<PAGE>
As filed with the Securities and Exchange Commission on October 30, 2000
Registration No. 333-
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
TURBOLINUX, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7372 87-0500032
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
---------------
8000 Marina Boulevard, Suite 300
Brisbane, CA 94005
(650) 228-5000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
T. Paul Thomas
Chairman and Chief Executive Officer
TurboLinux, Inc.
8000 Marina Boulevard, Suite 300
Brisbane, CA 94005
(650) 228-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to
<TABLE>
<S> <C>
Robert M. Mattson, Jr. Eric S. Haueter
Robert I. Newton Brown & Wood LLP
Daniel E. Roston 555 California Street
Morrison & Foerster LLP San Francisco, CA 94104
19900 MacArthur Boulevard (415) 772-1200
Irvine, CA 92612
(949) 251-7500
</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,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]_____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]_____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]_____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Offering Amount of
Securities to be Registered Price(1) Registration Fee
--------------------------------------------------------------------------------
<S> <C> <C>
Common Stock ($0.001 par value)............ $60,000,000 $15,840
--------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o).
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is declared effective. This +
+preliminary prospectus is not an offer to sell these securities and we are +
+not soliciting an offer to buy these securities in any state where the offer +
+or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated October 30, 2000
[TURBOLINUX LOGO]
--------------------------------------------------------------------------------
Shares
Common Stock
--------------------------------------------------------------------------------
This is the initial public offering of TurboLinux, Inc. We are offering
shares of our common stock. We anticipate that the initial public
offering price will be between $ and $ per share. We have applied to
list our common stock on the Nasdaq National Market under the symbol "TLUX."
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions TurboLinux
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to additional
shares to cover any over-allotments.
Deutsche Banc Alex. Brown
Dain Rauscher Wessels
SG Cowen
WR Hambrecht + Co
The date of this prospectus is , 2001
<PAGE>
[DESCRIBE ARTWORK]
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that you
should consider before investing in our common stock. You should carefully read
the entire prospectus, including "Risk Factors" and the financial statements,
before making an investment decision.
Our Business
We are a leading provider of Linux-based software solutions for Internet and
enterprise computing infrastructure. Our products include core infrastructure
workstation and server operating systems products and value-added clustering
software to manage network traffic and provide peer-to-peer distributed
computing capabilities. We also have additional value-added products that
include solutions built on top of our server products to combine open source
software, our core technologies and leading commercially available software. We
also have expertise in customizing software for different geographic markets,
particularly for Asian languages computing.
As the Internet has evolved into a critical business resource, there has been
increasing demand for Internet infrastructure products and services to handle
the technical demands of an Internet-centric computing environment. These
demands include the need for reliable, available and scalable systems that
offer high-performance computing capabilities and are able to manage a high
volume of computing traffic. Furthermore, the proliferation of Internet
communication has enabled collaborative software development, which has fueled
the development of open source software. The term "open source" refers to
software with source code that is publicly available and can be read, modified,
copied and distributed on the Internet with minimal restrictions. Linux is an
open source, UNIX-like operating system that runs on various hardware
architectures. The open source nature of Linux has led to a robust operating
system which is flexible and customizable, facilitating its integration into
different computing environments.
We believe that our products are attractive to organizations seeking open
source technology solutions to meet the demands of an Internet-centric
computing environment. Our solutions provide the following key benefits to our
customers:
. Reliable, available and scalable solutions designed to address an
organization's need to scale its Internet and enterprise computing
systems;
. Multiple solutions to meet enterprise computing needs ranging from the
end user desktop to high-availability, high-performance computing;
. Solutions that integrate our software with commercial software and
hardware offerings from established companies in the computer industry;
. Lower cost of ownership by offering solutions that incorporate Linux and
other open source software into our products; and
. Customized solutions to meet the needs of specific geographic markets.
1
<PAGE>
We have established strategic relationships with a number of companies in the
computer industry, many of whom are global industry leaders in hardware systems
and components, software and related services, including Compaq, CTC, Dell,
Fujitsu, Fujitsu (Fujisoft ABC), Hewlett Packard, Hitachi, IBM, Inprise, Intel,
Mission Critical Linux, NEC, Oracle, Otsuka Shokai, Sun Microsystems and
Veritas.
Our core workstation product is targeted at individual end users, developers
and small to medium size businesses and is primarily sold through distributors.
Server and value-added clustering products are targeted to Internet and
enterprise computing infrastructure markets, including application service
providers, Internet service providers, small to medium size businesses and
Fortune 2000 companies, and are sold primarily through value-added resellers
and system integrators. Some of our server and cluster product end-user
customers who purchased more than $1,000 of our products since 1999 include, in
the United States, the American Red Cross, Birkenstock, Corvis, JP Morgan,
National Weather Service, Procter and Gamble, the University of Chicago and
Yale University and, in the Asia Pacific region, AMP Henderson Global
Investors, DeoDeo, Fujisoft ABC, Huadi Computer, Info-carry, Nippon Timeshare
and Twin Communication.
We were incorporated in Utah under the name Pacific HiTech Inc. in September
1992 and reincorporated in Delaware as TurboLinux, Inc. in June 1999. Our
principal executive offices are located at 8000 Marina Boulevard, Suite 300,
Brisbane, California 94005. Our telephone number at that location is (650) 228-
5000. References in this prospectus to "TurboLinux," "we," "our," and "us"
refer to TurboLinux, Inc., a Delaware corporation, from and after our
reincorporation in Delaware in June 1999, and to Pacific HiTech Inc. prior to
that reincorporation, and in each case include, unless we expressly state
otherwise or the context otherwise requires, our subsidiaries. Our website is
located at www.turbolinux.com, in Japanese at www.turbolinux.co.jp and in
Chinese at www.turbolinux.cn. The information contained on our websites does
not constitute part of this prospectus.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by
Turbolinux............. shares
Common stock to be
outstanding after this
offering............... shares
Use of proceeds......... For general corporate purposes. See "Use of Proceeds"
on page 23 for more detailed information
Proposed Nasdaq National
Market symbol.......... TLUX
</TABLE>
The total number of shares of our common stock to be outstanding after this
offering is based on the actual number of shares of common stock outstanding as
of June 30, 2000:
. plus 8,465,753 shares of Series B redeemable convertible preferred stock
that we issued after June 30, 2000; and
. minus 2,054,793 shares of common stock that we repurchased from our
founders in October 2000.
The total number of shares of our common stock to be outstanding after this
offering assumes the conversion of all of our redeemable convertible preferred
stock outstanding on June 30, 2000 and the 8,465,753 shares of Series B
redeemable convertible preferred stock we issued after June 30, 2000 into
34,224,804 shares of common stock, and excludes:
. the issuance of shares of common stock upon option exercises subsequent
to June 30, 2000, including 1,227,500 shares of common stock issued upon
option exercises from July 1, 2000 through October 15, 2000;
. options to purchase 4,762,228 shares of common stock outstanding under
our 1999 Equity Incentive Plan and options to purchase 1,900,000 shares
of common stock granted outside of our 1999 Equity Incentive Plan at a
weighted average exercise price of $0.45 per share outstanding as of
October 15, 2000;
. 1,403,272 shares of common stock available for future grant under our
1999 Equity Incentive Plan as of October 15, 2000, which after the date
of this offering will be issued under our 2000 Stock Incentive Plan;
. 3,000,000 shares of common stock, plus annual increases, to be available
for future grant under our 2000 Stock Incentive Plan;
. 500,000 shares of common stock, plus annual increases, to be available
for future purchase under our 2000 Employee Stock Purchase Plan; and
. 956,608 shares of common stock issuable upon exercise of outstanding
warrants as of October 15, 2000 at a weighted average exercise price of
$0.68 per share.
3
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
-------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue................. $4,669 $3,093 $1,615 $3,574 $ 4,939 $1,766 $ 2,932
Cost of revenue......... 1,935 1,305 642 1,395 2,872 846 3,133
Gross margin............ 2,734 1,788 973 2,179 2,067 920 (201)
Operating expenses...... 2,732 2,269 1,019 1,481 11,576 1,863 30,997
Income (loss) from
operations............. 2 (481) (46) 698 (9,509) (943) (31,198)
Net income (loss)....... (41) (388) (47) 287 (9,396) (841) (29,953)
Net income (loss) per
share basic and
diluted................ $ -- $(0.02) $ -- $ 0.01 $ (0.45) $(0.04) $ (1.43)
Shares used in
calculating basic and
diluted net income
(loss) per share....... 21,000 21,000 21,000 21,000 21,000 21,000 21,000
Pro forma net loss per
share basic and
diluted................ $ (0.37) $ (0.65)
Shares used in
calculating pro forma
basic and diluted net
loss per share......... 25,121 46,200
</TABLE>
Pro forma net loss per share and shares used in calculating pro forma net
loss per share appearing in the above table have been computed by assuming that
the shares of our redeemable convertible preferred stock outstanding as of June
30, 2000 had been converted into shares of common stock as of their respective
dates of issuance. The pro forma data in the above table does not give effect
to the issuance of 8,465,753 shares of Series B redeemable convertible
preferred stock that we issued subsequent to June 30, 2000, the issuance of any
shares of our common stock pursuant to option exercises after June 30, 2000 or
our repurchase in October 2000 of 2,054,793 shares of common stock from our
founders.
<TABLE>
<CAPTION>
As of June 30, 2000
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....................... $ 26,988 $49,688
Working capital................................. 22,884 45,584
Total assets.................................... 43,592 66,292
Redeemable convertible preferred stock.......... 61,903 --
Total stockholders' equity (deficit)............ (26,623) 57,980
</TABLE>
The pro forma balance sheet data summarized above assumes:
. the 8,465,753 shares of redeemable convertible preferred stock that we
issued subsequent to June 30, 2000 for total net proceeds of
approximately $30.2 million had been issued as of June 30, 2000;
4
<PAGE>
. all of our shares of redeemable convertible preferred stock outstanding
as of June 30, 2000 and the 8,465,753 shares of redeemable convertible
preferred stock we issued after that date had been converted into
34,224,804 shares of common stock upon completion of this offering, as
if the conversion had occurred as of June 30, 2000; and
. the 2,054,793 shares of common stock that we repurchased from our
founders in October 2000 for $7.5 million, or $3.65 per share, had been
repurchased as of June 30, 2000.
The pro forma as adjusted balance sheet data summarized above adjusts the pro
forma amounts to reflect the issuance of the shares of common stock
which we are offering by this prospectus and our receipt of the estimated net
proceeds from the sale of those shares at an assumed initial public offering
price of $ per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
The pro forma financial data appearing on the prior page does not purport to
be indicative of the results of operations or financial condition that would
have resulted had the transactions reflected in that pro forma data in fact
taken place on the assumed dates referred to above, nor does it purport to be
indicative of our future results of operations or financial condition.
Turbolinux is the trademark of Turbolinux. All other brand names or
trademarks appearing in this prospectus are the property of their respective
holders.
----------------
Unless otherwise indicated, this prospectus assumes:
. that the underwriters have not exercised their option to purchase
additional shares;
. conversion of all shares of our redeemable convertible preferred stock
into shares of common stock upon completion of this offering; and
. the filing of our second restated certificate of incorporation which,
among other things, will authorize a class of 10,000,000 shares of
undesignated preferred stock and provide for a staggered board of
directors, and the amendment of our bylaws to, among other things,
impose limitations on the ability of our stockholders to call special
meetings and implement procedures for advance notification of
stockholder nominations and proposals.
5
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties and the other information in this prospectus before
deciding whether to invest in shares of our common stock. Any of the following
risks could cause the trading price of our common stock to decline.
Risks Related to Our Business
Because we recently substantially changed our business plan and restructured
our operations, our historical results provide little or no basis upon which to
evaluate the prospects for our business.
Although we began operations in 1992, prior to 1997 we focused on selling
various kinds of software and CD-ROM products. We began to emphasize selling
Linux and other related products in 1997 and, beginning in 1997, a substantial
portion of our revenue has been derived from sales of our desktop operating
system products. During the past 12 months we have substantially revised our
business plan and restructured our operations to focus on Linux-based software
solutions for Internet and enterprise computing infrastructure needs, made
additions to our product line and hired a number of new employees, including
key members of our management team. In addition, in May 2000 we reduced our
workforce by 52 employees, consisting primarily of administrative and support
personnel and representing approximately 16% of our total employees at that
time.
As noted above, beginning in 1997 a substantial portion of our revenue has
been derived from sales of our Turbolinux Workstation product, a desktop
operating system, which is targeted at individual end users, developers and
small to medium size businesses. Turbolinux Workstation accounted for
approximately 61%, 81% and 37%, respectively, of our revenue for 1998, 1999 and
the six months ended June 30, 2000. In addition, a substantial portion of our
revenue has been derived from customers in Japan, who accounted for
approximately 96%, 95% and 75%, respectively, of our revenue for 1998, 1999 and
the six months ended June 30, 2000. Consequently, although our new business
plan focuses on software targeted to Internet and enterprise customers in
United States and international markets, since 1997, a substantial portion of
our revenue has been generated by sales of workstation software to retail
customers in Japan. We recently developed and released our clustering and
enterprise solution products and as a result have only a limited history of
selling these products and have not generated meaningful revenue from these
products. Likewise, although our new business plan focuses on sales in United
States and international markets, we have only limited experience in selling
our products in markets outside of Japan. As a result, you have a limited
basis, if any, upon which to evaluate whether our business plan will be
successful.
In addition, the Linux software market is new. As a company in a new and
evolving industry, we face risks and uncertainties relating to our ability to
successfully implement our strategy. You must consider the risks, expenses and
uncertainties that a company like ours, operating with an unproven business
model, faces in a new and evolving market such as the market for Linux
software. In particular, you must consider that our business model is based on
an expectation that demand for Linux-based servers and applications will
increase materially in the Internet and enterprise computing communities, which
at present significantly favor other competing operating environments. See
"Risk Factors--Risks Related to Our Business--The market for Linux solutions
may not grow as we anticipate."
6
<PAGE>
If we cannot address these risks and uncertainties or are unable to execute
our strategy, we may not be successful, which would significantly reduce the
value of your investment.
Our business may not succeed because open source software business models are
unproven.
We have not demonstrated the success of our open source business model, which
gives our customers the right freely to copy and distribute some of our
software. There is uncertainty in connection with open source business models,
particularly as to whether or not businesses based on open source software can
operate profitably. Few open source software products have gained widespread
commercial acceptance. In addition, because our business model also
contemplates developing products based on and including proprietary technology
that is not freely available, we may alienate the Linux and open source
communities, which could harm our product development efforts and reputation
and decrease our revenue. We also face risks that independent developers may
develop competing open source solutions or that our partners may choose to take
proprietary products in which we have invested significant time and resources
and make those products available on an open source basis, making our
proprietary solutions less attractive and decreasing our revenue. If our
business model should fail to gain widespread commercial and open source
community acceptance, we will not be able to sustain our revenue and our
business could fail.
We expect to incur substantial losses for the foreseeable future.
We incurred net losses in 1999 and the six months ended June 30, 2000, and do
not expect to achieve profitability for the foreseeable future. If our revenue
declines or grows at a slower rate than we anticipate, or if our spending or
expense levels exceed our expectations or cannot be adjusted to reflect slower
revenue growth, we may not generate sufficient revenue to achieve or sustain
profitability or generate positive cash flows. In this case, the value of your
investment could be reduced. We incurred net losses of $9.4 million for fiscal
year 1999 and $30.0 million for the six months ended June 30, 2000. We expect
to continue to incur losses because we anticipate incurring significant
expenses in connection with developing our products, hiring and training
employees, expanding our market reach and building awareness of our brand. We
forecast our future expense levels based on our operating plans and our
estimates of future revenue. We may find it necessary to accelerate
expenditures relating to product development and support and our sales and
marketing efforts beyond our current expectations or otherwise increase our
financial commitment to creating and maintaining brand awareness among
potential customers.
Our strategy to provide Linux solutions for Internet and enterprise computing
infrastructure depends upon our ability to successfully introduce products
tailored for these markets.
To date, our sales revenue has come primarily from retail sales of our
Turbolinux Workstation software product in Japan. Our business model, however,
is targeted toward selling Linux solutions for Internet and enterprise
computing infrastructure in the United States and in other worldwide markets.
In order for our strategy to be successful, we must timely develop products
that meet the needs of our technology partners, solution providers and Internet
service providers and their customers. We recently developed our clustering
products, Turbolinux Cluster Server and EnFuzion, and plan to develop
additional products in the future. These new products may not be adopted by our
technology partners, solution providers, Internet service providers or their
customers for any number of reasons, including lack of customer awareness of
our company and our products, malfunction of the products and failure to
competitively meet Internet and enterprise computing infrastructure needs. If
our products are not successful, we will fail to execute our strategy and our
sales may not grow or may decline.
7
<PAGE>
You should not rely on our quarterly operating results as an indication of our
future results because they are subject to significant fluctuations.
Fluctuations in our operating results or the failure of our operating results
to meet the expectations of public market analysts and investors may negatively
impact our stock price.
Our quarterly operating results have varied in the past and we expect them to
fluctuate significantly in the future due to a variety of factors that could
affect our revenue or our expenses in any particular quarter. Fluctuations in
our quarterly operating results could cause our stock price to decline. You
should not rely on quarter-to-quarter comparisons of our results of operations
as an indication of future performance. Factors that may affect our quarterly
results include:
. the interest level of our strategic partners and our distributors in
recommending our Linux solutions;
. changing business attitudes about Linux as a viable alternative to other
competing operating systems;
. the introduction, development, timing, competitive pricing and market
acceptance of our products and services and those of our competitors;
. changes in general economic conditions, such as recessions, that could
affect capital expenditures and recruiting efforts in the software
industry in general and in the Linux environment in particular;
. the magnitude and timing of our marketing initiatives;
. the maintenance and development of our strategic relationships;
. the attraction, retention and training of key engineering, sales and
services personnel;
. budgeting, purchasing and payment cycles of our customers; and
. our ability to manage our anticipated growth and expansion.
It is possible that in some future periods our results of operations may be
below the expectations of public market analysts and investors. This could
cause our stock price to decline. In addition, we plan to increase our
operating expenses to expand our sales and marketing, administration, training,
maintenance and technical support and research and development efforts. If
revenue falls below our expectations in any quarter and we are unable to
quickly reduce our spending in response, our operating results would be lower
than expected and our stock price may fall.
We will require additional financing to sustain our operations and execute our
business strategy.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, will be sufficient to fund our currently
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, we expect that in the future we will need to
obtain substantial additional financing in order to sustain our operations and
execute our business strategy. Moreover, we also may need to raise additional
funds during the next 12 months to support more rapid expansion, respond to
competitive pressures, acquire businesses or technologies or respond to
unanticipated requirements. We cannot assure you that additional funding will
be available to us in amounts or on terms acceptable to us, or at all. If
sufficient funds are not available or are not available on acceptable terms,
our ability to sustain our operations, execute our business strategy, fund our
expansion, take advantage of acquisition opportunities, develop or enhance our
products or services, or otherwise respond to competitive pressures would be
significantly impaired.
8
<PAGE>
Since we have historically received a majority of our revenue in currencies
other than the U.S. dollar, our business, financial condition and results of
operations could suffer due to currency fluctuations in foreign countries.
The value of our revenue generated in foreign countries is partially a
function of the currency exchange rate between the U.S. dollar and the
applicable local currency. For the year ended December 31, 1999, we received
approximately 97% of our revenue in currencies other than the U.S. dollar,
particularly the Japanese yen. As a result, we are exposed to a risk that our
financial results will be subject to significant variations based solely on
fluctuations in currency exchange rates. We report our results of operations in
U.S. dollars and, to the extent that we continue to generate sales in foreign
currencies, our results of operations will be adversely affected by a
depreciation in the value of those foreign currencies compared to the U.S.
dollar. Historically, exchange ratios between the U.S. dollar and other
currencies have been subject to significant fluctuations, and similar
fluctuations could occur in the future. In the past, we have not hedged against
foreign currency exchange rate risks. As a result, our results of operations
may be materially adversely affected solely as a result of currency exchange
rate fluctuations.
We rely on an indirect sales channel for distribution of our products, and
disruption of any part of this channel could adversely affect the sales of our
products.
We sell our products primarily through an indirect distribution channel which
includes distributors, value-added resellers and solution providers, such as
system integrators, original equipment manufacturers and Internet service
providers. These relationships allow us to offer our products and services to a
much larger customer base than we would otherwise be able to reach solely
through our own direct sales and marketing efforts. Because we sell indirectly
through these third-party channels, we cannot control the relationships through
which our products are ultimately sold to end users, businesses and
enterprises. Therefore, our distribution channel could be affected by
disruptions in the relationships between our distributors and their customers.
We also cannot control how our products are marketed or the effort devoted to
marketing by these third parties. In addition, because we have historically
sold primarily through retail distribution channels, most of the distributors
we currently use to market our Internet and enterprise computer infrastructure
solutions are new and may choose not to emphasize our products to their
customers. Any of these occurrences could diminish the effectiveness of our
distribution channel and lead to decreased sales or slower than expected
growth.
For the year ended December 31, 1999, SOFTBANK Commerce and ComputerWare
accounted for 35% and 26% of our total revenue and these two customers
accounted for 29% and 16% of our total revenue for the six months ended June
30, 2000, respectively. The loss of either of these customers could have a
material adverse impact on our results of operation.
We are highly dependent upon our strategic relationships and the loss of any of
these relationships could adversely affect our business prospects.
We depend on our relationships with companies such as Compaq, CTC, Dell,
Fujitsu, Fujitsu (Fujisoft ABC), Hewlett-Packard, Hitachi, IBM, Inprise, Intel,
Mission Critical Linux, NEC Software, Oracle, Otsuka, Shokai, Sun Microsystems
and Veritas. These relationships encompass product integration, joint-
technology development, support services, distribution, joint marketing, co-
branding and revenue-generating initiatives such as product bundles. We expect
that these relationships will create opportunities for our products and
services in business markets in which we otherwise might not have access. If we
are unable to maintain these relationships, we will not be able to develop and
deploy our products in certain of our target markets and our product
development and sales will not grow.
9
<PAGE>
In addition, our existing strategic relationships do not, and any future
strategic relationships may not, afford us any exclusive marketing, development
or distribution rights. As a result, the companies with which we have strategic
alliances are free to pursue alternative technologies, products and services in
addition to or in lieu of our products, either on their own or in collaboration
with others, including our competitors. Moreover, we cannot guarantee that the
companies with which we have strategic relationships will market our products
effectively or continue to devote the resources necessary to provide us with
effective sales, marketing and technical support.
Both we and our current and potential customers may find it difficult to hire
and train qualified employees to handle installation and implementation of our
products, which could negatively affect sales of our products and lead to
dissatisfaction among customers.
There are limited numbers of individuals that are trained and qualified to
manage Linux systems, including our Turbolinux products. We, our current and
potential customers and our distributors may lack the resources to hire or
train qualified personnel to install and implement our products, which could
lead to dissatisfaction with our products among our customers and deter
potential purchases of our products.
If we fail to manage technological change effectively, demand for our products
and services will suffer.
The market for Linux solutions is in an early stage of development and is
characterized by rapidly changing technology, evolving industry standards,
frequent new service and product introductions and changes in customer demands.
Our future success will depend to a substantial degree on our ability to offer
products and services that incorporate leading technology and respond to
technological advances and emerging industry standards and practices on a
timely and cost-effective basis. You should be aware that:
. our technology or systems may become obsolete upon the introduction of
alternative technologies;
. the technological life cycles of our products have been historically
short and are difficult to accurately estimate;
. we may not have sufficient resources to develop or acquire new
technologies or to introduce new services capable of competing with
future technologies or service offerings; and
. the price of the products and services we provide may decline as rapidly
as, or more rapidly than, the cost of any competitive alternatives.
We may not be able to effectively respond to the technological requirements
of the changing market for Linux solutions. To the extent we determine that new
technologies and equipment are required to remain competitive, the development,
acquisition and implementation of those technologies and equipment are likely
to continue to require significant capital investment by us. We may not have
sufficient capital for this purpose in the future, and even if it is available,
investments in new technologies may not result in commercially viable products
and services. If we do not develop and introduce new products and services and
achieve market acceptance in a timely manner, demand for our products and
services will drop and our business will suffer.
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We rely on independent developers in the open source community in order to
release upgrades of our Linux-based products.
Many of the components of our software products, including the Linux kernel,
the core of the Linux operating system, are developed by independent developers
in the open source community and are available to anyone without cost. Linus
Torvalds, the original developer of the Linux kernel, and a small group of
independent engineers have in the past overseen the development and upgrading
of the Linux kernel. Neither Mr. Torvalds nor any significant contributor to
the Linux kernel is an employee of ours, and none of these individuals is
required to further update the Linux kernel. If these independent developers
and others in the open source community do not further develop the Linux kernel
and other open source software included in our products on a timely basis, or
at all, our ability to enhance our product offerings will suffer. As a
consequence, we will be forced to rely to a greater extent on our own
development efforts or license commercial software products as replacements,
which would increase our expenses and delay enhancements to our products. Any
failure on the part of the kernel developers to further develop and enhance the
kernel could also stifle the development of additional Linux applications.
Our reliance on independent third parties to develop software included in our
products could result in delays or unreliable products and damage to our
reputation.
Our products consist of many different software components and applications,
most of which are developed by independent third parties over whom we have no
control. We cannot guarantee that we have selected or will select in the future
the most reliable components available in the market or that we will
successfully integrate the many components of our products. In addition, if any
of these third-party products is not reliable or available, we may have to
develop them ourselves, which would significantly increase our development
expenses and delay our time to market. Our customers could be dissatisfied if
any of these products fails to work as designed or if adequate product support
is not provided, which could damage our reputation and lead to potential
litigation.
We could lose revenue as a result of software errors or defects.
Software programs frequently contain errors or defects, especially when first
introduced or when new versions are released. We could, in the future, lose
revenue as a result of errors or defects in our software products. We cannot
assure you that errors will not be found in new products or releases. We
currently do not have product liability or errors and omissions insurance.
While we test our products prior to release, the fact that most of the
components of our software offerings are developed by independent parties over
whom we exercise no supervision or control makes it particularly difficult to
identify and remedy any errors or defects that could exist. Any errors could
result in loss of revenue, or delay in market introduction or acceptance,
diversion of development resources, damage to our reputation or increased
service costs.
We must achieve rapid market penetration of our products and broad brand
recognition in order to compete successfully.
Because Linux solutions markets are new and emerging, companies that are
early in providing products for these markets may have an advantage in building
awareness and customer loyalty. In order for us to successfully market our
products on a wide scale, we must rapidly achieve market penetration and broad
recognition as a leading provider of Linux-based software solutions for
Internet and enterprise computing infrastructure. We may lack the economic and
managerial resources necessary to promote this growth.
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We expect to increase our sales and marketing expenses in future periods as
we build the Turbolinux brand and awareness of our products and services. We
may lack the resources necessary to accomplish these initiatives. Even if the
resources are available, we cannot be certain that our brand enhancement
strategy will deliver the brand recognition and favorable market perception
that we seek. If our strategy is unsuccessful, these expenses may never be
recovered and we may be unable to increase future revenue. Even if we achieve
greater recognition of our brand, competitors with greater resources or more
recognizable brands could reduce our share of the emerging Linux market, as
well as the broader market for solutions for Internet and enterprise computing
infrastructure needs.
We may be unable to successfully manage growth.
Our planned growth entails risk. If we do not expand our operations in an
efficient manner, our expenses could grow disproportionately to revenue or our
revenue could decline or grow more slowly than expected, either of which could
negatively affect the value of your investment. Our current and anticipated
future growth, combined with the requirements we will face as a public company,
will place a significant strain on our management, systems and resources. Our
key personnel have limited experience managing this type of growth. We also
need to improve our financial and managerial controls and reporting systems and
procedures and to continue to expand and maintain close coordination among our
technical, accounting, finance, sales and marketing organizations. As part of
these efforts, we are centralizing in our corporate headquarters in the United
States the management of engineering, marketing and finance units in various
parts of the world that were not previously under centralized management. If we
do not succeed in these efforts, it could reduce our revenue and the value of
your investment.
Our management team may not be able to successfully implement our business
strategies because it has only recently begun to work together.
Our business is highly dependent on the ability of our management to work
together effectively to meet the demands of our growth. Several members of our
senior management, including T. Paul Thomas, our Chief Executive Officer,
President and Chairman of the Board, Robert P. Bowe, our Chief Financial
Officer, Ly-Huong T. Pham, our Executive Vice President of Worldwide
Development, Michael Duffy, our Senior Vice President of Sales and Services,
Ashok Pandey, the General Manager and President of Turbolinux Asia Pacific, and
Gerald Greenberg, our Senior Vice President of Worldwide Marketing have been
employed by us for a relatively short period of time. In addition, most of the
members of our management team have had only limited experience managing a
rapidly growing company on either a public or private basis. The failure of our
management team to work together effectively could prevent efficient decision-
making, affecting product development and sales and marketing efforts, which
would negatively impact our operating results.
Loss of any of our key management personnel could negatively impact our
business.
The loss or departure of any of our key management personnel could harm our
ability to implement our business plan and could lower our revenue. In that
regard, in July 2000 Irving Miller, our Chairman, co-founder and former Chief
Executive Officer, and Iris Miller, President of our Asia Pacific division and
co-founder, were terminated without cause. In July 2000, T. Paul Thomas, who
first joined us in March 2000, became our Chief Executive Officer. Our future
success depends to a significant extent on the continued service and
coordination of our management team. We do not maintain key person insurance
for any member of our management team.
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<PAGE>
Due to the competitive labor markets, we may not be able to recruit and retain
sufficient qualified professionals necessary for our growth.
In order to grow as we anticipate, we need to hire significant numbers of
professionals to develop and market our products and provide technical support,
education and training and other services to our customers. Competition for
qualified professionals in the software industry is intense, and we may be
unable to recruit and retain sufficient professionals to grow as we anticipate.
Our competitive position could decline if we are unable to acquire businesses
or technologies that are strategic for our growth and success.
If appropriate opportunities arise, we may seek to acquire businesses,
technologies, services or products that we believe are strategic for our
success. The market for Linux products is new and is rapidly evolving and our
competitive position could decline if we are unable to identify and acquire
businesses or technologies that are strategic for our success in this market.
Effecting acquisitions could require us to issue a significant number of
additional shares of common stock, use a significant amount of cash or incur
substantial indebtedness. In that regard, the willingness of a seller to accept
our common stock will depend upon a number of factors, including the historical
trading prices of our common stock and the prospects for future capital
appreciation. If potential sellers do not consider our common stock an
attractive investment, our ability to make acquisitions in exchange for our
common stock could be severely impaired. If we do issue equity or equity-linked
securities to pay for any future acquisitions, these issuances could be
dilutive to existing and future stockholders. In addition, to the extent we are
required to obtain additional financing to complete acquisitions, we cannot
assure you that we will be able to obtain such financing in amounts or on terms
acceptable to us, or at all. Moreover, the terms of any debt financing may
include financial and other covenants that could significantly limit our
ability to incur additional indebtedness, engage in certain other transactions
and otherwise impede our intended growth. Acquisitions and investments may have
negative effects on our reported results of operations due to acquisition-
related charges and amortization of acquired technology and other intangibles.
Any of these acquisition-related risks or costs could harm our business,
financial condition and operating results.
Any future acquisitions of companies or technologies may result in distraction
of our management and disruptions to our business.
If we acquire or invest in another company, we could have difficulty
assimilating that company's personnel, operations, technology or products and
service offerings. In addition, the key personnel of the acquired company may
decide not to work for us. These difficulties could disrupt our ongoing
business, distract our management and employees, increase our expenses and
adversely affect our results of operations.
If we do not successfully implement our expansion into domestic and new
international markets, our business may not grow as anticipated and substantial
resources may be drained.
A key component of our growth strategy is to expand our presence in United
States markets and in new international markets. However, for the six months
ended June 30, 2000, revenue from Japan accounted for approximately 75% of our
total revenue, while revenue from the United States accounted for only 14% and
revenue from other geographic areas
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accounted for only 11% of our total revenue. Expanding our presence in the
United States and new international markets is an essential element of our
business plan, but any revenue we generate from activities in these areas may
not offset the expense of establishing, promoting and maintaining these
operations.
A substantial majority of our historical revenue has been generated by our
Japanese subsidiary and international operations and will continue to be
affected by risks and uncertainties that are not present in domestic
operations.
For the year ended December 31, 1999, substantially all of our revenue was
derived from our Japanese and other international operations and our business
strategy anticipates that international operations will continue to be crucial
to our success. International operations pose a number of risks and
uncertainties that are not present in domestic operations. For example, some of
the factors that may impact our ability to initiate and maintain successful
operations in foreign markets include:
. difficulties in hiring and supervising employees in foreign
jurisdictions;
. language and cultural differences;
. the inability to find necessary partners for the successful distribution
of our products in foreign jurisdictions;
. varying technology standards and capabilities and other differences in
infrastructure;
. compliance with foreign laws with which we may not be familiar;
. issues relating to uncertainties of laws and enforcement relating to the
protection of intellectual property;
. export controls that may prevent us from shipping our products into and
from some markets;
. potentially adverse tax consequences;
. unexpected changes in trading policies, including the imposition of
tariffs and taxes;
. unexpected changes in regulatory requirements, including laws and
regulations governing the conduct of commerce;
. political instability or social unrest, particularly in light of the
fact that we do not have political risk insurance in the foreign
countries in which we currently conduct business;
. the fact that laws relating to the Internet remain unsettled in certain
foreign countries, and the possible adoption of new laws that may slow
the growth of the Internet and therefore decrease the demand for our
Internet and enterprise computer infrastructure products; and
. general political and economic risks and trends, including risks of
nationalization, potential economic recessions in foreign markets, and
fluctuations in foreign currencies.
If we are unable to operate profitably in foreign markets, our business will
not grow as anticipated, substantial resources could be drained and our
business, financial condition and results of operations could suffer.
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We could harm our business and reputation as a result of a violation of the
Foreign Corrupt Practices Act.
We are subject to the Foreign Corrupt Practices Act, which generally
prohibits U.S. companies and their intermediaries from bribing foreign
officials for the purpose of obtaining or keeping business or licenses or
otherwise obtaining favorable treatment. In particular, we may be held
responsible for actions taken by our strategic or local partners even though
such strategic or local partners may themselves be foreign companies that are
not subject to the Foreign Corrupt Practices Act. We have no ability to control
these strategic or local partners. Any determination that we have violated the
Foreign Corrupt Practices Act could have a material adverse effect on our
business and harm our reputation.
Our ability to repatriate funds from our foreign operations may be limited by
foreign taxes and currency controls.
Repatriation of funds received as a result of our foreign operations are
likely to be subject to withholding taxes imposed by the jurisdictions in which
we operate. In general, a U.S. corporation may claim a foreign tax credit
against its federal income tax expense for such foreign withholding taxes and
foreign taxes paid directly by corporate entities in which the corporation owns
10% or more of the voting stock. The ability to claim such foreign tax credits
and to utilize net foreign losses is, however, subject to numerous limitations,
and we may incur incremental tax costs as a result of these limitations. In
addition, we will be able to utilize these foreign tax credits only if we
generate taxable income for United States federal income tax purposes.
Moreover, our ability to repatriate funds from abroad may be subject to
currency exchange controls or other restrictions imposed by foreign
jurisdictions. Because we may rely upon cash generated by our foreign
operations to fund working capital and other cash needs of our domestic
operations, any significant limitation on our ability to repatriate funds from
abroad could have a material adverse effect on our cash position and ability to
conduct our business.
We are vulnerable to claims that our products infringe third-party intellectual
property rights particularly because our products are comprised of many
distinct software components developed by a large number of independent
parties.
We may be exposed to future litigation based on claims that our products
infringe the intellectual property rights of others. This risk is exacerbated
by the fact that most of the code in our products was developed by a large
number of independent parties over whom we exercise no supervision or control
and who may object to our commercial use of open source code they have
developed. Claims of infringement could require us to reengineer our products
or seek to obtain licenses from third parties in order to continue offering our
products. In addition, an adverse legal decision affecting our intellectual
property, or the use of significant resources to defend against this type of
claim, could place a significant strain on our financial and managerial
resources and harm our reputation.
Failure to adequately protect our intellectual property rights would result in
significant harm to our business.
While much of the code for our products is open source, our success depends
significantly on our ability to protect our trademarks, trade secrets and
certain proprietary technology contained in our products. We rely on a
combination of copyright and trademark laws, and on trade secrets and
confidentiality provisions and other contractual provisions, to protect our
intellectual property rights. These measures afford only limited protection.
Effective trademark protection may not be available in every country in which
we intend to offer our products and
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services. Our means of protecting our proprietary rights in the United States
or abroad may not be adequate and competitors may independently develop similar
technologies. Our future success will depend in part on our ability to protect
our proprietary rights. Despite our efforts to protect our proprietary rights
and technologies, unauthorized parties may attempt to copy aspects of our
products or to obtain and use trade secrets or other information that we regard
as proprietary. Legal proceedings to enforce our intellectual property rights
could be burdensome and expensive and could involve a high degree of
uncertainty. These legal proceedings may also divert management's attention
from growing our business. In addition, the laws of some foreign countries do
not protect our intellectual property rights as fully as do the laws of the
United States. If we do not enforce and protect our intellectual property, our
business may suffer substantial harm.
Because we do not own the Linux trademark, we may be prohibited from using the
Turbolinux name and mark in connection with our products and there may be
confusion about Linux products.
We use the term "Linux" as part of the name of our company and in the names
of several of our products. We have received consent from Linus Torvalds to use
"Linux" in the Turbolinux name and mark. While we have been granted a trademark
registration on the mark Turbolinux in the United States and Japan, we do not
own the Linux mark and may be prohibited from registering the Turbolinux
trademark in certain countries. We have been refused registration of the
Turbolinux mark in Korea based on a prior registration for Turbolinux owned by
a third party. If we are prohibited from using the Turbolinux name and mark in
certain countries, our brand awareness could be materially adversely affected.
Also, because we do not control the use of the Linux name or trademark by
others, use of the name by others could lead to confusion about the source,
quality, reputation and dependability of the Linux operating system in general,
which could negatively affect markets for our products.
We may be sued as a result of information published or posted on or accessible
from our Turbolinux.com websites.
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or other claims relating to the information we publish
on our websites. These types of claims have been brought, sometimes
successfully, against online services in the past, and can be costly to defend.
We may also be subjected to claims based on content that is accessible from our
websites through links to other websites or through content and materials that
may be posted by visitors to our website. Our commercial and general liability
insurance may not adequately protect us against these types of claims. We have
not been a party to any lawsuit of this type to date.
Risks Related to Our Industry
The market for Linux solutions may not grow as we anticipate.
Our strategy for marketing our Linux solutions depends in part upon our
belief that businesses and enterprises will increasingly adopt Linux solutions.
If businesses and enterprises, which at present favor Microsoft, UNIX and other
non-Linux operating systems, do not increasingly adopt the Linux operating
system and related solutions, a significant market for our products will not
develop. Factors that may keep businesses and enterprises from adopting Linux
solutions include:
. limited adoption of Linux among businesses and enterprises generally;
. previous significant investments in competing systems; and
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. lack of adequate Linux-trained professionals and support services.
Our products may not be adopted due to the scarcity of software applications
for Linux operating systems and the lack of Linux standards for these
applications.
Business and enterprises will not adopt our Linux products if sufficient
Linux applications are not available to meet their needs. The number of
software products available for use with Linux is limited, and many widely-used
software products have not been developed in versions that are compatible with
Linux operating systems. Since software applications meeting Internet and
enterprise computing infrastructure needs are readily available for operating
systems currently favored by businesses and enterprises, such as Windows NT and
UNIX, our Linux products may not be adopted even if the Linux operating system
and our Linux solutions are perceived to offer performance advantages over
competing operating systems and solutions. In addition, many different versions
of Linux are currently available in the market and no standards for
compatibility among these versions of Linux have been widely adopted. It is
unlikely that developers will develop products for Linux if they will not be
compatible with the majority of Linux versions. If developers decide not to
develop applications that meet Internet and enterprise computing infrastructure
needs, demand for our products and services may decline or fail to grow.
If multiple and incompatible versions of Linux achieve sufficient market
acceptance, demand for our products could decline.
According to International Data Corporation, there are over 100 commercially
available unique versions of the Linux operating system. We believe that,
currently, most distributions of the Linux operating system are compatible and
existing 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 demand for our products could
decline. Furthermore, our product development costs could increase if we
attempt to develop a product compatible across different versions or release
separate versions of our products to run on these different versions. If the
demand for our products declines or our product development costs rise, our
business could suffer.
The Linux operating system and Internet and enterprise computing infrastructure
markets are intensely competitive and we may be unable to compete effectively
with providers of competitive operating systems and solutions.
The Linux operating system, Internet and enterprise computing infrastructure
and clustering solutions markets are highly competitive, characterized by rapid
technological change and significantly affected by new product innovations. We
face direct competition in the area of clustering solutions primarily from a
few well-established companies including SGI, Sun Microsystems and Veritas.
These competitors are large, well-established companies that have significantly
greater financial resources, more extensive marketing and distribution
capabilities, larger development staffs and more widely recognized brands and
products than we have. We also face competition in this space from newer but
quickly moving companies such as Resonate and F5 Networks, which focus
specifically on high-availability solutions for eCommerce.
We compete with other providers of Linux operating systems, particularly Red
Hat, Caldera Systems, SuSE and Corel. Some of these competitors, such as Red
Hat, have stronger brand awareness, larger and more cohesive distribution
channels, a greater number of strategic alliances and larger installed customer
bases than we do. Due to the open source nature of Linux, anyone can freely
download Linux and many Linux applications and modify
17
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and re-distribute them with few restrictions. For example, solution providers
upon whom we depend for the distribution of our products could instead create
their own Linux solutions to provide to their customers. Also, established
companies and other institutions could easily produce competing versions of
Linux, since the Linux operating system market in which we compete exhibits
minimal barriers to entry. In particular, distributors of UNIX operating
systems could leverage their existing service organizations and compete with us
because Linux and UNIX operating systems share many common features. These
companies have more significant resources, stronger brand awareness and larger
customer bases than we do and could quickly achieve significant market share.
We also compete with providers of other, more established operating systems,
including technical support organizations, consulting and professional services
organizations and non-Linux operating system vendors which include companies
with which we have strategic relationships. AT&T, Compaq, Hewlett-Packard, IBM,
Microsoft, Novell, Olivetti, Sun Microsystems and Unisys are each providers of
competing operating systems, which in most cases are more established among
business users than the Linux operating system. These companies have
significantly greater resources and brand awareness, larger development staffs
and more extensive marketing and distribution capabilities than we do.
We could be prevented from selling or developing our products if the GNU
General Public License and similar licenses under which our products are
developed and licensed are not enforceable.
The core of the Linux operating system, which we refer to as the Linux
kernel, has been developed and licensed under the GNU General Public License
and similar licenses. These licenses state that any program licensed under them
may be copied, modified and distributed by anyone without the payment of
royalties. We know of no circumstance under which these licenses have been
challenged or interpreted in court. Accordingly, it is possible that a court
would hold these licenses to be unenforceable in the event that someone were to
file a claim asserting proprietary rights in a program developed and
distributed under them. Any ruling by a court that these licenses are not
enforceable, or that Linux-based operating systems or other similar open source
software, or significant portions of them, may not be liberally copied,
modified or distributed, would have the effect of preventing us from selling or
developing our products.
Risks Related to This Offering
Our stock price may be extremely volatile.
Our common stock has never been sold in a public market and an active trading
market for our common stock may not develop or be sustained upon the completion
of this offering. The initial offering price of the common stock in this
offering may not be indicative of the prices that will prevail in the public
market after this offering, and the market price of the common stock could fall
below the initial public offering price.
In addition, the market price of our common stock could fluctuate widely in
response to a number of factors, including the following:
. actual or anticipated variations in operating results;
. announcements of technological innovations, new products or new services
by us or by our competitors or customers;
. changes in financial estimates or recommendations by stock market
analysts regarding us or our competitors;
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. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel;
. future equity or debt offerings by us or our announcements of these
offerings; and
. general market and economic conditions.
In addition, in recent years, the stock market in general, and the Nasdaq
National Market and the securities of technology companies in particular, have
experienced extreme price and volume fluctuations. These fluctuations have
often been unrelated or disproportionate to the operating performance of
individual companies. These broad market fluctuations may materially adversely
affect our stock price, regardless of our operating results.
We may invest or spend the proceeds of this offering in ways with which you may
not agree and in ways that may not yield a return.
We will retain broad discretion over the use of proceeds from this offering.
Stockholders may not deem the actual uses desirable, and our use of the
proceeds may not yield a significant return or any return at all. We intend to
use the proceeds from this offering for general corporate purposes, including
working capital and capital expenditures. We may also use a portion of the
proceeds for acquisitions and investments. Because of the number and
variability of factors that determine our use of the net proceeds from this
offering, we cannot assure you that these uses will not vary substantially from
our currently planned uses.
Some of our existing stockholders can exert control over us, and they may not
make decisions that reflect the interests of all stockholders.
After this offering, our officers, directors and principal stockholders
(greater than 5% stockholders) will together control approximately % of our
outstanding common stock and our founders, who are no longer officers or
directors, will control approximately % of our outstanding common stock. As a
result, these stockholders, if they act together, and our founders acting
alone, will be able to exert a significant degree of influence over our
management and affairs and control matters requiring stockholder approval,
including the election of all of our directors and approval of significant
corporate transactions. In addition, this concentration of ownership may delay
or prevent a change in control of Turbolinux and might affect the market price
of our common stock, even when a change may be in the best interests of all
stockholders. In addition, the interests of these stockholders may not always
coincide with our interests or the interests of other stockholders. Our
founding stockholders have recently entered into a separation agreement with us
and are no longer directors or officers of Turbolinux or our subsidiaries and,
as a result, they may seek to take actions which are opposed by management or
which our management does not believe are in our best interests.
Our charter and bylaws and Delaware law contain provisions that may delay or
prevent a change of control.
Provisions of our charter and bylaws, both of which will be amended and
restated upon the closing of this offering, may have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of us. These provisions could limit the
price that investors might be willing to pay in the future for shares of our
common stock. These provisions include:
. the division of the board of directors into three separate classes;
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. the absence of cumulative voting in the election of directors;
. restrictions on the ability of our stockholders to call special
meetings;
. procedures for advance notification of stockholder nominations and
proposals; and
. the ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, our board of directors has the authority to issue up to
10,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The issuance of
preferred stock, while providing flexibility in connection with possible
financings or acquisitions or other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of our
outstanding voting stock.
We are also subject to Section 203 of the Delaware General Corporation Law
that, subject to exceptions, prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years following the date that this stockholder became an interested stockholder
without the approval of either its board of directors or stockholders. The
preceding provisions of our charter and bylaws, as well as Section 203 of the
Delaware General Corporation Law, could discourage potential acquisition
proposals, and delay or prevent a change of control and changes in our
management.
Sales of shares eligible for future sale after this offering could cause our
stock price to decline.
Based on shares outstanding as of , we will have shares of common
stock outstanding upon the completion of this offering, assuming no exercise of
outstanding options or warrants. If our stockholders sell substantial amounts
of our common stock, including shares issued upon exercise of outstanding
options and warrants, in the public market following this offering, the market
price of our common stock could fall. Such sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. In particular, our founders, who
separated from us in July 2000, will hold approximately % of our outstanding
common stock immediately after this offering and may seek to sell all or a
substantial portion of their shares in the public market or in private
transactions. Please see "'Shares Eligible for Future Sale" for a description
of sales of our common stock, including sales by our founders, that may occur
in the future. Of the shares outstanding upon completion of this offering,
all of the shares sold in this offering will be freely tradeable, unless they
are held by our affiliates. The remaining shares of common stock outstanding
after this offering will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of
Date of Availability for Sale Shares
----------------------------- ----------
<S> <C>
At the date of this prospectus................................
90 days after the date of effectiveness of the registration
statement.................................................... 704,513
181 days after the date of this prospectus.................... 51,387,021
Periodically thereafter....................................... 9,288,253
</TABLE>
We do not intend to pay dividends on our common stock.
We currently intend to retain available funds to finance the development of
our business and, therefore, do not anticipate paying any dividends in the
foreseeable future.
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Investors in this offering will suffer immediate and substantial dilution.
We expect the initial public offering price to be substantially higher than
the net tangible book value per share of our common stock. The net pro forma
tangible book value, computed as of June 30, 2000 and after giving effect to
the sale of the shares offered by this prospectus, of a share of common stock
purchased at an assumed initial public offering price of $ per share will
be only $ . We compute net tangible book value per share as described below
under "Dilution." Additional dilution may occur if holders of options or
warrants to purchase our common stock, whether currently outstanding or
subsequently granted, exercise their options or warrants.
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SPECIAL NOTE ON 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. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "anticipate," "intend,"
"plan," "believe," "estimate," "potential," or "continue," the negative of
these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from any forward-
looking statement for many reasons, including the risks outlined under "Risk
Factors."
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. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the forward-
looking statements.
We undertake no obligation to update any forward-looking statements for any
reason after the date of this prospectus, whether to conform these statements
to actual results or to changes in our expectations or otherwise. Before you
invest in our common stock, you should be aware that the occurrence of the
events described under "Risk Factors" and elsewhere in this prospectus could
have a material adverse effect on our business, operating results and financial
condition.
In addition, this prospectus contains forecasts and estimates regarding the
Internet and related matters, such as estimated historical growth in units
shipped by, and market share of, Linux software companies, anticipated growth
in Internet infrastructure spending, anticipated growth in shipments and sales
of Linux and other operating systems and similar matters. These forecasts and
estimates have been included in studies, reports or other data published or
provided by market research and other firms, including International Data
Corporation. While we believe these studies, reports and other data to be
reliable, we have not independently verified them and, because they are
forecasts and estimates only, they are subject to inherent uncertainty.
Moreover, in this prospectus we refer to market and demographic data and
estimates obtained from market research, publicly available information and
industry publications. While we believe that this market research and publicly
available information and these industry publications are reliable, we have not
independently verified any of them and we cannot make any representation to you
as to the accuracy of that information.
22
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of common
stock we are offering at an estimated initial public offering price of $
per share, after deducting underwriting discounts and commissions and estimated
offering expenses, will be approximately $ . If the underwriters over-
allotment option is exercised in full, we estimate that our net proceeds will
be approximately $ million. We expect to use the net proceeds from this
offering for general corporate purposes, including working capital and capital
expenditures. We also may use a portion of the net proceeds for acquisitions
and investments. Pending use of the net proceeds for the above purposes, we
intend to invest these funds in short-term investments.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends in the foreseeable future. We presently
intend to retain available funds to finance the development of our business.
Payment of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results, current and anticipated cash needs and plans for
expansion.
23
<PAGE>
CAPITALIZATION
The following table shows our consolidated cash and cash equivalents and our
consolidated capitalization as of June 30, 2000:
. on an actual basis;
. on a pro forma basis to reflect:
-- the issuance of 8,465,753 shares of redeemable convertible preferred
stock subsequent to June 30, 2000 for total net proceeds of
approximately $30.2 million, as if these shares had been issued as
of June 30, 2000;
-- the conversion upon completion of this offering of all of our shares
of redeemable convertible preferred stock outstanding as of June 30,
2000 and the 8,465,753 shares of redeemable convertible preferred
stock we issued after that date into 34,224,804 shares common stock,
as if the conversion had occurred as of June 30, 2000; and
-- our repurchase of 2,054,793 shares of common stock from our founders
in October 2000 for $7.5 million, or $3.65 per share, as if the
repurchase had occurred as of June 30, 2000.
. on a pro forma basis, calculated as described above, as adjusted to
reflect the receipt of the estimated net proceeds from the sale of
common stock offered by us at an assumed initial public offering price
of $ per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
The following table does not include:
. the issuance of shares of common stock upon option exercises subsequent
to June 30, 2000, including 1,227,500 shares of common stock issued upon
option exercises from July 1, 2000 through October 15, 2000;
. options to purchase 4,762,228 shares of common stock outstanding under
our 1999 Equity Incentive Plan and options to purchase 1,900,000 shares
of common stock granted outside of our 1999 Equity Incentive Plan at a
weighted average exercise price of $0.45 per share outstanding as of
October 15, 2000;
. 1,403,272 shares of common stock available for future grant under our
1999 Equity Incentive Plan as of October 15, 2000, which after the date
of this offering will be issued under our 2000 Stock Incentive Plan;
. 3,000,000 shares of common stock, plus annual increases, to be available
for future grant under our 2000 Stock Incentive Plan;
. 500,000 shares of common stock, plus annual increases, to be available
for future purchase under our 2000 Employee Stock Purchase Plan; and
. 956,608 shares of common stock issuable upon exercise of outstanding
warrants as of October 15, 2000 at a weighted average exercise price of
$0.68 per share.
24
<PAGE>
This information should be read in conjunction with the financial statements
and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, unaudited)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 26,998 $ 49,688
======== ========
Redeemable convertible preferred stock, $0.001
par value, 26,500,000 shares authorized,
25,759,052 shares issued and outstanding
actual; 10,000,000 shares authorized, no
shares issued and outstanding pro forma and
pro forma as adjusted......................... $ 61,903 $ --
Stockholders' equity (deficit):
Common stock, $0.001 par value, 95,500,000
shares authorized, 27,982,276 shares issued
and outstanding actual; 200,000,000 shares
authorized pro forma and pro forma as
adjusted; 60,152,287 shares issued and
outstanding pro forma; shares issued
and outstanding pro forma as adjusted....... 30,837 122,927
Deferred stock compensation.................... (17,206) (17,206)
Notes receivable from stockholders............. (1,545) (1,545)
Accumulated other comprehensive income (loss).. (2) (2)
Retained earnings (accumulated deficit)........ (38,707) (46,194)
-------- --------
Total stockholders' equity (deficit)....... (26,623) 57,980
-------- --------
Total capitalization....................... $ 35,280 $ 57,980
======== ========
</TABLE>
25
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000, before giving
effect to the issuance of the common stock offered by this prospectus, was
approximately $50.5 million or $0.84 per share of common stock. Pro forma net
tangible book value per share represents the amount of our pro forma
stockholders' equity less our intangible assets and deferred offering costs
divided by the number of shares of common stock outstanding, assuming:
. the 8,465,753 shares of redeemable convertible preferred stock that we
issued subsequent to June 30, 2000 for total net proceeds of
approximately $30.2 million had been issued as of June 30, 2000;
. all of our shares of redeemable convertible preferred stock outstanding
as of June 30, 2000 and the 8,465,753 shares of redeemable convertible
preferred stock we issued after that date had been converted into
34,224,804 shares of common stock upon completion of this offering, as
if the conversion had occurred as of June 30, 2000; and
. the 2,054,793 shares of common stock that we repurchased from our
founders in October 2000 for $7.5 million, or $3.65 per share, had been
repurchased as of June 30, 2000.
After giving effect to our sale of the shares of common stock offered by
this prospectus, based upon an assumed initial public offering price of $
per share and after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us, our pro forma net tangible book
value at June 30, 2000, calculated on a pro forma basis as described above,
would have been $ or $ per share. This represents an immediate increase
in pro forma net tangible book value of $ per share to existing stockholders
and an immediate dilution to new investors of $ per share. Dilution is
determined by subtracting pro forma net tangible book value per share after the
offering from the assumed initial public offering price per share. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
Pro forma net tangible book value per share before the
offering as of June 30, 2000................................. $0.84
Increase in pro forma net tangible book value per share
attributable to new investors................................
-----
Pro forma net tangible book value per share after the offering..
----
Pro forma dilution per share to new investors................... $
====
</TABLE>
The following table sets forth, on the pro forma basis, as of June 30, 2000,
the difference between the number of shares of common stock purchased from us,
the total consideration paid, and the average price per share paid by the
existing stockholders and by investors purchasing shares in this offering
(based upon an assumed initial public offering price of $ per share):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 60,152,287 % $88,145,000 % $1.47
New investors ......... $
---------- ----- ----------- -----
Total................ 100.0% $ 100.0% $
========== ===== =========== =====
</TABLE>
26
<PAGE>
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to or % of the total
shares of common stock outstanding after this offering.
In the event that we issue additional shares of common stock in the future,
purchasers of common stock in this offering may experience further dilution.
As of October 15, 2000, 1,227,500 shares of common stock had been issued as a
result of option exercises after June 30, 2000 at a weighted average exercise
price of $0.50 per share. The issuance of these shares resulted in additional
dilution to new investors.
As of October 15, 2000, there were options outstanding to purchase 6,662,228
shares of common stock at a weighted average exercise price of $0.45 per share
and 956,608 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $0.68 per share. An aggregate
of 3,000,000 shares of common stock, plus annual increases, will be available
for future grant under our 2000 Stock Incentive Plan, and a total of 500,000
shares of common stock, plus annual increases, will be available for future
purchases under our 2000 Employee Stock Purchase Plan, upon completion of this
offering. As of October 15, 2000, 1,403,272 shares of common stock were
available for issuance under our 1999 Equity Incentive Plan. To the extent the
outstanding options or warrants described above are exercised, new investors
will experience further dilution, and to the extent that new shares, options or
rights are issued under our stock plans, new investors may experience further
dilution.
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1998
and 1999 and for each of the three years in the period ended December 31, 1999
are derived from our audited consolidated financial statements included
elsewhere in this prospectus. The consolidated financial data as of June 30,
2000 and for the six months ended June 30, 1999 and 2000 are derived from our
unaudited consolidated financial statements included elsewhere in this
prospectus. The consolidated balance sheet data as of December 31, 1997 are
derived from audited consolidated financial statements and the consolidated
financial data as of and for the years ended December 31, 1995 and 1996 are
derived from unaudited consolidated financial statements not included in this
prospectus. We have prepared our unaudited consolidated financial statements on
the same basis as our audited consolidated financial statements and have
included all adjustments, consisting of only normal recurring adjustments, that
we consider necessary for a fair presentation of our financial position and
operating results. When you read this selected consolidated financial data, it
is important that you also read the historical and pro forma financial
statements and related notes included in this prospectus, as well as the
section of this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Our historical results of
operations and financial condition are not necessarily indicative of our future
results of operations or financial condition.
Pro forma net loss per share and shares used in calculating pro forma net
loss per share appearing in the following table have been computed by assuming
that the shares of our redeemable convertible preferred stock outstanding as of
June 30, 2000 had been converted into shares of common stock as of their
respective issue dates. This pro forma data does not give effect to the
issuance of 8,465,753 shares of Series B redeemable convertible preferred stock
that we issued subsequent to June 30, 2000, the issuance of any shares of our
common stock pursuant to option exercises after June 30, 2000 or our repurchase
in October 2000 of 2,054,793 shares of common stock from our founders. See
notes 1 and 8 to our consolidated financial statements for an explanation of
how these pro forma amounts have been calculated. The pro forma financial data
appearing below does not purport to be indicative of the results of operations
that would have resulted had the transactions reflected in that pro forma data
in fact taken place on the assumed dates referred to above, nor does it purport
to be indicative of our future results of operations.
28
<PAGE>
<TABLE>
<CAPTION>
Six months
Year Ended December 31, Ended June 30,
-------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------- ------ --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue................. $4,669 $3,093 $1,615 $3,574 $ 4,939 $1,766 $ 2,932
Cost of revenue......... 1,935 1,305 642 1,395 2,872 846 3,133
------ ------ ------ ------ ------- ------ --------
Gross margin............ 2,734 1,788 973 2,179 2,067 920 (201)
Operating expenses:
Sales and marketing... 682 1,046 380 549 3,897 735 14,242
Research and
development.......... 490 591 234 313 1,949 372 6,885
General and
administrative....... 1,560 632 405 619 3,199 756 6,788
Amortization of
deferred stock
compensation*........ -- -- -- -- 2,531 -- 3,082
------ ------ ------ ------ ------- ------ --------
Total operating
expenses............ 2,732 2,269 1,019 1,481 11,576 1,863 30,997
------ ------ ------ ------ ------- ------ --------
Income (loss) from
operations............. 2 (481) (46) 698 (9,509) (943) (31,198)
Other income (expense):
Interest income....... 15 -- -- 6 69 72 1,203
Other income
(expense)............ (31) (152) (86) 78 (22) (6) 43
------ ------ ------ ------ ------- ------ --------
Other income
(expense), net...... (16) (152) (86) 84 47 66 1,246
------ ------ ------ ------ ------- ------ --------
Income (loss) before
income taxes........... (14) (633) (132) 782 (9,462) (877) (29,952)
Provision for (benefit
from) income taxes..... 27 (245) (85) 495 (66) (36) 1
------ ------ ------ ------ ------- ------ --------
Net income (loss)....... $ (41) $ (388) $ (47) $ 287 $(9,396) $ (841) $(29,953)
====== ====== ====== ====== ======= ====== ========
Net income (loss) per
share basic and
diluted................ $ -- $(0.02) $ -- $ 0.01 $ (0.45) $(0.04) $ (1.43)
====== ====== ====== ====== ======= ====== ========
Shares used in
calculating basic and
diluted net income
(loss) per share....... 21,000 21,000 21,000 21,000 21,000 21,000 21,000
====== ====== ====== ====== ======= ====== ========
Pro forma net loss per
share basic and
diluted................ $ (0.37) $ (0.65)
======= ========
Shares used in
calculating pro forma
basic and diluted net
loss per share......... 25,121 46,200
======= ========
* Amortization of
deferred stock
compensation:
Cost of revenue....... $ -- $ 133
Sales and marketing... 1,067 1,112
Research and
development.......... 496 1,394
General and
administrative....... 968 443
------- --------
Total................ $ 2,531 $ 3,082
======= ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
------------------------------- June 30,
1995 1996 1997 1998 1999 2000
------ ---- ---- ------ ------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents...... $ 186 $ 33 $ 31 $ 630 $34,709 $ 26,988
Working capital................ 545 213 202 796 31,113 22,884
Total assets................... 1,399 960 764 2,330 37,733 43,592
Redeemable convertible
preferred stock............... -- -- -- -- 38,528 61,903
Total stockholders' equity
(deficit)..................... 964 573 555 886 (6,138) (26,623)
</TABLE>
29
<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 Consolidated Financial Data" and the financial statements and notes
included elsewhere in this prospectus. The discussion in this prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of our plans, objectives, expectations and intentions. The
cautionary statements made in this prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this prospectus. Our actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or
contribute to the differences include those discussed in "Risk Factors," as
well as those discussed elsewhere in this prospectus.
Overview
We are a leading provider of open source software solutions and services. We
are focused on Linux-based Internet and enterprise computing infrastructure
software solutions, including open source Linux workstation and server
operating systems and value-added Linux clustering technologies.
We were incorporated in Utah as Pacific HiTech, Inc. in September 1992 and
reincorporated in Delaware as TurboLinux, Inc. in June 1999. Prior to 1999, we
financed our activities primarily through cash flow from operations. Beginning
in 1999, we have financed our operations primarily from the proceeds of private
sales of our redeemable convertible preferred stock. In 1997, we changed our
product mix from selling Linux and non-Linux based software and CD-ROM products
to selling Linux and other related products. During the past twelve months, we
have substantially revised our business plan and restructured our operations to
focus on Linux-based software solutions for Internet and enterprise computing
infrastructure needs. Our Linux software products are distributed through a
variety of indirect channels such as distributors, value-added resellers and
solution providers, such as system integrators, original equipment
manufacturers and Internet service providers, as well as directly to the end
user using our internal sales team and website.
We currently market our software and related products worldwide. We changed
our product mix to focus on open source products in 1997, and until early 1999,
we focused our efforts in the Asia Pacific markets, primarily Japan. Revenue
from customers outside the United States was $1.1 million in 1997, $3.4 million
in 1998, $4.8 million in 1999 and $2.5 million in the first six months of 2000,
representing 67%, 96%, 97% and 86% of total revenue during the respective
periods. Substantially all of our international revenue during 1997, 1998 and
1999 was attributable to sales in Japan, while sales in Japan comprised
approximately 87% of our international revenue for the six months ended June
30, 2000.
Prior to 2000, we did not provide any significant service offerings to our
customers. Beginning in 2000, we expanded the services provided to our
customers to include more extensive support and maintenance, as well as
consulting and training services.
We recognize revenue in accordance with the American Institute of Certified
Public Accountants, or AICPA, Statement of Position (SOP) 97-2, Software
Revenue Recognition. Revenue from the sales of software is recognized upon
shipment of the product provided that the following requirements are met:
. persuasive evidence of an arrangement exists;
. delivery has occurred or services have been performed;
30
<PAGE>
. the price to the buyer is fixed and determinable; and
. collection of the resulting receivable is probable.
We require all sales into the distribution channel, other than sales through
our website, to be evidenced by a written agreement. If a reserve for returns
of products sold through distributors and other resellers can be reasonably
estimated, revenue is recognized upon shipment, less a reserve for sales
returns, and when all revenue recognition criteria have been met. If a reserve
for these returns cannot be reasonably estimated, revenue is recognized upon
sell-through to the end user or, if sell-through information is not available,
the collection of cash, and when all revenue recognition criteria have been
met. Product returns due to defects and damage during shipment are
insignificant and are included in warranty costs.
For the sale of some of our software products, we currently provide telephone
and email technical support services for 60 to 90 days after customer
registration, depending upon the product. There is no additional fee for these
services, which do not include product updates or upgrade rights. Since we do
not currently sell these technical support services separately, there is no
vendor specific objective evidence of the fair value of these services.
Therefore, we recognize all of the revenue from these sales over the period
that the technical support services are provided.
Revenue related to shipments to resellers where we have significant post-
delivery obligations or where the sale is subject to customer acceptance is
deferred until there is no significant obligation remaining or acceptance has
occurred. To date, we have not shipped any products having significant post-
delivery obligations or subject to acceptance.
Revenue for support, maintenance, consulting, and training services is
recognized as services are performed. Revenue from any extended support
agreements is deferred and recognized as the services are provided or over the
period of the contract. Through June 30, 2000, revenue for support,
maintenance, consulting and training services has not been significant.
Cost of revenue consists primarily of our cost for production, fulfillment
and shipment of software. The cost of production includes expenses for the
physical media, documentation and packaging. Royalties owed to third parties
for software included in our products are also included in these costs. Costs
of our service organization are included in our cost of revenue although these
costs were not significant until 2000.
Our gross margin has been affected by production costs, product mix, selling
prices and distribution channel. Gross margin varies by product category and
geographical region. In addition, selling price discounts due to various
promotions have adversely impacted our gross product margin. We expect this
overall gross margin, as a percentage of revenue, will fluctuate from period to
period as sales shift among product types, distribution channels and
geographies and depending upon the discounts or other promotions we may
implement from time to time. We have recently incurred additional
infrastructure expense to build up our support, maintenance, consulting, and
training services organization. This has resulted in a negative gross margin
for the first six months of 2000. We expect to continue to incur additional
infrastructure expenses to build our service organization. These expenses will
continue to adversely affect our results of operations to the extent that our
service revenue does not substantially increase.
Sales and marketing expense consists primarily of personnel related expenses
such as salary, benefits and travel and entertainment, as well as sales
commissions, advertising, promotions, marketing development funds and trade
show expenses.
31
<PAGE>
Research and development expense includes salary and related costs of
employees engaged in research and development activities. We have engineering
centers in various locations around the world that are focused on delivering
new technology to the enterprise. We believe that continued investment in
research and development is necessary for our long-term success.
General and administrative expense consists primarily of salaries and related
costs for administration, finance, human resources and legal, as well as
amortization of intangible assets. Information system expenses, as well as
facility costs, are allocated to the other functional areas in our company that
use these services. The provision for uncollectible accounts receivable is
included in general and administrative expense.
We recorded deferred stock compensation of $12.3 million for 1999 and $10.5
million for the six months ended June 30, 2000 in connection with the grant of
employee and nonemployee stock options. From July 1, 2000 through September 30,
2000, we granted stock options to purchase an additional 4,660,300 shares of
common stock at a weighted average exercise price of $0.53 per share and expect
to record additional deferred stock compensation during the third quarter of
2000. Deferred stock compensation represents the difference between the deemed
fair value of common stock for accounting purposes and the option exercise
price for these options at the date of the grant. Deferred stock compensation
is presented on our consolidated balance sheets as a reduction in stockholders'
equity and is amortized over the vesting period of the options. We expensed
$2.5 million of deferred stock compensation during 1999 and $3.1 million in the
first half of 2000. Based on stock options granted through June 30, 2000 and
excluding deferred stock compensation expense resulting from any options
granted after that date, we expect deferred stock compensation expense of
approximately $3.8 million for the six months ending December 31, 2000, $4.9
million for 2001, $4.6 million for 2002, $3.5 million for 2003, $0.3 million
for 2004 and $0.1 million for 2005. We may incur additional deferred stock
compensation in connection with future options granted.
In February 2000, we acquired certain assets from Active Tools. The $8.4
million purchase price consisted of $2.9 million in cash and fully vested
options to purchase 1.1 million shares of our common stock at an exercise price
of $0.50 per share. In addition, we issued warrants to purchase 710,000 shares
of common stock at an exercise price of $0.50 per share. In connection with
this asset purchase, we recorded $5.7 million of goodwill and $1.5 million of
other intangible assets, and also recorded $1.1 million of acquired in-process
research and development which was expensed in the first quarter of 2000.
Goodwill will be amortized on a straight-line basis over an estimated useful
life of seven years, or approximately $0.8 million per annum. Other intangible
assets will be amortized also on a straight-line basis over estimated useful
lives of three to five years, or approximately $0.3 million per annum.
In October 2000, we entered into a separation agreement with our founders
which is described under the caption "Certain Transactions" appearing elsewhere
in this prospectus. Under the separation agreement, we made a payment in the
amount of $850,000 to our founders, which will be reflected as an expense in
our financial statements in the second half of 2000. We also repurchased shares
of our common stock from our founders in October 2000 for approximately $7.5
million, or $3.65 per share. We may also be required to make additional
payments and loans to our founders under the terms of the separation agreement.
32
<PAGE>
Results of Operations
The following table shows the percentage of revenue represented by items
reflected on our consolidated statement of operations:
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
--------------------- ----------------
1997 1998 1999 1999 2000
----- ----- ------ ----- --------
<S> <C> <C> <C> <C> <C>
Revenue............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue..................... 39.8 39.0 58.1 47.9 106.9
----- ----- ------ ----- --------
Gross margin........................ 60.2 61.0 41.9 52.1 (6.9)
Operating expenses:
Sales and marketing............... 23.5 15.4 78.9 41.6 485.7
Research and development.......... 14.5 8.8 39.5 21.1 234.8
General and administrative........ 25.1 17.3 64.8 42.8 231.5
Amortization of deferred stock
compensation..................... -- -- 51.2 -- 105.1
----- ----- ------ ----- --------
Total operating expenses........ 63.1 41.5 234.4 105.5 1,057.1
----- ----- ------ ----- --------
Income (loss) from operations....... (2.9) 19.5 (192.5) (53.4) (1,064.0)
Other income (expense):
Interest income................... -- 0.2 1.4 4.1 41.0
Other income (expense)............ (5.3) 2.2 (0.4) (0.3) 1.5
----- ----- ------ ----- --------
Other income (expense), net..... (5.3) 2.4 1.0 3.8 42.5
----- ----- ------ ----- --------
Income (loss) before income taxes... (8.2) 21.9 (191.5) (49.6) (1,021.5)
Provision for (benefit from) income
taxes.............................. (5.3) 13.9 (1.3) (2.0) --
----- ----- ------ ----- --------
Net income (loss)............... (2.9)% 8.0% (190.2)% (47.6)% (1,021.5)%
===== ===== ====== ===== ========
</TABLE>
Six Months Ended June 30, 1999 and 2000
Revenue
Our revenue was $1.8 million for the six months ended June 30, 1999 and
$2.9 million for the six months ended June 30, 2000. This increase was due
primarily to increased sales of our products in the United States and China. We
also began to offer customer service and support in 2000 that provided $125,000
of revenue in the first six months of 2000. Revenue in Japan as a percentage of
our total revenue was 97% in the first six months of 1999 and 75% in the same
period in 2000. This decline in the percentage of revenues from sales in Japan
was due to the introduction and sale of our Internet and enterprise software
products outside of Japan in the first six months of 2000.
Gross Margin
Gross margin was $0.9 million for the six months ended June 30, 1999 and
$(0.2) million for the six months ended June 30, 2000. Gross margin as a
percentage of revenue was 52% in the first six months of 1999 and (7)% in the
same period in 2000. While gross margin in the first six months of 2000 was
down slightly in Japan as compared to the same period of 1999, the significant
decrease in our gross margin in the first half of 2000 was the result of
negative service and support gross margin as we incurred substantial additional
infrastructure expense to build our support, maintenance, consulting and
training services organization, as well as negative product gross margin in the
United States in the first half of 2000 as a result of an aggressive price
discount program in the retail channel. This decrease was offset in part by the
favorable impact of a change in our product mix toward enterprise and Internet
infrastructure solutions.
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<PAGE>
Operating Expenses
Sales and Marketing. Sales and marketing expense was $0.7 million for the six
months ended June 30, 1999 and $14.2 million for the six months ended June 30,
2000. The large increase in 2000 was the result of a net increase in staffing
to build our sales and marketing infrastructure. In addition, we had
significant increases in advertising, promotions and trade show expenses.
Research and Development. Research and development expense was $0.4 million
for the six months ended June 30, 1999 and $6.9 million for the six months
ended June 30, 2000. The large increase in 2000 was the result of an increase
in software engineering and development personnel. Research and development
expense for the first half of 2000 also included a $1.1 million charge for
acquired in-process research and development as a result of our February 2000
acquisition of assets from Active Tools.
General and Administrative. General and administrative expense was
$0.8 million for the six months ended June 30, 1999 and $6.8 million for the
six months ended June 30, 2000. The large increase in expense from 1999 to 2000
was principally due to the growth in our support infrastructure.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation was $0.0 for the six months ended June 30, 1999 and $3.1 million
for the six months ended June 30, 2000. This amortization was the result of our
recognition in 1999 and the first six months of 2000 of deferred stock
compensation in the total amount of $22.8 million related to stock option
grants to employees and non-employees, which we are amortizing over the vesting
period of the options beginning in the second half of 1999.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income, interest
expense and foreign exchange gain (loss) and was $66,000 for the six months
ended June 30, 1999 and $1.2 million for the six months ended June 30, 2000.
The increase in other income from 1999 to 2000 was due to a large increase in
interest income, as our average cash balance in the first half of 2000 was much
higher than the first half of 1999 due to the receipt of proceeds from the sale
of our redeemable convertible preferred stock.
Provision for Income Taxes
We had an income tax benefit in the first six months of 1999 of $36,000 and a
provision of $1,000 for the comparable period in 2000. We have provided a full
valuation allowance to reduce our net deferred tax assets to amounts that are
more likely than not to be realized. Accordingly, no significant tax benefit
was recorded in the first six months of 1999 and 2000.
Years Ended December 31, 1997, 1998 and 1999
Revenue
Our revenue was $1.6 million for 1997, $3.6 million for 1998 and $4.9 million
for 1999. The 121% increase from 1997 to 1998 was principally due to the
increased sales of our Workstation products in the Japanese market. In
addition, we had lower sales in Japan in 1997 due to our transition from
selling Linux and non-Linux based software and CD-ROM products to selling Linux
and other related products. The 38% increase in revenue from 1998 to 1999 was
also due primarily to increased sales of our Workstation products in Japan.
Revenue in Japan as a percentage of our total revenue was 67% in 1997, 96% in
1998 and 95% in 1999.
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Gross Margin
Gross margin was $1.0 million in 1997, $2.2 million in 1998 and $2.1 million
in 1999. Gross margin as a percent of revenue was 60% in 1997, 61% in 1998 and
42% in 1999. Gross margin as a percentage of revenue was largely unchanged from
1997 to 1998 due to consistent gross margin as a percentage of revenue in
Japan. The decrease in gross margin as a percentage of revenue from 1998 to
1999 was due to negative gross margin as a percentage of revenue in the United
States in 1999 due to an aggressive pricing discount program in the retail
channel, offset in part by slightly higher gross margin as a percentage of
revenue in Japan in 1999.
Operating Expenses
Sales and Marketing. Sales and marketing expense was $0.4 million in 1997,
$0.5 million in 1998 and $3.9 million in 1999. The large increase in 1999 was
the result of increased staffing to build our sales and marketing
infrastructure. In addition, we had significant increases in advertising,
promotions and trade show expenses in 1999 compared to 1998.
Research and Development. Research and development expense was $0.2 million
in 1997, $0.3 million in 1998 and $1.9 million in 1999. The large increase in
1999 was primarily the result of an increase in software engineering and
development personnel.
General and Administrative. General and administrative expense was
$0.4 million in 1997, $0.6 million in 1998 and $3.2 million in 1999. The large
increase in expense from 1998 to 1999 was principally due to the growth in
support infrastructure, primarily in the United States.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation was $0.0 in 1997, $0 in 1998 and $2.5 million in 1999. This
amortization was the result of recognizing deferred compensation of $12.3
million in 1999 related to stock option grants to employees and non-employees,
which we are amortizing over the vesting period of the options beginning in the
second half of 1999.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income, interest
expense and foreign exchange gain (loss) and was $(86,000) in 1997, $84,000 in
1998 and $47,000 in 1999. The increase in other income (expense), net from 1997
to 1998 was due to an increase in net foreign exchange gains. In 1999, the
decrease was due to net foreign exchange losses offset in part by increased
interest income as our average cash balance in 1999 was higher than 1998 due to
the receipt of proceeds from the sale of our redeemable convertible preferred
stock.
Provision for Income Taxes
Provision for (benefit from) income taxes was $(85,000) in 1997, $495,000 in
1998 and $(66,000) in 1999. The provision in 1998 was due to income taxes on
our non-U.S. income. Beginning in 1999, we have provided a full valuation
allowance to reduce our net deferred tax assets to amounts that are more likely
than not to be realized. Accordingly, no significant tax benefit was recorded
in 1999.
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<PAGE>
Quarterly Results of Operations
The following table shows our unaudited quarterly statement of operations
data for each of the six quarters in the period ended June 30, 2000, as well as
this information expressed as a percentage of revenue for the periods. This
unaudited quarterly information has been prepared on the same basis as our
audited consolidated financial statements and, in the opinion of management,
reflects all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the periods presented.
This information should be read in conjunction with the financial statements
and notes to those statements included elsewhere in this prospectus. These
results are not necessarily indicative of results of any future periods.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30,
1999 1999 1999 1999 2000 2000
-------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $1,267 $ 498 $ 1,973 $ 1,201 $ 937 $ 1,995
Cost of revenue......... 521 325 1,408 618 1,261 1,872
------ ----- ------- ------- -------- --------
Gross margin............ 746 173 565 583 (324) 123
Operating expenses:
Sales and marketing... 262 473 1,346 1,816 6,738 7,504
Research and
development.......... 158 213 435 1,143 3,546 3,339
General and
administrative....... 340 417 544 1,898 3,119 3,669
Amortization of
deferred stock
compensation......... -- -- 120 2,411 1,126 1,956
------ ----- ------- ------- -------- --------
Total operating
expenses............ 760 1,103 2,445 7,268 14,529 16,468
------ ----- ------- ------- -------- --------
Loss from operations.... (14) (930) (1,880) (6,685) (14,853) (16,345)
Other income (expense):
Interest income....... 9 -- 14 46 660 543
Other income
(expense)............ 33 25 (21) (59) (64) 107
------ ----- ------- ------- -------- --------
Other income
(expense), net...... 42 25 (7) (13) 596 650
------ ----- ------- ------- -------- --------
Income (loss) before
income taxes........... 28 (905) (1,887) (6,698) (14,257) (15,695)
Provision for (benefit
from) income taxes..... 103 (139) (26) (4) -- 1
------ ----- ------- ------- -------- --------
Net loss............. $ (75) $(766) $(1,861) $(6,694) $(14,257) $(15,696)
====== ===== ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30,
1999 1999 1999 1999 2000 2000
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue......... 41.1 65.3 71.4 51.5 134.6 93.8
----- ------ ----- ------ -------- ------
Gross margin............ 58.9 34.7 28.6 48.5 (34.6) 6.2
Operating expenses:
Sales and marketing... 20.7 95.0 68.2 151.2 719.1 376.1
Research and
development.......... 12.5 42.8 22.0 95.1 378.4 167.4
General and
administrative....... 26.8 83.7 27.6 158.0 332.9 183.9
Amortization of
deferred stock
compensation......... -- -- 6.1 200.8 120.2 98.1
----- ------ ----- ------ -------- ------
Total operating
expenses............ 60.0 221.5 123.9 605.1 1,550.6 825.5
----- ------ ----- ------ -------- ------
Loss from operations.... (1.1) (186.8) (95.3) (556.6) (1,585.2) (819.3)
Other income (expense):
Interest income....... 0.7 -- 0.7 3.8 70.4 27.2
Other income
(expense)............ 2.6 5.0 (1.0) (4.9) (6.8) 5.4
----- ------ ----- ------ -------- ------
Other income
(expense), net...... 3.3 5.0 (0.3) (1.1) 63.6 32.6
----- ------ ----- ------ -------- ------
Income (loss) before
income taxes........... 2.2 (181.8) (95.6) (557.7) (1,521.6) (786.7)
Provision for (benefit
from) income taxes..... 8.1 (27.9) (1.3) (0.3) -- 0.1
----- ------ ----- ------ -------- ------
Net loss............. (5.9)% (153.9)% (94.3)% (557.4)% (1,521.6)% (786.8)%
===== ====== ===== ====== ======== ======
</TABLE>
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<PAGE>
Six Quarters Ended June 30, 2000
Revenue
Revenue over the four quarters ended December 1999 came predominately from
sales of our Workstation products in Japan, while revenue for the first two
quarters of 2000 came predominantly from sales of our Workstation and Server
products in Japan. Quarterly fluctuations were primarily due to the timing of
new product releases. Product sales were typically lower in the quarter
preceding the release of a new product and generally increased in the quarter
of the new release. In the second quarter of 1999, our revenue declined
significantly, largely because we did not have a new product release in Japan.
Revenue in the third quarter of 1999 and the second quarter of 2000 increased
significantly due to increased revenue in Japan as a result of a new product
release. Service revenue was insignificant in this period.
Gross Margin
In Japan, gross margin, as a percentage of revenue, was fairly consistent
during the six quarters ended June 30, 2000 but fluctuated in absolute dollar
terms based upon revenue fluctuations resulting from the timing of our new
product releases. Our overall gross margin generally declined (in absolute
dollar terms and as a percentage of revenue) over the six quarters primarily as
a result of declining gross margin in the United States, which was
substantially attributable to an aggressive price discount program in the
United States retail channel beginning in the second quarter of 1999. Gross
margin declined significantly (in absolute dollar terms and as a percentage of
revenue) in the second quarter of 1999, in part because we did not have a new
product release in Japan, which significantly reduced revenue, and in part
because of the price discount program in the United States retail channel,
which caused per unit revenue in the United States to decline while per unit
cost of revenue generally remained the same. Gross margin increased in the
third quarter of 1999 in absolute dollar terms, substantially due to increased
revenue in Japan as result of a new product release, but declined as a
percentage of revenue, primarily due to the price discount program in the
United States retail channel. Gross margin in the first two quarters of 2000,
both in absolute dollar terms and as a percentage of revenue, was substantially
lower than during the last two quarters of 1999. This decline was in part due
to negative service and support margins in the first two quarters of 2000 as we
continued to build our infrastructure for support, maintenance, consulting and
training services organization and in part due to our price discount program in
the United States retail channel.
Operating Expenses
Our total operating expenses increased in each of the last six quarters as we
have added employees to our sales and marketing, research and development and
administrative organizations. Sales and marketing expenses also grew due to
large increases in advertising, promotions and trade show expenses. Research
and development costs for the quarter ended March 31, 2000 included a $1.1
million charge for acquired in-process research and development as a result of
our acquisition of assets from Active Tools. Operating expenses also increased
as the result of the amortization of deferred stock compensation expense,
commencing in the second half of 1999. Beginning in the first quarter of 2000,
operating expenses further increased due to amortization of intangible assets
resulting from our acquisition of assets from Active Tools.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income, interest
expense and foreign exchange gain (loss). Other income (expense), net increased
substantially during the
37
<PAGE>
two quarters ended June 30, 2000 largely due to an increase in interest income,
as our average cash balance was much higher as a result of the receipt of
proceeds from the sale of our redeemable convertible preferred stock.
We believe that period to period comparisons of our operating results are not
necessarily meaningful. You should not rely on them to predict future
performance. The amount and timing of our revenue and expenses may fluctuate
significantly in the future as a result of a variety of factors. In addition,
our expenses in future periods will include substantial deferred stock
compensation expense. We face a number of risks and uncertainties encountered
by early stage companies, particularly those in rapidly evolving markets. We
may not be able to successfully address these risks and uncertainties due to a
number of factors, including those discussed under "Risk Factors" and elsewhere
in this prospectus.
Liquidity and Capital Resources
Until 1999, we financed our operations primarily with cash flow from
operations. Beginning in 1999, our business has been funded primarily from
proceeds from the sale of our redeemable convertible preferred stock. As of
June 30, 2000, we had cash and cash equivalents of $27.0 million, compared to
$34.7 million as of December 31, 1999 and $0.6 million as of December 31, 1998.
The decrease in cash and cash equivalents from December 31, 1999 to June 30,
2000 was due to increases in our operating expenses, offset in part by $23.4
million of net proceeds received in the quarter ended March 31, 2000 from the
issuance of Series B redeemable convertible preferred stock. The $23.4 million
was part of $54.5 million of net proceeds raised from sales of our Series B
redeemable convertible preferred stock in December 1999 and January 2000. The
increase in cash and cash equivalents from December 31, 1998 to December 31,
1999 was primarily due to the receipt of the proceeds from these sales of
redeemable convertible preferred stock, offset in part by an increase in our
operating expenses.
Our net cash used in operating activities was $23.8 million for the six
months ended June 30, 2000, $2.9 million for 1999 and $0.1 million for 1997,
while operating activities provided net cash of $0.4 million in 1998. The cash
used during these periods was primarily attributable to net losses in all
periods except 1998, in which we had net income of $0.3 million for the year.
Cash used in operating activities for the six months ended June 30, 2000 and
1999 was offset in part by amortization of deferred stock compensation of
$3.1 million for the six months ended June 30, 2000 and $2.5 million for 1999.
Our net cash used in investing activities was $6.7 million for the six months
ended June 30, 2000, $1.3 million for 1999 and $9,000 for 1998, while investing
activities provided net cash of $94,000 in 1997. The cash used during these
periods primarily consisted of purchases of property and equipment, as well as
the acquisition of assets of Active Tools. In the six months ended June 30,
2000, we acquired assets of Active Tools for an aggregate purchase price of
$8.4 million, of which $2.9 million was paid in cash and the remainder was paid
through the issuance of warrants and options. In connection with this
acquisition, we recorded intangible assets of $7.3 million and $1.1 million of
acquired in-process research and development that we expensed in the first
quarter of 2000.
Our net cash provided by financing activities was $22.7 million for the six
months ended June 30, 2000, $38.4 million for 1999 and $0.2 million for 1998,
while financing activities used cash of $27,000 in 1997. The primary source of
cash during the six months ended June 30, 2000 was $23.4 million of net
proceeds received as part of our Series B redeemable convertible preferred
stock financing. Net cash provided by financing activities in 1999 consisted
primarily of $7.4 million of net proceeds provided by the sale of Series A
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<PAGE>
redeemable convertible preferred stock and $31.1 million of net proceeds
provided by the sale of Series B redeemable convertible preferred stock.
In September and October 2000, we sold 8,465,753 additional shares of Series
B redeemable convertible preferred stock and received net proceeds of
approximately $30.2 million from those sales. We used $7.5 million of the
proceeds from this financing to repurchase 2,054,793 shares of common stock
from our founders at a purchase price of $3.65 per share.
As of June 30, 2000, we had no outstanding borrowings.
In 1999 and in the first six months of year 2000, we substantially increased
our operating expenses as we expanded and grew our infrastructure. We believe
that the net proceeds from this offering, together with current cash and cash
equivalents, will be sufficient to meet our currently anticipated working
capital and capital expenditure requirements for at least the next 12 months.
However, we expect that in the future we will need to obtain substantial
additional financing in order to sustain our operations and execute our
business strategy. Moreover, we also may need to raise additional funds during
the next 12 months to support more rapid expansion, respond to competitive
pressures, acquire businesses or technologies or respond to unanticipated
requirements. We cannot assure you that additional funding will be available to
us in amounts or on terms acceptable to us, or at all. If sufficient funds are
not available or are not available on acceptable terms, our ability to sustain
our operations, execute our business strategy, fund our expansion, take
advantage of acquisition opportunities, develop or enhance our products or
services, or otherwise respond to competitive pressures would be significantly
impaired.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the value of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. In May 1999, SFAS
No. 133 was amended to defer its effective date. SFAS No. 133 is effective for
Turbolinux in fiscal 2001. Although we have not fully assessed the implications
of SFAS No. 133, we do not believe that adoption of this statement will have a
material impact on our financial position or results of operations.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to foreign currency fluctuations primarily through our
worldwide operations (primarily in Japan and China). This exposure is the
result of timing differences between incoming and outgoing cashflows
denominated in foreign currencies. We do not use derivative financial
instruments to hedge these exposures. A hypothetical 10% change in the foreign
currency exchange rates at December 31, 1999 and June 30, 2000 would not have a
material impact on our results of operations.
39
<PAGE>
BUSINESS
Overview
We are a leading provider of open source software solutions and services. We
are focused on Linux-based software solutions for Internet and enterprise
computing infrastructure, including core infrastructure workstation and server
operating systems products and value-added clustering software to manage
network traffic and provide peer-to-peer distributed computing capabilities. We
also have additional value-added products that include solutions built on top
of our server products to combine open source software, our core technologies
and leading commercially available software. Our clustering software links
computers in a network, enhancing computing capability and providing reliable,
available and scalable systems to manage the high volume of computer inquiries
which are associated with Internet transactions. Our products can significantly
reduce technology integration time and offer value-added solutions for the
Internet and business computing needs of our customers. Although we primarily
produce Linux software solutions, our products are generally interoperable with
other Linux, UNIX and Windows operating systems. We also have expertise in
customizing software for different geographic markets, particularly for Asian
languages computing.
We are a leading provider of Linux software in the Asia Pacific geographic
market. According to International Data Corporation, or IDC, we were the
fastest growing Linux software company based on growth in worldwide units
shipped and market share in 1999 compared to 1998. We sell our products through
worldwide distribution channels including distributors, value-added resellers,
solution providers, original equipment manufacturers and direct electronic
sales through our websites.
We are focused on integrating our software solutions with commercial software
and hardware systems and components offerings from leading companies in the
computer industry. We have established strategic relationships with many of
these companies, including Compaq, Dell, Fujitsu, Hewlett Packard, Hitachi,
IBM, Inprise, Intel, NEC, Oracle, Sun Microsystems and Veritas. Our core
workstation product is targeted at individual end users, developers and small
to medium size businesses and is primarily sold through distributors. Server
and value-added clustering products are targeted to Internet and enterprise
computing infrastructure markets, including application service providers,
Internet service providers, small to medium size businesses and Fortune 2000
companies, and are sold primarily through value-added resellers and system
integrators. Prior to 2000, we did not derive revenue from service offerings to
our customers. Beginning in 2000, we expanded our services organization to
include more extensive support and maintenance, as well as consulting and
training services.
Some of our server and cluster product end-user customers who purchased more
than $1,000 of our products since 1999 include, in the United States, the
American Red Cross, Birkenstock, Corvis, JP Morgan, National Weather Service,
Procter and Gamble, the University of Chicago and Yale University and, in the
Asia Pacific region, AMP Henderson Global Investors, DeoDeo, Fujisoft ABC,
Huadi Computer, Info-carry, Nippon Timeshare and Twin Communication. Revenue
from customers outside the U.S. in 1998, 1999 and the first six months of 2000
accounted for 96%, 97% and 86% of our total revenue during the respective
periods.
40
<PAGE>
Industry Background
Infrastructure Requirements to Meet the Growth of the Internet
The Internet has evolved into a critical resource for global communications,
information sharing and business transactions. This has led to increasing
demand for Internet infrastructure products and services in order for companies
to be prepared to handle the technical demands of an Internet-centric computing
environment. These technology infrastructure demands include the need for
reliable, available and scalable systems that offer high-performance computing
capabilities and are able to manage a high volume of computing traffic.
According to IDC forecasts, organizations will spend an estimated $36.2 billion
on Internet infrastructure software in 2003.
The Trend Toward Open Source
The proliferation of Internet communication has enabled collaborative
software development on a scale never before possible, which we believe has
fueled the development of open source software. The term "open source" refers
to software with source code that is publicly available and can be read,
modified, copied and distributed on the Internet with minimal restrictions. We
believe that this access to source code can produce results that an individual
developer or even an organization's group of developers could not produce
alone. The open source model follows a peer review cycle where programmers and
developers worldwide are able to review, modify and improve software source
code. We believe that this can enhance software innovation and evolution and
produce robust software that is more easily integrated into various computing
environments.
The Growth of Linux
Linux is a freely available UNIX-like operating system that runs on various
hardware architectures including Alpha, Intel x86 and PowerPC platforms. Linux
follows the open source model and is a registered trademark of Linus Torvalds,
who developed the original core operating system at the University of Helsinki
in 1991. IDC has forecast that worldwide shipments of the Linux operating
system will grow to over eight million units in 2003 and that growth in
worldwide unit shipments of the Linux operating system will outpace growth in
worldwide unit shipments of any other major operating system during the period
from 1999 through 2003. Furthermore, IDC projects that total sales of Linux
software will grow from approximately $182 million in 1999 to more than $12
billion in 2004.
The open source nature of Linux has led to a robust operating system. Because
developers have the ability to add or subtract functionality to tailor the
system to specific tasks, Linux is highly flexible and customizable, which
facilitates its integration into different computing environments. According to
IDC, since 1997, Linux has captured significant market share as an Internet
operating system and has been used by enterprises, particularly for certain
computing needs such as mail serving, web serving and file and print serving.
According to industry research firm D.H. Brown, Linux is capable of becoming a
high-volume application standard for both development and deployment in the e-
business environment and in specialized computing devices and thin servers.
The Opportunity for Turbolinux
As demonstrated by the growing success of open source solutions, we believe
that an increasing number of users will continue to seek open source solutions
for their Internet infrastructure needs. The computing environment of many
organizations includes various types of hardware, software applications and
client devices. We believe that, in order to meet increased Internet
infrastructure demands, organizations will increasingly seek technology
solutions that are capable of adapting to different computing environments and
that are reliable, available and scalable. We believe that these solutions will
include flexible operating
41
<PAGE>
systems for workstations and servers that are generally interoperable with
various computing environments and clustering technologies to enhance computing
capability and manage computer traffic. We also believe that, as international
computing infrastructure demands grow, there will be an increasing need for
software solutions that are localized for various geographic markets. In
addition, as organizations continue to adopt Linux, the need for high-end
Linux-based solutions such as clustering technology may increase.
Our Solution
We develop Linux-based software solutions for Internet and enterprise
computing infrastructure, including reliable, available and scalable operating
systems for workstations and servers and software clustering solutions for
computing traffic management and peer-to-peer distributed computing. We
integrate advanced systems management features, function-specific applications
and certain best of breed open source and proprietary tools into our products
to meet the computing infrastructure needs of various market segments,
including application service providers, Internet service providers, small to
medium size businesses and Fortune 2000 companies. We believe the combination
of these components provides our customers with the reliability, availability,
scalability and performance they need to build mission-critical solutions. Key
benefits of our solution include:
Reliable, Available, Scalable and High-Performance Solutions for the
Computing Infrastructure Markets. As a leading provider of Linux clustering
software solutions, we offer Turbolinux Cluster Server and EnFuzion to
address an organization's need to rapidly scale its computing
infrastructure. These products are designed to provide the reliability,
availability and scalability necessary for Internet and enterprise
computing systems. Turbolinux Cluster Server enables users to cluster
multiple Linux, UNIX and Windows web servers so that they perform as one
server. Turbolinux Cluster Server allows an organization to link up to
twenty-five cluster nodes, or stand alone servers, to handle dynamic server
load balancing for high traffic loads. EnFuzion links an organization's
existing servers and workstations in a peer-to-peer network to enhance
computing capability while eliminating the expensive hardware typically
required by competitive solutions.
Multiple Solutions for the Enterprise. We differentiate ourselves from
many other Linux software providers by offering a number of products to
meet enterprise computing needs ranging from the end user desktop to high-
availability, high-performance computing. Our clustering products generally
are interoperable with a number of widely-adopted operating systems,
including other Linux operating systems, UNIX and Windows. Our products
include Turbolinux Workstation and Turbolinux Server, which are open source
operating systems for workstations and servers, and Turbolinux Cluster
Server and EnFuzion, which are Linux-based software clustering products
that manage network traffic and enhance computing capability through a
peer-to-peer network.
Integrated Solutions. We are focused on integrating our software
solutions with commercial software and hardware offerings from established
companies in the computer industry such as Compaq, Dell, Fujitsu, Hewlett-
Packard, Hitachi, IBM, Inprise, NEC, Oracle, Sun Microsystems and Veritas.
This approach can significantly reduce the time and effort our customers
must spend to integrate our products into their computing environments and
enables us to offer valuable solutions for end users, resellers and other
companies. We also seek to enhance our internal support and system
integration efforts by working with companies, including value added
resellers and leading systems integrators. These arrangements allow us to
focus on offering support, technology enhancements and complete Linux
solutions to our customers.
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<PAGE>
Lower Total Cost of Ownership. We believe we are able to offer our
customers lower acquisition and maintenance costs of software applications
because we incorporate Linux and other open source software into our
products. Linux and other open source software products are typically
available on a royalty-free basis. In addition, our products are also
developed to be easily customized and capable of adapting to existing
computing environments, including other Linux, UNIX and Windows
environments, without requiring expensive additional hardware. We believe
our lower cost solution significantly expands the set of potential
customers that could deploy our clustering products throughout their
enterprise.
Customized Solutions for Geographic Markets. We are an international
company with expertise in customizing our products to meet the needs of
specific geographic markets. We are a leading Linux software provider in
Japan and the Asia Pacific market and were the first Linux software
provider to include features that enable us to incorporate Asian language
characters in our products, facilitating the adoption and use of our
products in the Asia Pacific market.
Our Strategy
Our goal is to become the leading provider of end to end software products
and services for the Internet and enterprise computing infrastructure markets
by leveraging Linux and other open source solutions. Key elements of our
strategy include:
Focus on Clustering and Other Enterprise Software Solutions. Our strategy
is to maintain and enhance our position as a leading provider of Linux-
based software clustering solutions in order to meet the increasing
computing infrastructure needs of various computing market segments,
including application service providers, Internet service providers, small
to medium size businesses and Fortune 2000 companies. Our solutions
integrate network systems management features, function-specific
applications and certain best of breed open source and proprietary tools.
Our products address an organization's needs for manageable, configurable
and off-the-shelf solutions that provide high-availability and high-
performance computing capability. We expect to continue to add additional
features and functionality to our clustering solutions. In March 2000 we
established TurboLabs, an advanced computing laboratory based in Santa Fe,
New Mexico, with developers focused on clustering systems, peer-to-peer
distributed computing, network management, systems management, storage and
file data synchronization.
Leverage International Presence and Market Position. Our strategy is to
leverage our international presence and market position. We currently have
expertise in customized software for specific geographic markets,
particularly for the Asia Pacific market, including Japan, The People's
Republic of China, Hong Kong, Taiwan and South Korea. We believe that this
makes us an attractive partner for leading U.S. and global hardware and
software companies. We have a number of offices worldwide and plan to
expand our international presence to meet anticipated worldwide demand for
Linux solutions for Internet and enterprise computing infrastructure. A key
part of our international strategy is to partner with leading solution
providers in various geographic regions and to build on their existing
distribution channels. We believe our expertise in localized solutions will
help facilitate our international growth.
Continue to Integrate the Leading Open Source and Commercial
Software. Our business model is to provide solutions that integrate open
source and commercially available software. We believe this model will
facilitate the adoption of our products by providing solutions that are
easier to use because they can be readily integrated into
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other Linux, UNIX and Windows computing environments, allowing our
customers to leverage their existing computing systems. Although we
primarily develop Linux software products, we develop our clustering
products to be generally interoperable with widely-adopted operating
systems. Many enterprises have legacy products installed within the
framework of their computing infrastructure network. We recognize that
while there are available open source solutions for certain applications,
many software applications and tools such as IBM DB2 and Oracle8i are
commercially sold and not available as open source software. We plan to
continue to not only develop our products to be compatible with other
Linux, UNIX and Windows environments, but to also integrate and optimize
third-party software such as IBM DB2 for deployment over the Turbolinux
platform.
Work to Extend Strategic Relationships with Industry Leaders to Provide
Turbolinux Solutions. We intend to leverage our existing relationships with
technology companies and to build new relationships in the commercial and
open source software communities. We plan to promote our brand, distribute
our products and utilize our strategic relationships in an effort to
increase sales. We intend to add value to their solutions by providing them
with software tools, products, engineering resources, training and support.
We believe this strategy will provide these companies with the necessary
incentive to allow us to leverage their distribution channels and
relationships. We currently have strategic relationships with a number of
established vendors of hardware systems and components, software and
services, including:
<TABLE>
<CAPTION>
Hardware Systems
and Components Software Services
---------------- -------- --------
<S> <C> <C>
.Compaq .IBM .Compaq
.Dell .Inprise .CTC
.Fujitsu .NEC .Fujitsu (Fujisoft ABC)
.Hewlett-Packard .Oracle .Hewlett Packard
.Hitachi .Sun Microsystems .IBM
.IBM .Veritas .Mission Critical Linux
.Intel .Otsuka Shokai
</TABLE>
Continue to Build Turbolinux Brand Leadership. We believe that growing
and maintaining our brand awareness across vertical and geographic markets
is important to our continued success. Promoting and positioning our brand
on a global scale to the open source and commercial computing communities
is an important part in our strategic plan. We intend to promote and
increase our brand awareness through co-branding and co-marketing efforts,
print and on-line advertising campaigns, our university and education
outreach program and our websites. Through these efforts, we will seek to
inform our targeted customer groups of our recognition and success in the
Internet and enterprise computing infrastructure markets, thereby
identifying the Turbolinux brand with quality and reliable and scalable
performance.
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<PAGE>
Products
We develop Linux-based software solutions for Internet and enterprise
computing infrastructure. Our solutions include core infrastructure workstation
and server operating systems products and value-added clustering software to
manage network traffic and to provide peer-to-peer distributed computing
capabilities. We also have additional value-added products that include
solutions built on top of our server product to combine open source software,
our core technologies and leading commercially available software.
Our core infrastructure products, Turbolinux Workstation and Turbolinux
Server, include productivity tools and backend server solutions. Our load-
balancing, traffic management clustering product, Turbolinux Cluster Server, is
a leader in Linux high-end clustering. It enables multiple computers to work
together, providing our customers with an economical way to construct reliable,
available and scalable computing environments. Our peer-to-peer distributed
computing product, EnFuzion, is designed to support large-scale computing
projects on multiple networked workstations, PCs and servers, to cost-
effectively solve processing intensive computing problems by leveraging a
customer's existing hardware.
We build products that can be customized for specific geographic markets. Our
Turbolinux Workstation and Turbolinux Server products have been customized for
Asian and European languages. We are a leader in providing Linux software that
enables the use of Asian language characters in our software.
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The following table provides a summary description of our current products
and some of their features and benefits:
<TABLE>
<CAPTION>
Product Features & Benefits
-------------------------------------------------------------------------------------------------------------------------
<C> <S>
Core Infrastructure
-------------------------------------------------------------------------------------------------------------------------
Turbolinux Workstation . Linux operating system for workstations
. Bundled with leading 3rd party productivity applications (geographically differentiated)
. Available in English, Japanese, Chinese, German, Spanish, French, Italian and Portuguese
-------------------------------------------------------------------------------------------------------------------------
Turbolinux Server . Linux operating system for servers
. Bundled with leading 3rd party enterprise applications
. Can be configured as a web, mail, file or firewall server
. Available in English, Japanese, Chinese, German, Spanish, French, Italian and Portuguese
-------------------------------------------------------------------------------------------------------------------------
Turbolinux OS for Alpha . Turbolinux 64-bit Linux OS for Alpha
-------------------------------------------------------------------------------------------------------------------------
Value-Added Infrastructure
-------------------------------------------------------------------------------------------------------------------------
Turbolinux Cluster Server . Load balancing and traffic management software
. Designed to support up to 25 cluster nodes
. Simultaneously integrates Linux, UNIX and Windows network environments
. Allows integration of commodity components to a network
. Significantly lower price point than many competing UNIX solutions
. Fault tolerant, high-performance clustering software
-------------------------------------------------------------------------------------------------------------------------
EnFuzion . Peer-to-peer distributed computing solution
. Fault tolerant and highly available
. Uses existing networks for processing intensive calculations and transactions
. Designed to support unlimited nodes
. Simultaneously integrates into Linux, UNIX, and Windows NT network environments
-------------------------------------------------------------------------------------------------------------------------
Turbolinux DataServer with
IBM DB2 . Turbolinux data server bundled with and optimized for IBM DB2
-------------------------------------------------------------------------------------------------------------------------
Turbolinux DataServer . Turbolinux data server optimized for use with Oracle8i
Optimized for Oracle8i
</TABLE>
Core Infrastructure Products
Our product offerings include core open source operating systems software for
workstations and servers. Our Turbolinux Workstation product is primarily
targeted to end users, developers and small to medium size businesses. Our
Turbolinux Server product is primarily targeted to application service
providers, Internet service providers, small to medium size businesses and
Fortune 2000 companies for use in applications such as file, print and web
serving. Our Turbolinux OS for Alpha is primarily targeted to developers and
administrators of Compaq's Alpha Systems.
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Turbolinux Workstation. Turbolinux Workstation is our product offering for
Linux on the desktop. We developed this product for Internet access, office
productivity, software application development and server access. The product's
features are provided through pre-configured workstation systems. Turbolinux
Workstation provides end users with a powerful productivity workstation
including StarOffice from Sun Microsystems, which features Microsoft Office
compatibility and Netscape's web browser. Turbolinux Workstation also provides
developers with a broad suite of robust development tools and libraries with
which to write application software.
Turbolinux Server. Turbolinux Server is designed as a backend server to meet
enterprise computing needs and incorporates leading third-party commercial
software applications. Turbolinux Server delivers eCommerce solutions to help
users build the infrastructure needed to conduct business on the web.
Our server product is built on open source software with backend server
solutions for security, connectivity and availability. Server security is
enhanced through pre-configured installation options for firewall, mail and web
applications. Network connectivity tools are also included to integrate a
server into an organization's computing infrastructure environment. Commercial
backup and storage software is incorporated in Turbolinux Server to ensure that
a server environment is protected and easily re-installed during planned
maintenance. We also have incorporated web interfaces to simplify firewall
administration.
Turbolinux OS for Alpha. Turbolinux OS for Alpha is a 64-bit Linux operating
system designed for processing intensive tasks and is optimized for Compaq's
Alpha systems hardware. This product includes an eCommerce developer's tool kit
that contains tools to allow users to write or customize web-based
applications. Turbolinux OS for Alpha also includes graphical tools that reduce
setup and configuration times and also includes Apache, Sendmail, FTP and
server applications.
Examples of some of the key components contained in our Turbolinux
Workstation and Turbolinux Server and Turbolinux OS for Alpha products include:
<TABLE>
<CAPTION>
Function Open Source Components
-------- ----------------------
<S> <C>
Web server.......................... Apache
Graphical desktop................... GNOME & KDE
Operating system.................... Linux Kernel
Web browser......................... Netscape Communicator
Email routing software.............. Sendmail
<CAPTION>
Function Commercial Components
-------- ---------------------
<S> <C>
Cross platform graphical viewer..... Adobe Acrobat Reader, XV, Ghostview
Backup and restore.................. EST BRU
Java development kits............... IBM, SUN, Borland Components
eCommerce functionality............. Open Merchant & Tallyman
Sound card drivers.................. Open Sound System
Secure web server................... RSA Security software
Office application suite............ StarOffice & Applixware
Hard-drive partitioning............. System Commander
Pre-configured system............... Turbolinux Installer options
Database............................ IBM DB2 Specialized Server, Oracle8i
Allows multiple operating systems to VMWare
run concurrently...................
</TABLE>
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<TABLE>
<CAPTION>
International Commercial
Function Components
-------- ------------------------
<S> <C>
Chinese characters.............................. Huan-Tian type fonts
Japanese input system........................... JustSystem ATOK, Omron Wnn
Japanese/English translator..................... Omron Honyaku-Damashii
Japanese fonts.................................. Ryobi fonts
Security and encryption......................... Open SSL
</TABLE>
Value-Added Infrastructure Products
Our product offerings also include value-added software solutions which
combine open source software, our core technologies and leading commercially
available software. These products currently include clustering software that
provides computer traffic management through our Turbolinux Cluster Server
product and peer-to-peer distributed computing capabilities through our
EnFuzion product. Additional products targeting database performance include
Turbolinux DataServer Optimized for Oracle8i and Turbolinux DataServer with IBM
DB2 Universal Database. These products are primarily targeted to application
service providers, Internet service providers, small to medium size businesses
and Fortune 2000 companies for conducting business on the Internet.
Turbolinux Cluster Server. Turbolinux Cluster Server is a value-added load
balancing clustering solution for mission critical Internet and enterprise
computing infrastructure that requires reliability, availability and
scalability. We have designed this product to provide advanced technologies and
features in a way that removes much of the traditional complexity associated
with computer clustering. Turbolinux Cluster Server includes management tools
that may be accessed either from a console, a graphical user interface or over
the web. In addition to Turbolinux Cluster Server's technical benefits, it
enables the construction of reliable, available and scalable networks based on
low cost commodity components, including standard PC systems and off-the-shelf
applications. Turbolinux Cluster Server is built on a technology base that
allows each system within a cluster of servers to function as a single unit.
This provides a reliable and easy to manage platform that can grow to meet a
customer's performance needs. We believe that Turbolinux Cluster Server can
enhance the accessibility and responsiveness of our customer's web, eCommerce,
email and other Internet services.
Turbolinux Cluster Server is priced to enable affordable clustering and can
be used with a variety of operating systems and applications, including other
Linux, UNIX and Windows computing environments. Turbolinux Cluster Server does
not require special hardware or software to gain the benefits of its clustering
technologies. As a result, Turbolinux Cluster Server allows our customers to
leverage their existing computing infrastructure investments by continuing to
use their existing hardware and software solutions.
EnFuzion. EnFuzion is a value-added software solution designed to support
large-scale distributed computing projects on clusters of workstations, PCs and
servers as a distributed peer-to-peer network. EnFuzion allows a customer to
replace a single extremely fast computer with a larger number of inexpensive
slower computers, providing less expensive high-performance computing
capability. Rather than executing each job sequentially on one fast and
expensive computer, calculations are run in parallel on multiple inexpensive
computers. EnFuzion can address problems in a wide range of industries,
including financial services, biotechnology, oil and gas exploration, broadband
equipment and network design and testing, data mining and Internet traffic
analysis.
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EnFuzion is intended to provide an economical solution that allows customers
to leverage existing systems such as Linux, UNIX and Windows. EnFuzion does not
require dedicated hardware because it is designed to use idle computers that
are already deployed in a customer's computing infrastructure. EnFuzion can be
customized to work with many existing applications and is designed to require
minimal new application development or systems administration. In addition, an
application program interface facilitates the integration of EnFuzion with
third-party products.
Turbolinux DataServer Optimized for Oracle8i. Turbolinux DataServer Optimized
for Oracle8i is engineered as a database server for workgroups and as an
application deployment platform. Turbolinux DataServer Optimized for Oracle8i
offers affordable and reliable e-business infrastructure for business-to-
business providers. We believe it is particularly well suited for small and
medium-sized companies and workgroups within large companies.
Turbolinux DataServer Optimized for Oracle8i is tested and supported by
Oracle and Turbolinux to ensure a stable and reliable database. Turbolinux
DataServer Optimized for Oracle8i is designed for quick installation and is
optimized for performance on Linux. This product features an open source Linux
kernel and system-level optimizations for running processing intensive
applications.
Turbolinux DataServer with IBM DB2 Universal Database. We believe that
Turbolinux DataServer with IBM DB2 Universal database is a leading multimedia,
web-ready relational database management system integrated with an optimized
Linux operating system. It is designed to meet the demands of large
corporations and is flexible enough to serve small and medium size businesses.
Turbolinux DataServer with IBM DB2 Universal Database gives five concurrent
users access to the database and unlimited access to the Turbolinux DataServer
operating system. It also provides organizations with a robust tool for the
collection, consolidation and analysis of data stored in numerous databases and
data warehouses. Turbolinux DataServer with IBM DB2 Universal Database is
designed to make it faster and easier to build and deploy business
intelligence, enterprise resource planning, customer relationship management,
eCommerce and integrated document applications.
Services
Customer Support. Customers who purchase Turbolinux workstation and server
products are entitled to 60 days free email installation support. Customers who
purchase Turbolinux Cluster Server, Turbolinux DataServer Optimized for
Oracle8i, Turbolinux DataServer with IBM DB2 Universal Database and Turbolinux
OS for Alpha receive 60 days of free email and telephone installation support.
We provide 90 days of free email and telephone installation support for
EnFuzion.
As part of our effort to maximize customer satisfaction, we have outsourced
email support for our workstation and server products to Multi-User Solutions,
a company which provides frontline call support. In addition, we have been
building our own support call center to support value-added resellers, solution
providers and original equipment manufacturers. While our current strategy has
been to provide free email and telephone support to our customers related to
product installation, we are in the process of designing professional and
consulting services programs to augment our current technical support services.
Service Relationships. We currently have service relationships with some of
the industry's leading computer companies such as Compaq, CTC, Fujitsu
(Fujisoft ABC), Hewlett
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<PAGE>
Packard, IBM, Mission Critical Linux and Otsuka Shokai. These companies work
with current and potential Turbolinux customers to inspect networks for
compatibility while helping to install our clustering products. Other companies
with which we have service relationships have agreed to provide support for
their hardware running Turbolinux products and to provide end to end support.
Engineering Services. We currently have engineering services agreements with
leading hardware and software original equipment manufacturers, including IBM
and Compaq, where we provide custom engineering and product optimization, IA64
development, and computing platform development.
Training and Education. We provide courses on the Linux operating system and
Turbolinux products. Our programs are designed for Turbolinux customers,
consultants, value- added resellers, application service providers, Internet
service providers, systems administration professionals and anyone else
interested in learning more about Linux. Our education goal is to accelerate
the adoption of Linux by enterprises. Our custom on-site and web based training
courses prepare trainees for the Linux Professional Institute Certification
Exams.
Customers
Our core workstation product is targeted to individual end users, application
developers and small to medium size businesses and is sold primarily through
distributors, including Canon Sales, Catena, ComputerWave, Frank Kasper, Ingram
Micro, Merisel, Navarre and SOFTBANK Commerce. Our server and value-added
clustering products are targeted to the Internet and enterprise computing
infrastructure markets, including application service providers, Internet
service providers, small to medium size businesses and Fortune 2000 companies,
and are sold primarily through value-added resellers and system integrators
complemented with a direct sales team in the United States. Some server and
cluster product end customers who purchased more than $1,000 of our products
since 1999 include:
<TABLE>
<S> <C>
.American Red Cross .JP Morgan
.AMP Henderson Global Investors .National Weather Service
.Birkenstock .Nippon Timeshare
.Corvis .Procter & Gamble
.DeoDeo .Twin Communication
.Fujisoft ABC .University of Chicago
.Huadi Computer .Yale University
.Info-carry
</TABLE>
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Customer Case Studies
Turbolinux Server
DeoDeo. DeoDeo, a large Japanese consumer electronics appliance retailer,
needed a flexible eCommerce solution that was robust enough to host an Oracle8i
database. DeoDeo advised us that it chose a Turbolinux and Java solution in
part because it cost them substantially less than a proprietary UNIX-based
solution. DeoDeo runs its web commerce site on a group of five IBM Netfinity
5000 servers and a sixth Netfinity 5000 for systems administration located off-
site. According to DeoDeo, Turbolinux Server was selected for its stability and
flexibility, while Turbolinux was chosen because of its support system and
eCommerce experience.
Fujisoft ABC Inc. Fujisoft ABC Inc., a leading Japanese systems integrator,
needed an enterprise resource planning system for payroll to replace its PC-
based salary accounting system. Fujisoft ABC indicated that it selected
Turbolinux Server based on its reputation as an enterprise-class solution and
its ability to use its existing Compaq Proliant servers, which come configured
with the redundant data backup technology that it wanted to incorporate in the
new payroll system. Oracle Workgroup Server for Linux, version 8.0.5, was
selected as the database and Windows 98 for the clients. According to Fujisoft
ABC, the Turbolinux hosted system calculated Fujisoft ABC's employee salary
payments considerably faster than the PC-based predecessor.
Info-carry. Info-carry, a large Japanese online automobile auction site,
wanted to expand its service beyond the desktop to tap the Internet via "i-
mode" wireless Internet telephones from NTT DoCoMo, a leading
telecommunications provider in Japan. The project required building an
eCommerce website specially formatted to accommodate the small LCD screens of
the i-mode telephones. Info-carry hired a Tokyo-based web production company,
Cool-site to deploy Linux, UNIX or Windows alternatives as a backend server
solution. For the i-mode project, Cool-site loaded Turbolinux onto Dell servers
with an Oracle8i database as the backend.
Turbolinux Cluster Server
Birkenstock. Birkenstock, the North American distributor of Birkenstock
Footwear, recently moved its website and eCommerce engine to run Turbolinux
Cluster Server to balance traffic across multiple systems in a computer
cluster. The cluster configuration consists of five machines: two cluster
managers, two web servers and a database server. According to Deluxe Digital
Media, Inc., the Birkenstock web strategy consultant, Birkenstock chose
Turbolinux Cluster Server because of its fault tolerance capabilities, Internet
traffic load balancing, and scalable architecture. Birkenstock can purchase and
add cluster licenses to the network as its traffic increases.
EnFuzion
AMP Henderson Global Investors. AMP Henderson Global Investors, a leading
Australian investment management company, uses artificial intelligence and
computational finance for decision support and trend forecasting. According to
AMP Henderson Global Investors, it had outgrown its available computing
resources and sought a solution that could take advantage of idle Windows
workstations. EnFuzion offered AMP Henderson Global Investors an affordable
solution for turning its idle NT workstations into a distributed high-
performance computer cluster. According to AMP, EnFuzion allowed it to run a
financial model in a week that had previously required several months on a
supercomputer.
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JP Morgan & Co., Inc. JP Morgan, a leading financial services institution,
deployed EnFuzion to upgrade its legacy risk management modeling system and
integrate over 50 servers and 300 workstations, taking advantage of idle
processing cycles across the network.
Yale University. Yale University's Department of Computer Science is using
EnFuzion to enable several high performance, parametric applications to take
advantage of several clusters in the department as well as idle processing
cycles from participating desktop PCs. According to Yale, the resulting
parallel applications will make computational science and engineering a
practical alternative for both students and researchers. As part of this
effort, researchers at Yale have advised us that they intend to explore the
integration of EnFuzion with other technologies to enhance its functionality
and dynamic load balancing capabilities.
Strategic Relationships and Open Source Community Involvement
In an effort to gain industry support and acceptance of our products while
increasing the market for open source software, we have established strategic
relationships with a number of companies, many of whom are global industry
leaders in hardware systems and components, software and related services.
These relationships primarily focus on present and future product integration,
original equipment manufacturing, joint technology development, support
services, distribution, joint marketing, co-branding and revenue-generating
initiatives such as product bundling. Our objectives in entering into these
relationships include:
. providing complete solutions through the integration of our software
with industry leading hardware and software technologies;
. supplying our customers with a comprehensive array of support services
vendors from which to choose;
. utilizing the sales and distribution strengths of companies with which
we have strategic relationships in order to gain greater access to
enterprise sales channels and strengthen our brand;
. ensuring that we certify and optimize our products for third-party
hardware and software technologies; and
. supporting the development efforts of companies with which we have
strategic relationships to ensure their commitment to our products and
customers.
The following is a list of our strategic relationships in the computer
hardware systems and components, software and services industries:
<TABLE>
<CAPTION>
Hardware Systems
and Components Software Services
---------------- -------- --------
<S> <C> <C>
.Compaq .IBM .Compaq
.Dell .Inprise .CTC
.Fujitsu .NEC .Fujitsu (Fujisoft ABC)
.Hewlett-Packard .Oracle .Hewlett Packard
.Hitachi .Sun Microsystems .IBM
.IBM .Veritas .Mission Critical Linux
.Intel .Otsuka Shokai
</TABLE>
We work closely with a number of vendors on joint technology development and
marketing. A team of our engineers works with enterprise software vendors to
certify these vendors' products and to create functionality-specific software
applications. For example, we have an arrangement with IBM to bundle our
Turbolinux server with IBM's DB2. In addition,
52
<PAGE>
several Turbolinux engineers work onsite at Oracle to certify and optimize
Oracle products to work with our Turbolinux Server product, and we cooperate
with Oracle on sales and marketing initiatives. In China, we are partnering
with Oracle to jointly pursue enterprise markets with cross-channel sales
efforts.
We pursue an original equipment manufacturer, or OEM, strategy focused on
pre-installing our value-added infrastructure products. Our OEM agreements
generally grant licenses to the OEMs to include our products with their own
products in exchange for royalty payments to us. We currently have OEM pre-
install agreements with Dell and Hewlett-Packard.
We also participate as a member of several industry standard and open source
initiatives including:
. Linux Professional Institute, an independent organization dedicated to
the establishment of professional certification standards for Linux
professionals;
. Linux Standards Base, a Linux community initiative developing standards
to increase compatibility among Linux solutions enabling software
applications to run on compliant Linux systems;
. Linux International, a Linux community initiative promoting the
development and ease of use of Linux and how it will benefit businesses
and personal users;
. Linux International Initiative, an independent organization focused on
the internationalization of a core set of application protocol
interfaces and components of Linux solutions in order to achieve a
common Linux platform;
. Linux SNA (Systems Network Architecture) initiative, a Turbolinux funded
and sponsored project developing kernel patches, tools and features to
support SNA, a reliable enterprise and peer-to-peer communications
network that automates important transactions;
. Linux Kernel Crash Dumps, an open source initiative founded with the
goal of improving support capabilities for system failures by creating a
set of tools and kernel code to perform system crash dumps upon kernel
failure; and
. Extreme Linux, an open source initiative involved in building clusters
of computers for peer-to-peer distributed computing.
Sales, Marketing and Distribution
We sell our products and services through worldwide distribution channels
that include value-added resellers, solution providers such as system
integrators, original equipment manufacturers, distributors and direct
electronic sales through our website. Our sales efforts have focused on
building a global sales pipeline to reach our targeted customers.
Beginning in 1997, the majority of our revenue has been generated by sales of
our Turbolinux Workstation product through distributors. As of September 30,
2000, we had 92 distributors worldwide who purchase directly from us. We
believe more than 7,000 retailers worldwide purchase our products through these
distributors. Our efforts in the retail channel were historically focused on
driving volume to increase retail market share and augment visibility at the
end user level. Our retail sales have largely been driven by pricing
strategies, rebates and demand creation through channel promotions. Some of our
principal distributors include Canon Sales, Catena, Computer Associates Japan,
ComputerWave, CTC, Frank Kasper, Ingram Micro, Merisel, Navarre, NTT-ME and
SOFTBANK Commerce. For the year ended December 31, 1999, SOFTBANK Commerce and
ComputerWave accounted for 35% and 26% of
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our total revenue and these two customers accounted for 29% and 16% of our
total revenue for the six months ended June 30, 2000, respectively. Our direct
sales are done primarily through our website. End users are able to
electronically purchase all of our products at the full list price. Our web
sales are currently handled on consignment by Digital River. Prior to December
of 1999, we directly handled all web sales. Prior to third quarter 1999, web
sales represented the majority of our United States shipments.
Our enterprise sales team is targeting value-added resellers, solution
providers such as system integrators and original equipment manufacturers to
obtain market penetration for our value-added Linux solutions for Internet and
enterprise computing infrastructure. Our sales efforts are directed at
maintaining and extending relationships with solution providers that target
small to medium businesses and corporate end users. We provide value-added
resellers and other solution providers with support, training and a corporate
end user lead generation program. Our sales strategy is to increase the number
of solution provider accounts in addition to our existing accounts with Cnetics
Technologies, EBIZ Enterprises (LinuxStore), GE Capital ITS, Mission Critical
Linux, Open Source Group, PC Guru and Scientific Computing.
We also are directing marketing efforts to lead generation and brand
awareness through joint marketing and co-branding relationships with various
hardware systems and components and software vendors including Compaq, Dell,
IBM, Intel, NEC, Oracle and Sun Microsystems and through participation in print
and online advertising, public relations campaigns, industry trade shows,
technology seminars, channel sales programs, retail promotions, education
programs and promotion of our products and services through our websites,
including online tradeshows. Recently, we have developed a program with
selected universities to distribute and eventually sell our products to both
campus stores and university departments. This campaign is intended to educate
students and faculty about Linux in addition to providing additional direct
revenue opportunities.
Competition
The Linux operating system, Internet and enterprise computing infrastructure
and clustering solutions markets are highly competitive, characterized by rapid
technological change and significantly affected by new product innovations. We
expect competition to intensify further as this market evolves. Currently, we
face competition from a large number of operating systems vendors.
International Data Corporation reports that there are over 100 commercially
available distributions of the Linux operating system. Additional competition
includes non-Linux operating system vendors, technical support organizations
and consulting and professional services organizations. Our competition in the
high-performance and clustering solutions market tends to be large established
companies as well as younger but quickly moving companies focused on high-
availability and performance for e-business applications.
Competing companies in the Linux operating system market include Red Hat,
Caldera, SuSE and Corel. Some of our competitors have a stronger brand name,
larger and more cohesive distribution and partner channels and a larger
installed customer base. Furthermore, due to the open source licensing model
under which Linux is distributed, any individual or organization can freely
download the Linux kernel or other open source packages from the Internet and
package and distribute this software as their own version of the Linux
operating system. Also, larger, more established companies could easily produce
competing versions of Linux. In particular, distributors of UNIX operating
systems could leverage their existing service organizations for a Linux
distribution because of the common UNIX and Linux features. Certain of these
companies, such as Sun Microsystems, have indicated an interest in creating
Linux products. The Linux operating system market in which we compete,
therefore, exhibits minimal barriers to entry.
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At the enterprise level, we encounter competition within the broader
operating system market. The companies in this space include IBM, Microsoft,
Sun Microsystems and Novell, all of which offer hardware-independent multi-user
operating systems for Intel based platforms. In addition, AT&T, Compaq,
Hewlett-Packard, IBM, Olivetti, Sun Microsystems and Unisys each offers its own
version of the UNIX operating system. Many of our competitors in this space
enjoy significantly greater financial resources, a broader range of products,
larger development staffs and more extensive marketing and distribution
capabilities.
In the clustering solutions markets, we primarily compete with a limited
number of well-established companies including SGI, Sun Microsystems and
Veritas. These competitors enjoy superior brand recognition, broader product
offerings, more robust sales and marketing resources and larger development and
engineering staffs. Competitors in this space also include newer companies such
as Resonate and F5 Networks, which focus specifically on high-availability
solutions for eCommerce.
We believe the following are among the key factors that affect our
competitive landscape:
. product performance, functionality and price;
. application availability;
. ease of use;
. networking capability;
. breadth of hardware compatibility;
. quality of support and customer services;
. distribution strength;
. strength of strategic relationships;
. brand awareness; and
. market receptivity.
Software Engineering and Development
We have invested, and intend to continue to invest, significant resources in
product development. Our software development organization is responsible for
product architecture, core technology, product testing and quality assurance,
product user documentation and expansion of the ability of Turbolinux products
to operate with the leading hardware platforms and enterprise applications.
We utilize a tailored approach to developing our products, having created
Turbolinux Workstation and Turbolinux Server as customized products. By
segmenting our products into the open source core workstation and server lines
and our value-added lines, we are able to leverage the ability to customize
Linux to deliver tailored solutions.
We seek to deliver high quality products to meet Internet and business
computing infrastructure needs through innovative integration of best of breed
solutions, including both the leading open source and proprietary software. Our
engineers have worked to build an enterprise focus into our product
installation tools, allowing enterprise wide deployment. We have also focused
on building advanced management tools for configuration management and various
controls and monitors in an effort to reduce administrative costs. We believe
cluster technology is important in today's markets and have focused on
delivering scalable clustering technology for server appliances, application
service providers and Internet service providers.
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Our clustering products inter-operate with Linux, UNIX and Windows. In
addition, reliability, availability, scalability and performance are key
considerations in our software design process. Due to the global nature of
enterprise level software solutions, we also concentrate on delivering
customized software for different geographic markets, particularly software
customized for Asian language computing, unifying language support across each
product line.
We currently have development teams in China, Japan, Slovenia and the United
States and have recruited development talent from Hewlett-Packard, Novell, SCO,
SGI, Sun Microsystems and other leading enterprise software companies. In March
2000, we established TurboLabs, an advanced computing laboratory based in Santa
Fe, New Mexico, with developers focused on clustering systems, peer-to-peer
distributed computing, network management, systems management, storage and file
data synchronization.
Intellectual Property
Certain core infrastructure products we provide, including the Turbolinux
Workstation and Turbolinux Server, are made available under the GNU General
Public License and similar licenses which generally allow any person or
organization to copy, modify and distribute software. Accordingly, because
these products are open source and we do not own copyrights for their source
code, we rely on trademarks utilized with these products as important
intellectual property. We currently own the registered trademark for Turbolinux
in the United States and Japan and have applications pending in several
international jurisdictions. We also have filed trademark applications in the
United States for our EnFuzion product and for TurboLabs. Our trademark
application in Korea was denied based on a prior registration for Turbolinux
owned by a third party and this denial is currently on appeal. In addition, we
own various registered design marks in the United States. However, we do not
own the Linux trademark and, therefore, may be prohibited from using the Linux
name in some jurisdictions. In addition, because we do not control the use of
the Linux name or trademark by others, use of the name by others could lead to
confusion about the source, quality, reputation and dependability of the Linux
operating system in general, which could negatively affect markets for our
products.
We also license or own copyrights for certain third-party software products
and for value-added products we develop, such as our Turbolinux Cluster Server
product and EnFuzion product. We further rely on various trade secrets. We
generally regulate access to and distribution of our documentation and other
proprietary information. Despite our efforts to protect our proprietary
intellectual property rights, unauthorized third parties may attempt to
misappropriate our intellectual property rights. The laws of some foreign
jurisdictions do not protect our rights to the same extent as the laws of the
United States. In addition, policing unauthorized use of our intellectual
property rights is difficult, expensive and time consuming. The loss of any
material trademark or tradename could have a significant negative effect on our
business.
We do not believe that our products infringe any material rights of third
parties. However, our products are comprised of many distinct software
components developed by many independent parties who may in the future assert
infringement claims against us, which could result in costly litigation or
require us to obtain a license to use such rights.
Employees
As of September 30, 2000, we had 253 full time employees, including 95 in
sales and marketing, 89 in software engineering, 28 in customer service and
support, and 41 in
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administration, finance, and operations. Our future success will depend highly
on our ability to attract, retain, and motivate highly qualified technical and
management personnel, for whom competition is intense. We employ independent
contractors to support our professional services, product development, sales,
marketing and business development organizations. None of our employees is
subject to a collective bargaining agreement and we believe our relations with
our employees are good.
Facilities
Our headquarters are located near San Francisco in Brisbane, California,
where we recently entered into a lease for approximately 50,026 square feet.
This new lease will expire in February 2008. We also lease approximately 5,010
square feet and sublease approximately 13,381 square feet in Brisbane,
California, both of which will expire on October 31, 2000. We also lease 2,048
square feet near Salt Lake City, Utah under a lease that expires in March 2003
and 6,137 square feet in Santa Fe, New Mexico under a lease that expires in
June 2005. The amount of space listed for each of these leases is an
approximation.
We also lease office space internationally. These leases include 160 square
meters in Buenos Aires, Argentina under a lease that expires in January 2003;
170 square meters in Sydney, Australia under a lease that expires in July 2003;
925 square meters in Beijing, China under a lease that expires September 2002;
423 square meters in Seoul, Korea under a lease that expires in December 2000;
755 square meters in Hamburg, Germany under a lease that expires in March 2005;
1,539 square feet in Wanchai, Hong Kong under a lease that expires in March
2002; 707 square meters in Tokyo, Japan under a lease that expires in February
2002; and 725 square meters in Tokyo, Japan under a lease that expires in
October 2001. The amount of space listed for each of these leases is an
approximation. In addition, we lease a corporate apartment in Tokyo, Japan.
We believe that our leases meet our current needs at our various
international offices but we expect that we will require additional space
overseas within the next 12 months, and that suitable additional space will be
available on commercially reasonable terms, although we cannot assure you in
this regard. We do not own any real estate.
Legal Proceedings
Although we are not currently a party to any material litigation, we may from
time to time become involved in litigation, including litigation relating to
claims arising from our ordinary course of business. These claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
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MANAGEMENT
Executive Officers and Directors
The names, ages, and positions of our current executive officers and
directors as of October 15, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
T. Paul Thomas.......... 40 Chief Executive Officer, President and Chairman of the Board
Robert P. Bowe.......... 52 Chief Financial Officer
Ly-Huong T. Pham........ 41 Executive Vice President, Worldwide Development
Michael Duffy........... 49 Senior Vice President, Sales and Services
Gerald Greenberg........ 59 Senior Vice President, Worldwide Marketing
Kuniteru Kojima......... 49 President, Turbolinux Japan, K.K.
Ashok Pandey............ 44 General Manager and President, Turbolinux Asia Pacific
Rok Sosic............... 40 Chief Technology Officer
John Chen............... 44 Director
Gordon Eubanks Jr....... 52 Director
Andrew S. Rappaport..... 43 Director
</TABLE>
Executive Officers
T. Paul Thomas has been our President and one of our directors since March
2000 and has been our Chief Executive Officer since July 2000. From March 2000
until July 2000, Mr. Thomas was our Chief Operating Officer. From June 1997 to
February 2000, Mr. Thomas served as President and Chief Executive Officer at
Artisoft, Inc., a computer telephony software company. From May 1996 to June
1997, Mr. Thomas served as Senior Vice President of Marketing at Sunquest
Information Systems. Prior to that, Mr. Thomas held various roles at Apple
Computer and Compaq Computer. Mr. Thomas received his B.S. degree in Finance
and Business Administration from Northern Arizona University.
Robert P. Bowe has served as our Chief Financial Officer since April 2000.
Between January 1993 and January 2000, Mr. Bowe was Corporate Controller and
later became Chief Financial Officer of Network Equipment Technologies. Mr.
Bowe received his B.S. degree in Business and Finance from Oregon State
University and his M.B.A. degree from Santa Clara University and is a Certified
Public Accountant.
Ly-Huong T. Pham has served as our Executive Vice President of Worldwide
Development since June 2000. From October 1997 to June 2000, Ms. Pham worked at
Vtel/Onscreen24, most recently as Chief Operating Officer of Onscreen24 and as
Vice President of Research and Development and Chief Technology Officer at
Vtel, a designer and manufacturer of digital visual communications systems.
Prior to that, from May 1992 to October 1997, Ms. Pham served in various roles
at Apple Computer, most recently as Senior Director of Operating System
Technologies. Ms. Pham holds seven patents and received her B.A. degree in
Mathematics and her M.S. degree in Computer Science from Boston University.
Michael Duffy has served as our Senior Vice President of Sales and Services
since May 2000. From June 1997 to April 2000, Mr. Duffy served in various roles
at Sequel/Solectron, most recently as Vice President of International Business
Development. From May 1995 to May 1997, Mr. Duffy was Director of Worldwide
Business Development and Marketing at Madge Networks. Prior to that, Mr. Duffy
served in various roles at Sun Microsystems. Mr. Duffy received his B.S.E.E.
degree in Electrical Engineering from University College Dublin and College of
Technology, Dublin, Ireland.
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Gerald Greenberg has served as our Senior Vice President of Worldwide
Marketing since October 2000. From January 1991 to September 2000, Mr.
Greenberg has served in various roles with Amdahl and Hal Computer Systems
(Fujitsu subsidiaries), most recently as Senior Director of Marketing. Mr.
Greenberg received his B.S. degree in Mathematics from Brooklyn College and his
M.S.E. degree in Computer and Information Sciences from the University of
Pennsylvania.
Kuniteru Kojima has served as President of Turbolinux Japan, K.K., our
Japanese subsidiary, since October 1999. From April 1997 to September 1999, Mr.
Kojima served as President of Object Design Japan. From April 1995 to March
1997, Mr. Kojima served as Director of Marketing of Cheyenne Software K.K.
Prior to that, Mr. Kojima served as Director of Marketing and Engineering of
Sybase K.K. Mr. Kojima received his B.S. degree in Applied Physics from Waseda
University and his Ph.D. degree in Physics from the University of Tokyo.
Ashok Pandey has served as General Manager and President, Turbolinux Asia
Pacific since August 2000. From January 1996 to May 2000, Mr. Pandey served in
various roles at Compaq Computer/Tandem, most recently as General Manager of
Sales. From August 1994 to July 1995, Mr. Pandey worked as a consultant for
Dessault A.T. From January 1988 to July 1994, Mr. Pandey worked as District
Manager for Bull S.A. Mr. Pandey received his B.S. degree in Electrical
Engineering from Tsinghua University and his post-graduate degree in Hydraulic
Engineering from Tsinghua University.
Rok Sosic has been our Chief Technology Officer since January 2000. From
March 1996 to July 1999, Mr. Sosic served as the Founder and Chief Executive
Officer of Active Tools Pty Ltd. From March 1993 to February 1996, Mr. Sosic
was a lecturer at Griffith University. Prior to that, Mr. Sosic held various
positions in academia and industry, including Xerox PARC. Mr. Sosic has been
granted two U.S. patents. Mr. Sosic received his B.S. degree and his
M.S. degree in Computer Science from the University of Ljubljana, Slovenia and
his Ph.D. degree in Computer Science from the University of Utah.
Directors
John Chen has been one of our directors since September 2000. Mr. Chen has
been the President, Chief Executive Officer and the Chairman of the Board of
Directors of Sybase since August 1997. From March 1995 to July 1997, he ran the
Open Enterprise Computing Division of Siemens Nixdorf, an electrical
engineering and electronics company, and served as President, Chief Executive
Officer and Chairman of Siemens Pyramid, a subsidiary of Siemens Nixdorf. Mr.
Chen also serves as a director of CIT and is on the board of Niku Corporation.
Mr. Chen received his B.S. degree in electrical engineering from Brown
University and his M.S. degree in electrical engineering from the California
Institute of Technology.
Gordon Eubanks Jr. has been one of our directors since May 2000. Mr. Eubanks
has been the Chief Executive Officer and President of Oblix Corp. since April
1999. From September 1983 to April 1999, Mr. Eubanks was the Chief Executive
Officer and President of Symantec Corp. Mr. Eubanks received his B. S. degree
in Electrical Engineering from Oklahoma State University. Mr. Eubanks received
his Masters degree in Computer Science from Naval Postgraduate School in
Monterey, California.
Andrew S. Rappaport has been one of our directors since August 1999. Mr.
Rappaport has been a member of August Capital Management II, L.L.C., a venture
capital firm, since July 1996. Prior to that, Mr. Rappaport was president of
The Technology Research Group, Inc., a Boston-based strategic management-
consulting firm, which he founded in August 1984. Mr. Rappaport is a member of
the board of directors of Silicon Image, MMC Networks and Telocity, as well as
several private corporations. Mr. Rappaport attended Princeton University.
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Board of Directors
Our board of directors is currently comprised of four directors. In
accordance with the terms of our second restated certificate of incorporation
to be filed upon closing of the offering, the terms of office of our board of
directors will be divided into three classes: Class I, whose term will expire
at the annual meeting of stockholders to be held in 2001; Class II, whose term
will expire at the annual meeting of stockholders to be held in 2002; and Class
III, whose term will expire at the annual meeting of stockholders to be held in
2003. The Class I director will be Mr. Eubanks, the Class II director will be
Mr. Chen, and the Class III directors will be Messrs. Rappaport and Thomas.
At each annual meeting of stockholders after the initial term of a class of
directors, the successors to directors whose terms are then expiring will be
elected to serve from the time of election and qualification until the third
annual meeting following election. 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 one-third of
our directors. This classification of the board of directors may have the
effect of delaying or preventing changes in control of our company. Under the
terms of our second restated certificate of incorporation and our second
amended and restated bylaws to become effective upon the closing of this
offering, our directors may be removed for cause by the affirmative vote of the
holders of a majority of our common stock.
Board Committees
Our board of directors has a compensation committee and an audit committee.
The compensation committee consists of Messrs. Chen, Eubanks and Rappaport. The
compensation committee makes recommendations regarding our stock option plans
and all matters concerning executive compensation. The audit committee consists
of Messrs. Chen, Eubanks and Rappaport. The audit committee approves our
independent auditors, reviews the results and scope of annual audits and other
accounting related services, and evaluates our internal audit and control
functions. Both the compensation committee and the audit committee were
established in August 2000, prior to which the board of directors made
decisions regarding compensation and audit matters.
Director Compensation
We do not pay any cash compensation to members of our board of directors for
serving in that capacity, although directors are reimbursed for expenses in
connection with attendance at board of directors and committee meetings.
Compensation Committee Interlocks and Insider Participation
The compensation committee consists of Messrs. Chen, Eubanks and Rappaport,
each of whom is a member of our board of directors and none of whom is an
employee of Turbolinux. None of our executive officers serves as a director or
member of the compensation committee or other board committee performing
equivalent functions of another entity that has one or more executive officers
serving on the board of directors or compensation committee of Turbolinux.
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Executive Compensation
The following table sets forth in summary form information concerning the
compensation paid by us during 1999 to our Chief Executive Officer and the
other executive officers who made more than $100,000 in 1999. These individuals
are referred to as the named executive officers in this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Position Salary Bonus Compensation Options Compensation
------------------ -------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
T. Paul Thomas........... $ -- $ -- $ -- $ -- $ --
Chief Executive Officer,
President and Chairman
Irving W. Miller......... 209,689 -- 25,270 -- --
Former Chief Executive
Officer and former
Chairman
Iris M. Miller........... 190,675 -- 79,046 -- --
Former President,
Beijing TurboLinux,
Inc. and former
director
</TABLE>
The amount of salary in the above table for Irving W. Miller and Iris M.
Miller, respectively, includes 17,800,000 and 15,650,000 Japanese yen converted
to U.S. dollars at a rate of 0.0095 dollars per yen. The amount of "Other
Annual Compensation" for Ms. Miller includes reimbursement for tuition expenses
and a housing subsidy. The Millers were terminated as officers in July 2000 and
resigned as directors in October 2000.
Option Grants in Last Fiscal Year
None of the named executive officers received any stock options at and as of
December 31, 1999. In 1999, we granted options to purchase a total of 6,052,500
shares pursuant to our 1999 Equity Incentive Plan.
Employment Agreements
In July 2000, we entered into an employment agreement with Irving W. Miller,
formerly our Chief Executive Officer and Chairman of the Board. The agreement
provided for an annual base salary of $275,000 and for annual bonuses of up to
100% of his base salary. The bonus was based upon achievement of mutually
agreeable performance targets. Mr. Miller's agreement also provided for a
mortgage subsidy. Under the employment agreement, Mr. Miller was entitled to
severance payments in the aggregate amount of $550,000, plus two years' target
bonus and continuation of medical benefits upon any termination other than a
termination by us for cause. In July 2000, we also entered into a letter
agreement with Iris M. Miller that provided we would pay Ms. Miller severance
payments in the aggregate amount of $150,000 upon any termination other than a
termination by us for cause. In July 2000, we terminated the employment of both
of the Millers without cause and, in October 2000, entered into a separation
agreement with the Millers which replaces the severance obligations under these
employment agreements and addresses other post-termination matters. See
"Certain Transactions--Separation Agreement."
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In February 2000, we entered into an employment agreement with T. Paul
Thomas, our President, Chief Executive Officer and Chairman of the Board. This
agreement provides for an annual base salary at $275,000 and provides for an
annual cash bonus of up to 100% of his annual base salary. The annual bonus is
based upon mutually agreeable performance targets. This bonus will equal
$275,000 for 2000, the first fiscal year of Mr. Thomas' employment. For each
fiscal year thereafter, the total potential target bonus Mr. Thomas may receive
will be equal to 100% of his base salary. Fifty percent of Mr. Thomas' bonus
for fiscal year 2000 is guaranteed without regard to meeting performance
targets. Mr. Thomas is also entitled to a mortgage subsidy of approximately
$10,350 per month plus a gross-up for any income tax liability resulting from
his receipt of that assistance. Mr. Thomas is further entitled to reimbursement
for certain relocation expenses and other expenses. In addition, Mr. Thomas is
to receive severance payment equal to one year's base salary plus bonus,
continuation of medical benefits and six months' accelerated vesting of any
stock or options in the event of a termination other than by Turbolinux for
cause. In the event Mr. Thomas is terminated by us without cause within
twelve months following a change of control, he also is entitled to full
accelerated vesting of any stock or options.
Under his employment agreement, Mr. Thomas was granted a hire-on option and a
performance option. The hire-on option allowed Mr. Thomas to purchase 2,111,356
shares of our common stock at an exercise price of $0.50 per share. This option
was immediately exercisable by Mr. Thomas subject to our right to repurchase
the underlying stock at the purchase price if Mr. Thomas' employment with us
terminates before the completion of four years of continuous service. This
repurchase right lapses as to 25% of the underlying stock on the first
anniversary of Mr. Thomas' employment and the remaining 75% in equal monthly
installments thereafter over the following 36 months. The performance option
allowed Mr. Thomas to purchase 263,920 shares of our common stock at an
exercise price of $0.50 per share. The performance option also was immediately
exercisable subject to our right to repurchase the underlying stock at the
purchase price until the repurchase right lapses upon the earlier of
achievement of performance milestones mutually agreeable to us and Mr. Thomas
that may reasonably be achieved within 12 to 18 months after Mr. Thomas' date
of hire or his completion of six years of continuous service. On March 1, 2000,
Mr. Thomas fully exercised both of these options by delivering to us a
promissory note, subject to our repurchase rights described above in the event
he ceases his service to us or one of our subsidiaries prior to the lapse of
the repurchase rights. See "Certain Transactions-- Promissory Notes."
We have entered into an employment letter agreement with Rok Sosic, our Chief
Technology Officer. This agreement provides for an annual base salary of
$150,000 plus a one-time bonus of $1.5 million. The agreement also entitles Mr.
Sosic to receive stock options exercisable for 600,000 shares of our common
stock, which were granted at an exercise price of $0.10 per share, and another
grant of 1.9 million shares, which were granted at an exercise price of $0.50
per share. Under the agreement, the grants were to be exercisable over a
four-year vesting schedule for the initial 600,000 shares, with 25% vesting on
the first anniversary of Mr. Sosic's service and the remaining 75% vesting in
equal monthly installments thereafter, immediately for 1.1 million shares and
on November 1, 2000 for the remaining 800,000 shares. After granting these
options, however, the board of directors approved the immediate exercise of the
option for 600,000 shares, subject to our right to repurchase the underlying
stock if Mr. Sosic's service with us terminates before the completion of four
years of continuous service. The agreement also provides Mr. Sosic with
severance pay equal to six months of prorated base salary plus acceleration of
vesting of the options to purchase 800,000 shares which are otherwise to vest
on November 1, 2000 in the event we terminate Mr. Sosic's employment without
cause.
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Employee Benefit Plans
1999 Equity Incentive Plan
Our board of directors and stockholders approved our 1999 Equity Incentive
Plan on August 16, 1999. Our board adopted amendments to the 1999 Equity
Incentive Plan in May 2000, which the stockholders approved as of July 2000. As
of October 15, 2000, an aggregate of 12,000,000 shares of common stock have
been authorized for issuance under the 1999 Equity Incentive Plan. As of
October 15, 2000, options to purchase an aggregate of 4,762,228 shares were
outstanding under the 1999 Equity Incentive Plan, an aggregate of 5,834,500
shares of common stock have been issued as a result of option exercises under
the 1999 Equity Incentive Plan and 1,403,272 shares were available for future
option grants and stock awards under the 1999 Equity Incentive Plan.
The 1999 Equity Incentive Plan provides for the grant of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
nonstatutory stock options, restricted stock purchase rights and stock bonuses
to our employees, consultants and directors. Incentive stock options may be
granted only to employees. The 1999 Equity Incentive Plan is administered by
the board of directors or a committee appointed by the board. The board or
committee determines the terms of awards granted, including the exercise price,
the number of shares subject to the award and the exercisability of awards. The
exercise price of incentive stock options granted under the 1999 Equity
Incentive Plan must be at least equal to the fair market value of our common
stock on the date of grant. However, for any employee holding more than 10% of
the voting power of all classes of our stock, the exercise price will be at
least equal to 110% of the fair market value and the term of the option may not
exceed five years. The exercise price of nonstatutory stock options is set by
the administrator of the 1999 Equity Incentive Plan, but can be no less than
85% of the fair market value. The maximum term of options granted under the
1999 Equity Incentive Plan is ten years.
Unless otherwise provided in an option agreement, an optionee whose
relationship as an employee, director or consultant with us or any related
corporation ceases for any reason, other than for death or total or permanent
disability, may exercise options in the three-month period following this
cessation, or such other period of time as determined by the administrator,
unless these options terminate or expire sooner, or later, by their terms. The
three-month period is extended to twelve months for terminations due to total
and permanent disability and eighteen months for terminations due to death.
Generally, the option holder may not transfer a stock option other than by will
or the laws of descent and distribution unless the optionholder holds a
nonstatutory stock option that provides for transfer in the stock option
agreement. However, an option holder may designate a beneficiary who may
exercise the option following the option holder's death.
A "change in control" is defined in the 1999 Equity Incentive Plan as the
sale of substantially all of our assets, a merger or consolidation where we are
not the surviving corporation or a reverse merger where we are the surviving
corporation but our shares of common stock are converted into other securities,
cash or other property. If a change in control occurs, any outstanding options
held by persons then performing services for us as an employee, director or
consultant may either be assumed or continued or an equivalent award may be
substituted by the surviving entity. In this situation, if options are not
assumed, continued or substituted, these options will become fully exercisable
by participants whose service to us has not terminated, including as to shares
that would not otherwise be exercisable, and restricted stock will become fully
vested, but the options must be exercised at or prior to the closing of the
merger or consolidation or they will terminate. Options also become fully
exercisable in the event of a securities acquisition representing 50% or more
of the combined voting power of our securities or a change in over 50% of the
directors on our
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board as it was comprised on the date the 1999 Equity Incentive Plan was
approved by the board, provided that any new director approved by at least 50%
of the incumbent board does not count as a change in board member.
When we become subject to Section 162(m) of the Internal Revenue Code, which
denies a deduction to publicly held corporations for compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000, no person may be granted options under the 1999 Equity
Incentive Plan covering more than 2,250,000 shares in any calendar year.
Restricted stock purchase awards are granted under the 1999 Equity Incentive
Plan in accordance with a vesting schedule determined by our board of directors
or a committee appointed by our board. These restricted stock purchase awards
are subject to a right of repurchase by us. The price of a restricted stock
purchase award under the 1999 Equity Incentive Plan cannot be less than 85% of
the fair market value of the stock subject to the award on the date of grant.
Stock bonuses may be awarded for past services without a purchase payment.
Unless otherwise specified, rights under a stock bonus or restricted stock
bonus agreement generally may not be transferred other than by will or the laws
of descent and distribution as long as the stock awarded pursuant to an
agreement remains subject to the agreement.
Subject to stockholder approval, as necessary, our board of directors may
amend the 1999 Equity Incentive Plan at any time. Our board of directors may
suspend or terminate the 1999 Equity Incentive Plan at any time. If not
terminated sooner, the 1999 Equity Incentive Plan will terminate on the day
before the 10th anniversary of its adoption by our board of directors.
We grant stock options to employees of our subsidiary, TurboLinux, Inc.
(China) under our TurboLinux, Inc. Year 2000 Stock Option Plan. Eligible
participants must be employees of TurboLinux, Inc. (China) who are citizens of
the People's Republic of China. The shares available for issuance under the
Blueprint China Option Plan come out of the shares reserved under our 1999
Equity Incentive Plan. The Blueprint China Option Plan is administered by our
board of directors or a committee of our board of directors, which determines
the terms and conditions of the option grants. The Blueprint China Option Plan
will terminate in July 2009.
2000 Stock Incentive Plan
Our 2000 Stock Incentive Plan was adopted by our board of directors in
October, 2000. The purpose of the 2000 Stock Incentive Plan is to attract and
retain personnel, to provide additional incentive to our employees, directors
and consultants, and the employees, directors and consultants of our
subsidiaries, and to promote the success of our business. The 2000 Stock
Incentive Plan provides for the granting to employees of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code and the
granting of nonstatutory stock options, stock appreciation rights, dividend
equivalent rights, restricted stock, performance units, performance shares, and
other equity-based rights to our employees, directors and consultants.
Initially, 3,000,000 shares of our common stock are reserved for issuance under
the plan, plus any shares available for future awards under our 1999 Equity
Incentive Plan as of the effective date of this offering. Commencing in 2001,
the number of shares of stock reserved for issuance under the 2000 Stock
Incentive Plan will be increased each year by a number equal to the lesser of
(1) 5% of the number of shares of common stock outstanding as of the first day
of such fiscal year, (2) 3,000,000 shares or (3) an amount determined by our
board of directors. Where the award agreement permits the exercise or purchase
of the award for a certain period of time following the recipient's termination
of service with us, or the recipient's disability or death, the award will
terminate to
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the extent not exercised or purchased on the last day of the specified period
or the last day of the original term of the award, whichever occurs first. To
date, no awards have been granted under the 2000 Stock Incentive Plan.
With respect to awards granted to our directors or officers, the 2000 Stock
Incentive Plan is administered by our board of directors or a committee
designated by our board of directors constituted to permit such awards to be
exempt from Section 16(b) of the Securities Exchange Act of 1934, as amended,
in accordance with Rule 16b-3 thereunder. With respect to awards granted to
other participants, the 2000 Stock Incentive Plan is administered by our board
of directors or a committee designated by it. In each case, our board of
directors or the committee it designates shall determine the provisions, terms
and conditions of each award, including, but not limited to, the award vesting
schedule, repurchase provisions, rights of first refusal, forfeiture
provisions, form of payment upon settlement of the award, payment contingencies
and satisfaction of any performance criteria. Incentive stock options are not
transferable by the optionee other than by will or the laws of descent and
distribution, and each incentive stock option is exercisable during the
lifetime of the optionee only by such optionee. Other awards shall be
transferable to the extent provided in the agreement evidencing the award. The
exercise price of incentive stock options must be at least equal to the fair
market value of our common stock on the date of grant, and the term of the
option must not exceed ten years. The term of other awards will be determined
by the 2000 Stock Incentive Plan administrator. With respect to an employee who
owns stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
must equal at least 110% of the fair market value of our common stock on the
grant date and the term of the option must not exceed five years. The exercise
price of any non-qualified stock option must equal at least 85% of the fair
market value of our common stock on the grant date. The exercise or purchase
price of other awards will be such price as determined by the administrator.
The consideration to be paid for the shares of our common stock upon exercise
or purchase of an award will be determined by the administrator and may include
cash, check, shares of common stock, a promissory note, or the assignment of
part of the proceeds from the sale of shares acquired upon exercise or purchase
of the award.
In the event a third party acquires us through the purchase of all or
substantially all of our assets, a merger or other business combination, except
as provided otherwise in an award agreement, all unexercised options shall
accelerate and become fully exercisable for any optionholder who is
subsequently terminated without "cause" within twelve months following such
transaction. In such event, the options must be exercised at or prior to the
consummation of the transaction or they will terminate. Unless terminated
sooner, the 2000 Stock Incentive Plan will terminate automatically in 2010. Our
board has the authority to amend, suspend or terminate the 2000 Stock Incentive
Plan subject to stockholder approval of certain amendments and provided no such
action may affect awards previously granted under the 2000 Stock Incentive
Plan.
2000 Employee Stock Purchase Plan.
Our 2000 Employee Stock Purchase Plan was adopted by the board of directors
of Turbolinux in October 2000 and will become effective upon the closing of
this offering. A total of 500,000 shares of common stock have been reserved for
issuance under the Purchase Plan. The Purchase Plan provides for automatic
annual increases in the number of shares reserved for issuance under the plan
on the first day of each fiscal year, beginning in 2001, in an amount each year
equal to the lesser of (1) 2% of the outstanding shares on such date,
(2) 500,000 shares or (3) such lesser amount as may be determined by the board.
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The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, contains consecutive, overlapping, twenty-four month
offering periods. Each offering period generally includes four six-month
purchase periods. The offering periods generally start on February 1 and August
1 of each year, except for the first such offering period. The first offering
period commences on the first trading day on or after the effective date of
this offering and ends on January 31, 2003.
Employees are eligible to participate in the Purchase Plan if they are
customarily employed by us or any participating subsidiary for more than 20
hours per week and more than five months in any calendar year. However, any
employee who (1) immediately after the grant owns stock possessing 5% or more
of the total combined voting power or value of all classes of our capital
stock, or (2) whose rights to purchase stock under all of our employee stock
purchase plans accrues at a rate which exceeds $25,000 worth of stock for each
calendar year may be not be granted an option to purchase stock under the
Purchase Plan. Payroll deductions may range from 1% to 10% (in whole percentage
increments) of a participant's regular base pay, exclusive of overtime,
bonuses, shift-premiums or commissions. Participants may not make direct cash
payments to their accounts. The maximum number of shares of common stock which
any employee may purchase under the 2000 Stock Purchase Plan during a purchase
period is 500 shares. Certain additional limitations on the amount of common
stock which may be purchased during any calendar year are imposed by the Code.
On the first day of each purchase period, a participating employee is granted
a purchase right which is a form of option to be automatically exercised on the
forthcoming exercise date within the purchase period during which deductions
are to be made from the pay of participants (in accordance with their
authorizations) and credited to their accounts under the 2000 Stock Purchase
Plan. When the purchase right is exercised, the participant's withheld salary
is used to purchase shares of our common stock. The price per share at which
shares of common stock are to be purchased under the 2000 Stock Purchase Plan
during any accrual period is the lesser of (a) 85% of the fair market value of
our common stock on the date of the grant of the option (the commencement of
the purchase period) or (b) 85% of the fair market value of our common stock on
the applicable exercise date. The participant's purchase right is exercised in
this manner on all four exercise dates arising in the offering period unless,
on the first day of any accrual period, the fair market value of our common
stock is lower than the fair market value of the common stock on the first day
of the purchase period. If so, the participant's participation in the original
purchase period is terminated, and the participant is automatically enrolled in
the new purchase period commencing on such day.
Rights granted under the Purchase Plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the Purchase Plan. The Purchase Plan provides that, in the event
of a merger of Turbolinux with or into another corporation or a sale of
substantially all of our assets, each outstanding option shall be assumed or
substituted for by the successor corporation. In lieu of such assumption or
substitution, the administrator of the Purchase Plan can elect to shorten the
offering period then in progress and set a new exercise date. The Purchase Plan
will terminate in 2010. The board of directors has the authority to amend or
terminate the Purchase Plan, except that no such action may adversely affect
any outstanding rights to purchase stock under the Purchase Plan.
The 2000 Employee Stock Purchase Plan will be administered by our board of
directors or a committee designated by our board, which will have the authority
to administer the 2000 Stock Purchase Plan and to resolve all questions
relating to its administration.
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2000 Non-Employee Director Option Program
In October 2000, our board of directors approved the 2000 Non-Employee
Director Option Program, which provides for automatic stock option grants to
our non-employee directors. Under the Non-Employee Director Program, our non-
employee directors who are appointed or elected after the effective date of
this registration statement receive an initial option to purchase 50,000 shares
of common stock upon the date elected to the board of directors. An additional
option to purchase 20,000 shares of common stock is automatically granted to
each non-employee director following each annual meeting of the stockholders in
each subsequent year that a director remains a non-employee member of our board
of directors, if such director has been a member of the board of directors for
at least six months prior to that annual meeting. The exercise price for all
options granted under the Non-Employee Director Program must equal 100% of the
fair market value of our common stock on the date of grant and have a three
year vesting period. The vesting of the options accelerates and the options
fully vest upon a change of control in Turbolinux. Shares available for
issuance under the Non-Employee Director Program come out of shares reserved
under our 2000 Stock Incentive Plan. The Non-Employee Director Program is
administered by our board of directors or a committee of the board of
directors.
401(k) Retirement Plan
In January 2000, we implemented a tax-qualified retirement and deferred
savings plan for our employees, commonly known as a 401(k) plan. The 401(k)
plan provides that each participant may contribute up to 10% of his or her pre-
tax gross compensation up to a statutory limit. In addition, we may make
contributions under the 401(k) Plan as we determine each year in our
discretion.
Limitation of Liability and Indemnification Matters
Our second restated certificate of incorporation that we will file upon the
closing of this offering limits the liability of 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 for:
. breach of their duty of loyalty to the corporation or its stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derives an improper personal
benefit.
Our second amended and restated bylaws that will become effective upon the
closing of this offering provide that we shall indemnify our directors,
officers, employees and agents to the maximum extent permitted by Delaware law.
These bylaws generally require us to advance expenses to directors and officers
incurred by them in connection with any proceeding where they may be entitled
to indemnification by us. These bylaws also permit us to secure insurance on
behalf of any current or former officer, director, employee or other agent of
Turbolinux, or of another enterprise if serving at our request, for any
liability arising out of his or her actions in that capacity, regardless of
whether we would have the power to indemnify him or her against liability under
the provisions of Delaware law.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws. These
agreements, among other
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things, will require us to indemnify our directors and executive officers for
any and all expenses, including attorneys' fees, and any federal, state, local
or foreign taxes imposed on them as a result of the actual or deemed receipt of
any payments under the indemnification agreement, judgments, fines, penalties
and amounts paid in settlement (if such settlement is approved in advance by
us, which approval shall not be unreasonably withheld), actually and reasonably
incurred by the officer or director in any action or proceeding, including any
action by or in the right of Turbolinux arising out of the individual's status
as a director, officer, employee, agent or fiduciary of Turbolinux, any
subsidiary of Turbolinux or any other company or enterprise to which the person
provides services at our request, and to advance expenses incurred by the
individual in connection with any proceeding against the individual with
respect to which the individual may be entitled to indemnification by us. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
At present, we are not aware of any pending litigation or proceeding
involving a director or officer in which indemnification is required or
permitted.
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CERTAIN TRANSACTIONS
The following is a description of transactions in the last three fiscal years
to which we have been a party, in which the amount involved in the transaction
exceeds $60,000 and in which any director, executive officer or holder of more
than 5% of our capital stock had or will have a direct or indirect material
interest other than compensation arrangements that are otherwise described
under "Management."
Acquisitions
In February 2000, we purchased substantially all of the assets of Active
Tools Pty Ltd., a company organized under the laws of Queensland, Australia.
Mr. Sosic, our Chief Technical Officer, was the largest stockholder of Active
Tools. In connection with the acquisition and the subsequent hiring of Mr.
Sosic, we paid $100,000 for the assets of Active Tools and a one-time cash
bonus to Mr. Sosic of $1.5 million. Mr. Sosic also received stock options and
other benefits under an employment agreement described under "Management--
Employment Agreements."
Preferred Stock Sales
Series A Preferred Stock. In September and October 1999, we sold an aggregate
of 10,135,138 shares of our Series A Preferred Stock at a price of $0.74 per
share to raise capital to finance our operations. These shares are convertible
into an aggregate of 10,135,138 shares of our common stock. In connection with
the transaction, the holders of our Series A Preferred Stock were allotted one
seat on our board of directors to be chosen by August Capital II, L.P.,
currently filled by Andrew S. Rappaport. This right expires upon the closing of
this offering.
Series B Preferred Stock. In December 1999 and January, September and October
2000, we sold an aggregate of 24,089,666 shares of our Series B Preferred Stock
at a price of $3.65 per share to raise capital to finance our operations. These
shares are convertible into an aggregate of 24,089,666 shares of our common
stock. In connection with the transaction, the holders of our Series B
Preferred Stock were allocated one seat on our board of directors, currently
unfilled. This right expires upon the closing of this offering.
The following table shows the holders of more than 5% of our voting stock who
purchased, or received from an affiliate, shares of our redeemable convertible
preferred stock and the aggregate consideration we received for those shares:
<TABLE>
<CAPTION>
No. of Shares No. of Shares Total No. of
of Series A of Series B Shares of Aggregate
Purchaser Preferred Preferred Preferred Stock Consideration
--------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Entities affiliated with
August Capital
Management II,
L.L.C. ................ 7,432,435 2,643,836 10,076,271 $15,150,000
Asia Pacific Growth Fund
III, L.P. and its
affiliates............. -- 4,109,586 4,109,586 $14,999,989
Dell Ventures, L.P. .... -- 5,616,439 5,616,439 $20,500,002
Intel Corporation....... 2,027,027 1,767,124 3,794,151 $ 7,950,003
</TABLE>
In connection with the share transactions, we entered into agreements with
the investors providing for registration rights with respect to these shares.
The most recent of these agreements is the second amended and restated investor
rights agreement dated September 1, 2000, which, among other things, restates
and incorporates the registration rights of all investors. For more information
regarding these registration rights, see "Description of Capital Stock--
Registration Rights."
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Separation Agreement
In October 2000, we entered into a separation agreement with our founders,
Irving W. Miller and Iris M. Miller, under which they have resigned from our
board of directors and have agreed to cooperate generally with our management
and other stockholders prior to this offering on matters such as the election
of directors and control of our management. As part of the separation
agreement, we repurchased from the Millers 2,054,793 shares of our common stock
at a price of approximately $7.5 million, or $3.65 per share, and made lump sum
base salary severance payments of $550,000 to Mr. Miller and $300,000 to Ms.
Miller. We have also agreed to make additional lump sum severance payments of
up to $275,000 to Mr. Miller and $75,000 to Ms. Miller for each of 2000 and
2001. The exact amount of these additional severance payments will equal the
maximum percentage of any target bonus we pay our executive officers for each
of 2000 and 2001, excluding any guaranteed bonus we pay T. Paul Thomas.
The separation agreement also provides that we will make a three year term
loan to the Millers to assist them with any tax liabilities that may be
assessed against them in the future solely as a result of their ownership of
our predecessor, Pacific HiTech, a Utah corporation, prior to 1995. The loan
will be secured by shares of our common stock owned by the Millers, which will
be our sole recourse in the event of their default. The maximum amount of the
loan will be equal to the fair market value of the shares pledged by the
Millers to secure the loan. In addition to this loan, we have agreed to
indemnify the Millers for tax liabilities that may be assessed against them in
connection with their sale to us of our Japanese subsidiary, up to a maximum
amount of $750,000.
The separation agreement further provides for a mutual general release of all
past, present and future claims, excluding claims that may arise under the
separation agreement and any related agreements, claims that result from our
standard director and officer indemnification agreements that we have
previously entered into with the Millers or claims that result from fraud or
intentional misconduct of the Millers. Under the separation agreement, we also
have agreed to provide the Millers with piggyback and S-3 registration rights
which, subject to customary limitations, generally require us to register with
the Securities and Exchange Commission shares of our common stock currently
held by the Millers in the event we register other shares of our capital stock
or not more than twice in any 12-month period, upon a request by the Millers,
if we qualify to register our shares with the Securities and Exchange
Commission on Form S-3 at the time of the request, and, among other
limitations, the proposed aggregate selling price is at least $1 million. For a
more detailed description of the registration rights of the holders of our
securities, see "Description of Capital Stock-- Registration Rights."
The Millers have entered into a lock-up agreement in which they have agreed
not to offer, sell, contract to sell or otherwise dispose of any shares of our
common stock or any securities convertible into or exchangeable or exercisable
for shares of our common stock for a period of 180 days after the date of this
prospectus without the prior written consent of Deutsche Bank Securities Inc.
The Millers have also agreed that, during the period from the 181st day after
the date of this prospectus through the first anniversary of that date, they
will not offer, sell, contract to sell or otherwise dispose of any shares of
our common stock or any securities convertible into or exchangeable or
exercisable for shares of our common stock which, in the aggregate, exceed the
volume limitations of Rule 144(e) under the Securities Act of 1933, whether or
not these volume limitations are in fact applicable to those transfers, without
the prior written consent of Deutsche Bank Securities Inc. The consent of
Deutsche Bank Securities Inc. may be given at any time without public notice.
The restrictions described in this paragraph will not apply to shares of common
stock purchased in open market transactions
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after this offering, and the Millers will be entitled to make transfers during
the periods referred to above by gift, will or intestacy or to trusts for
estate planning purposes, provided that the transferee agrees in writing that
it is subject to the lock-up agreement.
Promissory Notes
Pursuant to his employment agreement, T. Paul Thomas, our President and Chief
Operating Officer, exercised his options to purchase an aggregate of 2,375,276
shares of common stock by executing a full-recourse promissory note in favor of
Turbolinux in the original principal amount of $1,187,638. The note bears
interest at 6.8% per annum and principal and interest are due and payable in
March 2006 or earlier if Mr. Thomas' employment with us terminates for any
reason. Mr. Thomas pledged the shares of common stock purchased with the
promissory note as collateral and the shares are held in escrow.
In January 2000, the board of directors approved the early exercise of stock
options for holders of options to purchase at least 100,000 shares of common
stock under the 1999 Equity Incentive Plan. Robert Bowe, Michael Duffy and Ly-
Huong Pham elected to exercise options to purchase 400,000, 160,000 and 660,000
shares, respectively, pursuant to full-recourse promissory notes in respective
principal amounts of $200,000, $80,000 and $330,000. These promissory notes
bear interest at 6.22% per annum with principal and interest due and payable in
September 2004 or earlier if their respective employment with us terminates for
any reason. Each individual pledged his or her shares purchased with their
respective promissory note as collateral and these shares are held by us in
escrow.
Indemnification Agreements
We have entered into an indemnification agreement with each of our executive
officers and directors. See "Management--Limitation of Liability and
Indemnification Matters."
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PRINCIPAL STOCKHOLDERS
The following table sets forth as of October 15, 2000, and as adjusted to
reflect the sale of the shares of common stock offered hereby, information with
respect to the beneficial ownership of our common stock as to:
. each person known by us to own beneficially more than 5% of the
outstanding shares of our common stock;
. each of the named executive officers;
. each of our directors; and
. all of our directors and executive officers as a group.
Except as indicated in the table or footnotes below, and subject to
applicable community property laws, the persons named below have sole voting
and investment power with respect to all shares of common stock held by them.
The data in the table is based on 61,379,787 shares of common stock
outstanding as of October 15, 2000, which assumes conversion of all of the
outstanding shares of our redeemable convertible preferred stock into common
stock and the repurchase of 2,054,793 shares of common stock from our founders
as if it occurred on October 15, 2000, and shares outstanding
immediately following the completion of this offering, based on shares
outstanding as of October 15, 2000 and subject to the same assumptions.
Beneficial ownership is determined in accordance with the rules of the SEC.
Shares of common stock subject to options or warrants that are presently
exercisable or exercisable within 60 days of October 15, 2000 are deemed
outstanding for the purpose of computing the percentage ownership of the person
or entity holding the options or warrants, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person or
entity.
Unless otherwise indicated below, each person or entity named below has an
address in care of our principal executive offices at 8000 Marina Boulevard,
Suite 300, Brisbane, California 94005.
<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially
Number of Owned
Shares -----------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
------------------------ ------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with August Capital
Management II, L.L.C.(1)...................... 10,076,271 16.42% %
Dell Ventures, L.P. ........................... 5,616,439 9.15
Asia Pacific Growth Fund III L.P. and
affiliated entities(2)........................ 4,109,586 6.70
Intel Corporation.............................. 3,794,151 6.18
Irving W. Miller(3)............................ 18,935,207 30.85
Iris Miller(3)................................. 18,935,207 30.85
T. Paul Thomas(4).............................. 2,375,276 3.87
John Chen...................................... * *
Gordon Eubanks................................. * *
Andrew S. Rappaport(5)......................... 10,076,271 16.42
All directors and executive officers as a group
(6 persons)(6)................................ 31,359,767 52.07
</TABLE>
--------
* Less than 1% of the outstanding shares of common stock.
(1) Consists of 9,632,367 shares held by August Capital II, L.P. and 443,904
shares held by August Capital Strategic Partners II, L.P. August Capital
Management II, L.L.C. is the
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general partner of both these partnerships and has voting and dispositive
authority over the shares held by each of these partnerships. The address
of record for these entities is 2480 Sand Hill Road, Suite 101, Menlo Park,
California 94025.
(2) Consists of 3,561,641 shares held by Asia Pacific Growth Fund III L.P.,
410,959 shares held by HanTech International II Venture Capital Corp. and
136,986 shares held by H&Q/GAI Incubation Fund, L.P.
(3) Consists of 11,691,509 shares held by Irving Miller, 6,123,698 shares held
by Iris Miller, Mr. Miller's spouse, and an aggregate of 1,120,000 shares
held by several trusts. Irving and Iris Miller collectively are trustees
of these trusts and share voting and dispositive authority over the shares
held by these trusts. Mr. and Mrs. Miller disclaim beneficial ownership of
the shares held by these trusts.
(4) Consists of 2,111,356 shares subject to a right of repurchase in favor of
Turbolinux that lapses over a period of four years and 263,920 shares
subject to a right of repurchase in favor of Turbolinux that lapses upon
the earlier to occur of our achievement of certain performance targets or
Mr. Thomas' completion of six years of continuous service to us.
(5) Mr. Rappaport, one of our directors, is a member of August Capital
Management II, L.L.C., which is the general partner of each of August
Capital II, L.P. and August Capital Strategic Partners II, L.P. August
Management II, L.L.C. has voting and dispositive authority over the shares
held by these partnerships. Mr. Rappaport disclaims beneficial ownership
of the shares held by August Management II, L.L.C., except to the extent
of his pecuniary interest in these shares.
(6) Includes an option grant to John Chen to purchase 50,000 shares of common
stock and an option grant to Gordon Eubanks to purchase 50,000 shares of
common stock, each of which is exercisable within 60 days of October 15,
2000.
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DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 200,000,000 shares of common stock, $0.001 par value per share, and
10,000,000 shares of preferred stock, $0.001 par value per share.
The following summary does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of our second restated certificate
of incorporation, and our second amended and restated bylaws, both of which
will become effective upon the closing of this offering, our Second Amended and
Restated Investor Rights Agreement, and the Separation Agreement dated as of
October 10, 2000 between our founders and us. Copies of these documents are
included as exhibits to the registration statement of which this prospectus is
a part.
Common Stock
Assuming the conversion of all outstanding shares of redeemable convertible
preferred stock into common stock as of October 15, 2000, there were 61,379,787
shares of common stock outstanding held of record by 108 stockholders. After
giving effect to the sale of common stock offered hereby and based on shares
outstanding on October 15, 2000, there will be shares of common stock
outstanding.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of common
stock are not entitled to cumulative voting, which means that the holders of a
majority of our outstanding shares of common stock may elect all of our
directors. Holders of common stock have no preemptive rights or rights to
convert their common stock into any other securities. There are no redemption
or sinking fund provisions applicable to the common stock. All outstanding
shares of common stock are fully paid and non-assessable, and the shares of
common stock to be issued in this offering will be fully paid and non-
assessable.
Preferred Stock
Upon the closing of this offering, each outstanding share of redeemable
convertible preferred stock will automatically convert into one share of common
stock. Pursuant to our amended and restated certificate of incorporation to be
filed upon the closing of this offering, the board of directors has the
authority, without further action by the stockholders, to issue up 10,000,000
shares of preferred stock in one or more series and to fix the designations,
powers, preferences, privileges and relative participating, optional or special
rights and the qualifications, limitations or restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of redemption and
liquidation preferences, any or all of which may be greater than the rights of
the common stock. The board, without stockholder approval, can issue preferred
stock with voting, conversion or other rights that could adversely affect the
voting power and other rights of the holders of common stock. Preferred stock
could thus be issued quickly with terms calculated to delay or prevent a change
in control of Turbolinux or make removal of management more difficult.
Additionally, the issuance of preferred stock may have the effect of decreasing
the market price of the common stock, and may adversely affect the voting and
other rights of the holders of common stock. Upon the closing of this offering,
there will be no shares of preferred stock outstanding and we have no plans to
issue any of the preferred stock.
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Warrants
In connection with our acquisition of assets from Active Tools, we issued
warrants to purchase an aggregate of 710,000 shares of our common stock at an
exercise price of $0.50 per share. We issued a warrant to purchase an aggregate
of 50,000 shares of our common stock at an exercise price of $3.65 per share to
an affiliate of the landlord of our corporate headquarters. As of October 15,
2000, in connection with recruiting services, we issued warrants to
two executive placement firms to purchase an aggregate of 196,608 shares of our
common stock with a weighted average exercise price of $0.60 per share.
Registration Rights
Assuming the conversion of all outstanding redeemable convertible preferred
stock into common stock upon completion of this offering, the holders,
including T. Paul Thomas and our founders described below, of 54,415,287 shares
of our common stock or their permitted transferees are entitled to registration
rights with respect to these shares under the Securities Act of 1933. Of this
total, registration rights with respect to an aggregate of 34,224,804 of these
shares are provided under the terms of a second amended and restated investor
rights agreement between Turbolinux and the holders of these securities.
Subject to limitations in the agreements, these registration rights include the
following:
. The holders of at least 25% of these securities then outstanding may
require, on two occasions beginning 180 days after the effective date of
the registration statement relating to this offering, that we register
these securities for public resale, provided that at least 20% of the
securities entitled to be included are included in the registration and
that the anticipated aggregate offering price of the public resale would
exceed $5.0 million, and further provided that if the offering is
underwritten, the underwriters may limit the total number of shares
included in the offering.
. If we register any of our common stock either for our own account or for
the account of other security holders, the holders of these securities
are entitled to include their shares of common stock in that
registration, subject to the ability of the underwriters to limit the
number of shares included in the offering.
. The holders of these securities may also require us, not more than twice
in any 12-month period, to register all or a portion of these securities
on Form S-3 when use of that form becomes available to us, provided,
among other limitations, that the proposed aggregate selling price is at
least $1.0 million.
We have granted similar registration rights for 17,815,207 shares pursuant to
the separation agreement dated October 10, 2000 between our founders, Irving W.
Miller and Iris M. Miller, and us. This agreement requires us to register with
the Securities and Exchange Commission shares of our common stock currently
held by the Millers in the event we register other shares of our capital stock
or, not more than twice in any 12-month period, upon a request by the Millers,
if we qualify to register our shares with the Commission on Form S-3 at the
time of the request, and, among other limitations, the proposed aggregate
selling price is at least $1.0 million.
We also have agreed to register the resale of 2,375,276 shares of common
stock issued to T. Paul Thomas, our Chief Executive Officer and President, to
the extent he is vested in these shares.
For all of the 54,415,287 shares of our common stock entitled to registration
rights, we will be responsible for paying all registration expenses other than
underwriting discounts and commissions, which will be payable by the holders
selling their shares.
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<PAGE>
Anti-Takeover Effects of Provisions of Our Second Restated Certificate of
Incorporation, Second Amended and Restated Bylaws and of Delaware Law
Charter Documents
Provisions of our second restated certificate of incorporation, which will be
filed upon the closing of this offering, and our second amended and restated
bylaws, which will become effective upon the closing of this offering, may have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of us. We expect
these provisions to discourage coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of Turbolinux
to first negotiate with us. These provisions could limit the price investors
might be willing to pay in the future for our common stock and could have the
effect of delaying or preventing a change in control. We believe that the
benefits of increased protection of our ability to negotiate with the proponent
of an unfriendly or unsolicited acquisition proposal outweigh the disadvantages
of discouraging these proposals because, among other things, negotiation may
result in an improvement of their terms. These provisions could limit the price
that investors might be willing to pay in the future for shares of our common
stock. These provisions include:
. the division of the board of directors into three separate classes;
. the absence of cumulative voting in the election of directors;
. procedures for advance notification of stockholder nominations and
proposals;
. limitations on the ability of our stockholders to call special meetings
of the stockholders; and
. the ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, our board of directors has the authority to issue up to
10,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The issuance of
preferred stock, while providing flexibility in connection with possible
financings or acquisitions or other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of our
outstanding voting stock.
Delaware Law
We are also subject to Section 203 of the Delaware General Corporation Law
which, subject to certain exceptions, prohibits a publicly held Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the time the person became an
interested stockholder, unless:
. prior to the time that the stockholder became an interested stockholder,
the board of directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding (a) shares owned by persons who are directors and also
officers and (b) shares held by 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
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<PAGE>
. at or subsequent to the time that the stockholder became an interested
stockholder, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders
by the affirmative vote of at least two-thirds of the outstanding voting
stock that is not owned by the interested stockholder.
Generally, a "business combination" includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns or, within three years prior to the
determination of interested stockholder status, did own 15% or more of a
corporation's outstanding voting securities.
We expect the existence of this provision to have an anti-takeover effect
with respect to transactions that our board of directors does not approve in
advance. We also anticipate that Section 203 may also discourage takeover
attempts that might result in a premium over the market price for the shares of
common stock held by our stockholders. A Delaware corporation may opt out of
Section 203 with an express provision in its original certificate of
incorporation or an express provision in its certification of incorporation or
bylaws resulting from amendments approved by the holders of at least a majority
of the corporation's outstanding voting shares. We have not opted out of
Section 203.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is .
77
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock
and any sale of substantial amounts of common stock in the open market, or the
perception that these sales may occur, may adversely affect the market price of
our common stock. Furthermore, since only a limited number of shares, in
addition to the shares sold in this offering, will be available for public sale
shortly after this offering because of contractual and legal restrictions on
resale described below, sales of substantial amounts of our common stock in the
public market after the restrictions lapse, or the perception that those sales
may occur, could adversely affect the prevailing market price of our common
stock and our ability to raise equity capital in the future.
Upon completion of this offering, and based on shares outstanding as of
October 15, 2000, we will have outstanding shares of common stock,
assuming no exercise of the underwriters' over-allotment option, no exercise of
options or warrants after October 15, 2000 and that the repurchase of 2,054,793
shares of our common stock from our founders had occurred as of October 15,
2000. Of these shares, the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
except that, if shares are purchased by our "affiliates," as that term is
defined in Rule 144 of the Securities Act, those shares would be subject to the
limitations and restrictions on resale described below.
The remaining 61,379,787 shares of common stock held by existing stockholders
were issued and sold by us in reliance on exemptions from the registration
requirements of the Securities Act. Substantially all of these shares will be
subject to the lock-up agreements described below. These shares will become
eligible for public sale as follows:
<TABLE>
<CAPTION>
Number of
Date of Availability for Sale Shares
----------------------------- ----------
<S> <C>
At the date of this prospectus..................................
90 days after the date of effectiveness of the registration
statement...................................................... 704,513
181 days after the date of this prospectus...................... 51,387,021
Periodically thereafter......................................... 9,288,253
</TABLE>
Stock Options and Warrants
In addition, immediately after completion of this offering, and based on
options outstanding as of October 15, 2000, we will have 1,403,272 shares of
common stock available for future grant pursuant to our current stock option
plans, and 4,762,228 shares subject to outstanding options. The holders of
substantially all of these outstanding options are subject to lock-up
agreements, as described below. Upon completion of this offering, a total of
3,500,000 additional shares of common stock, plus annual increases, will be
available for issuance under our 2000 Stock Incentive Plan and 2000 Employee
Stock Purchase Plan. We intend to register, prior to the expiration of the
lock-up period, all of the shares of common stock reserved for issuance under
our stock option plans and under our employee stock purchase plan and 2,375,276
shares of common stock held by T. Paul Thomas, our Chief Executive Officer and
President, to the extent he is vested in these shares. This registration will
permit the resale of shares by non-affiliates in the public market without
restriction beginning on expiration of the lock-up.
As of October 15, 2000, there were also outstanding warrants to purchase
956,608 shares of our common stock. An aggregate of shares subject to these
warrants will be available for sale without registration under the Securities
Act upon the expiration of the lock-
78
<PAGE>
up period, assuming a cashless exercise of the warrants, and the remaining
6,000 shares will become available for sale without registration in October
2001, assuming a cashless exercise.
Lock-Up Agreements
Each of our officers, directors, the holders of substantially all of our
outstanding shares of common stock, and the holders of substantially all of our
outstanding options and warrants, have agreed with Deutsche Bank Securities
Inc. not to sell or otherwise dispose of any their shares for a period of 180
days after the date of this prospectus without the prior written consent of
Deutsche Bank Securities Inc. The consent of Deutsche Bank Securities Inc. may
be given at any time and without notice. Please see "Certain Transactions--
Separation Agreement" for a summary of additional provisions of the lock-up
agreement that our founders have entered into.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the registration statement of which this prospectus is a
part, a person who has beneficially owned shares of our common stock for at
least one year would be entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of our common stock on the Nasdaq
National Market System during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to other requirements regarding the
manner of sale, notice filing and the availability of current public
information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, would be entitled
to sell these shares without regard to the Rule 144 volume limitations
described above. Therefore, unless otherwise restricted, "144(k) shares" may be
sold immediately upon the completion of this offering.
Rule 701
In general, any employee, director, officer, consultant or advisor who
purchases shares from us in connection with a written compensatory plan or
contract before the effective date of the registration statement of which this
prospectus is a part is entitled to resell these shares beginning 90 days after
the effective date of the registration statement in reliance on Rule 701,
without having to comply with certain restrictions, including the holding
period and volume limitations, contained in Rule 144.
The Securities and Exchange Commission has indicated that Rule 701 will apply
to typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, along with the
shares acquired upon exercise of these options, including exercises after the
effective date of the registration statement of which this prospectus is a
part. Securities issued in reliance on Rule 701 are restricted securities and,
subject to the lock-up agreements described above, beginning 90 days after the
effective date
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<PAGE>
of the registration statement may be sold by persons other than "affiliates"
subject only to the manner of sale restrictions of Rule 144 and may be sold by
"affiliates" under Rule 144 without compliance with its one-year minimum
holding requirement.
Registration Rights
After this offering, the holders of 54,415,287 shares of our common stock
will be entitled to certain rights with respect to registration of such shares
under the Securities Act. Registration of these shares under the Securities Act
would result in these shares becoming freely tradeable without restriction
under the Securities Act (except for shares purchased by us or our affiliates).
Investors should review "Description of Capital Stock--Registration Rights" for
a description of these registration rights.
80
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank
Securities Inc., Dain Rauscher Incorporated, SG Cowen Securities Corporation
and W.R. Hambrecht + Co., LLC, have severally agreed to purchase from us the
following numbers of shares of common stock at the public offering price less
the underwriting discounts and commissions specified on the cover page of this
prospectus:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
Deutsche Bank Securities Inc. ........................................
Dain Rauscher Incorporated............................................
SG Cowen Securities Corporation.......................................
W.R. Hambrecht + Co., LLC.............................................
----
Total...............................................................
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered by this prospectus
are subject to specified conditions and that the underwriters will purchase all
of the shares of common stock offered by this prospectus, other than those
covered by the over-allotment option described below, if any of these shares
are purchased.
We have been advised by the representatives of the underwriters that the
underwriters propose to offer the shares of common stock to the public at the
public offering price specified on the cover of this prospectus and to selected
dealers at a price that represents a concession not in excess of $ per
share under the public offering price. The underwriters may allow, and these
dealers may re-allow, a concession of not more than $ per share to other
dealers. After the initial public offering, the representatives of the
underwriters may change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to additional
shares of common stock at the public offering price less the underwriting
discounts and commissions specified on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered by this prospectus. To the
extent that the underwriters exercise this option, each of the underwriters
will become obligated, subject to conditions, to purchase approximately the
same percentage of these additional shares of common stock as the number of
shares of common stock to be purchased by that underwriter as specified in the
above table bears to the total number of shares of common stock offered by this
prospectus. We will be obligated, pursuant to the option, to sell these
additional shares of common stock to the underwriters to the extent the option
is exercised. If any additional shares of common stock are purchased, the
underwriters will offer the additional shares on the same terms as those on
which the shares are being offered.
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<PAGE>
The underwriting discounts and commissions per share are equal to the public
offering price per share of common stock less the amount paid by the
underwriters to us per share of common stock. The underwriting discounts and
commissions are % of the initial public offering price. We have agreed to
pay the underwriters the following discounts and commissions, assuming either
no exercise or full exercise by the underwriters of the underwriters' over-
allotment option:
<TABLE>
<CAPTION>
Total Discounts and Commissions
-----------------------------------------
Discounts and Without Exercise of
Commissions Over-Allotment With Full Exercise of
per Share Option Over-Allotment Option
------------- ------------------- ---------------------
<S> <C> <C> <C>
Discounts and
commissions paid by
us.................... $ $ $
</TABLE>
In addition, we estimate that the total expenses of this offering, all of
which are payable by us, excluding underwriting discounts and commissions, will
be approximately $ .
We have agreed to indemnify the underwriters against some specified types of
liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make in respect of any of these
liabilities.
Each of our officers and directors, the holders of substantially all of the
outstanding shares of our capital stock, and the holders of substantially all
of the outstanding options and warrants to purchase our capital stock have
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of our common stock or any securities convertible into or exchangeable or
exercisable for shares of our common stock, other than shares of common stock
purchased in open market transactions after the pricing of this offering or
pursuant to the directed share program referred to below, for a period of 180
days after the date of this prospectus without the prior written consent of
Deutsche Bank Securities Inc. This consent may be given at any time without
public notice. However, transfers may be made during the lock-up period:
. by gift, will or intestacy;
. to trusts for estate planning purposes; or
. to the transferor's stockholders, partners, equity interest holders or
affiliates;
provided that the transferee agrees in writing that it is subject to the lock-
up agreement. We have entered into a similar agreement with the representatives
of the underwriters except that, without their consent, we may grant options
and issue shares pursuant to our 2000 Stock Incentive Plan, 2000 Employee Stock
Purchase Plan and our 1999 Equity Incentive Plan and issue shares upon the
exercise of outstanding options and warrants.
The representatives of the underwriters have advised us that the underwriters
do not intend to confirm sales to any account over which they exercise
discretionary authority.
In order to facilitate the offering of our common stock, the underwriters may
engage in transactions that stabilize, maintain, or otherwise affect the market
price of our common stock. Specifically, the underwriters may over-allot shares
of our common stock in connection with this offering, creating a short position
in our common stock for their own account. A short position results when an
underwriter sells more shares of common stock than that underwriter is
committed to purchase. A short position may involve either "covered" short
sales or "naked" short sales. Covered short sales are sales made in an amount
not greater than the underwriters' over-allotment option to purchase additional
shares in the offering. The underwriters may close out any covered short
position by either exercising their over-
82
<PAGE>
allotment option or purchasing shares in the open market. In determining the
source of shares to close out any covered short position, the underwriters may
consider, among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares through
the over-allotment option. Naked short sales are sales in excess of the over-
allotment option. The underwriters will have to close out any naked short
position by purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering.
Accordingly, to cover these short positions or to stabilize the market price
of our common stock, the underwriters may bid for, and purchase, shares of our
common stock in the open market. These transactions may be effected on the
Nasdaq National Market or otherwise. Additionally, the representatives, on
behalf of the underwriters, may reclaim selling concessions allowed to an
underwriter or dealer if the underwriting syndicate repurchases shares
distributed by that underwriter or dealer. Similar to other purchase
transactions, any purchases by the underwriters to cover any syndicate short
positions or to stabilize the market price of our common stock may have the
effect of raising or maintaining the market price of our common stock or
preventing or mitigating a decline in the market price of our common stock. As
a result, the price of the shares of our common stock may be higher than the
price that might otherwise exist in the open market. The underwriters are not
required to engage in these activities and, if commenced, may end any of these
activities at any time.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to of the shares of common stock being sold in
this offering for sale to our vendors, employees, family members of employees,
customers and other third parties and up to of the shares of common stock
being sold in this offering for sale to open source software developers and
other members of the open source software community that we believe have
contributed to the success of this community and our growth, in each case
through a directed share program. The number of shares of our common stock
available for sale to the general public in this offering will be reduced to
the extent these reserved shares are purchased. Any reserved shares that are
not purchased by these persons will be offered by the underwriters to the
general public on the same basis as the other shares in this offering.
In October 2000, BT Investment Partners, Inc., an affiliate of Deutsche Bank
Securities Inc., purchased 136,986 shares of our Series B redeemable
convertible preferred stock as part of a private placement. BT Investment
Partners purchased those shares at the same price as the other investors who
purchased shares in that private placement. These shares will convert
automatically into shares of our common stock upon the completion of this
offering.
A prospectus in electronic format is being made available on Internet
websites maintained by one or more of the lead underwriters of this offering
and may be made available on websites maintained by other underwriters. Other
than the prospectus in electronic format, the information on any underwriter's
website and any information contained in any other website maintained by an
underwriter is not part of this prospectus or the registration statement of
which this prospectus forms a part.
W.R. Hambrecht + Co., LLC is an investment banking firm formed in February
1998. In addition to this offering, W.R. Hambrecht + Co., LLC has engaged in
the business of public and private equity investing and financial advisory
services since its inception. The chairman and chief executive officer of W.R.
Hambrecht + Co., LLC, William R. Hambrecht, has 40 years of experience in the
securities industry.
83
<PAGE>
Pricing of this Offering
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial public offering price of our common stock will be
determined by negotiation between us and the representatives of the
underwriters. Among the primary factors that will be considered in determining
the public offering price are:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business; and
. estimates of our business potential.
The estimated initial public offering price range appearing on the cover of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Turbolinux by Morrison & Foerster LLP, Irvine, California. Brown & Wood LLP,
San Francisco, California, will act as counsel for the underwriters.
EXPERTS
The consolidated financial statements of Turbolinux, Inc. and subsidiaries as
of December 31, 1998 and 1999, and for each of the three years in the period
ended December 31, 1999 and the consolidated financial statements of Active
Tools Pty. Ltd. and subsidiary as of and for the year ended December 31, 1999
included in this prospectus and the related financial statement schedule of
Turbolinux, Inc. and subsidiaries included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the registration
statement, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
In February 2000, we engaged Deloitte & Touche LLP to replace the former
accountants, BDO Seidman, LLP, as our principal accountants. No report issued
by BDO Seidman, LLP on any of our financial statements contained any adverse
opinion, a disclaimer of opinion, or any qualifications or modifications
related to uncertainty, limitation of audit scope, or application of accounting
principles. In connection with the services conducted by BDO Seidman, LLP for
any period, including the year ended December 31, 1998, there were no
disagreements with BDO Seidman, LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedures,
which, if not resolved to BDO Seidman, LLP's satisfaction, would have caused
them to reference the subject matter of the disagreement in their reports. The
change in accountants was approved by the board of directors.
84
<PAGE>
ADDITIONAL INFORMATION AVAILABLE TO YOU
We have filed with the SEC under the Securities Act a registration statement
on Form S-1, including exhibits and schedules filed with this registration
statement, with respect to the common stock to be sold under this prospectus.
This prospectus does not contain all the information included in the
registration statement. For further information about our company and the
shares of common stock to be sold in the offering, please refer to the
registration statement. Statements made in this prospectus concerning the
contents of any contract, agreement or other document filed as an exhibit to
the registration statement are summaries of the terms of contract, agreement or
document and are not necessarily complete. Complete exhibits have been filed
with the registration statement.
The registration statement and exhibits may be inspected, without charge, and
copies may be obtained at prescribed rates, at the SEC's Public Reference
facility, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the SEC located at 7 World Trade Center, New York, New York 10048
and at Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The registration statement and other
information filed with the SEC is available at the website maintained by the
SEC on the worldwide web at http://www.sec.gov.
Prior to the offering we were not required to file reports with the SEC. We
intend to furnish our stockholders with annual reports containing financial
statements audited by our independent accountants and quarterly reports for the
first three quarters of each fiscal year containing unaudited financial
statements.
85
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Turbolinux, Inc. and Subsidiaries
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 and June 30,
2000 (Unaudited)........................................................ F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999 and Six Months Ended June 30, 1999 and 2000
(Unaudited)............................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1997, 1998 and 1999 and Six Months Ended June 30,
2000 (Unaudited)........................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999 and Six Months Ended June 30, 1999 and 2000
(Unaudited)............................................................. F-6
Notes to Consolidated Financial Statements for the Years Ended December
31, 1997, 1998 and 1999 and Six Months Ended June 30, 1999 and 2000
(Unaudited)............................................................. F-7
Active Tools Pty. Ltd. and Subsidiary
Independent Auditors' Report............................................. F-23
Consolidated Balance Sheet as of December 31, 1999....................... F-24
Consolidated Statement of Operations and Accumulated Deficit for the Year
Ended December 31, 1999................................................. F-25
Consolidated Statement of Cash Flows for the Year Ended December 31,
1999.................................................................... F-26
Notes to Consolidated Financial Statements for the Year Ended December
31, 1999................................................................ F-27
Pro Forma Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Statements of Operations...... F-32
Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the Year Ended December 31, 1999........................................ F-33
Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the Six Months Ended June 30, 2000...................................... F-34
Notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations.............................................................. F-35
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Turbolinux, Inc.:
We have audited the accompanying consolidated balance sheets of Turbolinux,
Inc. and subsidiaries (the Company) as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years ended December 31, 1997, 1998 and 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 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Turbolinux, Inc. and subsidiaries
as of December 31, 1998 and 1999, and the results of their operations and their
cash flows for the years ended December 31, 1997, 1998 and 1999 in conformity
with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
San Jose, California
July 13, 2000
F-2
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
December 31, Pro Forma
-------------- June 30, June 30,
1998 1999 2000 2000
------ ------- -------- ---------
(Note 1)
(Unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................ $ 630 $34,709 $ 26,988 $ 49,688
Accounts receivable, net of allowances of
$7, $30 and $11 in 1998, 1999 and 2000,
respectively............................ 1,386 1,008 1,461 1,461
Prepaid expenses and other............... 64 707 2,715 2,715
Deferred income taxes.................... 160 -- -- --
------ ------- -------- --------
Total current assets................... 2,240 36,424 31,164 53,864
Property and equipment, net................ 15 966 3,737 3,737
Deferred income taxes...................... 4 -- -- --
Intangible assets.......................... -- -- 6,826 6,826
Other assets............................... 71 343 1,865 1,865
------ ------- -------- --------
Total assets........................... $2,330 $37,733 $ 43,592 $ 66,292
====== ======= ======== ========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Bank overdraft........................... $ 212 $ -- $ -- $ --
Accounts payable......................... 385 1,085 3,517 3,517
Accrued expenses......................... 365 3,814 3,397 3,397
Deferred revenues........................ -- -- 983 983
Income taxes payable..................... 420 232 284 284
Payable to stockholders.................. 62 180 99 99
------ ------- -------- --------
Total current liabilities.............. 1,444 5,311 8,280 8,280
Long-term liabilities...................... -- 32 32 32
------ ------- -------- --------
Total liabilities...................... 1,444 5,343 8,312 8,312
------ ------- -------- --------
Commitments (Note 9)
Redeemable convertible preferred stock,
$0.001 par value; shares authorized
26,500,000 shares; aggregate liquidation
preference of $40,030 in 1999 and
$64,527 in 2000
Series A, 10,500,000 shares designated and
10,135,138 outstanding in 1999 and 2000... -- 7,433 7,433 --
Series B, 16,000,000 shares designated and
8,912,329 outstanding in 1999 and
15,623,913 in 2000........................ -- 31,095 54,470 --
Stockholders' equity (deficit):
Common stock, $0.001 par value;
95,500,000 shares authorized; shares
outstanding: 1998 and 1999, 21,000,000;
2000, 27,982,276; pro forma,
60,152,287.............................. 115 12,404 30,837 122,927
Deferred stock compensation.............. -- (9,738) (17,206) (17,206)
Notes receivable from stockholders....... -- -- (1,545) (1,545)
Accumulated other comprehensive income
(loss).................................. 54 (50) (2) (2)
Retained earnings (accumulated deficit).. 717 (8,754) (38,707) (46,194)
------ ------- -------- --------
Total stockholders' equity (deficit)... 886 (6,138) (26,623) 57,980
------ ------- -------- --------
Total liabilities and stockholders'
equity (deficit)...................... $2,330 $37,733 $ 43,592 $ 66,292
====== ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December Six Months
31, Ended June 30,
----------------------- ----------------
1997 1998 1999 1999 2000
------ ------ -------- ------ --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue............................. $1,615 $3,574 $ 4,939 $1,766 $ 2,932
Cost of revenue (excluding
amortization of deferred stock
compensation)...................... 642 1,395 2,872 846 3,133
------ ------ -------- ------ --------
Gross margin (excluding amortization
of deferred stock compensation).... 973 2,179 2,067 920 (201)
Operating expenses:
Sales and marketing (excluding
amortization of deferred stock
compensation).................... 380 549 3,897 735 14,242
Research and development
(excluding amortization of
deferred stock compensation)..... 234 313 1,949 372 6,885
General and administrative
(excluding amortization of
deferred stock compensation)..... 405 619 3,199 756 6,788
Amortization of deferred stock
compensation*.................... -- -- 2,531 -- 3,082
------ ------ -------- ------ --------
Total operating expenses........ 1,019 1,481 11,576 1,863 30,997
------ ------ -------- ------ --------
Income (loss) from operations....... (46) 698 (9,509) (943) (31,198)
Other income (expense):
Interest income................... -- 6 69 72 1,203
Other income (expense)............ (86) 78 (22) (6) 43
------ ------ -------- ------ --------
Other income (expense), net..... (86) 84 47 66 1,246
------ ------ -------- ------ --------
Income (loss) before income taxes... (132) 782 (9,462) (877) (29,952)
Provision for (benefit from) income
taxes.............................. (85) 495 (66) (36) 1
------ ------ -------- ------ --------
Net income (loss)................... $ (47) $ 287 $ (9,396) $ (841) $(29,953)
====== ====== ======== ====== ========
Net income (loss) per share, basic
and diluted........................ $ -- $ 0.01 $ (0.45) $(0.04) $ (1.43)
====== ====== ======== ====== ========
Shares used in calculating basic and
diluted net income (loss) per
share.............................. 21,000 21,000 21,000 21,000 21,000
====== ====== ======== ====== ========
Pro forma basic and diluted net loss
per share (unaudited) (Notes 1 and
8)................................. $ (0.37) $ (0.65)
======== ========
Shares used in calculating pro forma
basic and diluted net loss per
share (unaudited) (Notes 1 and 8).. 25,121 46,200
======== ========
* Amortization of deferred stock
compensation:
Cost of revenue................... $ -- $ -- $ -- $ -- $ 133
Sales and marketing............... -- -- 1,067 -- 1,112
Research and development.......... -- -- 496 -- 1,394
General and administrative........ -- -- 968 -- 443
------ ------ -------- ------ --------
Total........................... $ -- $ -- $ 2,531 $ -- $ 3,082
====== ====== ======== ====== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 1997, 1998 and 1999
and Six Months Ended June 30, 2000
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Notes Retained
Common Stock Deferred Receivable Accumulated Earnings Total
------------------ Stock from Comprehensive (Accumulated Comprehensive
Shares Amount Compensation Stockholders Income (Loss) (Deficit) Total Income (Loss)
---------- ------- ------------ ------------ ------------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1997................... 21,000,000 $ 115 $ -- $ -- $ (19) $ 477 $ 573
Net loss................ (47) (47) $ (47)
Translation adjustment.. 29 29 29
--------
Comprehensive loss...... $ (18)
---------- ------- -------- ------- ----- -------- -------- ========
Balances, December 31,
1997................... 21,000,000 115 -- -- 10 430 555
Net income.............. 287 287 $ 287
Translation adjustment.. 44 44 44
--------
Comprehensive income.... $ 331
---------- ------- -------- ------- ----- -------- -------- ========
Balances, December 31,
1998................... 21,000,000 115 -- -- 54 717 886
Net loss................ (9,396) (9,396) $ (9,396)
Translation adjustment.. (104) (104) (104)
--------
Comprehensive loss...... $ (9,500)
========
Effect of stock split
(see Note 1)........... 20 (20) --
Distribution to
stockholders (see
Note 1)................ (55) (55)
Deferred stock
compensation........... 12,269 (12,269) --
Amortization of deferred
stock compensation..... 2,531 2,531
---------- ------- -------- ------- ----- -------- --------
Balances, December 31,
1999................... 21,000,000 12,404 (9,738) -- (50) (8,754) (6,138)
Net loss*............... (29,953) (29,953) $(29,953)
Translation
adjustment*............. 48 48 48
--------
Comprehensive loss*..... $(29,905)
========
Issuance of stock
options and warrants
related to acquisition
of Active Tools assets
(see Note 2)*.......... 5,549 5,549
Exercise of stock
options*............... 6,982,276 1,648 (1,545) 103
Issuance of common stock
warrants*.............. 686 686
Deferred stock
compensation*.......... 10,550 (10,550) --
Amortization of deferred
stock compensation*.... 3,082 3,082
---------- ------- -------- ------- ----- -------- --------
Balances, June 30,
2000*.................. 27,982,276 $30,837 $(17,206) $(1,545) $ (2) $(38,707) $(26,623)
========== ======= ======== ======= ===== ======== ========
</TABLE>
-----
* Unaudited
See notes to consolidated financial statements.
F-5
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
----------------------- ----------------
1997 1998 1999 1999 2000
----- ------- ------- ------ --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................... $ (47) $ 287 $(9,396) $ (841) $(29,953)
Reconciliation of net loss to net
cash (used in) provided by
operating activities:
Depreciation and amortization...... 58 25 90 12 792
Amortization of deferred stock
compensation...................... -- -- 2,531 -- 3,082
In process research and
development (see Note 2).......... -- -- -- -- 1,132
(Gain) loss on the disposal of
property and equipment............ (4) 6 15 -- --
Deferred income taxes.............. (63) 113 164 (35) --
Issuance of common stock warrants
for services...................... -- -- -- -- 573
Changes in operating assets and
liabilities:
Accounts receivable.............. 115 (1,066) 378 1,040 (453)
Prepaid expenses and other....... (9) (35) (643) (374) (2,008)
Accounts payable................. (78) 313 699 (94) 2,432
Accrued expenses................. (79) 318 3,448 113 (417)
Deferred revenues................ -- -- -- -- 983
Income tax payable............... 8 -- (187) 19 51
Long-term liabilities............ -- 406 32 -- --
----- ------- ------- ------ --------
Net cash provided by (used in)
operating activities.......... (99) 367 (2,869) (160) (23,786)
----- ------- ------- ------ --------
Cash flows from investing
activities:
Purchases of property and
equipment.......................... (9) (2) (1,061) (151) (3,118)
Proceeds from the sale of property
and equipment...................... 31 -- -- -- --
Cash paid for acquisition of Active
Tools Pty. Ltd. assets............. -- -- -- -- (2,850)
Other assets........................ 72 (7) (272) (103) (745)
----- ------- ------- ------ --------
Net cash provided by (used in)
investing activities.......... 94 (9) (1,333) (254) (6,713)
----- ------- ------- ------ --------
Cash flows from financing
activities:
Proceeds from sale of preferred
stock.............................. -- -- 38,528 -- 23,375
Proceeds from sale of common stock.. -- -- -- -- 103
Bank overdraft increase (decrease).. -- 212 (212) (212) --
Payable to stockholders increase
(decrease)......................... (27) (19) 55 454 (81)
Deferred offering costs............. -- -- -- -- (664)
----- ------- ------- ------ --------
Net cash provided by (used in)
financing activities.......... (27) 193 38,371 242 22,733
----- ------- ------- ------ --------
Net increase (decrease) in cash and
cash equivalents................... (32) 551 34,169 (172) (7,766)
Effect of exchange rate on cash
equivalents........................ 30 48 (90) 29 45
Cash and cash equivalents, beginning
of period.......................... 33 31 630 630 34,709
----- ------- ------- ------ --------
Cash and cash equivalents, end
of period..................... $ 31 $ 630 $34,709 $ 487 $ 26,988
===== ======= ======= ====== ========
Noncash investing and financing
activities:
Acquisition of Active Tools Pty.
Ltd. assets:
Value of common stock options and
warrants issued................... $ -- $ -- $ -- $ -- $ 5,549
Cash paid.......................... -- -- -- -- 2,850
----- ------- ------- ------ --------
Assets acquired (including
intangibles of $7,267)............. $ -- $ -- $ -- $ -- $ 8,399
===== ======= ======= ====== ========
Issuance of common stock for notes
receivable......................... $ -- $ -- $ -- $ -- $ 1,545
===== ======= ======= ====== ========
Issuance of common stock warrants
related to a facilities lease...... $ -- $ -- $ -- $ -- $ 113
===== ======= ======= ====== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for
Income taxes....................... $ 1 $ 12 $ 40 $ 40 $ --
===== ======= ======= ====== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
1. Organization and Summary of Significant Accounting Policies
Organization and Basis of Presentation--Turbolinux, Inc. (formerly Pacific
HiTech, Inc.) (the "Company" or "Turbo") was incorporated in Utah in 1992 and
was reincorporated in Delaware in June 1999. Turbolinux Japan KK (formerly
Pacific HiTech KK) ("Turbolinux Japan") was incorporated in Japan in 1995. The
Company is a leading developer of Linux software and related products.
Through December 31, 1996, two stockholders, Irving W. Miller and Iris M.
Miller (the "Significant Stockholders") owned 100% and 50% of the outstanding
stock of Turbolinux, Inc. and Turbolinux Japan, respectively. In addition, the
Significant Stockholders performed all significant management functions and
controlled the board of directors of Turbolinux, Inc. and Turbolinux Japan.
During 1997, the Significant Stockholders purchased the remaining 50% of the
outstanding common stock of Turbolinux Japan for an insignificant amount.
During 1999, Turbolinux, Inc. purchased 100% of the common stock of
Turbolinux Japan from the Significant Stockholders for approximately $55,000.
This transaction was accounted for as a distribution to stockholders.
In connection with the Company's reincorporation in Delaware in 1999, the
outstanding 10,000 shares of $0.10 par common stock were exchanged for the
21,000,000 shares of $0.001 par value common stock. This exchange has been
accounted for as a stock split and all share amounts in these financial
statements have been adjusted to give effect to the exchange. The $20,000
adjustment to increase the recorded par value has been recorded as a
distribution to stockholders. In addition, the financial statements have been
presented as if the Company owned Turbolinux Japan for all periods presented.
The consolidated financial statements include the Company and its majority-
and wholly-owned subsidiaries (including Turbolinux Japan as it was under
common ownership and control for all periods presented). All material
intercompany balances and transactions have been eliminated.
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
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Equivalents--The Company considers all highly liquid debt instruments
with maturities at the date of purchase of three months or less to be cash
equivalents.
Property and Equipment--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives, generally three to seven years. Amortization of leasehold
improvements is computed over the shorter of the lease term or the estimated
useful lives of the related assets.
F-7
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
Intangible Assets--Intangible assets include acquired workforce, acquired
technology and goodwill (see Note 2). The acquired workforce and existing
technology are amortized on a straight-line basis over estimated useful lives
of three to five years. Goodwill is amortized on a straight-line basis over an
estimated useful life of seven years. Intangible asset amortization totaled
$441,000 for the six months ended June 30, 2000.
Long-Lived Assets--The Company evaluates long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. An impairment loss would be recognized when
the sum of the undiscounted future net cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying value.
Revenue Recognition--Revenue is recognized when earned in accordance with
applicable accounting standards, including American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("SOP") No. 97-2, Software
Revenue Recognition, as amended. Revenue from the sale of software is
recognized when each of the following criteria have been met: a purchase order
has been received, delivery has occurred or services have been performed, the
sale price is fixed and determinable and collection of the resulting receivable
is probable.
The Company requires all sales into the distribution channel, other than
sales through their website, to have a written agreement. If a reserve for
returns of products sold through distributors and other resellers can be
reasonably estimated, revenue is recognized upon shipment, less a reserve for
sales returns, and when all revenue recognition criteria have been met. If a
reserve for these returns cannot be reasonably estimated, revenue is recognized
upon sell-through to the end user or, if sell-through information is not
available, the collection of cash, and when all revenue recognition criteria
have been met. Product returns due to defects and damage during shipment are
insignificant and are included in warranty costs.
For the sale of some of its software products, the Company currently provides
telephone and email technical support services for 60 to 90 days after customer
registration, depending upon the product. There is no additional fee for these
services, which do not include product updates or upgrade rights. Since the
Company does not currently sell these technical support services separately,
there is no vendor specific objective evidence of the fair value of these
services. Therefore, the Company recognizes all of the revenue from these sales
over the period that the technical support services are provided.
Revenue related to shipments to resellers where a significant post-delivery
obligation exists or the sale is subject to customer acceptance, is deferred
until there is no significant obligation remaining or acceptance has occurred.
To date, the Company has not shipped any products having significant post-
delivery obligations or subject to acceptance.
Revenue for support, maintenance, consulting and training services is
recognized as services are performed. Revenue from any extended support
agreements is deferred and
F-8
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
recognized as the services are provided or over the period of the contract.
Through June 30, 2000, revenue for support, maintenance, consulting and
training services have not been significant.
Software Development Costs--Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, Computer Software
To Be Sold, Leased or Otherwise Marketed. The costs to develop such software
have not been capitalized as the Company believes its current software
development process is essentially completed concurrent with the establishment
of technological feasibility.
Research and Development--Costs incurred in research and development are
charged to operations as incurred.
Royalty Costs--Royalties that the Company is required to pay on applications
licensed from third parties that are a component of the software products sold
by the Company are expensed as cost of revenue on a per unit basis as software
products are sold. Royalties paid in advance of the sale of the Company's
software products are included in prepaid expenses and recorded as expense when
the related software products are sold.
Advertising Costs--All advertising costs are expensed as incurred.
Advertising costs, which are included in sales and marketing expense, were
$99,000, $66,000 and $1,286,000 for 1997, 1998 and 1999, respectively.
Income Taxes--Income taxes are provided under the provisions of SFAS No. 109,
Accounting for Income Taxes. This statement requires an asset and liability
approach to account for income taxes and requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. A valuation allowance is recorded to reduce net
deferred tax assets to amounts that are more likely than not to be realized.
Stock-Based Awards--The Company accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees.
The Company accounts for equity instruments issued to nonemployees in
accordance with the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, and Emerging Issues Task Force ("EITF") Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, which requires
that the fair value of such instruments be recognized as an expense over the
period in which the related services are received.
Foreign Currency Translation--The functional currencies of the Company's
significant foreign subsidiaries are their local currencies. Accordingly, gains
and losses from the
F-9
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
translation of the financial statements of foreign subsidiaries are reported as
a separate component of accumulated other comprehensive income. Foreign
currency transaction gains and losses are included in net earnings.
Significant Customers and Credit Risk--Financial instruments which
potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents and accounts receivable. Cash and cash
equivalents primarily consist of money market accounts and cash in bank
accounts. The Company performs ongoing credit evaluations to reduce credit risk
and maintains allowances for estimated potential bad debt losses.
Certain Significant Risks and Uncertainties--The Company operates in the
software industry, and accordingly, can be affected by a variety of factors.
For example, management of the Company believes that changes in any of the
following areas could have a significant negative effect on the Company's
future financial position, results of operations and cash flows: ability to
obtain additional financing; regulatory changes; fundamental changes in the
technology underlying the Company's software products; market acceptance of the
Company's products under development; development of sales channels; litigation
or other claims against the Company; the hiring, training and retention of key
employees; successful and timely completion of product development efforts; and
new product introductions by competitors.
Recently Issued Accounting Standards--In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the value of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. In May 1999, SFAS No. 133 was amended to defer its
effective date. SFAS No. 133 is effective for the Company in fiscal 2001.
Although the Company has not fully assessed the implications of SFAS No. 133,
the Company does not believe that adoption of this statement will have a
material impact on the Company's financial position or results of operations.
Net Income (Loss) per Share--Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding (excluding shares subject to repurchase), for the period. Diluted
loss per common share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Common share equivalents are excluded from the computation
in loss periods as their effect would be antidilutive.
Unaudited Pro forma Net Loss per Common Share--Pro forma basic and diluted
net loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding for the period (excluding shares
subject to repurchase) plus the weighted average number of common shares
resulting from the assumed conversion upon the closing of the planned initial
public offering of outstanding shares of convertible preferred stock.
F-10
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
Unaudited Interim Financial Information--The unaudited interim financial
information as of June 30, 2000 and for the six months ended June 30, 1999 and
2000 has been prepared on the same basis as the audited consolidated financial
statements. In the opinion of management, such unaudited information includes
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of this interim information when read in conjunction with
the consolidated financial statements and notes thereto. Operating results for
the six months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.
Unaudited Pro forma Information--The unaudited pro forma balance sheet
information as of June 30, 2000 assumes that the following transactions had
occurred as of June 30, 2000 (i) the issuance after June 30, 2000 of 8,465,753
shares of redeemable convertible preferred stock for net proceeds of
approximately $30,200,000, (ii) the conversion of all shares of redeemable
convertible preferred stock outstanding as of June 30, 2000 and issued after
June 30, 2000 into common stock upon completion of the initial public offering
on a one-to-one basis and (iii) the Company's repurchase of 2,054,793 shares of
common stock from the Significant Stockholders for $7,500,000 (see Note 14).
2. Acquisition
In February 2000, the Company acquired certain assets of Active Tools Pty.
Ltd. ("Active"), a software company, in exchange for cash of $2,850,000 and
fully-vested options to purchase 1,100,000 shares of the Company's common stock
at $0.50 per share and fully-vested warrants to purchase 710,000 shares of the
Company's common stock at $0.50 per share having an estimated fair value
totaling $5,549,000 (see Note 7). The acquisition was treated as a purchase
and, accordingly, the acquired assets and liabilities were recorded at their
fair market values at the date of acquisition.
The aggregate purchase price of $8,399,000 has been allocated as follows (in
thousands):
<TABLE>
<S> <C>
Acquired in-process research and development......................... $1,132
Intangible assets:
Workforce.......................................................... 89
Existing technology................................................ 1,437
Goodwill........................................................... 5,741
------
Total............................................................ $8,399
======
</TABLE>
The purchase price allocation and intangible valuation was based on
management's estimates of the after-tax net cash flows and gave explicit
consideration to the Securities and Exchange Commission's views on purchased
in-process research and development as set forth in its September 9, 1998
letter to the American Institute of Certified Public Accountants. Specifically,
the valuation gave consideration to the following: (i) the employment of a fair
market value premise excluding any Company-specific considerations which could
result in estimates of investment value for the subject assets; (ii)
comprehensive due diligence concerning all potential intangible assets
including trademarks/trade names, patents, copyrights, non-compete agreements,
assembled workforce, customer relationships and sales
F-11
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
channel; (iii) the value of existing technology was specifically addressed,
with a view toward ensuring that the relative allocations to existing
technology and in-process research and development were consistent with the
relative contributions of each to the final product; and (iv) the allocation to
in-process research and development was based on a calculation that considered
only the efforts completed as of the transaction date, and only the cash flow
associated with said completed efforts for one generation of the products
currently in process.
As indicated above, the Company recorded a one-time charge of $1,132,000 in
research and development expenses during the six months ended June 30, 2000 for
purchased in-process research and development related to the Active
acquisition. The charge related to the portion of these products, excluding
existing technology, that had not reached technological feasibility, had no
alternative future use and for which successful development was uncertain.
Management's conclusion that the in-process development effort had no
alternative future use was reached in consultation with the engineering
personnel from both the Company and Active.
The following unaudited pro forma information shows the results of operations
for the year ended December 31, 1999 and the six months ended June 30, 2000 as
if the Active acquisition had occurred as of January 1, 1999. The results are
not necessarily indicative of what would have occurred had the acquisition
actually been made at the beginning of the respective periods, or of future
operations of the combined companies (in thousands, except per share
information):
a
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31 June 30,
1999 2000
------------ ----------
<S> <C> <C>
Total revenue........................................ $ 5,018 $ 2,939
Net loss............................................. 10,835 30,091
Net loss per share, basic and diluted................ 0.52 1.43
</TABLE>
3. Property and Equipment
Property and equipment consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1998 1999 2000
----- ------ --------
<S> <C> <C> <C>
Computer equipment and software...................... $ 148 $ 608 $2,208
Furniture and fixtures............................... 28 177 552
Leasehold improvements............................... -- 392 1,454
Vehicles............................................. -- 22 22
Construction in progress............................. -- -- 65
----- ------ ------
Total.............................................. 176 1,199 4,301
Less accumulated depreciation and amortization....... (161) (233) (564)
----- ------ ------
Property and equipment--net........................ $ 15 $ 966 $3,737
===== ====== ======
</TABLE>
F-12
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
4. Accrued Expenses
Accrued expenses consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------
June 30,
1998 1999 2000
---- ------ --------
<S> <C> <C> <C>
Payroll and related benefits............................ $225 $ 420 $1,444
Preferred stock issuance costs.......................... -- 1,425 --
Marketing costs......................................... 6 584 295
Other................................................... 134 1,385 1,658
---- ------ ------
$365 $3,814 $3,397
==== ====== ======
</TABLE>
5. Income Taxes
The components of income tax expense (benefit) for the years ended December
31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- -----
<S> <C> <C> <C>
Current income taxes--foreign............................. $ 11 $360 $(230)
Deferred income taxes--foreign............................ (96) 135 164
---- ---- -----
Income tax provision (benefit).......................... $(85) $495 $ (66)
==== ==== =====
</TABLE>
The Company's effective tax rate differs from the expected benefit at the
federal statutory rates for the years ended December 31 as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ----- ------
<S> <C> <C> <C>
Federal statutory tax rate.......................... (35.00)% 35.00% (35.00)%
State tax rate...................................... (5.75) 5.75 (5.75)
Foreign income taxes................................ (18.32) 16.64 (0.94)
Valuation allowance................................. (6.35) 5.86 40.88
Other............................................... 0.82 0.04 0.11
------ ----- ------
Provision for income taxes........................ (64.60)% 63.29% (0.70)%
====== ===== ======
</TABLE>
The Company's deferred income tax assets are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
----- -------
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards......................... $ 130 $ 3,747
General business credit carryforwards.................... -- 32
Other.................................................... 193 247
----- -------
Total gross deferred tax assets before valuation
allowance............................................. 323 4,026
Valuation allowance........................................ (159) (4,026)
----- -------
Total.................................................. $ 164 $ --
===== =======
</TABLE>
F-13
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss and tax credit carryforwards.
At December 31, 1999, the Company had net operating loss ("NOL")
carryforwards of approximately $7,598,000 for state and federal loss
carryforwards available to offset future income. At December 31, 1999, foreign
loss carryforwards are approximately $1,626,000. The federal NOL carryforwards
expire through 2020 and the state and foreign NOL carryforwards expire through
2004. In addition, at December 31, 1999, the Company had $21,000 of research
and development tax credit carryforwards for federal and $11,000 for state
income tax purposes. The federal research and development tax credit
carryforwards can be carried forward to 2020 and the state research and
development tax credit carryforwards can be carried forward indefinitely.
Pursuant to certain provisions of the Internal Revenue Code and analogous
state law, the utilization of the Company's net operating loss and tax credit
carryforwards to offset future taxable income may be limited, on an annual
basis, due to ownership changes taking place in prior periods. Management has
not yet determined the extent to which the Company may be subject to such
limitations. Due to this and other uncertainties regarding the ultimate
realization of the value of its deferred tax attributes, the Company has
established a valuation allowance sufficient to fully reserve its net deferred
tax asset.
6. Redeemable Convertible Preferred Stock
In 1999, the Company issued 10,135,138 shares of Series A redeemable
convertible stock at $0.74 per share resulting in net proceeds of $7,433,000
and 8,912,329 shares of Series B redeemable convertible preferred stock at
$3.65 per share resulting in net proceeds of $31,095,000.
In January 2000, the Company issued an additional 6,711,584 shares of Series
B preferred stock at $3.65 per share resulting in net proceeds of $23,375,000.
Significant terms of the redeemable convertible preferred stock are as
follows:
. Each share is convertible, at the option of the holder, into one share
of common stock (subject to adjustments for events of dilution). Shares
of Series A will be automatically converted into common stock upon
majority vote of the stockholders or upon the closing of a public
offering yielding gross proceeds in excess of $10 million. Shares of
Series B will be automatically converted into common stock upon majority
vote of the stockholders or upon closing of a public offering yielding
an offering price of at least two times the original issue price of
$3.65 per share.
. Shares are redeemable at the option of the holders of a majority of each
series of preferred stock outstanding five years after the original
issue date if the Company has not completed a public offering resulting
in the conversion of such shares into common stock. The redemption price
of the shares is the original issue price of $0.74
F-14
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
and $3.65 per share for the Series A and Series B (as adjusted for any
stock dividends, combinations or splits), respectively.
. Each share has the same voting rights as the number of shares of common
stock into which it is convertible.
. Holders of Series B preferred stock are entitled to annual noncumulative
dividends at a rate of 8% of the original issue price per share, when
and if declared by the Board of Directors, prior to any dividends
declared on Series A and common stock. Holders of Series A preferred
stock are entitled to annual noncumulative dividends at a rate of 8% of
the original issue price per share, when and if declared by the Board of
Directors, prior to any dividends declared on common stock. No such
dividends have been declared.
. In the event of liquidation, dissolution or winding up of the Company,
the preferred stockholders of Series A and Series B shall receive an
amount equal to the original issue price plus all declared and unpaid
dividends. Any remaining assets will be distributed among the holders of
common stock on a pro rata basis.
7. Stockholders' Equity
Common Stock
Common Shares Reserved for Issuance--At December 31, 1999, the Company had
reserved shares of common stock for issuance as follows:
<TABLE>
<S> <C>
Conversion of outstanding preferred stock 19,047,467
Issuance under stock option plan.................................. 9,000,000
----------
Total........................................................... 28,047,467
==========
</TABLE>
Stock Plans
Under the Company's 1999 Equity Incentive Plan (the "Plan"), 12,000,000
shares (increased by 3,000,000 shares during the six months ended June 30,
2000) are reserved for issuance to employees, consultants and directors.
Incentive stock options are granted at fair market value of the underlying
stock (as determined by the Board of Directors) at the date of grant;
nonstatutory options and stock sales may be offered at not less than 85% of
fair market value. Generally, options become exercisable over four years and
expire ten years after the date of grant. As of December 31, 1999 and June 30,
2000, the Company had 2,947,500 and 5,325,000 shares available for grant.
In February 2000, nonqualified stock options to purchase 3,175,276 shares of
the Company's common stock were granted to two executives. Also in February
2000, the Company issued nonqualified stock options to purchase 1,100,000
shares of the Company's common stock related to the acquisition of Active
Tools Pty. Ltd. assets (see Note 2). These options were granted separate from
the Company's 1999 Equity Incentive Plan.
F-15
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
The Board of Directors in their determination of fair market value on the
date of grant takes into consideration many factors including, but not limited
to, the Company's financial performance, current economic trends, actions by
competitors, market maturity, emerging technologies and near term backlog.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Outstanding Options
--------------------
Weighted
Average
Exercise
Price
Number of per
Shares Share
---------- --------
<S> <C> <C>
Options granted in 1999 (weighted-average fair value
of $1.49)........................................... 6,052,500 $0.10
Outstanding, December 31, 1999....................... 6,052,500 $0.10
Options granted (weighted-average fair value of
$3.00)*............................................. 5,228,276 $0.50
Options exercised*................................... (6,982,276) $0.24
Options canceled*.................................... (330,500) $0.44
----------
Outstanding, June 30, 2000*........................ 3,968,000 $0.36
==========
</TABLE>
--------
* Unaudited
The following table summarizes information concerning options outstanding as
of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Vested
-----------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices Outstanding (Years) Price Vested Price
--------------- ----------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.10...................... 6,052,500 9.74 $0.10 718,018 $0.10
========= ==== ===== ======= =====
</TABLE>
Deferred Stock Compensation--In connection with options granted to purchase
common stock, the Company recorded deferred stock compensation of $0, $0,
$12,269,000 and $10,550,000 in 1997, 1998, 1999 and the six months ended June
30, 2000, respectively. Such amount represents, for employee stock options, the
difference between the exercise price and the fair value of the Company's
common stock at the date of grant, and, for non-employee options, the deemed
fair value of the option at the date of vesting. The deferred compensation is
being amortized to expense over the vesting period of the underlying stock
options. Stock-based compensation expense of $0, $0, $2,531,000 and $3,082,000
was recognized during 1997, 1998, 1999 and the six months ended June 30, 2000,
respectively. The fair value of options granted to nonemployees is estimated
using the Black-Scholes option pricing model with the following weighted
average assumptions: no dividend yield; volatility of 70%; risk-free interest
rate of 6.64% and 6.38% in 1999 and the six months ended June 30, 2000,
respectively; and a contractual life of ten years.
F-16
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
Additional Stock Plan Information--As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value
method in accordance with APB No. 25. Accordingly, no compensation expense has
been recognized in the consolidated financial statements for employee stock
arrangements when the exercise price is equal to the fair market value at the
date of grant.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS 123"), requires the disclosure of pro forma net
income or loss had the Company adopted the fair value method. Under SFAS 123,
the fair value of stock-based awards to employees is calculated through the use
of option pricing models, even though such models were developed to estimate
the fair value of freely tradeable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the minimum value
method with the following weighted average assumptions for fiscal 1999:
expected option lives of two years following vesting; risk-free rates of
approximately 5.92%; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and recognition
of forfeitures as they occur. If the computed fair values of the fiscal 1999
awards had been amortized to expense, pro forma net loss for 1999 would have
been $9,414,000.
Notes Receivable from Stockholders--In January and March 2000, in conjunction
with the exercise of options for 5,950,276 shares of common stock by certain
officers and employees of the Company, the Company received $1,545,000 of notes
receivable. These full recourse notes are secured by common stock (5,950,276
shares) bearing interest at 6.0% to 6.8% and generally are due five years from
the issue date. The stock sold in connection with these notes and other stock
sales for cash are subject to repurchase by the Company at the original issue
price. This right generally lapses over a four-year period subject to continued
employment. At December 31, 1999 and June 30, 2000, 0 and approximately
6,982,276 shares of common stock, respectively, are subject to this repurchase
right.
Warrants--In February 2000, the Company issued a fully vested warrant to
purchase 50,000 shares of common stock at $3.65 per share in connection with a
new facilities lease. The warrant expires in 2008. The estimated fair value of
the warrant of $113,000 has been included in other assets and is being
amortized over the lease term. In February 2000, the Company issued a fully
vested warrant to purchase 190,608 shares of common stock at $0.50 to a
consultant in connection with the hiring of an officer of the Company. The
warrant expires in 2007. The estimated fair value of the warrant of $573,000
has been included in general and administrative expenses during the six months
ended June 30, 2000.
In conjunction with the acquisition of Active (see Note 2), the Company
issued fully vested warrants to purchase an aggregate of 710,000 shares of the
Company's common stock at $0.50 per share. The warrants expire in February
2005. The estimated fair value of the warrants of $2,177,000 has been included
as part of the purchase price of Active.
F-17
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
8. Net income (loss) per Share
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net income (loss) per share (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
---------------------- ----------------
1997 1998 1999 1999 2000
------ ------ ------- ------ --------
<S> <C> <C> <C> <C> <C>
Net income (loss) (numerator), basic
and diluted......................... $ (47) $ 287 $(9,396) $ (841) $(29,953)
====== ====== ======= ====== ========
Shares (denominator):
Weighted average common shares
outstanding....................... 21,000 21,000 21,000 21,000 27,191
Weighted average common shares
outstanding subject to
repurchase........................ -- -- -- -- (6,191)
------ ------ ------- ------ --------
Shares used in computation, basic
and diluted..................... 21,000 21,000 21,000 21,000 21,000
====== ====== ======= ====== ========
Net income (loss) per share,
basic and diluted............... $ -- $ 0.01 $ (0.45) $(0.04) $ (1.43)
====== ====== ======= ====== ========
Shares used in computation, basic and
diluted............................. 21,000 21,000
Weighted average preferred stock
outstanding......................... 4,121 25,200
------- --------
Shares used in computing pro forma
per share amounts on a converted
basis............................... 25,121 46,200
======= ========
Pro forma net loss per share on a
converted basis, basic and diluted.. $ (0.37) $ (0.65)
======= ========
</TABLE>
For the above mentioned periods, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following:
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
-------------------- ---------------
1997 1998 1999 1999 2000
---- ---- ---------- ---- ----------
<S> <C> <C> <C> <C> <C>
Convertible preferred stock........... -- -- 19,047,467 -- 25,759,051
Shares of common stock subject to
repurchase........................... -- -- -- -- 6,982,276
Outstanding options................... -- -- 6,052,500 -- 3,968,000
Warrants.............................. -- -- -- -- 950,608
</TABLE>
F-18
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
9. Commitments
Operating Leases--The Company leases its facilities under various
noncancelable operating leases and certain equipment under an operating lease.
Under the terms of the facility leases, the Company is responsible for its
proportionate share of maintenance, property tax and insurance expenses.
Annual minimum lease payments for leases in effect at December 31, 1999 were
as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
2000............................................................... $ 771
2001............................................................... 346
------
Total future lease payments.................................... $1,117
======
</TABLE>
Facilities rent expense was approximately $105,000, $30,000 and $524,000 for
the years ended December 31, 1997, 1998 and 1999, respectively.
In January through March 2000, the Company entered into lease agreements for
$188,000 per month for its corporate facilities expiring in fiscal year 2008.
With the expansion of operations, the Company entered into additional facility
leases totaling approximately $135,000 per month in lease costs with lease
terms of up to five years.
10. Employee Benefit Plan
The Company sponsors a 401(k) Savings and Retirement Plan (the "Plan") for
all employees who meet certain eligibility requirements. Participants may
contribute, on a pre-tax basis, between 1% and 15% of their annual
compensation, but not to exceed a maximum contribution amount pursuant to
Section 401(k) of the Internal Revenue Code. The Company is not required to
contribute, nor has it contributed, to the Plan for any of the years presented.
F-19
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
11. Segment and Geographic Information
Effective January 1, 1999, the Company adopted SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information. SFAS 131 establishes
disclosures related to components of a company for which separate financial
information is available and evaluated regularly by a company's chief operating
decision makers in deciding how to allocate resources and in assessing
performance. The Company determined it did not have any separately reportable
operating segments as of December 31, 1997, 1998 or 1999 or as of June 30,
2000. The Company has offices in the United States and Japan, which are
considered material on an individual basis. Offices in China, Hong Kong, Korea
and Taiwan are collectively referred to as "Asia Pacific." Offices in the
United Kingdom, Germany, Argentina and Australia are collectively referred to
as "Rest of the World." The following presents net sales and long-lived assets
by geographic territory (in thousands):
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
-------------------- -------------
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total revenue:
United States........................... $ 533 $ 135 $ 140 $ 49 $ 422
Japan................................... 1,082 3,439 4,690 1,717 2,193
Asia Pacific............................ -- -- 109 -- 181
Rest of the world....................... -- -- -- -- 136
------ ------ ------ ------ ------
Total revenue*........................ $1,615 $3,574 $4,939 $1,766 $2,932
====== ====== ====== ====== ======
</TABLE>
--------
* Revenue is attributed to countries based on location of customers invoiced.
<TABLE>
<CAPTION>
As of As of
December 31, June 30,
------------- -------
1998 1999 2000
------------- -------
<S> <C> <C> <C>
Long-lived assets:
United States....................................... $ 13 $ 505 $ 9,309
Japan............................................... 77 593 2,142
Asia Pacific........................................ -- 211 849
Rest of the world................................... -- -- 128
---- ------- -------
Total long-lived assets........................... $ 90 $ 1,309 $12,428
==== ======= =======
</TABLE>
F-20
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
12. Major Customers
The following table summarizes net revenue and accounts receivable for
customers which accounted for 10% or more of net revenue or accounts
receivable:
<TABLE>
<CAPTION>
Net Revenue
----------------------------
Six
Accounts Receivable Months
-------------------------- Years Ended Ended
December 31, December 31, June 30,
------------ June 30, ---------------- ----------
1998 1999 2000 1997 1998 1999 1999 2000
------ ------ -------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A........................ 38% 32% 36% -- 30% 35% 38% 29%
B........................ 23% 22% 17% 13% 20% 26% 27% 16%
C........................ 12% -- -- 15% 13% -- -- --
</TABLE>
13. Related Party Transactions
At December 31, 1998 and 1999, the Company owed $62,000 and $180,000 to the
Significant Stockholders. These amounts primarily represent noninterest bearing
advances from the stockholders and have been repaid in 2000 including
approximately $99,000 subsequent to June 30, 2000.
14. Subsequent Events
During the period July 1, 2000 through October 15, 2000, the Company granted
4,660,300 stock options to employees with a weighted average exercise price of
$0.53 which will result in additional deferred stock compensation.
During the period July 1, 2000 through October 15, 2000, the Company issued
8,465,753 additional shares of Series B redeemable convertible preferred stock
for $3.65 per share for total proceeds of approximately $30,200,000 (net of
estimated issuance costs of $700,000).
In October 2000, the Company entered into a separation agreement with its
Significant Stockholders. As part of the separation agreement, the Company:
. Repurchased from the Significant Stockholders 2,054,793 shares of the
Company's common stock for $7,500,000, or $3.65 per share.
. Made severance payments of approximately $850,000 and may be required to
make additional severance payments during 2000 and 2001 of up to a total
of $350,000. The actual amount of additional severance payments will be
based on the maximum percentage of any target incentive bonus the Company
pays its executive officers during 2000 and 2001.
. Will make loans to the Significant Stockholders, secured by common stock
of the Company owned by the Significant Stockholders, related to any tax
liabilities assessed against them as a result of their ownership of the
Company prior to 1995.
F-21
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1997, 1998 and 1999
and the Six Months Ended June 30, 1999 and 2000
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited.)
. Will indemnify the Significant Stockholders for a maximum amount of
$750,000 for any tax liability assessed against them as a result of their
sale of the Company's Japanese subsidiary to the Company.
In October 2000, the Company's board of directors approved, subject to
stockholder approval, the following:
. An increase in the authorized shares of common stock to 200,000,000 and
the creation of newly undesignated preferred stock totaling 10,000,000
shares, contingent upon the closing of the Company's initial public
offering.
. Adoption of the Company's 2000 Stock Incentive Plan (the 2000 Plan).
Initially, 3,000,000 shares are reserved for issuance under the 2000
Plan. Additional shares available for future awards under the Company's
1999 Equity Incentive Plan as of the effective date of the Company's
initial public offering will also be available for issuance under the
2000 Plan. The number of shares reserved under the 2000 Plan will be
increased on the first day of each year beginning 2001 and ending 2010 in
an amount equal to the lesser of (1) 5% of the number of shares of common
stock outstanding as of the first day of such year, (2) 3,000,000 shares
or (3) an amount determined by the Company's board of directors.
. Adoption of the Company's 2000 Non-employee Director Option Program (the
2000 Director Program). Shares issued under the 2000 Director Program
come from shares reserved under the 2000 Plan. Under the 2000 Director
Program, non-employee directors who are appointed or elected after the
effective date of the Company's initial public offering will receive an
initial option to purchase 50,000 shares of the Company's common stock at
the fair market value at the grant date. An additional option to purchase
20,000 shares of common stock at the fair market value at the grant date
will automatically be granted to each non-employee director following
each annual meeting of the Company's stockholders in each subsequent year
the director remains a non-employee director.
. Adoption of the Company's 2000 Employee Stock Purchase Plan (the ESPP).
The ESPP will become effective upon the closing of the Company's initial
public offering. Initially, 500,000 shares are reserved for issuance
under the ESPP. The number of shares reserved under the ESPP will be
increased on the first day of each year beginning 2001 and ending 2010 in
an amount equal to the lesser of (1) 2% of the number of shares of common
stock outstanding as of the first day of such year, (2) 500,000 shares or
(3) an amount determined by the Company's board of directors. Under the
ESPP, shares of common stock will be sold to employees at a price not
less than 85% of the lower of the fair market value at the beginning of
the two-year offering period or the end of the six-month purchase
periods.
* * * * *
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Active Tools Pty. Ltd.:
We have audited the accompanying consolidated balance sheet of Active Tools
Pty. Ltd. and subsidiary (the Company) as of December 31, 1999, and the related
consolidated statements of operations and accumulated deficit and of cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Active Tools Pty. Ltd. and
subsidiary as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
San Jose, California
May 26, 2000
F-23
<PAGE>
ACTIVE TOOLS PTY. LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1999
(In thousands of Australian dollars, except for share and per share data)
<TABLE>
<S> <C>
Assets
Current assets--cash.................................................. A$ 70
Property and equipment--net........................................... 9
Investment in and loan to affiliated company (see Note 4)............. 15
Other assets.......................................................... 2
-------
Total assets...................................................... A$ 96
=======
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable.................................................... A$ 43
Accrued liabilities................................................. 17
Deferred revenue.................................................... 52
Current portion of capital lease obligations........................ 2
-------
Total current liabilities......................................... 114
Capital lease obligations............................................. 1
Loan from stockholder................................................. 89
Commitments (See Note 6)
Stockholders' deficiency:
Ordinary shares--A$1.00 par value; 989,999 shares authorized; 730
shares issued and outstanding...................................... 1
Class C shares, A$1.00 par value; 1,000 shares authorized; 98 shares
issued and outstanding............................................. --
Additional paid-in capital.......................................... 38
Accumulated deficit................................................. (147)
-------
Total stockholders' deficiency.................................... (108)
-------
Total liabilities and stockholders' deficiency.................... A$ 96
=======
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE>
ACTIVE TOOLS PTY. LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
Year Ended December 31, 1999
(In thousands of Australian dollars)
<TABLE>
<S> <C>
Revenue................................................................ A$ 123
Cost of revenue........................................................ 7
------
Gross profit........................................................... 116
------
Operating expenses:
Sales and marketing.................................................. 72
General and administrative........................................... 66
------
Total operating expenses........................................... 138
------
Loss from operations................................................... (22)
Other income (expense):
Interest expense, net................................................ (8)
Equity in earnings of affiliated company (See Note 4)................ 4
------
Other expense, net................................................. (4)
------
Net loss............................................................... (26)
Accumulated deficit--beginning of year................................. (121)
------
Accumulated deficit--end of year....................................... A$(147)
======
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE>
ACTIVE TOOLS PTY. LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, 1999
(In thousands of Australian dollars)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss............................................................... A$(26)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization........................................ 8
Interest payable on loan to stockholder.............................. 6
Equity in earnings of affiliated company............................. (4)
Changes in assets and liabilities:
Accounts receivable................................................ 44
Accounts payable and accrued liabilities........................... (7)
Deferred revenue................................................... 46
-----
Net cash provided by operating activities........................ 67
-----
Cash flows from investing activities--loan to affiliated company....... 1
-----
Cash flows from financing activities:
Repayment of capital lease obligations................................. (2)
Repayment of loan from stockholder..................................... (6)
-----
Net cash used in financing activities............................ (8)
-----
Net increase in cash................................................... 60
Cash, beginning of year................................................ 10
-----
Cash, end of year...................................................... A$ 70
=====
Supplemental disclosure of cash flow information:
Cash paid for interest................................................. A$ 2
=====
Income taxes paid...................................................... A$ --
=====
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE>
ACTIVE TOOLS PTY. LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 1999
1. Business
Nature of Operations--Active Tools Pty. Ltd. (the "Company") was incorporated
in Australia in December 1995. The Company develops and markets computer
software.
2. Significant Accounting Policies
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. The equity method
of accounting is used for investments in which the Company has significant
influence. Generally this represents common stock ownership of at least 20% and
not more than 50%. All material intercompany accounts and transactions have
been eliminated.
Generally Accepted Accounting Principles--These financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America.
Financial Statement Estimates--The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ materially from those
estimates.
Foreign Currency--The functional and reporting currency of the Company and
its subsidiary is the Australian dollar.
Property and Equipment--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives, generally three years.
Software Development Costs--Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs are capitalized. The costs to develop such
software have not been capitalized as the Company believes its current software
development process is essentially completed concurrent with the establishment
of technological feasibility.
Revenue Recognition and Deferred Revenue--The Company recognizes revenue in
accordance with applicable accounting regulations, including American Institute
of Certified Public Accountants Statement of Position 97-2, Software Revenue
Recognition, as amended. Revenue from the sale of software is recognized when
each of the following criteria have been met: a purchase order has been
received, delivery has occurred or services have been performed, the sale price
is fixed and determinable and collection of the resulting receivable is
probable.
Revenue earned on software arrangements involving multiple elements (i.e.,
software products, upgrades/enhancements, post contract customer support,
installation, training, etc.) is allocated to each element based on vendor
specific objective evidence of relative fair value of the elements. For
arrangements containing multiple elements wherein vendor specific objective
evidence does not exist for all undelivered elements, revenue for the delivered
and
F-27
<PAGE>
ACTIVE TOOLS PTY. LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended December 31, 1999
undelivered elements is deferred until vendor specific objective evidence
exists or all elements have been delivered. If the only undelivered element is
post contract customer support, revenue for the delivered and undelivered
elements is deferred and recognized over the term of the related arrangement.
Income Taxes--Income taxes are provided under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. This
statement requires an asset and liability approach to account for income taxes
and requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities. A
valuation allowance is recorded to reduce net deferred tax assets to amounts
that are more likely than not to be realized.
Certain Significant Risks and Uncertainties--Financial instruments which
potentially subject the Company to concentrations of credit risk consist
primarily of cash held with two financial institutions.
Major Customers--Three customers accounted for 31%, 29% and 14%,
respectively, of revenue in fiscal 1999.
Comprehensive Income--The Company has no material components of other
comprehensive loss. Accordingly, comprehensive loss is the same as reported net
loss for the period presented.
Recently Issued Accounting Standards--In June 1998, the FASB issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
defines derivatives, requires that all derivatives be carried at fair value,
and provides for hedge accounting when certain conditions are met. In June
1999, the FASB issued SFAS No. 137, which deferred the effective date of
adoption of SFAS No. 133 for one year. SFAS No. 133 is now effective for the
Company in 2001. The Company is in the process of assessing the implications of
SFAS No. 133.
3. Property and Equipment
Property and equipment at December 31, 1999 consist of (in thousands):
<TABLE>
<S> <C>
Computer equipment and software....................................... A$ 23
Less accumulated depreciation and amortization........................ (14)
-----
Property and equipment--net......................................... A$ 9
=====
</TABLE>
4. Investment in and Loan to Affiliated Company
At December 31, 1999, the Company had a 20% investment in Active Tools
Slovenia, Inc., a company incorporated under the laws of Slovenia. No dividends
were received during the year.
F-28
<PAGE>
ACTIVE TOOLS PTY. LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended December 31, 1999
The investment in and loan to affiliated company consists of the following
(in thousands):
<TABLE>
<S> <C>
Investment in affiliated company....................................... A$ 8
Loan to affiliated company............................................. 7
----
Total................................................................ A$15
====
</TABLE>
The loan to Active Tools Slovenia, Inc. is unsecured and bears interest at 9%
per annum. The principal and interest are payable no later than January 1,
2001.
Summarized financial information of Active Tools Slovenia, Inc. as of and for
the year ended December 31, 1999 is as follows (in thousands):
<TABLE>
<S> <C>
Income statement information:
Revenue............................................................. A$253
Income from operations.............................................. 28
Net income.......................................................... 20
Balance sheet information:
Current assets...................................................... A$ 2
Noncurrent assets................................................... 74
Total liabilities................................................... 9
Net assets.......................................................... 67
</TABLE>
5. Accrued Liabilities
Accrued liabilities at December 31, 1999 consist of (in thousands):
<TABLE>
<S> <C>
Compensation........................................................... A$ 3
Accrued payroll tax.................................................... 5
Other accrued liabilities.............................................. 9
----
Total................................................................ A$17
====
</TABLE>
6. Commitments
Capital Lease--The Company leases computer equipment under a capital lease
which expires in April 2001. Future minimum annual lease commitments are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000.................................................................... A$2
2001.................................................................... 1
---
Present value of future minimum payments................................ 3
Current portion......................................................... 2
---
Noncurrent portion...................................................... A$1
===
</TABLE>
F-29
<PAGE>
ACTIVE TOOLS PTY. LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended December 31, 1999
Royalty Agreement--In October 1996, the Company entered into a Software
License and Distribution Agreement which provides the Company a perpetual,
nonexclusive license to certain third-party technology. The Company is required
to pay specified royalties based on a percentage of total gross revenue for a
period of five years, which commenced on January 1, 1997. Total royalty expense
under the Agreement for 1999 was A$18,600.
7. Income Taxes
The Company's deferred income tax assets are comprised of the following as of
December 31, 1999 (in thousands):
<TABLE>
<S> <C>
Net tax assets--net operating loss carryforwards..................... A$ 90
Valuation allowance.................................................. (90)
------
Total.............................................................. A$ --
======
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss carryforwards. Due to the uncertainty surrounding the realization of the
benefits of its favorable tax attributes in future tax returns, the Company has
fully reserved its net deferred tax assets.
At December 31, 1999, the Company's United States subsidiary had net
operating loss ("NOL") carryforwards of approximately A$50,000 for federal and
state income tax purposes. At December 31, 1999, the Company had loss
carryforwards in Australia of A$52,000 which have no expiration date. The
federal NOL carryforwards expire through 2019 and the state NOL carryforwards
expire through 2004. The extent to which the loss carryforwards can be used to
offset future taxable income in the United States may be limited, depending on
the extent of ownership changes within any three-year period as provided in the
Tax Reform Act of 1986 and the California Conformity Act of 1987.
8. Loan from Stockholder
The loan from stockholder is secured by all the assets of the Company, bears
interest at 6.45% per annum and is payable on demand.
9. Stockholders' Equity
The voting ordinary shares and nonvoting Class C shares rank equally on a
return of capital either through a reduction in capital or as a result of
liquidation of the Company.
There were no changes in issued share capital during 1999.
The Company has reserved 162 ordinary shares to be issued to a stockholder if
the Company meets certain milestones relating to revenue for a period of five
years commencing January 1999. If the Company is sold during the five-year
period, these shares become immediately issuable.
F-30
<PAGE>
ACTIVE TOOLS PTY. LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended December 31, 1999
10. Geographic Information
Information about the Company's geographic operations is given below (in
thousands):
<TABLE>
<S> <C>
Revenue:
Australia............................................................ A$ 39
United States........................................................ 84
-----
Total revenue...................................................... A$123
=====
Long-lived assets:
Australia............................................................ A$ 16
United States........................................................ 10
-----
Total assets....................................................... A$ 26
=====
</TABLE>
11. Subsequent Event
On February 10, 2000, Turbolinux, Inc. acquired substantially all of the
assets of the Company related to its cluster software product.
* * * * *
F-31
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
On February 10, 2000, the Company acquired certain assets of Active Tools
Pty. Ltd. ("Active"), a software company, in exchange for cash of $2,850,000
and fully vested options to purchase 1,100,000 shares of the Company's common
stock at $0.50 per share and fully vested warrants to purchase 710,000 shares
of the Company's common stock at $0.50 per share having an estimated fair value
of $5,549,000.
The acquisition was accounted for using the purchase method and the Company's
consolidated financial statements reflect the results of operations of Active
from the date of acquisition. The aggregate purchase price was allocated to the
assets and liabilities acquired based on their estimated fair value at date of
acquisition. The total consideration exceeds the estimated fair value of the
net tangible assets acquired and liabilities assumed of $8,399,000, which
excess was allocated to acquired in-process research and development, acquired
workforce, existing technology and goodwill. The acquired in-process research
and development charge of $1,132,000 is included in research and development
expenses for the six months ended June 30, 2000. The intangible assets are
being amortized over a period of three to five years, and goodwill is being
amortized over a period of seven years.
The accompanying unaudited pro forma condensed consolidated financial
statements are presented in accordance with Article 11 of Regulation S-X.
The accompanying unaudited pro forma condensed consolidated statements of
operations give effect to the acquisition of Active as if it had occurred on
January 1, 1999, by consolidating the results of operations of Active with
Turbolinux for the year ended December 31, 1999 and the six months ended June
30, 2000.
The unaudited pro forma condensed consolidated information is presented for
illustrative purposes only, is subject to a number of estimates, assumptions
and uncertainties and does not purport to be indicative of the operating
results that would have occurred if the transaction had been consummated at the
dates indicated nor does it purport to be indicative of future operating
results of the combined companies.
The unaudited pro forma condensed consolidated statement of operations should
be read in conjunction with the historical consolidated financial statements of
the Company and Active.
F-32
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1999
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Turbolinux, Active Tools Pro Forma
Inc. Pty. Ltd.(1) Adjustments Notes Pro Forma
----------- ------------ ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Revenue................... $ 4,939 $ 79 $ -- $ 5,018
Cost of revenue........... 2,872 5 -- 2,877
------- ---- ------- --------
Gross margin.............. 2,067 74 -- 2,141
Operating expenses:
Sales and marketing..... 3,897 46 -- 3,943
Research and
development............ 1,949 -- -- 1,949
General and
administrative......... 3,199 42 1,137 (2) 4,378
Amortization of deferred
stock compensation..... 2,531 -- -- 2,531
------- ---- ------- --------
Total operating
expenses............. 11,576 88 1,137 12,801
------- ---- ------- --------
Loss from operations...... (9,509) (14) -- (10,660)
Other income (expense),
net...................... 47 (3) (285) (3) (241)
------- ---- ------- --------
Loss before income taxes.. (9,462) (17) (1,422) (10,901)
Benefit from income
taxes.................... (66) -- -- (66)
------- ---- ------- --------
Net loss.................. $(9,396) $(17) $(1,422) $(10,835)
======= ==== ======= ========
Pro forma net loss per
share, basic and
diluted.................. $ (0.45) $ (0.52)
======= ========
Shares used in computing
pro forma basic and
diluted net loss per
share.................... 21,000 21,000
======= ========
</TABLE>
See notes to unaudited pro forma condensed consolidated statements of
operations.
F-33
<PAGE>
TURBOLINUX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2000
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Active
Tools Pty. Ltd.
Period from
Turbolinux, Inc. January 1, 2000
Six Months Ended to February 10, Pro Forma
June 30, 2000 2000(1) Adjustments Notes Pro Forma
---------------- --------------- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Revenue................. $ 2,932 $ 7 $ -- $ 2,939
Cost of revenue......... 3,133 2 -- 3,135
-------- --- ----- --------
Gross margin............ (201) 5 -- (196)
Operating expenses:
Sales and marketing... 14,242 -- -- 14,242
Research and
development.......... 6,885 -- -- 6,885
General and
administrative....... 6,788 -- 142 (2) 6,930
Amortization of
deferred stock
compensation......... 3,082 -- -- 3,082
-------- --- ----- --------
Total operating
expenses........... 30,997 -- 142 31,139
-------- --- ----- --------
Income (loss) from
operations............. (31,198) 5 (142) (31,335)
Other income (expense),
net.................... 1,246 (1) -- 1,245
-------- --- ----- --------
Income (loss) before
income taxes........... (29,952) 4 (142) (30,090)
Provision for income
taxes.................. 1 -- -- 1
-------- --- ----- --------
Net income (loss)....... $(29,953) $ 4 $(142) $(30,091)
======== === ===== ========
Pro forma net loss per
share, basic and
diluted................ $ (1.43) $ (1.43)
======== ========
Shares used in
computating pro forma
basic and diluted net
loss per share......... 21,000 21,000
======== ========
</TABLE>
See notes to unaudited pro forma condensed consolidated statements of
operations.
F-34
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
The following pro forma adjustments have been made to the unaudited pro forma
condensed consolidated statements of operations:
(1) Amount translated from Australian dollars (A$) to US dollars($) using
average annual exchange rates of A$1.5577/$ and A1.5906/$ for the year
ended December 31, 1999 and the period from January 1, 2000 to February
10, 2000, respectively.
(2) Reflects the amortization of intangible assets recorded in the
acquisition.
(3) Reflects the increase in interest expense in 1999 as a result of the
$2,850,000 paid for the acquisition of Active Tools Pty. Ltd. No
adjustment was recorded for the six months ended June 30, 2000 as the
amount was not material.
* * * * *
F-35
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. We are offering to sell, and seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of our common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Special Note on Forward-looking Statements............................... 22
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Dilution................................................................. 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Business................................................................. 40
Management............................................................... 58
Certain Transactions..................................................... 69
Principal Stockholders................................................... 72
Description of Capital Stock............................................. 74
Shares Eligible for Future Sale.......................................... 78
Underwriting............................................................. 81
Legal Matters............................................................ 84
Experts.................................................................. 84
Change in Accountants.................................................... 84
Additional Information Available to You.................................. 85
Index to Financial Statements............................................ F-1
</TABLE>
Until , 2001, 25 days after the date of this prospectus, all dealers that
buy, sell or trade in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. Dealers are also obligated
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
--------------------------------------------------------------------------------
[TLI LOGO]
TurboLinux, Inc.
Shares
Common Stock
Deutsche Banc Alex. Brown
Dain Rauscher Wessels
SG Cowen
WR Hambrecht + Co
Prospectus
, 2001
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates
except the registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
Amount
To Be
Paid
-------
<S> <C>
SEC Registration Fee................................................ $15,840
NASD Fee............................................................ 5,500
Nasdaq National Market Listing Fee.................................. *
Legal Fees and Expenses............................................. *
Accounting Fees and Expenses........................................ *
Blue Sky Fees and Expenses.......................................... *
Printing Expenses................................................... *
Transfer Agent and Registrar Fees and Expenses...................... *
Miscellaneous Expenses.............................................. *
Total............................................................. $ *
</TABLE>
--------
* To be filed by amendment
Item 14. Indemnification of Directors and Officers
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's second restated certificate of incorporation to be filed upon the
closing of this offering includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of their fiduciary
duty as a director. In addition, as permitted by Section 145 of the Delaware
General Corporation Law, the bylaws of the Registrant provide that: (1) the
Registrant is required to indemnify its directors and executive officers and
persons serving in these capacities in other business enterprises at the
Registrant's request (including, for example, subsidiaries of the Registrant),
to the fullest extent permitted by Delaware law, including in those
circumstances in which indemnification would otherwise be discretionary; (2)
the Registrant may, in its discretion, indemnify employees and agents in those
circumstances where indemnification is not required by law; (3) the rights
conferred in the bylaws are not exclusive, and the Registrant is authorized to
enter into indemnification agreements with its directors, executive officers
and employees; and (4) the Registrant may not retroactively amend the bylaw
provisions in a way that is adverse to the directors, executive officers and
employees who benefit from these protections.
The Registrant's policy is to enter into indemnification agreements with each
of its directors and executive officers that provide the maximum indemnity
allowed to directors and executive officers by Section 145 of the Delaware
General Corporation Law and the bylaws, as well as certain additional
procedural protections. In addition, these indemnity agreements provide that
parties to the indemnification agreements will be indemnified to the fullest
possible extent not prohibited by law against any and all expenses (including
any federal, state, local or foreign taxes imposed on the Indemnitee as a
result of the actual or deemed receipt of any payments under the
indemnification agreement), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by Turbolinux, which
approval shall not be unreasonably withheld), actually and reasonably incurred
in relation to
II-1
<PAGE>
the indemnified party's position as a director, officer, employee, agent or
fiduciary of the Registrant, or any subsidiary of the Registrant, or in
relation to the indemnified party's service at the request of the Registrant as
a director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust or other enterprise or in relation to the
indemnified party's action or inaction while serving in such a capacity.
Turbolinux will not be obligated pursuant to the indemnity agreements to
indemnify or advance expenses to an indemnified party with respect to
proceedings or claims initiated by the indemnified party against Turbolinux or
any of our officers or directors, except with respect to proceedings
specifically authorized by Turbolinux's Board of Directors or brought to
enforce a right to indemnification under the indemnity agreement, Turbolinux's
Bylaws or any statute or law.
Reference is also made to Section of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against specified liabilities. The indemnification provision
in the second restated certificate of incorporation, second amended and
restated bylaws and the indemnification agreements entered into between the
Registrant and its directors and executive officers, may be sufficiently broad
to permit indemnification of the Registrant's officers and directors for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act").
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit
Document Number
-------- -------
<S> <C>
Form of Underwriting Agreement........................................ 1.1
Restated Certificate of Incorporation of Registrant as currently in
effect............................................................... 3.1
Form of Second Restated Certificate of Incorporation of Registrant to
be filed upon closing of the offering................................ 3.2
Bylaws of Registrant, as amended, as currently in effect.............. 3.3
Form of Second Amended and Restated Bylaws of Registrant to be in
effect upon the closing of the offering.............................. 3.4
Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers......................... 10.1
</TABLE>
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued and sold the following
securities:
(a) As of October 15, 2000, the Registrant has granted an aggregate of
15,941,076 options to purchase shares of unregistered common stock to
directors, officers, employees, former employees and consultants at exercise
prices ranging from $0.10 to $1.50 per share. These shares were sold pursuant
to the exercise of options granted by the Board of Directors. As to each
director, officer, employee and consultant of the Registrant who was issued
these securities, the Registrant relied upon Rule 701 of the Securities Act,
except for the grant of options to purchase an aggregate of 2,375,276 shares of
common stock to T. Paul Thomas, an aggregate of 1,900,000 shares of common
stock to Rok Sosic, and an aggregate of 155,000 shares to two consultants in
connection with the Registrant's purchase of assets from Actively Tools, Pty
Ltd., which grants were made pursuant to Section 4(2) of the Securities Act.
Each such person was granted such options pursuant to a written contract
between such person and the Registrant. In addition, the Registrant met the
conditions imposed under Rule 701(b).
II-2
<PAGE>
(b) On September 3, 1999 and October 4, 1999, the Registrant sold 10,135,138
shares of unregistered Series A Preferred Stock to two venture capital firms
and to a major corporation for the aggregate consideration of $7,500,000
consisting of $7,000,000 cash and $500,000 of cancellation of indebtedness. The
Registrant relied upon Rule 506 promulgated by the Securities and Exchange
Commission under the Securities Act and Section 4(2) under such Act in
connection with the sale of these shares.
(c) On December 17, 1999, January 14, 2000, January 28, 2000, September 1,
2000 and October 10, 2000, the Registrant sold an aggregate of 24,089,667
shares of unregistered Series B Preferred Stock to 86 investors for the
aggregate consideration of $87.9 million cash. The Registrant relied upon Rule
506 promulgated by the Securities and Exchange Commission under the Securities
Act and Section 4(2) under such Act in connection with the sale of these
shares.
(d) On February 10, 2000 the Registrant issued warrants to purchase an
aggregate of 710,000 shares of common stock at an exercise price of $0.50 per
share in connection with its purchase of assets from Active Tools Pty Ltd.
(e) On February 11, 2000, the Registrant issued a warrant to purchase 190,608
shares of common stock at an exercise price of $0.50 per share to Heidrick &
Struggles, Inc.
(f) On October 11, 2000, the Registrant issued a warrant to purchase 6,000
shares of common stock at an exercise price of $3.65 to Frank Lopilato and
Associates.
(g) On October 20, 2000, the Registrant issued 8,000 shares of common stock
to Art Burns and Associates in consideration of consulting services.
The Registrant relied upon Section 4(2) under the Securities Act in
connection with the issuance of the securities described items (d), (e), (f)
and (g) above.
Appropriate legends were affixed to the share certificates and warrants
issued in the transactions described above. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of Registrant as currently in
effect.
3.2* Form of Second Restated Certificate of Incorporation of Registrant to be
filed upon the closing of the offering.
3.3 Bylaws of Registrant, as amended, as currently in effect.
3.4* Form of Second Amended and Restated Bylaws of Registrant, to be in
effect upon the closing of the offering.
4.1* Form of Registrant's Common Stock Certificate.
4.2 Second Amended and Restated Investor Rights Agreement, dated as of
September 1, 2000, among the Registrant and the parties named therein.
5.1* Opinion of Morrison & Foerster LLP.
10.1 Form of Indemnification Agreement entered into between Registrant and
its directors and executive officers.
10.2 Registrant's 1999 Equity Incentive Plan as amended.
10.3 Registrant's Blueprint (China) Year 2000 Stock Option Plan.
10.4* Registrant's 2000 Stock Incentive Plan.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.5* Registrant's 2000 Employee Stock Purchase Plan.
10.6* Registrant's 2000 Non-Employee Director Option Program.
10.7 Office lease dated as of February 3, 2000 between the Registrant and
Sierra Point, L.L.C.
10.8 Employment Agreement dated as of February 28, 2000 between the
Registrant and T. Paul Thomas.
10.9 Employment Agreement dated as of July 12, 2000 between the Registrant
and Irving W. Miller.
10.10 Employment Letter Agreement dated as of June 1, 2000 between the
Registrant and Iris M. Miller.
10.11 Separation Agreement dated as of October 10, 2000 between the Registrant
and its subsidiaries, Irving W. Miller, Iris M. Miller and certain
trusts controlled by the Millers.
10.12 GNU General Public License, Version 2.
11.1 Statement of computation of net income per share and pro forma net
income per share (see Note 8 of Notes to Financial Statements).
16.1 Letter Regarding Change in Certifying Accountants.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Morrison & Foerster LLP (included in Exhibit 5.1).
23.2 Independent Auditors' Consent.
24.1 Power of Attorney (see signature page).
27.1 Financial Data Schedule.
</TABLE>
--------
* To be supplied by amendment.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
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 hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the 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 such
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, 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,
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, the Registrant
has duly caused this registration statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Brisbane,
State of California, on this 30th day of October, 2000.
TURBOLINUX, INC.
/s/ T. Paul Thomas
By: _________________________________
T. Paul Thomas
President, Chief Executive Officer
and Chairman
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints, jointly and severally, T. Paul Thomas and
Robert P. Bowe and each one of them, his true and lawful attorney-in-fact and
agents, each with full power of substitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and any registration
statement related to the offering contemplated by this registration statement
that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933 and to file the same, with all exhibits thereto and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that each of said attorneys-in-fact and agents or any of
them, or his, her or their substitute or substitutes, may lawfully do or cause
to be done or by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ T. Paul Thomas President, Chief Executive October 30, 2000
____________________________________ Officer and Chairman
T. Paul Thomas (Principal executive
officer)
/s/ Robert P. Bowe Chief Financial Officer October 30, 2000
____________________________________ (Principal financial and
Robert P. Bowe accounting officer)
/s/ John Chen Director October 28, 2000
____________________________________
John Chen
/s/ Gordon Eubanks Director October 30, 2000
____________________________________
Gordon Eubanks
/s/ Andrew S. Rappaport Director October 30, 2000
____________________________________
Andrew S. Rappaport
</TABLE>
II-6
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
Turbolinux, Inc.:
We have audited the consolidated financial statements of Turbolinux, Inc. and
its subsidiaries (the Company) as of December 31, 1998 and 1999, and for the
years ended December 31, 1997, 1998 and 1999, and have issued our report
thereon dated July 13, 2000 (included elsewhere in the Registration Statement).
Our audits also included the financial statement schedule listed in Item 16(b)
of this Registration Statement. The consolidated financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
San Jose, California
July 13, 2000
<PAGE>
SCHEDULE II
TURBOLINUX, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
Balance at Additions Write-Offs Balance
Beginning and Charges and at End
Description of Year to Expenses Deductions of Year
----------- ---------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1997--
Accounts receivable allowance....... $ -- $ $ $ --
==== === === ====
Year ended December 31, 1998--
Accounts receivable allowance....... $ -- $ 7 $-- $ 7
==== === === ====
Year ended December 31, 1999--
Accounts receivable allowance....... $ 7 $23 $ $ 30
==== === === ====
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of Registrant as currently in
effect.
3.2* Form of Second Restated Certificate of Incorporation of Registrant to
be filed upon the closing of the offering.
3.3 Bylaws of Registrant, as amended, as currently in effect.
3.4* Form of Second Amended and Restated Bylaws of Registrant, to be in
effect upon the closing of the offering.
4.1* Form of Registrant's Common Stock Certificate.
4.2 Second Amended and Restated Investor Rights Agreement, dated as of
September 1, 2000, among the Registrant and the parties named therein.
5.1* Opinion of Morrison & Foerster LLP.
10.1 Form of Indemnification Agreement entered into between Registrant and
its directors and executive officers.
10.2 Registrant's 1999 Equity Incentive Plan, as amended.
10.3 Registrant's Blueprint (China) Year 2000 Stock Option Plan.
10.4* Registrant's 2000 Stock Incentive Plan.
10.5* Registrant's 2000 Employee Stock Purchase Plan.
10.6* Registrant's 2000 Non-Employee Director Option Program.
10.7 Office lease dated as of February 3, 2000 between the Registrant and
Sierra Point, L.L.C.
10.8 Employment Agreement dated as of February 28, 2000 between the
Registrant and T. Paul Thomas.
10.9 Employment Agreement dated as of July 12, 2000 between the Registrant
and Irving W. Miller.
10.10 Employment Letter Agreement dated as of June 1, 2000 between the
Registrant and Iris M. Miller.
10.11 Separation Agreement dated as of October 10, 2000 between the
Registrant and its subsidiaries, Irving W. Miller, Iris M. Miller and
certain trusts controlled by the Millers.
10.12 GNU General Public License, Version 2.
11.1 Statement of computation of net income per share and pro forma net
income per share (see Note 8 of Notes to Financial Statements).
16.1 Letter Regarding Change in Certifying Accountants.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Morrison & Foerster LLP (included in Exhibit 5.1).
23.2 Independent Auditors' Consent.
24.1 Power of Attorney (see signature page).
27.1 Financial Data Schedule.
</TABLE>
