay Terminal, BART, the nearest Municipal Railway
stop, the Ferry Building and CalTrain Terminal. The cost of the shuttle service
shall be included in Operating Costs. Lessor may terminate the shuttle service
if the City of San Francisco is, in Lessor's reasonable judgment, then providing
adequate public transportation to the area of the Building and no longer
requires that Lessor provide such shuttle service.
58.
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EXHIBIT D
WORK LETTER AGREEMENT
---------------------
(LESSOR'S IMPROVEMENTS)
1. LESSOR'S IMPROVEMENT WORK
1.1 The Leased Premises shall be delivered to Lessee in as "AS-IS"
condition and without any obligation on the part of Lessor to perform
improvements to the Leased Premises, except for the work expressly set
forth in this Exhibit D as Lessor's Work.
1.2. Lessor's Work:
1.2.1. As an inducement to Lessee to enter into the Lease, Lessor
agrees to perform the following improvements at its sole cost
and expense:
1.2.1.1. Lessor shall install Building standard window film
on all demising windows of the Leased Premises.
1.2.1.2. Lessor shall demolish the partitions indicated on
the Space Plan (the "Space Plan") attached hereto
as Schedule 1.
1.2.1.3. Lessor shall re-key the locks on Lessee's exterior
doors and provide Lessee with five (5) sets of
keys.
1.2.2. Lessor shall perform the following work (the "TI's") so long as
the cost thereof does not exceed $5.00 for each square foot of
Adjusted Rentable Area in the Leased Premises (the
"Allowance").
1.2.2.1. Paint the entire Leased Premises in a single color
with Building Standard paint.
1.2.2.2. Install new Building Standard carpeting throughout
the Leased Premises.
1.2.2.3. Wire into the main electrical panel fire detection
devices as required.
1.2.2.4. Install additional electrical outlets in the Leased
Premises.
Notwithstanding the foregoing, Lessee shall pay all costs
incurred in connection with the construction of the Tenant
Improvements in excess of the Allowance. Lessor need not
perform any work until and unless Lessee pays to Lessor the
full amount of any costs of TI's in excess of $23,915.
D-1
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1.1. As used herein, the term "Building Standard" refers to the materials
maintained in stock by Lessor for use in the improvements of Lessee
space in the Building.
1.2. If the Allowance is not used for the costs of Lessor's Work, the
unused portion shall revert to Lessor and shall not be available for
any other purpose by Lessee. Lessor shall pay for the costs of
Lessor's Work upon the presentation of invoices therefor from the
person(s) performing the work or rendering the services and such
supporting documentation as Lessor may reasonably request in
connection therewith.
2. RENT COMMENCEMENT
No delay in the completion of Lessor's Work shall be considered in the
determination of the Commencement Date of the Lease and Lessor's Work shall be
considered to be substantially completed for purposes of the determination of
the Commencement Date on the date by which Lessor's Work would have been
completed if there had been no such delay.
D-2
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[CHART OMITTED]
SCHEDULE 1
<PAGE>
[CHART OMITTED]
<PAGE>
EXHIBIT E
ACKNOWLEDGMENT OF COMMENCEMENT
LOCATION: 650 TOWNSEND STREET
SAN FRANCISCO, CA
This Acknowledgment is made as of ______________, with reference to that
certain Lease (hereinafter referred to as the "Lease") dated February ___, 1999,
by and between Zoro, LLC as "Lessor" therein, and LinuxCare, Inc. as "Lessee."
The undersigned hereby confirms the following:
1. That Lessee accepted possession of the Leased Premises (as described in
the Lease) on the following date: ____________________________; that the Leased
Premises are as represented by Lessor and in good order, condition and repair;
and that the improvements, if any, required by the Lease to be constructed for
Lessee by Lessor have been so constructed and are satisfactorily completed in
all respects.
2. That all conditions of the Lease to be performed by Lessor prerequisite
to the full effectiveness of the Lease have been satisfied and Lessor has
fulfilled all of its duties of an inducement nature, except
_______________________________________.
3. That in accordance with the provisions of Article 4 of the Lease the
Commencement Date for the Leased Premises is _______________________________ and
that unless sooner terminated, the Expiration Date of the original term of the
Lease is ________________________.
4. That the Lease is in full force and effect and that the same represents
the entire agreement between Lessor and Lessee concerning the subject matter of
the Lease.
5. That there are no existing defenses or offsets which Lessee has against
the enforcement of the Lease by Lessor, and no presently exercisable offsets or
credits against rentals, except_______________________________________________.
6. That Lessee's obligation for payment of Minimum Rent under the Lease is
presently in effect and that all rentals, charges and other obligations on the
part of Lessee under the Lease commenced to accrue on the date set forth in
Section 3 of this Acknowledgment
1
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7. That the undersigned Lessee has not made any prior assignment,
hypothecation or pledge of the Lease or of the rents thereunder.
LESSOR: LESSEE
ZORO, LLC, LINUXCARE, INC., A DELAWARE
A CALIFORNIA LIMITED LIABILITY COMPANY CORPORATION
By: By:
----------------------------------- -----------------------------
Martin I. Zankel Its:
Its Managing Member ----------------------------
By:
-----------------------------
Its:
----------------------------
Dated:_______________, 19__ Dated:________________, 19__.
2
<PAGE>
EXHIBIT G
RULES AND REGULATIONS
---------------------
1. Common Areas. The sidewalks, halls, passages, exits, entrances,
------------
elevators and stairways of the Building shall not be obstructed by Tenant or
used for any purpose other than for ingress to and egress from the Premises. The
halls, passages, exits, entrances, elevators and stairways are not for the
general public and Landlord shall in all cases have the right to control and
prevent access thereto of all persons (including, without limitation, messengers
or delivery personnel not wearing uniforms) whose presence in the judgment of
Landlord would be prejudicial to the safety, character, reputation or interests
of the Building and its tenants. Neither Tenant nor any agent, employee,
contractor, invitee or licensee of Tenant shall go upon the roof of the
Building. Landlord shall have the right at any time, without the same
constituting an actual or constructive eviction and without incurring any
liability to Tenant therefor, to change the arrangement or location of entrances
or passageways, doors or doorways, corridors, elevators, stairs, toilets and
common areas of the Building.
2. Signs. No sign, placard, picture, name, advertisement or notice
-----
visible from the exterior of the Premises shall be inscribed, painted, affixed
or otherwise displayed by Tenant on any part of the Building or the Premises
without the prior written consent of Landlord. Landlord will adopt and furnish
to tenants general guidelines relating to signs inside the Building. Tenant
agrees to conform to such guidelines. All approved signs or lettering shall be
printed, painted, affixed or inscribed at the expense of Tenant by a person
approved by Landlord. Material visible from outside the Building will not be
permitted.
3. Prohibited Uses. The Premises shall not be used for the storage of
---------------
merchandise held for sale to the general public or for lodging. No cooking shall
be done or permitted on the Premises except that private use by Tenant of
microwave ovens Underwriters' Laboratory-approved equipment for brewing coffee,
tea, hot chocolate and similar beverages will be permitted, provided that such
use is in accordance with all applicable federal, state and municipal laws,
codes, ordinances, rules and regulations. Tenant shall not place any load on the
floors of the Building exceeding fifty (50) pounds per square foot, live or dead
load. Tenant shall not use electricity for lighting, machines or equipment in
excess of four (4) watts per square foot.
4. Janitorial Service. Tenant shall not employ any person other than the
------------------
janitor of Landlord for the purpose of cleaning the Premises unless otherwise
agreed to by Landlord in writing. Except with the written consent of Landlord,
no persons other than those approved by Landlord shall be permitted to enter the
Building for the purpose of cleaning the Premises. Tenant shall not cause any
unnecessary labor by reason of Tenant's carelessness or indifference in the
preservation of good order and
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cleanliness. Landlord shall not be responsible to Tenant for any loss of
property in the Premises, however occurring, or for any damage done to the
effects of Tenant by the janitor or any other employee or any other person.
5. Keys. Landlord will furnish Tenant without charge with two (2) keys to
----
each door lock provided in the Premises by Landlord. Landlord may make a
reasonable charge for any additional keys. Tenant shall not have any such keys
copied or any keys made. Tenant shall not alter any lock or install a new or
additional lock or any bolt on any door of the Premises. Tenant, upon the
termination of this Lease, shall deliver to Landlord all keys to doors in the
Building.
6. Moving Procedures. Landlord shall designate appropriate entrances for
-----------------
deliveries or other movement to or from the Premises of equipment, materials,
supplies, furniture or other property, and Tenant shall not use any other
entrances for such purposes. All moves shall be scheduled and carried out during
nonbusiness hours of the Building. All persons employed and means or methods
used to move equipment, materials, supplies, furniture or other property in our
out of the Building must be approved by Landlord prior to any such movement.
Landlord shall have the right to prescribe the maximum weight, size and position
of all equipment, materials, furniture or other property brought into the
Building. Heavy objects shall, if considered necessary by Landlord, stand on a
platform of such thickness as is necessary properly to distribute the weight.
Landlord will not be responsible for loss of or damage to any such property from
any cause, and all damage done to the Building by moving or maintaining such
property shall be repaired at the expense of Tenant.
7. No Nuisances. Tenant shall not use or keep in the Premises or the
------------
Building any kerosene, gasoline or inflammable or combustible fluid or material
other than limited quantities thereof reasonably necessary for the operation or
maintenance of office equipment. Tenant shall not use any method of heating or
air conditioning other than that supplied by Landlord. Tenant shall not use or
keep or permit to be used or kept any foul or noxious gas or substance in the
Premises, or permit or suffer the Premises to be occupied or used in a manner
offensive or objectionable to Landlord or other occupants of the Building by
reason of noise, odors or vibrations, or interfere in any way with other tenants
or those having business in the Building, nor shall any animals be brought or
kept in the Premises or the Building.
8. Change of Address. Landlord shall have the right, exercisable without
-----------------
notice and without liability to Tenant, to change the name or street address of
the Building or the room or suite number of the Premises.
9. Business Hours. Landlord establishes the hours of 8:00 a.m. to 6:00
--------------
p.m. Monday through Friday, except union holidays and legal holidays, as
reasonable and usual business hours for the purposes of this Lease. If Tenant
requests electricity or heat or air conditioning or any other services during
any other hours or on any other days, and if Landlord is able to provide the
same, Tenant shall pay
G-2
<PAGE>
Landlord such charge as Landlord shall establish from time to time for providing
such services during such hours. Any such charges which Tenant is obligated to
pay shall be deemed to be additional rent under this Lease.
10. Access to Building. Landlord reserves the right to exclude from the
------------------
Building during the evening, night and early morning hours beginning at 6:00
p.m. and ending at 8:00 a.m. Monday through Friday, and at all hours on
Saturdays, Sundays, union holidays and legal holidays, all persons who do not
present identification acceptable to Landlord. Tenant shall provide Landlord
with a list of all persons authorized by Tenant to enter the Premises and shall
be liable to Landlord for all acts of such persons. Landlord shall in no case be
liable for damages for any error with regard to the admission to or exclusion
from the Building of any person. In the case of invasion, mob, riot, public
excitement or other circumstances rendering such action advisable in Landlord's
opinion, Landlord reserves the right to prevent access to the Building during
the continuance of the same by such action as Landlord may deem appropriate,
including closing doors.
11. Building Directory. The directory of the Building will be provided for
------------------
the display of the name and location of Tenant and a reasonable number of the
principal officers and employees of Tenant at the expense of Tenant. Landlord
reserves the right to restrict the amount of directory space utilized by Tenant.
12. Window Coverings. No curtains, draperies, blinds, shutters, shades,
----------------
screens or other coverings, hangings or decorations shall be attached to, hung
or placed in, or used in connection with any window of the Building without the
prior written consent of Landlord. In any event, with the prior written consent
of Landlord, such items shall be installed on the office side of Landlord's
standard window covering and shall in no way be visible from the exterior of the
Building. Tenant shall keep window coverings closed when the effect of sunlight
(or the lack thereof) would impose unnecessary loads on the Building's air
conditioning systems.
13. Food and Beverages. Tenant shall not obtain for use in the Premises
------------------
vending machines or other similar services, except at such reasonable hours and
under such reasonable regulations as may be established by Landlord.
14. Procedures When Leaving. Tenant shall ensure that the doors of the
-----------------------
Premises are closed and locked and that all water faucets, water apparatus and
utilities are shut off before Tenant and its employees leave the Premises so as
to prevent waste or damage. For any default or carelessness in this regard,
Tenant shall be liable and pay for all damage and injuries sustained by Landlord
or other tenants or occupants of the Building. On multiple-tenancy floors,
Tenant shall keep the doors to the Building corridors closed at all times except
for ingress and egress.
15. Bathrooms. The toilet rooms, toilets, urinals, wash bowls and other
---------
apparatus shall not be used for any purpose other than that for which they were
constructed, no foreign substance of any kind whatsoever shall be thrown
therein, and
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the expense of any breakage, stoppage or damage resulting from the violation of
this rule shall be paid by Tenant if caused by Tenant or its agents, employees,
contractors, invitees or licensees.
16. Prohibited Activities. Except with the prior written consent of
---------------------
Landlord, Tenant shall not sell at retail newspapers, magazines, periodicals,
theater or travel tickets or any other goods or merchandise to the general
public in or on the Premises, nor shall Tenant carry on or permit or allow any
employee or other person to carry on the business of stenography, typewriting,
printing or photocopying or any similar business in or from the Premises for the
service or accommodation of occupants of any other portion of the Building, nor
shall the Premises be used for manufacturing of any kind, or any business or
activity other than that specifically provided for in this Lease.
17. No Antenna. Tenant shall not install any radio or television antenna,
----------
loudspeaker, or other device on the roof or exterior walls of the Building. No
television or radio or recorder shall be played in such a manner as to cause a
nuisance to any other tenant.
18. Vehicles. There shall not be used in any space, or in the public halls
--------
of the Building, either by Tenant or others, any hand trucks except those
equipped with rubber tires and side guards or such other material handling
equipment as Landlord approves. No other vehicles of any kind shall be brought
by Tenant into the Building or kept in or about the Premises.
19. Trash Removal. Tenant shall store all its trash and garbage within the
-------------
Premises. No material shall be placed in the trash boxes or receptacles if such
material is of such nature that it may not be disposed of in the ordinary and
customary manner of removing and disposing of office building trash and garbage
in the city or county in which the Building is located without being in
violation of any law or ordinance governing such disposal. All garbage and
refuse disposal shall be made only through entryways and elevators provided for
such purposes and at such times as Landlord shall designate. Tenant shall crush
and flatten all boxes, cartons and containers. Tenant shall pay extra charges
for any unusual trash disposal.
20. No Soliciting. Canvassing, soliciting, distribution of handbills or
-------------
any other written material and peddling in the Building are prohibited, and
Tenant shall cooperate to prevent the same.
21. No Overnight Use. The premises shall not be used for any lodging or
----------------
overnight occupancy.
22. Uses Reserved by Landlord. By its execution of the Lease to which
-------------------------
these Rules and Regulations are attached, Tenant acknowledges that portions of
the Building may be used by the Landlord or its licensees for large scale
exhibitions and special events, including conventions, trade shows, social and
political gatherings and
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parties, and such that events may generate noise, including music, amplified
sound and revelry, during and after the regular business hours of the Building.
Tenant agrees that the use of the Building for such purposes by Landlord and its
licensees shall not constitute a constructive eviction or breach of any covenant
of quiet enjoyment or entitle Tenant to any abatement of rent.
23. Services. The requirements of Tenant will be attended to only upon
--------
application in writing at the office of the Building. Personnel of Landlord
shall not perform any work or do anything outside of their regular duties unless
under special instructions from Landlord.
24. Waiver. Landlord may waive any one or more of these Rules and
------
Regulations for the benefit of any particular tenant or tenants, but no such
waiver by Landlord shall be construed as a waiver of such Rules and Regulations
in favor of any other tenant or tenants, nor prevent Landlord from thereafter
enforcing any such Rules and Regulations against any or all of the tenants of
the Building.
25. Supplemental to Lease. These Rules and Regulations are in addition to,
---------------------
and shall not be construed to in any way modify or amend, in whole or in part,
the covenants of this Lease.
26. Amendments and Additions. Landlord reserves the right to make such
------------------------
other rules and regulations, and to amend or repeal these Rules and Regulations,
as in Landlord's judgment may from time to time be desirable for the safety,
care and cleanliness of the Building and for the preservation of good order
therein.
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<PAGE>
EXHIBIT H
BUILDING STANDARDS
That certain Redevelopment Masterplan for the Townsend Center dated January 20,
1998 and revised on February 5, 1998, copy of which was delivered to Lessee on
January 25, 1999.
<PAGE>
EXHIBIT J
JANITORIAL SPECIFICATIONS
A. Janitorial Service Specifications for Day Porter
------------------------------------------------
Day Porter shall be on duty from 8:30 a.m. to 5:00 p.m., Monday through
Friday; Saturdays, Sundays and holidays excepted. The duties of the Day
Porter, who is under the exclusive direction of the Chief
Engineer/Operations Manager and Property Manager, shall be, but is not
limited to, the following:
1. Entrance Lobby
The entrance lobby is to be kept neat and clean at all times and the
following minimum cleaning operations shall be maintained to attain
this effect:
a. Wipe down metal surfaces daily.
b. Clean cigarette urns as necessary.
c. Wash glass doors and mirrored surfaces daily and as needed.
d. Empty garbage receptacles as necessary.
2. Elevators/Escalators
a. Vacuum carpets daily and as needed. Include spot cleaning as
required in base contract.
b. Spot clean lobby elevator saddles, doors and frames daily.
c. Spot clean sides of elevator cars daily.
d. Spot clean sides of escalators daily.
3. Toilets - Daily
a. Fill soap dispensers and paper towel dispensers (towels and soap
to be furnished by Lessor).
b. Report all mechanical deficiencies (i.e., dripping faucets, etc.)
to the Property Manager.
c. Wash all mirrors, powder shelves and lavatory tops.
d. Empty paper towel receptacles and debris as needed but not less
than once daily.
e. Stock and maintain all sanitary product machines.
<PAGE>
4. Public Areas
a. Remove all foreign matter and debris from all public corridors as
necessary.
b. Handles special requests as directed by Manager (i.e., unplug
toilets, remove trash, etc.)
5. Building Service Areas
a. Remove foreign matter and debris from planters and sidewalks
along 8th and Townsend Streets daily.
b. Lay down and remove lobby runners, as necessary.
c. Ensure that the loading dock area, including the Mail Room, is
free of debris.
B. Janitorial Service Specifications for Common Areas and Tenant Suites
--------------------------------------------------------------------
1. Nightly Services - Sunday through Thursday.
a. Secure all lights as soon as possible each night.
b. Vacuum all Common Area carpets and tenanted areas.
c. Dust mop all resilient and composition floors with treated dust
mops. Damp mop to remove spills and water stains as require.
d. Feather dust all desks and office furniture, excluding chairs.
e. Papers and folders on desks are not to be moved.
f. Empty all ash trays and ash urns. Clean and sanitize as required.
g. Empty all waste paper baskets and other trash containers.
h. Remove all trash from floors to designated trash areas.
i. Remove fingerprints, dirt smudges, graffiti, etc., from all
doors, frames, glass partitions, windows, light switches, walls,
elevator door jambs and elevator interiors.
j. Return chairs and waste baskets to proper positions.
k. Clean, sanitize and polish drinking fountains.
2. Weekly Services
a. Dust all low reach and high reach areas, including but not
limited to, structural ledges, mirror tops, partition tops and
edges, air conditioning diffusers and return air grilles.
2
<PAGE>
3. Monthly Services
a. Wipe down all walls and metal partitions. Partitions shall be
left clean and not streaked after this work.
b. Clean all ventilation grilles.
c. Dust all doors and door jambs.
4. Quarterly Services
a. Thoroughly clean and reseal all ceramic tile floors, using
approved sealers.
C. Main Floor Elevator/Escalator Lobbies and Public Corridors Specifications
-------------------------------------------------------------------------
1. Nightly Services
a. Thoroughly wash all swinging glass doors exclusive of tenant
door.
b. Spot clean all glass including low partitions and the corridor
side of all windows and glass doors to tenant premises.
c. Spot clean all chrome brightwork including swinging door
hardware, kick plates, base, partition tops, handrails, waste
paper receptacles, planters, elevator call button plates, hose
cabinets and visible hardware on the corridor side of tenant
entry doors.
d. Spot clean all interior architectural finishes including the
corridor side of all tenant area window and door frames and
bases.
e. Thoroughly clean all door saddles of dirt and debris.
f. Spot clean and dust directory boards and ledges.
g. Empty, clean and sanitize as required all waste paperbaskets and
refuse receptacles.
h. Vacuum all carpets and minor spot clean, as necessary.
i. Spot clean all elevator doors and frames.
j. Police all areas for debris at least once during day time
operating hours.
2. Monthly Services
a. Thoroughly clean all chrome and architectural interior finishes.
3
<PAGE>
E. Basement Corridors, Service Office (Engineering, Security, Cleaning), Store
---------------------------------------------------------------------------
Rooms, Service Corridors, Roof and Service Sink Closets:
-------------------------------------------------------
Note: Nightly and periodic services for offices, corridors, locker rooms
----
and restrooms included in the above areas shall be per specifications
previously outlined for tenant areas and common areas on tenant
floors. Additional work not previously specified shall be as follows:
1. Nightly Services
a. Remove trash from all the above areas.
b. Maintain an orderly arrangement of all janitorial supplies and
paper products in the storage rooms and service sink closets.
c. Maintain an orderly arrangement of all equipment stored in these
areas such as mops, buckets, brooms, vacuum cleaners, scrubbers,
etc.
d. Clean and disinfect service sinks.
e. Sweep and damp mop service sink closet floors; deodorize and
disinfect as required.
f. Sweep store room floors.
g. Receive and store all janitorial supplies in an orderly manner.
2. Weekly Services
a. Damp mop all composition floors in store rooms; deodorize and
disinfect as required.
b. High dusting of these areas, including all pipes, ducts,
conduits, ventilating diffusers and grills, mechanical,
electrical equipment exposed beneath the hung ceilings outside
of the mechanical equipment rooms.
F. Passenger Elevator/Escalator Cleaning Specifications
----------------------------------------------------
1. Nightly Services
a. Spot clean walls and interior door.
b. Spot clean outside surfaces of all doors and frames.
c. Clean all floors thoroughly. Edge thoroughly.
d. Vacuum all thresholds.
e. Spot clean elevator carpets.
4
<PAGE>
2. Weekly Services
a. Thoroughly clean entire interior surfaces and finish of all doors
and frames and outside surfaces of all doors and frames.
b. Steel wool clean all thresholds.
c. Wipe thoroughly all handrails.
3. Monthly Services
a. Shampoo all elevator cab floor carpets.
b. Wipe clean elevator cab lamps.
c. Wipe clean entire cab ceiling.
G. Trash Area and Service Entrance Specifications
----------------------------------------------
1. Nightly Services
a. Place all miscellaneous trash and debris except construction
material, in the Property's trash receptacles or compactor.
b. Neatly stack all trash in the designated area.
c. Sweep entire area.
H. Exterior Structure and Grounds Services Specifications
------------------------------------------------------
1. Nightly Services
5
<PAGE>
EXHIBIT 10.4
LINUXCARE, INC.
AMENDED AND RESTATED
1999 STOCK PLAN
1. Purposes of the Plan. The purposes of this amended and restated 1999
--------------------
Stock Plan are:
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as
-------------
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Change in Control" means:
-----------------
(i) The consummation of a merger or consolidation of the
Company with or into another entity or any other corporate reorganization, if
persons who were not stockholders of the Company immediately prior to such
merger, consolidation or other reorganization own immediately after such merger,
consolidation or other reorganization 50% or more of the voting power of the
outstanding securities of each of (A) the continuing or surviving entity and (B)
any direct or indirect parent corporation of such continuing or surviving
entity; or
(ii) The sale, transfer or other disposition of all or
substantially all of the Company's assets.
<PAGE>
A transaction shall not constitute a Change of Control if its sole purpose
is to change the state of the Company's incorporation or to create a holding
company that will be owned in substantially the same proportions by the persons
who held the Company's securities immediately before such transaction.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means a committee of Directors appointed by the Board in
---------
accordance with Section 4 of the Plan.
(g) "Common Stock" means the common stock of the Company.
------------
(h) "Company" means Linuxcare, Inc., a Delaware corporation.
-------
(i) "Consultant" means any person, including an advisor, engaged by the
----------
Company or a Parent or Subsidiary to render services to such entity.
(j) "Director" means a member of the Board.
--------
(k) "Disability" means total and permanent disability as defined in Section
----------
22(e)(3) of the Code.
(l) "Employee" means any person, including Officers and Directors, employed
--------
by the Company or any Parent or Subsidiary of the Company. A Service Provider
shall not cease to be an Employee in the case of (i) any leave of absence
approved by the Company or (ii) transfers between locations of the Company or
between the Company, its Parent, any Subsidiary, or any successor. For purposes
of Incentive Stock Options, no such leave may exceed ninety days, unless
reemployment upon expiration of such leave is guaranteed by statute or contract.
If reemployment upon expiration of a leave of absence approved by the Company is
not so guaranteed, on the day three (3) months and one (1) day following the
90/th/ day of such leave, any Incentive Stock Option held by the Optionee shall
cease to be treated as an Incentive Stock Option and shall be treated for tax
purposes as a Nonstatutory Stock Option. Neither service as a Director nor
payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
(n) "Fair Market Value" means, as of any date, the value of Common Stock
-----------------
determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market
Value shall be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system on the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
-2-
<PAGE>
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the day of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(o) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(p) "Nonstatutory Stock Option" means an Option not intended to qualify as
-------------------------
an Incentive Stock Option.
(q) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(r) "Officer" means a person who is an officer of the Company within the
-------
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "Option" means a stock option granted pursuant to the Plan.
------
(t) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(u) "Option Exchange Program" means a program whereby outstanding Options
-----------------------
are surrendered in exchange for Options with a lower exercise price.
(v) "Optioned Stock" means the Common Stock subject to an Option or Stock
--------------
Purchase Right.
(w) "Optionee" means the holder of an outstanding Option or Stock Purchase
--------
Right granted under the Plan.
(x) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(y) "Plan" means this amended and restated 1999 Stock Plan.
----
(z) "Restricted Stock" means shares of Common Stock acquired pursuant to a
----------------
grant of Stock Purchase Rights under Section 11 of the Plan.
-3-
<PAGE>
(aa) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(bb) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
----------
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
(cc) "Section 16(b) " means Section 16(b) of the Exchange Act.
-------------
(dd) "Service Provider" means an Employee, Director or Consultant.
----------------
(ee) "Share" means a share of the Common Stock, as adjusted in accordance
-----
with Section 13 of the Plan.
(ff) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(gg) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 9,302,738 Shares (as adjusted for stock splits, stock
dividends, recapitalizations and the like occurring after the adoption of the
Plan ("Recapitalizations")) plus an annual increase to be added on the first day
of the Company's fiscal year beginning in 2001, equal to the lesser of (i)
4,000,000 shares (as adjusted for Recapitalizations), (ii) 5% of the outstanding
shares on such date or (iii) a lesser amount determined by the Board. The
Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. Different Committees
------------------------------
with respect to different groups of Service Providers may administer the Plan.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the
-4-
<PAGE>
meaning of Section 162(m) of the Code, the Plan shall be administered by a
Committee of two or more "outside directors" within the meaning of Section
162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
----------
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
--------------------
shall be administered by (A) the Board or (B) a Committee, which committee shall
be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan,
---------------------------
and in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any Option or Stock Purchase Right granted hereunder.
Such terms and conditions include, but are not limited to, the exercise price,
the time or times when Options or Stock Purchase Rights may be exercised (which
may be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or Stock Purchase Right or the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to reduce the exercise price of any Option or Stock Purchase
Right to the then current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option or Stock Purchase Right shall have declined
since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations relating
to the Plan, including rules and regulations relating to sub-plans established
for the purpose of satisfying applicable foreign laws;
-5-
<PAGE>
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the minimum amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined. All elections by an
Optionee to have Shares withheld for this purpose shall be made in such form and
under such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights
-----------
may be granted to Service Providers. Incentive Stock Options may be granted only
to Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal
year of the Company, Options to purchase more than 3,000,000 Shares (as adjusted
for Recapitalizations).
-6-
<PAGE>
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 3,000,000 Shares
(as adjusted for Recapitalizations), which shall not count against the limit set
forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 13.
(iv) If an Option is cancelled in the same fiscal year of the Company
in which it was granted (other than in connection with a transaction described
in Section 13), the cancelled Option will be counted against the limits set
forth in subsections (i) and (ii) above. For this purpose, if the exercise
price of an Option is reduced, the transaction will be treated as a cancellation
of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
------------
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares
--------------
to be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
-7-
<PAGE>
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price of less than 100% of the Fair Market Value per
Share on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares, which in the case of Shares acquired from
the Company, (A) have been owned by the Optionee for more than six months on the
date of surrender, and (B) have a Fair Market Value on the date of surrender
equal to the aggregate exercise price of the Shares as to which said Option
shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any
-----------------------------------------------
Option granted hereunder shall be exercisable according to the terms of the Plan
and at such times and under such conditions as determined by the Administrator
and set forth in the Option Agreement. Unless the Administrator provides
otherwise, vesting of Options granted hereunder shall be tolled during any
unpaid leave of absence. An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is
-8-
<PAGE>
exercised. Full payment may consist of any consideration and method of payment
authorized by the Administrator and permitted by the Option Agreement and the
Plan. Shares issued upon exercise of an Option shall be issued in the name of
the Optionee or, if requested by the Optionee, in the name of the Optionee and
his or her spouse. Until the Shares are issued (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
Shares promptly after the Option is exercised. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the
Shares are issued, except as provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence
of a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for six (6) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider, the
-----------------
Option may be exercised within such period of time as is specified in the Option
Agreement (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquires the right to exercise the Option by bequest or inheritance, but
only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the
-9-
<PAGE>
Plan. The Option may be exercised by the executor or administrator of the
Optionee's estate or, if none, by the person(s) entitled to exercise the Option
under the Optionee's will or the laws of descent or distribution. If the Option
is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued
------------------
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing or electronically, by means of a Notice of Grant,
of the terms, conditions and restrictions related to the offer, including the
number of Shares that the offeree shall be entitled to purchase, the price to be
paid, and the time within which the offeree must accept such offer. The offer
shall be accepted by execution of a Restricted Stock Purchase Agreement in the
form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement
----------------
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Change of Control.
- -----------------
(a) Changes in Capitalization. Subject to any required action
-------------------------
by the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for
-10-
<PAGE>
issuance under the Plan, but as to which no Options or Stock Purchase Rights
have yet been granted or which have been returned to the Plan upon cancellation
or expiration of an Option or Stock Purchase Right, the number of shares that
may be added to the Plan annually pursuant to Section 3(i), as well as the price
per share of Common Stock covered by each such outstanding Option or Stock
Purchase Right, shall be proportionately adjusted for any increase or decrease
in the number of issued shares of Common Stock resulting from a stock split,
reverse stock split, stock dividend, stock split, declaration of an
extraordinary dividend payable if the form other than Shares in an amount that
has a material effect on the Fair Market Value of the Common Stock, combination
or reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
--------------------------
or liquidation of the Company, the Administrator shall notify each Optionee as
soon as practicable prior to the effective date of such proposed transaction.
The Administrator in its discretion may provide for an Optionee to have the
right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Change of Control. In the event of a merger of the Company
---------------------------
with or into another corporation or a Change of Control, each outstanding Option
and Stock Purchase Right shall be assumed or an equivalent option or right
substituted by the successor corporation, or a Parent or Subsidiary of the
successor corporation, and any Company repurchase option with respect to
Restricted Stock shall be assigned to such successor corporation, or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the Option or Stock Purchase
Right, the Optionee shall fully vest in and have the right to exercise the
Option or Stock Purchase Right as to all of the Optioned Stock, including Shares
as to which it would not otherwise be vested or exercisable. Any repurchase
option the Company has with respect to Restricted Stock which is not assigned to
such successor corporation shall lapse. If an Option or Stock Purchase Right
becomes fully vested and exercisable in lieu of assumption or substitution in
the event of a merger or Change of Control,
-11-
<PAGE>
the Administrator shall notify the Optionee in writing or electronically that
the Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or Change of Control, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
Change of Control, the consideration (whether stock, cash, or other securities
or property) received in the merger or Change of Control by holders of Common
Stock for each Share held on the effective date of the transaction (and if
holders were offered a choice of consideration, the type of consideration chosen
by the holders of a majority of the outstanding Shares); provided, however, that
if such consideration received in the merger or Change of Control is not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option or Stock Purchase Right, for each
Share of Optioned Stock subject to the Option or Stock Purchase Right, to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common Stock
in the merger or Change of Control.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment,
----------------------------------
alteration, suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee and
the Company. Termination of the Plan shall not affect the Administrator's
ability to exercise the powers granted to it hereunder with respect to Options
granted under the Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to
----------------
the exercise of an Option or Stock Purchase Right unless the exercise of such
Option or Stock Purchase Right and the issuance and delivery of such Shares
shall comply with Applicable Laws and shall be further subject to the approval
of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise
--------------------------
of an Option or Stock Purchase Right, the Company may require the person
exercising such Option or Stock Purchase Right to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation is
required.
-12-
<PAGE>
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-13-
<PAGE>
Exhibit 10.5
EXHIBIT E
---------
LINUXCARE, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 2000 Employee Stock Purchase
Plan of Linuxcare, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company or any
-----
committee thereof designated by the Board of Directors of the Company in
accordance with Section 14 of the Plan.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the common stock of the Company.
------------
(d) "Company" shall mean Linuxcare, Inc. and any Designated
-------
Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings
------------
and commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary that has been
---------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91/st/ day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each
---------------
Offering Period.
<PAGE>
(i) "Exercise Date" shall mean the last Trading Day of each Purchase
-------------
Period.
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the day of determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock the
date of determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board; or
(iv) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Periods" shall mean the periods of approximately
----------------
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after May 1 and November
1 of each year and terminating on the last Trading Day in the periods ending
twenty-four months later; provided, however, that the first Offering Period
under the Plan shall commence with the first Trading Day on or after the date on
which the Securities and Exchange Commission declares the Company's Registration
Statement effective and ending on the last Trading Day on or before April 30,
2002. The duration and timing of Offering Periods may be changed pursuant to
Section 4 of this Plan.
(l) "Plan" shall mean this 2000 Employee Stock Purchase Plan.
----
(m) "Purchase Period" shall mean the approximately six-month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
(n) "Purchase Price" shall mean 85% of the Fair Market Value of a
--------------
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever
is lower; provided however, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
-2-
<PAGE>
(o) "Reserves" shall mean the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1 and November 1 each year, or on such other date as
the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
April 30, 2002. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without shareholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Offering
Period to be affected thereafter.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
-3-
<PAGE>
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding 10% of the Compensation
which he or she receives on each pay day during the Offering Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 5,000
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19), and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future
Offering Periods, increase or decrease, in its absolute discretion, the maximum
number of
-4-
<PAGE>
shares of the Company's Common Stock an Employee may purchase during each
Purchase Period of such Offering Period. Exercise of the option shall occur as
provided in Section 8 hereof, unless the participant has withdrawn pursuant to
Section 10 hereof. The option shall expire on the last day of the Offering
Period.
8. Exercise of Option.
------------------
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may exceed
(i) the number of shares of Common Stock that were available for sale under the
Plan on the Enrollment Date of the applicable Offering Period, or (ii) the
number of shares available for sale under the Plan on such Exercise Date, the
Board may in its sole discretion (x) provide that the Company shall make a pro
rata allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform
a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Exercise Date, and terminate any or all Offering Periods
then in effect pursuant to Section 20 hereof. The Company may make pro rata
allocation of the shares available on the Enrollment Date of any applicable
Offering Period pursuant to the preceding sentence, notwithstanding any
authorization of additional shares for issuance under the Plan by the Company's
shareholders subsequent to such Enrollment Date.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant
-5-
<PAGE>
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee, for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 1,000,000 shares (as adjusted for stock splits, stock dividends,
recapitalizations and the like occurring after the adoption of the Plan
("Recapitalizations")) plus an annual increase to be added on the first day of
the Company's fiscal year beginning in 2001, equal to the lesser of (i)
1,000,000 shares (as adjusted for Recapitalizations), (ii) 2% of the outstanding
shares on such date or (iii) a lesser amount determined by the Board.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
-6-
<PAGE>
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
- --------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), the
number of shares that may be added annually to the shares reserved under the
Plan (pursuant to Section 13(a)(i)), as well as the price per share and the
number of shares of Common Stock covered by each option under the Plan which has
not yet been exercised shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the
-7-
<PAGE>
number of shares of Common Stock effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its shareholders. Except as provided
in Section 19 and this Section 20 hereof, no amendment may make any change in
any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other applicable law, regulation or stock
exchange rule), the Company shall obtain shareholder approval in such a manner
and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be
-8-
<PAGE>
entitled to change the Offering Periods, limit the frequency and/or number of
changes in the amount withheld during an Offering Period, establish the exchange
ratio applicable to amounts withheld in a currency other than U.S. dollars,
permit payroll withholding in excess of the amount designated by a participant
in order to adjust for delays or mistakes in the Company's processing of
properly completed withholding elections, establish reasonable waiting and
adjustment periods and/or accounting and crediting procedures to ensure that
amounts applied toward the purchase of Common Stock for each participant
properly correspond with amounts withheld from the participant's Compensation,
and establish such other limitations or procedures as the Board (or its
committee) determines in its sole discretion advisable which are consistent with
the Plan.
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
(i) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(ii) shortening any Offering Period so that Offering Period ends
on a new Exercise Date, including an Offering Period underway at the time of the
Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
-9-
<PAGE>
24. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
-10-
<PAGE>
EXHIBIT A
---------
LINUXCARE, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
____ Original Application Enrollment Date:__________
____ Change in Payroll Deduction Rate
____ Change of Beneficiary(ies)
1. ____________________ hereby elects to participate in the Linuxcare, Inc.
Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and
subscribes to purchase shares of the Company's Common Stock in accordance
with this Subscription Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 0 to _____%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my ability
to exercise the option under this Subscription Agreement is subject to
shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only).
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me over the price which I paid for the shares. I
-
hereby agree to notify the Company in writing within 30 days after the date
---------------------------------------------------------------------------
of any disposition of my shares and I will make adequate provision for
----------------------------------------------------------------------
Federal, state or other tax withholding obligations, if any, which arise
------------------------------------------------------------------------
upon the
--------
<PAGE>
disposition of the Common Stock. The Company may, but will not be obligated
-------------------------------
to, withhold from my compensation the amount necessary to meet any
applicable withholding obligation including any withholding necessary to
make available to the Company any tax deductions or benefits attributable
to sale or early disposition of Common Stock by me. If I dispose of such
shares at any time after the expiration of the 2-year and 1-year holding
periods, I understand that I will be treated for federal income tax
purposes as having received income only at the time of such disposition,
and that such income will be taxed as ordinary income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of
the shares at the time of such disposition over the purchase price which I
paid for the shares, or (2) 15% of the fair market value of the shares on
the first day of the Offering Period. The remainder of the gain, if any,
recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)_____________________________________________________
(First) (Middle) (Last)
_________________________ __________________________________
Relationship
__________________________________
(Address)
-12-
<PAGE>
Employee's Social
Security Number: __________________________________
Employee's Address: __________________________________
__________________________________
__________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_________________________ __________________________________
Signature of Employee
__________________________________
Spouse's Signature (If beneficiary
other than spouse)
-13-
<PAGE>
EXHIBIT B
---------
LINUXCARE, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Linuxcare, Inc.
Employee Stock Purchase Plan which began on ______________, _____ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
__________________________________
__________________________________
__________________________________
Signature:
__________________________________
Date:_____________________________
-14-
<PAGE>
EXHIBIT 10.6
EXHIBIT F
---------
LINUXCARE, INC.
2000 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 2000 Director Option
--------------------
Plan are to attract and retain the best available personnel for service as
Outside Directors (as defined herein) of the Company, to provide additional
incentive to the Outside Directors of the Company to serve as Directors, and to
encourage their continued service on the Board.
All Options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the common stock of the Company.
------------
(d) "Company" means Linuxcare, Inc., a Delaware corporation.
-------
(e) "Director" means a member of the Board.
--------
(f) "Disability" means total and permanent disability as defined in
----------
section 22(e)(3) of the Code.
(g) "Employee" means any person, including officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(i) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system on
the day of determination as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
<PAGE>
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock for the day of determination, as reported in The
Wall Street Journal or such other source as the Board deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(j) "IPO" means the Company's initial public offering of its equity
---
securities that is registered with the Securities Exchange Commission.
(k) "Inside Director" means a Director who is an Employee.
---------------
(l) "Option" means a stock option granted pursuant to the Plan.
------
(m) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(n) "Optionee" means a Director who holds an Option.
--------
(o) "Outside Director" means a Director who is not an Employee.
----------------
(p) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(q) "Plan" means this 2000 Director Option Plan.
----
(r) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 10 of the Plan.
(s) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of
1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 300,000 Shares (subject to adjustment for stock splits, stock
dividends, recapitalizations and the like occurring after the date of adoption
of the Plan ("Recapitalizations")) (the "Pool"). The Shares may be authorized,
but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
-2-
<PAGE>
4. Administration and Grants of Options under the Plan.
---------------------------------------------------
(a) Procedure for Grants. All grants of Options to Outside Directors
--------------------
under this Plan shall be automatic and nondiscretionary and shall be made
strictly in accordance with the following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options.
(ii) Each Outside Director shall be automatically granted an
Option to purchase 20,000 Shares (as adjusted for Recapitalizations) (the "First
Option") on the date on which such person first becomes an Outside Director,
whether through election by the shareholders of the Company or appointment by
the Board to fill a vacancy; provided, however, that an Inside Director who
ceases to be an Inside Director but who remains a Director shall not receive a
First Option; provided, further, that no person who was a Director prior to the
IPO shall receive a First Option.
(iii) Each Outside Director shall be automatically granted an
Option to purchase 5,000 Shares (as adjusted for Recapitalizations) (a
"Subsequent Option") on the date of the Company's annual stockholder's meeting
of each year, provided he or she is then an Outside Director and if as of such
date, he or she shall have served on the Board for at least the preceding six
(6) months.
(iv) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, any exercise of an Option granted before the Company has obtained
shareholder approval of the Plan in accordance with Section 16 hereof shall be
conditioned upon obtaining such shareholder approval of the Plan in accordance
with Section 16 hereof.
(v) The terms of a First Option granted hereunder shall be as
follows:
(A) the term of the First Option shall be ten (10) years.
(B) the First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the First Option.
(D) subject to Section 10 hereof, the First Option shall
become exercisable as to 25% of the Shares subject to the First Option on each
anniversary of its date of grant, provided that the Optionee continues to serve
as a Director on such dates.
(vi) The terms of a Subsequent Option granted hereunder shall be
as follows:
(A) the term of the Subsequent Option shall be ten (10)
years.
-3-
<PAGE>
(B) the Subsequent Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Subsequent Option.
(D) subject to Section 10 hereof, the Subsequent Option
shall become exercisable as to 100% of the Shares subject to the Subsequent
Option on the first anniversary of its date of grant, provided that the Optionee
continues to serve as a Director on such date.
(vii) In the event that any Option granted under the Plan would
cause the number of Shares subject to outstanding Options plus the number of
Shares previously purchased under Options to exceed the Pool, then the remaining
Shares available for Option grant shall be granted under Options to the Outside
Directors on a pro rata basis. No further grants shall be made until such time,
if any, as additional Shares become available for grant under the Plan through
action of the Board or the shareholders to increase the number of Shares which
may be issued under the Plan or through cancellation or expiration of Options
previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate the Director's relationship with the Company at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board or its approval by the shareholders of the
Company as described in Section 16 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares to
---------------------
be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other Shares, provided Shares acquired
directly from the Company, (x) have been owned by the Optionee for more than six
(6) months on the date of surrender, and (y) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, (iv) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (v) any combination of the foregoing methods of payment.
8. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4 hereof; provided, however,
-4-
<PAGE>
that no Options shall be exercisable until shareholder approval of the Plan in
accordance with Section 16 hereof has been obtained. An Option may not be
exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. Subject to Section 10
----------------------------------------------
hereof, in the event an Optionee's status as a Director terminates (other than
upon the Optionee's death or Disability), the Optionee may exercise his or her
Option, but only within three (3) months following the date of such termination,
and only to the extent that the Optionee was entitled to exercise it on the date
of such termination (but in no event later than the expiration of its ten (10)
year term). To the extent that the Optionee was not entitled to exercise an
Option on the date of such termination, and to the extent that the Optionee does
not exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event Optionee's status as a Director
----------------------
terminates as a result of Disability, the Optionee may exercise his or her
Option, but only within six (6) months following the date of such termination,
and only to the extent that the Optionee was entitled to exercise it on the date
of such termination (but in no event later than the expiration of its ten (10)
year term). To the extent that the Optionee was not entitled to exercise an
Option on the date of termination, or if he or she does not exercise such Option
(to the extent otherwise so entitled) within the time specified herein, the
Option shall terminate.
(d) Death of Optionee. In the event of an Optionee's death, the
-----------------
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to
-5-
<PAGE>
exercise such Option does not exercise such Option (to the extent otherwise so
entitled) within the time specified herein, the Option shall terminate.
9. Non-Transferability of Options. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger
---------------------------------------------------------------
or Asset Sale.
- -------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares which have been authorized for issuance under the
Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of Shares
subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation or the sale of substantially all of the assets
of the Company, outstanding Options may be assumed or equivalent options may be
substituted by the successor corporation or a Parent or Subsidiary thereof (the
"Successor Corporation"). If an Option is assumed or substituted for, the
Option or equivalent option shall continue to be exercisable as provided in
Section 4 hereof for so long as the Optionee serves as a Director or a director
of the Successor Corporation. Following such assumption or substitution, if the
Optionee's status as a Director or director of the Successor Corporation, as
applicable, is terminated other than upon a voluntary resignation by the
Optionee, the Option or option shall become fully exercisable, including as to
Shares for which it would not otherwise be exercisable. Thereafter, the Option
or option shall remain exercisable in accordance with Sections 8(b) through (d)
above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and upon the expiration of such period the Option shall terminate.
-6-
<PAGE>
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
If such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
11. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with any applicable
law, regulation or stock exchange rule, the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful
-7-
<PAGE>
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
16. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under applicable state and federal law and any stock exchange rules.
-8-
<PAGE>
Exhibit 23.1.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 14, 2000, in the Registration Statement
(Form S-1 Amendment No.1 No. 33-94985) and related Prospectus of Linuxcare,
Inc. for the registration of 6,000,000 shares of common stock.
/s/ Ernst & Young LLP
Palo Alto, California
February 24, 2000
<PAGE>
Exhibit 23.1.2
Consent of Ernst & Young LLP, of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 31, 2000, in the Registration Statement
(Form S-1 Amendment No. 1 No. 333-94985) and related Prospectus of Linuxcare,
Inc. for the registration of 6,000,000 shares of common stock.
/s/ Ernst & Young LLP
Ottawa, Canada
February 24, 2000
<PAGE>
Exhibit 23.1.3
Consent of Reconta Ernst & Young S.p.A., Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 7, 2000, in the Registration Statement
(Form S-1 Amendment No. 1 No. 333-94985) and related Prospectus of Linuxcare,
Inc. for the registration of 6,000,000 shares of common stock.
/s/ Reconta Ernst & Young S.p.A
Milan, Italy
February 25, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> OTHER YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> DEC-09-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 138,920 29,994,575
<SECURITIES> 0 0
<RECEIVABLES> 0 726,904
<ALLOWANCES> 0 76,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 200,300 31,724,320
<PP&E> 0 2,584,673
<DEPRECIATION> 0 208,849
<TOTAL-ASSETS> 200,300 36,366,003
<CURRENT-LIABILITIES> 13,458 6,694,561
<BONDS> 0 0
0 0
0 40,374,016
<COMMON> 706 969
<OTHER-SE> (13,864) (12,629,561)
<TOTAL-LIABILITY-AND-EQUITY> 200,300 36,366,003
<SALES> 0 1,210,806
<TOTAL-REVENUES> 0 1,210,806
<CGS> 0 2,814,546
<TOTAL-COSTS> 13,458 18,919,453
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 468,267
<INCOME-PRETAX> (13,458) (20,946,399)
<INCOME-TAX> 0 4,200
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,458) (20,210,979)
<EPS-BASIC> 0 (7.49)
<EPS-DILUTED> 0 (2.26)
</TABLE>
